SECURITIES AND EXCHANGE COMMISSION
                  WASHINGTON, D.C.  20549



                      F O R M   10-K

       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
          OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 1996   Commission file
number:  1-11234


            KINDER MORGAN ENERGY PARTNERS, L.P.
  (Exact name of registrant as specified in its charter)


         DELAWARE                         76-0380342
  (State or other jurisdiction           (I.R.S. Employer
of incorporation or organization)       Identification No.)


   1301 McKinney Street, Ste. 3450, Houston, Texas 77010
    (Address of principal executive offices)(zip code)
Registrant's telephone number, including area code: 713-844-9500



Securities registered pursuant to Section 12(b) of the Act:


Title of each className of each exchange on which registered

   Common Units            New York Stock Exchange


Securities registered pursuant to Section 12(g) of the Act:
                           None



     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

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.


     Aggregate  market value of the Common Units held by  non-affiliates  of the
registrant, based on closing prices in the daily composite list for transactions
on the New York Stock Exchange on March 12, 1997, was approximately
$254,043,000.


<PAGE>



            KINDER MORGAN ENERGY PARTNERS, L.P.
                     TABLE OF CONTENTS





                                                   Page No.

                       P A R T  I

Item 1.  Business                                              1

Item 2.  Properties                                           18

Item 3.  Legal Proceedings                                    18

Item 4.  Submission of Matters to a Vote of Security Holders  19

                        P A R T  II

Item 5.  Market for the Registrant's Common Units and
   Related Security Holder Matters                            20

Item 6.  Selected Financial Data                              21

Item 7.  Management's Discussion and Analysis of
   Financial Condition and Results of Operation               22

Item 8.  Financial Statements and Supplementary Data          26

Item 9.  Changes in and Disagreements on Accounting and
   Financial Disclosure                                       26

                       P A R T  III

Item 10.  Directors and Executive Officers of the
   Registrant                                                 27

Item 11.  Executive Compensation                              28

Item 12.  Security Ownership of Certain Beneficial
   Owners and Management                                      30

Item 13.  Certain Relationships and Related Transactions      31

                        P A R T  IV

Item 14. Exhibits, Financial Statement Schedules, and
   Reports on Form 8-K                                        33

Financial Statements                                          F-1

                             i

<PAGE>



                        P A R T  I


Item 1. Business


Change of Control

   On February 14, 1997, Kinder Morgan,  Inc., a Delaware  corporation  formerly
known as KC Liquids  Holding  Corporation  ("KMI"),  acquired from Enron Liquids
Holding  Corporation,  a Delaware  corporation  ("ELHC"),  all of the issued and
outstanding common stock of Enron Liquids Pipeline Company,  the general partner
of the  Partnership  and a Delaware  corporation  (the "General  Partner"),  for
approximately  $21.7  million.  As a result of KMI's  acquisition  of the common
stock  of  the  General  Partner,   KMI  indirectly   acquired  control  of  the
Partnership. See Item 12 for information regarding the ownership of KMI.

   In connection with the  transaction,  the name of the Partnership was changed
to Kinder  Morgan Energy  Partners,  L.P.,  the name of the General  Partner was
changed to Kinder  Morgan  G.P.,  Inc.  and the address of the  Partnership  was
changed to 1301  McKinney  Street,  Suite 3450,  Houston,  Texas 77010.  The new
telephone number of the Partnership is (713) 844-9500.


General

   The  Partnership  was formed in June 1992 to acquire,  own and operate  three
pipeline  systems  used to  transport  natural  gas  liquids  ("NGLs"),  refined
petroleum products and carbon dioxide ("CO2") and to acquire and own an indirect
interest in an NGL fractionation  facility.  In 1993, the Partnership acquired a
coal terminaling and storage business,  and in 1994, the Partnership  acquired a
natural gas processing plant and related facilities.  Effective October 1, 1995,
the  Partnership  took  assignment of a gas processing  agreement from Enron Gas
Processing Company ("EGP") and subleased capacity at the EGP Bushton natural gas
processing  plant  to  perform  the  Partnership's  obligations  under  the  gas
processing agreement.

   Kinder  Morgan  G.P.,  Inc.  serves  as  the  sole  general  partner  of  the
Partnership.  In addition to its 2% general partner interest in the Partnership,
the General Partner owns  approximately 6.6% of the Common Units ("Common Units"
represent limited partnership  interests in the Partnership).  The Partnership's
operations  are  conducted  through  two  operating  partnerships  of which  the
Partnership is the  approximate  99% limited  partner and the General Partner is
the approximate 1% general  partner.  Kinder Morgan Operating L.P. "A" ("OLP-A")
(formerly known as Enron Liquids Pipeline Operating Limited Partnership),  which
was created at the time of the  Partnership's  initial public offering of Common
Units in August  1992  ("Initial  Public  Offering"),  owns  most of the  assets
relating to the  transportation  of NGLs,  refined  petroleum  products and CO2.
Through  a  subsidiary  company,  OLP-A  has  an  indirect  interest  in  a  NGL
fractionation  facility located at Mont Belvieu,  Texas. Kinder Morgan Operating
L.P. "B" ("OLP-B")  (formerly  known as Enron  Transportation  Services,  L.P.),
which was  created in 1993,  owns a coal  terminaling  and  storage  facility in
Illinois and a natural gas processing  plant and related  facilities in Wyoming.
The Partnership may find it beneficial to create  additional  operating  limited
partnerships in the future in connection with acquisitions of additional assets.
These  operating  limited  partnerships  are  collectively  referred  to as  the
"Operating  Partnerships." Unless the context otherwise requires, all references
herein to the  Partnership  with respect to the  operation  and ownership of the
Partnership's  assets are also references to the Operating  Partnerships  and to
their predecessors.  The Partnership's  business segments are Liquids Pipelines,
Gas Processing and Fractionation,  and Coal Transfer and Storage. See Note 11 of
the Notes to the Consolidated  Financial  Statements of the Partnership included
elsewhere in this report for additional  information regarding the Partnership's
business segments.


<PAGE>



   Although the  Partnership's  revenues derive from a wide customer base, Mobil
Corporation and Amoco Corporation,  including their subsidiaries,  accounted for
approximately  12% and  10%,  respectively,  of the  Partnership's  consolidated
revenue in 1996. Additionally,  in 1996, the two largest customers accounted for
12.3% and 11.1% of the revenues for the Liquids Pipelines  business segment.  In
the Gas Processing and Fractionation business segment, the two largest customers
accounted for 48.4% and 31.6% of the revenues.  In the Coal Transfer and Storage
business  segment,  the three largest customers  accounted for 36.4%,  29.1% and
19.8% of the revenues of the business segment. See "--Liquids Pipelines," "--Gas
Processing  and  Fractionation"  and "--Coal  Transfer  and  Storage" for a more
complete discussion of customers.


Liquids Pipelines

   The North System

      General.  The  North  System,  which  prior  to  its  acquisition  by  the
Partnership had been owned and operated by Enron Corp.  ("Enron") since 1966, is
an approximate  1,600 mile interstate  common carrier NGL and refined  petroleum
products  pipeline  system that  extends  from South  Central  Kansas  (Wichita,
Hutchinson, McPherson, Conway, Bushton) to the Chicago area.

      NGLs, which include ethane, propane, normal butane,  isobutane and natural
gasoline,  are  typically  extracted  from  natural gas in liquid form under low
temperature and high pressure  conditions.  Ethane,  propane,  normal butane and
natural  gasoline  are  used  as  feedstocks  for  petrochemical  plants  in the
production of plastics,  synthetic rubber and other products.  Normal butane and
natural  gasoline  are used by  refineries  in the  blending of motor  gasoline.
Isobutane  is used in the  manufacturing  process of motor  gasoline and is also
used in the production of methyl tertiary butyl ether ("MTBE"), which is used to
produce cleaner burning motor gasoline. Propane is used as fuel for home heating
and  cooking,  crop  drying,  industrial  facilities  and as an engine  fuel for
forklifts and other vehicles.

   The North System,  as an interstate  common carrier  pipeline,  is subject to
regulation by the Federal Energy Regulatory Commission ("FERC"). The Partnership
offers  interstate  transportation  services as a common carrier by means of the
North System to any shipper of NGLs who requests  such  services,  provided that
the products transported satisfy the conditions and specifications  contained in
the applicable  tariff.  Through the North System,  the Partnership  transports,
stores and delivers  NGLs from South  Central  Kansas to markets in the midwest,
including major refineries in the Chicago area,  propane  terminals in Nebraska,
Iowa and Illinois,  and to other pipeline systems, which in turn deliver NGLs to
other midwestern and eastern markets. In addition, the North System receives NGL
products into its system from a  Canadian/U.S.  pipeline  originating in Western
Canada.  During the summer months,  the North System  transports  refinery grade
normal  butane  produced in the Chicago area to Bushton,  Kansas for storage and
transports the product back to the Chicago area on demand.  The Partnership also
owns a 50% interest in the Heartland Partnership, a partnership with Conoco Pipe
Line Company ("Conoco"), that transports refined petroleum products on the North
System from South Central Kansas to a Conoco terminal at Lincoln, Nebraska and a
Heartland Partnership terminal at Des Moines, Iowa.

   South  Central  Kansas  is a major  hub for  producing,  gathering,  storage,
fractionation and  transportation of NGLs extracted from natural gas produced in
the Mid-Continent and Rocky Mountain areas of the United States and includes the
third largest NGL extraction  facility in the lower 48 states,  which is located
at Bushton and  operated by EGP.  The Bushton  natural gas  processing  facility
historically  has, and  continues to,  account for a significant  portion of the
NGLs transported on the North System. Storage facilities along the North

                             2

<PAGE>



System and at Bushton give shippers and other  customers  flexibility in meeting
their seasonal demand and permit the  Partnership to maintain  system  operating
efficiencies.

   Pipelines.  The primary  segment of the North System is its main line,  which
extends from Bushton,  Kansas to Morris,  Illinois  (the "Main Line").  The Main
Line is  composed  of  approximately  1,400  miles of 8" and 10"  pipelines  and
includes  (i) two  pipelines  that begin at Bushton and are  parallel  with each
other, with the exception of a 50-mile segment in Nebraska, to their destination
point at a major  storage and terminal  area in Des Moines,  Iowa,  (ii) a third
pipeline, which extends from Bushton to the Kansas City, Missouri area, where it
intersects with a pipeline (the "Williams Pipeline") owned by Williams Pipe Line
Company,  an  unaffiliated  pipeline  company,  and (iii) a fourth pipeline that
transports  product  to the  Chicago  area from Des  Moines.  A  portion  of the
Williams  Pipeline  extends  from  Kansas  City to Des  Moines,  where  it again
interconnects  with the Main Line. The Partnership has entered into an agreement
with the  Williams  Pipe Line Company  that gives the  Partnership  defined sole
carrier rights to use certain portions of the Williams  Pipeline in exchange for
guaranteed minimum payments of $2.2 million per year. The agreement expires June
30,  2001,  but  provides  for two five  year  extensions  at the  option of the
Partnership.  In addition,  the North System gathers  liquids from, and delivers
liquids to, other pipelines at Wichita, McPherson, Hutchison and Conway, Kansas.
Seven propane loading terminals,  a multi-terminal  complex at Morris,  Illinois
capable of loading  propane,  normal butane,  isobutane and natural gasoline and
operating  storage  facilities (mined caverns and steel tanks) are strategically
placed along the North System. Total storage capacity is approximately 1 million
barrels ("MMBbls").  The Tampico,  Illinois terminal, which is the Partnership's
newest  propane  terminal,  was placed in service in  January,  1996.  The North
System currently has unit pumping power of 62,000 horsepower.

   The North System interconnects with several other NGL common carrier pipeline
systems, utilizes leased capacity of the Williams Pipeline and has joint tariffs
with other pipelines.

   Truck  Loading  Terminals.  The North System  includes  seven  propane  truck
loading  terminals plus a  multi-terminal  complex at Morris,  Illinois,  in the
Chicago area, capable of loading propane,  normal butane,  isobutane and natural
gasoline.   The  propane   terminals  have  an  aggregate  storage  capacity  of
approximately  69 thousand  barrels  ("MBbls").  Additional  propane  storage of
approximately 358 MBbls at Des Moines, Iowa and Morris and Lemont,  Illinois, is
provided by underground mined caverns and above-ground  steel tanks. The loading
terminals (for propane, normal butane, isobutane and natural gasoline) at Morris
provide services to the aerosol, chemical and motor gasoline blending markets in
the Chicago area.

   Storage  Facilities.  The North System's  available  storage  facilities give
shippers flexibility in meeting their seasonal demand and allow the North System
to maintain operating  efficiencies and integrity of product  specification.  In
addition to approximately 628 MBbls of pipeline line-fill available on the North
System and 300 MBbls of storage capacity in dedicated third-party pipelines, the
North  System  includes  separate  cavern and tank  storage  facilities  with an
aggregate  usable  capacity,  including the propane storage  discussed above, of
approximately 1.0 MMBbls.

   The  Partnership  also  has an  agreement  to use a  portion  of the  storage
facilities of EGP, which consist of 98 large  underground  salt caverns with the
combined capacity to store up to 12.8 MMBbls of NGLs. The Partnership's  storage
agreement  became  effective in January 1996,  for a three year term with annual
evergreen  provisions  thereafter.  The agreement  provides  storage capacity of
approximately  5.0 MMBbls.  This agreement was a key factor in improved  product
availability for ultimate transportation on the North System in 1996.


                             3

<PAGE>



   Heartland Partnership. The Heartland System was completed in the fall of 1990
and is owned by the Heartland Partnership,  a partnership shared equally between
the Partnership and Conoco. The Heartland Partnership provides transportation of
refined petroleum  products from refineries in the Kansas and Oklahoma area to a
Conoco terminal in Lincoln, Nebraska and Heartland's Des Moines terminal.

   The core of the Heartland  Partnership's  system is one of the North System's
Main Line sections that originates in Bushton, Kansas. The Heartland Partnership
leases certain specified pipeline capacity to ship refined petroleum products on
this  line  under  a long  term  lease  agreement  that  will  expire  in  2010.
Heartland's  Des Moines  terminal  has five main  tanks  that  allow  storage of
approximately 200 MBbls of different grades of gasoline and fuel oils.

   Under Heartland's  organizational  structure and partnership  agreement,  the
Partnership  operates the pipeline,  and Conoco operates  Heartland's Des Moines
terminal and serves as the managing partner.

   Refined petroleum  products  transported by the Heartland  Partnership on the
North  System  are  supplied  to the  North  System  mainly  from  the  National
Cooperative Refinery Association crude oil refinery in McPherson, Kansas and the
Conoco, Inc. crude oil refinery in Ponca City, Oklahoma.  The Ponca City volumes
move to the North System through  interconnecting  third-party pipelines,  while
the McPherson volumes are transported directly through the North System.

   The  volume  of  refined  petroleum  products  transported  by the  Heartland
Partnership  is  directly  affected by the demand  for,  and supply of,  refined
petroleum  products  in the  geographic  regions  served.  The major  portion of
refined  petroleum product volumes  transported by the Heartland  Partnership is
motor gasoline, the demand for which is dependent on price,  prevailing economic
conditions  and  demographic  changes  in  the  markets  served.  The  Heartland
Partnership's  business has  experienced  only minor  seasonal  fluctuations  in
demand.

   Pipeline Operations. Substantially all of the Partnership's operations on the
North System constitute  interstate common carrier pipeline  operations.  Common
carrier  operations are those under which  transportation is available at tariff
rates  published  and filed with the FERC to any  shipper of NGLs that  requests
such   services,   provided   that  each  NGL  product   satisfies  the  product
specifications  for shipment  and meets the tariff  shipping  requirements.  The
Partnership  does not  normally  engage in the  merchant  function of buying and
selling  NGLs for its own account and does not  purchase or sell NGLs except for
quantities of NGLs from system gains and losses,  or use in connection  with the
ongoing operation of the North System.
 The  Partnership,   however,  may  engage  in  product  exchange  if  there  is
opportunity to enhance  pipeline  revenues with little or no commodity risk, and
will continue to evaluate any such future opportunities. The products shipped on
the North System (line-fill) are owned by the shippers, and no loss allowance or
shrinkage  deduction is applied.  Thus, the Partnership bears the responsibility
for gains or losses.

   Sources of  Products  Transported.  NGLs  extracted  or  fractionated  at the
Bushton natural gas processing plant operated by EGP have historically accounted
for a  significant  portion of the NGL  volumes  transported  through  the North
System.  Other sources of NGLs transported in the North System include major and
independent  oil companies and natural gas processors  that use  interconnecting
pipeline systems to transport  hydrocarbons from major producing areas in Texas,
Oklahoma,  Kansas and the Rocky  Mountain  region  into the  market  area in and
around  Bushton,   known  as  Group  140  (Mid-Continent   Region).   Group  140
fractionators  compete for NGL feedstock  supply with  fractionators in the Gulf
Coast  market area in Mont  Belvieu,  Texas.  The North  System's  NGL supply is
directly   affected   by  the  price   differential,   adjusted   for   relevant
transportation  costs,  between these two markets because higher prices obtained
in the Gulf Coast market area direct NGLs away from Group 140 to the Gulf Coast.

                             4

<PAGE>



   Principal  Products and Markets.  The North System's major operations are the
transportation,  storage and terminaling of NGLs and refined petroleum  products
along its Main Line. The North System currently serves approximately 50 shippers
in the upper Midwest  market,  including  both users and wholesale  marketers of
NGLs.  These  shippers  include all four major  refineries  in the Chicago area.
Wholesale  marketers of NGLs  primarily  make direct large volume sales to major
end-users,  such as  propane  marketers,  refineries,  petrochemical  plants and
industrial concerns.

   Market  demand for NGLs varies in respect to the  different end uses to which
the NGL products delivered through the North System may be applied. For example,
the demand for  propane,  which is used mainly in  connection  with  residential
heating and agricultural uses (agricultural facilities,  crop-drying,  operating
farm equipment,  etc.) is seasonal,  with high demand  occurring during the fall
and winter months.  The demand for butanes and natural gasoline,  which are used
primarily by refineries  for either further  processing or direct  blending into
gasoline motor fuel, depends in turn on the demand for motor gasoline, the price
relationship  between NGLs and motor gasolines,  and vapor pressure limits.  The
demand for ethane and to a lesser extent  propane and normal  butane,  which are
feedstocks used by petrochemical plants in the production of numerous chemicals,
depends on the  demand for  petrochemical  products.  Demand for  transportation
services is  influenced  not only by demand for NGLs,  but also by the available
supply of NGLs.

   The North System  transports  refinery  grade normal  butane  produced in the
Chicago area to the Bushton,  Kansas area (line reversal  transport)  during the
summer months for storage and subsequent  transportation north from Bushton back
to Chicago area refineries  during the winter gasoline  blending  season.  These
transportation volumes originating from Chicago area refineries result from more
restrictive  Environmental  Protection  Agency ("EPA") vapor pressure  limits on
motor gasoline during summer months. See "--Regulation--Environmental  Matters."
As EPA vapor  pressure  limits  continue to force more normal  butane out of the
motor  gasoline  blending  pool in the summer  months,  increased  line reversal
transportation and storage  opportunities become available for the North System.
To be properly  positioned for these  opportunities,  significant  modifications
were made on the North System in late summer 1995 to increase the  capability to
transport  additional line reversal  volumes of refinery grade butane out of the
Chicago area to Bushton for storage and subsequent  redelivery in the winter. In
1996,  additional  storage  caverns at Bushton were  converted to refinery grade
butane service, increasing refinery grade butane storage capacity by 1.65 MMBbls
to a total capacity of 3.5 MMBbls.


                             5

<PAGE>



   The  following  table sets forth  volumes  of NGLs  transported  on the North
System for delivery to the various markets for the periods indicated:


                                               Year Ended December
                    31,

                      1992    1993(1)    1994      1995      1996
                      ----    -------    ----      ----      ----

                                       (MBbls)

Petrochemicals      11,682   11,201     2,861(2)  1,125       684

Refineries & Line   10,532    9,676    10,478     9,765     9,536
Reversal 

Fuels               10,394    8,957    10,039     7,763(3) 10,500

Other (4)            7,033    6,879     6,551     7,114     8,126
                    ------    -----    ------     ------   ------

   Total            39,641   36,713    29,929    25,767    28,846
                    ======   ======    ======    ======    ======



(1)These volumes reflect the supply constrained  conditions in the butane market
   during  January and February 1993 and lower demand for propane in part as the
   result of warmer weather relative to 1992.
(2)The 1994 volumes  reflect the loss of the major  petrochemical  shipper as of
   February 28, 1994.
(3)The 1995  volumes  reflect the shut down of a synthetic  natural gas plant in
   1995.
(4)NGL gathering systems and Chicago  originations  other than long-haul volumes
   of refinery butanes.

   The North System operated at approximately 59% of capacity in 1995 and 66% of
capacity  in 1996,  reversing a three year  decline in NGL product  moved on the
North System.  This gain in capacity  utilization  was caused by a 12.0% gain in
NGL product moved on the North System in 1996. The  Partnership is attempting to
increase its revenues,  and regain  volumes lost during the past three years due
to the  loss of  several  major  customers,  by  pursuing  throughput  incentive
agreements,  market  development  and  other  strategies.  Under  the  incentive
agreements,  the applicable  tariff rates decrease as the shipper  substantially
increases its volume on the North System over the term of the  agreement.  These
contracts  reflect   management's   current  strategy  of  pursuing  incremental
increases in revenue and volumes on the North  System  through  agreements  with
several shippers.  Several of these transactions have been negotiated and placed
into service.  For instance,  with the  development  and opening of the Tampico,
Illinois  propane  terminal  in early 1996,  the  Partnership  entered  into two
incentive agreements with propane shippers for five-year terms. In addition, the
North System also recently  entered into three long-term  transport  agreements.
The  Partnership  anticipates  that these  types of  transactions  will  provide
incremental revenue to the Partnership during 1997.

   Competition.  The  Partnership's  North System  competes  with other  liquids
pipelines and to a lesser extent rail transporters.  In most cases,  established
pipelines are generally the lowest cost  alternative for the  transportation  of
NGLs and  refined  petroleum  products.  Therefore,  the  Partnership's  primary
competition is represented by pipelines owned and operated by others.

   In the Chicago area, the North System  competes with other NGL pipelines that
deliver into the area and with rail car deliveries  primarily from Canada. Other
Midwest pipelines and area refineries  compete with the North System for propane
terminal deliveries.  The North System also competes with pipelines that deliver
product to markets not served by the North System, such as the Gulf Coast market
area.

   Rates charged for interstate common carrier NGL transportation are subject to
regulation  by  the  FERC.  See  "--Regulation."  Because  tariffs  charged  for
transportation on the North System must be competitive with

                             6

<PAGE>



those charged by other  transporters,  the Partnership's  tariffs are determined
based on  competitive  factors in  addition  to rate  regulation  considerations
applicable to the North System.

   Cypress Pipeline

   General.  Completed  in April  1991,  the Cypress  Pipeline is an  interstate
common carrier  pipeline,  subject to regulation by FERC, that transports purity
ethane and is capable of  transporting  other NGLs.  The pipeline  originates at
storage facilities in Mont Belvieu, Texas and extends 104 miles east to the Lake
Charles,  Louisiana area. Mont Belvieu,  located  approximately 20 miles east of
Houston, is the largest hub for NGL gathering, transportation, fractionation and
storage in the United  States and is  located at the  intersection  of  multiple
long-haul NGL pipelines as well as NGL pipelines for  transportation to the Port
of  Houston,  the area with the  largest  concentration  of major  petrochemical
plants and refineries in the United States.  Mont Belvieu also has major storage
and rail  transportation  facilities  and access to import  and  export  markets
through  the  Port of  Houston.  The  pipeline  was  built  to  service  a major
petrochemical  producer  in the Lake  Charles,  Louisiana  area  under a 20 year
transportation agreement that expires in 2011.

   Pipeline Operations.  The Cypress Pipeline utilizes a single 1,000 horsepower
pump located at Mont Belvieu,  which has a current  capacity of approximately 32
MBbls/d.  A second 800 horsepower pump is available as a back-up.  The two pumps
can operate  simultaneously  with a capacity of 37  MBbls/d.  Maximum  allowable
operating  pressure of the line is 2,160  pounds per square inch.  In 1996,  the
Partnership entered into an agreement with the petrochemical  producer to expand
the  Cypress  Pipeline's  current  capacity  by 25  MBbls/d to 57  MBbls/d.  The
expansion is expected to be complete by the fourth quarter of 1997.

   The  petrochemical  producer has elected to be an  "investor  shipper" and as
such has the right, exercisable at the end of any year during the contract term,
to purchase  up to a 50% joint  venture  interest  in the Cypress  Pipeline at a
price established in accordance with a formula  contained in the  transportation
agreement.  The Partnership  believes,  based on the formula  purchase price and
current  market  conditions,  that it would  be  uneconomical  for the  investor
shipper to exercise its buy-in option in the  foreseeable  future.  However,  no
assurance can be given that the option will not be exercised.

   Sources of Products  Transported.  The Cypress  Pipeline  originates  in Mont
Belvieu where it is able to receive ethane from local storage  facilities.  Mont
Belvieu has facilities to fractionate NGLs received from several  pipelines into
ethane and other  components.  Additionally,  ethane is supplied to Mont Belvieu
through pipeline systems that transport  specification NGLs from major producing
areas in Texas, New Mexico, Louisiana, Oklahoma and the Mid-Continent Region.

   Principal  Products and Markets.  As stated above,  the pipeline was built to
service a major  petrochemical  producer in the Lake Charles  area.  The initial
base  load  for the  line is a  fixed  tariff,  ship-or-pay  contract  with  the
petrochemical producer for a minimum volume of 30 MBbls/d (on a monthly average)
for an  initial  term of 20 years  expiring  in  2011.  In  connection  with the
expansion of the current  capacity of the Cypress  Pipeline,  the  petrochemical
producer has entered into a five-year  contract to ship or pay for an additional
approximate 14 MBbls/d.  The Partnership  anticipates  that the Cypress Pipeline
will  operate at or near  capacity  of 57  MBbls/d.  In  addition,  the  Cypress
Pipeline can also provide  transportation  services for shippers serving markets
east of Mont Belvieu and (through  third-party  pipelines) markets as distant as
the Baton Rouge/Geismar area of Louisiana.

   Competition.  The  Cypress  Pipeline  competes  with  several  ethane and NGL
pipelines in the Gulf Coast corridor and NGLs from other sources,  in particular
NGLs produced in  Louisiana.  Its  competitive  position is affected by the same
general competitive factors that affect the North System.

                             7

<PAGE>



   As with the  North  System,  the rates  charged  for the  Cypress  Pipeline's
interstate common carrier ethane transportation are subject to regulation by the
FERC. Because tariffs charged for transportation  must be competitive with those
charged by other transporters, the Partnership's tariffs are determined based on
competitive factors in addition to rate regulation  considerations applicable to
the Cypress Pipeline.

   Central Basin Pipeline

   General.  Placed in service in 1985, the Central Basin  Pipeline  consists of
approximately  143 miles of 16" to 26" main  pipeline and 157 miles of 4" to 12"
lateral supply lines located in the Permian Basin between Denver City, Texas and
McCamey, Texas. Pursuant to long-term agreements, the Partnership transports CO2
on the Central Basin Pipeline for two independent and 11 major oil companies for
use primarily in enhanced oil recovery  projects.  The Partnership  owns the CO2
line fill with the exception of line fill in the El Mar lateral,  which is owned
by the shipper; however, all shippers bear the benefit and risk of CO2 gains and
losses up to 2%. Historically, gains and losses have been less than 2%.

   CO2 is used in  enhanced  oil  recovery  projects  as a  flooding  medium for
recovering  crude  oil from  mature  oil  fields.  A  typical  project  requires
substantial  capital  expenditures  by  the  producer  at the  beginning  of the
project. After the project has been initiated, CO2 generally will continue to be
transported to the field for injection throughout the life of the project, which
may be for many years.  Typically the volumes of CO2 transported will peak after
several  years  and then  decline  over the life of the  project.  The  customer
generally  commits to a minimum  CO2  ship-or-pay  contract  for the life of the
project.

   The Central Basin  Pipeline's  profitability  is dependent on the demand from
oil  producers  in the Permian  Basin of Texas for CO2 used in  connection  with
their  enhanced  oil  recovery  programs.  The level of  enhanced  oil  recovery
programs is sensitive to the level of oil prices.  The pipeline operated at 15%,
20%  and  30% of  current  capacity  during  the  years  1994,  1995  and  1996,
respectively.

   Pipeline  Operations.  The Central  Basin  Pipeline  has a current  unpowered
capacity  in excess of 600  million  cubic feet per day  ("MMcf/d").  All of the
laterals are unpowered, except at Dollarhide,  Texas where a 400 horsepower pump
boosts the pressure at the delivery end of the lateral.  Fifteen delivery points
are currently  active,  including 14 oil field floods (including the addition of
deliveries to the South Cowden Unit,  East Pennwell  Unit,  North Cross Unit and
Goldsmith San Andres Unit in 1996), and one CO2 trucking operation.

   In 1996,  revenues increased $3.2 million from 1995 to $9.8 million,  and the
1996 average daily volume  increased to 171 MMcf/d as compared to volumes of 121
MMcf/d in 1995.  The increase in volumes  resulted from the start up of four new
CO2 floods.  The South Cowden and the East Pennwell  projects were  initiated in
the third  quarter  of 1996 and the  North  Cross and  Goldsmith  projects  were
initiated in the fourth quarter of 1996. Although the operator of the Yates Unit
ceased its use of CO2 late in the year, these volumes were offset by an increase
in CO2 use by the operator of the Sacroc  Unit.  The operator of the Sacroc Unit
has indicated to the Partnership its intention to further increase its volume by
50  MMcf/d by the end of 1997.  However,  there  can be no  assurance  that such
increase will occur. Additionally, the Partnership entered into a transportation
agreement in February  1997 that provides for  transportation  of CO2 to the Mid
Cross Unit,  which project is  anticipated  to commence in the second quarter of
1997.

   The South Cowden Unit flood  project  required  construction  of a lateral to
connect the unit to the Central Basin  Pipeline.  The lateral is owned by Morgan
Associates,  Inc.  ("MAI"),  which is owned by William V. Morgan, an officer and
director of the General Partner.  MAI also owns  approximately 48% of the voting
stock of KMI. MAI and the Partnership  entered into agreements that provided for
construction and operation

                             8

<PAGE>



of the proposed lateral by the Partnership, and a
transportation agreement that allows for the Partnership's
use of the lateral and requires the Partnership to ship
certain minimum quantities of CO2 on the lateral.  See
"Certain Relationships and Related Transactions."

   Sources of Products Transported. At its origination point in Denver City, the
Central Basin Pipeline  interconnects  with all three major CO2 supply pipelines
from  Colorado  and New  Mexico,  namely the  Cortez,  Bravo and Sheep  Mountain
pipelines (operated by affiliates of Shell, Amoco and ARCO, respectively). These
pipelines provide significant purchasing flexibility for shippers on the Central
Basin Pipeline and operational  flexibility for the Central Basin Pipeline.  The
mainline  terminates near McCamey,  where it interconnects  with the Canyon Reef
Carriers,  Inc. pipeline.  The eight lateral pipelines  terminate in the various
oil fields that are being flooded by Central Basin Pipeline shippers.

   Principal  Markets.   The  Central  Basin  Pipeline  primarily  serves  major
integrated  oil  companies and  independent  producers  conducting  enhanced oil
recovery  operations in the Permian Basin of West Texas. To a lesser extent, the
Central Basin  Pipeline  delivers CO2 to a truck  terminal  located in the North
Cowden field,  which is operated by a company that delivers CO2 to operators for
oil well  servicing  purposes.  The four largest  shippers on the Central  Basin
Pipeline  accounted for approximately 51% of the revenues from the Central Basin
Pipeline in 1996.

   Competition.  The Central Basin  Pipeline is well located in the heart of the
Permian Basin near existing and potential CO2 floods.  It nevertheless  competes
with other CO2  pipelines  for supply and  sales.  Competitive  factors  include
access to CO2 supply,  proximity  to oil fields  amenable to CO2  injection  and
amounts charged for transportation services. There are alternative processes for
enhanced oil recovery  projects,  including those that use natural gas, nitrogen
or surfactants rather than CO2.

Gas Processing and Fractionation

   Mont Belvieu Fractionator

   General.  The  Partnership  owns an indirect 25% interest in the Mont Belvieu
Fractionator,  located  approximately  20 miles east of Houston in Mont Belvieu,
Texas.  The Mont Belvieu  Fractionator is a full service  Y-grade  fractionating
facility  that produces a range of  specification  products,  including  ethane,
propane,  normal butane,  isobutane and natural gasoline. The facility was built
in 1980 and is operated by Enterprise Products Company  ("Enterprise")  pursuant
to an  operating  agreement  among  the  owners of the  fractionator,  including
Enterprise. The fractionator has access to virtually all major liquids pipelines
and storage  facilities  located in the Mont Belvieu area. The Partnership  owns
the stock of Kinder Morgan Natural Gas Liquids Corp. ("KMNGL"). KMNGL owns a 50%
interest in Mont  Belvieu  Associates,  which in turn owns a 50% interest in the
Mont  Belvieu   Fractionator.   Mont  Belvieu  Associates  is  a  Texas  general
partnership owned equally by KMNGL and Enterprise;  KMNGL serves as the managing
partner.  The  Partnership's  cash flow from its  indirect  interest in the Mont
Belvieu  Fractionator depends on the difference between  fractionation  revenues
and fractionation costs (including the level of capital  expenditures),  as well
as demand for  fractionation  services.  The Mont Belvieu  Fractionator  has two
major components:  NGL (Y-grade)  fractionating  and butane  splitting.  The NGL
fractionating  component  consists of two  trains:  the West Texas train and the
Seminole train. Each train consists of a de-ethanizer, a de-propanizer and a de-
butanizer.  Each major  unit has an  associated  reboiler  and  related  control
equipment.   The  fractionation   process  uses  heat  recovery   equipment  and
cogeneration.  Because of the  multiple  facilities  owned by  various  entities
within the perimeter of the plant, there are  facilities-sharing  agreements for
such  equipment  as the  flare,  fire  control  system,  roads,  laboratory  and
cogeneration   facilities.   In  December   1996,  the  total  capacity  of  the
fractionator  was  expanded by  approximately  45 MBbls/d to  approximately  200
MBbls/d. The

                             9

<PAGE>



Partnership  anticipates that the  fractionator  will operate at or near the 200
MBbls/d of capacity for 1997. The butane  splitter is fed a mix of normal butane
and  iso-butane  by the West Texas and  Seminole  trains  and has a capacity  of
approximately 42 MBbls/d.  A natural gasoline water wash system was approved for
installation  and was placed in service in the first quarter of 1996.  The water
wash system is necessary to maintain quality natural gasoline  deliveries to the
fractionator's customers.

   The Mont Belvieu Fractionator  operated at approximately 96%, 96% and 100% of
capacity, respectively, during 1994, 1995 and 1996.

   Sources of Products Fractionated. The Mont Belvieu Fractionator is fed by six
major Y-grade pipelines (the Attco, Chevron, Black Lake, Seminole, Chaparral and
Panola  pipelines).   Through  several  pipeline   interconnects  and  unloading
facilities,  the Mont Belvieu Fractionator also can access supply from a variety
of other  sources.  Supply can either be brought  directly  into the facility or
directed  into  underground  salt  dome  storage.  The  Chaparral  and  Seminole
pipelines  gather  Y-grade  from a variety of natural gas  processing  plants in
Texas,  New Mexico,  Oklahoma  and the  Mid-Continent  area.  The  Chevron  line
transports  NGLs from Chevron's East Texas and Central Texas  facilities.  Black
Lake draws its supply from the Northern  Louisiana  region.  The Attco  Pipeline
draws its supply from South Texas and the Panola  pipeline  transports NGLs from
East Texas.  Additionally,  import  barrels  can be brought to the Mont  Belvieu
Fractionator from locations on the Port of Houston.

   Principal Markets.  The Mont Belvieu  Fractionator is located in proximity to
major end-users of its specification products, ensuring consistent access to the
largest domestic market for NGL products. In addition,  the Mont Belvieu hub has
access to deep-water port loading  facilities via the Port of Houston,  allowing
access to import and export markets.

   Product is  delivered  from the  tailgate  of the Mont  Belvieu  Fractionator
either  directly to  pipelines  or to  underground  storage.  There are numerous
delivery  lines  owned by third  parties,  including  the ARCO  Junction,  which
provide   connections   throughout   the  Gulf  Coast   refinery,   storage  and
petrochemical  areas,  plus direct  connections to TEPPCO,  Diamond Shamrock and
other  outlets.  Owners of the facility and third parties using the Mont Belvieu
Fractionator  have storage  contracts with operators of salt dome  facilities at
Mont Belvieu.  Products are delivered to storage at Enterprise,  Enron,  Warren,
Diamond Shamrock and other facilities. Products, as well as Y-Grade, can also be
loaded into, and unloaded from, jumbo rail cars nearby.

   Competition.  The Mont Belvieu  Fractionator  competes for volumes of Y-grade
with three other  fractionators  located in the Mont Belvieu hub and surrounding
areas.  Competitive  factors  for  customers  include  primarily  the  level  of
fractionation fees charged and the relative amount of available capacity.

   Painter Gas Processing Plant

   On June 30, 1994, the Partnership,  through OLP-B, acquired the Painter Plant
from Enron Gas Processing  Company (the "Painter  Plant").  The Painter Plant is
located near Evanston, Wyoming and consists of a natural gas processing plant, a
nitrogen  rejection  unit, a fractionator,  an NGL terminal and  interconnecting
pipelines  with truck and rail loading  facilities.  The  processing  plant is a
conventional  refrigeration-type natural gas processing unit that separates NGLs
from the gas. The remaining gas, which contains  primarily methane and nitrogen,
is then processed to remove the majority of the nitrogen in a nitrogen rejection
unit.  The nitrogen is used in secondary  recovery  operations in the producer's
oil fields,  and the residue gas is delivered  into an  unaffiliated  interstate
natural gas pipeline.  The Y-grade extracted in the natural gas processing plant
is fractionated into propane, mixed butane and natural gasoline products. In

                            10

<PAGE>



addition,  Y-grade  from the nearby  Amoco  Painter  Complex  Gas Plant  ("Amoco
Plant") is delivered to the Painter Plant for  fractionation.  The fractionation
facility has a capacity of approximately 6 MBbls/d that varies, depending on the
feedstock  composition.  After  fractionation,  the propane,  mixed  butanes and
natural gasoline are delivered  through three  interconnecting  NGL pipelines to
the  Partnership's  Millis Terminal and Storage  Facility  ("Millis"),  which is
located approximately seven miles from the Painter Plant. Truck and rail loading
of fractionated  products is provided at Millis, where there is approximately 14
MBbls of above- ground storage for all products.

   In 1996, under a contract that was to extend through December 1998,  Chevron,
USA  ("Chevron")  was the only gas processing  customer at the Painter Plant. In
April 1996, the  Partnership  was notified by Chevron that it was exercising its
right to terminate the gas processing  agreement at the Painter Plant  effective
as of August 1, 1996.  The gas  processing  agreement  with Chevron  allowed for
early  termination by Chevron,  subject to an approximate  $2.9 million one time
termination  payment.  On June 14, 1996, a force majeure event  occurred and the
Painter Plant gas processing  facilities  were shut down.  Chevron  subsequently
disputed its obligation to pay the early  termination  payment.  The Partnership
negotiated  with Chevron to settle all claims  between the two parties under the
gas processing  agreement.  The  Partnership  agreed in September 1996 to accept
$2.7 million as full and final settlement of all claims. This amount was reduced
to  $2.5  million  in  connection  with  the  settlement  of  certain   disputed
receivables.  Historically,  approximately  56% of the revenues from the Painter
Plant were generated from processing Chevron gas. Management  estimates that the
Chevron  contract  would have  generated  approximately  $3.9 million of revenue
during each of the remaining two years of the contract.

   On February 14, 1997, the  Partnership  executed an operating lease agreement
with  Amoco  Oil  Company  ("Amoco")  for  Amoco's  use  of  the  Painter  Plant
fractionator and the Millis facilities with the nearby Amoco Painter Complex Gas
Plant. The lease will generate  approximately  $1.0 million of cash flow in 1997
with  annual  escalations  thereafter.  The  primary  term of the lease  expires
February 14, 2007,  with  evergreen  provisions  at the end of the primary term.
Amoco will take  assignment of all of the commercial  arrangements  currently in
place,  and will assume all day to day  operations,  maintenance,  repairs,  and
replacements,  and all  expenses  (other than minor  easement  fees),  taxes and
charges associated with the fractionator and the Millis facilities.  After lease
year seven,  Amoco may elect to purchase the fractionator and Millis  facilities
under certain terms. A portion of the gas processing facilities and the nitrogen
rejection unit at the Painter Plant remain  operationally  idle. The Partnership
continues to assess its alternatives for these idled facilities.

   Gas Processing Agreement and Subleased Capacity from EGP

   General. On October 1, 1995, Enron Gas Processing Company ("EGP") assigned to
the Partnership its rights and duties under a gas processing contract with Mobil
Natural  Gas,  Inc.  (the "Mobil  Agreement").  Under the Mobil  Agreement,  the
Partnership is obligated to process dedicated volumes of natural gas produced by
Mobil from a prolific geological  formation located in Kansas and commonly known
as the Hugoton  Embayment.  Also on October 1, 1995, the  Partnership  subleased
from EGP a portion of the capacity at the Bushton gas  processing  plant located
in Ellsworth County,  Kansas (the "Bushton  Plant").  The leased capacity at the
Bushton Plant enables the  Partnership to fulfill the processing  obligations it
assumed in the Mobil Agreement.  The Mobil Agreement and the sublease  agreement
are  coterminous  with primary terms ending April 30, 2005. As a result of these
transactions,  the  Partnership  receives  processing  fees from Mobil and makes
sublease  payments to EGP. It is anticipated  that the fees generated  under the
Mobil Agreement will be greater than the sublease payments.

   Agreements.  Under the terms of the Mobil Agreement,
the Partnership is paid a processing fee for extracting
NGLs from the "wet" gas received from Mobil into its
constituent components.  Mobil retains legal

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<PAGE>



title  to the  natural  gas  delivered  to the  plant  and to the  contractually
specified  volumes of extracted NGLs and the resulting residue gas at the outlet
of the plant.  Furthermore,  Mobil  provides the fuel to power the processing of
its gas at  Bushton  and bears the loss for the  shrinkage  of the  natural  gas
stream  experienced  during  such  processing.  Under the Mobil  Agreement,  the
Partnership does not provide the storage or transportation of any NGLs generated
as a result of processing.

   The Mobil  Agreement  provides  that Mobil is entitled  to receive  specified
volumes of NGLs  attributable  to the  processing  of Mobil's gas based upon the
NGLs  contained  in one  thousand  cubic  feet of  natural  gas  processed.  The
Partnership   is  allowed  to  retain  any  NGLs   produced  in  excess  of  the
contractually  specified volumes.  For any NGLs that are retained,  however, the
Partnership  is  obligated  to  reimburse  Mobil with a quantity  of natural gas
containing an equivalent BTU content.  Additionally,  the Partnership  must bear
the cost of the plant fuel for the retained  NGLs.  Typically,  this exchange of
natural gas for NGLs is profitable for the  Partnership,  because  normally NGLs
have a higher market value than natural gas.

   The Mobil Agreement requires the Partnership to redeliver Mobil's residue gas
at applicable  minimum  pipeline heating value  specifications.  The Partnership
accomplishes this by obtaining  additional  volumes of natural gas to blend with
Mobil's   residue  gas  to  achieve  such   minimum   pipeline   heating   value
specifications.  In  consideration  for this blending  service,  the Partnership
retains an equivalent  thermal  quantity of propane  extracted from Mobil's gas.
The  Partnership  acquires  the  additional  volumes of  natural  gas needed for
blending  through  a  physical   requirements   swap  transaction   whereby  the
Partnership receives physical volumes of natural gas needed, if any, in exchange
for a thermally  equivalent  volume of propane  equal to the  quantity  retained
under the Mobil Agreement.

   Both gas  composition  and plant  operation  can  affect  NGL  recovery.  The
difference between actual plant recoveries and the fixed recoveries specified in
the Mobil Agreement is borne by the Partnership.  The Partnership believes that,
while  plant  recoveries  vary,  they  are  consistent  over  time  and that gas
composition from this production area is stable. Therefore, plant recoveries and
gas  composition  should  result  in  only  minimal  uncertainty,  although  the
Partnership cannot guarantee this result.

   Under the terms of the sublease agreement, the Partnership pays EGP a monthly
sublease payment  consisting of a variable and a fixed  component.  The variable
component  is based on actual  gallons of NGLs  recovered  from Mobil's gas. The
fixed  component is an agreed amount that is paid even if Mobil fails to deliver
gas for processing.  Mobil's failure to deliver gas for processing  would result
from either a depletion of Mobil's gas reserves,  a decision by Mobil to shut-in
gas  production or an election by Mobil to not process its gas. The  Partnership
believes  that these risks are minimal  based on history,  economics,  operating
factors and other ancillary matters.  No assurance can be given,  however,  that
the monthly  fees  generated  from the Mobil  Agreement  will exceed the monthly
sublease payments.

Coal Transfer and Storage

   Cora Terminal--Coal Transfer and Storage

   Terminal. On September 30, 1993, the Partnership  acquired,  through OLP-B, a
high-speed,  rail-to-barge  coal  transfer and storage  facility  from Cora Dock
Corporation ("Cora"), an indirect wholly-owned subsidiary of Enron. The terminal
(the "Cora  Terminal") is located on  approximately  480 acres of land along the
upper Mississippi River at mile marker 98.5, near Cora, Illinois, about 80 miles
south of St. Louis. It was built in 1980 at an initial cost of approximately $24
million.  Its equipment  includes 3.5 miles of railroad  track, a rotary dumping
station  and  train  indexer,  a   multi-directional   coal   stacker/reclaimer,
approximately 4,000 feet of conveyor belts and an anchored  terminaling facility
on the Mississippi River that takes advantage of

                            12

<PAGE>



approximately  five miles of owned and leased available  riverfront  access with
approximately  7,000 feet developed.  The terminal has a throughput  capacity of
about 12 million  tons per year,  and it can be expanded to 20 million tons with
certain capital additions.  The facility's  equipment permits it continuously to
unload  115-car  unit trains at a rate of 3,500 tons per hour.  The terminal can
transfer  the coal to a  storage  yard or unload to barges at a rate up to 5,700
tons  per  hour.  The  railroad  track  can   accommodate   two  115-car  trains
simultaneously.  The riverfront  access permits the fleeting of up to 100 barges
at once.  The  terminal  also has  automatic  sampling,  programmable  controls,
certified belt scales,  computerized  inventory control and the ability to blend
different  types of coal.  The  terminal  currently  is  equipped to store up to
500,000 tons of coal,  which gives customers the flexibility to coordinate their
supplies  of  coal  with  the  demand  at  power  plants.   Anticipated  capital
expenditures  for 1997  include  expanding  the storage  yard to store up to 1.0
million tons of coal and to improve the terminal's blending capacity.

   Terminal  Operations.  Cora Terminal generates revenue from transloading coal
from rail cars and trucks to river barges, storage of coal, blending of coal and
harbor  services.  Cora is operated on three shifts per day with an experienced,
full-time staff of 29 persons employed by the General  Partner,  including seven
non-  union  employees  and 22  hourly  personnel  who  are  represented  by the
International  Union  of  Operating  Engineers  under  a  collective  bargaining
agreement that expires  September 1998.  Operations at the facility are directed
by a lead  manager  who  participated  in the  design  and  construction  of the
facility. The General Partner considers its relations with the union to be good.

   Sources of Products  Transferred.  Historically,  the Cora Terminal has moved
coal that originated in the mines of southern Illinois. Many shippers,  however,
particularly in the East, are now using western coal loaded at the Cora Terminal
or a  mixture  of  western  coal  and  Illinois  coal  as  a  means  of  meeting
environmental  restrictions.  The General  Partner  believes  that Illinois coal
producers and shippers will continue to be important customers in the terminal's
business,  but  anticipates  that the real growth in volume through the terminal
will be western coal originating in Wyoming, Colorado and Utah.

   The Cora Terminal sits on the mainline of the Union Pacific  Railroad ("Union
Pacific").  Mines in southern  Illinois  and in Wyoming  (Hanna and Powder River
basins) are within the Union  Pacific's  service area and its connecting  lines.
With the recent merger of the Union Pacific and Southern Pacific Railroads, coal
mined in the  Colorado  and Utah  basins  can now be  shipped  through  the Cora
Terminal.  Union  Pacific is one of only two major rail lines  connected  to the
western  mines that ship coal to the East. It serves major coal  companies  that
have substantial developed and undeveloped reserves.

   Principal  Markets.  Three major customers ship  approximately 80% of all the
coal  loaded   through  the  terminal:   Franklin  Coal  Company   ("Franklin"),
Indiana-Kentucky Electric Corporation ("IKEC") and Carboex International Limited
("Carboex").  The  agreement  with  Franklin  was entered  into in 1981 and will
terminate in December 2004. The IKEC agreement was entered into in 1994 and will
also  terminate in December 2004. The agreement with Carboex was entered into in
1995 and will expire in December of 1998,  but includes an option for Carboex to
extend  through  December of 2001.  The  Partnership  recently  entered  into an
agreement in principle to ship western coal for a major Southeastern utility.

   Coal still dominates as a fuel for electric generation, holding more than 55%
of the  capacity.  Forecasts of overall coal usage and power plant usage for the
next 20 years show an increase of about 1.5% per year. Current domestic supplies
are  predicted  to last for more  than 300  years.  Most of the Cora  Terminal's
volume is destined for use in  coal-fired  electric  generation.  The market for
southern  Illinois coal is stagnant and not expected to grow because of changing
supply  and  demand  conditions  in  domestic  and  international  markets.  The
Partnership  believes  that  obligations  to  comply  with  the  Clean  Air  Act
Amendments  of 1990 will drive  shippers to increase  the use of the  low-sulfur
coal from the western United States. Approximately 80% of

                            13

<PAGE>



the coal loaded through the Cora Terminal  originates  from mines located in the
Western  United  States' Hanna and Powder River  basins.  During the three years
ended December 31, 1996, 1995 and 1994, the Cora Terminal handled  approximately
6.0 million tons,  6.5 million tons and 4.5 million tons of coal,  respectively.
The  Partnership  is actively  marketing  the services of the Cora  Terminal and
anticipates that the terminal will handle approximately 10 million tons in 1997.
However, the Partnership does not currently have commitments with respect to all
of these volumes and there can be no assurance that the Partnership will achieve
such volumes.

   Competition.  The Cora Terminal competes with six other terminal  facilities.
Two of these are  located  in St.  Louis;  one is  connected  to the  Burlington
Northern Railroad and the other to the Union Pacific Railroad. Both compete with
Cora for western coal. A third  terminal,  located at Metropolis,  Illinois,  is
primarily a private use terminal and is owned by a consortium of electric  power
companies. The fourth terminal,  located on the Tennessee River, is connected to
the Paducah and Louisville Railroad and competes with Cora for southern Illinois
coal moving to power plants on the Tennessee and  Cumberland  Rivers.  The fifth
terminal,  situated 25 miles north of the Cora  Terminal,  is  connected  to the
Union Pacific Railroad.  This terminal is primarily a private use facility.  The
sixth  terminal is located  north of St. Louis on the  Mississippi  River and is
connected to the Burlington Northern Railroad. The Partnership believes that the
Cora Terminal can compete successfully with these other terminals because of its
favorable location,  independent ownership, available capacity, modern equipment
and large storage area.

   No new coal  terminals  have been  constructed  on the  Mississippi  and Ohio
rivers in the last 10 years. The Partnership believes that there are significant
barriers to entry for the  construction  of new coal  terminals,  including  the
requirement for significant capital  expenditures and restrictive  environmental
permitting requirements.

   The  Partnership  plans to expand its market  position  in coal  terminaling,
loading and storage and continues to evaluate the potential acquisition of other
terminaling  operations to enhance its position of moving  western coal into the
export and eastern utility markets.

Regulation

   Interstate Common Carrier Regulation

   The  Partnership's  North System and Cypress  Pipeline are interstate  common
carrier  pipelines,  subject  to  regulation  by the FERC  under the  Interstate
Commerce Act ("ICA").  As interstate  common carriers,  these pipelines  provide
service to any shipper who requests transportation  services,  provided that the
products tendered for  transportation  satisfy the conditions and specifications
contained in the applicable tariff. The ICA requires the Partnership to maintain
tariffs on file with the FERC, which tariffs set forth the rates the Partnership
charges for providing  transportation  services on the interstate common carrier
pipelines as well as the rules and regulations governing these services.

   The ICA gives  the FERC  authority  to  regulate  the  rates the  Partnership
charges  for  service  on the  interstate  common  carrier  pipelines.  The  ICA
requires,  among  other  things,  that such rates be "just and  reasonable"  and
nondiscriminatory.  The ICA permits interested persons to challenge proposed new
or changed rates and  authorizes the FERC to suspend the  effectiveness  of such
rates for a period of up to seven months and to investigate such rates. If, upon
completion of an  investigation,  the FERC finds that the new or changed rate is
unlawful,  it is  authorized  to require the  carrier to refund the  revenues in
excess of the prior tariff collected  during the pendency of the  investigation.
The FERC may also investigate,  upon complaint or on its own motion,  rates that
are already in effect and may order a carrier to change its rates prospectively.

                            14

<PAGE>



Upon an  appropriate  showing,  a shipper  may obtain  reparations  for  damages
sustained for a period of up to two years prior to the filing of a complaint.

   On October 24, 1992,  Congress  passed the Energy Policy Act of 1992 ("Energy
Policy Act"). The Energy Policy Act deemed petroleum pipeline rates that were in
effect for the 365-day  period  ending on the date of  enactment or that were in
effect  on the  365th  day  preceding  enactment  and had not  been  subject  to
complaint,  protest or  investigation  during the 365-day  period to be just and
reasonable  under the ICA (i.e.,  "grandfathered").  The Energy  Policy Act also
limited  the  circumstances  under which a complaint  can be made  against  such
grandfathered  rates.  The  rates the  Partnership  charges  for  transportation
service on its North System and Cypress  Pipeline  were not suspended or subject
to protest or complaint during the relevant 365-period established by the Energy
Policy Act.  For this reason,  the  Partnership  believes  these rates should be
grandfathered under the Energy Policy Act.

   The  Energy  Policy  Act  required  the FERC to issue  rules  establishing  a
simplified  and  generally  applicable  ratemaking   methodology  for  petroleum
pipelines (including NGL pipelines),  and to streamline  procedures in petroleum
pipeline  proceedings.  The FERC  responded to this mandate by issuing Order No.
561,  which,  among other things,  adopted a new indexing rate  methodology  for
petroleum  pipelines.  Under the regulations,  which became effective January 1,
1995,  petroleum  pipelines  are able to change  their rates  within  prescribed
ceiling levels that are tied to an inflation  index.  Rate increases made within
the ceiling levels will be subject to protest,  but such protests must show that
the portion of the rate  increase  resulting  from  application  of the index is
substantially in excess of the pipeline's increase in costs. A pipeline must, as
a general rule, utilize the indexing  methodology to change its rates. The FERC,
however, retained cost-of-service ratemaking,  market-based rates and settlement
as  alternatives to the indexing  approach,  which  alternatives  may be used in
certain specified circumstances.  FERC Order No. 561-A, affirming and clarifying
Order No. 561,  expands the  circumstances  under which petroleum  pipelines may
employ cost-of-service ratemaking in lieu of the indexing methodology, effective
January 1, 1995. In 1995 and 1996,  application of the indexing  methodology did
not significantly affect the Partnership's rates.

   Although the  grandfathering of base rates and the automatic indexing of rate
changes to inflation  provides relative  certainty  regarding the maximum lawful
rates,  the rates  charged for  transportation  must be  competitive  with those
charged by other transporters.

   State and Local Regulation

   The Partnership's  activities are subject to various state and local laws and
regulations,  as well as orders of regulatory bodies pursuant thereto, governing
a wide variety of matters, including marketing,  production, pricing, pollution,
protection of the environment, safety and other matters.

   Safety Regulation

   The Liquids Pipelines and the pipelines  connecting the Millis to the Painter
Plant  are  subject  to   regulation   by  the  United   States   Department  of
Transportation  ("D.O.T.")  with respect to the design,  installation,  testing,
construction,  operation,  replacement and management of pipeline facilities. In
addition, the partnership must permit access to and copying of records, and make
certain  reports  and  provide  information  as  required  by the  Secretary  of
Transportation.  Comparable  regulation  exists  in some  states  in  which  the
Partnership conducts pipeline operations.  In addition,  the Partnership's truck
and rail loading facilities are subject to D.O.T.  regulations  dealing with the
transportation of hazardous materials for motor vehicles and rail cars.


                            15

<PAGE>



    Pipeline  safety issues  currently are  receiving  significant  attention in
various  political  and  administrative  forums at both the  state  and  federal
levels. Significant expenses could be incurred if additional safety requirements
are imposed that exceed the current pipeline control system capabilities.

   The Liquids Pipelines,  the Mont Belvieu Fractionator,  the Cora Terminal and
the Painter Plant are subject to the  requirements  of the Federal  Occupational
Safety and Health Act ("OSHA") and comparable  state  statutes.  The Partnership
believes that its pipelines,  the Cora Terminal and the Painter Plant (which are
operated by the Partnership)  have been operated in substantial  compliance with
OSHA   requirements,   including  general  industry   standards,   recordkeeping
requirements  and  monitoring  of  occupational  exposure  to benzene  and other
regulated substances.

   In general, the Partnership expects to increase expenditures in the future to
comply  with higher  industry  and  regulatory  safety  standards  such as those
described above. Such expenditures cannot be accurately  estimated at this time,
although  the  Partnership  does not expect that such  expenditures  will have a
material  adverse  impact on the  Partnership,  except to the extent  additional
hydrostatic testing requirements are imposed.

   Environmental Matters

   General. The operations of the Partnership are subject to federal,  state and
local laws and  regulations  relating  to  protection  of the  environment.  The
Partnership   believes  that  its  operations  and  facilities  are  in  general
compliance with  applicable  environmental  regulations.  The Partnership has an
ongoing environmental audit and compliance program. Risks of accidental leaks or
spills are, however,  associated with  fractionation of NGLs,  transportation of
NGLs and refined  petroleum  products,  the  handling  and storage of coal,  the
processing  of gas,  as well as the  truck  and  rail  loading  of  fractionated
products.  There can be no assurance that significant costs and liabilities will
not be incurred,  including those relating to claims for damages to property and
persons resulting from operation of the Partnership's  businesses.  Moreover, it
is possible that other developments,  such as increasingly strict  environmental
laws and  regulations  and  enforcement  policies  thereunder,  could  result in
increased costs and liabilities to the Partnership.

   Environmental  laws and regulations  have changed  substantially  and rapidly
over the last 25 years,  and the  Partnership  anticipates  that  there  will be
continuing changes. The clear trend in environmental regulation is to place more
restrictions and limitations on activities that may impact the environment, such
as  emissions  of  pollutants,  generation  and  disposal  of wastes and use and
handling of chemical substances.  Increasingly strict environmental restrictions
and limitations  have resulted in increased  operating costs for the Partnership
and other similar  businesses  throughout the United States,  and it is possible
that the  costs of  compliance  with  environmental  laws and  regulations  will
continue  to  increase.  The  Partnership  will  attempt  to  anticipate  future
regulatory  requirements  that might be imposed and to plan accordingly in order
to remain in compliance with changing  environmental laws and regulations and to
minimize the costs of such compliance.

   Solid Waste. The Partnership owns several  properties that have been used for
NGL  transportation  and  storage and coal  storage for many years.  Solid waste
disposal practices within the NGL industry and other oil and natural gas related
industries have improved over the years with the passage and  implementation  of
various   environmental   laws  and  regulations.   A  possibility  exists  that
hydrocarbons  and  other  solid  wastes  may have been  disposed  of on or under
various  properties  owned by the  Partnership  during the operating  history of
these  facilities.  In such cases,  hydrocarbons  and other solid  wastes  could
migrate  from  their  original  disposal  areas  and have an  adverse  effect on
groundwater.  The  Partnership  does not  believe  that there  presently  exists
significant surface or subsurface contamination of its assets by hydrocarbons or
other solid wastes.

                            16

<PAGE>



   The Partnership  will generate both hazardous and  nonhazardous  solid wastes
that are subject to the  requirements of the federal  Resource  Conservation and
Recovery Act ("RCRA") and comparable  state  statutes.  From time to time United
States  Environmental  Protection  Agency  ("EPA")  considers  the  adoption  of
stricter disposal standards for nonhazardous waste. Furthermore,  it is possible
that some wastes that are  currently  classified  as  nonhazardous,  which could
include wastes currently generated during pipeline operations, may in the future
be  designated  as  "hazardous  wastes."  Hazardous  wastes are  subject to more
rigorous and costly disposal  requirements.  Such changes in the regulations may
result  in  additional  capital   expenditures  or  operating  expenses  by  the
Partnership.

   Superfund.  The  Comprehensive   Environmental  Response,   Compensation  and
Liability Act ("CERCLA"),  also known as the "Superfund" law, imposes liability,
without  regard to fault or the  legality of the  original  conduct,  on certain
classes of persons that  contributed  to the release of a "hazardous  substance"
into the environment.  These persons include the owner or operator of a site and
companies that disposed or arranged for the disposal of the hazardous substances
found at the site.  CERCLA also  authorizes  the EPA and,  in some cases,  third
parties to take  actions  in  response  to  threats to the public  health or the
environment and to seek to recover from the  responsible  classes of persons the
costs they incur. Although "petroleum" is excluded from CERCLA's definition of a
"hazardous  substance," in the course of its ordinary operations the Partnership
will  generate  wastes  that may fall  within  the  definition  of a  "hazardous
substance." The  Partnership may be responsible  under CERCLA for all or part of
the costs required to clean up sites at which such wastes have been disposed.

   EPA Gasoline  Volatility  Restrictions.  In order to control air pollution in
the United  States,  the EPA has  adopted  regulations  that  require  the vapor
pressure  of motor  gasoline  sold in the United  States to be reduced  from May
through  mid-September of each year. These  regulations  mandated vapor pressure
reductions  beginning in 1989,  with more  stringent  restrictions  beginning in
1992. States may impose additional volatility restrictions. The regulations have
had a substantial  effect on the market price and demand for normal butane,  and
to some extent  isobutane,  in the United  States.  Butanes are used by gasoline
manufacturers  in the  production  of motor  gasolines.  Since normal  butane is
highly  volatile,  it is now less  desirable for use in blended  gasolines  sold
during the summer months.  Although the EPA regulations  have reduced demand and
may have resulted in a  significant  decrease in prices for normal  butane,  low
normal  butane  prices have not impacted the Liquids  Pipelines  business in the
same way they  would  impact a  business  with  commodity  price  risk.  The EPA
regulations  have  presented  the  opportunity  for  additional   transportation
services on the North  System.  In the summer of 1991,  the North  System  began
long-haul transportation of refinery grade normal butane produced in the Chicago
area to the Bushton, Kansas area for storage and subsequent transportation north
from  Bushton  during the winter  gasoline  blending  season.  These  additional
transportation  volumes  produced at Chicago area  refineries  resulted from the
more restrictive EPA vapor pressure limits on motor gasoline.

   Clean Air Act.  The operations of the Partnership are
subject to the Clean Air Act and comparable state
statutes.  The Partnership believes that the operations of
the Liquids Pipelines, the Mont Belvieu Fractionator, the
Cora Terminal and the Painter Plant are in substantial
compliance with such statutes.

   Numerous  amendments  to the  Clean  Air Act  were  adopted  in  1990.  These
amendments contain lengthy, complex provisions that may result in the imposition
over the next  several  years of certain  pollution  control  requirements  with
respect to air emissions from the operations of the Liquids Pipelines,  the Mont
Belvieu Fractionator and the Painter Plant. The EPA is developing, over a period
of many years,  regulations to implement  those  requirements.  Depending on the
nature of those regulations,  and upon requirements that may be imposed by state
and local  regulatory  authorities,  the  Partnership  may be  required to incur
certain  capital  expenditures  over the next  several  years for air  pollution
control equipment in connection with maintaining

                            17

<PAGE>



or  obtaining   operating   permits  and  approvals  and  addressing  other  air
emission-related  issues.  Due to the broad scope and  complexity  of the issues
involved  and  the  resultant   complexity  and  controversial   nature  of  the
regulations,  full development and implementation of many of the regulations has
been  delayed.  Until  such  time as the new  Clean  Air  Act  requirements  are
implemented,  the  Partnership  is unable to estimate  the effect on earnings or
operations or the amount and timing of such required  capital  expenditures.  At
this time,  however,  the  Partnership  does not  believe it will be  materially
adversely affected by any such requirements.

Item 2.  Properties

   The Partnership  believes that in all material  respects it has  satisfactory
title to all of its assets.  Although such properties are subject to liabilities
in certain cases, such as customary interests generally contracted in connection
with acquisition of real property, any environmental liabilities associated with
historical  operations,  liens for  current  taxes and other  burdens  and minor
encumbrances, the Partnership believes that none of such burdens will materially
detract from the value of such  properties  or from the  Partnership's  interest
therein or will  materially  interfere  with their use in the  operation  of the
Partnership's business.  Substantially all of the property,  plant and equipment
associated with the Liquids  Pipelines,  the Cora Terminal and the Painter Plant
are subject to mortgages.

   The Partnership  conducts business and owns properties  located in 10 states.
The Liquids  Pipelines are, in general,  located on land owned by others and are
operated  under  perpetual  easements or  rights-of-way  granted by land owners.
Where Partnership facilities are located on or cross public property,  railways,
rivers,  roads or  highways,  or similar  crossings,  they are  operating  under
permits or easements from public authorities, railways or public utilities, some
of which are  revocable  at the election of the  grantor.  The Painter  Plant is
located on Bureau of Land  Management land that is leased to the Partnership and
Enron (50% each) until September of 2009. Millis is located on private lands and
is under lease to the Partnership  until September of 2009. The Cora Terminal is
located on lands owned by the  Partnership  and on private  lands under lease to
the Partnership. The primary lease for Cora Terminal expires December 2015.

   The right to  construct  and  operate the Liquids  Pipelines  across  certain
property was obtained  through the right of eminent  domain by  predecessors  in
title to the  Partnership.  The  Partnership  has been  advised  by  counsel  in
Indiana,  Iowa,  Kansas,  Louisiana,  Missouri,  Nebraska  and  Texas  that  the
Partnership  has the power of eminent  domain in such states with respect to the
North System and the Cypress  Pipeline  assuming the  Partnership  meets certain
requirements, which differ from state to state. While there can be no assurance,
the Partnership believes that it will meet such requirements in such states. The
Partnership  has been  advised by counsel in Illinois  that it does not have the
power of eminent domain in such state.  The Partnership does not believe that it
has the power of eminent domain with respect to the Central Basin Pipeline.  The
inability of the  Partnership to exercise the power of eminent domain could have
a material  adverse effect on the business of the Partnership in those instances
where  the  Partnership  does not  have the  right  through  leases,  easements,
rights-of-way,  permits or licenses to use or occupy the  property  used for the
operation of the Liquids Pipelines and where the Partnership is unable to obtain
such rights.

Item 3.  Legal Proceedings

   The  Partnership,  in the  ordinary  course of  business,  is a defendant  in
various lawsuits relating to the Partnership's assets. The liabilities,  if any,
associated  with  any  lawsuits  pending  at the  time of the  formation  of the
Partnership were retained by Enron and not assumed by the Partnership.  Pursuant
to an Omnibus  Agreement  with  Enron (the  "Omnibus  Agreement"),  the  General
Partner  agreed to cause  the  Partnership,  at the  Partnership's  expense,  to
cooperate  with  Enron in the  defense  of any  such  litigation  by  furnishing
information  relating to the  Partnership's  assets  involved in the litigation,
furnishing access to files and

                            18

<PAGE>



otherwise  assisting in the defense.  The costs to the  Partnership  relating to
such  agreement  have  not  been  and are not  expected  to be  significant.  In
addition,  Enron agreed to indemnify the  Partnership for any losses incurred in
connection  with  the  lawsuits   pending  at  the  time  of  formation  of  the
Partnership.  In  connection  with the sale of the Common  Stock of the  General
Partner to KMI, Enron agreed to assume liability, and indemnify the Partnership,
for certain lawsuits currently pending.

   The General  Partner is a defendant in a suit filed on September  12, 1995 by
the State of Illinois. The suit seeks civil penalties and an injunction based on
five  counts of  environmental  violations  for events  relating  to a fire that
occurred at the Morris storage field in September,  1994. The fire occurred when
a sphere  containing  natural  gasoline  overfilled  and released  product which
ignited.  There  were  no  injuries,  and no  damage  to  property,  other  than
Partnership property.  The suit seeks civil penalties in the stated amount of up
to $50,000  each for three counts of air and water  pollution,  plus $10,000 per
day for any  continuing  violation.  The State also seeks an injunction  against
future  similar  events.  On August 29, 1996,  the Illinois  Attorney  General's
office  proposed a settlement in the form of a consent decree that would require
the  Partnership to implement  several fire  protection  recommendations,  pay a
$100,000 civil penalty, and pay a $500 per day penalty if established  deadlines
for  implementing  the  recommendations  are not met. The Partnership has made a
settlement offer to the State and settlement negotiations are ongoing.

   On December  10, 1996,  the D.O.T  issued to the General  Partner a notice of
eight probable  violations of federal safety  regulations in connection with the
fire at the Morris storage  field.  The DOT proposed a civil penalty of $90,000.
The General Partner is currently in the process of responding to the notice, but
believes that the alleged  violations and proposed fine will not have a material
impact on the Partnership.

   It is expected that the  Partnership  will reimburse the General  Partner for
any liability or expenses  incurred by the General  Partner in  connection  with
these legal proceedings.

Item 4.  Submission of Matters to a Vote of Security
Holders

   There were no matters  submitted  to a vote of  security  holders  during the
fourth quarter of 1996.

                            19

<PAGE>



                        P A R T  II

Item 5.  Market for the Registrant's Common Units and
Related Security Holder Matters

   The following table sets forth, for the periods  indicated,  the high and low
sale prices per Common  Unit,  as reported on the New York Stock  Exchange,  the
principal  market in which the  securities  are  traded,  and the amount of cash
distributions paid per Common Unit.


                           Price Range              Cash 
                       High         Low        Distributions
                       ----         ---        -------------
       1996
       ----
       First Quarter  $26.375      $24.375        $0.63
       Second          26.000       24.875         0.63
       Quarter
       Third Quarter   28.125       25.375         0.63
       Fourth          29.125       25.625         0.63
       Quarter




       1995
       First                                       
       Quarter      $26.000     $24.250            $0.63
       Second                                       
       Quarter      26.500       24.125             0.63
       Third                                        
       Quarter      26.750       25.125             0.63
       Fourth                                       
       Quarter      26.875       23.875             0.63



      As of December 31, 1996,  there were  approximately  725 record holders of
the  Partnership's  Common  Units and there were an estimated  9,870  beneficial
owners of the Common Units, including Common Units held in street name.

      Following  termination of the deferral  period on September  30,1994,  the
Partnership  began making  distributions  in respect of the limited  partnership
interests held by the General Partner on a pro rata basis with the Common Units.
On February 14, 1997,  these limited  partnership  interests were converted into
Common Units. See "Certain Relationships and Related Transactions."


                            20

<PAGE>
<TABLE>
<CAPTION>


Item 6.  Selected Financial Data (unaudited)
        (in thousands, except per unit and operating data)

                                                                                                                      Combined
                                                                      Partnership                                     Historical
                                   -------------------------------------------------------------------------------   ------------
                                                                                      Pro Forma                      Seven Months
                                                                                        Year        Five Months         Ended
                                                   Year Ended December 31,          December 31,     December 31,     July 31,
                                   ----------------------------------------------   ------------   ---------------    ----------

<S>                              <C>         <C>           <C>          <C>         <C>           <C>              <C>
 
Income and Cash Flow Data:
   Revenues                      $ 71,250    $ 64,304      $ 54,904     $ 51,180    $ 53,010      $ 24,146         $ 28,863
   Cost of product sold             7,874       8,020           940          685         762           762                -
   Operating Expense               27,263      19,862        19,125       19,807      20,672         8,977           11,797
   Lease expense, net                   -           -             -            -           -             -            3,536
   Depreciation                     9,908       9,548         8,539        7,167       7,050         2,938            2,431
   General and administrative       9,132       8,739         8,196        7,073       6,641         2,729            4,716
                                    -----      -------      -------       -------    -------       -------         --------
   Operating Income                17,073      18,135         18,104      16,448      17,885         8,740            6,383
   Equity in earnings (loss)
   of partnerships                  5,675       5,755          5,867       1,835       1,755           826            1,244
   Interest expense               (12,634)    (12,455)       (11,989)    (10,302)     (9,648)       (3,965)               -
   Other Income                     3,129       1,311            509         510         497           166               93     
  Net Income                    $ 11,900    $ 11,314       $ 11,102    $  8,574     $ 10,383     $  5,777         $  7,251
                                 ---------   ========       ========    ========     ========     ========         ========
   Net Income per Common
      Unit                       $   1.79    $   1.71       $   1.86    $   1.50     $   1.82     $   1.01         $      -
                                 ========    ========       ========    ========     ========     ========         ========
   Additions to property,        $  8,575
     plant and equipment(1)                  $  7,826       $  5,195    $  4,688     $  5,644     $  1,507         $  4,137

Balance Sheet Data (at end of
period):
   Net property, plant and
      equipment                  $235,994    $236,854       $238,850    $228,859     $      -     $206,108         $116,066
   Total assets                   303,603     303,664        299,271     288,345            -      260,943          155,087
   Long-term debt                 160,211     156,938        150,219     138,485            -      110,000                -
   Equity of parent                     -           -              -           -            -            -          120,379
   Partners' capital              118,344     123,116        128,474     132,391            -      136,851                -

Operating Data (unaudited):
   Liquids pipelines
      transportation volumes
      (MBbls)                      46,601      41,613         46,078      52,600       53,874       24,427           29,447
   NGL fractionation volumes
      (MBbls)(2)                   59,912      59,546         57,703      53,053       47,517       19,060           28,457
   Gas processing volumes
      (MMcf/d)(3)                      14          34             34           -            -            -                -
   NGL revenue volumes
      (MBbls)(4)                    1,638         477              -           -            -            -                -
   CO2 transportation
volumes (Bcf)                          63          44             32          33           32           14               18
   Coal transport volumes
      (Mtons)(5)                    6,090        6,486         4,539       1,209            -            -                -

</TABLE>

(1)  Excluding the effect of construction costs related to the Cypress Pipeline,
     additions to property,  plant and equipment  would have been $3,837 for the
     seven-month  period ended July 31, 1992.  Additions to property,  plant and
     equipment  for 1993 and 1994  exclude the $25,291 and the $12,825 of assets
     acquired in the  September  1993 Cora  Terminal  and June 1994  Painter Gas
     Processing Plant (Painter Plant) acquisitions, respectively.
(2)  Represents total volumes for the Mont Belvieu  Fractionator and the Painter
     Plant (beginning in 1994).
(3)      Represents  the  volumes of the gas  processing  portion of the Painter
         Plant, which has been operationally idle since June 1996.
(4)  Represents the volumes of the Bushton facility (beginning
     in October, 1995).
(5)      Represents  the  volumes of the Cora  Terminal,  excluding  ship or pay
         volumes of 252 Mtons for 1996.


                              21

<PAGE>



Item 7.  Management's Discussion and Analysis of Financial
Condition and Results of Operations

Results of Operations of the Partnership

   Year Ended December 31, 1996 Compared With Year Ended
December 31, 1995

   Net income of the  Partnership  increased to $11.9 million in 1996 from $11.3
million in 1995.  The 5.3%  increase is  primarily  due to  increased  operating
earnings  from the Central  Basin  Pipeline  and a $2.5 million  buyout  payment
received from Chevron for early termination of a gas processing  contract at the
Painter Plant,  which were partially offset by lower operating earnings from the
Painter Plant, the North System and Cora Terminal.

   Revenues of the Partnership increased 10.9% to $71.3 million in 1996 compared
to $64.3 million in 1995.  The increase in revenues was due primarily to a 42.4%
increase in transport volumes on the Central Basin Pipeline combined with a full
year of revenues  earned at the Bushton  Facility in  connection  with the Mobil
Agreement, which was assigned to the Partnership as of October 1, 1995 (see Note
10 in the Notes to Consolidated Financial Statements). Additionally, revenues on
the  North  System  increased  due to a  12.2%  increase  in  transport  volumes
resulting  from a  favorable  crop  drying  season  and  colder  weather.  These
increases  were offset by lower revenues at the Painter Plant due to the Chevron
gas processing contract termination and unscheduled downtime due to an equipment
malfunction.

   Cost of products  sold  decreased  $.1 million  (1.8%) in 1996 as compared to
1995 primarily due to reduced product sales on the North System.

   Operating expense,  which includes operations and maintenance  expense,  fuel
and power  costs and taxes  other than income  taxes,  increased  37.2% to $27.3
million in 1996  compared to $19.9  million in 1995 due to expenses  incurred in
connection with the Mobil Agreement.  Additionally,  operating expense increased
$.9 million as a result of a new storage agreement with a Partnership  affiliate
on the North  System that went into  effect on January 1, 1996.  The new storage
agreement increases the North System's storage capacity at Bushton,  Kansas from
1.5 MMBbls to 5.0 MMBbls.

   Depreciation  expense increased $.4 million (3.8%) during 1996 as compared to
1995 primarily as a result of 1996 property additions.

   General and administrative  expenses increased $0.4 million (4.5%) in 1996 as
compared to 1995  primarily  due to a 6% annual  increase in  reimbursements  to
Enron for services  provided to the  partnership  by Enron and its affiliates in
accordance with the Omnibus Agreement.

   Interest  expense  increased  $0.2 million (1.4%) in 1996 as compared to 1995
primarily as a result of increased  borrowings  under  OLP-A's  working  capital
facility due to borrowings for expansion capital expenditures.

   Other  income  increased  127.9% to $3.3  million in 1996 as compared to $1.4
million in 1995 primarily due to the $2.5 million  buyout payment  received from
Chevron in 1996. (See Note 3 in the Notes to Consolidated Financial Statements).
In addition, other income for 1995 included a $0.5 million business interruption
insurance settlement related to a previous year event on the North System.

   Year Ended December 31, 1995 Compared With Year Ended
December 31, 1994

   Net income of the  Partnership  increased  1.8% to $11.3 million in 1995 from
$11.1  million in 1994.  The increase  reflects a full year of earnings from the
Painter Plant  acquisition  (see Note 3 in the Notes to  Consolidated  Financial
Statements) and higher earnings on the Central Basin Pipeline and Cora Terminal,
partially offset by lower

                            22

<PAGE>



earnings on the North System and the Cypress  Pipeline and lower equity earnings
from the Mont Belvieu Associates partnership.

   Revenues of the Partnership increased $9.4 million (17.1%) for the year ended
December  31,  1995,  as  compared  to 1994.  The  increase  in revenue  was due
primarily to increased  product  sales on the North System and the Central Basin
Pipeline,  the  inclusion  of a full year of  operations  at the Painter  Plant,
acquired  June  1994,  and an  increase  in coal  volumes  handled  at the  Cora
Terminal.  Additionally,  revenues  increased  approximately $1.4 million due to
three months of revenue from the Mobil Agreement. These increases were offset by
a decrease  in volumes  transported  to  refineries  on the North  System due to
temporary downtime at two major customers'  facilities  combined with the effect
of Gulf Coast product  prices being more  favorable  than prices in the Midwest,
which caused  product to move into the Chicago  area on pipelines  from the Gulf
Coast.  In July 1995,  a customer of a major  North  System  shipper  closed its
synthetic  natural gas facility in the Chicago area.  The  Partnership  had been
delivering  approximately 2 MMBbls of ethane to the facility  annually.  Loss of
these volumes  resulted in an  approximate  $1.2 million loss of revenues in the
last half of 1995 compared to the same period in 1994.

   Cost of products sold  increased  significantly  on both the North System and
the Central Basin Pipeline primarily because of selling arrangements which allow
for increased throughput, but nominal gross margin.

   Operating  expense  increased $0.7 million (3.9%) in 1995 as compared to 1994
primarily  because of the  inclusion of a full year of operations at the Painter
Plant and because of $1.2 million of  operating  expenses  incurred  during 1995
related to the Mobil  Agreement.  These increases were offset by lower operating
expenses incurred on the North System as a result of lower transport volumes.

   Depreciation  expense  increased $1.0 million (11.8%) during 1995 as compared
to 1994  primarily  as a result of the  inclusion of a full year of operation at
the Painter Plant.

   General and administrative  expenses increased $0.5 million (6.6%) in 1995 as
compared to 1994  primarily  due to a 6% annual  increase in  reimbursements  to
Enron for services  provided to the  Partnership  by Enron and its affiliates in
accordance  with the Omnibus  Agreement as well as the  inclusion of the Painter
Plant operations.

   Interest  expense  increased  $0.5 million (3.9%) in 1995 as compared to 1994
primarily as a result of the addition of debt related to the  acquisition of the
Painter Plant.

   Other  income  increased  $0.8  million  (129.3%) in 1995 as compared to 1994
primarily because of a $0.5 million business  interruption  insurance settlement
received in 1995 related to a previous year event on the North System.

Outlook

   Under the new  management,  the  Partnership  intends  to  actively  pursue a
strategy  to  increase  the  Partnership's  operating  income.  A  three-pronged
strategy will be utilized to accomplish this goal.

o  Cost Reductions.  The Partnership has substantially
   reduced its general and administrative expenses and
   will continue to seek further reductions where
   appropriate.

o  Internal  Growth.  The  Partnership  intends to expand the  operations of its
   current  facilities.  The  Partnership  has  taken a  number  of  steps  that
   management   believes  will  increase  revenues  from  existing   operations,
   including the following:

   An  agreement  has been  reached  with the  principal  shipper on the Cypress
   Pipeline  to expand the  capacity  of the  pipeline  effective  in the fourth
   quarter of 1997.

                            23

<PAGE>



   The Cora Terminal is expected to handle  approximately 10 million tons during
   1997 as a  result  of an  anticipated  agreement  with a  major  southeastern
   utility and other new business.

   The volume  handled by the Central Basin  Pipeline is expected to increase in
   1997 as a result of several new agreements.

   The Painter  Fractionator  and Millis Terminal have been leased to Amoco on a
   long-term basis effective in the first quarter of 1997.

   See "Item 1.  Business" for a more detailed discussion
regarding these and other developments.

o  Strategic Acquisitions.  The Partnership intends to
   seek opportunities to make strategic acquisitions to
   expand existing businesses or to enter into related
   businesses.  The Partnership has identified several
   potential acquisitions, although no assurance can be
   given that the Partnership will be able to consummate
   such acquisitions.  Management anticipates that
   acquisitions will be financed temporarily by bank
   bridge loans and permanently by a combination of debt
   and equity funding from the issuance of new Common
   Units.

   Management intends to increase the quarterly  distribution from $.63 per Unit
to $.80 per Unit in the second  quarter  of 1997,  which  distribution  would be
payable in August 1997.

   The Partnership  intends to seek to refinance or restructure the $110 million
First Mortgage  Notes ("First  Mortgage  Notes") and its bank credit  facilities
during 1997.  However,  there can be no assurances that the Partnership  will be
able to refinance or restructure  such  indebtedness  on terms  favorable to the
Partnership.

Financial Condition

   General

   The Partnership's primary cash requirements,  in addition to normal operating
expenses,  are debt  service,  sustaining  capital  expenditures,  discretionary
capital  expenditures and quarterly  distributions  to partners.  In addition to
utilizing cash generated from  operations,  the Partnership  could meet its cash
requirements  through  the  utilization  of  credit  facilities  or  by  issuing
additional limited partner interests in the Partnership.

   Enron has the support  obligation  to contribute  cash, if necessary,  to the
Partnership  through  September 30, 1997 in exchange for additional  partnership
interests (API's) to support the Partnership's ability to distribute the Minimum
Quarterly  Distribution (the "Minimum Quarterly  Distribution") of $.55 per Unit
as required by the Omnibus Agreement among the Partnership,  the General Partner
and Enron.  KMI has obtained a $10.9  million  letter of credit from First Union
National Bank of North Carolina  ("First  Union") to support  Enron's  remaining
obligations with respect to the Minimum  Quarterly  Distribution  payable to the
holders of the Partnership's Common Units.

   In connection with KMI's  acquisition of the General  Partner,  OLP-B entered
into a credit  agreement  with First Union which  provided  for a $15.9  million
revolving credit  facility.  The obligations of OLP-B under the credit agreement
are guaranteed by the Partnership.  Borrowings under the credit facility are due
February 14, 1999 and bear interest,  at OLP-B's option, at either First Union's
Base Rate plus .5% per annum or London  Interbank  Offered Rate  ("LIBOR")  plus
2.25% per annum (in each case  increasing by .25% as of the end of each calendar
quarter  commencing  June 30,  1997).  The new credit  facility  (i)  refinanced
approximately  $4.4  million  owed by OLP-B to Enron and (ii)  replaced  OLP-B's
existing credit facility with First Union,  which had approximately $9.6 million
outstanding  as of February 14,  1997.  As of March 1, 1997,  the  Partnership's
outstanding  borrowings  under the  Credit  Facility  were  $14.6  million.  The
Partnership's  ability to borrow  additional  funds under the credit facility is
subject to  compliance  with certain  financial  covenants  and ratios.  The new
credit facility also provides for an approximate  $24.1 million letter of credit
that has been issued by First Union to replace a letter of credit previously

                            24

<PAGE>



issued by Wachovia Bank of Georgia, N.A. and which was
guaranteed by Enron supporting the Cora Terminal revenue
bonds.  The letter of credit fee has increased from .25%
per annum to 1.50% per annum.

   OLP-A has established a $15 million revolving credit agreement  facility with
a bank to meet its  working  capital  requirements.  As of March  1,  1997,  the
outstanding   borrowings  under  the  credit  facility  were  $13  million.  The
Partnership  also has the ability to borrow up to an additional $25.0 million in
accordance with the provisions of the First Mortgage Notes.

   In order to finance the acquisition of the General Partner,  KMI borrowed $15
million from First Union. The loan is due August 31, 1999 and bears interest, at
the option of KMI, at either First Union's Base Rate plus .5% per annum or LIBOR
plus 2.5% per annum.  The  borrowings  by KMI from First  Union are secured by a
pledge of all of the stock of the  General  Partner.  In  addition,  the General
Partner pledged all of the Common Units owned by it as additional collateral for
the loans. The Credit Agreement  requires First Union's consent for, among other
things,  (i) the  merger  or  consolidation  of the  Partnership  with any other
person, (ii) the sale, lease or other disposition of all or substantially all of
the  Partnership's  property or assets to any other person or (iii) the issuance
of any additional Common Units.

   Cash Provided by Operating Activities

   Cash flow from  operations  totaled $22.8 million for the year ended December
31, 1996  compared to $22.6  million in 1995.  The increase is primarily  due to
higher earnings and increased  distribution  from  investments in  partnerships,
partially offset by increased working capital requirements.

   Cash Used in Investing Activities

   Cash used in investing  activities increased 5.8% to $9.1 million during 1996
as compared to $8.6  million  during  1995.  Additions  to  property,  plant and
equipment totaled $8.6 million and $7.8 million for 1996 and 1995, respectively.
Property additions in 1996 increased  primarily due to a new propane terminal on
the North System and pipeline laterals on the Central Basin Pipeline.

   Cash Used in Financing Activities

   Cash used in financing  activities  increased  25.9% to $13.6 million for the
year ended December 31, 1996 as compared to $10.8 million during 1995. Cash used
during 1996 and 1995 primarily reflected  distributions to Unitholders partially
offset by a net  increase in  long-term  debt in the amount of $3.3  million and
$6.7 million, respectively, to finance capital expansion projects on the Central
Basin Pipeline and the North System.

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.  Although the Partnership  believes that its  expectations are based on
reasonable  assumptions,  it can  give  no  assurance  that  its  goals  will be
achieved.  Price trends and overall  demand for NGLs, CO2 and coal in the United
States and the condition of the capital  markets and equity  markets could cause
actual results to differ from those in the forward looking statements herein.


                            25

<PAGE>



Item 8.  Financial Statements and Supplementary Data

   The information required hereunder is included in this report as set forth in
the "Index to Financial Statements" on page F-1.

Item 9.  Changes in and Disagreements on Accounting and
Financial Disclosure

   None.

                            26

<PAGE>



                       P A R T  III

Item 10.  Directors and Executive Officers of the
Registrant

Directors and Executive Officers of the General Partner

     As is commonly  the case with  publicly-traded  limited  partnerships,  the
Partnership  does not employ any of the  persons  responsible  for  managing  or
operating the Partnership,  but instead reimburses the General Partner for their
services.  Set forth below is certain  information  concerning the directors and
executive officers of the General Partner.  All directors of the General Partner
are elected  annually by, and may be removed by, KMI as the sole  shareholder of
the General  Partner.  All officers  serve at the discretion of the directors of
the Board of Directors of the General Partner.

    Name           Age     Position with the General
Partner
Richard D. Kinder  52  Director, Chairman and CEO
William V. Morgan  53      Director and Vice Chairman
Alan L. Atterbury  54  Director
Edward O. Gaylord  65      Director
Thomas B. King     35  Director and President
Thomas P. Tosoni   46  Chief Financial Officer and
Assistant Secretary
Michael C. Morgan  28  Vice President, Corporate
Development
David G. Dehaemers, Jr. 36 Secretary and Treasurer
Roger C. Mosby     49  Vice President

   Richard D. Kinder was elected Director, Chairman and
CEO of the General Partner in February 1997.  From 1992 to
1994, Mr. Kinder served as Chairman of the General
Partner.  From October 1990 until December 1996, Mr.
Kinder was President of Enron Corp.  Mr. Kinder was
employed by Enron and its affiliates and predecessors for
over 16 years.

   William V. Morgan was  elected as a director  of the General  Partner in June
1994 and Vice Chairman of the General  Partner in February  1997. Mr. Morgan has
been the  President  of Morgan  Associates,  Inc.,  an  investment  and pipeline
management  company,  since February 1987, and Cortez  Holdings  Corporation,  a
related pipeline investment  company,  since October 1992. He has held legal and
management   positions  in  the  energy  industry  since  1975,   including  the
presidencies  of three major  interstate  natural gas companies  which are now a
part of Enron: Florida Gas Transmission  Company,  Transwestern Pipeline Company
and Northern  Natural Gas  Company.  Prior to joining  Florida Gas in 1975,  Mr.
Morgan was engaged in the private practice of law in Washington, D.C.

   Alan L.  Atterbury  was  elected  as a  director  of the  General  Partner in
February 1997. Mr.  Atterbury is a co-founder of Midland Loan Services,  L.P., a
real estate financial  services  company,  and has served as its Chief Executive
Officer and President  since its inception in 1992. Mr.  Atterbury has also been
the  President and a Director of Midland Data  Systems,  the general  partner of
Midland Loan Services,  since its inception in 1990 and the President of Midland
Properties,  a property  management and real estate development  company,  since
1980.

   Edward O. Gaylord was elected as a director of the
General Partner in February 1997.  Mr. Gaylord is the
President of Gaylord & Company, a venture capital company
located in Houston, Texas.  Mr. Gaylord also serves as
Chairman of the Board for EOTT Energy Corporation, an oil
trading and transportation company also located in
Houston, Texas.  He is also President of Jacintoport
Terminal Company.

   Thomas  P.  Tosoni  has  served  as Vice  President,  Finance  and  Assistant
Secretary  for the  General  Partner  since July 1, 1995.  He was  elected  Vice
President,  Finance &  Administration  and  Assistant  Secretary  of the General
Partner  on  September  15,  1993.  Prior to that he held the  position  of Vice
President, Controller and Assistant

                            27

<PAGE>



Secretary of the General  Partner from  December  17, 1992 until  September  15,
1993.  From 1990 until  December  1992,  he served as  Controller  and Assistant
Secretary for the General Partner.  He previously served as Controller for Enron
Gas Processing Company from 1986 to 1989. He served as Assistant  Controller for
the Production and Transportation  Division of the Enron Liquid Fuels Group from
1984 to 1986.

   Michael C. Morgan was elected Vice President, Corporate
Development of the General Partner in February 1997.  From
August 1995 until February 1997, Mr. Morgan was an
associate with McKinsey & Company, an international
management consulting firm.  In 1995, Mr. Morgan received
a Masters in Business Administration from the Harvard
Business School.  From March 1991 to June 1993, Mr. Morgan
held various positions at PSI Energy, Inc., an electric
utility, including Assistant to the Chairman.  Mr. Morgan
received a Bachelor of Arts in Economics and a Masters of
Arts in Sociology from Stanford University in 1990.  Mr.
Morgan is the son of William V. Morgan.

   David G. Dehaemers, Jr. was elected Secretary and
Treasurer of the General Partner in February 1997.  Mr.
Dehaemers has been self-employed as a tax and accounting
consultant since 1988.  Mr. Dehaemers has also been the
President of TNT Wash Systems, Inc. since January 1992.

   Roger C. Mosby was elected Vice President of the
General Partner in February 1997.  Prior to that, Mr.
Mosby was Vice President for Enron Liquid Services Corp.
from July 1994 until February 1997.  He was Vice President
of Enron Gas Processing Company from January 1990 until
March 1994.

   Thomas B. King was  elected  President  of the General  Partner in  February,
1997. Prior to that, he held the position of Vice-President,  Midwest Region for
the  General  Partner  from July 1995 until  February  1997.  Mr.  King has held
several  positions  since he joined  Enron in 1989,  including  Vice  President,
Gathering  Services of Transwestern  Pipeline  Company and Northern  Natural Gas
Company and as  Regional  Vice  President,  Marketing  of  Northern  Natural Gas
Company.  From  December  1989 to August 1993,  he served as Director,  Business
Development for Northern Border Pipeline Company in Omaha, Nebraska.

   Section  16(a) of the  Securities  Exchange Act of 1934 requires the officers
and  directors  of the General  Partner,  and persons who own more than 10% of a
registered class of the equity securities of the Partnership, to file reports of
ownership and changes in ownership with the SEC and the New York Stock Exchange.
Based  solely on its review of the  copies of such  reports  received  by it, or
written  representations  from  certain  reporting  persons that no Forms 5 were
required for those persons,  the General Partner  believes that during 1996, its
officers and  directors  and 10% holders of the  Partnership  complied  with all
applicable filing requirements; except as follows:

   On January 14,  1997,  the General  Partner and Enron filed Form 3s reporting
the direct  ownership  by the General  Partner,  and the  indirect  ownership by
Enron, of 860,000 Deferred  Participation  Units on September 30, 1994, the date
on which the Deferral  Period  ended with respect to the Deferred  Participation
Units.

Item 11.  Executive Compensation

   The  compensation  paid by the General  Partner for services  rendered during
1996,  1995 and 1994  respectively,  to the General  Partner's  Chief  Executive
Officer ("CEO") are as follows (no other executive  officer's salaries allocated
to the  Partnership  exceeded  $100,000):  Mr.  Raymond R. Kaskel,  who held the
office of President of the General Partner from July 1, 1995 until June 30, 1996
was paid  $36,500 and $22,917 for 1996 and 1995,  respectively.  Mr.  William V.
Allison, who was elected President of the General Partner as of July 1, 1996 was
paid  $79,375  by  the  General  Partner  during  1996.  Because  prior  to  the
acquisition of the General Partner by KMI, the executive officers of the General
Partner were  employees of other Enron  subsidiaries,  and provided  services to
these  subsidiaries,  the Partnership  only reimbursed the General Partner for a
portion of their salaries.  As a result of this  allocation,  the portion of the
other executive  officers' salaries reimbursed by the Partnership did not exceed
$100,000.

                            28

<PAGE>



   In addition to the above cash compensation,  for which the General Partner is
reimbursed by the Partnership, the above named individuals received compensation
from the General  Partner or from Enron under various  employee  benefit  plans.
Under the terms of the  Partnership  Agreement and Omnibus  Agreement  among the
Partnership,  the General Partner and Enron, reimbursement for certain expenses,
including employee benefits, was subject to certain limits. As a result of KMI's
acquisition  of the  General  Partner,  Enron and its  affiliates  are no longer
required to provide  corporate staff and support services under the terms of the
Omnibus Agreement,  and the limitations on reimbursement for corporate staff and
support  services  incurred by the General  Partner on behalf of the Partnership
are no longer applicable. During 1996, neither the General Partner nor Enron was
reimbursed  by the  Partnership  for such other  compensation  paid to the named
executive officers because the limits were exceeded.  See Note 8 of the Notes to
Consolidated  Financial Statements of the Partnership included elsewhere in this
report.



                            29

<PAGE>
<TABLE>
<CAPTION>

Item 12.  Security Ownership of Certain Beneficial Owners
and Management


                                                             Amount and Nature of Beneficial Ownership

                                                                        KMI Voting Stock                 KMI Non Voting Stock
                                       Common Units (1)                 (Class "A" Stock)                 (Class "B" Stock)
                                      ------------------               -------------------               ------------------
                                      Number       Percent           Number          Percent           Number          Percent
                                    of Units     of Class(2)     of Shares (3)       of Class       of Shares(3)       of Class
<S>                                  <C>                 <C>             <C>              <C>            <C>                <C>
First Union Corporation              429,000             6.6%            105              1.98%          2,541              47.99%
One First Union Center
5th Floor
301 South College Street
Charlotte, NC 28288-0732

Kinder Morgan G.P., Inc              431,000             6.6%             --              --                --               --
1301 McKinney Street
Suite 3450
Houston, Texas 77010

Kinder Morgan, Inc. (4)              431,000             6.6%             --              --                --               --
1301 McKinney Street
Suite 3450
Houston, Texas 77010

Richard D. Kinder                      7,500              *            2,646             49.99%          2,648              50.01%

William V. Morgan                      1,000              *            2,542(5)          48.03%            106(5)            2.00%

Alan L. Atterbury                      3,000              *               --              --                --               --

Edward O. Gaylord                         --             --               --              --                --               --

Thomas B. King                            --             --               --              --                --               --

Directors and Officers                12,300              *            5,188             98.00%          2,754              52.01%
  as a group (9 persons)


</TABLE>
*Less than 1%
(1)All Common Units involve sole voting power and sole investment power.
(2)As of March 1, 1997 the Partnership had 6,510,000
   Common Units issued and outstanding.
(3)As of  March  1,  1997,  KMI  had a total  of  5,293  shares  of  issued  and
   outstanding  voting  stock  and  a  total  of  5,295  shares  of  issued  and
   outstanding non voting stock.
(4) Represents Units held by Kinder Morgan G.P., Inc.,
which is wholly owned by Kinder Morgan, Inc.
(5)These shares are held by Morgan Associates, Inc., a
   Kansas corporation, wholly owned by Mr. Morgan.

   KMI  pledged  all of the  stock of the  General  Partner  to  First  Union in
connection with its acquisition of the General Partner.

   Mr. Kinder has the right to acquire  control of KMI,  through the purchase of
certain shares of stock from MAI or conversion of non-voting KMI stock to voting
stock,  at such time as KMI and William Morgan agree upon a long term employment
contract for Mr.  Morgan.  In  addition,  commencing  on February 15, 1999,  Mr.
Kinder and Mr.  Morgan  have an option to  purchase  certain  KMI stock owned by
First Union Corporation, and commencing on August 15, 2000, KMI has an option to
purchase and First Union Corporation has the right to require KMI to

                            30

<PAGE>



purchase, all of the KMI stock owned by First Union Corporation.  As a result of
the foregoing arrangements,  Mr. Kinder may in the future acquire control of the
General Partner.

Item 13.  Certain Relationships and Related Transactions

General and Administrative Expenses

   Under the terms of the Omnibus  Agreement that was executed among Enron,  the
Partnership and the General Partner at the time of formation of the Partnership,
Enron agreed that it and its  affiliates  would  provide to the General  Partner
certain  corporate  staff and support  services to assist the General Partner in
its  management  and  operation  of the  Partnership.  The  amount  paid  by the
Partnership  to  reimburse  Enron and its  affiliates  for such  services to the
General Partner was subject to certain  limitations  established under the terms
of the  Omnibus  Agreement.  As a result  of KMI's  acquisition  of the  General
Partner,  Enron and its affiliates are no longer  required to provide  corporate
staff and support  services  under the terms of the Omnibus  Agreement,  and the
limitations on reimbursement  for corporate staff and support services  incurred
by the General Partner on behalf of the Partnership are no longer applicable.

Partnership Distributions

   The General  Partner owns 431,000 Common Units,  representing  an approximate
6.6% of the Common  Units.  The  Partnership  Agreements  provide for  incentive
distributions payable to the General Partner out of the Partnership's  Available
Cash in the event that quarterly  distributions  to  Unitholders  exceed certain
specified targets. In general,  subject to certain  limitations,  if a quarterly
distribution  to  Unitholders  exceeds a target of $0.605 per Unit,  the General
Partner will receive incentive distributions equal to (i) 15% of that portion of
the  quarterly  distribution  per Unit that exceeds  $0.605 but is not more than
$0.715,  plus (ii) 25% of that portion of the  quarterly  distribution  per Unit
that exceeds the  quarterly  distribution  amount of $0.715 but is not more than
$0.935,  plus (iii) 50% of that portion of the quarterly  distribution  per Unit
that exceeds $0.935.

   To support the  Partnership's  ability to  distribute  the Minimum  Quarterly
Distribution on all outstanding Common Units through the period ending September
30, 1997,  Enron agreed that,  if  necessary,  it would  contribute  cash to the
Partnership in exchange for APIs in the  Partnership.  The APIs are not entitled
to cash  distributions,  allocations  of taxable  income or loss  (except  under
limited  circumstances)  or voting  rights,  but the  Partnership is required to
redeem them if and to the extent that Available Cash reaches certain levels.  No
APIs have been  purchased by Enron since the inception of the  Partnership,  and
management does not expect that APIs will be required to be purchased to support
the payment of distributions in 1997. KMI has obtained a $10.9 million letter of
credit  from First Union  National  Bank of North  Carolina  to support  Enron's
remaining obligations with respect to the Minimum Quarterly Distribution payable
to the holders of the Partnership's Common Units.

South Cowden Lateral

   During 1996, a lateral was  constructed  that  connects the South Cowden Unit
flood project to the Central Basin Pipeline.  The lateral is owned by MAI, which
is owned by William V. Morgan,  and was  constructed  for MAI by the Partnership
under the terms of a Construction  Agreement at a cost of $1.35  million,  which
amount has been paid by MAI. In addition,  MAI and the Partnership  entered into
an  Operating  &  Maintenance   Agreement   which  provides  for  operation  and
maintenance of the lateral by the Partnership,  and a  Transportation  Agreement
which allows the Partnership to ship specified  quantities of CO2 on the lateral
and requires the  Partnership to ship certain  minimum  quantities of CO2 on the
lateral.  The agreements  are  coterminus  and expire in 2016.  During 1996, the
Partnership  charged MAI $31,250 under the Operating and  Maintenance  Agreement
and MAI charged the Partnership $194,648 under the Transportation Agreement. The
terms of such  agreements  are comparable to those which the  Partnership  would
make available to unaffiliated third parties.


                            31

<PAGE>



   Revenues and Expenses

      Revenues  for the years ended  December  31,  1996,  1995 and 1994 include
transportation  charges  and  product  sales to an Enron  subsidiary,  Enron Gas
Liquids,  Inc.,  of $7.7 million,  $5.9 million and $4.7 million,  respectively.
Another  Enron  subsidiary,  Enron  Gas  Processing  Company  ("EGP"),  provides
services in connection with the Mobil Agreement (see Note 10) as well as storage
and other services to the Partnership and charged $6.6 million, $2.7 million and
$0.7 million for the years ended December 31, 1996, 1995 and 1994, respectively.
Management  believes  that these  charges are  reasonable.  As a result of KMI's
acquisition  of all of the common  stock of the General  Partner,  Enron and its
affiliates are no longer affiliates of the Partnership.

   Other

   The General  Partner  makes all decisions  relating to the  management of the
Partnership.  KMI owns all the  common  stock of the  General  Partner.  Certain
conflicts  of interest  could arise as a result of the  relationships  among the
General Partner, KMI and the Partnership. The directors and officers of KMI have
fiduciary  duties to manage  KMI,  including  selection  and  management  of its
investments in its  subsidiaries and affiliates,  in a manner  beneficial to the
shareholders  of KMI. In general,  the General  Partner has a fiduciary  duty to
manage  the  Partnership  in  a  manner  beneficial  to  the  Unitholders.   The
Partnership Agreements contain provisions that allow the General Partner to take
into  account  the  interests  of  parties in  addition  to the  Partnership  in
resolving  conflicts of interest,  thereby  limiting its  fiduciary  duty to the
Unitholders,  as well as provisions that may restrict the remedies  available to
Unitholders for actions taken that might,  without such limitations,  constitute
breaches of fiduciary duty. The duty of the directors and officers of KMI to the
shareholders  of KMI may,  therefore,  come into conflict with the duties of the
General  Partner to the  Unitholders.  The Conflicts and Audit  Committee of the
Board of Directors of the General  Partner  will,  at the request of the General
Partner,  review (and is one of the means for  resolving)  conflicts of interest
that  may  arise  between  KMI or its  subsidiaries,  on the one  hand,  and the
Partnership, on the other hand.

                            32

<PAGE>



                        P A R T  IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K

   (a)(1) and (2) Financial Statements and Financial
Statement Schedules

   See "Index to Financial Statements" set forth on page F-1.

   (a)(3) Exhibits

*3.1  -Amended and Restated Partnership Agreement of Enron
       Liquids Pipeline, L.P. (Exhibit 3.1 to the
       Partnership's Annual Report on Form 10-K for the
       year ended December 31, 1993 ("1993 10-K"))
*3.2  -First Amendment to Amended and Restated Agreement
       of Limited Partnership of Enron Liquids Pipeline,
       L.P. effective as of August 6, 1992 (Exhibit 3.2 to
       the Partnership's Annual Report on Form 10-K for
       the year ended December 31, 1992 ("1992 10-K"))
*3.3  -Second Amendment to Amended and Restated Agreement
       of Limited Partnership of Enron Liquids Pipeline,
       L.P. effective as of September 30, 1993 (Exhibit
       3.3 to 1993 10-K)
*3.4   -Third Amendment to Amended and Restated Agreement of Limited Partnership
       dated as of February 14, 1997 (Exhibit 4.0 to the Partnership's  Form 8-K
       Report dated February 14, 1997)
*4.1  -Specimen Certificate representing Common Units
       (Exhibit 4.1 to 1993 10-K)
*10.1 -Omnibus Agreement among Enron Corp., Enron Liquids
       Pipeline Company, Enron Liquids Pipeline, L.P. and
       Enron Liquids Pipeline Operating Limited
       Partnership (Exhibit 10.1 to 1993 10-K)
*10.1.-First Amendment to Omnibus Agreement, dated as of
       September 30, 1993 (Exhibit 10.1.1 to 1993 10-K)
*10.1.-Second Amendment to Omnibus Agreement, dated as of
       September 7, 1994 (Exhibit 10.1.2 to 1994 10-K)
*10.2 -Amended and Restated Agreement of Limited
       Partnership of Enron Liquids Pipeline Operating
       Limited Partnership effective as of August 6, 1992
       (Exhibit 10.2 to 1993 10-K)
*10.2.-First Amendment to Amended and Restated Agreement of Limited  Partnership
       of Enron Liquids Pipeline Operating Limited  Partnership  effective as of
       August 6, 1992 (Exhibit 10.2.1 to 1992 10-K)
*10.2.-Second Amendment to Amended and Restated Agreement of Limited Partnership
       of Enron Liquids Pipeline Operating Limited Partnership dated as of March
       22, 1993 but effective as of August 6, 1992 (Exhibit 10.2.2 to 1992 10-K)
 10.2.-Third Amendment to Amended and Restated Agreement
       of Limited Partnership of Enron Liquids Pipeline
       Operating Limited Partnership dated as of February
       14, 1997
*10.3 -Conveyance, Contribution and Assumption Agreement
       among certain Enron Corp. subsidiaries and the
       Operating Partnership (Exhibit 10.3 to 1993 10-K)
*10.3.-First  Amendment to Conveyance,  Contribution  and  Assumption  Agreement
       effective as of August 6, 1992 (Exhibit 10.3.1 to 1992 10-K)
*10.4 -Form of Fractionation Agreement between Enron
       Natural Gas Liquids Corporation ("ENGL") and Enron
       Gas Liquids, Inc. for fractionation services at the
       Mont Belvieu Fractionator (Exhibit 10.4 to
       Amendment No. 2 to the Partnership's Form S-1
       Registration Statement, Registration No. 33-48142,
       filed on July 30, 1992 ("Form S-1"))
*10.5 -Storage Agreement between Enron Gas Processing
       Company and the General Partner dated February 18,
       1987 relating to the Bushton storage field,
       Amendment No. 1 dated October 19, 1988, Amendment
       No. 2 dated May 22, 1992, and Amendment No. 3 dated
       May 29, 1992 (Exhibit 10.5 to Form S-1)
*10.5-  Amendment No. 4 to Storage Agreement dated August
     25, 1994 (Exhibit 10.5.1 to Form S-1)
*10.6- Transportation Agreement between Enron Liquids
       Pipeline Company and Enron Gas Liquids Inc. dated
       August 1, 1989 relating to the Peoples Gas Light &
       Coke Company and the form of Amendment No. 1
       thereto (Exhibit 10.6 to Form S-1)

                            33

<PAGE>



*10.7 -Facilities Service Agreement between Enron Liquids
       Pipeline Company and Enron Gas Processing Company
       dated February 18, 1987, relating to facilities at
       Bushton, Kansas, Amendment  No. 1 dated January 10,
       1989, and Amendment No. 2 dated May 30, 1992
       (Exhibit 10.7 to Form S-1)
*10.8- Fractionation  Agreement between Enron Liquids Pipeline Company and Enron
       Liquids Marketing Company (now Enron Gas Liquids, Inc.) for fractionation
       services at Bushton,  Kansas, dated September 24, 1987, (first) Amendment
       effective  as of  January  1,  1988  and  dated  May 25,  1988,  (second)
       Amendment  dated August 1, 1989,  (third)  Amendment dated March 7, 1991,
       and Amendment No. 4 dated as of August 1, 1992 (Exhibit 10.8 to Form S-1)
*10.9- Unstenched Loading Letter Agreement between Enron
       Liquids Pipeline Company and Enron Gas Liquids,
       Inc. dated November 12, 1991 (Exhibit 10.9 to Form
       S-1)
*10.1- Note Agreement relating to the First Mortgage Notes
       (Exhibit 10.10 to 1993 10-K)
*10.1- Trust Agreement relating to the First Mortgage
       Notes (Exhibit 10.11 to 1993 10-K)
*10.1- Pledge and Security Agreement relating to the First
       Mortgage Notes (Exhibit 10.13 to 1993 10-K)
*10.1- Mortgage,  Security  Agreement and Fixture  Filing  relating to the First
       Mortgage Notes (Exhibit 10.12 to 1993 10-K)
*10.14 Amended and Restated Agreement of Limited
       Partnership of Enron Transportation Services, L.P.
       dated as of September 30, 1993 (Exhibit 10.14 to
       1993 10-K)
 10.1- First Amendment to Amended and Restated Agreement
       of Limited Partnership of Enron Transportation
       Services, L.P. dated as of February 14, 1997
*10.1- Asset  Purchase  Agreement,  dated as of September 30, 1993, by and among
       Cora Dock  Corporation,  as Seller,  and Enron  Transportation  Services,
       L.P.,  as  Purchaser,  and Houston  Pipe Line  Company,  as  guarantor of
       certain obligations of Seller (Exhibit 10.15 to 1993 10-K)
*10.1- Loan Agreement, dated April 1, 1994 between
       Jackson-Union Counties Regional Port District and
       Enron Transportation Services, L.P. (Exhibit 10.18
       to 1995 10-K)
*10.1- Guaranty and Indemnity, dated September 30, 1993,
       issued by Enron Liquids Pipeline, L.P. in favor of
       Enron Corp. and Houston Pipe Line Company (Exhibit
       10.19 to 1993 10-K)
*10.1- Purchase and Sale  Agreement,  dated June 30, 1994,  by and between Enron
       Gas Processing and Enron  Transportation  Services,  L.P.  (Exhibit 10 to
       Current Report on Form 8-K dated July 15, 1994)
*10.19 Operation and Maintenance Agreement between Enron
       Gas Processing Company and Northern Natural Gas
       Company dated August 1, 1987, assigned to Enron
       Transportation Services, L.P. effective July 1,
       1994 (Exhibit 10.24 to 1994 10-K)
*10.20 Loan Agreement between Enron Liquids Pipeline
       Operating Limited Partnership and Bank One, Texas,
       N.A., dated effective May 24, 1995 (Exhibit 10.28
       to 1995 10-K)
*10.20.First Amendment to Loan Agreement,  dated effective May 24, 1995, between
       Enron Liquids Pipeline Operating Limited Partnership and Bank One, Texas,
       N.A., dated effective September 30, 1995 (Exhibit 10.28.1 to 1995 10-K)
*10.21 Letter  Agreement  regarding  SWAP  transaction  to Enron  Transportation
       Services,  L.P. from First Union National Bank of North  Carolina,  dated
       February 13, 1996 (Exhibit 10.29 to 1995 10-K)
*10.22 Gas Sales Agreement between Enron Liquids Pipeline
       Operating Limited Partnership and Enron Gas
       Processing Company, dated effective October 1, 1995
       (Exhibit 10.30 to 1995 10-K)
*10.23 Bushton Hydrocarbon Plant Sublease Agreement
       between Enron Liquids Pipeline Operating Limited
       Partnership and Enron Gas Processing Company, dated
       effective October 1, 1995 (Exhibit 10.31 to 1995
       10-K)
*10.24 Assignment and Assumption Of Contract from Enron
       Gas Processing Company to Enron Liquids Pipeline
       Operating Limited Partnership, dated October 1,
       1995 (Exhibit 10.32 to 1995 10-K)
*10.25 Agency Agreement between Enron Liquids Pipeline
       Company and Enron Liquid Fuel Company, dated July
       19, 1995 (Exhibit 10.33 to 1995 10-K)
*10.26 Agreement between Enron Transportation Services,
       L.P. and International Union of Operating
       Engineers, AFL-CIO, dated March 19, 1995 (Exhibit
       10.34 to 1995 10-K)

                            34

<PAGE>



*10.27 Lease between Richard Zang Hamilton, Doris Marie Hamilton,  Richard David
       Hamilton and James Price Hamilton,  as Lessors, and Zeigler Coal Company,
       as Lessee, dated April 21, 1976 (Exhibit 10.35 to 1995 10-K)
*10.28 Storage Agreement between Enron Gas Processing
       Company and Enron Liquids Pipeline Company dated
       effective January 1, 1996 (Exhibit 10.36 to 1995
       10-K)
*10.29 Termination of the Bushton Storage Agreement
       between Enron Gas Liquids, Inc. and Enron Liquids
       Pipeline Operating Limited Partnership, dated
       effective December 3, 1995 (Exhibit 10.37 to 1995
       10-K)
*10.30 Transaction Agreement between Enron Liquids
       Pipeline Operating Limited Partnership and Enron
       Capital & Trade Resources Corp., dated September
       27, 1995 (Exhibit 10.38 to 1995 10-K)
*10.3- Credit  Agreement  dated as of  February  14,  1997 among  Kinder  Morgan
       Operating  L.P. "B" and First Union  National Bank of North Carolina with
       form of Notes attached (Exhibit 10.1 to the Partnership's Form 8-K Report
       dated February 14, 1997)
*10.3- Security Agreement dated as of February 14, 1997
       between Kinder Morgan Energy Partners, L.P. and
       First Union National Bank of North Carolina
       (Exhibit 10.2 to the Partnership's Form 8-K Report
       dated February 14, 1997)
*10.3- Security Agreement dated as of February 14, 1997
       between Kinder Morgan Operating L.P. "B" and First
       Union National Bank of North Carolina (Exhibit 10.3
       to the Partnership's Form 8-K Report dated February
       14, 1997)
*10.3- Guaranty  Agreement  dated as of February  14,  1997 from  Kinder  Morgan
       Energy  Partners,  L.P.  in favor of First Union  National  Bank of North
       Carolina  (Exhibit  10.4  to the  Partnership's  Form  8-K  Report  dated
       February 14, 1997)
*10.3- Credit Agreement dated as of February 14, 1997
       among Kinder Morgan, Inc. and First Union National
       Bank of North Carolina (Exhibit 10.5 to the
       Partnership's Form 8-K Report dated February 14,
       1997)
*10.36 Mortgage and Security Agreement with Assignment of
       Rents from Enron Transportation Services, L.P. to
       First Union National Bank of North Carolina, dated
       December 29, 1994 (Exhibit 10.22 to 1994 10-K)
*10.37 First Amendment to Mortgage and Security Agreement
       with Assignment Rents (Illinois) dated as of
                       February 14, 1997 between Kinder
                       Morgan Operating L.P. "B" and First
                       Union National Bank of North
                       Carolina (Exhibit 10.6 to the
                       Partnership's Form 8-K Report dated
                       February 14, 1997)
*10.38 Mortgage,  Security  Agreement,  and Financing  Statement  (Uinta County,
       Wyoming),  from Enron  Transportation  Services  in favor of First  Union
       National Bank of North  Carolina,  dated as of December 29, 1994 (Exhibit
       10.25 to 1994 10-K)
*10.3- First Amendment to Mortgage, Security Agreement and
       Financing Statement (Wyoming) dated as of February
       14, 1997 between Kinder Morgan Operating L.P. "B"
       and First Union National Bank of North Carolina as
       Agent (Exhibit 10.7 to the Partnership's Form 8-K
       Report dated February 14, 1997)
 10.40 Lease dated as of September 6, 1979 between Broken
       Circle Cattle Company and Northern Gas Products
       Company
 10.41 Construction Agreement between Morgan Associates,
       Inc. and Enron Liquids Pipeline Operating Limited
       Partnership dated June 20, 1996
 10.42 Operating & Maintenance Agreement between Morgan
       Associates, Inc. and Enron Liquids Pipeline
       Operating Limited Partnership dated June 20, 1996
 10.43 Transportation Agreement between Morgan Associates,
       Inc. and Enron Liquids Pipeline Operating Limited
       Partnership dated June 20, 1996

 21  - List of subsidiaries

-------------------------------------
* Asterisk indicates exhibits incorporated by reference as indicated;  all other
exhibits are filed herewith.

                            35

<PAGE>



(b) Reports on Form 8-K

   Form 8-K dated February 14, 1997, covering Items 1, 5 and 7.



                            36

<PAGE>



               INDEX TO FINANCIAL STATEMENTS


                                                       Page

KINDER MORGAN ENERGY PARTNERS, L.P.
     AND SUBSIDIARIES

Report of Independent Public Accountants                F-2

Consolidated Statements of Income for the years ended
     December 31, 1996, 1995 and 1994                   F-3

Consolidated Balance Sheets for the years ended December
31, 1996 and 1995                                       F-4

Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994                        F-5

Consolidated Statements of Partners' Capital for the
     years ended December 31, 1996, 1995 and 1994       F-6

Notes to Consolidated Financial Statements              F-7


MONT BELVIEU ASSOCIATES

Report of Independent Public Accountants               F-22

Statements of Income for the years ended December 31,
1996, 1995 and 1994                                    F-23

Balance Sheets for the years ended December 31, 1996 and
1995                                                   F-24

Statements of Cash Flows for the years ended December
     31, 1996, 1995 and 1994                           F-25

Statements of Partners' Capital for the years ended
December 31, 1996, 1995 and 1994                       F-26

Notes to Financial Statements                          F-27




                            F-1

<PAGE>



         REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To the Partners of Kinder Morgan Energy Partners, L.P.
(Formerly Enron Liquids Pipeline, L.P.):





We have audited the  accompanying  consolidated  balance  sheet of Kinder Morgan
Energy Partners,  L.P. (a Delaware  limited  partnership) and subsidiaries as of
December 31, 1996 and 1995, and the related  consolidated  statements of income,
cash flows and partners' capital for each of the three years in the period ended
December 31, 1996.  These  financial  statements are the  responsibility  of the
Partnership's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Kinder Morgan Energy Partners,
L.P. as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.


                                        ARTHUR ANDERSEN LLP







Houston, Texas
February 21, 1997



                            F-2

<PAGE>



   KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
             CONSOLIDATED STATEMENT OF INCOME
          (In thousands, except per unit amounts)

                              Year Ended December 31,
                              1996       1995      1994
                              ----       ----      ----
Revenues
     Trade                 $62,561    $57,379   $48,876
     Related party           8,689      6,925     6,028
                            ------     ------    ------
                            71,250     64,304    54,904
                            ------     ------    ------

Costs and expenses

     Cost of products sold   7,874      8,020       940
     Operations and
maintenance
         Related party       6,558      2,683       697
         Other              12,322      9,956     9,576
     Fuel and power          4,916      3,934     5,481
     Depreciation            9,908      9,548     8,539
     General and
administrative
         Allocated from      5,835      5,495     5,123
Enron
         Other               3,297      3,244     3,073
     Taxes, other than       3,467      3,289     3,371
                            ------     ------    ------
income taxes
                            54,177     46,169    36,800
                            ------     ------    ------
Operating income            17,073     18,135    18,104
Other income (expense)
     Equity in earnings of   5,675      5,755     5,867
partnerships
     Interest expense      (12,634)   (12,455)  (11,989)
     Other                   3,250      1,426       622
Minority interest             (121)      (115)     (113)
                            -------    -------   -------
Income before income taxes  13,243     12,746    12,491
Income tax expense           1,343      1,432     1,389
                            ------     ------    ------
Net income                 $11,900    $11,314   $11,102
                            =======    =======   =======
Net income per Unit Note 2)$  1.79    $  1.71   $  1.86
                            =======    =======   =======
Number of Units used in      6,510      6,510     5,865
                            =======    =======   =======
computation (Note 2)
















   The      accompanying  notes  are an  integral  part  of  these  consolidated
            financial statements.

                            F-3

<PAGE>



   KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
                CONSOLIDATED BALANCE SHEET
                      (In thousands)
                                                  December 31,
                                                1996         1995
ASSETS

Current assets
     Cash and cash equivalents             $  14,299      $  14,202
     Accounts receivable
          Trade                                7,970          7,913
          Related parties                      4,390          2,183
     Inventories
          Products                               882            832
          Materials and supplies               1,827          2,075
                                               -----          -----
                                              29,368         27,205

Property, plant and equipment, at cos        272,178        263,838
     Less accumulated depreciation            36,184         26,984
                                             235,994        236,854

Investments in partnerships                   32,043         32,613
                                              ------         ------

Deferred charges and other assets              6,198          6,992
                                               -----          -----


TOTAL ASSETS                                $303,603       $303,664

LIABILITIES AND PARTNERS' CAPITAL

Current liabilities
     Accounts payable
          Trade                               $5,512         $5,272
          Related parties                      4,520          2,664
     Current portion of long-term debt         1,709          1,700
     Accrued liabilities                         811          2,808
     Accrued taxes other than income           2,304          2,155
     Distributions payable                     4,210          4,210
                                               -----          -----
                                              19,066         18,809

Long-term liabilities and deferred credits
     Long-term debt                           160,211       156,938
     Other                                      3,492         2,264
                                              163,703       159,202
Commitments and contingencies (Notes 6, 9 and 10)

Minority interest                               2,490         2,537
                                              -------       -------
Partners' capital
     Common unitholders                       101,000       105,100
     Deferred participation unitholder         16,165        16,787
     General partner                            1,179         1,229
                                              118,344       123,116
TOTAL LIABILITIES AND PARTNERS' CAPITAL      $303,603      $303,664

   The      accompanying  notes  are an  integral  part  of  these  consolidated
            financial statements.

                            F-4

<PAGE>



   KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
           CONSOLIDATED STATEMENT OF CASH FLOWS
                      (In thousands)


                                          Year Ended December 31,
                                           1996     1995     1994
                                         ------    -----   -----
Cash flows from operating activities
Reconciliation of net income to net cash
provided by operating activities
   Net income                          $11,900  $11,314  $11,102
   Depreciation                          9,908    9,548    8,539
   Equity in earnings of partnerships   (5,675)  (5,755)  (5,867)
   Distributions from investments in
   partnerships 6,791 6,061
7,336
     Changes in components of working capital
          Accounts receivable           (2,264)   (2,958)    (939)
          Inventories                      198       465     (854)
          Accounts payable               2,096     1,581     (690)
          Accrued liabilities           (1,997)    1,535     (289)
          Accrued taxes                    149      (373)     (80)
          Distribution payable               -        -       540
     Other, net                          1,670     1,148      313
                                         ------   -------  ------
Net cash provided by operating activities 22,776  22,566   19,111
                                          ------   ------  ------

Cash flows from investing activities
     Acquisition of assets                     -       -  (12,825)
     Additions to property, plant and 
     equipment                            (8,575) (7,826)  (5,195)
     Contributions to partnership 
     investment                             (546)   (772)    (304)
Net cash used in investing activities     (9,121) (8,598) (18,324)

Cash flows from financing activities
     Decrease/increase in short-term debt       -   (650)     650
     Issuance of long-term debt             5,000  8,000   49,961
     Repayment of long-term debt           (1,718)(1,290) (36,762)
     Distributions to partners
          Common units                    (14,236)(14,236)(14,236)
          General partner                  (2,436) (2,436)   (232)
          Minority interest                  (168)   (168)   (163)
                                             -----  -----   -----
Net cash used in financing activities     (13,558)(10,780)   (782)

Increase in cash and cash equivalents          97   3,188       5
Cash and cash equivalents, beginning
of period                                  14,202  11,014  11,009
Cash and cash equivalents, end of Period  $14,299 $14,202 $11,014


Supplemental disclosures of cash flow 
information
     Cash paid during the year for
          Interest (net of capitalized
           interest)                      $12,487 $11,870 $11,676
          Income Taxes                    $   397 $   425 $   413


   The      accompanying  notes  are an  integral  part  of  these  consolidated
            financial statements.

                            F-5

<PAGE>

<TABLE>
<CAPTION>

   KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
        CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
                      (In thousands)




                                                                    Deferred                   Total
                                                      Common      Participation   General    Partners'
                                                       Units          Units       Partner     Capital
                                                      -------     -------------   -------    --------
<S>                                                  <C>             <C>           <C>       <C>  

Partners' capital at December 31, 1993               $113,711        $17,376       $1,304    $132,391

Net income                                             10,228            652          222      11,102

Distributions                                         (14,236)          (542)        (241)    (15,019)
                                                     ---------          -----        -----    -------

Partners' capital at December 31, 1994                109,703         17,486        1,285     128,474

Net income                                              9,633          1,469          212      11,314

Distributions                                         (14,236)        (2,168)        (268)    (16,672)
                                                      --------        -------        -----    -------

Partners' capital at December 31, 1995                105,100         16,787        1,229     123,116

Net income                                             10,136          1,546          218      11,900

Distributions                                         (14,236)        (2,168)        (268)    (16,672)
                                                      --------        -------        -----    -------

Partners' capital at December 31, 1996               $101,000        $16,165       $1,179    $118,344
                                                     ========        =======       ======    ========

</TABLE>



















   The      accompanying  notes  are an  integral  part  of  these  consolidated
            financial statements.

                            F-6

<PAGE>


   KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




1.  Organization


   Subsequent Event--Sale of the stock of the General
Partner

   Kinder Morgan Energy Partners, L.P. (the "Partnership",
formerly Enron Liquids Pipeline, L.P.), a Delaware limited
partnership was formed in August 1992.  Effective February
14, 1997, Kinder Morgan, Inc. ("KMI") acquired all of the
issued and outstanding stock of Enron Liquids Pipeline
Company, the general partner, from Enron Liquids Holding
Corp. ("ELHC").  At the time of the acquisition, the
general partner and the Partnership's subsidiaries were
renamed as follows:  Kinder Morgan G.P., Inc. (the
"General Partner", formerly Enron Liquids Pipeline
Company); Kinder Morgan Operating L.P. "A" ("OLP-A",
formerly Enron Liquids Operating Limited Partnership);
Kinder Morgan Operating L.P. "B" ("OLP-B", formerly Enron
Transportation Services, L.P.); and Kinder Morgan Natural
Gas Liquids Corporation ("KMNGL", formerly Enron Natural
Gas Liquids Corporation).

  General

  The Partnership's  assets include two interstate natural gas liquids ("NGL" or
"NGLs")  pipelines  ("North  System" and "Cypress  Pipeline"),  a carbon dioxide
("CO2") pipeline  ("Central Basin  Pipeline"),  a coal transfer  facility ("Cora
Terminal"), a gas processing plant ("Painter Plant"), a 25% indirect interest in
an NGL  fractionator  in Mont  Belvieu,  Texas by means of the  ownership of the
common  stock  of  KMNGL,  and  a gas  processing  capacity  sublease  ("Bushton
Sublease").  The North  System  transports,  stores and delivers a full range of
NGLs and refined  products from South  Central  Kansas to markets in the Midwest
and has  interconnects,  using  third-party  pipelines  in the  Midwest,  to the
eastern United States. The Cypress Pipeline transports ethane from Mont Belvieu,
Texas,  to  the  Lake  Charles,  Louisiana  area.  The  Central  Basin  Pipeline
transports  CO2 in West Texas.  The Cora  Terminal  transfers  coal from rail to
barge on the banks of the  Mississippi  River near Cora,  Illinois.  The Painter
Plant processes  natural gas and fractionates NGLs near Evanston,  Wyoming.  The
Bushton Sublease,  which expires in 2005,  provides gas processing capacity at a
plant in  Ellsworth  County,  Kansas and was  executed  in  conjunction  with an
assignment of a gas processing  agreement with Mobil Natural Gas, Inc. (see Note
10).

  The Partnership operates through two operating limited partnerships, OLP-A and
OLP-B (collectively, the "Operating Partnerships").  Kinder Morgan G.P., Inc. is
a wholly owned  subsidiary of KMI and serves as the sole general  partner of the
Partnership, OLP-A and OLP-B. The Partnership and the Operating Partnerships are
governed by Amended and Restated  Agreements of Limited  Partnership and certain
other agreements (collectively, the "Partnership Agreements").




                            F-7

<PAGE>


   KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




2.  Summary of Significant Accounting Policies

  Principles of Consolidation and Use of Estimates

  The  consolidated  financial  statements  include the assets,  liabilities and
results of operations of the  Partnership and its  majority-owned  subsidiaries.
All significant intercompany items have been eliminated in consolidation.

  The preparation of financial  statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

  Cash Equivalents

  Cash equivalents are defined as all highly liquid short-term  investments with
original maturities of three months or less.

  Inventories

  Inventories of products  consist of NGLs which are valued at the lower of cost
(weighted-average  cost method) or market.  Materials and supplies are stated at
the lower of cost or market.

  Property, Plant and Equipment

  Property,  plant and equipment is stated at its acquisition cost. Expenditures
for  maintenance  and repairs are charged to operations in the period  incurred.
The cost of  property,  plant and  equipment  sold or  retired  and the  related
depreciation are removed from the accounts in the period of sale or disposition.
The provision for depreciation is computed using the straight-line  method based
on  estimated  economic  or  Federal  Energy  Regulatory  Commission  ("FERC") -
mandated  lives.   Generally,   composite  depreciation  rates  are  applied  to
functional groups of property having similar economic  characteristics and range
from 2.5% to 12.5%,  excluding certain short-lived assets such as vehicles.  The
original cost of property  retired is charged to  accumulated  depreciation  and
amortization,  net of salvage and cost of removal. No retirement gain or loss is
included in income except in the case of extraordinary retirements or sales.

  In March 1995, the Financial  Accounting  Standards Board issued  Statement of
Financial Accounting Standards ("SFAS") No. 121 - "Accounting for the Impairment
of  Long-Lived  Assets  and for  Long-Lived  Assets to be  Disposed  Of,"  which
requires,  among other things,  that long-lived assets and certain  identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be  recoverable.  The  Partnership  adopted  SFAS No.  121 in the  first
quarter of 1996. The adoption of SFAS No. 121 did not have a material  impact on
the Partnership's financial position or results of operations.


                            F-8

<PAGE>


   KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




Property, plant and equipment consists of the following (in thousands):

                                      December 31,
                                  1996         1995

    Liquids Pipelines           $223,337     $217,105
    Coal Handling                 24,197       23,932
    Gas Processing                13,529       13,120
    Land                           2,936        2,288
    Other                          8,179        7,393
                                --------        -----
         Total                  $272,178     $263,838
                                ========     ========

  Revenue Recognition

  Revenues for the pipeline  operations  are  generally  recognized  on delivery
based  on the  actual  volume  transported.  Coal  handling  and gas  processing
revenues  are  recognized  based upon  volumes  loaded and volumes  processed or
fractionated, respectively.

  Investments in Partnerships

  The Partnership's  investments in partnerships  accounted for under the equity
method consisted of the following (dollars in thousands):

                               Percent     December 31,
                              Ownership      1996      1995

  Mont Belvieu Associates          50%     $27,205    $27,481
  Heartland Pipeline Company       50%       4,838      5,132
                                  ----     -------    -------
         Total                     100%    $32,043    $32,613
                                   ====    =======    =======

  The  Partnership's  equity in earnings of  investments in  partnerships  is as
follows (in thousands):

                                 Year Ended December 31,

                                 1996     1995      1994
                                ------   ------    -----

Mont Belvieu Associates         $4,968   $5,208    $5,534
Heartland Pipeline Company         707      547       333
     Total                      $5,675   $5,755    $5,867
                                ======   ======    ======



                            F-9

<PAGE>


   KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




  Summarized  combined  financial  information of the  partnerships is presented
below (in thousands):

                                        December 31,
                                     1996       1995
Balance Sheet
    Current assets                 $ 7,729    $ 9,472
    Non-current assets              54,401     44,743
    Current liabilities              5,043      3,992
    Non-current liabilities         15,022      1,019
    Partners' equity                42,065     49,204


                            Year Ended December 31,
                           1996     1995      1994
                          ------   ------    -----

Income Statement
  Revenues               $31,534  $30,032   $31,548
  Expenses                19,563   18,074    18,396
                          ------   ------    ------
  Net income             $11,971  $11,958   $13,152
                         =======  =======   =======

  The excess of the Partnership's  cost over its 50% share of the underlying net
assets of the partnerships is being amortized over the estimated  remaining life
of the property,  plant and equipment of the partnerships.  Such amortization is
reflected  as a  reduction  in  equity  earnings  related  to the  Partnership's
investments.

  Minority Interest

  Minority  interest  consists of the approximate 1% general partner interest in
the Operating  Partnerships as well as other  contributions  that have been made
relative to the Mont Belvieu Fractionator.

  Income Taxes

  The  Partnership is not a taxable  entity for federal income tax purposes.  As
such, no federal income tax will be paid by the  Partnership.  Each partner will
be  required  to report on its tax return  its  allocable  share of the  taxable
income  and  loss of the  Partnership.  Such  taxable  income  or loss  may vary
substantially  from the net  income  or net loss  reported  in the  consolidated
statement of income primarily because of accelerated tax depreciation.

  KMNGL,  however,  is subject to  corporate  federal  and state  income  taxes.
Accordingly,  for financial reporting purposes, no recognition has been given to
income  taxes  related to the  operations  of the  Partnership  other than those
recorded by KMNGL.

  KMNGL accounts for income taxes under the provisions of
SFAS No. 109 - "Accounting for Income Taxes."  SFAS No.
109 provides for an asset and liability approach for
accounting for income taxes.  Under this approach,
deferred assets and liabilities are recognized based on
anticipated future tax consequences

                           F-10

<PAGE>


   KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




attributable to differences  between  financial  statement  carrying  amounts of
assets and liabilities of their respective tax bases.

  The difference  between  KMNGL's  effective  income tax rate of  approximately
37.0% and the federal statutory tax rate relates to state income taxes.

  KMNGL's net  deferred  tax  liability  at December  31, 1996 and 1995 was $3.2
million and $2.2 million, respectively. At December 31, 1996, KMNGL had recorded
deferred tax assets  related to $1.3 million of  alternative  minimum tax credit
carryforwards  with no expiration  date and tax benefits of a net operating loss
("NOL")  carryforward  which  substantially  expires  in 2008.  In  1996,  KMNGL
utilized  approximately  $0.5  million  of  its  approximate  $3.7  million  NOL
carryforward.

  Net Income Per Unit

  Net income per unit is computed by dividing net income, after the deduction of
the General Partner's interest,  including  incentives,  by the weighted average
number of outstanding  Participating Units which includes 5,650,000 Common Units
("Common Units" represent limited partnership interests in the Partnership) and,
after  September 30, 1994,  also includes the 860,000 limited partner units held
by the General Partner on December 31, 1996. On February 14, 1997, these limited
partnership  interests  were  converted to Common Units and the General  Partner
then sold 429,000 of the units to a third party. (See Note 5).

3.  The Painter Plant

  Acquisition

    On June 30, 1994,  the  Partnership  acquired,  through  OLP-B,  the Painter
Plant,  a gas  processing  plant located in Uinta County,  Wyoming,  and related
assets  consisting of terminal  facilities and  construction  work-  in-progress
associated with such facilities and certain pipelines  connecting the plant with
third party  facilities.  The assets  were  acquired  from Enron Gas  Processing
Company,  an indirect  wholly-owned  subsidiary  of Enron Corp.  ("Enron").  The
accompanying consolidated financial statements include the results of operations
for the Painter Plant  beginning July 1, 1994. The cost of this  acquisition was
$12.8 million which OLP-B  originally  financed with a note from Enron. The debt
was  subsequently  refinanced  with a third  party  lender.  (See Note 4).  This
acquisition was accounted for as a purchase.

                           F-11

<PAGE>


   KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




    Detailed  below is  summarized  pro  forma  results  of  operations  for the
Partnership  for  1994  as  though  the  Painter  Plant  had  been a part of the
Partnership's operations as of January 1, 1994.

(Unaudited; in thousands, except per unit amounts)
                           Year Ended December 31, 1994
                                       Pro Forma

    Revenues                            $58,275
    Net income                           11,921
    Net income per unit                     2.00
       









    The above pro forma  consolidated  results do not purport to present  actual
operating  results had the  acquisition of the Painter Plant occurred on January
1, 1994.

    Chevron Contract Buyout

    In 1996, under a contract that was to extend through December 1998, Chevron,
USA  ("Chevron")  was the only gas processing  customer at the Painter Plant. In
April 1996, the  Partnership  was notified by Chevron that it was exercising its
right to terminate the gas processing  agreement at the Painter Plant  effective
as of August 1, 1996.  The gas  processing  agreement  with Chevron  allowed for
early  termination by Chevron,  subject to an approximate  $2.9 million one time
termination  payment.  On June 14, 1996, a force majeure event  occurred and the
Painter Plant gas processing  facilities  were shut down.  Chevron  subsequently
disputed its obligation to pay the early  termination  payment.  The Partnership
negotiated  with Chevron to settle all claims  between the two parties under the
gas processing  agreement.  The  Partnership  agreed in September 1996 to accept
$2.7 million as full and final settlement of all claims. This amount was reduced
to  $2.5  million  in  connection  with  the  settlement  of  certain   disputed
receivables.  Historically,  approximately  56% of the revenues from the Painter
Plant were generated from processing Chevron gas. Management  estimates that the
Chevron  contract  would have  generated  approximately  $3.9 million of revenue
during each of the remaining two years of the contract.

    The  fractionation,  terminaling  and storage  operations  conducted  at the
Painter Plant are continuing.  The fractionation  agreement with Chevron,  which
extends  through  November  1997,  remains in effect,  and the  Partnership  has
fractionation agreements with other third parties.

    Gas Processing and Terminal Lease to Amoco

    On February 14, 1997, the Partnership  executed an operating lease agreement
with Amoco Oil Company  ("Amoco")  for Amoco's use of the  fractionator  and the
Partnership's  Millis Terminal and Storage  Facility  ("Millis") with the nearby
Amoco  Painter  Complex Gas Plant.  The lease will generate  approximately  $1.0
million of cash flow in 1997 with  annual  escalations  thereafter.  The primary
term of the lease expires

                           F-12

<PAGE>


   KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




February 14, 2007,  with  evergreen  provisions  at the end of the primary term.
Amoco will take  assignment of all of the commercial  arrangements  currently in
place,  including the Chevron fractionation  agreement described above, and will
assume all day to day operations,  maintenance,  repairs,  replacements  and all
expenses (other than minor easement fees), taxes and charges associated with the
fractionator and the Millis facilities.  After lease year seven, Amoco may elect
to purchase the  fractionator  and Millis  facilities  under  certain  terms.  A
portion of the gas processing  facilities and the nitrogen rejection unit at the
Painter Plant remain operationally idle. The Partnership continues to assess its
alternatives for these idled facilities.


4. Long-Term Debt

   OLP-A

   OLP-A has  outstanding  $110 million of 8.79% First  Mortgage  Notes  ("First
Mortgage  Notes") due 2007. Such notes are secured by  substantially  all of the
liquids pipeline property,  plant and equipment of OLP-A and the common stock of
KMNGL and are with recourse to the General Partner.

   As allowed by the agreement between OLP-A and the holders of the $110 million
of 8.79% First  Mortgage  Notes,  OLP-A has  established a committed $15 million
revolving credit facility with a bank to meet its working capital requirements.

   OLP-A's  credit  facility with the bank has a variable rate interest equal to
the London  Interbank  Offered  Rate  ("LIBOR")  plus 1.75% per annum,  requires
quarterly interest payments on outstanding borrowings, and upon its June 1, 1998
termination,  requires the repayment of the entire outstanding principal amount.
At December 31, 1996, the Partnership had outstanding  borrowings of $13 million
under this facility.  During 1996, the weighted-average  interest rate was 7.22%
per annum.

   OLP-B

   OLP-B has  outstanding  $23.7  million  principal  amount of tax exempt bonds
issued by the Jackson-Union Counties Regional Port District due 2024. Such bonds
bear   interest  at  a  weekly   floating   market  rate.   During   1996,   the
weighted-average  interest  rate on these  bonds was 3.58% per annum.  OLP-B has
entered  into  an  interest   rate  swap  which  fixes  the  interest   rate  at
approximately  3.65% per annum  during  the period  from  February  13,  1996 to
December 31, 1998.

   OLP-B had  outstanding  at December 31, 1996 a $12.8  million note which bore
interest at a rate equal to the LIBOR plus a variable  rate  ranging  from 1.25%
per annum to 1.75% per annum.  During 1996, the  weighted-average  interest rate
was 7.06% per annum.  OLP-B also had  outstanding  at December  31, 1996, a $4.4
million,  6.96%  promissory  note to Enron due  September 30, 2003. In addition,
OLP-B had a $2.0 million,  committed  working  capital  revolving line of credit
with a bank which at  December  31, 1996 was unused.  In  connection  with KMI's
acquisition  of  the  General  Partner,   OLP-B  refinanced  its  existing  bank
indebtedness with a new $15.9 million revolving credit facility with First Union
National Bank of North Carolina ("First Union").  The obligations of OLP-B under
the credit  facility are  guaranteed by the  Partnership.  Borrowings  under the
credit facility are due February 14, 1999 and bear interest,  at OLP-B's option,
at either  First  Union's  Base Rate plus .5% per annum or LIBOR  plus 2.25% per
annum (in each case

                           F-13

<PAGE>


   KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




increasing by .25% as of the end of each calendar  quarter  commencing  June 30,
1997).  The  Partnership's  ability to borrow  additional funds under the credit
facility is subject to compliance with certain financial covenants and ratios.

   Maturities of the  Partnership's  long-term debt as of December 31, 1996 were
as follows (in thousands):
          1997                    $ 1,709
          1998                     25,718
          1999                     18,915
          2000                     11,946
          2001                     11,946
          Thereafter               91,751



     After giving effect to the refinancing of OLP-B's indebtedness,  maturities
of the  Partnership's  long-term  debt as of March 15,  1997 were as follows (in
thousands):
          1997                    $   106
          1998                     24,115
          1999                     25,796
          2000                     11,061
          2001                     11,013
          Thereafter               89,979


   The estimated fair value of the long-term debt based upon prevailing interest
rates  available to the  Partnership  at December 31, 1996 and 1995 is disclosed
below.  Fair value as used in SFAS No. 107 --  "Disclosures  About Fair Value of
Financial  Instruments"  represents the amount at which the instrument  could be
exchanged in a current transaction between willing parties.

                           December 31, 1996        December 31, 1995
                         Carrying    Estimated    Carrying   Estimated
                           Value     Fair Value     Value    Fair Value
                                           (in thousands)

    Long-term debt      ($161,920)   ($152,631)   ($158,638) ($162,029)
    Interest rate swap         -      $    155            -          -

5. Partners' Capital

    At December 31, 1996,  Partners' capital consisted of 5,650,000 Common Units
representing an 85.1% limited partner interest in the Partnership, 860,000 units
held by the General Partner  representing a 12.9% limited partner  interest (see
below) and a 2% general  partner  interest which includes the General  Partner's
approximate  1% general  partner  interest  in the  Operating  Partnerships.  On
February 14, 1997, the limited

                           F-14

<PAGE>


   KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




partnership interests held by the General Partner were converted to Common Units
and the General Partner then sold 429,000 of its Common Units to a third party.

    Through  September 30, 1997, Enron has agreed to contribute cash in exchange
for  additional  partnership  interests  ("APIs") if Available  Cash (as defined
below) is insufficient to meet the Minimum Quarterly Distributions (the "Minimum
Quarterly Distribution") on the Common Units of $0.55 per Unit . Available Cash,
as  defined  in the  Partnership  Agreements,  generally  consists  of all  cash
receipts of the Partnership less all of its cash disbursements and net additions
to reserves.  Through December 31, 1996, no such capital contributions have been
required. (See Note 8).

    On September 30, 1994, the Deferral  Period,  as defined in the  Partnership
Agreements,  ended with respect to the 12.9% limited partner interests then held
by the General  Partner.  As a result,  these limited partner  interests  became
eligible and began to  participate  in all  allocations  of income or losses and
distributions  made with  respect  to Common  Units  effective  with the  fourth
quarter of 1994. In order for the Deferral  Period to end, the  Partnership  was
required to generate and distribute approximately $0.63 per Common Unit for four
consecutive quarters after September 30, 1993. The fourth quarterly distribution
of $0.63 per Unit occurred in the third quarter of 1994.


6. Litigation and Other Contingencies

  General

    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.

    The  liabilities,  if any,  associated with any lawsuits pending at the time
the Partnership was formed in 1992 were retained by Enron and not assumed by the
Partnership.  Pursuant to the Omnibus  Agreement,  the General Partner agreed to
cause the Partnership,  at the Partnership's expense, to cooperate with Enron in
the defense of any such  litigation  by furnishing  information  relating to the
Partnership's assets involved in the litigation,  furnishing access to files and
otherwise  assisting in the defense.  The costs to the  Partnership  relating to
such  agreement  have  not  been  and are not  expected  to be  significant.  In
addition,  Enron agreed to indemnify the  Partnership for any losses incurred in
connection with the lawsuits pending at the time the Partnership was formed.  In
connection  with the sale of the  Common  Stock of the  General  Partner to KMI,
Enron agreed to assume  liability,  and indemnify the  Partnership,  for certain
lawsuits then pending.

Morris Storage Facility

    The General  Partner is a defendant in a suit filed on September 12, 1995 by
the State of Illinois. The suit seeks civil penalties and an injunction based on
five  counts of  environmental  violations  for events  relating  to a fire that
occurred at the Morris storage field in September,  1994. The fire occurred when
a sphere  containing  natural  gasoline  overfilled  and released  product which
ignited.  There  were  no  injuries  and  no  damage  to  property,  other  than
Partnership property. The suit seeks civil penalties in the stated amount of

                           F-15

<PAGE>


   KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




up to $50,000 each for three counts of air and water pollution, plus $10,000 per
day for any  continuing  violation.  The State also seeks an injunction  against
future  similar  events.  On August 29, 1996,  the Illinois  Attorney  General's
office  proposed a settlement in the form of a consent decree that would require
the  Partnership to implement  several fire  protection  recommendations,  pay a
$100,000 civil penalty, and pay a $500 per day penalty if established  deadlines
for  implementing  the  recommendations  are not met. The Partnership has made a
settlement  offer to the State  and  settlement  negotiations  are  ongoing.  If
attempts at settlement are  unsuccessful,  the General  Partner will  vigorously
defend itself and the Partnership against the charges. Although no assurance can
be given, the Partnership  believes that the ultimate  resolution of this matter
will not have a material adverse effect on its financial  position or results of
operations.

  On December 10, 1996, the U.S.  Department of Transportation  ("D.O.T") issued
to the General  Partner a notice of eight probable  violations of federal safety
regulations in connection  with the fire at the Morris storage field.  The D.O.T
proposed a civil  penalty of $90,000.  The General  Partner is  currently in the
process of  responding to the notice,  but believes that the alleged  violations
and proposed fine will not have a material impact on the Partnership.

  It is expected that the Partnership will reimburse the General Partner for any
liability or expenses  incurred by the General  Partner in connection with these
legal proceedings.

  The operations of the Partnership are subject to federal, state and local laws
and  regulations  relating to protection  of the  environment.  The  Partnership
believes that its  operations  and  facilities  are in general  compliance  with
applicable   environmental   regulations.   The   Partnership   has  an  ongoing
environmental audit and compliance program.  Risks of accidental leaks or spills
are, however,  associated with fractionation of NGLs, transportation of NGLs and
refined petroleum products,  the handling and storage of coal, the processing of
gas, as well as the truck and rail loading of fractionated  products.  There can
be no assurance that  significant  costs and  liabilities  will not be incurred,
including those relating to claims for damages to property and persons resulting
from operation of the Partnership's  businesses.  Moreover,  it is possible that
other  developments,   such  as  increasingly  strict   environmental  laws  and
regulations and enforcement policies thereunder, could result in increased costs
and liabilities to the Partnership.


7.  Major Customers and Concentrations of Credit Risk

    A  substantial  portion  of  the  Partnership's  revenues  is  derived  from
transportation  services to oil and gas refining and marketing  companies in the
Midwest.  This concentration could affect the Partnership's  overall exposure to
credit risk inasmuch as these customers could be affected by similar economic or
other conditions.  However,  management believes that the Partnership is exposed
to minimal credit risk. The  Partnership  generally does not require  collateral
for its receivables.

    In 1996,  revenues from two customers  represented  12.4% and 10.4% of total
Partnership  revenues.  In 1995,  revenues from two customers  represented 10.2%
each of total Partnership revenues. In 1994, revenues from one liquids pipelines
customer represented 10.1% of total Partnership revenues.


                           F-16

<PAGE>


   KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




8.  Related Party Transactions

  Revenues and Expenses

    Revenues  for the years  ended  December  31,  1996,  1995 and 1994  include
transportation  charges  and  product  sales to an Enron  subsidiary,  Enron Gas
Liquids,  Inc.,  of $7.7 million,  $5.9 million and $4.7 million,  respectively.
Another  Enron  subsidiary,  Enron  Gas  Processing  Company  ("EGP"),  provides
services in connection with the Mobil Agreement (see Note 10) as well as storage
and other services to the Partnership and charged $6.6 million, $2.7 million and
$0.7 million for the years ended December 31, 1996, 1995 and 1994, respectively.
Management  believes  that these  charges are  reasonable.  As a result of KMI's
acquisition  of all of the common  stock of the General  Partner,  Enron and its
affiliates are no longer affiliates of the Partnership.

    The  Partnership  leases certain  capacity rights of 17 MBbls/d of the North
System to  Heartland  Pipeline  Company  ("Heartland")  under a long-term  lease
agreement  which will expire in 2010.  Revenues  earned from  Heartland  for the
lease rights were $0.9 million for each of the years ended
December 31, 1996, 1995 and 1994.

  General and Administrative Expenses

  The  Partnership has no employees and is managed and controlled by the General
Partner  pursuant  to  the  Partnership  Agreements.  Under  the  terms  of  the
Partnership  Agreements,  the General Partner is reimbursed for certain expenses
incurred by it on behalf of the Partnership.  Additionally, prior to the sale of
the  General  Partner,  Enron and its  affiliates  were  reimbursed  for certain
corporate staff and support services rendered to the General Partner in managing
and operating  the  Partnership  pursuant to the terms of the Omnibus  Agreement
which was executed among Enron,  the  Partnership and the General Partner at the
time of  formation of the  Partnership.  The amount paid by the  Partnership  to
reimburse  Enron and its affiliates for such services to the General Partner was
subject  to  certain  limitations  established  under the  terms of the  Omnibus
Agreement.  For the years ended  December  31,  1996,  1995 and 1994 the maximum
amount  allowed  for  reimbursements  of $5.8  million,  $5.5  million  and $5.1
million, respectively,  were paid to Enron for Basic Services, as defined in the
Omnibus  Agreement.  As a result of KMI's  acquisition  of the General  Partner,
Enron and its affiliates are no longer  required to provide  corporate staff and
support services under the terms of the Omnibus  Agreement,  and the limitations
on  reimbursement  for  corporate  staff and  support  services  incurred by the
General Partner on behalf of the Partnership are no longer applicable.

  Partnership Distributions

  The General Partner owns 431,000 Common Units, representing approximately 6.6%
of  the  Common  Units.  The  Partnership   Agreements   provide  for  incentive
distributions payable to the General Partner out of the Partnership's  Available
Cash in the event that quarterly  distributions  to  Unitholders  exceed certain
specified targets. In general,  subject to certain  limitations,  if a quarterly
distribution  to  Unitholders  exceeds a target of $0.605 per Unit,  the General
Partner will receive incentive distributions equal to (i) 15% of that portion of
the  quarterly  distribution  per Unit that exceeds  $0.605 but is not more than
$0.715,  plus (ii) 25% of that portion of the  quarterly  distribution  per Unit
that exceeds the quarterly distribution amount of $0.715

                           F-17

<PAGE>


   KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




but is not more than  $0.935,  plus (iii) 50% of that  portion of the  quarterly
distribution per Unit that exceeds $0.935.

  To support the  Partnership's  ability to  distribute  the  Minimum  Quarterly
Distribution on all outstanding Common Units through the period ending September
30, 1997,  Enron agreed that,  if  necessary,  it would  contribute  cash to the
Partnership in exchange for APIs in the  Partnership.  The APIs are not entitled
to cash  distributions,  allocations  of taxable  income or loss  (except  under
limited  circumstances)  or voting  rights,  but the  Partnership is required to
redeem them if and to the extent that Available Cash reaches certain levels.  No
APIs have been  purchased by Enron since the inception of the  Partnership,  and
management does not expect that APIs will be required to be purchased to support
the payment of  distributions  in 1997.  KMI obtained a $10.9 million  letter of
credit from First Union to support Enron's remaining obligations with respect to
the Minimum Quarterly  Distribution  payable to the holders of the Partnership's
Common Units.

  South Cowden Lateral

  During 1996,  a lateral was  constructed  that  connects the South Cowden Unit
flood  project to the  Central  Basin  Pipeline.  The lateral is owned by Morgan
Associates,  Inc.  ("MAI"),  which  is  owned  by  William  V.  Morgan,  and was
constructed  for  MAI by the  Partnership  under  the  terms  of a  Construction
Agreement  at a cost of $1.35  million,  which  amount has been paid by MAI.  In
addition,  MAI and the  Partnership  entered  into an  Operating  &  Maintenance
Agreement  which  provides for operation and  maintenance  of the lateral by the
Partnership and a Transportation  Agreement which allows the Partnership to ship
specified  quantities of CO2 on the lateral and requires the Partnership to ship
certain minimum quantities of CO2 on the lateral.  The agreements are coterminus
and expire in 2016.  During 1996, the Partnership  charged MAI $31,250 under the
Operating & Maintenance Agreement and MAI charged the Partnership $194,648 under
the  Transportation  Agreement.  The terms of such  agreements are comparable to
those which the Partnership would make available to unaffiliated third parties.

9.  Regulatory Matters

    The tariffs charged for interstate  common carrier  pipeline  transportation
for the North System and the Cypress  Pipeline are subject to rate regulation by
the FERC under the  Interstate  Commerce Act ("ICA").  The ICA  requires,  among
other things,  that petroleum  products  (including NGLs) pipeline rates be just
and reasonable and non-discriminatory. Pursuant to FERC Order No. 561, effective
January 1, 1995,  petroleum  pipelines  are able to change  their  rates  within
prescribed  ceiling levels that are tied to an inflation  index.  FERC Order No.
561-A,  affirming and clarifying Order No. 561, expands the circumstances  under
which petroleum pipelines may employ  cost-of-service  ratemaking in lieu of the
indexing methodology,  effective January 1, 1995. In 1995 and 1996,  application
of the  indexing  methodology  did not  significantly  affect the  Partnership's
rates.

10.  Commitments and Leases

    The  primary  shipper on the  Cypress  Pipeline  has the right until 2011 to
purchase up to a 50% joint venture interest in the pipeline at a price based on,
among  other  things,  the  construction  cost  of the  Cypress  Pipeline,  plus
adjustments  for  expansions.  If the  customer  exercises  its rights under the
option, management anticipates that no loss will accrue to the Partnership.

                           F-18

<PAGE>


   KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




    Under a joint tariff agreement,  the Partnership's North System is obligated
to pay minimum tariff revenues of  approximately  $2.2 million per contract year
to an  unaffiliated  pipeline  company  subject  to  certain  adjustments.  This
agreement  expires June 30, 2001,  but provides for two five-year  extensions at
the option of the Partnership.

    On October 1, 1995,  EGP assigned to the  Partnership  an EGP gas processing
contract  with Mobil  Natural  Gas,  Inc.  (the "Mobil  Agreement").  Under this
contract,  the Partnership is obligated to process  dedicated volumes of natural
gas produced by Mobil.  Also on October 1, 1995, the Partnership  subleased from
EGP a portion of the  capacity at the Bushton gas  processing  plant  located in
Ellsworth  County,  Kansas (the  "Bushton  Plant").  The leased  capacity at the
Bushton Plant enables the  Partnership to fulfill the processing  obligations it
assumed in the Mobil Agreement.  The Mobil Agreement and the sublease  agreement
are  coterminous  with primary terms ending April 30, 2005. As a result of these
transactions,  the  Partnership  receives  processing  fees from Mobil and makes
sublease payments to EGP.

    The  Partnership  has entered into  certain  operating  leases  primarily in
relation to the gas processing and coal terminaling operations.  The leases have
remaining  terms  ranging from eight to  thirty-one  years.  Future  commitments
related to these leases, including the sublease payments to EGP, at December 31,
1996 are as follows (in thousands):

           1997                    $  1,411
           1998                       1,305
           1999                       1,357
           2000                       1,505
           2001                       1,535
           Thereafter                 8,050
                                      -----
             Total minimum payments  15,163

    Total lease expenses,  including related variable charges,  incurred for the
years ended December 31, 1996, 1995 and 1994 were $1.5 million, $1.4 million and
$0.4 million, respectively.



                           F-19

<PAGE>


   KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




11.  Business Segment Information

    The  Partnership's  operations are classified into three business  segments:
Liquids  pipelines  (which  includes  transportation  services  and  NGL and CO2
product sales to shippers),  coal transfer and storage,  and gas  processing and
fractionation. Financial information by business segment follows (in thousands):

<TABLE>
<CAPTION>

                                                                         1996           1995           1994
                                                                         ----           ----           ----

                  <S>                                                <C>            <C>             <C>  
                  Revenues     
                        Liquids pipelines                            $54,064         $46,986         $44,753
                        Coal transfer and storage                      8,059           8,398           6,670
                        Gas processing and fractionation               9,127           8,920           3,481
                                                                     -------         -------         -------
                        Total                                        $71,250         $64,304         $54,904
                                                                     =======         =======         =======

                  Depreciation and Amortization
                        Liquids pipelines                             $7,558          $7,267          $7,173
                        Coal transfer and storage                      1,366           1,332             905
                        Gas processing and fractionation                 984             949             461
                                                                      ------          ------          ------
                        Total                                         $9,908          $9,548          $8,539
                                                                      ======          ======          ======

                  Operating Income
                        Liquids pipelines                            $13,100         $10,346         $12,916
                        Coal transfer and storage                      4,001           4,320           3,638
                        Gas processing and fractionation                (28)           3,469           1,550
                                                                    --------         -------         -------
                        Total                                        $17,073         $18,135         $18,104
                                                                     =======         =======         =======

                  Additions to Property, Plant
                     and Equipment
                        Liquids pipelines                             $7,673          $7,342          $4,171
                        Coal transfer and storage                        606             148             718
                        Gas processing and fractionation                 296             336             306
                                                                      ------          ------           -----
                        Total                                         $8,575          $7,826          $5,195
                                                                      ======          ======          ======

                  Total Assets
                        Liquids pipelines                           $247,266        $245,329        $243,505
                        Coal transfer and storage                     28,738          29,673          30,527
                        Gas processing and fractionation              12,833          14,479          14,253
                         Other (a)                                    14,766          14,183          10,986
                                                                    --------        --------        --------
                        Total                                       $303,603        $303,664        $299,271
                                                                    ========        ========        ========

</TABLE>

         (a) Other includes cash and other miscellaneous
assets.


                           F-20

<PAGE>


   KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




12.  Quarterly Financial Data (Unaudited)

(In thousands, except              Operating             Net Income
per unit amounts)         Revenues  Income   Net Income   per Unit
  
1994
       First Quarter      $15,137    $4,900     $2,935      $0.51
       Second Quarter      10,394     2,927      1,259       0.22
       Third Quarter       12,192     3,580      1,906       0.33
       Fourth Quarter      17,181     6,697      5,002       0.76

1995
       First Quarter      $15,708    $5,846     $3,996      $0.60
       Second Quarter      12,322     2,852      1,615       0.24
       Third Quarter       15,215     2,830        978       0.14
       Fourth Quarter      21,059     6,607      4,725       0.71


1996
       First Quarter      $18,431    $5,124     $2,810      $0.42
       Second Quarter      14,668     2,860      1,353       0.20
       Third Quarter       14,422     1,948      2,346       0.35
       Fourth Quarter      23,729     7,141      5,391       0.82




                           F-21

<PAGE>





         REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Partners of Mont Belvieu Associates:

We have audited the  accompanying  balance  sheet of Mont Belvieu  Associates (a
Texas  general  partnership)  as of December 31, 1996 and 1995,  and the related
statements  of income,  cash flows and  partners'  capital for each of the three
years in the period ended December 31, 1996. These financial  statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial position of Mont Belvieu Associates as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the years in the period ended  December 31, 1996 in conformity  with
generally accepted accounting principles.


                                ARTHUR  ANDERSEN  LLP


Houston, Texas
February 21, 1997



                           F-22

<PAGE>





                  MONT BELVIEU ASSOCIATES
                    STATEMENT OF INCOME
                      (In thousands)



                                          Year Ended December 31,
                                         1996      1995        1994

Revenues                                $26,954   $25,795    $27,272

Costs and expenses
     Operations and maintenance          14,302    13,361     13,221
     Depreciation                         1,424     1,293      1,222
     Taxes, other than income taxes         634       517        502
     Amortization of organization costs      --         4          7
                                         ------    ------     ------
                                         16,360    15,175     14,952

Operating income                         10,594    10,620     12,320

Other income (expense)
     Interest expense                      (92)     (125)       (17)
     Other                                 105       329         81
                                         ------    -------     ------ 
                                            13       204         64
                                         ------    -------     ------

Net income                              $10,607  $10,824    $12,384
                                        =======  =======    =======





















   The             accompanying  notes are an integral  part of these  financial
                   statements.

                           F-23

<PAGE>





                  MONT BELVIEU ASSOCIATES
                       BALANCE SHEET
                      (In thousands)


                                             December 31,
                                         1996          1995
ASSETS

Current assets
   Cash and cash equivalents         $      2      $    11
   Accounts receivable
     Due from partners                  1,542        3,261
     Trade                              3,510        3,595
   Advances to fractionator             1,448        1,218
                                       ------       ------
                                        6,502        8,085

Property, plant and equipment, at cost              68,609
56,926
   Less accumulated depreciation       22,643       21,219
                                       45,966       35,707

TOTAL ASSETS                          $52,468      $43,792
                                      =======      =======

LIABILITIES AND PARTNERS' CAPITAL

Current liabilities
   Accounts payable due to fractionator             $  282
$ 2,708
   Current portion of long-term debt                 2,996
399
   Accrued taxes other than income                     536
536
   Deferred revenues                      732            -
                                       ------       ------
                                        4,546        3,643

Long-term debt (Note 3)                15,022        1,019

Partners' capital                      32,900       39,130
                                       ------       ------

TOTAL LIABILITIES AND PARTNERS' CAPITAL            $52,468
$43,792








   The             accompanying  notes are an integral  part of these  financial
                   statements.

                           F-24

<PAGE>





                  MONT BELVIEU ASSOCIATES
                  STATEMENT OF CASH FLOWS
                      (In thousands)
<TABLE>
<CAPTION>

                                                                  Year Ended December 31,
                                                             1996           1995             1994
<S>                                                       <C>              <C>                <C>
Cash flows from operating activities
Reconciliation of net income to net cash
 provided by operating activities
         Net income                                       $10,607          $10,824            $12,384
         Depreciation and amortization                      1,424            1,297              1,229
         Changes in components of working capital
              Advances to fractionator                       (230)              92               (103)
              Accounts receivable                           1,804           (1,745)               853
              Accounts payable due to fractionator(2,426)   1,161             (475)
              Accrued taxes other than income                   -               (1)                 -
         Other, net                                           732           (1,423)               412
                                                          -------          -------             ------
Net cash provided by operating activities                  11,911           10,205             14,300
                                                          -------          -------             ------

Cash flows from investing activities
         Additions to property, plant and equipment       (11,684)          (2,089)            (1,404)
                                                          -------           ------             ------
Net cash used in investing activities                     (11,684)          (2,089)            (1,404)
                                                          -------           ------             ------

Cash flows from financing activities
         Contributions from partners                          871            1,652                252
         Issuance of long-term debt                        17,000              436              1,148
         Repayment of long-term debt                         (399)            (166)                 -
         Cash distributions                               (14,308)         (10,036)           (14,294)
         Distribution of Equity Loan
              to Enterprise                                (3,400)               -                  -
Net cash used in financing activities                        (236)          (8,114)           (12,894)
                                                             -----          -------           -------


Increase (decrease) in cash and cash equivalents(9)             2                2
Cash and cash equivalents, beginning of period   11             9                7
Cash and cash equivalents, end of period                  $     2         $     11            $     9
                                                          =======         ========            =======



Supplemental disclosures of cash flow information
     Cash paid during the year for
       interest (including capitalized interest)             $333             $125                $17

</TABLE>



   The             accompanying  notes are an integral  part of these  financial
                   statements.

                           F-25

<PAGE>





                  MONT BELVIEU ASSOCIATES
              STATEMENT OF PARTNERS' CAPITAL
                      (In thousands)

<TABLE>
<CAPTION>
                                                                                                Total
                                                                         Enterprise             Partners'
                                                              KMNGL     Products Co.             Capital
                                                               -----     ------------             -------
<S>                                                         <C>             <C>                  <C>  
Partners' capital at December 31, 1993 (unaudited)          $ 19,174        $ 19,174             $ 38,348

Contributions                                                    126             126                  252

Net income                                                     6,192           6,192               12,384

Distributions                                                 (7,147)         (7,147)             (14,294)
                                                              -------         -------             -------

Partners' capital at December 31, 1994                        18,345          18,345               36,690

Contributions                                                    826             826                1,652

Net income                                                     5,412           5,412               10,824

Distributions                                                 (5,018)         (5,018)             (10,036)
                                                              -------         -------             -------

Partners' capital at December 31, 1995                        19,565          19,565               39,130

Contributions                                                    435             436                  871

Net income                                                     5,304           5,303               10,607

Distributions                                                 (7,154)         (7,154)             (14,308)

Distributions for equity loan                                     --          (3,400)              (3,400)
                                                           ---------         --------             --------

Partners' capital at December 31, 1996                     $ 18,150         $ 14,750             $ 32,900
                                                           =========        ========             ========

</TABLE>









   The             accompanying  notes are an integral  part of these  financial
                   statements.

                           F-26

<PAGE>


                  MONT BELVIEU ASSOCIATES
               NOTES TO FINANCIAL STATEMENTS




1.  Organization and Formation

    Mont Belvieu Associates  ("MBA"), a Texas general partnership formed on July
17, 1985, owns an undivided 50% interest in a natural gas liquids  fractionation
facility  (the "Mont Belvieu  Fractionator"  or the  "Fractionator")  located in
Chambers County,  Texas.  Enterprise Products Company  ("Enterprise") owns a 50%
interest in MBA and operates the Fractionator. Kinder Morgan Natural Gas Liquids
Corporation ("KMNGL") owns the remaining 50% interest and serves as the managing
general partner for MBA.

2.  Summary of Significant Accounting Policies

    Basis of Presentation

    MBA accounts for its investment in the Fractionator  using the proportionate
consolidation method of accounting, whereby MBA's proportionate share of assets,
liabilities,  revenues and operating  expenses are reflected in the accompanying
financial statements.

    The  preparation  of  financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

    Cash Equivalents

    Cash  equivalents  are defined as all highly liquid  short-term  investments
with original maturities of three months or less.

    Property, Plant and Equipment

    Property,  plant and equipment is stated at cost.  Depreciation  is computed
using the straight-line method based on the estimated economic and physical life
of the assets. Effective January 1, 1994, the depreciable life was extended from
20 to 30 years to more appropriately  reflect the remaining useful life of these
assets.  This  change  resulted in a $1.6  million  adjustment  to  depreciation
expense for 1994.

    Revenue Recognition

    Revenues are recognized based on actual barrels fractionated.

    Income Taxes

    MBA is not a taxable  entity for federal  income tax  purposes.  As such, no
federal  income tax will be paid by MBA. Each partner will be required to report
on its tax return its allocable share of the taxable income or loss of MBA.



                           F-27

<PAGE>


                  MONT BELVIEU ASSOCIATES
               NOTES TO FINANCIAL STATEMENTS




3.  Long-Term Debt

    MBA's debt at December 31, 1996  included a note payable to  Enterprise  for
expansion projects.  The original principal balance of $1.6 million is due in 48
equal monthly  payments  with the final  payment  being made in September  1999.
Interest on the note is equal to the  Eurodollar  rate plus 1.75%.  During 1995,
the  weighted-average  interest rate on this note was 7.14%. The note is secured
by MBA's partnership interest in the Fractionator.

    MBA has outstanding a $17 million promissory note which bears interest equal
to the London Interbank  Offered Rate ("LIBOR") plus a margin of .75% per annum.
The principle  amount is payable in equal monthly  installments,  except for the
final payment due December 31, 2001, based on a six year  amortization  schedule
commencing  February 14, 1997. The loan is  non-recourse  to the partners and is
secured by the borrower's rights under the Operating Agreement between the joint
owners.

       Maturities of long-term  debt as of December 31, 1996 were as follows (in
thousands):
          1997                     $2,996
          1998                      3,233
          1999                      3,054
          2000                      2,833
          2001                      5,903
         Thereafter                          -

4.   Related Party Transactions and Concentration of
Credit Risk

     Generally,  each  partner  of the  Fractionator  has the  right to  deliver
natural  gas liquids up to its  proportionate  share of  fractionator  capacity.
Approximately  92% of revenues was earned from the partners of the  Fractionator
in 1996. All billings are passed from the Fractionator to MBA for its applicable
portion.  In turn,  MBA bills each of its  partners.  All of MBA's  revenues are
derived from  fractionation  services to customers in the Gulf Coast area.  This
concentration  could  impact  MBA's  exposure to credit  risk  inasmuch as these
customers could be affected by similar  economic or other  conditions.  However,
management  believes that MBA is exposed to minimal  credit risk.  MBA generally
does not require collateral for its receivables.





                           F-28

<PAGE>


                        SIGNATURES

   Pursuant  to the  requirements  of  Section  13 or  15(d)  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  on the 21st day of
March, 1997.

                              KINDER MORGAN ENERGY
PARTNERS, L.P.
                               (A Delaware Limited
Partnership)
                            By: KINDER MORGAN G.P., INC.
                                  as General Partner


                                By:/s/ Thomas B.
King
                                 Thomas B. King
                                    President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed  below by the  following  persons in the  capacities  and on the
dates indicated.

   Signature                      Title
Date

/s/ Richard D. Kinder                         Director,
Chairman and CEO    March 21, 1997             Richard D.
Kinder                 (Principal Executive Officer)

/s/ William V. Morgan                         Director and
Vice Chairman          March 21, 1997
William V. Morgan

/s/ Alan L. Atterbury                         Director
March 21, 1997
Alan L. Atterbury

/s/ Edward O. Gaylord                         Director
March 21, 1997
Edward O. Gaylord

/s/ Thomas B. King                            Director and
President        March 21, 1997
Thomas B. King

/s/ Thomas P. Tosoni                          Chief
Financial Officer           March 21, 1997
Thomas P. Tosoni               (Principal Financial and
                               Accounting Officer)



                            S-1

<PAGE>