UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
KINDER MORGAN ENERGY PARTNERS, L.P.
KINDER MORGAN OPERATING L.P. "A"
KINDER MORGAN OPERATING L.P. "B"
KINDER MORGAN OPERATING L.P. "C"
KINDER MORGAN OPERATING L.P. "D"
KINDER MORGAN NATURAL GAS LIQUIDS CORPORATION
KINDER MORGAN CO2, LLC
KINDER MORGAN BULK TERMINALS, INC.
(Exact name of registrants as specified in their charters)
Delaware 1-11234 76-0380342
Delaware 333-66931-01 76-0380015
Delaware 333-66931-02 76-0414819
Delaware 333-66931-03 76-0547319
Delaware 333-66931-04 76-0561780
Delaware 333-66931-05 76-0256928
Delaware 333-66931-06 76-0563308
Louisiana 333-66931-07 72-1073113
(State or Other Jurisdiction (Commission File (I.R.S. Employer
of Incorporation or Organization) Number) Identification No.)
1301 McKinney St.
Suite 3450
Houston, Texas 77010
------------------------------- -------------------------
(Address of Principal Executive (Zip Code)
Offices)
(713) 844-9500
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The Registrant had 48,815,690 units outstanding at August 5, 1999.
Page 1 of 28
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. - Financial Statements (Unaudited)
Consolidated Statements of Income - Three Months
and Six Months Ended June 30, 1999 and 1998 3
Consolidated Balance Sheets - June 30, 1999 and
December 31, 1998 4
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
ITEM 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
ITEM 3. - Quantitative and Qualitative Disclosures about
Market Risk 24
PART II. OTHER INFORMATION
ITEM 1. - Legal Proceedings 25
ITEM 5. - Other Information 25
ITEM 6. - Exhibits and Reports on Form 8-K 25
Page 2 of 28
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Unit Amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
Revenues $102,933 82,044 $202,982 $118,785
Costs and Expenses
Operating expenses 30,987 20,431 59,906 30,789
Depreciation and amortization 12,291 9,671 24,345 14,390
General and administrative 8,942 9,064 16,760 14,158
Taxes, other than income taxes 4,154 3,507 8,425 4,986
--------- --------- --------- ---------
56,374 42,673 109,436 64,323
--------- --------- --------- ---------
Operating Income 46,559 39,371 93,546 54,462
Other Income (Expense)
Earnings from equity investments 9,746 5,325 17,701 10,607
Interest, net (12,184) (12,105) (23,983) (17,773)
Other, net 1,898 (1,863) 1,887 (2,542)
Minority Interest (805) (415) (1,426) (477)
--------- --------- --------- ---------
Income Before Income Taxes and Extraordinary charge 45,214 30,313 87,725 44,277
Income Tax Benefit (Expense) (2,101) - (3,543) -
--------- --------- --------- ---------
Income Before Extraordinary charge 43,113 30,313 84,182 44,277
Extraordinary charge on early extinguishment of debt - - - (13,611)
--------- --------- --------- ---------
Net Income $ 43,113 30,313 $ 84,182 $ 30,666
========= ========= ========= =========
Calculation of Limited Partners' Interest in
Net Income:
Income Before Extraordinary charge $ 43,113 30,313 $ 84,182 $ 44,277
Less: General Partner's interest in Net Income (13,385) (9,562) (26,748) (12,427)
--------- --------- --------- ---------
Limited Partners' Net Income before extraord.charge 29,728 20,751 57,434 31,850
Less: Extraord. charge on early exting. of debt - - - (13,611)
--------- --------- --------- ---------
Limited Partners' Net Income $ 29,728 20,751 $ 57,434 $ 18,239
========= ========= ========= =========
Net Income per Unit before extraordinary charge $ 0.61 0.50 $ 1.18 $ 1.00
========= ========= ========= =========
Extraordinary charge per Unit $ - - $ - $ (0.43)
========= ========= ========= =========
Net Income per Unit $ 0.61 0.50 $ 1.18 $ 0.57
========= ========= ========= =========
Number of Units used in Computation 48,816 41,908 48,816 31,763
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
Page 3 of 28
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
June 30, December 31,
1999 1998
--------------- -------------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 22,758 $ 31,735
Accounts and notes receivable 53,489 44,125
Inventories
Products 4,535 2,901
Materials and supplies 2,556 2,640
--------------- ------------
83,338 81,401
--------------- ------------
Property, Plant and Equipment, at cost 1,881,397 1,836,719
Less accumulated depreciation 94,878 73,333
--------------- ------------
1,786,519 1,763,386
--------------- ------------
Equity Investments 358,429 238,608
--------------- ------------
Intangibles 56,873 58,536
Deferred charges and other assets 16,044 10,341
--------------- ------------
TOTAL ASSETS $ 2,301,203 $ 2,152,272
=============== ============
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Accounts and notes payable $ 21,566 $ 25,642
Accrued liabilities 30,438 18,230
Accrued employee benefits 5,926 9,415
Accrued taxes 4,002 4,195
--------------- ------------
61,932 57,482
--------------- ------------
Long-Term Liabilities and Deferred Credits
Long-term debt 770,361 611,571
Other 96,855 104,789
--------------- ------------
867,216 716,360
--------------- ------------
Commitments and Contingencies
Minority Interest 18,118 17,767
--------------- ------------
Partners' Capital
Common Units 1,339,600 1,348,591
General Partner 14,337 12,072
--------------- ------------
1,353,937 1,360,663
--------------- ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 2,301,203 $ 2,152,272
=============== ============
The accompanying notes are an integral part of these
consolidated financial statements.
Page 4 of 28
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended June 30,
1999 1998
--------------- ---------------
Cash Flows From Operating Activities
Reconciliation of net income to net cash provided by operating activities
Net income $ 84,182 $ 30,666
Extraordinary charge on early extinguishment of debt - 13,611
Depreciation and amortization 24,345 14,390
Earnings from equity investments (17,701) (10,607)
Distributions from equity investments 17,184 7,082
Changes in components of working capital (6,468) (12,829)
Other, net (7,804) 4,044
--------------- ---------------
Net Cash Provided by Operating Activities 93,738 46,357
--------------- ---------------
Cash Flows From Investing Activities
Acquisitions of assets - (74,706)
Additions to property, plant and equipment for
expansion and maintenance projects (44,446) (9,424)
Sale of investments, property, plant and equipment 1,110 33
Acqusitions of equity investments (124,163) (25,000)
Contributions to equity investments (570) (1,155)
--------------- ---------------
Net Cash Used in Investing Activities (168,069) (110,252)
--------------- ---------------
Cash Flows From Financing Activities
Issuance of debt 389,717 265,054
Payment of debt (230,443) (337,895)
Long-term debt - refinancing / issue costs (2,132) (16,428)
Proceeds from issuance of common units - 212,303
Contributions from General Partner's Minority Interest - 11,737
Distributions to partners
Common Units (65,342) (32,184)
General Partner (25,027) (7,698)
Minority Interest (1,075) (518)
Other, net (344) (8)
--------------- ---------------
Net Cash Provided by Financing Activities 65,354 94,363
--------------- ---------------
Increase (Decrease) in Cash and Cash Equivalents (8,977) 30,468
Cash and Cash Equivalents, Beginning of Period 31,735 9,612
--------------- ---------------
Cash and Cash Equivalents, End of Period $ 22,758 $ 40,080
=============== ===============
Noncash Investing and Financing Activities
Contribution of net assets to partnership investments $ - $ 59,311
Assets acquired by the issuance of Common Units $ - $ 943,202
Assets acquired by the assumption of liabilities $ - $ 531,906
The accompanying notes are an integral part of these
consolidated financial statements.
Page 5 of 28
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The unaudited consolidated financial statements included herein have been
prepared by Kinder Morgan Energy Partners, L.P. (the "Partnership") pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they reflect all adjustments, which are, in the opinion of
management, necessary for a fair presentation of the financial results for the
interim periods. Certain information and notes normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
Partnership believes, however, that the disclosures are adequate to make the
information presented not misleading. These consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 1998 ("Form 10-K").
The Limited Partners' Net Income per Unit was computed by dividing the
Limited Partners' interest in Net Income (before and after the extraordinary
charge on early extinguishment of debt in 1998) by the weighted average number
of units outstanding during the period.
2. Acquisitions and Joint Ventures
During 1998, the Partnership completed certain significant acquisitions
consisting of SFPP, L.P. ("SFPP"), an operating partnership acquired on March 6,
1998, valued at more than $1.4 billion inclusive of liabilities assumed,
Hall-Buck Marine, Inc. ("Hall-Buck"), acquired on July 1, 1998, valued at $100
million including common units and debt assumed, and an equity interest in Shell
CO2 Company, Ltd. ("Shell CO2 Company"), acquired on March 5, 1998, valued at
$85 million, including contributions of a pipeline and cash.
Pro Forma Information
The following summarized unaudited Pro Forma Consolidated Income Statement
information for the six months ended June 30, 1998, assumes the above
acquisitions had occurred as of January 1, 1998. The unaudited Pro Forma
financial results have been prepared for comparative purposes only and may not
be indicative of the results that would have occurred if the Partnership had
completed the above acquisitions on the dates indicated or which will be
attained in the future.
The Pro Forma information does not include the effects of the
Partnership's acquisitions of an equity interest in Plantation Pipe Line Company
on September 15, 1998, or the acquisitions of the Pier IX and Shipyard River
Terminals on December 18, 1998. Amounts presented below are in thousands, except
for per unit amounts:
Page 6 of 28
Pro Forma
Six Months Ended
June 30,
Income Statement 1998
-----
Revenues $192,131
Operating Income $69,558
Net Income before extraordinary charge $53,183
Net Income $39,572
Net Income per unit before extraordinary charge $0.86
Net Income per unit $0.55
Other Acquisitions
On September 15, 1998, the Partnership acquired approximately 24% of
Plantation Pipe Line Company for $110 million. On June 16, 1999, the Partnership
acquired Chevron's approximate 27% interest in Plantation Pipe Line Company for
approximately $124 million. The Partnership now owns approximately 51% of
Plantation Pipe Line Company, and Exxon Pipeline Company, an affiliate of Exxon
Corp., owns approximately 49%.
3. Litigation
FERC Proceedings
On January 13, 1999, the Federal Energy Regulatory Commission issued its
Opinion No. 435 in Docket Nos. OR92-8-000, et. al. This docket deals with a
complaint filed by certain shippers: (1) challenging SFPP's West Line rates from
the Los Angeles area to Phoenix and Tucson, Arizona and East Line rates from El
Paso, Texas to Tucson and Phoenix and (2) challenging SFPP's proration policy.
Opinion 435 affirmed in part and modified in part the initial decision by the
FERC Administrative Law Judge that was issued on September 25, 1997. In Opinion
No. 435, the FERC ruled that all but one of the West Line rates are
"grandfathered" as just and reasonable and that "changed circumstances" had not
been shown to satisfy the complainants' threshold burden necessary to challenge
those rates. The FERC further held that the one "non-grandfathered" West Line
tariff did not require rate reduction. Accordingly, all complaints against the
West Line rates were dismissed without any requirement that SFPP reduce, or pay
any reparations for, any West Line rate.
With respect to the East Line rates, Opinion No. 435 reversed in part and
affirmed in part the administrative law judge's initial decision regarding the
methodology of calculating the rate base for the East Line. Among other things,
Opinion No. 435 modified the initial decision concerning the date in reference
to which the starting rate base would be calculated and the income tax allowance
and allowable cost of equity used to calculate the rate base. In addition,
Opinion No. 435 ruled that no reparations would be owed to any complainant for
any period prior to the date on which that complainant's complaint was filed,
thus reducing the potential reparations period for most complainants by two
years. Complainants have filed applications for rehearing with the FERC and
petitions with the United States Court of Appeals for the District of Columbia
circuit for review of Opinion No. 435. SFPP has filed for both rehearing and
appellate review of Opinion No. 435. The Partnership believes Opinion No. 435
substantially reduces the negative impact of the initial decision.
In a companion order to Opinion No. 435, the FERC directed the
complainants in Docket Nos. OR98-1-000 and OR98-2-000 to amend their complaints,
as may be appropriate, so as to make them consistent with the terms and
conditions of its orders, including Opinion No. 435. These complaints challenge
the justness and reasonableness of all of SFPP's interstate rates and include an
assertion that the acquisition of SFPP and the cost savings anticipated to
result from the acquisition constitute "changed
Page 7 of 28
circumstances" that provide a basis for terminating the "grandfathered" status
of SFPP's otherwise protected rates.
California Public Utilities Commission Proceeding
ARCO Products Company, Mobil Oil Corporation and Texaco Refining and
Marketing Inc. have filed a complaint with the California Public Utilities
Commission ("CPUC") against SFPP challenging the rates charged by SFPP for
intrastate transportation of refined petroleum products in California and
requesting prospective rate adjustments. On June 18, 1998, the CPUC affirmed a
ruling dismissing the complaint. The complainants filed for rehearing of the
CPUC's decision and on June 24, 1999, the CPUC issued an order on rehearing and
remanded the proceedings to an Administrative Law Judge for further handling.
The Partnership has filed with the CPUC a response to the CPUC remand for the
purpose of having the June 18, 1998 dismissal affirmed and the decision to
remand overruled. The Partnership believes it has adequate reserves recorded for
any adverse decision related to this matter.
SPTC Easements
SFPP and Southern Pacific Transportation Company ("SPTC") are engaged in a
judicial reference proceeding to determine the extent, if any, to which the rent
payable by SFPP for the use of pipeline easements on rights-of-way held by SPTC
should be adjusted pursuant to existing contractual arrangements. The judge in
the case has issued a Statement of Tentative Decision indicating that he intends
to establish a new base annual rental for the subject rights-of-way at a level,
subject to inflation adjustments, that is adequately provided for by the amounts
accrued by SFPP through June 30, 1999. The case is currently pending before the
Court of Appeals for the First Appellate District of the State of California.
Environmental Matters
The Partnership is currently involved in the following governmental
proceedings related to compliance with environmental regulations:
o SFPP, along with several other respondents, is involved in one cleanup
ordered by the United States Environmental Protection Agency related to
ground water contamination in the vicinity of SFPP's storage facilities and
truck loading terminal at Sparks, Nevada.
o SFPP is currently involved in 18 ground water hydrocarbon remediation efforts
under administrative orders issued by the California Regional Water Quality
Control Board and two other state agencies.
o SFPP is involved in an investigation by the Regional Water Quality Board
of California (Santa Ana region) regarding a May 1999 discharge of pipeline
hydrotest water from SFPP's Colton facility. In the investigation, SFPP
has been accused of discharging, in the hydrotest process, 50,000 barrels
of jet fuel into the San Bernardino County Flood Control District Channel.
The Partnership and SFPP believe the charges are unfounded, and SFPP is
vigorously defending itself in this matter. The investigation will
determine whether the discharge otherwise violated environmental laws or
regulations regarding water quality.
o The general partner was a defendant in two proceedings (one by the State
of Illinois and one by the Department of Transportation) relating to
alleged environmental violations for events relating to a fire that
occurred at the Morris storage field in September 1994. The general
partner and the State of Illinois reached an agreement, which called for,
among other things, the payment of $50,000 in settlement of these
proceedings. On July 13, 1999, the Circuit Court for the Thirteenth
Judicial Circuit, Grundy County,
Page 8 of 28
Illinois, entered an Order accepting the settlement and terminating the
proceedings.
In addition, the Partnership from time to time is involved in civil
proceedings relating to damages alleged to have occurred as a result of
accidental leaks or spills of refined petroleum products or natural gas liquids.
Among these matters is a lawsuit originally filed in February 1998 against SFPP
in the Superior Court of the State of California in and for the County of Solano
by 283 individual plaintiffs alleging personal injury and property damage
arising from a release in 1996 of petroleum products from SFPP's pipeline
running through Elmira, California. An amended complaint was filed on May 22,
1998. No trial date has been set. The Partnership continues to aggressively
defend the action.
Although no assurance can be given, the Partnership believes that the
ultimate resolution of these matters will not have a material adverse effect on
its financial position or results of operations. The Partnership has recorded a
reserve for environmental claims in the amount of $21.2 million at June 30,
1999.
Other
The Partnership, in the ordinary course of business, is a defendant in
various lawsuits relating to the Partnership's assets. Although no assurance can
be given, the Partnership believes, based on its experience to date, that the
ultimate resolution of such items will not have a material adverse impact on the
Partnership's financial position or results of operations.
For more detailed information regarding these proceedings and other
litigation, please refer to the Partnership's Form 10-K, Note 15 of the Notes to
the Consolidated Financial Statements.
4. Distributions
On May 14, 1999, the Partnership paid a cash distribution for the
quarterly period ended March 31, 1999, of $0.70 per unit. The distribution was
declared on April 12, 1999, payable to unitholders of record as of April 30,
1999.
On July 15, 1999, the Partnership declared a cash distribution for the
quarterly period ended June 30, 1999, of $0.70 per unit. The distribution will
be paid on or before August 13, 1999, to unitholders of record as of July 31,
1999.
5. Long-Term Debt
The Partnership's debt facilities consist of:
o a $325 million unsecured credit facility,
o $250 million of 6.30% Senior Notes due February 1, 2009,
o $244 million of Series F First Mortgage Notes (a subsidiary, SFPP, L.P.,
is the obligor on the notes),
o a $175 million secured credit facility of SFPP, L.P., and
o $23.7 million of tax-exempt bonds due 2024 (a subsidiary, Kinder Morgan
Operating L.P. "B" ("OLP-B"), is the obligor on these bonds).
In February 1998, the Partnership refinanced the first mortgage notes and
existing bank credit facilities of Kinder Morgan Operating L.P. "A" with a $325
million secured revolving credit facility ("Credit Facility") expiring in
February 2005. On December 1, 1998, the Credit Facility was amended to release
the collateral and the Credit Facility became unsecured. The Credit
Page 9 of 28
Facility had an outstanding balance of $230 million at December 31, 1998, and
$140 million at June 30, 1999. Borrowings under the Credit Facility were
primarily used to fund the Partnership's investment in Plantation Pipe Line
Company in June 1999. During the first six months of 1999, the weighted average
interest rate on the Credit Facility was approximately 5.85% per annum.
On January 29, 1999, the Partnership closed a public offering of $250
million in principal amount of 6.30% Senior Notes due February 1, 2009 ("Notes")
at a price to the public of 99.67% per Note. In the offering, the Partnership
received proceeds, net of underwriting discounts and commissions, of
approximately $248 million. The proceeds were used to pay the outstanding
balance on the Credit Facility and for working capital and other proper
Partnership purposes. The Notes will be guaranteed on a full, unconditional, and
joint and several basis by all of the Partnership's consolidating subsidiaries
(excluding SFPP and the subsidiaries of Kinder Morgan Bulk Terminals, Inc.) so
long as any other debt obligations of the Partnership are guaranteed by such
subsidiaries. SFPP is not a guarantor of the public debt securities. Kinder
Morgan Energy Partners, L.P., the parent company, has operations only from
investments in its subsidiaries. On June 30, 1999, the unamortized Senior Note
liability balance was approximately $249 million.
At June 30, 1999, the outstanding balance under SFPP's Series F notes was
$244.0 million. The annual interest rate on the Series F notes is 10.70%, the
maturity is December 2004, and interest is payable semiannually in June and
December. The Series F notes are payable in annual installments of $31.5 million
in 1999, $32.5 million in 2000, $39.5 million in 2001, $42.5 million in 2002,
and $37.0 million in 2003. The Series F notes may also be prepaid beginning in
December 1999 in full or in part at a price equal to par plus, in certain
circumstances, a premium. The Series F notes are secured by mortgages on
substantially all of the properties of SFPP (the "Mortgaged Property"). The
Series F notes contain certain covenants limiting the amount of additional debt
or equity that may be issued and limiting the amount of cash distributions,
investments, and property dispositions.
At June 30, 1999, the outstanding balance under SFPP's bank facility was
$111.0 million. The bank credit facility provides for borrowings of up to $175
million due in August 2000 and interest, at a short-term Eurodollar rate,
payable quarterly. This bank credit facility is used primarily for financing the
Series F notes when due. Borrowings under this facility are also secured by the
Mortgaged Property and are generally subject to the same terms and conditions as
the Series F notes. At June 30, 1999, the interest rate on the credit facility
debt was 5.365%.
OLP-B's $23.7 million principal amount of tax exempt bonds due 2024 were
issued by the Jackson-Union Counties Regional Port District. Such bonds bear
interest at a weekly floating market rate. During the first six months of 1999,
the weighted average interest rate on these bonds was approximately 5.3% per
annum.
The following discloses the consolidating financial information for the
Partnership:
Page 10 of 28
CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1999
(In Thousands) (Unaudited)
Kinder Morgan Combined Combined
Energy Guarantor Nonguarantor Eliminations and
Partners, LP Subs. Subs. Adjustments Consolidated
--------------- -------------- -------------- --------------- --------------
Revenues $ - $ 37,793 $ 65,140 $ - $ 102,933
Costs and Expenses
Operating expenses - 19,426 11,561 - 30,987
Depreciation and amortization - 4,584 7,707 - 12,291
General and administrative - 2,166 6,776 - 8,942
Taxes, other than income taxes 1 1,521 2,632 - 4,154
--------------- -------------- -------------- --------------- --------------
1 27,697 28,676 - 56,374
--------------- -------------- -------------- --------------- --------------
Operating Income (1) 10,096 36,464 - 46,559
Other Income (Expense)
Earnings from equity investments 43,159 40,604 467 (74,484) 9,746
Interest, net (45) (4,768) (7,371) - (12,184)
Other, net - (24) 1,922 - 1,898
Minority Interest - (208) - (597) (805)
--------------- -------------- -------------- --------------- --------------
Income Before Income Taxes 43,113 45,700 31,482 (75,081) 45,214
Income Tax Benefit (Expense) - (2,101) - - (2,101)
--------------- -------------- -------------- --------------- --------------
Net Income $ 43,113 $ 43,599 $ 31,482 $ (75,081) $ 43,113
=============== ============== ============== =============== ==============
CONSOLIDATING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(In Thousands) (Unaudited)
Kinder Morgan Combined Combined
Energy Guarantor Nonguarantor Eliminations and
Partners, LP Subs. Subs. Adjustments Consolidated
-------------- -------------- --------------- -------------- --------------
Revenues $ - $ 77,119 $ 125,863 $ - $ 202,982
Costs and Expenses
Operating expenses - 40,105 19,801 - 59,906
Depreciation and amortization - 8,943 15,402 - 24,345
General and administrative - 4,118 12,642 - 16,760
Taxes, other than income taxes 1 3,029 5,395 - 8,425
-------------- -------------- --------------- -------------- --------------
1 56,195 53,240 - 109,436
-------------- -------------- --------------- -------------- --------------
Operating Income (1) 20,924 72,623 - 93,546
Other Income (Expense)
Earnings from equity investments 84,183 77,023 853 (144,358) 17,701
Interest, net - (9,073) (14,910) - (23,983)
Other, net - (24) 1,911 - 1,887
Minority Interest - (265) - (1,161) (1,426)
-------------- -------------- --------------- -------------- --------------
Income Before Income Taxes 84,182 88,585 60,477 (145,519) 87,725
Income Tax Benefit (Expense) - (3,543) - - (3,543)
-------------- -------------- --------------- -------------- --------------
Net Income $ 84,182 $ 85,042 $ 60,477 $ (145,519) $ 84,182
============== ============== =============== ============== ==============
Page 11 of 28
CONSOLIDATING BALANCE SHEET
AT JUNE 30, 1999
(In Thousands) (Unaudited)
Kinder Morgan Combined Combined
Energy Guarantor Nonguarantor Eliminations and
Partners, LP Subs. Subs. Adjustments Consolidated
------------- ------------- ------------- ------------- -------------
ASSETS
Current Assets
Cash and cash equivalents $ 5 $ 12,814 $ 9,939 $ - $ 22,758
Accounts and notes receivable 156,468 20,091 37,430 (160,500) 53,489
Inventories
Products - 4,335 200 - 4,535
Materials and supplies - 1,766 790 - 2,556
------------- ------------- ------------- ------------- -------------
156,473 39,006 48,359 (160,500) 83,338
------------- ------------- ------------- ------------- -------------
Prop., Plant and Equip, at cost - 308,488 1,572,909 - 1,881,397
Less accumulated depreciation - 52,291 42,587 - 94,878
------------- ------------- ------------- ------------- -------------
- 256,197 1,530,322 - 1,786,519
------------- ------------- ------------- ------------- -------------
Equity Investments 1,350,457 1,444,257 9,403 (2,445,688) 358,429
------------- ------------- ------------- ------------- -------------
Intangibles - 56,873 - - 56,873
Deferred charges and other assets 245,431 6,121 5,285 (240,793) 16,044
------------- ------------- ------------- ------------- -------------
TOTAL ASSETS $ 1,752,361 $ 1,802,454 $ 1,593,369 $ (2,846,981) $ 2,301,203
============= ============= ============= ============= =============
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Accounts and notes payable $ 2,076 $ 159,408 $ 20,582 $ (160,500) $ 21,566
Accrued liabilities 7,138 6,570 16,730 - 30,438
Accrued employee benefits - 573 5,353 - 5,926
Accrued taxes - 877 3,125 - 4,002
------------- ------------- ------------- ------------- -------------
9,214 167,428 45,790 (160,500) 61,932
------------- ------------- ------------- ------------- -------------
Long-Term Liabilities and Def. Credits
Long-term debt 389,210 266,843 355,101 (240,793) 770,361
Other - 5,047 91,808 - 96,855
------------- ------------- ------------- ------------- -------------
389,210 271,890 446,909 (240,793) 867,216
------------- ------------- ------------- ------------- -------------
Minority Interest - (1,101) - 19,219 18,118
------------- ------------- ------------- ------------- -------------
Partners' Capital
Limited Partner Interests - 1,350,457 - (1,350,457) -
General Partner Interests - - 1,095,231 (1,095,231) -
Special LP Interests - - 5,439 (5,439) -
Common Units 1,339,600 - - - 1,339,600
Kinder Morgan General Partner 14,337 13,780 - (13,780) 14,337
------------- ------------- ------------- ------------- -------------
1,353,937 1,364,237 1,100,670 (2,464,907) 1,353,937
------------- ------------- ------------- ------------- -------------
TOTAL LIABILITIES AND CAPITAL $ 1,752,361 $ 1,802,454 $ 1,593,369 $ (2,846,981) $ 2,301,203
============= ============= ============= ============= =============
Page 12 of 28
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(In Thousands) (Unaudited)
Kinder Morgan Combined Combined
Energy Guarantor Nonguarantor Eliminations and
Partners, LP Subs. Subs. Adjustments Consolidated
------------- ------------- ------------- ------------- -------------
Cash Flows From Operating Activities
Reconciliation of net income to net cash provided by operating activities
Net income $ 84,182 $ 85,042 $ 60,477 $ (145,519) $ 84,182
Depreciation and amortization - 8,943 15,402 - 24,345
Earnings from equity investments (84,183) (77,023) (853) 144,358 (17,701)
Distributions from equity investments 90,370 46,656 875 (120,717) 17,184
Changes in components of working capital (141,394) 135,193 (267) - (6,468)
Other, net 364 2,077 (11,406) 1,161 (7,804)
Net Cash Provided by (Used in)
------------- ------------- ------------- ------------- -------------
Operating Activities (50,661) 200,888 64,228 (120,717) 93,738
------------- ------------- ------------- ------------- -------------
Cash Flows From Investing Activities
Acquisitions of assets - - - - -
Adds to prop, plant and equip. for
expansion and maintenance projects - (5,274) (39,172) - (44,446)
Sale of investments, property, plant and equipment - - 1,110 - 1,110
Acquisitions of equity investments - (124,163) - - (124,163)
Contributions to equity investments - (570) - - (570)
Net Cash Provided by (Used in)
------------- ------------- ------------- ------------- -------------
Investing Activities - (130,007) (38,062) - (168,069)
------------- ------------- ------------- ------------- -------------
Cash Flows From Financing Activities
Issuance of debt 389,175 23,058 34 (22,550) 389,717
Payment of debt (230,000) (7,008) (423) 6,988 (230,443)
Long-term debt - refinancing / issue costs (2,132) - - - (2,132)
Proceeds from issuance of common units - - - - -
Contributions from GP interests - - - - -
Distributions to partners -
Limited Partner Interests - (90,369) - 90,369 -
General Partner Interests - - (30,347) 30,347 -
Special LP Interests - - (153) 153 -
Common Units (65,342) - - - (65,342)
Kinder Morgan General Partner (25,027) (922) - 922 (25,027)
Minority Interest - - - (1,075) (1,075)
Other, net (16,101) 194 - 15,563 (344)
Net Cash Provided by (Used in)
------------- ------------- ------------- ------------- -------------
Financing Activities 50,573 (75,047) (30,889) 120,717 65,354
------------- ------------- ------------- ------------- -------------
Incr/(Decr) in Cash and Cash Equivs. (88) (4,166) (4,723) - (8,977)
Cash and Cash Equivs., Beg. of Period 93 16,980 14,662 - 31,735
------------- ------------- ------------- ------------- -------------
Cash and Cash Equivs., End of Period $ 5 $ 12,814 $ 9,939 $ - $ 22,758
============= ============= ============= ============= =============
6. Partners' Capital
At December 31, 1997, the Partnership had 14,111,200 units outstanding.
From March 6 until June 30, 1998, the Partnership issued 26,548,879 units in
connection with the acquisition of SFPP, and on June 12, 1998, the Partnership
issued 6,070,578 units in a public offering. At June 30, 1998, the Partnership
had 46,730,657 units outstanding.
At December 31, 1998, the Partnership had 48,821,690 units outstanding. On
January 22, 1999, and January 30, 1999, the Partnership repurchased and
immediately cancelled 4,000 and 2,000 units, respectively. At March 31 and June
30, 1999, the Partnership had 48,815,690 units outstanding.
Page 13 of 28
These units represent the limited partners' interest and an effective 98%
economic interest in the Partnership, exclusive of the general partner's
incentive distribution. The general partner interest represents an effective 2%
interest in the Partnership, excluding the general partner's incentive
distribution.
For the purposes of maintaining partner capital accounts, the partnership
agreement specifies that items of income and loss shall be allocated among the
partners in accordance with their respective percentage interests. Normal
allocations according to percentage interests are done only, however, after
giving effect to any priority income allocations in an amount equal to incentive
distributions allocated 100% to the general partner.
Incentive distributions allocated to the general partner are determined by
the amount quarterly distributions to unitholders exceed certain specified
target levels. The Partnership's cash distribution of $0.70 per unit paid on May
14, 1999 for the first quarter of 1999 required an incentive distribution to the
General Partner of $13,083,847. The Partnership's cash distribution of $0.5625
per unit paid on May 15, 1998 for the first quarter of 1998 required an
incentive distribution to the general partner of $2,889,621. The increased
incentive distribution paid for the first quarter of 1999 over the distribution
paid for the first quarter of 1998 reflects the increase in amount distributed
per unit as well as the issuance of additional units.
The Partnership's declared distribution for the second quarter of 1999 of
$0.70 per unit will result in an incentive distribution to the general partner
of $13,083,847. This compares to the Partnership's cash distribution of $0.63
per unit and incentive distribution to the general partner of $9,352,984 for the
second quarter of 1998. The increased incentive distribution paid for the second
quarter of 1999 over the distribution paid for the second quarter of 1998
reflects the increase in amount distributed per unit as well as the issuance of
additional units.
7. Reportable Segments
The Partnership has adopted SFAS No. 131 -- "Disclosures About Segments of
an Enterprise and Related Information". The Partnership competes in three
reportable business segments: Pacific Operations, Mid-Continent Operations and
Bulk Terminals. The Partnership evaluates performance based on segment earnings,
which excludes general and administrative expenses, third-party debt costs,
unallocable non-affiliated interest income and expense, and minority interest.
The Partnership's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
segment involves different products and marketing strategies.
Financial information by segment follows (in thousands):
Six Months Ended June 30,
1999 1998
------------- -------------
Revenues
Pacific Operations $ 125,863 $ 86,259
Mid-Continent Operations 18,823 18,356
Bulk Terminals 58,296 14,170
------------- -------------
Total Segments $ 202,982 $ 118,785
============= =============
Page 14 of 28
Six Months Ended June 30,
1999 1998
------------- -------------
Operating expenses
Pacific Operations $ 19,801 $ 17,560
Mid-Continent Operations 7,189 6,528
Bulk Terminals 32,916 6,701
------------- -------------
Total Segments $ 59,906 $ 30,789
============= =============
Operating income
Pacific Operations $ 85,265 $ 55,186
Mid-Continent Operations 5,261 7,049
Bulk Terminals 19,782 6,385
------------- -------------
Total Segments $ 110,308 $ 68,620
============= =============
Earnings from equity investments
Pacific Operations $ 853 $ 175
Mid-Continent Operations 16,831 10,432
Bulk Terminals 17 -
------------- -------------
Total Segments $ 17,701 $ 10,607
============= =============
Segment earnings
Pacific Operations $ 88,029 $ 52,888
Mid-Continent Operations 19,139 17,290
Bulk Terminals 19,187 6,359
------------- -------------
Total Segments (1) $ 126,355 $ 76,537
============= =============
Assets at June 30
Pacific Operations $ 1,583,002 $ 1,547,850
Mid-Continent Operations 500,771 273,646
Bulk Terminals 190,034 57,123
------------- -------------
Total Segments (2) $ 2,273,807 $ 1,878,619
============= =============
(1) The following reconciles segment earnings to net income.
Six Months Ended June 30,
1999 1998
------------- -------------
Segment earnings $ 126,355 $ 76,537
Interest and corporate
administrative expenses (a) (42,173) (32,260)
Extraordinary charge - (13,611)
------------- -------------
Net Income $ 84,182 $ 30,666
============= =============
(a) Includes interest and debt expense, general and administrative expenses,
minority interest expense and other insignificant items.
(2) The following reconciles segment assets to consolidated assets.
Assets at June 30 1999 1998
------------- -------------
Segment assets $ 2,273,807 $ 1,878,619
Corporate assets (a) 27,396 42,762
------------- -------------
Total assets $ 2,301,203 $ 1,921,381
============= =============
(a) Includes cash, cash equivalents and certain unallocable deferred charges.
Page 15 of 28
8. Subsequent Events
On July 8, 1999, KN Energy, Inc. and Kinder Morgan, Inc. ("KMI")
announced that they had signed an Agreement and Plan of Merger to combine the
two companies. KMI is the sole stockholder of Kinder Morgan G.P., Inc., the
Partnership's general partner. In the combination, KN Energy, Inc. would issue
an aggregate of approximately 41.5 million shares of KN Energy, Inc. stock to
the stockholders of KMI in return for all of the outstanding shares of KMI. The
combined entity (including the Partnership) will have an enterprise value of
approximately $8.5 billion. The transaction is expected to close early in the
fourth quarter of 1999.
On July 20, 1999, the Partnership announced that it had signed a
definitive agreement with Primary Corporation to purchase Primary's transmix
processing plants in Richmond, Virginia and Dorsey Junction, Maryland. The
Partnership will give aggregate consideration of approximately $37 million
divided equally between cash and common units. The transaction is conditioned on
receiving certain government and customer approvals, and is expected to close by
the end of the third quarter 1999.
On July 28, 1999, the Partnership announced that it had agreed to sell its
25% Partnership interest in a natural gas liquids fractionation facility in Mont
Belvieu, Texas to Enterprise Products Partners L.P. The Partnership will receive
$45 million in cash for its interest in the fractionator. The transaction is
subject to the completion of a definitive agreement and clearance under the
Hart-Scott-Rodino Antitrust Act. The companies anticipate that closing will
occur by the end of the third quarter 1999.
Page 16 of 28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Second Quarter 1999 Compared With Second Quarter 1998
The Partnership's second quarter results reflect record quarterly revenues
and net earnings for the second straight quarter. Total net earnings for the
Partnership were $43.1 million in the second quarter of 1999 on revenues of
$102.9 million, compared with $30.3 million of net earnings in the second
quarter of 1998 on revenues of $82.0 million. Net earnings increased across all
business segments resulting in net income per unit of $0.61 in the second
quarter of 1999 versus $0.50 in the second quarter of 1998. Operating expenses,
excluding depreciation, amortization and taxes, other than income taxes, were
$31.0 million in the second quarter of 1999 versus $20.4 million in the same
prior year period. The $20.9 million increase (25%) in revenues and the $10.6
million increase (52%) in operating expenses were principally due to the
acquisition of Kinder Morgan Bulk Terminals, Inc. (formerly Hall-Buck Marine,
Inc.) in July 1998. Operating income for the three months ended June 30, 1999
was $46.6 million compared with $39.4 million for the same period of 1998.
Second quarter earnings from equity investments were $9.7 million in 1999
compared with $5.3 million in second quarter 1998. The $4.4 million increase
(83%) in equity earnings was mainly due to income realized on the Partnership's
investments in Plantation Pipe Line Company, acquired in September 1998 and June
1999.
The Pacific Operations reported segment earnings of $45.6 million and
operating revenues of $65.1 million for the second quarter of 1999. Segment
earnings and operating revenues for the second quarter of 1998 were $40.0
million and $65.5 million, respectively. The 14% increase in segment earnings
was largely due to an increase in higher tariff shipments and continued
improvement in operating efficiencies. The segment also benefited from
reductions in the second quarter of 1999 in expense accruals made for the FERC
Rate Case reserve as a result of the FERC's opinion relating to an outstanding
rate case dispute. Segment operating expenses were $11.6 million in the second
quarter of 1999 compared with $13.5 million in the same period last year.
Operating income for the quarter ended June 30, 1999 was $43.2 million compared
with $41.7 million for the same period of 1998.
The Mid-Continent Operations reported segment earnings of $9.1 million in
the second quarter of 1999 versus $7.9 million in the comparable period of 1998.
The 15% increase in segment earnings was chiefly due to the $2.1 million in net
earnings from the Partnership's equity investment in Plantation Pipe Line
Company, partially offset by a $0.7 million decrease in earnings from the
investment in the Mont Belvieu fractionator due to lower fractionation volumes.
Quarterly segment revenues were $8.2 million in both 1999 and 1998 but combined
operating expenses increased to $3.4 million in the second quarter of 1999
compared with $3.1 million in the second quarter of 1998. The operating results
reflect an 18% increase in throughput volumes on the Partnership's North System,
largely offset by lower average tariff rates. Segment operating income was $1.6
million in second quarter 1999, compared with $2.8 million in second quarter
1998. The decrease in operating income was due to higher operating expenses and
higher amortization expense associated with the acquisition of the equity
investment in Plantation Pipe Line Company.
The Bulk Terminals segment reported earnings of $10.3 million in the
second quarter of 1999 compared with $3.9 million in the same period of 1998.
Segment revenues for the second quarters of 1999 and 1998 were $29.6 million and
$8.3 million, respectively. The segment reported operating expenses of $16.0
million and operating income of $10.7 million for the second quarter of 1999
versus operating expenses of $3.8 million and operating income of $4.0 million
for the second quarter of 1998. Operating income was $10.7 million for
Page 17 of 28
the quarter ended June 30, 1999 and $4.0 million in the same year-ago period.
The 1999 increases in operating results reflect the Partnership's acquisitions
of Kinder Morgan Bulk Terminals, Inc. in July 1998 and the Pier IX and Shipyard
River Terminals in December 1998. Excluding these acquisitions, revenues and
earnings from the Partnership's other coal terminals increased 29% and 42%,
respectively, in the second quarter of 1999 compared with the year-earlier
period. The increases were primarily the result of a 43% increase in coal
volumes transferred, partially offset by a 10% decrease in average coal tariff
rates.
Operating statistics for the second quarter are as follows:
Second Quarter
1999 1998
-----------------
Pacific Operations
Delivery Volumes(MMBbls) 96.8 99.4
Average Revenue ($/Bbl) $0.67 $0.66
Mid-Continent Operations *
Delivery Volumes (MMBbls) 11.8 10.5
Average Tariff ($/Bbl) $0.58 $0.62
Bulk Terminals
Transport Volumes (MM Tons) 10.2 3.1
------------------------------------------------------------------------
* North System and Cypress only.
Earnings contribution by business segment for the second quarter is
as follows:
Earnings Contribution by Business Segment**
(Unaudited)
(In Thousands)
Second Quarter
1999 1998
--------------------
Pacific Operations $45,629 $40,023
Mid-Continent Operations $ 9,068 $7,881
Bulk Terminals $10,348 $3,909
----------------------------------------------------------------------
** Excludes general and administrative expenses, debt costs, and minority
interest. Includes the results of acquired operations from the date of
acquisition.
Income from items not attributable to any segment during the second
quarter of 1999 was essentially unchanged when compared to the year-ago period.
General and administrative expenses were $8.9 million in the second quarter of
1999 compared with $9.1 million in the same period of 1998. The 2% decrease was
the result of the Partnership's continued focus on productivity and expense
controls. Interest expense, net of interest income, was $12.2 million in the
second quarter of 1999 compared with $12.1 million in the same year-earlier
period. The Partnership reported income tax expense of $2.1 million in the
second quarter of 1999. The tax expense includes the Partnership's share of
income tax expense from Plantation Pipe Line Company and taxes related to Kinder
Morgan Bulk Terminals, Inc. The Partnership reported no income tax expense in
the second quarter of 1998.
Page 18 of 28
Six months Ended June 30, 1999 Compared With Six Months Ended June 30, 1998
For the six months ended June 30, 1999, the Partnership reported net
income of $84.2 million ($1.18 per unit). This amount compares with $44.3
million ($1.00 per unit) reported as net income before extraordinary charge for
the first half of 1998. Included in 1998 net earnings was an extraordinary
charge of $13.6 million associated with debt refinancing transactions, including
both a prepayment premium and the write-off of unamortized debt issue costs.
After the extraordinary charge, net income for the first six months of 1998 was
$30.7 million ($0.57 per unit). There was revenue growth across all business
segments, primarily due to the acquisitions of the Pacific Operations (formerly
Santa Fe Pacific Pipeline Partners, L.P.) in March 1998 and Kinder Morgan Bulk
Terminals, Inc. (formerly Hall-Buck Marine, Inc.) in July 1998. Total
Partnership revenue increased to $203.0 million in the first half of 1999
compared with $118.8 million in the first half of 1998. Operating expenses,
excluding depreciation, amortization and taxes, other than income taxes, were
$59.9 million in the first six-month period of 1999 compared with $30.8 million
for the same period in 1998. Operating income for the six months ended June 30,
1999 was $93.5 million compared with $54.5 million for the same period of 1998.
Total earnings from the Partnership's equity investments increased 67% to $17.7
million in the year-to-date 1999 period versus $10.6 million in the same prior
year period chiefly due to earnings from the Partnership's equity investments in
Plantation Pipe Line Company.
The Pacific Operations reported segment earnings of $88.0 million on
operating revenues of $125.9 million for the first six months of 1999. Segment
earnings and operating revenues for the first six months of 1998 were $52.9
million and $86.3 million, respectively. Segment operating expenses totaled
$19.8 million in the first six-month period of 1999 versus $17.6 million for the
same period in 1998. The 1999 results reflect the inclusion of a full six months
of operations and continued strong demand for refined products in the
Partnership's West Coast markets.
Mid-Continent segment earnings were $19.l million for the first six months
of 1999, compared with $17.3 million for the first six months of 1998. The 10%
increase in segment earnings in 1999 versus 1998 was largely due to the
Partnership's equity investment in Plantation Pipe Line Company. The overall
increase in equity earnings was partially offset by lower equity earnings from
the Partnership's investment in the Mont Belvieu fractionator, due to a lower
volume of fractionated barrels. Revenues and operating expenses were $18.8
million and $7.2 million, respectively, in the first half of 1999 and $18.4
million and $6.5 million, respectively, in the first half of 1998. A 6% increase
in barrels transported contributed to the 2% increase in segment revenues as
well as to the 11% increase in segment operating expenses. The higher operating
expenses, along with higher amortization expense associated with the acquisition
of the equity investment in Plantation Pipe Line Company, decreased operating
income to $5.3 million for the six-month 1999 period versus $7.0 million for the
same period of 1998.
The Bulk Terminals segment reported earnings of $19.2 million on operating
revenues of $58.3 million for the first six months of 1999. Segment earnings and
operating revenues for the first six months of 1998 were $6.4 million and $14.2
million, respectively. The segment reported operating expenses of $32.9 million
and operating income of $19.8 million for the first six months of 1999 versus
operating expenses of $6.7 million and operating income of $6.4 million for the
first six months of 1998. The 1999 results reflect the inclusion of Kinder
Morgan Bulk Terminals, Inc., Pier IX Terminal and the Shipyard River Terminal,
all acquired in the last half of 1998. Excluding these acquisitions, segment
earnings increased 13% compared with the first half of last year. Favorable
results from the coal terminals are the result of a 32% increase in coal volumes
transferred, partially offset by a 5%
Page 19 of 28
decrease in average coal tariff rates. For the year-to-date period, higher
overall segment earnings were partly offset by lower earnings from the
Partnership's coal marketing activities.
Operating statistics for the first six months of 1999 and 1998 are as follows:
Six Months Ended June 30,
1999 1998
-----------------
Pacific Operations
Delivery Volumes(MMBbls) 186.1 129.3
Average Revenue ($/Bbl) $0.68 $0.67
Mid-Continent Operations *
Delivery Volumes (MMBbls) 23.7 22.3
Average Tariff ($/Bbl) $0.69 $0.70
Bulk Terminals
Transport Volumes (MM Tons) 19.8 6.1
------------------------------------------------------------------------
* North System and Cypress only.
Earnings contribution by business segment for the first six months of 1999
and 1998 is as follows:
Earnings Contribution by Business Segment**
(Unaudited)
(In Thousands)
Six Months Ended June 30,
1999 1998
--------------------
Pacific Operations $88,029 $52,888
Mid-Continent Operations $19,139 $17,290
Bulk Terminals $19,187 $6,359
------------------------------------------------------------------------
** Excludes general and administrative expenses, debt costs, and minority
interest. Includes the results of acquired operations from the date of
acquisition.
Income items not attributable to any segment include general and
administrative expenses, unallocable interest income and expense and minority
interest expenses. Total Partnership general and administrative expenses
increased $2.6 million to $16.8 million in the first six months of 1999 compared
with $14.2 million in the same period of 1998. The increase was due to the
inclusion of a full six months of the Pacific Operations as well as additional
general and administrative expenses associated with new acquisitions and
investments made by the Partnership in the second half of 1998. Total
Partnership interest expense, net of interest income, was $24.0 million in the
second quarter of 1999 compared to $17.8 million in the same year-earlier
period. The increase was due to expenses related to the financing of the
Partnership's 1998 investments.
Due to the acquisition of Kinder Morgan Bulk Terminals, Inc. and the
Partnership's equity investments in Plantation Pipe Line Company, the
Partnership reported income tax expense of $3.5 million for the six-month period
ended June 30, 1999. The Partnership reported no income tax expense for the
first six-month period of 1998.
Page 20 of 28
Financial Condition
The Partnership's primary cash requirements, in addition to normal
operating expenses, are debt service, sustaining capital expenditures,
discretionary capital expenditures and quarterly distributions to partners. In
addition to utilizing cash generated from operations, the Partnership could meet
its cash requirements through borrowings under its credit facilities, issuing
long-term notes or issuing additional units. The Partnership expects to fund
future cash distributions and sustaining capital expenditures with existing cash
and cash flows from operating activities. Expansion capital expenditures are
expected to be funded through additional Partnership borrowings or issuance of
additional units. Interest payments are expected to be paid from cash flows from
operating activities and debt principal payments will be met by additional
borrowings as they become due or by issuance of additional units.
Cash Provided by Operating Activities
Net cash provided by operating activities was $93.7 million for the six
months ended June 30, 1999, versus $46.4 million in the comparable period of
1998. The period-to-period increase of $47.3 million in cash flow from
operations was primarily the result of higher net earnings, distributions from
equity investments and non-cash depreciation and amortization charges. Higher
earnings and depreciation charges, chiefly due to business acquisitions made
during 1998, increased $39.9 million and $10.0 million, respectively, in the
first six months of 1999 when compared with the same period in 1998.
Distributions from the Partnership's investment in Plantation Pipe Line Company
and increased distributions from the investment in Shell CO2 Company were the
primary factors for the $10.1 million increase in equity investment
distributions. The overall increase in cash provided by operating activities was
partially offset by higher earnings from equity investments, higher payments for
pipeline right-of-way easements and period-to-period reductions changes in the
FERC Rate Case reserve established for the Pacific Operations.
Cash Used in Investing Activities
Net cash used in investing activities was $168.1 million for the six month
period ended June 30, 1999, compared to $110.3 million in the same year-earlier
period. The $57.8 million net increase includes a $98.6 million increase in
equity investment contributions. The increase in equity investment contributions
was primarily the result of the Partnership's $124.2 million investment in
Plantation Pipe Line Company made in June 1999, as compared to the $25.0 million
equity acquisition in Shell CO2 Company made in March 1998. The increase in
funds utilized in investing activities is also attributable to increased capital
expenditures driven primarily by continued investment in the Partnership's
Pacific Operations, offset by lower expenditures for strategic acquisitions in
the 1999 period. The six month period ended June 30, 1998 included $74.7 million
used for the March 1998 acquisition of the Pacific Operations. All funds
classified as additions to property, plant and equipment include both expansion
and maintenance projects.
Cash Provided by Financing Activities
Net Cash provided by financing activities amounted to $65.4 million for
the six month period ended June 30, 1999. This decrease of $29.0 million from
the comparable 1998 period was the result of $212.3 million in proceeds received
from the June 1998 public offering of Partnership units and a year-to-year
increase of $51.0 million in distributions to partners. The net decrease in cash
provided by financing activities was offset by an increase of $232.1 million
from overall debt financing activities.
Page 21 of 28
Distributions to all partners increased to $91.4 million in the six month
period ended June 30, 1999, compared to $40.4 million in the comparable 1998
period. The increase in distributions was due to an increase in the per unit
distribution paid, the number of units outstanding and the general partner
incentive distributions which resulted from increased distributions to
unitholders. The Partnership paid distributions of $1.35 per unit in the first
six months of 1999 compared with $1.125 per unit in the first six months of
1998.
The 20% increase in paid distributions per unit resulted from favorable
operating results in 1999. On July 15, 1999, the Partnership declared a
distribution of $0.70 per unit for the second quarter of 1999. The Partnership
believes that future operating results will continue to support similar levels
of quarterly cash distributions, however, no assurance can be given that future
distributions will continue at such levels.
The partnership agreement requires the Partnership to distribute 100% of
"Available Cash" (as defined in the partnership agreement) to the Partners
within 45 days following the end of each calendar quarter in accordance with
their respective percentage interests. Available Cash consists generally of all
cash receipts of the Partnership and its operating partnerships, less cash
disbursements and net additions to reserves and amounts payable to the minority
interest owner, the former Santa Fe general partner, in respect of its 0.5%
interest in SFPP.
The Partnership's debt instruments generally require the Partnership to
maintain a reserve for future debt service obligations. The purpose of the
reserve is to lessen differences in the amount of Available Cash from quarter to
quarter due to the timing of required principal and interest payments (which may
only be required on a semi-annual or annual basis) and to provide a source of
funds to make such payments. The Partnership's debt instruments generally
require the Partnership to set aside each quarter a portion of the principal and
interest payments due in the next six to twelve months.
Available Cash of the Partnership generally is distributed 98% to the
limited partners (including the approximate 2% limited partner interest of the
general partner) and 2% to the general partner. This general requirement is
modified to provide for incentive distributions to be paid to the general
partner in the event that quarterly distributions to unitholders exceed certain
specified targets.
In general, Available Cash for each quarter is distributed, first, 98% to
the limited partners and 2% to the general partner until the limited partners
have received a total of $0.3025 per unit for such quarter, second, 85% to the
limited partners and 15% to the general partner until the limited partners have
received a total of $0.3575 per unit for such quarter, third, 75% to the limited
partners and 25% to the general partner until the limited partners have received
a total of $0.4675 per unit for such quarter, and fourth, thereafter 50% to the
limited partners and 50% to the general partner. Incentive distributions are
generally defined as all cash distributions to the general partner that are in
excess of 2% of the aggregate amount of cash being distributed. The general
partner's incentive distribution declared by the Partnership for the second
quarter of 1999 was $13.1 million, while the incentive distribution paid during
the first six months of 1999 and 1998 were $23.8 million and $4.8 million,
respectively.
Year 2000
The Partnership is currently implementing a five phase program to achieve Year
2000 compliance. The five steps are inventory, assessment, testing, remediation,
and contingency planning. The Partnership is evaluating both information
technology systems ("IT") and non-IT systems such as those that include embedded
technology.
Page 22 of 28
The Partnership has completed the system inventory phase. In the system
inventory phase, all hardware and critical software was inventoried and a
database of systems that needed further assessment was created.
The Partnership has completed the assessment phase. In the assessment phase,
specific Year 2000 issues and solutions were identified.
The Partnership has begun the system testing phase. In the system testing phase,
real world tests on critical systems are run to insure that they will operate
properly during and after the Year 2000. The Partnership anticipates completing
the system testing phase by the end of August 1999.
The Partnership has begun the remediation phase. In the remediation phase,
problems that arise in the Partnership's assessment and system testing phases
are corrected. The Partnership anticipates completing the remediation of
critical systems by the end of September 1999, and all other remediation by the
end of October 1999.
The Partnership has begun the contingency planning phase. The Partnership
currently has plans in place for non-Year 2000 related contingencies and will
modify these plans to address any specific contingencies related to the Year
2000 problem. Initial drills of contingency operations were held in the first
quarter of 1999. Refinement of contingency plans and employee training will
continue throughout the year and be completed in the fourth quarter of 1999.
The Partnership does not believe it has material exposure to third parties'
failures to remediate the Year 2000 problem. The Partnership has not sought and
does not intend to seek information from material suppliers, customers, or
service providers to determine the exact extent to which the Partnership would
be effected by third parties' failures to remediate the Year 2000 problem.
While the Partnership has budgeted sufficient funds to address the Year 2000
problem, the Partnership does not believe that any material expenditures will be
required to address the Year 2000 problem as it relates to existing systems.
However, uncertainty exists concerning the potential costs and effects
associated with any Year 2000 compliance. Therefore, the Partnership cannot give
any assurance that unexpected Year 2000 compliance problems of either the
Partnership or its vendors, customers, and service providers would not
materially and adversely affect the Partnership's business, financial condition
or operating results.
Information Regarding Forward Looking Statements
This filing includes forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward looking statements are identified as any
statement that does not relate strictly to historical or current facts. They use
words such as "anticipate," "continue," "estimate," "expect," "may," "will," or
other similar words. These statements discuss future expectations or contain
projections. Specific factors which could cause actual results to differ from
those in the forward looking statements, include:
o price trends and overall demand for natural gas liquids, refined
petroleum products, carbon dioxide, 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;
o if the Federal Energy Regulatory Commission or the California Public
Utilities Commission changes the Partnership's tariff rates;
o the Partnership's ability to integrate any acquired operations into its
existing operations;
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o if railroads experience difficulties or delays in delivering products to
the bulk terminals;
o the Partnership's ability to successfully identify and close strategic
acquisitions and make cost saving changes in operations;
o shut-downs or cutbacks at major refineries, petrochemical plants,
utilities, military bases or other businesses that use the Partnership's
services;
o the condition of the capital markets and equity markets in the United
States; and
o the political and economic stability of the oil producing nations of the
world.
See Items 1 and 2 "Business and Properties - Risk Factors" of the Annual
Report filed on Form 10-K with the Securities and Exchange Commission on March
15, 1999 for a more detailed description of these and other factors that may
affect the forward looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
Page 24 of 28
PART II. OTHER INFORMATION
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
ITEM 1. Legal Proceedings
See Part I, Item 1, Note 3 to Consolidated Financial Statements entitled
"Litigation" which is incorporated herein by reference.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*3.1 - Second Amendment to Amended and Restated Agreement of Limited
Partnership dated as of February 14, 1997 (filed as Exhibit 3.1 to
Amendment No. 1 to Kinder Morgan Energy Partners, L.P. Registration
Statement on Form S-4, file No. 333-46709, filed on April 13, 1999)
*4.1 - Specimen Certificate representing Common Units (filed as Exhibit 4.1
to Amendment No. 1 to Kinder Morgan Energy Partners, L.P. Registration
Statement on Form S-4, file No. 333-44519, filed on February 4, 1998)
*4.2 - Indenture dated as of January 29, 1999 among the Partnership, the
guarantors listed on the signature page thereto and U.S. Trust Company
of Texas, N.A., as trustee, relating to Senior Debt Securities (filed as
Exhibit 4.1 to the Partnership's Form 8-K dated January 29, 1999 (the
"January 29, 1999 Form 8-K"))
*4.3 - First Supplemental Indenture dated as of January 29, 1999 among the
Partnership, the subsidiary guarantors listed on the signature page
thereto and U.S. Trust Company of Texas, N.A., as trustee, relating to
$250,000,000 of 6.30% Senior Notes due February 1, 2009 (filed as
Exhibit 4.2 to the January 29, 1999 Form 8-K)
*4.4 - Amended and Restated Credit Agreement dated as of December 1, 1998
among the Partnership, Kinder Morgan Operating L.P. "B", the subsidiary
guarantors listed on the signature page thereto, the lenders party
thereto and First Union National Bank, as agent (filed as Exhibit 4.4 to
the Partnership's Form 10-K for 1998 (the "1998 Form 10-K"))
*4.5 - First Amendment, dated December 21, 1998 to Amended and Restated
Credit Agreement among the Partnership, Kinder Morgan Operating L.P.
"B", the subsidiary guarantors listed on the signature page thereto, the
lenders party thereto and First Union National Bank, as agent (filed as
Exhibit 4.5 to 1998 Form 10-K)
4.6 - Second Amendment, dated June 16, 1999, to Amended and Restated Credit
Agreement among the Partnership, Kinder Morgan Operating L.P. "B", the
subsidiary guarantors listed on the signature page thereto, the lenders
party thereto and First Union National Bank, as agent
*4.7 - First Mortgage Note Agreement dated December 8, 1988 among Southern
Pacific Pipe Lines Partnership, L.P. (now known as SFPP, L.P.) and the
Purchasers listed on Schedule A (a conformed composite of 54 separate
agreements, identical except for signatures) (filed as Exhibit 4.2 to
Form 10-K for Santa Fe Pacific Pipeline Partners, L.P. for 1988, file
no. 001-10066 ("Santa Fe 1988 Form 10-K"))
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*4.8 - Consent and Amendment dated as of December 19, 1997 between the
noteholders and SFPP, L.P. (a conformed composite of the separate
agreements with each noteholder, identical except for signatures)
(Exhibit 4.14.1 to the Partnership's Form 10-K for 1997)
*4.9 - Deed of Trust, Security Agreement and Fixture Filing, dated December
8, 1988, between SFPP, L.P., its general partner, Chicago Title
Insurance Company and Security Pacific National Bank (Exhibit 4.3 to
Santa Fe 1988 Form 10-K)
*4.10 - Trust Agreement dated December 19, 1988, between SFPP, L.P., its
general partner and Security Pacific National Bank (Exhibit 4.4 to
Sanga Fe 1988 Form 10-K)
*4.11 - Amended and Restated Credit Agreement dated as of August 11, 1997
among SFPP, L.P., Bank of America National Trust and Savings
Association, as agent, Texas Commerce Bank National Association, as
syndication agent, Bank of Montreal, as documentation agent,
BancAmerica Securities, Inc., as arranger, and the lenders that are
signatories thereto. As the maximum allowable borrowings under this
facility do not exceed 10% of the Registrant's total assets, this
instrument is not filed as an exhibit to this Report, however, the
Registrant hereby agrees to furnish a copy of such instrument to the
Securities and Exchange Commission upon request.
10.1 - Third Amendment to Credit Agreement, dated as of May 7, 1999, among
Kinder Morgan, Inc. and First Union National Bank
27.1 - Financial Data Schedule for Kinder Morgan Energy Partners, L.P.
27.2 - Financial Data Schedule for Kinder Morgan Operating L.P. "A"
27.3 - Financial Data Schedule for Kinder Morgan Operating L.P. "B"
27.4 - Financial Data Schedule for Kinder Morgan Operating L.P. "C"
27.5 - Financial Data Schedule for Kinder Morgan Operating L.P. "D"
27.6 - Financial Data Schedule for Kinder Morgan Natural Gas Liquids
Corporation
27.7 - Financial Data Schedule for Kinder Morgan CO2, LLC
27.8 - Financial Data Schedule for Kinder Morgan Bulk Terminals, Inc.
*Incorporated by reference.
(b) Reports on Form 8-K.
None.
Page 26 of 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KINDER MORGAN ENERGY PARTNERS, L.P.
(A Delaware Limited Partnership)
By: KINDER MORGAN G.P., Inc.
as General Partner
By: /s/ David G. Dehaemers, Jr.
------------------------------
David G. Dehaemers, Jr.
Vice President, CFO, Treasurer
and Assistant Secretary
KINDER MORGAN OPERATING L.P. "A"
(A Delaware Limited Partnership)
By: KINDER MORGAN G.P., Inc.
as General Partner
By: /s/ David G. Dehaemers, Jr.
------------------------------
David G. Dehaemers, Jr.
Vice President, CFO, Treasurer
and Assistant Secretary
KINDER MORGAN OPERATING L.P. "B"
(A Delaware Limited Partnership)
By: KINDER MORGAN G.P., Inc.
as General Partner
By: /s/ David G. Dehaemers, Jr.
------------------------------
David G. Dehaemers, Jr.
Vice President, CFO, Treasurer
and Assistant Secretary
KINDER MORGAN OPERATING L.P. "C"
(A Delaware Limited Partnership)
By: KINDER MORGAN G.P., Inc.
as General Partner
By: /s/ David G. Dehaemers, Jr.
------------------------------
David G. Dehaemers, Jr.
Vice President, CFO, Treasurer
and Assistant Secretary
KINDER MORGAN OPERATING L.P. "D"
(A Delaware Limited Partnership)
Page 27 of 28
By: KINDER MORGAN G.P., Inc.
as General Partner
By: /s/ David G. Dehaemers, Jr.
------------------------------
David G. Dehaemers, Jr.
Vice President, CFO, Treasurer
and Assistant Secretary
KINDER MORGAN NATURAL GAS LIQUIDS
CORPORATION
(A Delaware Corporation)
By: /s/ David G. Dehaemers, Jr.
------------------------------
David G. Dehaemers, Jr.
Vice President, CFO, Treasurer
and Assistant Secretary
KINDER MORGAN CO2, LLC
(A Delaware Limited Liability Company)
By: KINDER MORGAN OPERATING L.P. "A"
as sole Member
By: KINDER MORGAN G.P., Inc.
as General Partner
By: /s/ David G. Dehaemers, Jr.
------------------------------
David G. Dehaemers, Jr.
Vice President, CFO, Treasurer
and Assistant Secretary
KINDER MORGAN BULK TERMINALS, INC.
(A Louisiana Corporation)
By: /s/ David G. Dehaemers, Jr.
------------------------------
David G. Dehaemers, Jr.
Vice President, CFO and
Treasurer
Date: August 5, 1999
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