Filed Pursuant to Rule 424(b)(2)
Registration Statement No. 333-54616
This prospectus supplement was previously filed on March 12, 2002, but
inadvertently referenced Registration Statement No. 333-50898, another
registation statement of the Registrant. This prospectus supplement is meant to
correct that reference, and with the exception of this notation on the cover is
identical to the prospectus supplement filed on March 12, 2002.
PROSPECTUS SUPPLEMENT
(To Prospectus dated February 27, 2001)
$750,000,000
[KINDER MORGAN ENERGY PARTNERS, L.P. LOGO]
$450,000,000
7.125% Notes due 2012
Interest payable March 15 and September 15
ISSUE PRICE: 99.535%
$300,000,000
7.750% Notes due 2032
Interest payable March 15 and September 15
ISSUE PRICE: 99.492%
The 2012 notes will mature on March 15, 2012, and the 2032 notes will mature on
March 15, 2032. Interest on the notes will accrue from March 14, 2002. We may
redeem the notes in whole or in part at any time at the redemption prices
described on page S-9. The notes will be issued in minimum denominations of
$1,000 increased in multiples of $1,000.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THE ACCOMPANYING PROSPECTUS, AND THE
SECTION ENTITLED "RISK FACTORS" IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 2001, FOR A DISCUSSION OF CERTAIN RISKS THAT YOU SHOULD
CONSIDER IN CONNECTION WITH AN INVESTMENT IN THE NOTES.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the notes or determined that this
prospectus supplement or the accompanying prospectus is accurate or complete.
Any representation to the contrary is a criminal offense.
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------------
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC COMMISSIONS TO US
- -----------------------------------------------------------------------------------------------------------
Per 2012 Note 99.535% .650% 98.885%
- -----------------------------------------------------------------------------------------------------------
Total $447,907,500 $2,925,000 $444,982,500
- -----------------------------------------------------------------------------------------------------------
Per 2032 Note 99.492% .875% 98.617%
- -----------------------------------------------------------------------------------------------------------
Total $298,476,000 $2,625,000 $295,851,000
- -----------------------------------------------------------------------------------------------------------
</Table>
Neither series of notes will be listed on any national securities exchange.
Currently, there is no public market for either series of notes.
We expect to deliver the notes to investors through the book-entry system of The
Depository Trust Company for the accounts of its participants on or about March
14, 2002.
Joint Bookrunners
<Table>
JPMORGAN WACHOVIA SECURITIES
</Table>
BANC ONE CAPITAL MARKETS, INC.
BMO NESBITT BURNS
COMMERZBANK SECURITIES
CREDIT LYONNAIS SECURITIES
SCOTIA CAPITAL
SUNTRUST ROBINSON HUMPHREY
March 11, 2002
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not, and
the underwriters have not, authorized any other person to provide you with
different information. If anyone provides you with different or inconsistent
information, you should not rely on it. We are not, and the underwriters are
not, making an offer to sell the notes in any jurisdiction where the offer or
sale is not permitted. You should assume that the information appearing in this
prospectus supplement and the accompanying prospectus is accurate only as of the
respective dates on the front of those documents or earlier dates specified
therein. Our business, financial condition, results of operations and prospects
may have changed since those dates.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<Table>
<Caption>
PAGE
----
Summary..................................................... S-3
Cautionary Statement Regarding Forward-Looking Statements... S-6
Use of Proceeds............................................. S-7
Capitalization.............................................. S-7
Consolidated Ratios of Earnings to Fixed Charges............ S-8
Description of Notes........................................ S-9
Underwriting................................................ S-12
Validity of the Notes....................................... S-13
PROSPECTUS
PAGE
----
Where you Can Find More Information......................... 3
Kinder Morgan Energy Partners, L.P. ........................ 4
Risk Factors................................................ 5
Use of Proceeds............................................. 11
Consolidated Ratios of Earnings to Fixed Charges............ 12
Description of Debt Securities.............................. 12
Description of Common Units................................. 22
Material Federal Income Tax Considerations Relating to
Units..................................................... 24
Plan of Distribution........................................ 40
Validity of the Securities.................................. 41
Experts..................................................... 41
Information Regarding Forward-Looking Statements............ 42
</Table>
S-2
SUMMARY
This summary highlights information contained elsewhere in this prospectus
supplement and the accompanying prospectus. This summary does not contain all of
the information you should consider before buying notes in this offering.
Therefore, you should read this entire prospectus supplement and accompanying
prospectus and the documents incorporated by reference carefully, including the
risks discussed under the "Risk Factors" section of the accompanying prospectus
and in our Annual Report on Form 10-K for the year ended December 31, 2001, and
our historical financial statements and the related notes which are incorporated
by reference.
KINDER MORGAN ENERGY PARTNERS, L.P.
BUSINESS DESCRIPTION
We are a Delaware limited partnership formed in August 1992. Our common units
trade on the New York Stock Exchange under the symbol "KMP." We are the largest
publicly-traded pipeline limited partnership in the United States in terms of
market capitalization and the largest independent refined petroleum products
pipeline system in the United States in terms of volumes delivered. Since
February 1997, quarterly common unit distributions have more than tripled from
$0.1575 per common unit to $0.55 per common unit for the last quarter of 2001.
Our operations are grouped into the following four reportable business segments:
- - PRODUCT PIPELINES: Over 10,000 miles of pipelines and over 32 associated
terminals delivering gasoline, diesel fuel, jet fuel and natural gas liquids
to various markets. Includes our Pacific operations, our 51% interest in
Plantation Pipe Line Company, our North System, our CALNEV pipeline
operations, our West Coast terminals operations, our Central Florida Pipeline,
our Cypress Pipeline, our 44.8% interest in Cochin Pipeline System, our 50%
interest in Heartland Pipeline Company and our transmix operations;
- - NATURAL GAS PIPELINES: Transports, treats, processes and stores natural gas
and has over 13,000 miles of pipelines. Includes Kinder Morgan Interstate Gas
Transmission LLC, Kinder Morgan Texas Pipeline, our 66 2/3% interest in
Trailblazer Pipeline Company, our 49% interest in Red Cedar Gathering Company,
our Casper and Douglas natural gas gathering systems, our 25% interest in
Thunder Creek Gas Services LLC and our 50% interest in Coyote Gas Treating
LLC;
- - CO(2) PIPELINES: Transports by pipeline and markets carbon dioxide, commonly
called CO(2), for use in enhanced oil recovery operations. Assets include our
50% interest in Cortez Pipeline, our Central Basin Pipeline, our 81% interest
in Canyon Reef Carriers Pipeline, our 13% interest in Bravo Pipeline,
interests in CO(2) reserves, including our approximate 45% interest in McElmo
Dome and our approximate 11% interest in Bravo Dome, our approximate 22%
interest in the Snyder Gasoline Plant, our approximate 43% interest in the
Diamond M Gas Plant and interests in four unitized fields in West Texas,
including our greater than 80% interest in the SACROC Unit; and
- - TERMINALS: Includes 44 owned or operated liquid and bulk terminal facilities,
including 11 terminals that handle refined petroleum products, chemicals, and
other liquid products, four terminals that handle coal, eight terminals that
handle petroleum coke and 21 bulk terminal facilities that handle various
other bulk products.
BUSINESS STRATEGY
Our objective is to grow our portfolio of businesses 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 containing costs;
- - leveraging economies of scale from incremental acquisitions; and
- - maximizing the benefits of our financial structure.
S-3
We primarily transport and/or handle products for a fee and generally are not
engaged in the unmatched purchase and resale of commodity products. As a result,
we do not face significant risks relating directly to movements in commodity
prices.
Generally, as utilization of our pipelines and terminals increases, our
fee-based revenues increase. Increases in utilization are principally driven by
increases in demand for gasoline, jet fuel, natural gas and other energy
products we transport and handle. Increases in demand for these products are
generally driven by demographic growth in markets we serve, including the
rapidly growing western and southeastern United States.
MANAGEMENT STRUCTURE
Kinder Morgan G.P., Inc., our general partner, owns all the voting securities of
Kinder Morgan Management, LLC, a Delaware limited liability company, which is
called Kinder Morgan Management in this document. In May 2001, Kinder Morgan
Management conducted an initial public offering of its shares representing
limited liability company interests. It used substantially all of the net
proceeds from that offering to purchase i-units from us. The i-units are a
separate class of limited partner interests in us and are issued only to Kinder
Morgan Management. Quarterly distributions from our operations and interim
capital transactions are paid to Kinder Morgan Management in additional i-units
rather than in cash. Kinder Morgan Management trades on the New York Stock
Exchange under the symbol "KMR." When it purchased i-units from us, Kinder
Morgan Management became a limited partner in us and, pursuant to a delegation
of control agreement, manages and controls our business and affairs, and the
business and affairs of our operating limited partnerships and subsidiaries.
Under the delegation of control agreement, our general partner delegated to
Kinder Morgan Management, to the fullest extent permitted under Delaware law and
our partnership agreement, all of its power and authority to manage and control
our business and affairs, except that Kinder Morgan Management cannot take
certain specified actions without the approval of our general partner. In
accordance with its limited liability company agreement, Kinder Morgan
Management's activities will be limited to being a limited partner in, and
managing and controlling the business and affairs of, our partnership, including
our operating partnerships and their subsidiaries.
RECENT DEVELOPMENTS
TEJAS ACQUISITION
On February 28, 2002, we closed the acquisition of Tejas Gas, LLC, a wholly
owned subsidiary of InterGen (North America), Inc., for approximately $750
million in cash. The Tejas Gas system, with a transportation capacity of 3.5
billion cubic feet per day, is a 3,400 mile natural gas intrastate pipeline
system that extends from south Texas along the Mexico border and the Texas Gulf
Coast to near the Louisiana border and north from near Houston to east Texas.
CASH DISTRIBUTIONS
On February 28, 2002, we announced our intention, commencing in the first
quarter, to increase our quarterly cash distribution per common unit to $0.575
from $0.55, to be paid May 15, 2002 to unitholders of record on April 30, 2002.
This proposed increase was driven by the strong results that our assets are
delivering in the first quarter of 2002.
S-4
THE OFFERING
<Table>
SECURITIES OFFERED................ $450 million initial principal amount of 7.125% Notes due
2012.
$300 million initial principal amount of 7.750% Notes due
2032.
MATURITY DATES.................... 2012 notes - March 15, 2012.
2032 notes - March 15, 2032.
INTEREST PAYMENT DATES............ March 15 and September 15 of each year, commencing September
15, 2002.
OPTIONAL REDEMPTION............... Each series of notes will be redeemable, in whole or in
part, at our option at any time, at redemption prices
described in this prospectus supplement under "Description
of Notes -- Optional Redemption."
RANKING........................... The notes will:
- be our senior unsecured indebtedness,
- rank equally in right of payment with all our other senior
unsecured indebtedness,
- be senior in right of payment to all our subordinated
indebtedness, and
- be effectively junior in right of payment to all
indebtedness and other liabilities of our subsidiaries.
COVENANTS......................... The indenture governing the notes contains certain covenants
that, among other things, limit our ability and the ability
of our subsidiaries, as defined in the indenture, to:
- incur indebtedness secured by liens on principal property,
as defined in the indenture, and
- engage in sale/leaseback transactions.
USE OF PROCEEDS................... We intend to use the net proceeds from the sale of the notes
(estimated to be approximately $740,333,500 after deducting
underwriting discounts and our estimated offering expenses)
to reduce commercial paper debt incurred principally to
finance the Tejas acquisition and other acquisitions
completed since the middle of 2001.
ADDITIONAL NOTES.................. We may issue and sell additional principal amounts of the
notes of
each series in the future without the consent of the holders
of either series of notes. Any additional notes of a series,
together with these notes of that series, will constitute a
single series of notes under the senior indenture.
</Table>
RISK FACTORS
Investing in the notes involves risks. You should carefully consider, in
addition to the other information contained in, or incorporated by reference
into, this prospectus supplement or the accompanying prospectus, the risks that
are described in the "Risk Factors" section beginning on page 5 of the
accompanying prospectus and in the section entitled "Risk Factors" in our Annual
Report on Form 10-K for the year ended December 31, 2001.
S-5
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This document and the documents incorporated by reference include
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements are identified as any statement that does not relate
strictly to historical or current facts. They use words such as "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 comparable terminology. In particular,
statements, express or implied, concerning future operating results or the
ability to generate sales, income or cash flow or to make distributions are
forward-looking statements. Forward-looking statements are not guarantees of
performance. They involve risks, uncertainties and assumptions. The future
results of our operations may differ materially from those expressed in these
forward-looking statements. Many of the factors that will determine these
results are beyond our ability to control or predict. Specific factors which
could cause actual results to differ from those in the forward-looking
statements include:
- - price trends and overall demand for natural gas liquids, refined petroleum
products, oil, carbon dioxide, natural gas, coal and other bulk materials and
chemicals in the United States. Consumer confidence, economic activity,
political instability, weather, alternative energy sources, conservation and
technological advances may affect price trends and demand;
- - changes in our tariff rates implemented by the Federal Energy Regulatory
Commission or the California Public Utilities Commission;
- - our ability to integrate any acquired operations into our existing operations;
- - any difficulties or delays experienced by railroads, barges, trucks, ships or
pipelines in delivering products to our terminals;
- - our ability to identify and close strategic acquisitions and make cost saving
changes in operations;
- - shut-downs or cutbacks at major refineries, petrochemical or chemical plants,
utilities, military bases or other businesses that use or supply our services;
- - changes in laws or regulations, third party relations and approvals, decisions
of courts, regulators and governmental bodies may adversely affect our
business or our ability to compete;
- - indebtedness could make us vulnerable to general adverse economic and industry
conditions, limit our ability to borrow additional funds, place us at
competitive disadvantages compared to our competitors that have less debt or
have other adverse consequences;
- - interruptions of electric power supply to our facilities due to natural
disasters, power shortages, strikes, riots, terrorism, war or other causes;
- - acts of sabotage and terrorism for which insurance is not available at
reasonable premiums;
- - 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 in "Risk Factors" beginning on page 5 of the accompanying
prospectus and in our Annual Report on Form 10-K for the year ended December 31,
2001. Those risk factors could cause our actual results to differ materially
from those contained in any forward-looking statement. We disclaim any
obligation to update the above list or to announce publicly the result of any
revisions to any of the forward-looking statements to reflect future events or
developments.
S-6
USE OF PROCEEDS
We intend to use the net proceeds from the sale of the notes (estimated to be
approximately $740,333,500 after deducting underwriting discounts and our
estimated offering expenses) to reduce commercial paper debt incurred
principally to finance the Tejas acquisition and other acquisitions completed
since the middle of 2001. As of March 11, 2002, the weighted average interest
rate on the debt to be retired was approximately 2.55%.
CAPITALIZATION
The following table sets forth our historical consolidated capitalization as of
December 31, 2001, and our consolidated capitalization as adjusted to give
effect to our receipt and use of the net proceeds from the sale of the notes to
retire commercial paper. See "Use of Proceeds."
You should read this table in conjunction with our historical financial
statements and notes thereto that are incorporated by reference in this
document.
<Table>
<Caption>
AS ADJUSTED
HISTORICAL FOR THIS DEBT
DECEMBER 31, OFFERING
2001 (UNAUDITED)
------------ -------------
(THOUSANDS OF DOLLARS)
Cash and cash equivalents................................... $ 62,802 $ 62,802
========== ==========
Notes payable and current maturities of long-term debt...... $ 560,219 $ 550,982(1)
Long-term debt
Kinder Morgan Energy Partners:
Credit facilities....................................... -- --
6.75% notes due 2011.................................... 698,107 698,107
7.4% notes due 2031..................................... 299,265 299,265
6.3% notes due 2009..................................... 249,416 249,416
8% notes due 2005....................................... 199,734 199,734
7.5% notes due 2010..................................... 248,602 248,602
Other (market value of interest rate swaps)............. (5,441) (5,441)
Short-term debt expected to be refinanced............... 276,300 276,300
Notes offered hereby.................................... -- 746,384
Subsidiaries:
Credit facility (Trailblazer)........................... 55,000 55,000
First mortgage notes (SFPP, L.P.)....................... 37,057 37,057
Industrial revenue and economic development bonds
(Kinder Morgan Liquids Terminals)...................... 87,930 87,930
Notes due 2008 (Central Florida Pipeline)............... 35,000 35,000
New Jersey economic development bonds due 2018 (Kinder
Morgan Liquids Terminals).............................. 25,000 25,000
Tax exempt bonds due 2024 (Kinder Morgan Operating L.P.
"B")................................................... 23,700 23,700
Other................................................... 1,904 1,904
---------- ----------
Total long-term debt............................... $2,231,574 $2,977,958
---------- ----------
Minority interest........................................... $ 65,236 $ 65,236
---------- ----------
Partners' capital
Common units, 129,855,018 units issued and
outstanding(2).......................................... $1,894,677 $1,894,677
Class B units, 5,313,400 units issued and outstanding..... 125,750 125,750
i-Units, 30,636,363 units issued and outstanding.......... 1,020,153 1,020,153
General partner........................................... 54,628 54,628
Accumulated other comprehensive income.................... 63,826 63,826
---------- ----------
Total partners' capital............................ $3,159,034 $3,159,034
---------- ----------
Total capitalization........................................ $6,016,063 $6,753,210
========== ==========
</Table>
- ---------------
(1) As adjusted balance computed as follows:
<Table>
Historical balance at December 31, 2001..................... $ 560,219
Tejas acquisition debt (commercial paper)................... 682,754
Other debt incurred through March 11, 2002.................. 48,343
Estimated proceeds from sale of notes offered hereby........ (740,334)
---------
As adjusted balance......................................... $ 550,982
=========
</Table>
(2) Does not include 409,400 common units issuable, subject to vesting, upon
exercise of outstanding options.
S-7
CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
Our historical ratios of earnings to fixed charges for the periods indicated are
as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
- --------------------------------
2001 2000 1999 1998 1997
- ---- ---- ---- ---- ----
3.56 3.82 4.36 3.64 2.65
</Table>
In all cases, earnings is determined by adding:
- - income before income taxes, extraordinary items, equity income and minority
interest; plus
- - fixed charges, amortization of capitalized interest and distributed income of
equity investees; less
- - capitalized interest.
In all cases, fixed charges include:
- - interest, including capitalized interest; plus
- - amortization of debt issuance costs; plus
- - the estimated interest portion of rental expenses.
S-8
DESCRIPTION OF NOTES
We will issue both series of notes under the senior indenture referred to in the
accompanying prospectus. The following description and the description in the
accompanying prospectus are a summary of the material provisions of the notes
and the senior indenture. It does not restate the senior indenture in its
entirety. We urge you to read the senior indenture because it, and not this
description, defines your rights as holders of the notes. We have filed a copy
of the senior indenture as an exhibit to the registration statement, which
includes the accompanying prospectus.
This description of the notes supplements, and, to the extent it is
inconsistent, replaces, the description of the general provisions of the notes
and the senior indenture in the accompanying prospectus. The notes are "senior
debt securities" as that term is used in the accompanying prospectus. The notes
are unsecured and rank equal in priority with all of our other unsecured and
senior indebtedness. The senior indenture contains no restrictions on the amount
of additional indebtedness we may incur under it.
PRINCIPAL, MATURITY AND INTEREST
The 2012 notes will mature on March 15, 2012, and the 2032 notes will mature on
March 15, 2032. Although $450 million principal amount of the 2012 notes and
$300 million principal amount of the 2032 notes are initially offered hereby, we
may issue and sell additional principal amounts of the notes of each series in
the future without the consent of the holders of either series of notes. Any
additional notes of a series, together with these notes of that series, will
constitute a single series of notes under the senior indenture.
Interest on the 2012 notes will accrue at the rate of 7.125% per year. Interest
on the 2032 notes will accrue at the rate of 7.750% per year. Interest on the
notes of each series will be payable semiannually in arrears on March 15 and
September 15 of each year, commencing on September 15, 2002. We will make each
interest payment to the person in whose name the notes of a series, or any
predecessor notes, are registered at the close of business on the immediately
preceding March 1 or September 1, as the case may be, whether or not such date
is a business day. Interest on the notes will accrue from March 14, 2002 and
will be computed on the basis of a 360-day year comprised of twelve 30-day
months.
The notes are not entitled to any sinking fund.
If any interest payment date, maturity date or redemption date falls on a day
that is not a business day, the payment will be made on the next business day
and no interest will accrue for the period from and after such interest payment
date, maturity date or redemption date.
RANKING
The notes will be our senior unsecured obligations. The notes will rank equally
with all of our existing and future senior indebtedness. The notes will be
effectively subordinated in right of payment to the liabilities of our
subsidiaries, including debt of those subsidiaries, claims of trade creditors
and tort claimants. As of December 31, 2001, our subsidiaries had outstanding
approximately $266 million of indebtedness to third parties. We conduct all of
our operations through subsidiaries. Accordingly, we rely on distributions from
subsidiaries to provide funds necessary to meet our obligations, including the
payment of principal and interest on the notes. The ability of any subsidiary to
make distributions is subject to applicable laws and the financial condition and
operating requirements of such subsidiary, as well as the terms of any loan
agreements to which such subsidiary is or may become a party.
OPTIONAL REDEMPTION
We will have the right to redeem each series of the notes, in whole or in part
at any time, at a redemption price equal to the greater of (1) 100% of the
principal amount of the notes of such series to be redeemed or (2) the sum of
the present values of the remaining scheduled payments of principal and interest
on such series of notes (exclusive of interest accrued to the redemption date)
discounted to the redemption date on a semiannual basis (assuming a 360-day year
consisting of twelve 30-day months) at the Treasury Rate plus
S-9
25 basis points in the case of the 2012 notes, and the Treasury Rate plus 30
basis points in the case of the 2032 notes, plus, in either case, accrued and
unpaid interest on the principal amount being redeemed to such redemption date.
"Comparable Treasury Issue" means the United States Treasury security selected
by the Quotation Agent as having a maturity comparable to the remaining term of
the series of notes to be redeemed that would be utilized, at the time of
selection and in accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to the remaining term
of such series of notes.
"Comparable Treasury Price" means, with respect to any redemption date for a
series of notes, the average of two Reference Treasury Dealer Quotations for
such redemption date.
"Quotation Agent" means the Reference Treasury Dealer we appoint.
"Reference Treasury Dealer" means each of J.P. Morgan Securities Inc. and First
Union Securities, Inc. and their respective successors; provided, however, that
if either of the foregoing shall cease to be a primary U.S. Government
securities dealer in New York City (a "Primary Treasury Dealer"), we will
substitute therefor another Primary Treasury Dealer.
"Reference Treasury Dealer Quotations" means, with respect to each Reference
Treasury Dealer and any redemption date, the average, as determined by the
trustee under the indenture pursuant to which the notes of each series are
issued, of the bid and asked price for the Comparable Treasury Issue (expressed
in each case as a percentage of its principal amount) quoted in writing to the
trustee by such Reference Treasury Dealer at 5:00 p.m., New York City time, on
the third business day, as defined in the indenture, preceding such redemption
date.
"Treasury Rate" means, with respect to any redemption date, (1) the yield, under
the heading which represents the average for the immediately preceding week,
appearing in the most recently published statistical release designated "H.15
(519)" or any successor publication which is published weekly by the Board of
Governors of the Federal Reserve System and which establishes yields on actively
traded United State Treasury securities adjusted to constant maturity under the
caption "Treasury Constant Maturities," for the maturity corresponding to the
Comparable Treasury Issue (if no maturity is within three months before or after
the maturity date of the series of notes to be redeemed, yields for the two
published maturities most closely corresponding to the Comparable Treasury Issue
shall be determined, and the Treasury Rate shall be interpolated or extrapolated
from such yields on a straight-line basis, rounding to the nearest month) or (2)
if such release (or any successor release) is not published during the week
preceding the calculation date or does not contain such yields, the rate per
year equal to the semiannual equivalent yield to maturity of the Comparable
Treasury Issue, calculated using a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such redemption date. The Treasury Rate will be calculated on
the third business day preceding the redemption date.
We will provide not less than 30 nor more than 60 days' notice mailed to each
registered holder of the series of notes to be redeemed. If the redemption
notice is given and funds deposited as required, then interest will cease to
accrue on and after the redemption date on the notes or portions of such notes
called for redemption.
RESTRICTIVE COVENANTS
We have agreed to two principal restrictions on our activities for the benefit
of holders of the notes. Unless waived or amended, the restrictive covenants
described in the accompanying prospectus under "Description of Debt Securities
- -- Provisions Only in the Senior Indenture -- Limitations on Liens" and
"-- Restriction on Sale-Leasebacks" will apply as long as any of the notes are
outstanding.
FORM, DENOMINATION AND REGISTRATION; BOOK ENTRY ONLY SYSTEM
The notes of each series will be issued only in fully registered form, without
coupons, in minimum denominations of $1,000 and any integral multiple of $1,000
in excess thereof. The notes of each series will be deposited with, or on behalf
of, The Depository Trust Company ("DTC") or any successor depositary and
S-10
will be represented by one or more global notes registered in the name of Cede &
Co., as nominee of DTC. The interests of beneficial owners in the global notes
of each series will be represented through financial institutions acting on
their behalf as direct or indirect participants in DTC.
Settlement for the notes will be made in immediately available funds. So long as
the notes are subject to DTC's book-entry system, the notes will trade in DTC's
Same-Day Funds Settlement system until maturity, and therefore DTC will require
that secondary trading activity in the notes be settled in immediately available
funds. No assurance can be given as to the effect, if any, of settlement in
immediately available funds on trading activity in the notes.
S-11
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement,
dated the date of this prospectus supplement, we have agreed to sell to each of
the underwriters named below, severally, and each of the underwriters has
severally agreed to purchase, the principal amount of the notes of each series
set forth opposite its name below:
<Table>
<Caption>
PRINCIPAL AMOUNT PRINCIPAL AMOUNT
OF 2012 NOTES OF 2032 NOTES
UNDERWRITER ---------------- ----------------
- -----------
J.P. Morgan Securities Inc. ......................... $202,500,000 $135,000,000
First Union Securities, Inc. ........................ 157,500,000 105,000,000
Banc One Capital Markets, Inc. ...................... 15,000,000 10,000,000
BMO Nesbitt Burns Corp. ............................. 15,000,000 10,000,000
Commerzbank Capital Markets Corp. ................... 15,000,000 10,000,000
Credit Lyonnais Securities (USA) Inc. ............... 15,000,000 10,000,000
Scotia Capital (USA) Inc. ........................... 15,000,000 10,000,000
SunTrust Capital Markets, Inc. ...................... 15,000,000 10,000,000
------------ ------------
Total................................... $450,000,000 $300,000,000
============ ============
</Table>
Under the terms and conditions of the underwriting agreement, if the
underwriters take any of the notes, then the underwriters are obligated to take
and pay for all of the notes.
Each series of the notes is a new issue of securities with no established
trading market and will not be listed on any national securities exchange. The
underwriters have advised us that they intend to make a market for the notes,
but they have no obligation to do so and may discontinue market making at any
time without providing any notice. No assurance can be given as to the liquidity
of any trading market for the notes.
The underwriters initially propose to offer part of the notes directly to the
public at the offering prices described on the cover page of this prospectus
supplement and part to certain dealers at a price that represents a concession
not in excess of 0.40% of the principal amount of the 2012 notes and 0.50% of
the principal amount of the 2032 notes. Any underwriter may allow, and any such
dealer may reallow, a concession not in excess of 0.25% of the principal amount
of the 2012 notes and 0.25% of the principal amount of the 2032 notes to certain
other dealers. After the initial offering of the notes, the underwriters may
from time to time vary the offering prices and other selling terms.
We have also agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933 or to contribute to
payments that the underwriters may be required to make in respect of any such
liabilities.
In connection with the offering of the notes, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the prices of the
notes. Specifically, the underwriters may overallot in connection with the
offering of the notes, creating a syndicate short position. In addition, the
underwriters may bid for, and purchase, notes in the open market to cover
syndicate short positions or to stabilize the prices of the notes. Finally, the
underwriting syndicate may reclaim selling concessions allowed for distributing
the notes in the offering of the notes, if the syndicate repurchases previously
distributed notes in the syndicate covering transactions, stabilization
transactions or otherwise. Any of these activities may stabilize or maintain the
market prices of the notes above independent market levels. The underwriters are
not required to engage in any of these activities, and may end any of them at
any time.
Expenses associated with this offering, to be paid by us, are estimated at
$500,000.
J.P. Morgan Securities Inc., or "JPMorgan", will make the notes available for
distribution on the Internet through a proprietary web site and/or a third-party
system operated by Market Axess Inc., an Internet-based communications
technology provider. Market Axess Inc. is providing the system as a conduit for
communications between JPMorgan and its customers and is not a party to any
transactions. Market Axess Inc., a registered broker-dealer, will receive
compensation from JPMorgan based on transactions
S-12
JPMorgan conducts through the system. JPMorgan will make the notes available to
their customers through the Internet distributions, whether made through a
proprietary or third-party system, on the same terms as distributions made
through other channels.
In the ordinary course of their respective businesses, certain of the
underwriters and their affiliates have engaged, and may in the future engage, in
investment banking or commercial banking transactions with us and our
affiliates. Also, affiliates of the underwriters are lenders under certain of
our revolving credit facilities. First Union National Bank, an affiliate of
First Union Securities, Inc., is the trustee under the indenture pursuant to
which the notes will be issued.
First Union Securities, Inc., a subsidiary of Wachovia Corporation, conducts its
investment banking, institutional and capital markets businesses under the trade
name of Wachovia Securities. Any references to "Wachovia Securities" in this
prospectus supplement, however, do not include Wachovia Securities, Inc., a
separate broker-dealer subsidiary of Wachovia Corporation and sister affiliate
of First Union Securities, Inc. which may or may not be participating as a
separate selling dealer in the distribution of the notes.
VALIDITY OF THE NOTES
The validity of the notes will be passed upon for us by Bracewell & Patterson,
L.L.P. The validity of the notes will be passed upon for the underwriters by
Vinson & Elkins L.L.P. Vinson & Elkins L.L.P. also represents us or our
affiliates from time to time on matters unrelated to the issuance of the notes.
S-13
PROSPECTUS
$2,000,000,000
[KINDER MORGAN ENERGY PARTNERS, L.P. LOGO]
COMMON UNITS
DEBT SECURITIES
This prospectus provides you with a general description of the securities
we may offer. Each time we sell securities we will provide a prospectus
supplement that will contain specific information about the terms of that
offering. The prospectus supplement may also add, update or change information
contained in this prospectus. You should read this prospectus and any supplement
carefully before you invest.
Our common units are traded on the New York Stock Exchange under the symbol
"KMP." The last reported sale price of our common units on February 21, 2001, as
reported on the NYSE Composite Transactions tape, was $59.70 per unit.
We will provide information in the prospectus supplement for the expected
trading market, if any, for the debt securities.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF THE MATERIAL
RISKS INVOLVED IN INVESTING OUR SECURITIES.
---------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------
The date of this prospectus is February 27, 2001.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Where You Can Find More Information......................... 3
Kinder Morgan Energy Partners, L.P.......................... 4
Risk Factors................................................ 5
Use of Proceeds............................................. 11
Consolidated Ratios of Earnings to Fixed Charges............ 12
Description of Debt Securities.............................. 12
Description of Common Units................................. 22
Material Federal Income Tax Considerations Relating to
Units..................................................... 24
Plan of Distribution........................................ 40
Validity of the Securities.................................. 41
Experts..................................................... 41
Information Regarding Forward-Looking Statements............ 42
</Table>
---------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. THIS PROSPECTUS MAY ONLY BE USED WHERE IT IS LEGAL TO
SELL THE OFFERED SECURITIES. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER
THAN THE DATE ON THE FRONT COVER OF THOSE DOCUMENTS. OUR BUSINESS, FINANCIAL
CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE THOSE
DATES.
2
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. The SEC allows us to incorporate by reference
information we file with it, which means that we 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 we file later with the SEC will automatically update and
supersede this information as well as the information included in this
prospectus. We incorporate by reference the following documents:
- Our annual report on Form 10-K for the year ended December 31, 1999;
- Our quarterly reports on Form 10-Q for the quarters ended March 31, 2000,
June 30, 2000 and September 30, 2000;
- Our current reports on Form 8-K and Form 8-K/A filed on March 28, 2000,
March 31, 2000, April 3, 2000, June 28, 2000, December 1, 2000, December
7, 2000 and February 20, 2001; and
- All documents filed with the SEC under Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act between the date of this prospectus and the
completion of the sale of securities offered hereby.
You may read and copy any document we file at the SEC's public reference
rooms located at:
<Table>
- 450 Fifth Street, N.W. - Seven World Trade Center - Northwest Atrium Center
Washington, D.C. 20549 New York, New York 10048 500 West Madison Street
Chicago, Illinois 60661
</Table>
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms and their copy charges. Our SEC filings are also available to
the public on the SEC's Web site at http://www.sec.gov and through the New York
Stock Exchange, 20 Broad Street, New York, New York 10005, on which our limited
partner interests are listed.
We 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 us at the following address and
telephone number:
Kinder Morgan Energy Partners, L.P.
Investor Relations Department
One Allen Center, Suite 1000
500 Dallas Street
Houston, Texas 77002
(713) 369-9000
3
KINDER MORGAN ENERGY PARTNERS, L.P.
We are a Delaware limited partnership formed in August 1992. We are the
largest publicly-traded pipeline master limited partnership in the United States
and have the second largest products pipeline system based on volumes delivered.
Our operations are grouped into the following four reportable business segments:
- PRODUCT PIPELINES: Over 10,000 miles of pipelines and associated
terminals delivering gasoline, diesel, jet fuel and natural gas liquids to
various markets. Includes Pacific Operations, 51% of Plantation Pipe Line
Company, North System, Cypress Pipeline, 32.5% of Cochin Pipeline System,
50% interest in Heartland Pipeline Company and transmix operations;
- NATURAL GAS PIPELINES: Includes Kinder Morgan Interstate Gas
Transmission LLC, Kinder Morgan Texas Pipeline, L.P., a 66 2/3% interest
in Trailblazer Pipeline Company, a 49% interest in Red Cedar Gathering
Company, the Casper and Douglas gathering system, a 25% interest in
Thunder Creek Gas Services LLC and a 50% interest in Coyote Gas Treating
LLC;
- CO(2) PIPELINES: Transports via pipeline and markets CO(2) for use in
enhanced oil recovery projects. Assets include 50% of Cortez Pipeline,
Central Basin Pipeline, 81% of CRC Pipeline, 13% of Bravo Pipeline, 45% of
McElmo Dome, 11% of Bravo Dome, and interests in four unitized fields in
West Texas; and
- BULK TERMINALS: Includes over 25 owned and operated bulk terminal
facilities handling over 40 million tons of coal, petroleum coke and other
bulk products annually.
4
RISK FACTORS
You should carefully consider the risks described below in addition to
other information contained or incorporated by reference in this prospectus.
Realization of any of the following risks could have a material adverse effect
on our business, financial condition, cash flows and results of operations.
RISKS RELATED TO OUR BUSINESS
PENDING FEDERAL ENERGY REGULATORY COMMISSION AND CALIFORNIA PUBLIC
UTILITIES COMMISSION PROCEEDINGS SEEK SUBSTANTIAL REFUNDS AND REDUCTIONS IN
TARIFF RATES ON SOME OF OUR PIPELINES. Some shippers on our pipelines have filed
complaints with the Federal Energy Regulatory Commission and California Public
Utilities Commission that seek substantial refunds and reductions in the tariff
rates on our Pacific operations. Adverse decisions regarding these complaints
could negatively impact our cash flow. Additional challenges to tariff rates
could be filed with the Federal Energy Regulatory Commission and California
Public Utilities Commission in the future.
In the first set of complaints filed between 1992 and 1995 before the
Federal Energy Regulatory Commission, some shippers alleged that pipeline tariff
rates:
- for the West line, serving southern California and Arizona, were not
entitled to "grandfathered" status under the Energy Policy Act because
"substantially changed circumstances" had occurred pursuant to the Energy
Policy Act; and
- for the East line, serving New Mexico and Arizona, were unjust and
unreasonable.
An initial decision by the Federal Energy Regulatory Commission administrative
law judge was issued on September 25, 1997. The initial decision determined that
the Pacific operations' West line rates were grandfathered under the Energy
Policy Act. The initial decision also included rulings that were generally
adverse to the Pacific operations regarding certain cost of service issues for
the East line.
On January 13, 1999, the Federal Energy Regulatory Commission issued an
opinion that affirmed, in major respects, the initial decision, but also
modified parts of the decision that were adverse to us. In May 2000, the Federal
Energy Regulatory Commission issued a new opinion affirming in part and
modifying and clarifying in part the January 13, 1999 opinion. Some of the
complainants have appealed the Federal Energy Regulatory Commission's decision
to the United States Court of Appeals for the District of Columbia Circuit.
During the pendency of the above-referenced complaint proceeding, some
shippers filed complaints that predominantly attacked the pipeline tariff rates
of the Pacific operations, contending that the rates were not just and
reasonable under the Interstate Commerce Act and should not be entitled to
"grandfathered" status under the Energy Policy Act. These complaints covered
rates for service on the East line, the West line, the North line serving the
area between San Francisco, California and Reno, Nevada, and the Oregon line
serving the area from Portland, Oregon to Eugene, Oregon. The complaints seek
substantial reparations for alleged overcharges during the years in question and
request prospective rate reduction on each of the challenged facilities. These
complaints are expected to proceed to hearing in August 2001, with an initial
decision by the administrative law judge expected in the first half of 2002. In
January 2000, several of the shippers amended and restated their complaints
challenging the tariff rates of the Pacific operations and filed additional
complaints in July and August 2000. We are vigorously defending against all of
these complaints.
The complaints filed before the California Public Utilities Commission
challenge the rates charged for intrastate transportation of refined petroleum
through the Pacific operations' pipeline system in California. On August 6,
1998, the California Public Utilities
5
Commission issued its decision dismissing the complainants' challenge to SFPP,
L.P.'s intrastate rates. On June 24, 1999, the California Public Utilities
Commission granted limited rehearing of its August 1998 decision for the purpose
of:
- addressing the proper ratemaking treatment for partnership tax expenses;
- the calculation of environmental costs; and
- the public utility status of SFPP, L.P.'s Sepulveda line and its Watson
Station gathering enhancement facilities.
On April 10, 2000, the complainants filed a new complaint with the
California Public Utilities Commission asserting SFPP, L.P.'s intrastate rates
were not just and reasonable.
OUR ACQUISITION STRATEGY MAY REQUIRE ACCESS TO NEW CAPITAL, AND TIGHTENED
CREDIT MARKETS OR MORE EXPENSIVE CAPITAL WILL IMPAIR OUR ABILITY TO EXECUTE OUR
STRATEGY. Part of our business strategy includes acquiring additional
businesses that will allow us to increase distributions to unitholders. During
the period from December 31, 1996 to December 31, 2000, we made several
acquisitions that increased our asset base over 14 times and increased our net
income over 23 times. We regularly consider and enter into discussions regarding
potential acquisitions and are currently contemplating potential acquisitions.
While there are currently no unannounced purchase agreements pending for the
acquisition of any business or assets, such transactions can be effected
quickly, may occur at any time and may be significant in size relative to our
existing assets. We may need new capital to finance these acquisitions.
Limitations on our access to capital will impair our ability to execute our
strategy. Expensive capital will limit our ability to make acquisitions
accretive. Our ability to maintain our capital structure may impact the market
value of our common units and our debt securities.
ENVIRONMENTAL REGULATION SIGNIFICANTLY AFFECTS OUR BUSINESS. Our 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 our pipelines or at our storage facilities, we may have to
pay a significant amount to clean up the leak or spill. The resulting costs and
liabilities could negatively affect our 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 our
facilities. Although we cannot predict the impact of Environmental Protection
Agency standards or future environmental measures, our costs could increase
significantly if environmental laws and regulations become stricter. Since the
costs of environmental regulation are already significant, additional regulation
could negatively affect our business.
COMPETITION COULD ULTIMATELY LEAD TO LOWER LEVELS OF PROFITS AND LOWER OUR
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 our product pipelines are:
- proprietary pipelines owned and operated by major oil companies in the
areas where our pipelines deliver products;
- refineries within the market areas served by our product pipelines; and
- trucks.
6
Additional product pipelines may be constructed in the future to serve
specific markets now served by our pipelines.
Trucks competitively deliver products in certain markets. Recently, major
oil companies have 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. We cannot predict with certainty whether this
trend towards increased short-haul trucking will continue in the future.
Demand for terminaling services varies widely throughout the product
pipeline system. Certain major petroleum companies and independent terminal
operators directly compete with us at several terminal locations. At those
locations, pricing, service capabilities and available tank capacity control
market share.
Our natural gas pipelines compete against other existing natural gas
pipelines originating from the same sources or serving the same markets as our
natural gas pipelines. In addition, we also may face competition from natural
gas pipelines that may be built in the future.
Our ability to compete also depends upon general market conditions, which
may change. We conduct our operations without the benefit of exclusive
franchises from government entities. We provide common carrier transportation
services through our pipelines at posted tariffs and, with respect to our
Pacific operations, almost always without long-term contracts for transportation
service with customers. Demand for transportation services on our pipelines is
primarily a function of:
- total and per capita consumption;
- prevailing economic and demographic conditions;
- alternate modes of transportation;
- alternate sources; and
- price.
WE GENERALLY DO NOT OWN THE LAND ON WHICH OUR PIPELINES ARE CONSTRUCTED AND
WE ARE SUBJECT TO THE POSSIBILITY OF INCREASED COSTS FOR THE LOSS OF LAND
USE. We generally do not own the land on which our pipelines are constructed.
Instead, we obtain the right to construct and operate the pipelines on other
people's land for a period of time. If we were to lose these rights, our
business could be affected negatively.
Southern Pacific Transportation Company has allowed us to construct and
operate a significant portion of our 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, we may be required to obtain permission from the land owners in order
to continue to maintain the pipelines. Although no assurance can be given, we
believe we could obtain that permission over time at a cost that would not
negatively affect us.
Whether we have the power of eminent domain for our 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. Our inability to
exercise the power of eminent domain could negatively affect our business if we
were to lose the right to use or occupy the property on which our pipelines are
located.
OUR RAPID GROWTH MAY CAUSE DIFFICULTIES INTEGRATING NEW OPERATIONS. Part
of our business strategy includes acquiring additional businesses that will
allow us to increase distributions to unitholders. During
7
the period from December 31, 1996 to December 31, 2000, we made several
acquisitions that increased our asset base over 14 times and increased our net
income over 23 times. We believe that we can profitably combine the operations
of acquired businesses with our existing operations. However, unexpected costs
or challenges may arise whenever businesses with different operations and
management are combined. Successful business combinations require management and
other personnel to devote significant amounts of time to integrating the
acquired business with existing operations. These efforts may temporarily
distract their attention from day-to-day business, the development or
acquisition of new properties and other business opportunities. In addition, the
management of the acquired business often will not join our management team. The
change in management may make it more difficult to integrate an acquired
business with our existing operations.
OUR DEBT INSTRUMENTS MAY LIMIT OUR FINANCIAL FLEXIBILITY. The instruments
governing our debt contain restrictive covenants that may prevent us from
engaging in certain transactions we deem beneficial. The agreements governing
our debt generally require us to comply with various affirmative and negative
covenants, including the maintenance of certain financial ratios and
restrictions on:
- incurring additional debt;
- entering into mergers, consolidations and sales of assets; and
- granting liens.
The instruments governing any future debt may contain similar restrictions.
RESTRICTIONS ON OUR ABILITY TO PREPAY THE DEBT OF SFPP, L.P. MAY LIMIT OUR
FINANCIAL FLEXIBILITY. SFPP, L.P. is subject to restrictions with respect to
its debt that may limit our flexibility in structuring or refinancing existing
or future debt. These restrictions include the following:
- before December 15, 2002, we may prepay SFPP, L.P.'s first mortgage notes
with a make-whole prepayment premium; and
- we 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.
RISK RELATED TO OWNERSHIP OF OUR DEBT SECURITIES IF WE DEFAULT
DEBT SECURITIES ARE SUBORDINATED TO SFPP DEBT. Since SFPP, L.P. will not
guarantee the debt securities, the debt securities will be effectively
subordinated to all debt of SFPP. If SFPP defaults on its debt, the holders of
the debt securities would not receive any money from SFPP until SFPP repaid its
debt in full. SFPP is the operating partnership that owns our Pacific
Operations. Similarly, if businesses we acquire in the future have debt that
cannot be prepaid, we will be effectively subordinated to that debt. See
"Description of Debt Securities."
RISKS RELATED TO OWNERSHIP OF OUR COMMON UNITS IF WE DEFAULT
UNITHOLDERS MAY HAVE NEGATIVE TAX CONSEQUENCES IF WE DEFAULT ON OUR DEBT OR
SELL ASSETS. If we default on any of our debt, the lenders will have the right
to sue us for non-payment. Such an action could cause an investment loss and
cause negative tax consequences for unitholders through the realization of
taxable income by unitholders without a corresponding cash distribution.
Likewise, if we were to dispose of assets and realize a taxable gain while there
is substantial debt outstanding and proceeds of the sale were applied to the
debt, unitholders could have increased taxable income without a corresponding
cash distribution.
THERE IS THE POTENTIAL FOR A CHANGE OF CONTROL IF KINDER MORGAN, INC.
DEFAULTS ON DEBT. Kinder Morgan, Inc. owns all of the outstanding capital stock
of the general partner. KMI has significant operations which provide cash
independent of dividends that KMI receives from the general partner.
Nevertheless, if KMI defaults on its debt, its
8
lenders could acquire control of the general partner.
RISKS RELATED TO OUR COMMON UNITS
COMMON UNITHOLDERS HAVE LIMITED VOTING RIGHTS AND LIMITED CONTROL. Holders
of common units have only limited voting rights on matters affecting the
partnership. The general partner manages partnership activities. Holders of
common units have no right to elect the general partner on an annual or other
ongoing basis. If the general partner withdraws, however, its successor may be
elected by the holders of a majority of the outstanding common units (excluding
units owned by the departing general partner and its affiliates).
The limited partners may remove the general partner only if:
- the holders of at least 66 2/3% of the outstanding common units,
excluding common units owned by the departing general partner and its
affiliates, vote to remove the general partner;
- a successor general partner is approved by at least 66 2/3% of the
outstanding common units, excluding common units owned by the departing
general partner and its affiliates; and
- the partnership receives an opinion of counsel opining that the removal
would not result in the loss of the limited liability to any limited
partner or the limited partner of the operating partnership or cause the
partnership or the operating partnership to be taxed other than as a
partnership for federal income tax purposes.
A PERSON OR GROUP OWNING 20% OR MORE OF THE COMMON UNITS CANNOT VOTE. Any
common units held by a person or group that owns 20% or more of the common units
cannot be voted. This limitation does not apply to the general partner and its
affiliates. This provision may:
- discourage a person or group from attempting to remove the general
partner or otherwise change management; and
- reduce the price at which the common units will trade under certain
circumstances. For example, a third party will probably not attempt to
remove the general partner and take over our management by making a
tender offer for the common units at a price above their trading market
price without removing the general partner and substituting an affiliate.
THE GENERAL PARTNER'S LIABILITY TO THE PARTNERSHIP AND UNITHOLDERS MAY BE
LIMITED. The partnership agreement contains language limiting the liability of
the general partner to the partnership or the holders of common units. For
example, the partnership agreement provides that:
- the general partner does not breach any duty to the partnership or the
holders of common units by borrowing funds or approving any borrowing.
The general partner is protected even if the purpose or effect of the
borrowing is to increase incentive distributions to the general partner;
- the general partner does not breach any duty to the partnership or the
holders of common units by taking any actions consistent with the
standards of reasonable discretion outlined in the definitions of
available cash and cash from operations contained in the partnership
agreement; and
- the general partner does not breach any standard of care or duty by
resolving conflicts of interest unless the general partner acts in bad
faith.
THE PARTNERSHIP AGREEMENT MODIFIES THE FIDUCIARY DUTIES OF THE GENERAL
PARTNER UNDER DELAWARE LAW. Such modifications of state law standards of
fiduciary and other duties may significantly limit the ability of unitholders to
successfully challenge the actions of the general partner as being a breach of
what would otherwise have been a duty. These standards include the highest
duties of good faith, fairness and loyalty to the limited partners. Such a duty
of loyalty would generally prohibit a general partner of a
9
Delaware limited partnership from taking any action or engaging in any
transaction for which it has a conflict of interest. Under the partnership
agreement, the general partner may exercise its broad discretion and authority
in the management of the partnership and the conduct of its operations.
UNITHOLDERS MAY HAVE LIABILITY TO REPAY DISTRIBUTIONS. Unitholders will not
be liable for assessments in addition to their initial capital investment in the
common units. Under certain circumstances, however, holders of common units may
have to repay the partnership amounts wrongfully returned or distributed to
them. Under Delaware law, we may not make a distribution to you if the
distribution causes the liabilities of the partnership to exceed the fair value
of the partnership's assets. Liabilities to partners on account of their
partnership interests and non-recourse liabilities are not counted for purposes
of determining whether a distribution is permitted. Delaware law provides that
for a period of three years from the date of such a distribution, a limited
partner who receives the distribution and knew at the time of the distribution
that the distribution violated Delaware law will be liable to the limited
partnership for the distribution amount. Under Delaware law, an assignee who
becomes a substituted limited partner of a limited partnership is liable for the
obligations of the assignor to make contributions to the partnership. However,
such an assignee is not obligated for liabilities unknown to the assignee at the
time the assignee became a limited partner if the liabilities could not be
determined from the partnership agreement.
UNITHOLDERS MAY BE LIABLE IF WE HAVE NOT COMPLIED WITH STATE PARTNERSHIP
LAW. We conduct our business in a number of states. In some of those states the
limitations on the liability of limited partners for the obligations of a
limited partnership have not been clearly established. The unitholders might be
held liable for the partnership's obligations as if they were a general partner
if:
- a court or government agency determined that we were conducting business
in the state but had not complied with the state's partnership statute;
or
- unitholders' rights to act together to remove or replace the general
partner or take other actions under the partnership agreement constitute
"control" of the partnership's business.
THE GENERAL PARTNER MAY BUY OUT MINORITY UNITHOLDERS IF IT OWNS 80% OF THE
UNITS. If at any time the general partner and its affiliates own 80% or more of
the issued and outstanding common units, the general partner will have the right
to purchase all of the remaining common units. Because of this right, a
unitholder will have to sell its common units at a time or price that may be
undesirable. The general partner may only purchase all of the common units. The
purchase price for such a purchase will be the greater of:
- the most recent 20-day average trading price as of the date five days
prior to the date the notice of purchase is mailed; or
- the highest purchase price paid by the general partner or its affiliates
to acquire common units during the prior 90 days.
The general partner can assign this right to its affiliates or to the
partnership.
WE MAY SELL ADDITIONAL LIMITED PARTNER INTERESTS, DILUTING EXISTING
INTERESTS OF UNITHOLDERS. The partnership agreement allows the general partner
to cause the partnership to issue additional common units and other equity
securities. When we issue additional equity securities, your proportionate
partnership interest will decrease. Such an issuance could negatively affect the
amount of cash distributed to unitholders and the market price of common units.
Issuance of additional common units will also diminish the relative voting
strength of the previously outstanding common units. There is no limit on the
total number of common units we may issue.
THE GENERAL PARTNER CAN PROTECT ITSELF AGAINST DILUTION. Whenever the
partnership
10
issues equity securities to any person other than the general partner and its
affiliates, the general partner has the right to purchase additional limited
partnership interests on the same terms. This allows the general partner to
maintain its partnership interest in the partnership. No other unitholder has a
similar right. Therefore, only the general partner may protect itself against
dilution caused by issuance of additional equity securities.
THERE ARE POTENTIAL CONFLICTS OF INTEREST RELATED TO THE OPERATION OF THE
PARTNERSHIP. Certain conflicts of interest could arise among the partnership,
the general partner and its ultimate corporate parent, Kinder Morgan, Inc.
("KMI"). Such conflicts may include, among others, the following situations:
Some of the directors and officers of KMI are also our directors and
officers and directors and officers of the general partner. Conflicts of
interest may result due to the fiduciary duties such directors and officers may
have to manage the business of KMI in a manner beneficial to KMI and its
shareholders. The resolution of these conflicts may not always be in the best
interests of the partnership's unitholders.
The general partner may not be fully reimbursed for the use of its officers
and employees. KMI shares administrative personnel with the general partner to
operate both KMI's business and the business of the partnership. As a result,
the officers of the general partner, who in some cases may also be officers of
KMI, must allocate, in their reasonable and sole discretion, the time the
general partner's employees spend on behalf of the partnership and on behalf of
KMI. These allocations are not the result of arms-length negotiations between
the general partner and KMI. Although the general partner intends to be
reimbursed for its employees' activities, due to the nature of the allocations,
this reimbursement may not exactly match the actual time and overhead spent.
Since the partnership reimburses the general partner for its general and
administrative expenses, the under allocation of the time and overhead spent on
KMI's activities would negatively affect the amount of cash available for
distribution to the partnership's unitholders. See Item 13. "Certain
Relationships and Related Transactions -- General and Administrative Expenses"
in our most recent annual report on Form 10-K.
The general partner's decisions may affect cash distributions to
unitholders. The general partner determines the amount and timing of asset
purchases and sales, capital expenditures, borrowings and reserves. All of these
decisions can impact the amount of cash distributed by the partnership to its
unitholders, which, in turn, affects the amount of the cash incentive
distribution to the general partner.
The general partner tries to avoid being personally liable for partnership
obligations. The general partner is permitted to protect its assets in this
manner by the partnership agreement. Under the partnership agreement, the
general partner does not breach duties even if the partnership could have
obtained more favorable terms without limitations on the general partner's
liability.
The general partner's decision to exercise or assign its call right to
purchase all of the limited partnership interests may conflict with the
interests of the unitholders. If the general partner exercises this right, a
unitholder will have to sell its interest at a time or price that may be
undesirable.
USE OF PROCEEDS
The net proceeds from the sale of the common units and the debt securities
will be added to our general funds and will be used to repay debt, fund capital
expenditures, provide working capital and for general corporate purposes. Other
purposes may be stated in a prospectus supplement.
11
CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
The historical ratios of earnings to fixed charges of Kinder Morgan Energy
Partners and our consolidated subsidiaries for the periods indicated are as
follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
- --------------------------------
2000 1999 1998 1997 1996
- ---- ---- ---- ---- ----
3.82 4.36 3.64 2.65 2.15
</Table>
In all cases, earnings is determined by adding:
- income before income taxes, extraordinary items, equity income and
minority interest; plus
- fixed charges, amortization of capitalized interest and distributed
income of equity investees; less
- capitalized interest.
In all cases, fixed charges include:
- interest, including capitalized interest; plus
- amortization of debt issuance costs; plus
- the estimated interest portion of rental expenses.
DESCRIPTION OF DEBT SECURITIES
The debt securities will be:
- our direct unsecured general obligations; and
- either senior debt securities or subordinated debt securities.
Senior debt securities will be issued under a "senior indenture" and
subordinated debt securities will be issued under a "subordinated indenture".
Together the senior indenture and the subordinated indenture are called the
indentures, and the senior debt securities and the subordinated debt securities
are called debt securities.
We have summarized the material provisions of the indentures in the
following order:
- those provisions that apply only to the senior indenture;
- those provisions that apply only to the subordinated indenture; and
- those provisions that apply to both indentures.
We have not restated these agreements in their entirety. We have filed the
forms of the indentures as exhibits to the registration statement of which this
prospectus is a part. You should read the indentures, because they, and not this
description, control your rights as holders of the debt securities. In the
summary below, we have included references to section numbers of the applicable
indentures so that you can easily locate these provisions. Capitalized terms
used in the summary have the meanings specified in the indentures.
SPECIFIC TERMS OF EACH SERIES OF DEBT SECURITIES IN THE PROSPECTUS SUPPLEMENT
A prospectus supplement and any supplemental indenture relating to any
series of debt securities being offered will include specific terms relating to
the offering. These terms will include some or all of the following:
- the form and title of the debt securities;
- the total principal amount of the debt securities;
- the portion of the principal amount which will be payable if the maturity
of the debt securities is accelerated;
- the currency or currency unit in which the debt securities will be paid,
if not U.S. dollars;
- any right we may have to defer payments of interest by extending the
dates payments are due whether
12
interest on those deferred amounts will be payable as well;
- the place where the principal of (and premium, if any) and interest on
any debt securities will be payable;
- the dates on which the principal of the debt securities will be payable;
- the interest rate which the debt securities will bear and the interest
payment dates for the debt securities;
- any optional redemption provisions;
- any sinking fund or other provisions that would obligate us to repurchase
or otherwise redeem the debt securities;
- any changes to or additional events of default or covenants;
- any changes in trustees or paying or authenticating agents; and
- any other terms of the debt securities.
PROVISIONS ONLY IN THE SENIOR INDENTURE
The senior debt securities will rank equally in right of payment with all
of our other senior and unsubordinated debt. The senior indenture contains
provisions that:
- limit our ability to put liens on our principal assets;
- limit our ability to sell and lease back our principal property; and
- require our subsidiaries that in the future guarantee our long term debt
to guarantee the senior debt securities on an equal basis.
The subordinated indenture does not contain any similar provisions. We have
described below these provisions and some of the defined terms used in them.
LIMITATIONS ON LIENS. The senior indenture provides that we will not, nor
will it permit any Subsidiary to, create, assume, incur or suffer to exist any
lien upon any Principal Property, as defined below, or upon any shares of
capital stock of any Subsidiary owning or leasing any Principal Property,
whether owned or leased on the date of the senior indenture or thereafter
acquired, to secure any of our debt or the debt of any other person, other than
the senior debt securities issued under the senior indenture, without in any
such case making effective provision whereby all of the senior debt securities
outstanding thereunder shall be secured equally and ratably with, or prior to,
that debt so long as that debt is so secured.
"Principal Property" means, whether owned or leased on the date of the
senior indenture or thereafter acquired:
(a) any pipeline assets of ours or of any Subsidiary, including any
related facilities employed in the transportation, distribution, storage or
marketing of refined petroleum products, natural gas liquids and carbon
dioxide, that are located in the United States of America or any territory
or political subdivision thereof; and
(b) any processing or manufacturing plant or terminal owned or leased
by us or any Subsidiary that is located in the United States or any
territory or political subdivision thereof,
except, in the case of either of the foregoing clauses (a) or (b):
(1) any such assets consisting of inventories, furniture, office
fixtures and equipment (including data processing equipment), vehicles and
equipment used on, or useful with, vehicles; and
(2) any such assets, plant or terminal which, in the opinion of the
board of directors of Kinder Morgan G.P., Inc., our general partner, is not
material in relation to our activities or to our activities and those of
our Subsidiaries, taken as a whole.
There is excluded from this restriction:
1. Permitted Liens, as defined below;
2. any lien upon any property or assets created at the time of
acquisition of that property or assets by us or any Subsidiary or within
one year after such time to secure all or a portion of the
13
purchase price for such property or assets or debt incurred to finance such
purchase price, whether such debt was incurred prior to, at the time of or
within one year after the date of such acquisition;
3. any lien upon any property or assets to secure all or part of the
cost of construction, development, repair or improvements thereon or to
secure debt incurred prior to, at the time of, or within one year after
completion of such construction, development, repair or improvements or the
commencement of full operations thereof, whichever is later, to provide
funds for that purpose;
4. any lien upon any property or assets existing thereon at the time
of the acquisition thereof by us or any Subsidiary; provided, however, that
such lien only encumbers the property or assets so acquired;
5. any lien upon any property or assets of a person existing thereon
at the time such person becomes a Subsidiary by acquisition, merger or
otherwise; provided, however, that such lien only encumbers the property or
assets of such person at the time such person becomes a Subsidiary;
6. with respect to any series, any lien upon any property or assets of
the Partnership or any Subsidiary in existence on the date the senior debt
securities of such series are first issued or provided for pursuant to
agreements existing on such date;
7. liens imposed by law or order as a result of any proceeding before
any court or regulatory body that is being contested in good faith, and
liens which secure a judgment or other court-ordered award or settlement as
to which we or the applicable Subsidiary has not exhausted our appellate
rights;
8. any extension, renewal, refinancing, refunding or replacement, or
successive extensions, renewals, refinancing, refunding or replacements, of
liens, in whole or in part, referred to in clauses (1) through (7),
inclusive, above; provided, however, that any such extension, renewal,
refinancing, refunding or replacement lien shall be limited to the property
or assets covered by the lien extended, renewed, refinanced, refunded or
replaced and that the obligations secured by any such extension, renewal,
refinancing, refunding or replacement lien shall be in an amount not
greater than the amount of the obligations secured by the lien extended,
renewed, refinanced, refunded or replaced and any expenses of ours and our
Subsidiaries, including any premium, incurred in connection with such
extension, renewal, refinancing, refunding or replacement; or
9. any lien resulting from the deposit of moneys or evidence of
indebtedness in trust for the purpose of defeasing any of our debt or debt
of any Subsidiary.
Notwithstanding the foregoing, under the senior indenture, we may, and may
permit any Subsidiary to, create, assume, incur, or suffer to exist any lien
upon any Principal Property to secure debt of the Partnership or any person,
other than the senior debt securities, that is not excepted by clauses (1)
through (9), inclusive, above without securing the senior debt securities issued
under the senior indenture; provided that the aggregate principal amount of all
debt then outstanding secured by such lien and all similar liens, together with
all Attributable Indebtedness from Sale-Leaseback Transactions (excluding
Sale-Leaseback Transactions permitted by clauses (1) through (4), inclusive, of
the first paragraph of the restriction on sale-leasebacks covenant described
below) does not exceed 10% of Consolidated Net Tangible Assets. (Section 1006)
"Permitted Liens" means:
(1) liens upon rights-of-way for pipeline purposes;
(2) any statutory or governmental lien or lien arising by operation of
law, or any mechanics', repairmen's, materialmen's, suppliers', carriers',
14
landlords', warehousemen's or similar lien incurred in the ordinary course
of business which is not yet due or which is being contested in good faith
by appropriate proceedings and any undetermined lien which is incidental to
construction, development, improvement or repair;
(3) the right reserved to, or vested in, any municipality or public
authority by the terms of any right, power, franchise, grant, license,
permit or by any provision of law, to purchase or recapture or to designate
a purchaser of, any property;
(4) liens of taxes and assessments which are (A) for the then current
year, (B) not at the time delinquent, or (C) delinquent but the validity of
which is being contested at the time by us or any Subsidiary in good faith;
(5) liens of, or to secure performance of, leases, other than capital
leases;
(6) any lien upon, or deposits of, any assets in favor of any surety
company or clerk of court for the purpose of obtaining indemnity or stay of
judicial proceedings;
(7) any lien upon property or assets acquired or sold by us or any
Subsidiary resulting from the exercise of any rights arising out of
defaults on receivables;
(8) any lien incurred in the ordinary course of business in connection
with workmen's compensation, unemployment insurance, temporary disability,
social security, retiree health or similar laws or regulations or to secure
obligations imposed by statute or governmental regulations;
(9) any lien in favor of us or any Subsidiary;
(10) any lien in favor of the United States of America or any state
thereof, or any department, agency or instrumentality or political
subdivision of the United States of America or any state thereof, to secure
partial, progress, advance, or other payments pursuant to any contract or
statute, or any debt incurred by us or any Subsidiary for the purpose of
financing all or any part of the purchase price of, or the cost of
constructing, developing, repairing or improving, the property or assets
subject to such lien;
(11) any lien securing industrial development, pollution control or
similar revenue bonds;
(12) any lien securing our debt or debt of any Subsidiary, all or a
portion of the net proceeds of which are used, substantially concurrent
with the funding thereof (and for purposes of determining such "substantial
concurrence," taking into consideration, among other things, required
notices to be given to holders of outstanding senior debt securities under
the senior indenture in connection with such refunding, refinancing or
repurchase, and the required corresponding durations thereof), to
refinance, refund or repurchase all outstanding senior debt securities
under the senior indenture, including the amount of all accrued interest
thereon and reasonable fees and expenses and premium, if any, incurred by
us or any Subsidiary in connection therewith;
(13) liens in favor of any person to secure obligations under the
provisions of any letters of credit, bank guarantees, bonds or surety
obligations required or requested by any governmental authority in
connection with any contract or statute; or
(14) any lien upon or deposits of any assets to secure performance of
bids, trade contracts, leases or statutory obligations.
"Consolidated Net Tangible Assets" means, at any date of determination, the
total amount of assets after deducting therefrom:
- all current liabilities, excluding
- any current liabilities that by their terms are extendable or renewable
at the option of the obligor thereon to a time more than 12 months
after the
15
time as of which the amount thereof is being computed; and
- current maturities of long-term debt; and
- the value, net of any applicable reserves, of all goodwill, trade names,
trademarks, patents and other like intangible assets,
all as set forth, or on a proforma basis would be set forth, on our consolidated
balance sheet our most recently completed fiscal quarter, prepared in accordance
with generally accepted accounting principles.
RESTRICTION ON SALE-LEASEBACKS. The senior indenture provides that we will
not, and will not permit any Subsidiary to, engage in the sale or transfer by us
or any Subsidiary of any Principal Property to a person, other than the
Partnership or a Subsidiary, and the taking back by us or any Subsidiary, as the
case may be, of a lease of such Principal Property (a "Sale-Leaseback
Transaction"), unless:
(1) such Sale-Leaseback Transaction occurs within one year from the date of
completion of the acquisition of the Principal Property subject thereto or the
date of the completion of construction, development or substantial repair or
improvement, or commencement of full operations on such Principal Property,
whichever is later;
(2) the Sale-Leaseback Transaction involves a lease for a period, including
renewals, of not more than three years;
(3) we or a Subsidiary would be entitled to incur debt secured by a lien on
the Principal Property subject thereto in a principal amount equal to or
exceeding the Attributable Indebtedness from such Sale-Leaseback Transaction
without equally and ratably securing the senior debt securities; or
(4) we or a Subsidiary, within a one-year period after such Sale-Leaseback
Transaction, applies or causes to be applied an amount not less than the
Attributable Indebtedness from such Sale-Leaseback Transaction to:
- the prepayment, repayment, redemption, reduction or retirement of any of
our debt or the debt of any Subsidiary that is not subordinated to the
senior debt securities, or
- the expenditure or expenditures for Principal Property used or to be used
in the ordinary course of our business or the business of our
Subsidiaries.
"Attributable Indebtedness," when used with respect to any Sale-Leaseback
Transaction, means, as at the time of determination, the present value,
discounted at the rate set forth or implicit in the terms of the lease included
in such transaction, of the total obligations of the lessee for rental payments
(other than amounts required to be paid on account of property taxes,
maintenance, repairs, insurance, assessments, utilities, operating and labor
costs and other items that do not constitute payments for property rights)
during the remaining term of the lease included in such Sale-Leaseback
Transaction, including any period for which such lease has been extended. In the
case of any lease that is terminable by the lessee upon the payment of a penalty
or other termination payment, such amount shall be the lesser of the amount
determined assuming termination upon the first date such lease may be
terminated, in which case the amount shall also include the amount of the
penalty or termination payment, but no rent shall be considered as required to
be paid under such lease subsequent to the first date upon which it may be so
terminated, or the amount determined assuming no such termination.
Notwithstanding the foregoing, under the senior indenture the Partnership
may, and may permit any Subsidiary to, effect any Sale-Leaseback Transaction
that is not excepted by clauses (1) through (4), inclusive, of the first
paragraph under "-- Restriction on Sale-Leasebacks," provided that the
Attributable Indebtedness from such Sale-Leaseback Transaction, together with
the aggregate principal amount of outstanding debt (other than the senior debt
securities) secured by
16
liens upon Principal Properties not excepted by clauses (1) through (9),
inclusive, of the first paragraph of the limitation on liens covenant described
above, do not exceed 10% of Consolidated Net Tangible Assets. (Section 1007)
POTENTIAL GUARANTY OF SENIOR DEBT SECURITIES BY SUBSIDIARIES. We are a
holding company that conducts all of our operations through our subsidiaries.
Initially, none of our Subsidiaries will guarantee the senior debt securities.
However, the senior indenture requires our Subsidiaries which become guarantors
or co-obligors of our Funded Debt, as defined below, to fully and
unconditionally guarantee, as "Guarantors," our payment obligations on the
senior debt securities. In particular, the senior indenture will require those
Subsidiaries who become guarantors or borrowers under our Funded Debt, other
than senior debt securities, to equally guarantee the senior debt securities.
(Section 1401)
In the indentures, the term "Subsidiary" means, with respect to any person:
- any corporation, association or other business entity of which more than
50% of the total voting power of the equity interests entitled, without
regard to the occurrence of any contingency, to vote in the election of
directors, managers or trustees thereof; or
- any partnership of which more than 50% of the partners' equity interests,
considering all partners' equity interests as a single class, is at the
time owned or controlled, directly or indirectly, by such person or one
or more of the other Subsidiaries of such person or combination thereof.
"Funded Debt" means all debt :
- maturing one year or more from the date of its creation;
- directly or indirectly renewable or extendable, at the option of the
debtor, by its terms or by the terms of any instrument or agreement
relating to the debt, to a date one year or more from the date of its
creation; or
- under a revolving credit or similar agreement obligating the lender or
lenders to extend credit over a period of one year or more.
ADDITION AND RELEASE OF GUARANTEES. The senior indenture provides that if
any of our Subsidiaries is a guarantor or obligor of any of our Funded Debt,
other than senior debt securities, at any time on or subsequent to the date on
which the senior debt securities are originally issued, including, without
limitation, following any release of the Subsidiary from its Guarantee as
described below, then we will cause the senior debt securities to be equally and
ratably guaranteed by such Subsidiary. Under the terms of the senior indenture,
a Guarantor may be released from its Guarantee if such Guarantor is not a
guarantor or obligor of any of our Funded Debt, provided that no Default or
Event of Default under the senior indenture has occurred or is continuing.
(Section 1402)
Each of the Guarantees will be an unsecured obligation of a Guarantor and
will rank equally with existing and future unsecured debt that is not expressly
subordinated to its Guarantee.
Each Guarantor will be obligated under its Guarantee only up to an amount
that will not constitute a fraudulent conveyance or fraudulent transfer under
federal, state or foreign law.
SENIOR DEBT SECURITIES EFFECTIVELY SUBORDINATED TO DEBT OF NON-GUARANTOR
SUBSIDIARIES. Holders of senior debt securities will effectively have a junior
position to claims of creditors and preferred stockholders of our subsidiaries
who are not Guarantors. SFPP, L.P., the subsidiary that owns our Pacific
Operations, currently has debt agreements that prohibit it from being a
guarantor of any of our debt. As a result, SFPP will not be required to become a
Guarantor. As of December 31, 2000, SFPP had approximately $119 million of
outstanding debt to non-affiliates. This debt of SFPP, and any future debt it
incurs, effectively will be senior to the senior debt securities.
17
PROVISIONS ONLY IN THE SUBORDINATED INDENTURE
SUBORDINATED DEBT SECURITIES SUBORDINATED TO SENIOR DEBT. The subordinated
debt securities will rank junior in right of payment to all of our Senior Debt.
"Senior Debt" is defined to include all notes or other unsecured evidences of
indebtedness, including guarantees by us for money borrowed by us, not expressed
to be subordinate or junior in right of payment to any of our other
indebtedness.
PAYMENT BLOCKAGES. The subordinated indenture provides that no payment of
principal, interest and any premium on the subordinated debt securities may be
made in the event:
- we or our property are involved in any voluntary or involuntary
liquidation or bankruptcy;
- we fail to pay the principal, interest, any premium or any other amounts
on any Senior Debt when due; or
- we have a nonpayment default on any Senior Debt that imposes a payment
blockage on the subordinated debt securities for a maximum of 179 days at
any one time.
(Sections 1401, 1402 and 1403 of the subordinated indenture)
SUBORDINATED DEBT SECURITIES SUBORDINATED TO ALL DEBT OF SUBSIDIARIES. The
subordinated indenture will not require our Subsidiaries to guarantee the
subordinated debt securities. As a result, the holders of subordinated debt
securities will generally have a junior position to claims of all creditors and
preferred stockholders of our subsidiaries.
NO LIMITATION ON AMOUNT OF SENIOR DEBT. The subordinated indenture will not
limit the amount of Senior Debt that we may incur.
PROVISIONS IN BOTH INDENTURES
CONSOLIDATION, MERGER OR ASSET SALE. Each indenture generally allows us to
consolidate or merge with a domestic person, association or entity. They also
allow us to sell, lease or transfer all or substantially all of our property and
assets to a domestic person, association or entity. If this happens, the
remaining or acquiring person, association or entity must assume all of our
responsibilities and liabilities under the Indentures including the payment of
all amounts due on the debt securities and performance of the covenants in the
indentures.
However, we will only consolidate or merge with or into any other person,
association or entity or sell, lease or transfer all or substantially all of our
assets according to the terms and conditions of the indentures, which include
the following requirements:
- the remaining or acquiring person, association or entity is organized
under the laws of the United States, any state or the District of
Columbia;
- the remaining or acquiring person, association or entity assumes our
obligations under the indentures; and
- immediately after giving effect to the transaction no Default or Event of
Default, as defined below, exists.
The remaining or acquiring person, association or entity will be
substituted for us in the indentures with the same effect as if it had been an
original party to the indentures. Thereafter, the successor may exercise our
rights and powers under the Indentures, in our name or in its own name. If we
sell or transfer all or substantially all of our assets, we will be released
from all our liabilities and obligations under any indenture and under the debt
securities. If we lease all or substantially all of our assets, we will not be
released from our obligations under the indentures. (Sections 801 & 802)
If, at any time, any of our Subsidiaries is required to guarantee the
senior debt securities, the restriction on our ability to consolidate or merge
and to sell, lease or transfer all or substantially all of our property and
assets also will apply to that Subsidiary.
MODIFICATION OF INDENTURES. Under each indenture, generally we and the
trustee may modify our rights and obligations, the Guarantors' rights and
obligations and the rights of the holders with the consent of the holders of a
majority in aggregate principal
18
amount of the outstanding debt securities of each series affected by the
modification. No modification of the principal or interest payment terms, and no
modification reducing the percentage required for modifications, is effective
against any holder without its consent. In addition, we and the trustee may
amend the indentures without the consent of any holder of the debt securities to
make certain technical changes, such as:
- correcting errors;
- providing for a successor trustee;
- qualifying the indentures under the Trust Indenture Act; or
- adding provisions relating to a particular series of debt securities.
(Sections 901 & 902)
EVENTS OF DEFAULT AND REMEDIES. "Event of Default" when used in an
indenture, will mean any of the following:
- failure to pay the principal of or any premium on any debt security when
due;
- failure to pay interest on any debt security for 30 days;
- failure to perform any other covenant in the indenture that continues for
60 days after being given written notice;
- our bankruptcy, insolvency or reorganization; or
- any other Event of Default included in any indenture or supplemental
indenture. (Section 501)
An Event of Default for a particular series of debt securities does not
necessarily constitute an Event of Default for any other series of debt
securities issued under an Indenture. Further, an Event of Default under the
debt securities of any series will not necessarily constitute an event of
default under our other indebtedness or vice versa. The trustee may withhold
notice to the holders of debt securities of any default, except in the payment
of principal or interest, if it considers such withholding of notice to be in
the best interests of the holders. (Section 602)
If an Event of Default for any series of debt securities occurs and
continues, the trustee or the holders of at least 25% in aggregate principal
amount of the debt securities of the series may declare the entire principal of
all the debt securities of that series to be due and payable immediately. If
this happens, subject to certain conditions, the holders of a majority of the
aggregate principal amount of the debt securities of that series can void the
declaration. (Section 502)
Other than its duties in case of a default, a trustee is not obligated to
exercise any of its rights or powers under any indenture at the request, order
or direction of any holders, unless the holders offer the trustee reasonable
indemnity. (Section 601) If they provide this reasonable indemnification, the
holders of a majority in principal amount of any series of debt securities may
direct the time, method and place of conducting any proceeding or any remedy
available to the trustee, or exercising any power conferred upon the trustee,
for any series of debt securities. (Section 512)
NO LIMIT ON AMOUNT OF DEBT SECURITIES. Neither of the indentures limits the
amount of debt securities that we may issue. Each indenture allows us to issue
debt securities up to the principal amount that we authorize.
NO PERSONAL LIABILITY OF GENERAL PARTNER. Kinder Morgan G.P., Inc., our
general partner, and its directors, officers, employees and shareholders will
not have any liability for our obligations under the indentures or the debt
securities. Each holder of debt securities by accepting a debt security waives
and releases all such liability. The waiver and release are part of the
consideration for the issuance of the debt securities.
DISCHARGING OUR OBLIGATIONS. We and the Guarantors, if any, may choose
either to discharge our obligations on the debt securities of any series in a
legal defeasance, or to release ourselves from our covenant restrictions on the
debt securities of any series in a covenant defeasance. We may do so at any time
on the 91st day after we
19
deposit with the trustee sufficient cash or government securities to pay the
principal, interest, any premium and any other sums due to the stated maturity
date or a redemption date of the debt securities of the series. If we choose the
legal defeasance option, the holders of the debt securities of the series will
not be entitled to the benefits of the indenture except for registration of
transfer and exchange of debt securities, replacement of lost, stolen or
mutilated debt securities, conversion or exchange of debt securities, sinking
fund payments and receipt of principal and interest on the original stated due
dates or specified redemption dates. (Section 1302)
We may discharge our obligations under the indentures or release ourselves
from covenant restrictions only if we meet certain requirements. Among other
things, we must deliver an opinion of our legal counsel that the discharge will
not result in holders having to recognize taxable income or loss or subject them
to different tax treatment. In the case of legal defeasance, this opinion must
be based on either an IRS letter ruling or change in federal tax law. We may not
have a default on the debt securities discharged on the date of deposit. The
discharge may not violate any of our agreements. The discharge may not result in
our becoming an investment company in violation of the Investment Company Act of
1940.
CONCERNING THE TRUSTEE. First Union National Bank will initially act as
trustee under the senior indenture and the subordinated indenture. The corporate
trust office of the trustee is located at 40 Broad Street, Suite 550, New York,
New York 10004.
Under provisions of the indentures and the Trust Indenture Act of 1939, as
amended, governing trustee conflicts of interest, any uncured Event of Default
with respect to any series of senior debt securities will force the trustee to
resign as trustee under either the subordinated indenture or the senior
indenture. Also, any uncured Event of Default with respect to any series of
subordinated debt securities will force the trustee to resign as trustee under
either the senior indenture or the subordinated indenture. Any resignation will
require the appointment of a successor trustee under the applicable indenture in
accordance with the terms and conditions.
The trustee may resign or be removed by us with respect to one or more
series of debt securities and a successor trustee may be appointed to act with
respect to any such series. The holders of a majority in aggregate principal
amount of the debt securities of any series may remove the trustee with respect
to the debt securities of such series. (Section 610)
Each indenture contains certain limitations on the right of the trustee
thereunder, in the event that it becomes a creditor of the Partnership, to
obtain payment of claims in some cases, or to realize on property received in
respect of any such claim, as security or otherwise. (Section 613)
The trustee is required to submit an annual report to the holders of the
debt securities regarding, among other things, the trustee's eligibility to
serve as such, the priority of the trustee's claims regarding certain advances
made by it, and any action taken by the trustee materially affecting the debt
securities.
Each indenture provides that, in addition to other certificates or opinions
that may be specifically required by other provisions of an indenture, every
application by us for action by the trustee shall be accompanied by a
certificate of certain of our officers and an opinion of counsel (who may be our
counsel) stating that, in the opinion of the signers, we have complied with all
conditions precedent to the action. (Section 102)
Governing Law. The indentures are and the debt securities will be governed
by the laws of the State of New York.
FORM, DENOMINATION AND REGISTRATION; BOOK ENTRY ONLY SYSTEM. Unless
otherwise indicated in a prospectus supplement, the debt securities of a series
will be issued only in fully registered form, without coupons, in denominations
of $1,000 or integral multiples thereof. (Section 301) You will not have to pay
a service charge to transfer or exchange debt securities of a series, but we may
require you to pay for taxes or other
20
governmental charges due upon a transfer or exchange. (Section 305)
Unless otherwise indicated in a prospectus supplement, each series of debt
securities will be deposited with, or on behalf of, The Depository Trust Company
("DTC") or any successor depositary, which we call a depositary, and will be
represented by one or more global notes registered in the name of Cede & Co., as
nominee of DTC. The interests of beneficial owners in the global notes will be
represented through financial institutions acting on their behalf as direct or
indirect participants in DTC.
Ownership of beneficial interests in a global note will be limited to
persons, called participants, who have accounts with DTC or persons who hold
interests through participants. Ownership of beneficial interests in the global
notes will be shown on, and the transfer of these ownership interests will be
effected only through, records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with respect to
interests of persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of a
global note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the debt securities of that series represented by such
global note for all purposes of the indenture, the debt securities of that
series and applicable law. In addition, no beneficial owner of an interest in a
global note will be able to transfer that interest except in accordance with
DTC's applicable procedures, in addition to those under the applicable
indenture.
Payments on debt securities represented by global notes will be made to DTC
or its nominee, as the registered owner thereof. Neither we, the trustee, any
underwriter nor any paying agent will have any responsibility or liability for
any aspect of the records relating to or payments made on account of beneficial
ownership interests in global notes, for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests or for any action
taken or omitted to be taken by the depositary or any participant.
We expect that DTC or its nominee will credit participants' accounts on the
payable date with payments in respect of a global note in amounts proportionate
to their respective beneficial interest in the principal amount of such global
note as shown on the records of DTC or its nominee, unless DTC has reason to
believe that it will not receive payment on the payable date. We also expect
that payments by participants to owners of beneficial interests in such global
note held through such participants will be governed by standing instructions
and customary practices, as is now the case with securities held for the
accounts of customers registered in "street name." Such payments will be the
responsibility of such participants.
Transfers between participants in DTC will be effected in accordance with
DTC rules. The laws of some states require that certain persons take physical
delivery of securities in definitive form. Consequently, the ability to transfer
beneficial interests in a global note to such persons may be impaired. Because
DTC can only act on behalf of participants, who in turn act on behalf of others,
such as securities brokers and dealers, banks and trust companies, called
indirect participants, the ability of a person having a beneficial interest in a
global note to pledge that interest to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of that
interest, may be impaired by the lack of a physical certificate of that
interest.
We believe it is the policy of DTC to take any action permitted to be taken
by a holder of debt securities of a series only at the direction of one or more
participants to whose account interests in global notes are credited and only in
respect of such portion of the aggregate principal amount of the debt securities
of a series as to which such participant or participants has or have given such
direction.
If (1) the depositary notifies us that it is unwilling or unable to
continue as depositary or if the depositary ceases to be eligible under the
applicable indenture and a successor depositary is not appointed by us within 90
days or (2) an event of default with respect to a series of debt securities
shall
21
have occurred and be continuing, the respective global notes representing the
affected series of debt securities will be exchanged for debt securities in
definitive form of like tenor and of an equal aggregate principal amount, in
authorized denominations. Such definitive debt securities shall be registered in
such name or names as the depositary shall instruct the trustee. Such
instructions will most likely be based upon directions received by the
depositary from participants with respect to ownership of beneficial interests
in global notes.
DTC has advised us as follows: DTC is a limited-purpose trust company
organized under the New York Banking Law, a "banking organization" within the
meaning of the New York Banking Law, a member of the Federal Reserve 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 Exchange Act. DTC holds securities that its participants deposit with
DTC and facilitates the settlement among participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in participants' accounts, thereby
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. DTC is owned by a number
of its direct participants, including those who may act as underwriters of our
debt securities, and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others such as indirect participants that
clear through or maintain a custodial relationship with a direct participant,
either directly or indirectly. The rules applicable to DTC and its participants
are on file with the SEC.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in global notes among participants of DTC, it is under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither we, the trustee, any
underwriter nor any paying agent will have any responsibility for the
performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
DESCRIPTION OF COMMON UNITS
NUMBER OF COMMON UNITS
As of December 31, 2000, we had 64,858,109 common units outstanding. Our
partnership agreement does not limit the number of common units we may issue.
WHERE COMMON UNITS ARE TRADED
Our outstanding common units are listed on the New York Stock Exchange
under the symbol "KMP". Any additional common units we issue will also be listed
on the NYSE.
QUARTERLY DISTRIBUTIONS
Our partnership agreement requires us to distribute 100% of "Available
Cash" to the Partners within 45 days following the end of each calendar quarter.
"Available Cash" consists generally of all of our cash receipts, less cash
disbursements and net additions to reserves. In addition, when we acquired our
Pacific Operations from Santa Fe Pacific Pipeline Partners, L.P. ("Santa Fe"),
the general partner of Santa Fe retained a 0.5% interest in those operations.
"Available Cash" does not include amounts payable to the former Santa Fe general
partner due to this interest.
We distribute Available Cash for each quarter as follows:
- first, 98% to the Limited Partners and 2% to the General Partner until
the Limited Partners have received a total of $0.3025 per common unit for
such quarter;
22
- second, 85% to the limited Partners and 15% to the General Partner until
the Limited Partners have received a total of $0.3575 per common unit for
such quarter;
- third, 75% to the Limited Partners and 25% to the General Partner until
the Limited Partners have received a total of $0.4675 per common unit for
such quarter; and
- fourth, thereafter 50% to the Limited Partners and 50% to the General
Partner.
TRANSFER AGENT AND REGISTRAR
Our transfer agent and registrar for the 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 our partnership agreement is
included in the reports filed with the SEC.
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MATERIAL FEDERAL INCOME TAX CONSIDERATIONS RELATING TO UNITS
This section is a summary of material federal income tax considerations
that may be relevant to prospective unitholders who are individual citizens or
residents of the United States and, unless otherwise noted in the following
discussion, expresses the opinion of our counsel, Bracewell & Patterson, L.L.P.
("Counsel"), insofar as it relates to matters of 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 the
general partner. This section is based upon current provisions of the Internal
Revenue Code of 1986, as amended, existing and proposed regulations thereunder
and current administrative rulings and court decisions, all of which are subject
to change. Later changes in these authorities may cause the tax consequences to
vary substantially from the consequences described below. Unless the context
otherwise requires, references in this section to "us" or "we" are references to
Kinder Morgan Energy Partners, L.P. and the operating partnerships.
The following discussion does not address all federal income tax matters
affecting us or the unitholders, nor does it address state, local or foreign tax
matters. Moreover, the discussion focuses on unitholders who are individual
citizens or residents of the United States and has only limited application to
corporations, estates, trusts, nonresident aliens or other unitholders subject
to specialized tax treatment, such as tax-exempt institutions, foreign persons,
individual retirement accounts (IRAs), real estate investment trusts (REITS) or
mutual funds. ACCORDINGLY, PROSPECTIVE UNITHOLDERS 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 UNITS.
No ruling has been or will be requested from the Internal Revenue Service
regarding any matter affecting us or prospective unitholders. 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
respected or 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 the units
and the prices at which units trade. The costs of any contest with the IRS will
be borne directly or indirectly by our unitholders and the general partner.
Furthermore, the tax treatment of us, or of an investment in us, may be
significantly modified by future legislative or administrative changes or court
decisions. Any modification may or may not be retroactively applied.
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner of a partnership is required to take into
account that partner's share of items of income, gain, loss, deduction and
credit of the partnership in computing the partner's own federal income tax
liability, regardless of whether cash distributions are made to the partner by
the partnership. Distributions by a partnership to a partner are generally not
taxable unless the amount of cash distributed is in excess of the partner's
adjusted tax basis in that partner's partnership interest.
Pursuant to Treasury Regulations 301.7701-1, 301.7702-1 and 301.7701-3,
effective January 1, 1997 (the "Check-the-Box Regulations"), an entity in
existence on January 1, 1997, will generally retain its current classification
for federal income tax purposes. As of January 1, 1997, Kinder Morgan Energy
Partners, L.P. and the operating partnerships were each classified and taxed as
a partnership. Pursuant to the Check-the-Box Regulations, this prior
24
classification will be respected for all periods prior to January 1, 1997, if:
- the entity had a reasonable basis for the claimed classification;
- the entity recognized the federal tax consequences of any change in
classification within five years prior to January 1, 1997; and
- the entity was not notified prior to May 8, 1996 that the entity
classification was under examination.
Based on these regulations and the applicable federal income tax law,
Counsel is of the opinion that Kinder Morgan Energy Partners, L.P. and the
operating partnerships each have been and will be classified as a partnership
for federal income tax purposes.
In rendering its opinion, Counsel has relied on certain factual
representations and covenants made by us and the general partner, including:
- neither Kinder Morgan Energy Partners, L.P. nor the operating
partnerships has elected or will elect to be treated as an association
taxable as a corporation;
- we have been and will be operated in accordance with all applicable
partnership statutes and our partnership agreements and in the manner
described herein;
- except as otherwise required by Section 704 of the Internal Revenue Code
and regulations promulgated thereunder, the general partner has had and
will have, in the aggregate, an interest in each material item of our
income, gain, loss, deduction or credit equal to at least 1% at all times
during our existence;
- a representation and covenant of the general partner that the general
partner has and will maintain, in the aggregate, a minimum capital
account balance in us equal to 1% of our total positive capital account
balances;
- for each taxable year, less than 10% of our 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 "qualifying
income" within the meaning of Section 7704(d) of the Internal Revenue
Code.
This would be true even in the event of a change in the general partner,
assuming the new general partner will satisfy the same representations and
covenants.
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 (including pipelines) or
marketing of any mineral or natural resource including oil, natural gas and
products of oil and natural gas. Other types of qualifying income include
interest other than from a financial business, dividends, gains from the sale of
real property and gains from the sale or other disposition of assets held for
the production of income that otherwise constitutes qualifying income. We have
represented that in excess of 90% of our gross income has been and will be
derived from fees and charges for transporting natural gas, refined petroleum
products, natural gas liquids, carbon dioxide and other hydrocarbons through our
pipelines, dividends, and interest. Based upon that representation, Counsel is
of the opinion that at least 90% of our current gross income constitutes
qualifying income.
If we fail to meet the Qualifying Income Exception, other than a failure
which is determined by the IRS to be inadvertent and
25
which is cured within a reasonable time after discovery, we will be treated as
if we had transferred all of our assets, subject to liabilities, to a newly
formed corporation, on the first day of the year in which we fail 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
us. This contribution and liquidation should be tax-free to unitholders and us,
so long as we, at that time, do not have liabilities in excess of the tax basis
of our assets. Thereafter, we would be treated as a corporation for federal
income tax purposes.
If we were treated as an association or otherwise taxable as a corporation
in any taxable year, as a result of a failure to meet the Qualifying Income
Exception or otherwise, our items of income, gain, loss, deduction and credit
would be reflected only on our tax return rather than being passed through to
our unitholders, and our net income would be taxed to us at corporate rates. In
addition, any distribution made to a unitholder would be treated as either
taxable dividend income, to the extent of our current or accumulated earnings
and profits, or, in the absence of earnings and profits, a nontaxable return of
capital, to the extent of the unitholder's tax basis in the unitholder's units,
or taxable capital gain, after the unitholder's tax basis in the unitholder's
units is reduced to zero. Accordingly, our 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 assumption 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 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 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. Accordingly, a purchaser or other
transferee of units who does not execute and deliver a transfer application may
not receive certain federal income tax information or reports furnished to
record holders of units unless the units are held in a nominee or street name
account and the nominee or broker has executed and delivered a transfer
application for those units.
A beneficial owner of units whose units have been transferred to a short
seller to complete a short sale may lose the beneficial owner's status as a
partner with respect to those units for federal income tax purposes. See "Tax
Consequences of Unit Ownership -- Treatment of Short Sales."
Income, gain, deductions, losses or credits would not appear to be
reportable by a unitholder who is not a partner for federal income tax purposes,
and any cash distributions received by a 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
26
Partners, L.P. for federal income tax purposes.
TAX CONSEQUENCES OF UNIT OWNERSHIP
FLOW-THROUGH OF TAXABLE INCOME. We will not pay any federal income tax.
Instead, each unitholder will be required to report on that unitholder's federal
income tax return the unitholder's allocable share of our income, gains, losses
and deductions without regard to whether corresponding cash distributions are
received by the unitholder. Consequently, we may allocate income to a unitholder
even if the unitholder has not received a cash distribution in respect of such
income. Each unitholder will be required to include in income that unitholder's
allocable share of our income, gains, losses, deductions and credits for our
taxable year ending with or within the unitholder's taxable year.
TREATMENT OF DISTRIBUTIONS. Distributions by us to a unitholder generally
will not be taxable to the unitholder for federal income tax purposes to the
extent of his tax basis in his Units immediately before the distribution. Our
cash distributions in excess of a unitholder's tax basis generally will be
considered to be gain from the sale or exchange of the Units, taxable in
accordance with the rules described under "Disposition of Units below." Any
reduction in a unitholder's share of our 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 our distributions cause a unitholder's "at risk"
amount to be less than zero at the end of any taxable year, he must recapture as
additional income any losses deducted in previous years. See "Limitations on
Deductibility of Losses" below.
A decrease in a unitholder's percentage interest in us because of our
issuance of additional units will decrease the unitholder's share of our
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 unitholder, regardless of the unitholder's tax
basis in the unitholder's units, if the distribution reduces the unitholder's
share of our "unrealized receivables," including depreciation recapture, and/or
substantially appreciated "inventory items," both as defined in the Internal
Revenue Code, and collectively, "Section 751 Assets."
To that extent, the unitholder will be treated as having been distributed
the unitholder's proportionate share of the Section 751 Assets and having
exchanged those assets with us 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 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 unitholder's tax basis for the share of Section 751 Assets deemed
relinquished in the exchange.
BASIS OF UNITS. A unitholder's initial tax basis for the unitholder's
units will be the amount paid for the units plus the unitholder's share of our
nonrecourse liabilities. That basis will be increased by the unitholder's share
of our income and by any increases in the unitholder's share of our nonrecourse
liabilities. That basis will be decreased, but not below zero, by distributions
from us, by any decreases in the unitholder's share of our nonrecourse
liabilities, by the unitholder's share of our losses and by the unitholder's
share of our expenditures that are not deductible in computing taxable income
and are not required to be capitalized. A unitholder will have no share of our
debt which is recourse to the general partner, but will have a share, generally
based on the unitholder's share of our profits, of our nonrecourse liabilities.
LIMITATIONS ON DEDUCTIBILITY OF LOSSES. The deduction by a unitholder of
the unitholder's share of our 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
27
considered to be "at risk" with respect to our activities, if that is less than
the unitholder's tax basis. A unitholder must recapture losses deducted in
previous years to the extent that distributions cause the unitholder's at risk
amount to be less than zero at the end of any taxable year. Losses disallowed to
a 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 unit, any gain recognized by a 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 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 our 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 us, is related to the
unitholder or can look only to the units for repayment. A 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 of our 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 we generate will only be available to offset
our passive income generated in the future and will not be available to offset
income from other passive activities or investments, including our investments
or investments in other publicly-traded partnerships, or salary or active
business income. Passive losses that are not deductible because they exceed a
unitholder's share of the income we generate may be deducted in full when the
unitholder disposes of his entire investment in us 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 unitholder's share of our net income may be offset by any of our
suspended passive losses, but it may not be offset by any other current or
carryover losses from other passive activities, including those attributable to
other publicly-traded partnerships.
LIMITATIONS ON INTEREST DEDUCTIONS. The deductibility of a non-corporate
taxpayer's "investment interest expense" is generally limited to the amount of
that taxpayer's "net investment income." The IRS has announced that treasury
regulations will be issued that characterize net passive income from a
publicly-traded partnership as investment income for purposes of the limitations
on the deductibility of investment interest. In addition, the unitholder's share
of our portfolio income will be treated as investment income. Investment
interest expense includes:
- interest on indebtedness properly allocable to property held for
investment;
- our 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 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
28
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 we are required or elect under applicable law
to pay any federal, state or local income tax on behalf of any unitholder, the
general partner or any former unitholder, the general partner is authorized to
pay such taxes from our 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 us 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 we have a
net profit, our items of income, gain, loss and deduction will be allocated
among the general partner and the unitholders in accordance with their
percentage interests in us. A class of our unitholders that receives more cash
than another class, on a per unit basis, with respect to a year, will be
allocated additional income equal to that excess. If we have a net loss, that
loss will generally be allocated first, to the general partner and the
unitholders in accordance with their percentage interests in us 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 our 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 us, referred to in this discussion as
"Contributed Property." In addition, certain items of recapture income will be
allocated to the extent possible to the unitholder who was allocated the
deduction giving rise to the treatment of the gain as recapture income in order
to minimize the recognition of ordinary income by some unitholders, but these
allocations may not be respected by the IRS or the courts. If these allocations
of recapture income are not respected, the amount of the income or gain
allocated to a unitholder will not change, but instead a change in the character
of the income allocated to a unitholder would result. Finally, although we do
not expect that our operations will result in the creation of negative capital
accounts, if negative capital accounts nevertheless result, items of our 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 our income, gain, loss, deduction or credit,
other than an allocation required by the Internal Revenue Code to eliminate the
difference between a 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 distributive 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 distributive share of an item will be
determined on the basis of the unitholder's interest in us, which will be
determined by taking into account all the facts and circumstances, including the
unitholder's relative contributions to us, 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, 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
29
limitation," is not expected to have significant application to allocations with
respect to Contributed Property and thus, is not expected to prevent our
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, our 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 limitations. 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. However, since the final
treasury regulations are not applicable to us, Counsel is unable to opine on the
validity of the curative allocations.
Counsel is of the opinion that, with the exception of curative allocations
and the allocation of recapture income discussed above and the issues described
in "Tax Consequences of Unit Ownership -- Section 754 Election" and "Disposition
of Units -- Allocations Between Transferors and Transferees," allocations under
our partnership agreement will be given effect for federal income tax purposes
in determining a partner's share of an item of income, gain, loss or deduction.
There are, however, uncertainties in the treasury regulations relating to
allocations of partnership income, and investors should be aware that some of
the allocations in our partnership agreement could be successfully challenged by
the IRS.
TREATMENT OF SHORT SALES. A 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 our income, gain, deduction, loss or credit with respect to those units
would not to 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 will likely be ordinary income.
Counsel has not rendered an opinion regarding the treatment of a unitholder
where units are loaned to a short seller to cover a short sale of Units;
therefore, unitholders desiring to assure their status as partners and avoid the
risk of gain recognition from a loan to a short seller should modify any
applicable brokerage account agreements to prohibit their brokers from borrowing
their units. The IRS has announced that it is studying issues relating to the
tax treatment of short sales of partnership interests.
ALTERNATIVE MINIMUM TAX. Each unitholder will be required to take into
account that unitholder's distributive share of any items of our income, gain or
loss for purposes of the alternative minimum tax. A portion of our depreciation
deductions may be treated as an item of tax preference for this purpose.
A unitholder's alternative minimum taxable income derived from us may be
higher than that unitholder's share of our net income because we may use more
accelerated methods of depreciation for purposes of computing federal taxable
income or loss. The current minimum tax rate for noncorporate taxpayers is 26%
on the first $175,000 of alternative minimum taxable income in excess of the
exemption amount and 28% on any additional alternative minimum taxable income.
Prospective unitholders should consult with their tax advisors as to the impact
of an investment in units on their liability for the alternative minimum tax.
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SECTION 754 ELECTION. We previously made the election permitted by Section
754 of the Internal Revenue Code. That election is irrevocable without the
consent of the IRS. The election will generally permit us to adjust a unit
purchaser's tax basis in our assets ("inside basis") under Section 743(b) of the
Internal Revenue Code to reflect the purchase price. This election does not
apply to a person who purchases units directly from us. The Section 743(b)
adjustment belongs to the purchaser and not to other unitholders. For purposes
of this discussion, a unitholder's inside basis in our assets will be considered
to have two components: (1) unitholder's share of our 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 we may
adopt with respect to certain recovery property. If a different method is
adopted, the Section 743(b) adjustment attributable to property subject to cost
recovery deductions under Section 168 or amortization under Section 197 must be
taken into account as if it were a newly-purchased property placed in service
when the transfer giving rise to the Section 743(b) adjustment occurs.
Regardless of the method adopted, Treasury Regulation Section 1.167(c)-1(a)(6)
requires the portion of a Section 743(b) adjustment attributable to property
subject to depreciation under Section 167 of the Internal Revenue Code to be
depreciated using either the straight-line or the 150% declining balance method.
Pursuant to our partnership agreement, the general partner is authorized to
adopt a convention to preserve the uniformity of units even if that convention
is not consistent with specified treasury regulations. See "Disposition of
Units -- Uniformity of Units." Although Counsel is unable to opine as to the
validity of such an approach, we intend 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 we
determine that this position cannot reasonably be taken, we may adopt a
depreciation or amortization convention under which all purchasers acquiring
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 our assets.
This kind of aggregate approach may result in lower annual depreciation or
amortization deductions than would otherwise be allowable to certain of our
unitholders. See "Disposition of Units -- Uniformity of Units." If the IRS
successfully challenged our method for depreciating or amortizing the Section
743(b) adjustment, the uniformity of 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 Units -- Uniformity of
Units."
A Section 754 election is advantageous if the transferee's basis in the
transferee's units is higher than the units' share of the aggregate tax basis of
our 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
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depreciation deductions and the transferee's share of any gain or loss on a sale
of our assets would be less. Conversely, a Section 754 election is
disadvantageous if the transferee's basis in such units is lower than those
units' share of the aggregate tax basis of our assets immediately prior to the
transfer. Thus, the fair market value of the units may be affected either
favorably or unfavorably by the election.
The calculations involved in the Section 754 election are complex and will
be made on the basis of assumptions as to the value of our assets and other
matters. For example, the allocation of the Section 743(b) adjustment among our
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 us
to tangible assets to goodwill instead. Goodwill, as an intangible asset, is
generally amortizable over a longer period of time or under a less accelerated
method than our tangible assets. We cannot assure you that the determinations we
make will not be successfully challenged by the IRS and that the deductions
attributable to them will not be reduced or disallowed altogether. Should the
IRS require a different basis adjustment to be made, and should, in the general
partner's opinion, the expense of compliance exceed the benefit of the election,
the general partner may seek permission from the IRS to revoke our Section 754
election. If permission is granted, a subsequent purchaser of 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. We use the year ending December 31 as
our taxable year and the accrual method of accounting for federal income tax
purposes. Each unitholder will be required to include in income that
unitholder's share of our income, gain, loss and deduction for our taxable year
ending within or with that unitholder's taxable year. In addition, a 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 our taxable year but
before the close of that unitholder's taxable year must include that
unitholder's share of our income, gain, loss and deduction in income for that
unitholder's taxable year, with the result that the unitholder will be required
to include in income for that unitholder's taxable year that unitholder's share
of more than one year of our income, gain, loss and deduction.
INITIAL TAX BASIS, DEPRECIATION AND AMORTIZATION. The tax basis of our
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 our assets or seek to characterize intangible assets as
nonamortizable goodwill. If any challenge or characterization were successful,
the deductions allocated to a unitholder in respect of our assets would be
reduced, and a unitholder's share of taxable income received from us 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.
Property we subsequently acquire or construct may be depreciated using
accelerated methods permitted by the Internal Revenue Code.
If we dispose 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 unitholder who has taken cost recovery or depreciation deductions
with respect to property we own will likely be required to recapture some or all
of those deductions upon a sale of any of the unitholder's interest in us. See
"Tax Consequences of Unit Ownership -- Allocation of Income, Gain, Loss and
Deduction" and "Disposition of Units -- Recognition of Gain or Loss."
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The costs incurred in selling our units, called "syndication expenses,"
must be capitalized and cannot be deducted currently, ratably or upon our
termination. There are uncertainties regarding the classification of costs as
organization expenses, which may be amortized by us, and as syndication
expenses, which may not be amortized by us. The underwriting discounts and
commissions we incur will be treated as a syndication cost.
VALUATION AND TAX BASIS OF OUR PROPERTIES. The federal income tax
consequences of the ownership and disposition of units will depend in part on
our estimates of the relative fair market values, and the initial tax bases, of
our assets. Although we may from time to time consult with professional
appraisers regarding valuation matters, we will make many of the relative fair
market value estimates ourselves. These estimates are subject to challenge and
will not be binding on the IRS or the courts. If the estimates of fair market
value or basis are later found to be incorrect, the character and amount of
items of income, gain, loss, deductions or credits previously reported by our
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 UNITS
RECOGNITION OF GAIN OR LOSS. Gain or loss will be recognized on a sale of
units equal to the difference between the amount realized and the unitholder's
tax basis for the units sold. A unitholder's amount realized will be measured by
the sum of the cash or the fair market value of other property received by the
unitholder plus the unitholder's share of our nonrecourse liabilities. Because
the amount realized includes a unitholder's share of our 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 us in excess of cumulative net taxable income for
a unit that decreased a 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 unitholder, other than
a "dealer" in units, on the sale or exchange of a unit held for more than one
year will generally be taxable as capital gain or loss. Capital gain recognized
by an individual on the sale of units held more than 12 months will generally be
taxed at a maximum rate of 20%. A portion of this gain or loss, which will
likely be substantial, however, will be separately computed and taxed as
ordinary income or loss under Section 751 of the Internal Revenue Code to the
extent attributable to assets giving rise to depreciation recapture or other
"unrealized receivables" or to "inventory items" we own. The term "unrealized
receivables" includes potential recapture items, including depreciation
recapture. Ordinary income attributable to unrealized receivables, inventory
items and deprecation recapture may exceed net taxable gain realized upon the
sale of a unit and may be recognized even if there is a net taxable loss
realized on the sale of a unit. Thus, a unitholder may recognize both ordinary
income and a capital loss upon a sale of units. Net capital loss may offset
capital gains and no more than $3,000 of ordinary income, in the case of
individuals, and may only be used to offset capital gain in the case of
corporations.
The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis for all those interests. Upon a sale or disposition of less
than all of those interests, a portion of that tax basis must be allocated to
the interests sold using an "equitable apportionment" method. Although the
ruling is unclear as to how the holding period of these interests is determined
once they are combined, recently finalized treasury regulations allow a selling
unitholder who can identify units transferred with an ascertainable holding
period to elect to use the actual holding period of the units transferred. Thus,
according to the ruling, a unitholder will be unable to select high or low basis
units to sell
33
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 products and securities, including partnership interests, by
treating a taxpayer as having sold an "appreciated" partnership interest, one in
which gain would be recognized if it were sold, assigned or terminated at its
fair market value, if the taxpayer or related persons enter(s) into:
- a short sale;
- an offsetting notional principal contract; or
- a futures or forward contract with respect to the partnership interest or
substantially identical property.
Moreover, if a taxpayer has previously entered into a short sale, an
offsetting notional principal contract or a futures or forward contract with
respect to the partnership interest, the taxpayer will be treated as having sold
that position if the taxpayer or a related person then acquires the partnership
interest or substantially identical property. The Secretary of the Treasury is
also authorized to issue regulations that treat a taxpayer that enters into
transactions or positions that have substantially the same effect as the
preceding transactions as having constructively sold the financial position.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, our taxable
income and losses will be determined annually, will be prorated on a monthly
basis and will be subsequently apportioned among the 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 our assets other than in the ordinary
course of business will be allocated among the 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 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 unitholders. If this method is not
allowed under the treasury regulations, or only applies to transfers of less
than all of the unitholder's interest, our taxable income or losses might be
reallocated among our unitholders. We are authorized to revise our method of
allocation between unitholders to conform to a method permitted under future
treasury regulations.
A 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 unitholder who sells or exchanges units is
required to notify us in writing of that sale or exchange within 30 days after
the sale or exchange. We are 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 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
34
consideration received for the unit that is allocated to our goodwill or going
concern value. Failure to satisfy these reporting obligations may lead to the
imposition of substantial penalties.
CONSTRUCTIVE TERMINATION. We 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 our capital and profits within a 12-month period. A constructive
termination results in the closing of our taxable year for all unitholders. In
the case of a unitholder reporting on a taxable year other than a fiscal year
ending December 31, the closing of our tax year may result in more than 12
months of our taxable income or loss being includable in a unitholder's taxable
income for the year of termination. We would then 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 our
deductions for depreciation. A termination could also result in penalties if we
were unable to determine that the termination had occurred. Moreover, a
termination might either accelerate the application of, or subject us to, any
tax legislation enacted before the termination.
UNIFORMITY OF UNITS
Because we cannot match transferors and transferees of units, we must
maintain uniformity of the economic and tax characteristics of the units to a
purchaser of these units. In the absence of uniformity, we 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 our ability to make allocations to
eliminate Book-Tax Disparities attributable to Contributed Properties and our
property that has been revalued and reflected in the partners' capital accounts
("Adjusted Properties"). Any non-uniformity could have a negative impact on the
value of the units.
We intend to depreciate and amortize the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value of Contributed
Property or Adjusted Property, to the extent of any unamortized Book-Tax
Disparity, using a rate of depreciation or amortization derived from the
depreciation or amortization method and useful life applied to the Common Basis
of that property, or treat that portion as non-amortizable to the extent
attributable to property the Common Basis of which is not amortizable, despite
its inconsistency with treasury regulations. See "Tax Consequences of Unit
Ownership -- Section 754 Election." If we determine that this position cannot
reasonably be taken, we may adopt depreciation and amortization conventions
under which all purchasers acquiring 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 our property. If this position is
adopted, it may result in lower annual depreciation and amortization deductions
than would otherwise be allowable to some unitholders and risk the loss of
depreciation and amortization deductions not taken in the year that these
deductions are otherwise allowable. If we choose not to utilize this aggregate
method, we may use any other reasonable depreciation and amortization convention
to preserve the uniformity of the intrinsic tax characteristics of any units
that would not have a material adverse effect on the 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
units might be affected, and the gain from the sale of units might be increased
without the benefit of additional deductions.
Items of income and deduction will be specially allocated in a manner that
is intended to preserve the uniformity of intrinsic tax characteristics among
all units, despite the application of the "ceiling limitation" to
35
Contributed Properties and Adjusted Properties. Such special allocations will be
made solely for federal income tax purposes. See "Tax Consequences of Unit
Ownership -- Allocation of Income, Gain, Loss and Deduction."
TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS
Ownership of units by employee benefit plans, other tax-exempt
organizations, non-resident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to those investors and,
as described below, may have substantially adverse tax consequences to them.
Employee benefit plans and most other organizations exempt from federal
income tax, including individual retirement accounts and other retirement plans,
are subject to federal income tax on unrelated business taxable income.
Virtually all of our income allocated to a unitholder which is a tax-exempt
organization will be unrelated business taxable income and will be taxable to
them.
A regulated investment company or "mutual fund" is required to derive 90%
or more of its gross income from interest, dividends and gains from the sale of
stocks or securities or foreign currency or specified related sources. It is not
anticipated that any significant amount of our gross income will include that
type of income.
Non-resident aliens and foreign corporations, trusts or estates that own
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 our income, gain, loss, deduction
or credit and pay federal income tax at regular rates on their share of our net
income or gain. Under rules applicable to publicly traded partnerships, we will
withhold, currently at the rate of 39.6%, on cash distributions made quarterly
to foreign unitholders. Each foreign unitholder must obtain a taxpayer
identification number from the IRS and submit that number to our 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 us to change these
procedures.
In addition, because a foreign corporation that owns 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 our 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 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 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
OUR INFORMATION RETURNS AND AUDIT PROCEDURES. We intend 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 our income, gain, loss, deduction and credit for our preceding taxable year.
In preparing this information, which will not be reviewed by Counsel, we will
36
take various accounting and reporting positions, some of which have been
mentioned earlier, to determine that unitholder's share of income, gain, loss,
deduction and credits. We 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 successful challenge by the
IRS could negatively affect the value of the units.
The IRS may audit our federal income tax information returns. Adjustments
resulting from an IRS audit may require each 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 our returns as well as those related to our 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. Our 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 our returns. The Tax Matters Partner may bind a
unitholder with less than a 1% profits interest in us 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 our return. Intentional or
negligent disregard of this consistency requirement may subject a unitholder to
substantial penalties.
NOMINEE REPORTING. Persons who hold an interest in us as a nominee for
another person are required to furnish to us:
- the name, address and taxpayer identification number of the beneficial
owner and the nominee;
- whether the beneficial owner is (i) a person that is not a United States
person, (ii) a foreign government, an international organization or any
wholly owned agency or instrumentality of either of the foregoing or
(iii) a tax-exempt entity;
- the amount and description of units held, acquired or transferred for the
beneficial owner; and
- specific information including the dates of acquisitions and transfers,
means of acquisitions and transfers, and acquisition cost for purchases,
as well as the amount of net proceeds from sales.
Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and specific
information on units they acquire, hold or transfer for their own account. A
penalty of $50 per failure, up to a maximum of $100,000 per calendar year, is
imposed by the Internal Revenue Code for failure to report that information to
us. The nominee is required to supply the beneficial
37
owner of the units with the information furnished to us.
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 we are not
subject to the registration requirement on the basis that (i) we do not
constitute a tax shelter or (ii) we constitute a projected income investment
exempt from registration. However, we have registered as a tax shelter with the
Secretary of the Treasury because of the absence of assurance that we 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 US OR THE
CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS. Our
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 our tax shelter registration number on Form 8271 to be
attached to the tax return on which any deduction, loss, credit or other benefit
we generate is claimed or on which any of our 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 us. 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, we must disclose the pertinent facts on our return. In
addition, we will make a reasonable effort to furnish sufficient information for
unitholders to make adequate disclosure on their returns to avoid liability for
this penalty.
A substantial valuation misstatement exists if the value of any property,
or the adjusted basis of any property, claimed on a tax return is 200% or more
of the amount determined to be the correct amount of the valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment attributable
to a substantial valuation misstatement exceeds $5,000 ($10,000 for most
corporations). If the valuation claimed on a return is 400% or more than the
correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, you 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 we do business or own property or in which
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you are a resident. Although an analysis of those various taxes is not presented
here, each prospective unitholder should consider their potential impact on an
investment in us. We currently own property or are 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. You 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/or 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 us, or we 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 us. Based on current law and our estimate
of our future operations, the general partner anticipates that any amounts
required to be withheld will not be material. We may also own property or do
business in other states in the future.
It is the responsibility of each unitholder to investigate the legal and
tax consequences, under the laws of pertinent states, localities and foreign
jurisdictions, of an investment in us. Accordingly, each prospective 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
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 us.
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PLAN OF DISTRIBUTION
We may sell the common units or debt securities (1) through agents; (2)
through underwriters or dealers; (3) directly to one or more purchasers; or (4)
pursuant to delayed delivery contracts or forward contracts.
BY AGENTS
Common units and debt securities may be sold through agents designated by
us. The agents agree to use their reasonable best efforts to solicit purchases
for the period of their appointment.
BY UNDERWRITERS
If underwriters are used in the sale, the common units or debt securities
of the series offered will be acquired by the underwriters for their own
account. The underwriters may resell the common units or debt securities in one
or more transactions, including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of sale. The
obligations of the underwriters to purchase the common units or debt securities
of the series offered will be subject to certain conditions. The underwriters
will be obligated to purchase all the common units or debt securities of the
series offered if any of the securities are purchased. Any initial public
offering price and any discounts or concessions allowed or re-allowed or paid to
dealers may be changed from time to time.
DIRECT SALES
Common units and debt securities may also be sold directly by us. In this
case, no underwriters or agents would be involved. We may use electronic media,
including the Internet, to sell offered securities directly.
DELAYED DELIVERY CONTRACTS OR FORWARD CONTRACTS
If indicated in the prospectus supplement, we will authorize agents,
underwriters or dealers to solicit offers to purchase common units or debt
securities from us at the public offering price set forth in the prospectus
supplement pursuant to delayed delivery contracts or forward contracts providing
for payment or delivery on a specified date in the future at prices determined
as described in the prospectus supplement. Such contracts will be subject only
to those conditions set forth in the prospectus supplement, and the prospectus
supplement will set forth the commission payable for solicitation of such
contracts.
GENERAL INFORMATION
The debt securities, when first issued, will have no established trading
market. Any underwriters or agents to or through whom debt securities are sold
for public offering and sale may make a market in such debt securities, but such
underwriters or agents will not be obligated to do so and may discontinue any
market making at any time without notice. No assurance can be given as to the
liquidity of the trading market for any such debt securities.
The debt securities of the series offered may or may not be listed on a
national securities exchange. No assurances can be given that there will be a
market for the debt securities.
Underwriters, dealers and agents that participate in the distribution of
the common units or debt securities may be underwriters as defined in the
Securities Act, and any discounts or commissions received by them from us and
any profit on the resale of the common units or debt securities by them may be
treated as underwriting discounts and commissions under the Securities Act. Any
underwriters or agents will be identified and their compensation described in a
prospectus supplement.
We may have agreements with the underwriters, dealers and agents to
indemnify them against certain civil liabilities, including liabilities under
the Securities Act, or to contribute with respect to payments which the
underwriters, dealers or agents may be required to make.
Underwriters, dealers and agents or their affiliates may engage in
transactions with, or perform services for, us or our subsidiaries in the
ordinary course of their businesses.
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VALIDITY OF THE SECURITIES
The validity of the securities being offered hereby will be passed upon for
us by Bracewell & Patterson, L.L.P., Houston, Texas.
EXPERTS
The financial statements incorporated in this prospectus by reference to
the Annual Report on Form 10-K for the year ended December 31, 1999 have been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
In addition, (1) the balance sheet of Kinder Morgan G.P., Inc. as of
December 31, 1999 which appears in the Form 8-K dated March 30, 2000; (2) the
statements of income, cash flows and changes in member's equity of Kinder Morgan
Interstate Gas Transmission LLC for the year ended December 31, 1999 which
appear in the Form 8-K/A dated March 28, 2000; and (3) the statements of income,
cash flows and changes in partners' equity of Trailblazer Pipeline Company for
the year ended December 31, 1999 which appear in the Form 8-K/A dated March 28,
2000 incorporated by reference in this prospectus have been so incorporated in
reliance on the reports of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The financial statements of Red Cedar Gathering Company as of and for the
years ended December 31, 1999 and 1998 included in Kinder Morgan Energy
Partners, L.P.'s Form 8-KA filed on March 28, 2000, incorporated by reference in
this registration statement, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report dated March 24,
2000, with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The combined financial statements of GATX Terminals Companies as of and for
the year ended December 31, 2000, included in the Kinder Morgan Energy Partners,
L.P. Current Report on Form 8-K filed on February 20, 2001, and incorporated by
reference in this prospectus and registration statement have been audited by
Ernst & Young LLP, independent auditors, to the extent indicated in their report
thereon also incorporated herein by reference. Such combined 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.
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated in this prospectus by
reference include forward-looking statements within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act. These forward-looking
statements are identified as any statement that does not relate strictly to
historical or current facts. They use words such as "anticipate," "believe,"
"intend," "plan," "projection," "forecast," "strategy," "position," "continue,"
"estimate," "expect," "may," "will," or the negative of those terms or other
variations of them or by comparable terminology. In particular, statements,
express or implied, concerning future 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 our operations may differ materially from those expressed in
these forward-looking statements. Many of the factors that will determine these
results are beyond our ability to control or predict. Specific factors which
could cause actual results to differ from those in the forward-looking
statements, include:
- price trends and overall demand for natural gas liquids, refined
petroleum products, carbon dioxide, natural gas, coal and other bulk
materials in the United States; economic activity, weather, alternative
energy sources, conservation and technological advances may affect price
trends and demand;
- changes in our tariff rates implemented by the Federal Energy Regulatory
Commission or the California Public Utilities Commission;
- our ability to integrate any acquired operations into our existing
operations;
- any difficulties or delays experienced by railroads in delivering
products to the bulk terminals;
- our ability to successfully identify and close strategic acquisitions and
make cost saving changes in operations;
- shut-downs or cutbacks at major refineries, petrochemical plants,
utilities, military bases or other businesses that use or supply our
services;
- the condition of the capital markets and equity markets in the United
States; and
- the political and economic stability of the oil producing nations of the
world.
You should not put undue reliance on any forward-looking statements.
When considering forward-looking statements, one should keep in mind the
risk factors described under "Risk Factors" in this prospectus. We disclaim any
obligation to update the above list or to announce publicly the result of any
revisions to any of the forward-looking statements to reflect future events or
developments.
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