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, 1997   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 class           Name 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. [ X ]

     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  25,   1998  was   approximately
$1,361,127,733.  This  figure  assumes  that  only the  General  Partner  of the
Registrant  and officers and directors of the General  Partner of the Registrant
were affiliates. As of March 25, 1998 the registrant had 40,727,126 Common Units
outstanding.  Information  relating to the Common  Units has been  retroactively
restated to give effect to a two-for-one  Unit split  approved by the Registrant
on  September  2, 1997.  The  issuance  and mailing of split  Units  occurred on
October 1, 1997 to unitholders of record on September 15, 1997.




 
<PAGE>



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


                                                       Page No.

                             P A R T  I

Items 1. and 2.    Business and Properties                   1

Item 3.            Legal Proceedings                        37

Item 4.            Submission of Matters to a Vote 
                   of Security Holders                      41

                            P A R T  II

Item 5.            Market for the Registrant's Common 
                   Units and Related Security
                   Holder Matters                           42

Item 6.            Selected Financial Data                  43

Item 7.            Management's Discussion and Analysis 
                   of Financial Condition and Results 
                   of Operation                             44

Item 7A.           Quantitative and Qualitative Disclosures 
                   About Market Risk                        50

Item 8.            Financial Statements and Supplementary 
                   Data                                     50

Item 9.            Changes in and Disagreements on 
                   Accounting and Financial Disclosure      50

                            P A R T  III

Item 10.           Directors and Executive Officers of the 
                   Registrant                               51

Item 11.           Executive Compensation                   53

Item 12.           Security Ownership of Certain Beneficial 
                   Owners and Management                    55

Item 13.           Certain Relationships and Related 
                   Transactions                             56


                            P A R T  IV

Item 15.           Exhibits, Financial Statement Schedules,
                   and Reports on Form 8-K                  57

Financial Statements                                       F-1





<PAGE>


                              P A R T  I


Items 1 and 2. Business and Properties

  Kinder  Morgan  Energy  Partners,  L.P.  ("Registrant"  or  "Partnership"),  a
Delaware limited  partnership,  is a publicly traded master limited  partnership
("MLP")  formed in August  1992.  Through  its  operating  limited  partnerships
("OLPs"),  the Partnership  manages a diversified  portfolio of midstream energy
assets.  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 a general  partner and
limited  partner  interest  in the  Partnership.

  In connection with the transaction  Kinder Morgan,  Inc., changed the names of
the following entities:
Old Name                               New Name             Function
-------------------------------------------------------------------------
Enron Liquids Pipeline        Kinder Morgan G.P., Inc.   General Partner
Company
Enron Liquids Pipeline, L.P.  Kinder Morgan Energy             MLP
                              Partners, L.P.
Enron Liquids Pipeline        Kinder Morgan Operating          OLP
Operating, L.P.               L.P. "A"
Enron Transportation          Kinder Morgan Operating          OLP
Services, L.P.                L.P. "B"

  The  following  chart shows the  organizational  structure  and  ownership  of
entities. 

  [Chart showing the following ownership structure:

     Kinder Morgan, Inc. owning 100% of Kinder Morgan G.P., Inc.

     Kinder Morgan G.P., Inc. owning a 1.0101% general partner interest in 
       Kinder Morgan Operating L.P. "A", Kinder Morgan Operating L.P. "B",
       Kinder Morgan Operating L.P. "C" and Kinder Morgan Operating L.P. "D",
       and owning a 2.1% limited partner interest and 1% general partner
       interest in Kinder Morgan Energy Partners, L.P.

     The public owns 96.9% of Kinder Morgan Energy Partners, L.P.

     Kinder Morgan Energy Partners, L.P. owning a 98.9899% limited partner 
       interest in Kinder Morgan Operating L.P. "A", Kinder Morgan Operating 
       L.P. "B", Kinder Morgan Operating L.P. "C" and Kinder Morgan Operating 
       L.P. "D".

     Kinder Morgan Operating L.P. "A" owning the North System Pipeline, the 
       Cypress Pipeline, a 50% interest in Heartland Pipeline Company and a
       100% interest in Kinder Morgan CO2 LLC, which owns a 20% interest in
       Shell CO2 Company, Ltd.  Kinder Morgan Operating L.P. "A" also owning
       a 100% interest in Kinder Morgan Natural Gas Liquids, Inc., which owns
       a 50% interest in Mont Belvieu Associates, which owns a 50% interest in
       the Mont Belvieu fractionator.

     Kinder Morgan Operating L.P. "B" owning the Cora Coal Terminal, the
       Painter plant and Red Lightning.

     Kinder Morgan Operating L.P. "C" owning the Grand Rivers Coal Terminal.

     Kinder Morgan Operating L.P. "D" owning a 99.5% general partner interest
      in SFPP, L.P.]

See Item 12 for information regarding the ownership of KMI.
     

                                       1
<PAGE>

The Partnership  also changed its address to 1301 McKinney  Street,  Suite 3450,
Houston, Texas 77010 and its telephone number to (713) 844-9500.

  Kinder Morgan  Operating,  L.P. "A" (OLP-A) is a Delaware limited  partnership
which owns:

(i) the North System pipeline, which transports natural gas liquids ("NGLs") and
petroleum products between South Central Kansas and the Chicago area and various
intermediate points and which includes eight terminals ;

(ii) the Cypress  Pipeline,  which transports NGLs from the Mont Belvieu,  Texas
hub to a major petrochemical producer in Lake Charles, Louisiana;

(iii) an  indirect  20% limited  partner  interest  in Shell CO2  Company,  Ltd.
("Shell CO2 Company"),  formed in March,  1998 by the Partnership and affiliates
of Shell Oil  Company  ("Shell"),  which will  transport,  market,  produce  and
explore for CO2 to be used in enhanced  oil  recovery  projects  throughout  the
continental United States;

(iv) an indirect 25% interest in a 200,000 barrels per day Y-grade fractionation
facility located near Mont Belvieu, Texas; and

(v) a 50% interest in the Heartland  Pipeline Company, a partnership with Conoco
Inc. ("Conoco") which ships refined petroleum products.

  Kinder  Morgan  Operating  L.P. "B" (OLP-B) is a Delaware limited  partnership
which owns:

(i) the Cora coal  terminal,  a  high-speed,  rail-to-barge  coal  transfer  and
storage facility, located in Cora, Illinois on the Mississippi River; and

(ii)  the  Painter  Gas  Processing  Plant,  a  natural  gas  processing  plant,
fractionator, and NGL terminal with truck and rail loading facilities.

  Kinder Morgan  Operating,  L.P. "C" (OLP-C) is a Delaware limited  partnership
formed in September 1997 to acquire the Grand Rivers coal terminal, a high speed
coal transfer and storage  facility,  located on the  Tennessee  River above the
Kentucky  Dam. The terminal has  facilities  for  unloading  trains,  trucks and
barges with loading facilities for trucks and barges.

  Kinder Morgan  Operating  L.P. "D" (OLP-D),  a Delaware  limited  partnership,
acquired on March 6, 1998, 99% of SFPP, L.P. ("SFPP"), the operating partnership
of Santa Fe Pacific  Pipeline  Partners,  L.P.  ("Santa  Fe").  The  Partnership
acquired  the interest of Santa Fe's common unit holders in SFPP in exchange for
26.6 million Common Units (1.39 Common Units for each Santa Fe common unit). The
Partnership  paid $84.4  million to Santa Fe Pacific  Pipelines,  Inc.  (the "SF
General Partner") in exchange for the general partner interest in Santa Fe. Also
on March 6, 1998,  SFPP redeemed  from the SF General  Partner a .5% interest in
SFPP for $5.8 million. The redemption was paid from SFPP's cash reserves.  After
the redemption,  the SF General  Partner  continues to own a .5% special limited
partner  interest  in SFPP and OLP-D owns a 99.5%  general  partner  interest in
SFPP. Since the acquisition occurred after December 31, 1997, unless the context
indicates  otherwise,  the financial and operating  data in this report does not
include  information for SFPP. Assets acquired in this transaction  comprise the
Partnership's  Pacific  Operations,  which includes  thirteen owned and operated
terminals and four pipeline systems:

(i) the South Line consists of two pipeline  segments,  the West Line transports
products  from the Los Angeles Basin to Phoenix and Tucson,  Arizona,  including
intermediate points and the East Line transports products from El Paso, Texas to
Tucson and Phoenix;

(ii) the North Line consists of six pipeline  segments  originating in Richmond,
Concord and Bakersfield,  California serving the Partnership's terminals located
in  Brisbane,  Bradshaw,  Chico,  Fresno and San Jose,  California,  and Sparks,
Nevada;

(iii) the Oregon Line from its Portland,  Oregon origin extends south and serves
the Partnership's terminal located in Eugene, Oregon; and

                                       2
<PAGE>


(iv) the San Diego Line extends  south to serve the  Partnership's  terminals in
the cities of Orange and San Diego.

  Business Strategy

  General.  Management's objective is to operate as a growth-oriented,  publicly
traded MLP by reducing operating costs, better utilizing and expanding its asset
base,  and  making  selective,  strategic  acquisitions  that are  accretive  to
unitholder  distributions.  The partnership  agreement provides strong financial
incentives for the General Partner to increase unitholder  distributions through
successful  management and growth in business.  With the addition of the Pacific
Operations,  the Partnership has become the largest  pipeline MLP and the second
largest  products  pipeline  system in the  United  States  in terms of  volumes
delivered.

  Pacific  Operations.  The  Partnership  plans to extend  its  presence  in the
rapidly  growing  refined  products  market in the Western United States through
incremental  expansions  and  accretive  acquisitions.  In the  near  term,  the
Partnership  expects to realize $15-$20 million per year in cost savings through
elimination of redundant  general and  administrative  and other  expenses.  The
Partnership's management,  which changed in connection with KMI's acquisition of
the General Partner,  successfully  reduced 1997 general and  administrative and
operating expenses 15% from 1996 levels while increasing revenues.

  North System.  Because the North System serves a relatively mature market, the
Partnership's   strategic  development  will  focus  on  increasing  incremental
throughput by remaining a reliable,  cost-effective  provider of  transportation
services,  by using  creative  incentive  programs  that ensure  product  supply
availability,  and by continuing  to increase the range of products  transported
and services offered.

  Shell CO2 Company. Within the Permian Basin, the strategy of Shell CO2 Company
is to offer customers  "one-stop  shopping" for CO2 supply,  transportation  and
technical  support  service.  Outside the Permian Basin,  Shell CO2 Company will
compete  aggressively for the new supply and transportation  projects which will
arise as other U.S. oil  producing  basins mature and make the  transition  from
primary production to enhanced recovery methods.

  Coal Terminals.  Both of the  Partnership's  coal terminals are  strategically
positioned to benefit from the expected  increased demand for low sulfur western
coals  in  eastern  U.S.  markets  due to  increasing  environmental  compliance
standards. Because many utilities' compliance strategies require a diverse blend
of higher and lower sulfur coals, the Partnership's  modern blending  facilities
and large storage  capacities  enable it to offer higher margin  services to its
customers. During 1997, the Partnership expanded throughput and storage capacity
at the Cora Terminal and in 1998 began expansion of its Grand Rivers Terminal.

  The  Partnership's  operations  are  grouped  into  three reportable  business
segments:   Liquids  Pipelines;  Coal Transfer,  Storage and Services;  and, Gas
Processing  and Fractionation.

  Liquids Pipelines

  The   Partnership's   liquids  pipelines  segment  is  conducted  through  two
geographic  divisions;  Kinder  Morgan  Pacific  Operations  and  Kinder  Morgan
Mid-Continent  Operations.  The segment includes both interstate  common carrier
pipelines  regulated by the Federal Energy  Regulatory  Commission  ("FERC") and
intrastate  pipeline  systems.  Products  transported on these pipelines include
refined petroleum products, NGLs and CO2.

  Refined petroleum products and related uses are:

Product             Use
------------------------------------------------------------------------------
Gasoline            Transportation
Jet / Kerosene      Commercial and military air transportation
Distillate          Transportation (auto, rail, marine), farm, industrial and
                    commercial
Residual Fuels      Marine transportation, power generation
------------------------------------------------------------------------------


  Natural gas liquids are  typically  extracted  from natural gas in liquid form
under low  temperature  and high pressure  conditions.  NGL products and related
uses are:

                                       3
<PAGE>




Product                 Use
-------------------------------------------------------------------------
Propane                 Residential heating and agricultural uses,
                        petrochemical feedstock
Isobutanes              Further processing
Natural Gasoline        Further processing or gasoline blending into
                        gasoline motor fuel
Ethane                  Feedstock for petrochemical plants
Normal Butane           Feedstock for petrochemical plants
-------------------------------------------------------------------------

  CO2 is used in  enhanced  oil  recovery  projects  as a  flooding  medium  for
recovering crude oil from mature oil fields.

  The liquids pipelines are, in general, located on land owned by others and are
operated  under  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.

  Kinder Morgan Pacific Operations

  The Pacific  Operations liquids pipeline systems which include the South Line,
North  Line,  Oregon  Line and San Diego  Line  serve six  western  states  with
approximately  3,300 miles of refined  petroleum  products  pipeline and related
terminal facilities.  The Pacific Operations  pipelines transport  approximately
one  million  barrels  per day of  refined  petroleum  products.  The three main
products  transported are: gasoline (63%), diesel fuel (20%) and jet fuel (17%).
The  operations  also include 13 truck loading  terminals  and provide  pipeline
service to approximately 44 customer-owned terminals,  three commercial airports
and 12 military bases.

  These  pipeline  assets  provide  refined  petroleum  products  to some of the
fastest growing populations in the United States.  Significant  population gains
have occurred in the Los Angeles and Orange, California areas as well as the Las
Vegas, Nevada and the Tuscon-Phoenix,  Arizona regions.  Pipeline transportation
of gasoline and jet fuels has a direct  correlation with  demographic  patterns.
The positive  demographic changes associated with the Pacific Operations' assets
are expected to continue in the future.

  South  Line.  The South  Line consists of two pipeline segments, the West Line
and the East Line.

  The West Line  consists of  approximately  555 miles of primary  pipeline  and
currently   transports   products  for  approximately  50  shippers  from  seven
refineries and three pipeline  terminals in the Los Angeles Basin to Phoenix and
Tucson,  Arizona and  various  intermediate  commercial  and  military  delivery
points.  Also, a  significant  portion of West Line volumes are  transported  to
Colton,  California for local  distribution and for delivery to CalNev Pipeline,
an  unaffiliated  common  carrier of refined  petroleum  products  to Las Vegas,
Nevada and  intermediate  points.  The West Line  serves  Partnership  terminals
located in Colton and Imperial, California as well as in Phoenix and Tucson.

  The East Line is comprised of two parallel lines originating in El Paso, Texas
and continuing  approximately 300 miles west to the Tucson terminal and one line
continuing  northwest  approximately  130  miles  from  Tucson to  Phoenix.  All
products received by the East Line at El Paso come from a refinery in El Paso or
are delivered through connections with non-affiliated  pipelines from refineries
in Odessa and Dumas,  Texas and Artesia,  New Mexico.  The East Line  transports
refined petroleum  products for approximately 17 shippers.  The East Line serves
Partnership terminals located in Tucson and Phoenix.

  In late 1995, Diamond Shamrock,  Inc. completed  construction of a new 10-inch
diameter  products  pipeline from its refinery near Dumas,  Texas to El Paso. In
late 1996,  Diamond Shamrock  connected this pipeline to the East Line and began
shipping products to Tucson and Phoenix.

  Longhorn  Partners  Pipeline is a proposed  joint venture  project which would
begin transporting refined products from refineries on the Gulf Coast to El Paso
and other  destinations in Texas.  Increased  product supply in the El Paso area
could  result in some shift of volumes  transported  into  Arizona from the West
Line to East Line.  While  increased  movements  into the Arizona market from El
Paso would displace higher tariff volumes  supplied from Los Angeles on the West
Line,  such shift of supply sourcing has not had, and is not expected to have, a
material effect on operating results.


                                       4
<PAGE>


  North Line. The North Line consists of  approximately  1,075 miles of pipeline
in six  pipeline  segments  originating  in Richmond,  Concord and  Bakersfield,
California.  This line serves the  Partnership's  terminals located in Brisbane,
Bradshaw,  Chico,  Fresno and San Jose,  California,  and  Sparks,  Nevada.  The
products  delivered  through  the North  Line come  from  refineries  in the San
Francisco area. A small  percentage of supply is received from various  pipeline
and marine  terminals  that deliver  products  from foreign and domestic  ports.
Substantially all of the products shipped through the Bakersfield-Fresno segment
of the North Line are supplied by a refinery located in Bakersfield.

  Oregon Line. The Oregon Line is a 114-mile pipeline serving  approximately ten
shippers.  The Oregon Line receives  products from marine  terminals in Portland
and from Olympic Pipeline, a non-affiliated  carrier,  which transports products
from the Puget Sound area to Portland.  From its origination  point in Portland,
the Oregon Line extends  south and serves the  Partnership  terminal  located in
Eugene, Oregon.

  San Diego  Line.  The San Diego  Line is a  135-mile  pipeline  serving  major
population  areas in Orange  County  (immediately  south of Los Angeles) and San
Diego.  Approximately 20 shippers transport  products on this line,  supplied by
the same  refineries  and terminals that supply the West Line, and extends south
to serve Partnership terminals in the cities of Orange and San Diego.

  Truck  Loading  Terminals.  The Pacific  operations  include 13 truck  loading
terminals with an aggregate usable tankage capacity of approximately 8.2 million
barrels.  Terminals  are located at  destination  points on each of the lines as
well as at certain  intermediate  points  along each line where  deliveries  are
made. These terminals  furnish  short-term  product  storage,  truck loading and
ancillary  services,  such as  vapor  recovery,  additive  injection,  oxygenate
blending and quality  control.  The  simultaneous  truck loading capacity of the
terminals ranges from 2 to 12 trucks.

  The capacity of terminaling facilities varies throughout the pipelines systems
and terminal  facilities are not owned at all pipeline  delivery  locations.  At
certain  locations,  product deliveries are made to facilities owned by shippers
or independent terminal operators. Truck loading and other terminal services are
provided  as  an  additional  service,  and  a  separate  fee  (in  addition  to
transportation tariffs) is charged.

   Markets.  Currently the Pacific Operations serve in excess of 100 shippers in
the refined  products  market,  with the largest  customers  consisting of major
petroleum  companies,  independent  refineries,  the United States  military and
independent  marketers and  distributors of products.  A substantial  portion of
product  volume  transported  is gasoline,  the demand for which is dependent on
such factors as prevailing  economic  conditions and demographic  changes in the
markets served.  The majority of the Pacific  Operations'  market is expected to
maintain  growth  rates that exceed the  national  average  for the  foreseeable
future.

  Currently, the California gasoline market is approximately 900,000 barrels per
day, of which the Partnership  transports in excess of 65%. The Arizona gasoline
market is served  primarily  by the  Partnership  at a market  demand of 135,000
barrels  per day.  Nevada's  gasoline  market is  currently  in excess of 50,000
barrels  per day and  Oregon's is  approximately  98,000  barrels  per day.  The
distillate  market is approximately  377,000 barrels per day, 78,000 barrels per
day,  72,000 barrels per day and 62,000 barrels per day in California,  Arizona,
Nevada and Oregon, respectively.

  The  volume of  products  transported  is  directly  affected  by the level of
end-user  demand for such products in the  geographic  regions  served.  Certain
product volumes can experience seasonal variations; however, overall volumes may
be slightly lower during the first and fourth quarters of each year.

  Supply.  The  majority  of  the  refined  products  consumed  in  the  Pacific
Operations  markets are  supplied  by  pipelines  from the three major  refining
centers around Los Angeles,  San Francisco and Puget Sound.  Pacific  Operations
supply initiates from these three major refining centers and others,  as well as
waterborne terminals. The waterborne terminals supplying the Pacific Operations'
pipelines have three central  locations on the Pacific Coast: (1) GATX and Mobil
terminals,  among  others,  on the  Washington/Oregon  coast,  (2) the  Wickland
Terminal  on the  Northern  California  Coast,  and (3)  GATX,  Shell  and  ASTC
terminals on the Southern California Coast.

  Competition.  The  most  significant  competitors  of the  Pacific  Operations
pipeline  systems  are  proprietary  pipelines  owned and  operated by major oil
companies in the area where the pipeline  system delivers  products,  refineries
within the  Partnership's  market areas and related trucking  arrangements.  The
Partnership   believes  that  

                                       5
<PAGE>


high   capital   costs,   tariff   regulation   and   environmental   permitting
considerations  make it unlikely that a competing  pipeline system comparable in
size and  scope  will be  built in the  foreseeable  future,  provided  that the
Partnership  has available  capacity to satisfy demand and its tariffs remain at
reasonable  levels.  However,  the possibility of pipelines being constructed to
serve  specific  markets  is  a  continuing   competitive  factor.   Trucks  may
competitively  deliver  products in certain  markets.  Increased  utilization of
trucking  by major oil  companies  has caused  minor but notable  reductions  in
product volumes delivered to certain shorter-haul destinations, primarily Orange
and Colton,  California.  Management  cannot predict with certainty whether this
trend towards increased short-haul trucking will continue in the future.


  Kinder Morgan Mid-Continent Operations

  The Mid-Continent  Operations include the North System,  Cypress Pipeline, and
the  Partnership's  interests  in Shell CO2 Company and the  Heartland  Pipeline
Company.

  North System

  General.  The North  System is an  approximate  1,600 mile  interstate  common
carrier NGL and refined  petroleum  products  pipeline  system that extends from
South Central  Kansas to the Chicago area.  South Central  Kansas is a major hub
for producing,  gathering,  storing,  fractionating  and transporting  NGLs. The
North System's primary  pipeline is composed of approximately  1,400 miles of 8"
and 10" pipelines and includes (i) two parallel  pipelines (except for a 50-mile
segment in Nebraska)  originating  at Bushton and  continuing to a major storage
and terminal area in Des Moines, Iowa, (ii) a third pipeline, which extends from
Bushton to the Kansas City,  Missouri  area,  and (iii) a fourth  pipeline  that
transports product to the Chicago area from Des Moines. Through interconnections
with other major liquids pipelines,  the pipeline system connects  Mid-Continent
producing  areas to markets in the Midwest and eastern United States.  The North
System operated at approximately 62%, 66% and 59% of capacity during 1997, 1996,
and 1995 respectively.

  The  Partnership  has defined  sole carrier  rights to utilize  capacity on an
extensive pipeline system owned by the Williams Company which interconnects with
the North System. The Partnership negotiated an amendment to this capacity lease
agreement in March, 1998 which extends the lease term to February,  2013, with a
five year renewal option. A reduction in the minimum  guaranteed  payment and an
increase in capacity  provided  for such  payment  under this  agreement  should
result in  expected  annual cost  savings to the  Partnership  of  approximately
$600,000.

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

<TABLE>
<CAPTION>

                                               Year Ended December 31,
                          ----------------------------------------------------
                               1997      1996       1995      1994        1993
                               ----     -----       ----      ----        ----
                                         Volumes (MBbls)
<S>                          <C>        <C>       <C>        <C>         <C>      
  Petrochemicals              1,200        684     1,125      2,861 <F1> 11,201
  Refineries & line          10,600      9,536     9,765     10,478       9,676
  Fuels                       7,976     10,500     7,763<F2> 10,039       8,957
  Other <F3>                  7,399      8,126     7,114      6,551       6,879
                             ------     ------    ------     ------      ------
     Total                   27,175     28,846    25,767     29,929      36,713
                             ======     ======    ======     ======      ======

<FN>
<F1> The 1994 volumes reflect the loss of the major  petrochemical shipper as of
February  28, 1994.
<F2> The 1995 volumes  reflect the shut down of a synthetic natural gas plant in
1995. 
<F3> NGL  gathering  systems  and Chicago  origination's  other  than  long-haul 
volumes of refinery butanes.
</FN>
</TABLE>

  The  North  System  has  approximately 7.3 million barrels of storage capacity
which  include  caverns,  steel tanks,  pipeline  line-fill  and leased  storage
capacity.  This storage capacity provides operating efficiencies and flexibility
in meeting  seasonal demand of shippers as well as propane storage for the truck
loading terminals.

  Truck  Loading  Terminals.  The North System has seven  propane  truck loading
terminals and one  multi-terminal  complex at Morris,  Illinois,  in the Chicago
area, which is capable of loading propane, normal butane, isobutane, and natural
gasoline.

                                       6
<PAGE>


  Markets.  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
NGL products may be applied.  Demand for  transportation  services is influenced
not only by demand for NGLs, but also by the available supply of NGLs.

  Supply.  NGLs extracted or  fractionated  at the Bushton gas processing  plant
operated by KN Processing,  Inc. have  historically  accounted for a significant
portion of the NGLs transported through the North System (approximately 40-50%).
Other sources of NGLs transported in the North System include major  independent
oil  companies,  marketers,  end-users  and  natural  gas  processors  that  use
interconnecting pipelines to transport hydrocarbons.

  Competition.  The  Partnership's  North  System  competes  with other  liquids
pipelines  and to a lesser  extent rail  carriers.  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.

  Shell CO2 Company

  General. On March 5, 1998, the Partnership and affiliates of Shell Oil Company
("Shell")  agreed to combine their CO2  activities and assets into a partnership
(Shell CO2 Company,  Ltd.) to be operated by Shell.  The  Partnership  acquired,
through a newly created limited liability  company,  a 20% interest in Shell CO2
Company  in  exchange  for   contributing   the  Central   Basin   Pipeline  and
approximately  $25 million in cash.  Shell  contributed  its  approximately  45%
interest in the McElmo Dome CO2  reserves and its 11% interest in the Bravo Dome
CO2 reserves,  its indirect 50% interest in the Cortez pipeline and its indirect
13% interest in the Bravo  pipeline and other related  assets in exchange for an
80% interest in Shell CO2 Company.  The Cortez and Bravo  pipelines  connect CO2
reserves in the McElmo and Bravo Domes principally to Denver City, Texas,  where
they  interconnect  with the Central Basin  Pipeline,  among  others.  Shell CO2
Company is the industry leader in the supply and transportation of CO2.

  The  Partnership's  approval  will  be  required  for certain  key  decisions,
including  (i)  capital  calls  in  excess  of  $5  million,   (ii)  changes  in
distribution  policy and (iii) approval of the five-year budget. The combination
of Partnership  and Shell assets  facilitates the marketing of CO2 by bringing a
complete package of CO2 supply,  transportation  and technical  expertise to the
customer.  By creating an area of mutual interest in the  continental  U.S., the
Partnership  will have the opportunity to participate  with Shell in certain new
CO2 projects in the region.  Altura, Shell's joint venture with Amoco, is also a
major user of CO2 in its West Texas fields.

  Under  the  terms  of  the  Shell  CO2  Company  partnership  agreement,   the
Partnership  will receive a priority  distribution of $14.5 million per year for
the first four years. To the extent the amount paid to the Partnership  over the
first four years is in excess of 20% of Shell CO2 Company's  distributable  cash
flow for such period (discounted at 10%), the amount of such overpayment will be
deducted from the Partnership's distributions equally over years five and six.

  At any  time  after  March 5,  2002,  Shell  has the  right  to  purchase  the
Partnership's interest in Shell CO2 Company and the Partnership has the right to
require Shell to purchase the Partnership's  interest in Shell CO2 Company.  The
purchase price for the Partnership's  interest in Shell CO2 Company will be at a
discount from fair value in the event the Partnership  exercises its put option,
and at a premium over fair value in the event Shell  exercises  its call option.
The amount of the discount or premium  declines  during the period from March 5,
2003 through March 5, 2006 and is thereafter fixed at a 5% discount/premium.  If
the parties are unable to agree to the fair value of the Partnership's  interest
in Shell CO2 Company,  then the  Partnership  and Shell will use an  agreed-upon
appraisal methodology to determine fair value.

                                       7
<PAGE>


  McElmo  and Bravo  Domes.  Shell CO2  Company  operates,  and owns 45% of, the
McElmo Dome which  contains  more than 10 trillion  cubic feet ("TCF") of nearly
pure CO2.  The  remaining  interest  in McElmo is owned by Mobil  (approximately
40%),  Chevron  (approximately  4%) and  others.  This  dome  produces  from the
Leadville  formation at 8,000 feet through  wells that deliver gas at individual
rates up to 50 million cubic feet per day ("MMCF/d").  Delivery capacity exceeds
one billion  cubic feet per day  ("Bcf/d") to the Permian Basin and 60 MMcf/d to
Utah, and additional expansions are under consideration.

  The Bravo  Dome,  of which  Shell CO2  Company  owns 11%,  holds  reserves  of
approximately  eight TCF and covers an area of more than 1,400 square miles.  It
produces more than 400 MMcf/d from more than 350 wells in the Tubb  Sandstone at
2,300  feet.  The  remaining  interest  in the  Bravo  Dome is  owned  by  Amoco
(approximately 74%), Amerada Hess (approximately 10%) and others.

  CO2  Pipelines.  The 502-mile,  30-inch Cortez  Pipeline,  operated by a Shell
affiliate,  carries CO2 from the McElmo Dome source reservoir to the Denver City
hub.  The  Cortez  line  currently   transports  about  800  MMcf/d,   including
approximately  90% of the CO2  transported  on the Central  Basin  Pipeline (see
below). The Cortez Pipeline is owned by Shell CO2 Company (50%), Mobil (37%) and
Cortez Vickers Pipeline Company (13%).

  The  20-inch  Bravo  pipeline  runs 218 miles to the Denver City hub and has a
capacity of more than 350 MMcf/d.  Major delivery  points along the line include
the Slaughter Field in Cochran and Hockley counties, Texas, and the Wasson field
in Yoakum  County,  Texas.  Tariffs on the Cortez  and Bravo  pipelines  are not
regulated.  The Bravo Pipeline is owned by Amoco (81%),  Shell CO2 Company (13%)
and Markland (6%).

  Placed  in  service  in  1985,   the  Central  Basin   Pipeline   consists  of
approximately  143 miles of 16" to 20" main  pipeline and 157 miles of 4" to 12"
lateral supply lines located in the Permian Basin between Denver City, Texas and
McCamey,  Texas with a  throughput  capacity of 600 MMcf/d.  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  Shell,  Amoco,  and ARCO,
respectively).  The mainline terminates near McCamey where it interconnects with
the Canyon Reef Carriers, Inc. pipeline.

  CO2 pipeline  profitability  is dependent  upon the demand among oil producers
for CO2 in connection with enhanced oil recovery programs. The level of enhanced
oil  recovery  programs is  sensitive  to the level of oil prices.  Although CO2
floods  are  initially  capital-intensive,  they  have  relatively  low  ongoing
operational  costs. Many existing floods remain economic at oil prices as low as
$5 per barrel.  While volumes have increased on all three of Shell CO2 Company's
pipelines,  significant capacity exists for additional CO2 movement. This system
should benefit from increased  utilization  due to the increased use of enhanced
recovery techniques by companies expanding or initiating recovery projects.  The
CO2 pipelines' tariffs are not regulated.

  Competion. Shell CO2 Company's primary competitors for the sale of CO2 include
suppliers which have an ownership  interest in McElmo Dome, Bravo Dome and Sheep
Mountain Dome CO2 reserves.

  Shell CO2 Company's  ownership interests in the Cortez and Bravo pipelines are
in direct  competition with Sheep Mountain  pipeline,  as well as competing with
one another,  for  transportation  of CO2 to the Denver City, Texas market area.
Competitive  position is influenced by providing a lower laid in price in Denver
City. The laid in price is a combination of the commodity  price from the source
field and the transportation fee to move it to the market.  Utilization of Shell
CO2 Company's Central Basin pipeline, which runs from Denver City to the Permian
Basin is generally  dependent  upon the relative  distance  between it and other
competing pipelines to a CO2 flood project.

  There is no assurance that new CO2 source fields will not be discovered  which
could compete with Shell CO2 Company or that new  methodologies for enhanced oil
recovery could replace CO2 flooding.

  Cypress Pipeline

  General.  The Cypress  Pipeline,  which began  operations in April 1991, is an
interstate common carrier pipeline system  originating at storage  facilities in
Mont Belvieu, Texas and extending 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  


                                       8
<PAGE>


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.

  Markets.  The pipeline was built to service a major petrochemical  producer in
the Lake Charles,  Louisiana  area under a 20-year  ship-or-pay  agreement  that
expires in 2011.  The  producer is a private  company  engaged  primarily in the
olefins and vinyls businesses in North America with 20 operating sites producing
in excess of 7 billion  pounds  per year of  product.  The  contract  requires a
minimum volume of 30,000  barrels per day. In 1996, the Company  entered into an
agreement with the producer to expand the Cypress Pipeline's  capacity by 25,000
barrels per day to 57,000  barrels  per day.  The  expansion  was  completed  on
October 31, 1997.  In addition,  a new five-year  ship-or-pay  contract with the
producer  was  signed  for a minimum of 13,700  additional  barrels  per day and
shipment of additional volumes began on December 1, 1997.  Management  continues
to pursue projects that could increase throughput on the Cypress Pipeline.

  The  producer  has  elected to be an  "investor  shipper"  and as such has the
right,  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  producer to  exercise  its
buy-in option in the foreseeable future.

  Supply.  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.

  Heartland Pipeline Company

  General. The Heartland Pipeline was completed in the fall of 1990 and is owned
by Heartland  Pipeline Company  (Heartland),  a partnership owned equally by the
Partnership  and Conoco.  The core of Heartland's  pipeline system is one of the
North System's main line sections that originates in Bushton,  Kansas. Heartland
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 200,000 barrels 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.

  Markets.  Heartland 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 volume of refined  petroleum
products  transported  by Heartland 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 Heartland is
motor gasoline, the demand for which is dependent on price,  prevailing economic
conditions and demographic changes in the markets served.  Heartland's  business
has experienced only minor seasonal fluctuations in demand.

  Supply.  Refined  petroleum  products  transported  by  Heartland on the North
System are supplied primarily from the National Cooperative Refinery Association
crude oil  refinery in  McPherson,  Kansas and the Conoco  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.

  Competition.  Heartland competes with other refined product  carriers  in  the
geographic market served.  Heartland's principal competitor is Williams Pipeline
Company.

  Coal Transfer, Storage and Services

  Coal continues to dominate as the fuel for electric  generation,  holding more
than 55% of U.S. 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
Partnership's coal terminals' volume is destined for use in coal-fired  electric
generation.


                                       9
<PAGE>


  Environmental  legislation is currently  driving changes in  specification  of
coal used for electric  generation  to  low-sulfur  products.  When burned,  the
sulfur in coal  converts  to an air  pollutant  known as sulfur  dioxide  (SO2).
Effective January 1, 1995, Phase I of the Clean Air Act Amendments  required the
110 largest  sulfur-emitting  power  plants to reduce SO2  emissions.  Effective
January 1, 2000,  Phase II of the Act  requires  the plants to further  decrease
emissions.  The Partnership  believes that  obligations to comply with the Clean
Air Act Amendments of 1990 will drive shippers to increase the use of low-sulfur
coal  from the  western  United  States.  Approximately  80% of the coal  loaded
through the Cora and Grand Rivers terminals is low sulphur coal originating from
mines located in the western  United States,  including the Hanna basin,  Powder
River basin, western Colorado and Utah.

  Cora Coal Terminal

  The Cora  Terminal is a  high-speed,  rail-to-barge  coal transfer and storage
facility.  The Terminal is located on approximately  480 acres of land along the
upper Mississippi River near Cora, Illinois,  about 80 miles south of St. Louis.
It was built in 1980.  The terminal's  equipment  includes 3.5 miles of railroad
track,  a rotary  dumping  station and train indexer,  a  multidirectional  coal
stacker/reclaimer,  approximately  4,000 feet of conveyor  belts and an anchored
terminaling   facility  on  the  Mississippi   River  that  takes  advantage  of
approximately  five miles of owned and leased available  riverfront  access with
approximately 7,000 feet developed.  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 terminal has a throughput capacity of about 15 million tons per year which
can  be  expanded  to 20  million  tons  with  certain  capital  additions.  The
facility's  equipment permits it to continuously 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
simultaneous  fleeting  of up to 100 barges.  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 1.0 million tons of coal,  which gives  customers the
flexibility  to  coordinate  their  supplies  of coal  with the  demand at power
plants.

  Management  is focused on increasing  the volumes of coal handled  through the
Cora Terminal. A $1.5 million capital expenditure,  completed in 1997, increased
throughput  capacity by  approximately  25% and doubled  storage  capacity.  The
terminal  handled  approximately  7.1 million tons , 6.0 million  tons,  and 6.5
million tons of coal in 1997, 1996, and 1995, respectively.  Increased volume in
1997 resulted from higher volumes shipped under certain existing  contracts plus
volumes  shipped under a new contract with the  Tennessee  Valley  Authority and
other new  business.  Management  plans to  continue  to lower costs in order to
remain competitive and will try to cultivate strategic partners such as rail and
major barge carriers. Possible complementary acquisitions will also be examined.

  Cora terminal operations include transloading coal from railcars and trucks to
river barges, blending coal and providing harbor services.

  Markets.  Four major customers ship  approximately  80% of all the coal loaded
through the terminal. TECO Energy, Inc. ("TECO") is the parent of Tampa Electric
of Tampa, Florida. TECO Transport, TECO's barge subsidiary,  transports the coal
by barge down the Mississippi River and intercoastal waterway and burns the coal
in Tampa Electric's  power plants.  Through Ziegler Coal, TECO has two contracts
with  Cora  which  expire  December  31,  2004.  Carboex  International  Limited
("Carboex") is a Spanish state-owned coal purchasing company.  Carboex purchases
coal for the various Spanish state-owned utilities.  Carboex transports the coal
by barge to New  Orleans  and then by ship to Spain  for use in the  Puentes  de
Garcia Rodriguez Power Plant.  Carboex's contract with Cora expires December 31,
2001.  Indiana-Kentucky  Electric  Corp.  ("IKEC") is a  subsidiary  of American
Electric Power ("AEP") of Columbus,  Ohio.  AEP transports  coal by barge to its
various  power plants on the Ohio River.  The IKEC  contract  continues  through
December 31, 2004.  The  Partnership  signed a coal  transfer  contract with the
Tennessee  Valley  Authority  on  May  15,  1997  (effective  January  1,  1997)
continuing through December 31, 1999.

  Supply. 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
Partnership  believes that Illinois coal producers and shippers will continue to
be  important  customers,  but  anticipates  that  growth in volume  through the
terminal will be primarily due to western coal originating in Wyoming,  Colorado
and Utah.

                                       10
<PAGE>


  The Cora Terminal  sits on the mainline of the Union  Pacific  Railroad and is
strategically  well positioned to receive coal shipments from the West. 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 and serves major coal  companies  that have  substantial  developed and
undeveloped reserves.

  Grand Rivers Terminal

  On September 4, 1997, the Partnership  acquired at a cost of approximately $20
million the assets of BRT Transfer  Terminal,  Inc. and other assets from Vulcan
Materials  Company The name of the  terminal was  subsequently  changed to Grand
Rivers.  The Grand Rivers  Terminal is operated on land under  easements with an
initial expiration of July 2014.

  Grand  Rivers is a coal  transloading  and  storage  facility  located  on the
Tennessee  River,  just  above  the  Kentucky  Dam.  Grand  Rivers  is a modern,
high-speed  coal  handling  terminal  featuring  a  direct  dump  train-to-barge
facility, a bottom dump  train-to-storage  facility,  barge unloading and a coal
blending  facility that can blend up to four  different  coals at one time.  The
terminal has four distinct and separate facilities,  three of which are in close
proximity.  Three of the facilities receive coal by rail and the fourth by truck
and barge. Coal blending can be done in two of the facilities.  The terminal has
an annual  throughput  capacity of  approximately 25 million tons with a storage
capacity of approximately 2 million tons.

  Coal can be unloaded and sent either to storage or directly dumped into barges
at the rate of 5,000 tons per hour. Coal can be automatically blended and loaded
into  barges  at the rate of 3,000  tons per  hour.  The  fleeting  of barges is
currently  handled  by  Vulcan  pursuant  to an  operating  agreement  with  the
Partnership.   Other  features  of  the  terminal  include  automatic  sampling,
programmable  controls,  computerized  blending,  belt scales,  and computerized
inventory control.

  The Grand Rivers Terminal is strategically important to the Partnership's coal
business because: (i) it offers access to seven Class I railroads (Cora accesses
only one, the Union  Pacific);  (ii) it is located on two major  waterways  (the
Tennessee  and  Cumberland  Rivers)  and has access to the Ohio and  Mississippi
Rivers  and  the  Gulf  Coast  via  the   Tombigbee   System;   (iii)  it  is  a
state-of-the-art  blending  facility;  and  (iv) it is  isolated  from  flooding
problems due to its location  near the Kentucky Dam and can provide a back-up to
the  Cora  terminal  if  coal  cannot  be  accepted  at Cora  due to high  water
conditions.

  Supply.  Grand Rivers has its main  operations  on the Tennessee  River,  near
Grand   Rivers,   Kentucky.   The   terminal   provides   easy   access  to  the
Ohio-Mississippi River network, the  Tennessee-Tombigbee  System, major trucking
routes  on the  interstate  highway  system  and is  served  by  the  Paducah  &
Louisville  Railroad,  a short line railroad with  connections  to seven Class I
rail lines  including the Union Pacific,  CSX,  Illinois  Central and Burlington
Northern.  Grand Rivers is situated between the Illinois and western low-sulphur
coal fields. The major coal companies served by these railroads have substantial
developed and undeveloped reserves.

  Markets.  Grand Rivers' primary  business has been to supply blends of western
U.S.,  southern  Illinois and western Kentucky coal to the power plants operated
by  TVA  and  other   power   plants   located  on  the   Ohio-Mississippi   and
Tennessee-Tombigbee Systems. Grand Rivers is strategically positioned to receive
and store both local and western basin coals and can also blend large volumes of
coal with speed and accuracy.  The strategic position and blending  capabilities
will provide an advantage in meeting increased demand by power plants for blends
of western and eastern coals  necessary for continued  compliance with the Clean
Air Act Amendments of 1990.  Grand Rivers is the only major terminal in the area
that can both receive and load barge coal.

  Competition. Cora and Grand Rivers compete with several coal terminals located
in the general geographic area,  however, no significant new coal terminals have
been  constructed near the Cora or Grand Rivers terminals in the last ten years.
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.  Management believes the Cora
and Grand Rivers terminals can compete successfully with other terminals because
of their favorable location,  independent ownership,  available capacity, modern
equipment  and large  storage area.  Some of the the major  competing  terminals
include:


                                       11
<PAGE>


     American Commercial Marines' Hall Street Terminal, owned by CSX, is located
in St.  Louis.  This terminal is similar to Cora in design and  operation,  with
annual volumes estimated at 6 million tons. Like Cora, this terminal experiences
occasional interruptions of service due to high water conditions.

     Cook  Terminal,  owned by a consortium  of power  companies led by American
Electric  Power,  is located  north of GRT on the Ohio River.  This  terminal is
connected to both the Union Pacific and Burlington  Northern  railroads.  Annual
volumes are estimated at 12 million tons.

     Kellogg Dock, owned by Consolidated Coal Company ("Consol"),  is located 25
miles north of Cora Terminal. Kellogg is connected to the Union Pacific railroad
and has annual volumes estimated at 3 million tons.

     There are numerous other  terminals,  many that are for  proprietary use by
the owners.

     Red Lightning  Energy Services - Coal,  LPG's,  Refined Fuels, and Terminal
Services Marketing

  In 1997, the  Partnership  began  marketing  energy related  products and coal
terminal   services  through  its  Red  Lightning  Energy  Services  unit  ("Red
Lightning").  Products  marketed  include  coal and propane.  The unit  provides
marketing  of coal  terminal  services  for both the Cora and the  Grand  Rivers
Terminal.

  Markets.  Coal is marketed and sold to utilities and  industrial  customers in
the Midwest and Southeastern  region of the United States on short term delivery
or spot  contracts.  These  customers use coal  primarily for the  generation of
electricity. Propane is marketed and sold to industrial customers in the Midwest
for use as fuel for a variety of industrial applications.  Terminal services are
marketed  to  utility  and  industrial  customers  on both  short  and long term
contracts for storage and blending of coal.

  Supply.  Red Lightning  obtains coal primarily through producers in the Powder
River and Illinois  Basins on short term or spot sales  contracts.  Some coal is
purchased  through other coal  marketers and brokers.  Propane is purchased from
propane marketers.  Other services marketed by Red Lightning include storage and
blending for a fee at the Partnership's two coal terminals.

  The Partnership  plans to expand Red Lightning in 1998 by adding refined fuels
and natural gas to the  products it is  currently  marketing  to  utilities  and
municipal and industrial customers. The Partnership does not utilize derivatives
or other similar  instruments to hedge its risk with respect to commodity  price
fluctuations.

  Gas Processing and Fractionation

  The Partnership's gas processing and fractionating assets include its indirect
interest in the Mont Belvieu Fractionator and the Painter gas processing plant.

  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 fractionator is a full-service fractionating facility that produces a
range of  specification  products,  including  ethane,  propane,  normal butane,
isobutane  and  natural  gasoline  from a raw  stream  of  natural  gas  liquids
(Y-grade).  The  facility,  which was built in 1980,  is operated by  Enterprise
Products  Company and has access to virtually  all major  liquids  pipelines and
storage facilities located in the Mont Belvieu area. 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 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.  In  December  1996,  the  total  capacity  of the
fractionator   was  expanded  by   approximately   45,000  barrels  per  day  to
approximately 200,000 barrels per day. The Mont Belvieu Fractionator operated at
approximately  98%, 100% and 96% of capacity,  respectively,  during 1997, 1996,
and 1995.


                                       12
<PAGE>

  The fractionator is owned 50% by Mont Belvieu  Associates,  which is owned 50%
by each of the  Partnership  and Enterprise  Products.  The remaining 50% of the
fractionator  is owned equally by  Enterprise,  Texaco,  Union Pacific Fuels and
Burlington Resources. The owners of the fractionator,  with the exception of the
Partnership,  account for  approximately  75% of its revenues.  Other  customers
include Enron, Exxon, ARCO, Marathon, Warren and Phillips.

  Markets.  The  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.

  Supply.  The Mont Belvieu  Fractionator is fed by six major Y-grade  pipelines
(Attco,  Chevron, Black Lake, Seminole,  Chaparral and Panola).  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.

  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

  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
fractionation  facility has a capacity of  approximately  6,000 barrels per day,
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,  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
14,000  barrels of  aboveground  storage for all products.  The Painter Plant is
located on Bureau of Land  Management land that is leased to the Partnership and
Enron (50% each) until september 2009. Millis is located on private lands and is
under lease to the Partnership until September 2009.

  On February 14, 1997, the  Partnership  executed an operating  lease agreement
with Amoco Oil Company 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  per  year  for the
Partnership.  The primary term of the lease  expires  February  14,  2007,  with
evergreen provisions at the end of the primary term. Amoco took an assignment of
all commercial  arrangements  in place on February 14, 1997, and assumed 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 year seven,  Amoco may elect to
purchase the fractionator and Millis facilities under certain terms.

  Major Customers of the Partnership

  Although the  Partnership's  1997  revenues  were derived from a wide customer
base, revenues from Amoco Corporation, including its subsidiaries, accounted for
approximately  11.9% of  consolidated  revenues.  In 1996,  revenues  from Mobil
Corporation and Amoco Corporation,  including their subsidiaries,  accounted for
approximately  12.4% and 10.4%,  respectively,  of revenues.  For the year ended
December 31, 1995,  revenues  from Chevron  Corporation  and Amoco  Corporation,
including  their  subsidiaries,   each  accounted  for  approximately  10.2%  of
revenues. For a more complete discussion of customers,  see Note 11 of the Notes
to the Consolidated Financial Statements.

  Employees

  The Partnership  does not have any employees.  The General Partner employs all
persons  necessary  for the  operation  of the  Partnership's  business  and the
Partnership  reimburses the General Partner for the services of such persons. As
of 



                                       13
<PAGE>

March 6, 1998,  the General  Partner had  approximately  550  employees.  Twenty
hourly personnel at the Cora terminal are represented by the International Union
of Operating Engineers under a collective  bargaining  agreement that expires in
September 1998. No other employees of the General Partner are members of a union
or have a collective  bargaining  agreement.  The General Partner  considers its
relations with its employees to be good.

  Regulation

  Interstate Common Carrier Regulation

  The Partnership's  pipelines are interstate common carrier pipelines,  subject
to regulation  by the FERC under the  Interstate  Commerce Act ("ICA").  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.  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.  In 1997,
1996, and 1995,  application of the indexing  methodology did not  significantly
affect the Partnership's rates.

  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.
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-day period  established by the
Energy Policy Act. For this reason, the Partnership  believes these rates should
be grandfathered under the Energy Policy Act.

  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  facilities 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.

  The   Partnership  is  also  subject  to  the   requirements  of  the  Federal
Occupational  Safety and Health Act ("OSHA") and comparable state statutes.  The
Partnership   believes  that  it  is  in   substantial   compliance   with  OSHA
requirements,  including general industry standards, recordkeeping requirements,
and  monitoring  of  occupational   exposure  to  benzene  and  other  regulated
substances.


                                       14
<PAGE>

  In general, the Partnership expects to increase  expenditures in the future to
comply with higher industry and regulatory safety  standards.  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.

  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
substances".  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.


                                       15
<PAGE>

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 coal terminals 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 coal
terminals,  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
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 have 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.

   Risk Factors

   FERC Proceedings; Possible Effect on Rates

   Various shippers have filed complaints  before the Federal Energy  Regulatory
Commission  ("FERC")  challenging  certain of the  pipeline  tariff rates of the
South,  North and East  Lines,  alleging  that such  rates are not  entitled  to
"grandfathered"  status under the Energy Policy Act of 1992 ("EPACT") due to the
development of factors constituting  "changed  circumstances" within the meaning
of EPACT.  Certain of these complaints have alleged that the acquisition of SFPP
and the contemplated cost savings from the combination of the businesses of SFPP
and  the  Partnership   provide   additional   factors   constituting   "changed
circumstances."  The  Partnership  has taken the  position  that such  rates are
"grandfathered" and that "changed  circumstances" do not exist.  However,  these
proceedings  involve complex rules and regulations and numerous  factual issues,
all of which  must be  considered  and  analyzed  with the  benefit of a limited
number  of  legal  precedents.  It is  possible  that the  factors  cited by the
complaining   parties   in  support  of   "changed   circumstances,"   including
consummation  of the  acquisition  of  SFPP  and  realization  of  cost  savings
contemplated thereby,  could, when considered  individually or cumulatively,  be
found to constitute "changed circumstances." Such a finding could result in very
substantial rate refunds and prospective rate reductions,  thereby offsetting or
perhaps  exceeding any cost savings that may be realized.  A finding of "changed
circumstances"  could thus have a material  adverse  effect on SFPP's results of
operations, financial condition, liquidity and funds available for distributions
to holders of Common  Units.  See  "--Risks  Associated  with Legal  Proceedings
Related to Operations of SFPP" and Item 3. "Legal Proceedings."

   Combination  of  Pipeline  Operations;   Realization  of Synergies

   The management of the Partnership  believes that the Partnership will be able
to integrate the  geographically  and  operationally  diverse  businesses of the
Partnership  and  SFPP in a  beneficial  and  profitable  manner.  However,  the
operations and  management of the  Partnership  and SFPP are different,  and the
Partnership  may  incur  costs  or  encounter  other  challenges  not  currently
anticipated  which may  negatively  affect its  prospects.  The  integration  of
operations  following the acquisition  will require the dedication of management
and other  personnel  which may  temporarily  distract their  attention from the
day-to-day business of the combined partnership,  the development or acquisition
of new properties and the pursuit of other business acquisition opportunities.


                                       16
<PAGE>


   Change in Management of SFPP Assets

   The assets of SFPP previously managed by the SF General Partner are now under
the ultimate  control and  management  of different  persons.  While many of the
individuals  responsible  for the day-to-day  management of the SFPP assets have
continued with the Partnership following the acquisition, most members of senior
management of SFPP did not remain with the Partnership.

   Risks  Associated  with  Legal  Proceedings  Related  to
Operations of SFPP

   SFPP is currently a party to several legal  proceedings,  including,  without
limitation:  (i) three  proceedings  before the FERC, which generally  challenge
certain  of the  existing  tariff  rates of SFPP and seek both  reparations  and
prospective  rate  reductions,  (ii) a proceeding  before the California  Public
Utilities Commission ("CPUC"),  which generally challenges rates charged by SFPP
for intrastate transportation of refined petroleum products through its pipeline
system in the State of  California  and requests  prospective  rate  reductions,
(iii)  a  judicial  reference  proceeding  between  SFPP  and  Southern  Pacific
Transportation  Company  ("SPTC") to determine the extent,  if any, to which the
rent payable by SFPP for the use of pipeline  easements on rights-of-way held by
SPTC should be adjusted pursuant to existing  contractual  arrangements and (iv)
environmental  proceedings  related to ground  water and soil  contamination  in
Elmira,  California. In addition, SFPP has liabilities under settlements related
to ground  water  and soil  contamination  in the  vicinity  of  SFPP's  storage
facilities and truck loading terminals at Sparks, Nevada and 18 other sites.

   Each of the  actions  pending  before  the FERC and the CPUC  seeks to reduce
SFPP's rates. The complainants in FERC Docket Nos. OR92-8-000 et al. are seeking
reparations aggregating approximately $35 million for shipments between 1990 and
1994 as well as rate reductions of between 30% and 40% for shipments in 1995 and
thereafter.  If the complainants  were to prevail on all claims, it is estimated
that  reparations  resulting  from such rate  reductions  for shipments in 1995,
1996,  and  1997  would  aggregate  approximately  an  additional  $80  million,
resulting in total  reparations for the period 1990-1997 of  approximately  $115
million,  plus interest of approximately  $30 million.  The complainants in FERC
Docket Nos.  OR98-1-000 and OR98-2-000 also seek both prospective  reductions in
the rates  charged  by SFPP and  reparations.  In FERC  Docket  No.  IS98-1-000,
various  parties  have  protested  the  tariff  filed by SFPP in  response  to a
decision of the FERC which  required  SFPP to file a tariff for use of its lines
between Sepulveda  junction and Watson Station in California.  FERC has reserved
decision in Docket Nos.  OR98-2-000 et al. on reparations  until it rules on the
newly-filed  rates.  The  complainants  before  the CPUC seek  prospective  rate
reductions  aggregating  approximately  $15 million per year. SFPP is vigorously
contesting the complaints before the FERC and the CPUC.

   The initial decision  rendered by the presiding  Administrative  Law Judge in
Docket No.  OR92-8-000,  if  implemented in its current form and also applied to
the  Sepulveda  lines  rate at issue in  Docket  No.  IS98-1-000,  would  reduce
prospective  revenues by  approximately  $8 million to $10 million  annually and
require SFPP to pay reparations  through year end 1997 in the approximate amount
of $30  million.  Under the rulings in the  initial  decision,  reparations  and
interest  would continue to accrue at  approximately  $8 million per annum until
new prospective rates become effective.

   The  Partnership  is not able to predict with  certainty the final outcome of
these legal proceedings.  However,  the ultimate resolution of these proceedings
could have a material adverse effect on the Partnership's results of operations,
financial  condition,   liquidity  and  ability  to  maintain  its  annual  cash
distribution of $2.25 per Common Unit. See Item 3. "Legal Proceedings".

   No  Assurance  that Tariff  Rates can be  Maintained  or Increased

   Revenues  from   interstate   and   California   intrastate   common  carrier
transportation  on the liquids  pipelines  are  determined  in  accordance  with
tariffs  filed with FERC and the CPUC,  respectively.  As discussed  above,  the
pipeline  tariffs of SFPP are subject to challenge  before the FERC and CPUC and
thus such challenge  could,  if successful,  result in rate refunds and/or lower
prospective  pipeline rates,  which could have a material  adverse effect on the
Partnership's  results of operations,  financial condition,  liquidity and funds
available for distributions to holders of Common Units.

   Such  rates  could  also be  adversely  affected  in the future by  increased
competition.  See "--Competition."


                                       17
<PAGE>


   Possible  Insufficiency  of  Cash  Flow  to  Pay  Announced Distributions

   The pro forma historical combined cash flow of the Partnership and SFPP would
not be sufficient to pay the Partnership's  current annual distribution of $2.25
per Common Unit. The ability of the Partnership to generate sufficient cash flow
to pay such  distribution  will  depend on the  ability  of the  Partnership  to
realize  anticipated cost savings resulting from the acquisition of Santa Fe and
to increase  revenues in certain  sectors in accordance  with the  Partnership's
1998 business plan.  Although the  Partnership's  management  believes that such
cost savings and revenue increases can be realized, there can be no assurance in
this  regard.  In the short term the  Partnership  may fund  distributions  from
borrowings,  to the extent available.  However,  ultimately,  the ability of the
Partnership to sustain announced distributions will depend on the ability of the
Partnership  to  increase  distributable  cash flow.  In  addition,  there is no
guaranteed minimum quarterly distribution under the Partnership Agreement.

   Cash Distributions  will Fluctuate with Performance;  No Minimum Distribution

   General.  Although the General  Partner will distribute 100% of the Available
Cash,  there can be no assurance  regarding the amounts of Available  Cash to be
generated by the Partnership. See "--Risks Associated with Partnership Agreement
and State  Partnership  Law--Cash  Distribution  Policy" and "Description of the
Partnership    Agreement--Cash    Distribution    Policy."   The   Partnership's
profitability  and its ability to make  distributions to holders of Common Units
will  depend  to a large  extent  upon  volumes  of NGLs and  refined  petroleum
products  that the liquids  pipelines  transport and to a lesser extent upon the
volume of coal  transloaded and stored by the Coal Terminals and volumes of NGLs
for fractionation.  Diminished volumes would decrease the Partnership's  profits
and,  consequently,  the amount of cash available for distribution to holders of
Common  Units.  Because  the demand  for such  products  is subject to  numerous
factors outside the Partnership's  control,  no assurance can be given regarding
future volumes.

   Factors Affecting Transportation Volumes. Transportation volumes for NGLs and
refined  petroleum  products  are affected  primarily  by the market  demand for
products in the geographic regions served by the liquids pipelines.  Volumes for
the Coal  Terminals  depend on the market demand for western and Illinois  coal,
economic and available rail  transportation  from sources of supply and economic
barge  transportation  to  delivery  points.  Market  demand  for NGLs,  refined
petroleum  products  and coal may be  affected  by future  economic  conditions,
weather, fuel conservation measures,  alternate fuel requirements,  governmental
and environmental  regulation,  demographic changes or technological advances in
fuel economy and energy generation  devices.  The Partnership cannot predict the
effect of such factors on the demand for the  transportation of NGLs and refined
petroleum  products in the liquids  pipelines  and the  handling  and storage of
coal.

   Profitability  is Dependent on Certain Major  Customers.  Major  end-users of
NGLs and refined petroleum products transported by the liquids pipelines include
wholesalers and retailers of refined petroleum  products in the relevant service
areas,  refinery  facilities in the Chicago  area, a  world-scale  petrochemical
plant near Lake  Charles,  Louisiana  and United States  military  bases.  Major
suppliers of refined  petroleum  products  transported on the liquids  pipelines
include  refineries  located in Los  Angeles,  San  Francisco  and  Bakersfield,
California;   Chicago,  Illinois;  Houston  and  El  Paso,  Texas  and  Seattle,
Washington. A disruption of operations at any of such facilities could adversely
affect the  Partnership's  revenues by reducing  the volumes of NGLs and refined
petroleum products transported through the liquids pipelines.  In addition, four
major  customers  ship  approximately  80% of all coal  loaded  through the Coal
Terminals. The Partnership has business interruption insurance to protect itself
against  losses  from  reduced  volumes of products  transported  as a result of
disrupted  operations  of its assets or of a  supplier  or  end-user  because of
physical  loss or  damage.  However,  there can be no  assurance  that  business
interruption  insurance  will be adequate to cover losses that might result from
disruptions  of  operations.  Should  the  Partnership  lose  any of  its  major
customers,  the Partnership's  profitability  could be adversely  affected along
with its ability to make distributions to holders of Common Units.

   Establishment of Reserves May Affect Distributions. The Partnership Agreement
gives the General  Partner broad latitude in  establishing  reserves that affect
the amount of Available Cash because the General  Partner may, in its reasonable
discretion,  determine  amounts that can be set aside as reserves for the proper
conduct of the business.

   Risks Associated with Leverage

   Impact on Ability to Make Cash Distributions. The Partnership has significant
indebtedness. The debt service obligations associated with such indebtedness may
reduce the Available  Cash for  distribution  by the  Partnership  to holders of
Common Units and to the General Partner.  The ability of the Partnership to meet
these  debt  service   obligations   will  depend   primarily  upon  its  future
performance,  which will be subject to  prevailing  economic  conditions  


                                       18
<PAGE>


and to financial,  business and other factors  (including  regulation),  many of
which are beyond its control. The Partnership may in the future incur additional
indebtedness in order to finance acquisitions or for general business purposes.

   Assets Pledged to Secure Debt. The  Partnership's  primary credit facility is
secured  by a  first  priority  lien on (i) the  Partnership's  limited  partner
interests  in the  operating  partnerships;  (ii)  all of the  assets  of  OLP-D
(including  its  general  partner  interest  in SFPP),  (iii) the  Partnership's
ownership  interests  in  the  fractionator  and  Shell  CO2  Company  and  (iv)
intercompany  notes  executed  by the  operating  partnerships  in  favor of the
Partnership  for  loan  proceeds  lent  to  them  by  the  Partnership.  If  the
Partnership  fails  to  maintain  certain  financial  ratios,  then  each of the
operating  partnerships  will be obligated to secure its intercompany  note with
its assets.  SFPP has also granted liens on substantially  all of its properties
to secure its existing indebtedness and such liens remain in effect. If an event
of  default  occurs,  the  lenders  will have the right to  foreclose  upon such
collateral.  Foreclosure,  in addition to causing an investment loss, could have
significant adverse tax consequences for holders of Common Units,  including the
realization  of  taxable  income  by  such  holders   without  a   corresponding
distribution  of cash.  Similarly,  holders of Common Units could have increased
taxable income without a  corresponding  increased cash  distribution  if, while
there is substantial indebtedness  outstanding,  the Partnership were to dispose
of assets.

   Instruments  Governing  Indebtedness  Contain  Restrictive   Covenants.   The
Partnership may be prevented by the instruments  governing its indebtedness from
engaging in certain transactions which might otherwise be considered  beneficial
to the Partnership,  and such provisions may limit or prohibit  distributions to
holders of Common Units under certain  circumstances.  The agreements  governing
such indebtedness  generally  require the operating  partnerships to comply with
various  affirmative and negative covenants,  including without limitation,  the
maintenance of certain  financial  ratios and restrictions on (i) the incurrence
of additional indebtedness; (ii) entering into mergers, consolidations and sales
of assets; (iii) making investments;  and (iv) granting liens. In addition,  the
agreements  governing  the  Partnership's  indebtedness  generally  prohibit the
Partnership  from  making  cash  distributions  to holders of Common  Units more
frequently  than  quarterly,  from  distributing  amounts  in  excess of 100% of
Available Cash for the immediately  preceding  calendar  quarter and from making
any  distribution  to holders of Common  Units if an event of default  exists or
would exist upon making such  distribution.  The  instruments  governing  SFPP's
indebtedness  contain  similar  restrictions.   The  instruments  governing  any
additional  indebtedness incurred to refinance the indebtedness may also contain
similar restrictions.

   SFPP's First Mortgage Notes generally may not be prepaid at any time prior to
December 15, 1999.  After  December 15, 1999 and prior to December 15, 2002, the
Partnership  may  prepay  the  SFPP  First  Mortgage  Notes  with  a  make-whole
prepayment  premium.  On or after  December  15, 2002 and prior to December  15,
2003, the Partnership may prepay the SFPP First Mortgage Notes with a prepayment
premium equal to .7133% of the principal  amount so prepaid.  After December 15,
2003,  the  Partnership  may prepay the SFPP First Mortgage Notes in whole or in
part  without a  prepayment  premium.  SFPP is  restricted  from taking  certain
actions with respect to $190 million of the SFPP First Mortgage Notes, including
the prepayment of such amount.  Such  restrictions  may limit the  Partnership's
flexibility in structuring or refinancing existing or future indebtedness.

   Potential Change of Control if Kinder Morgan, Inc. Defaults on Indebtedness

   A change of control of the  Partnership  could occur if Kinder  Morgan,  Inc.
defaults on its secured  indebtedness.  Kinder Morgan,  Inc. ("KMI") owns all of
the outstanding capital stock of the General Partner. KMI has pledged this stock
to secure certain of its indebtedness. At the present time, KMI's only source of
income to pay such  indebtedness is dividends that KMI receives from the General
Partner.

   Risks Associated with Pipeline Easements

   A significant  portion of the South, North and East Lines, owned and operated
through SFPP, are located on railroad right-of-ways as to which SFPP was granted
easements by SPTC for the construction and operation of such lines. SPTC, or its
predecessors in interest, acquired some of such right-of-way pursuant to federal
statutes  enacted  in 1871 and 1875.  The  right-of-way  granted  under the 1871
statute was thought to be an outright ownership  interest,  which would continue
in perpetuity unless the right-of-way  ceased to be used for railroad  purposes,
in which  case  the  ownership  interest  would  be  extinguished.  SPTC and its
predecessors in interest have used the right-of-way for railroad  purposes since
the railroad was constructed.  Except for one lawsuit which was dismissed, these
lines have operated without  challenge to the validity of the easements  granted
by SPTC on and beneath the land since construction of such lines in the 1950s.


                                       19
<PAGE>

   Two United States Circuit  Courts,  however,  have  determined,  in decisions
rendered  in 1979 and 1980,  that  railroad  right-of-ways  granted  under  laws
similar  to the 1871  statute  provide  only a  surface  easement  for  railroad
purposes without any right to the subsurface.  If a court were to determine that
the 1871 statute also prohibits the use of the subsurface by the railroad or its
assignees  for the  operation  of a  pipeline,  SFPP may be  required  to obtain
easements from subsurface landowners in order to continue to maintain the South,
North and East lines  beneath the  right-of-way  SPTC was granted under the 1871
statute. The General Partner believes that such easements could be obtained over
time at a cost that would not have a material adverse effect on the Partnership,
although no assurance in this regard can be given.

   With respect to the liquids  pipelines,  the  Partnership has been advised by
counsel  that it has the  power of  eminent  domain  in the  states  in which it
operates  (except for  Illinois)  assuming it meets  certain  requirements  that
differ from state to state.  While there can be no  assurance,  the  Partnership
believes that it meets such requirements.  The Partnership does not believe that
Shell  CO2  Company  has the  power of  eminent  domain  with  repect to its CO2
pipelines.  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 will 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.

   Risks Associated with Shell CO2 Company

   The limited partnership agreement forming the Shell CO2 Company provides that
the  Partnership  will  be  entitled  to  a  fixed,  quarterly  distribution  of
approximately  $3.6 million ($14.5 million per year) during the four year period
ended December 31, 2001. In 2002 and 2003, the Partnership's  cash distributions
will be increased or decreased so that the aggregate cash distributions received
by the Partnership  during the first six years of Shell CO2 Company's  existence
will  be  equal  to  the   Partnership's   percentage  of  the  cumulative  cash
distributions  of Shell CO2  Company  during  such period  (which  initially  is
expected  to equal 20%) on a present  value  basis  (discounted  at 10%).  Under
certain scenarios,  which management believes are unlikely,  it is possible that
the  Partnership  would not  receive  any  distributions  from Shell CO2 Company
during  2002  and 2003  and  could  be  required  to  return  a  portion  of the
distributions  received during the first four years. After 2003, the Partnership
will participate in distributions in accordance with its partnership percentage.

   Costs of Environmental Regulation

   The business and operations of the Partnership are subject to federal,  state
and  local  laws  and  regulations  relating  to  environmental   practices.  In
particular, the Partnership could incur significant costs and liabilities in the
event of an  accidental  leak or  spill  in  connection  with  liquid  petroleum
products  transportation and storage. The costs and liabilities  associated with
leaks  and  spills  of  hazardous  materials,  either  individually  or  in  the
aggregate,  could negatively affect the level of cash available for distribution
to holders of Common Units.  Moreover,  it is possible that other  developments,
such as increasingly strict environmental laws and regulations,  could result in
increased  costs and  liabilities to the  Partnership.  The  Partnership  cannot
predict  the  ultimate   impact  on  their   business  and   operations  of  the
Environmental  Protection Agency standards or the impact of future environmental
measures.   The  costs  of  environmental   regulation  are,  however,   already
significant  and  there  is  a  possibility  that  additional  regulation  could
negatively  affect the level of cash  available for  distribution  to holders of
Common Units.

   Competition

   Propane  competes  with  electricity,   fuel  oil  and  natural  gas  in  the
residential and commercial  heating market.  In the engine fuel market,  propane
competes  with  gasoline and diesel fuel.  Butanes and natural  gasoline used in
motor  gasoline   blending  and  isobutane  used  in  alkylation   compete  with
alternative  products.  NGLs used as feedstocks for refineries and petrochemical
plants  compete  with  alternative  feedstocks.  As  a  result,  NGL  demand  is
significantly  affected by the  availability  and prices of  alternative  energy
sources and feedstocks. Such competition could ultimately result in lower levels
of the  Partnership  profits and lower cash  distributions  to holders of Common
Units.

   The  Partnership  conducts  its  operations  without the benefit of exclusive
franchises from  government  entities.  In addition,  it provides common carrier
transportation services through the liquids pipelines at posted tariffs, and, in
virtually all cases, without long-term contracts for transportation service with
its customers. Demand for transportation services for refined petroleum products
is  primarily a function of total and per capita  fuel  consumption,  prevailing
economic  and  demographic   conditions,   alternate  modes  of  transportation,
alternate product sources and price.


                                       20
<PAGE>

   Because  pipelines are generally the lowest cost method for  intermediate and
long-haul  overland product  movement,  the liquids  pipelines' most significant
competitors are proprietary  pipelines owned and operated by major oil companies
in the areas where the liquids pipelines deliver products, refineries within the
operating partnerships' market areas served by the liquids pipelines and trucks.
The  possibility  exists  that  additional   pipelines  may  in  the  future  be
constructed to serve specific  markets served by the liquids  pipelines.  Trucks
competitively  deliver products in certain markets.  Recently,  the South, North
and East Lines,  owned and operated  through SFPP,  have  experienced  minor but
notable  reductions  in  product  volumes  delivered  to  certain   shorter-haul
destinations,   primarily  Orange  and  Colton,  California,  due  to  increased
utilization of trucking by major oil companies.  Management  cannot predict with
certainty whether this trend towards increased short-haul trucking will continue
in the future.

   Utilization of and demand for terminaling  services varies widely  throughout
the  liquids  pipelines.  Certain of the major  petroleum  companies  as well as
independent  terminal  operators  are presently in direct  competition  with the
Partnership at several terminal locations.  At those locations,  market share is
primarily a function of pricing, service capabilities and available tankage.

   Risks Associated with the Partnership Agreement and State Partnership Law

   Cash Distribution Policy. Under the terms of the Partnership  Agreement,  the
General  Partner is entitled to receive a specified  percentage of the quarterly
cash  distributions  to the partners of the Partnership.  The percentage  varies
depending upon the amount of the quarterly distribution. See "Description of the
Partnership  Agreement--Cash  Distribution  Policy." After the holders of Common
Units have received  quarterly cash distributions of $.4675 per Common Unit, the
General Partner is entitled to receive 50% (the highest  marginal rate under the
Partnership  Agreement) of any  additional  cash  distributed  to the holders of
Common Units during such  quarter.  Based on the  Partnership's  current  annual
distribution  of $2.25 per  Common  Unit,  the  General  Partner  would  receive
approximately  20.8% of all such cash distributions and 50% of any distributions
in excess of such amount.

   Limited Voting Rights,  Management and Control.  Holders of Common Units will
have only  limited  voting  rights on matters  affecting  the  Partnership.  The
General Partner will manage and control the activities of the  Partnership.  See
"Description of Partnership Agreement--Management." Holders of Common Units have
no right to elect the General  Partner on an annual or other ongoing  basis.  If
the General  Partner  withdraws,  however,  its  successor may be elected by the
holders of a majority of the outstanding Common Units (excluding for purposes of
such  determination  Common Units owned by the departing general partner and its
affiliates).

   The General Partner may not be removed unless such removal is approved by the
vote of the holders of not less than  662/3% of the  outstanding  Common  Units,
excluding Common Units owned by the General Partner and its affiliates, provided
that certain other conditions are satisfied.  Any such removal is subject to the
limited  partners  approving  the  successor  general  partner  by the same vote
required for  removing the General  Partner and receipt of an opinion of counsel
that such removal and the approval of a successor will not result in the loss of
the limited  liability  of any limited  partner or cause the  Partnership  to be
treated as an  association  taxable as a  corporation  or otherwise  taxed as an
entity for federal income tax purposes. In addition,  any Common Units held by a
person (other than the General Partner and its affiliates) that owns 20% or more
of the Common  Units  cannot be voted.  These  provisions  mean that  holders of
Common Units only have a limited say in matters  affecting  the operation of the
Partnership  and, if such holders are in disagreement  with the decisions of the
General  Partner,  they may remove the General  Partner  only as provided in the
Partnership Agreement.

   The General Partner's  Liability to the Partnership and the Holders of Common
Units May be Limited.  Certain  provisions of the Partnership  Agreement contain
exculpatory language purporting to limit the liability of the General Partner to
the  Partnership or the holders of Common Units.  For example,  the  Partnership
Agreement provides that:

 (i)  borrowings  by or the  approval  thereof by the General  Partner  will not
constitute a breach of any duty of the General Partner to the Partnership or the
holders  of Common  Units  whether or not the  purpose  or effect  thereof is to
increase incentive distributions to the General Partner;

  (ii) any actions taken by the General Partner consistent with the standards of
reasonable  discretion  set forth in the  definitions of Available Cash and Cash
from  Operations  contained in the  Partnership  Agreement will be deemed not to
breach any duty of the  General  Partner to the  Partnership  or the  holders of
Common Units; and

                                       21
<PAGE>


  (iii) in the absence of bad faith by the General  Partner,  the  resolution of
conflicts of interest by the General Partner will not constitute a breach of the
Partnership Agreement or a breach of any standard of care or duty.

   Partnership  Agreement Limits the Liability and Modifies the Fiduciary Duties
of the  General  Partner  Under  Delaware  Law.  Provisions  of the  Partnership
Agreement  purport  to  limit  the  liability  of  the  General  Partner  to the
Partnership  and the holders of Common Units.  Such  provisions  also purport to
modify the fiduciary duty standards to which the General Partner would otherwise
be subject under  Delaware law,  under which a general  partner owes its limited
partners the highest  duties of good faith,  fairness and loyalty.  Such duty of
loyalty  would  generally  prohibit  a general  partner  of a  Delaware  limited
partnership from taking any action or engaging in any transaction as to which it
has a conflict  of  interest.  The  Partnership  Agreement  permits  the General
Partner to exercise the discretion and authority granted to it thereunder in the
management of the Partnership and the conduct of its operations,  so long as its
actions are in, or not inconsistent with, the best interests of the Partnership.
Such  modifications  of state law standards of fiduciary duty may  significantly
limit the  ability of  holders of Common  Units to  successfully  challenge  the
actions of the General  Partner as being a breach of what would  otherwise  have
been a fiduciary duty.

   Potential  Liability of the Holders of Common  Units to Repay  Distributions.
Holders of Common Units will not be liable for  assessments in addition to their
initial  capital  investment in the Common Units.  Under certain  circumstances,
however,  holders of Common  Units may be required  to repay to the  Partnership
amounts  wrongfully  returned or distributed to them.  Under the Delaware Act, a
limited  partnership may not make a distribution to a partner to the extent that
at the time of the distribution,  after giving effect to the  distribution,  all
liabilities of the Partnership, other than liabilities to partners on account of
their partnership interests and nonrecourse  liabilities,  exceed the fair value
of the assets of the limited  partnership.  The  Delaware  Act  provides  that a
limited  partner who receives  such a  distribution  and knew at the time of the
distribution  that the distribution was in violation of the Delaware Act will be
liable to the limited  partnership for the amount of the  distribution for three
years from the date of the distribution. Under the Delaware Act, an assignee who
becomes a substituted limited partner of a limited partnership is liable for the
obligations of the assignor to make contributions to the Partnership, except the
assignee is not obligated for  liabilities  unknown to him at the time he or she
became a limited partner and which could not be ascertained from the Partnership
agreement.

   Potential  Liability  of Holders of Common Units if the  Partnership  has not
Complied with a State Partnership Law. The Partnership  conducts its business in
16 states,  and in some of those  states the  limitations  on the  liability  of
limited  partners for the  obligations  of a limited  partnership  have not been
clearly  established.  If (i) a court or governmental agency determined that the
Partnership was conducting  business in any such state and had not complied with
the  applicable  limited  partnership  statute,  or (ii) the right of holders of
Common  Units as a group to remove or  replace  the  General  Partner or to take
other action  pursuant to the  Partnership  Agreement,  and the exercise of such
right or the taking of such action  constituted  "control" of the  Partnership's
business,   then   holders  of  Common  Units  might  be  held  liable  for  the
Partnership's obligations to the same extent as a general partner.

   The Partnership May Exercise its Limited Call Right. In the event that at any
time not more than 20% of the issued and outstanding limited partners' interests
of any class of the  Partnership  are held by  persons  other  than the  General
Partner and its affiliates,  the General Partner will have the right, assignable
to any of its  affiliates or to the  Partnership,  to purchase all, but not less
than all, of the  limited  partner  interests  of the  Partnership  held by such
unaffiliated persons for a price equal to the most recent 20-day average trading
price,  or the  highest  purchase  price  paid  by the  General  Partner  or its
affiliates to acquire limited partner interests of such class of the Partnership
during the prior 90 days,  whichever is higher.  As a  consequence,  a holder of
such limited partner  interests may have such holder's  interest  purchased even
though  the holder may not desire to sell it, or the price paid may be less than
the amount the holder would desire to receive.

   The  Partnership  May Sell Additional  Limited  Partner  Interests,  Diluting
Existing  Interests  of  Holders  of Common  Units.  The  Partnership  Agreement
authorizes  the General  Partner to cause the  Partnership  to issue  additional
limited  partner  interests and other equity  securities of the  Partnership for
such  consideration  and on such terms and conditions as shall be established by
the General  Partner.  Any issuance of  additional  Common Units or other equity
securities of the Partnership  would result in a  corresponding  decrease in the
proportionate  ownership interest in the Partnership represented by Common Units
then outstanding,  and such issuance could therefore adversely affect the amount
of cash  distributed  with  respect to, and the market  price of,  Common  Units
outstanding  prior  to such  issuance.  Such  additional  issuance's  will  also
diminish the  relative  voting  strength of the  previously  outstanding  Common
Units.

   Effects of Anti-takeover Provisions.  The Partnership Agreement provides that
any person or group  (other than the General  Partner and its  affiliates)  that
acquires  beneficial  ownership of 20% or more of the Common Units will lose its


                                       22
<PAGE>

voting  rights  with  respect  to all of its Common  Units.  This  provision  is
intended to  discourage a person or group from  attempting to remove the General
Partner or otherwise  change  management of the Partnership and may diminish the
price at which the Common  Units will trade  under  certain  circumstances.  For
example,  the provision may make it unlikely that a third party, in an effort to
remove the General  Partner  and take over the  management  of the  Partnership,
would make a tender  offer for the Common  Units at a price above their  trading
market price  without first  removing the General  Partner and  substituting  an
affiliate.

   Pre-emptive  Rights  of  General  Partner.   To  maintain  its  then  current
partnership interest in the Partnership,  the General Partner, acting as general
partner  of the  Partnership,  has the  right  to  purchase  additional  limited
partnership interests issued by the Partnership whenever,  and on the same terms
that,  the  Partnership  issues  such  securities  to any person  other than the
General  Partner  and its  affiliates.  No other  holder of  Common  Units has a
similar right.  Therefore,  only the General  Partner may protect itself against
the  dilutive  effect of an  issuance of  additional  equity  securities  of the
Partnership. The General Partner waived its pre-emptive right in connection with
the Transaction, but not with respect to any other or further transaction.

   Potential  Conflicts of Interest Related to Operation of the Partnership

   Certain  conflicts of interest could arise among the General Partner,  Kinder
Morgan  Inc.,  the  parent  company  of the  General  Partner  ("KMI")  and  the
Partnership. Such conflicts may include, among others, the following
situations:

  (i) The Partnership does not have any employees and relies solely on employees
of the General Partner and its affiliates, including KMI.

   (ii) Under the terms of the Partnership Agreement, the Partnership reimburses
the  General   Partner  for  costs   incurred  in  managing  and  operating  the
Partnership.

   (iii) The amount of cash expenditures, borrowings and reserves in any quarter
may affect  whether or the extent to which there is  sufficient  Available  Cash
constituting  Cash from Operations to pay quarterly  distributions on the Common
Units in such quarter or subsequent quarters.  The ability of the Partnership to
continue to make  distributions  at its current annual level of $2.25 per Common
Unit depends upon the operations of the  Partnership  and various  factors which
cannot be guaranteed. See "--Cash Distributions will Fluctuate with Performance;
No Minimum Distribution."

   (iv) Whenever  possible,  the General  Partner intends to limit the liability
under contractual arrangements of the Partnership to all or particular assets of
the Partnership, with the other party to the contract having no recourse against
the General Partner or its assets.  The Partnership  Agreement provides that any
action by the  General  Partner  in so  limiting  its  liability  or that of the
Partnership will not be deemed to be a breach of its fiduciary duty, even if the
Partnership  could have obtained more favorable terms without such limitation on
liability.

   (v) Under the terms of the Partnership Agreement,  the General Partner is not
restricted  from paying its affiliates  for any services  rendered on terms fair
and  reasonable  to the  Partnership  or entering  into  additional  contractual
arrangements  with any of the affiliates of the General Partner on behalf of the
Partnership.  Neither the Partnership Agreement nor any of the other agreements,
contracts and  arrangements  between the  Partnership,  on the one hand, and the
General Partner and its affiliates, on the other hand, are or will be the result
of arm's-length negotiations.

   (vi) The Partnership  Agreement provides that it will not constitute a breach
of the General  Partner's  fiduciary duty if the General  Partner  exercises its
right to call for and  purchase  limited  partner  interests  as provided in the
Partnership  Agreement or assigns this right to one of its  affiliates or to the
Partnership.

  Tax Treatment Of Publicly Traded Partnership Under The Internal Revenue Code

   The Internal  Revenue Code of 1986, as amended (the "Code"),  imposes certain
limitations on the current  deductibility of losses  attributable to investments
in publicly traded  partnerships and treats certain publicly traded partnerships
as  corporations  for federal  income tax  purposes.  The  following  discussion
briefly  describes certain aspects of the Code that apply to individuals who are
citizens or  residents of the United  States  without  commenting  on all of the
federal income tax matters affecting the Partnership or the Unitholders,  and is
qualified in its entirety by  reference  to the Code.  UNITHOLDERS  ARE URGED TO
CONSULT  THEIR OWN TAX ADVISOR ABOUT THE FEDERAL,  STATE,  LOCAL AND FOREIGN TAX
CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PARTNERSHIP.


                                       23
<PAGE>

   Tax  Characterization  of the  Partnership.  The  availability to a holder of
Common  Units  of the  federal  income  tax  benefits  of an  investment  in the
Partnership  depends, in large part, on the classification of the Partnership as
a partnership  for federal  income tax  purposes.  The Code  generally  treats a
publicly traded partnership formed after 1987 as a corporation  unless, for each
taxable  year of its  existence,  90% or more of its gross  income  consists  of
qualifying income.

   If the Partnership were to fail to meet the 90% "qualified  income" test (the
"Natural  Resources  Exception")  for any  year  prior to or  subsequent  to the
acquisition  of Santa Fe, the  Partnership  would be  treated  as a  corporation
unless it met the  inadvertent  failure  exception.  Qualifying  income includes
interest,  dividends, real property rents, gains from the sale or disposition of
real  property,  income and gains  derived  from the  exploration,  development,
mining or production,  processing, refining, transportation (including pipelines
transporting gas, oil or products  thereof),  or the marketing of any mineral or
natural resource (including fertilizer,  geothermal energy and timber), and gain
from the sale or disposition  of capital  assets that produced such income.  The
General Partner  believes that more than 90% of the  Partnership's  gross income
is, and has been, qualifying income because the Partnership is engaged primarily
in the  transportation of NGLs,  refined petroleum  products and CO2 through the
pipelines.

   If the Partnership were classified as an association taxable as a corporation
for federal income tax purposes, the Partnership would be required to pay tax on
its income at corporate  rates,  distributions  would  generally be taxed to the
holders of Common Units as corporate  distributions,  and no income, gain, loss,
deduction or credit would flow through to the holders of Common  Units.  Because
tax would be imposed upon the  Partnership as an entity,  the cash available for
distribution  to the  holders of Common  Units would be  substantially  reduced.
Treatment of the  Partnership  as an  association  taxable as a  corporation  or
otherwise  as a taxable  entity  would  result in a  material  reduction  in the
anticipated cash flow and after-tax return to the holders of Common Units.

   There can be no assurance that the law will not be changed so as to cause the
Partnership to be treated as an association taxable as a corporation for federal
income tax  purposes or otherwise to be subject to  entity-level  taxation.  The
Partnership  Agreement  provides  that,  if a law is enacted  that  subjects the
Partnership to taxation as a corporation or otherwise  subjects the  Partnership
to entity-level taxation for federal income tax purposes,  certain provisions of
the  Partnership   Agreement   relating  to  the  General  Partner's   incentive
distributions  will be subject to change,  including a decrease in the amount of
the Target Distribution levels to reflect the impact of entity level taxation on
the Partnership.

   Passive Activity Loss Limitations. Under the passive loss limitations, losses
generated by the  Partnership,  if any,  will only be available to offset future
income generated by the Partnership and cannot be used to offset income which an
individual  estate,  trust or personal service  corporation  realizes from other
activities, including passive activities or investments. Income which may not be
offset by passive activity "losses" includes not only salary and active business
income,  but also portfolio  income such as interest,  dividends or royalties or
gain from the sale of property  that  produces  portfolio  income.  Credits from
passive  activities are also limited to the tax  attributable to any income from
passive  activities.  The passive  activity  loss rules are applied  after other
applicable  limitations on  deductions,  such as the at-risk rules and the basis
limitation.  Certain closely held corporations are subject to slightly different
rules,  which can also limit  their  ability to offset  passive  losses  against
certain types of income.  A Common  Unitholder's  proportionate  share of unused
losses may be deducted  when the holder of Common Units  disposes of all of such
holder's Common Units in a fully taxable  transaction  with an unrelated  party.
Net passive income from the  Partnership may be offset by a Common Unit holder's
unused  Partnership losses carried over from prior years, but not by losses from
other  passive   activities,   including   losses  from  other  publicly  traded
partnerships.   In  addition,   a  Unitholder's   proportionate   share  of  the
Partnership's  portfolio  income,  including  portfolio  income arising from the
investment of the Partnership's working capital, is not treated as income from a
passive activity and many not be offset by such Unitholder's share of net losses
of the Partnership.

   Section 754 Election.  Each of the Partnership and its operating partnerships
has made,  will make,  as necessary,  and maintain the election  provided for by
Section 754 of the Code, which will generally permit a holder of Common Units to
calculate cost recovery and depreciation  deductions by reference to the portion
of the Common Unit holder's  purchase  price  attributable  to each asset of the
Partnership.  A  constructive  termination  of the  Partnership  could result in
penalties and a loss of basis  adjustments under Section 754, if the Partnership
were unable to determine that a termination had occurred and, therefore, did not
make a Section 754 election for the new Partnership.

   No Amortization of Book-Up Attributable to  Intangibles.  The acquisition  of
Santa  Fe  resulted in a restatement of the capital accounts of both the  former
Santa Fe common unit holders and the pre-acquisition Common Unit holders to fair
market  value  ("Book-Up")  and an allocation of such increased capital  account
value among the Partnership's assets will


                                       24
<PAGE>

be based on the values  indicated by an  independent  appraisal  obtained by the
General Partner. The General Partner has obtained an independent appraisal which
indicates that all of such value is attributable to tangible assets. However, if
such valuations were challenged by the IRS and such challenge were successful, a
portion of this Book-Up could be allocated to intangible assets that will not be
amortizable either for tax or capital account purposes, and therefore,  will not
support a curative allocation of income. This could result in a disproportionate
allocation of taxable income to either a pre-acquisition Common Unit holder or a
former Santa Fe common unit holder.

   Deductibility  of  Interest  Expense.   The  Code  generally   provides  that
investment  interest expense is deductible only to the extent of a non-corporate
taxpayer's net investment income. In general, net investment income for purposes
of this  limitation  includes  gross income from  property  held for  investment
(except for net capital  gains for which the taxpayer has elected to be taxed at
a maximum rate of 28 percent) and portfolio income  (determined  pursuant to the
passive loss rules) reduced by certain  expense (other than interest)  which are
directly  connected with the production of such income.  Property subject to the
passive loss rules is not treated as property held for investment.  However, the
IRS has issued a Notice which  provides  that net income from a publicly  traded
partnership  (not  otherwise  treated as a  corporation)  may be included in net
investment  income for the purposes of the  limitation on the  deductibility  of
investment  interest.  A  Unitholder's  investment  income  attributable  to its
interest  in the  Partnership  will  include  both  its  allocable  share of the
Partnership's  portfolio  income and trade or business  income.  A  Unitholder's
investment   interest   expense  will  include  its   allocable   share  of  the
Partnership's interest expense attributable to portfolio investments.

   Tax Liability  Exceeding Cash  Distributions or Proceeds from Dispositions of
Common  Units.  A holder of Common Units will be required to pay federal  income
tax and,  in  certain  cases,  state and  local  income  taxes on such  holder's
allocable share of the Partnership's income, whether or not such holder receives
cash distributions  from the Partnership.  No assurance is given that holders of
Common Units will receive cash  distributions  equal to their allocable share of
taxable income from the Partnership. Further, a holder of Common Units may incur
tax liability in excess of the amount of cash received.

   Tax Shelter Registration;  Potential IRS Audit. The Partnership is registered
with the IRS as a "tax shelter." No assurance can be given that the  Partnership
will not be audited  by the IRS or that tax  adjustments  will not be made.  The
rights of a Common  Unit holder  owning  less than a 1% profits  interest in the
Partnership   to   participate  in  the  income  tax  audit  process  have  been
substantially  reduced.  Further,  any adjustments in the Partnership's  returns
will lead to  adjustments in the returns of holders of Common Units and may lead
to audits of Common Unit holders'  returns and adjustments of items unrelated to
the  Partnership's.  Each  holder of  Common  Units  would  bear the cost of any
expenses  incurred in connection  with an examination of the personal tax return
of such holder.

   Unrelated  Business Taxable Income.  Certain  entities  otherwise exempt from
federal income taxes (such as individual retirement accounts,  pension plans and
charitable  organizations) are nevertheless subject to federal income tax on net
unrelated  business  taxable  income and each such entity must file a tax return
for each year in which it has more than $1,000 of gross  income  from  unrelated
business activities.  The General Partner believes that substantially all of the
Partnership's gross income will be treated as derived from an unrelated trade or
business and taxable to such  entities.  The  tax-exempt  entity's  share of the
Partnership's  deductions  directly  connected  with carrying on such  unrelated
trade or business  are  allowed in  computing  the  entity's  taxable  unrelated
business  income.  ACCORDINGLY,  INVESTMENT  IN THE  PARTNERSHIP  BY  TAX-EXEMPT
ENTITIES SUCH AS INDIVIDUAL  RETIREMENT  ACCOUNTS,  PENSION PLANS AND CHARITABLE
TRUSTS MAY NOT BE ADVISABLE.

   State and Local Tax Treatment.  Each holder of Common Units may be subject to
income,  estate or  inheritance  taxes in  states  and  localities  in which the
Partnership  owns  property or does  business,  as well as in such  holder's own
state or locality.  The  Partnership  conducts  business in 15 states:  Arizona,
California,  Illinois,  Indiana, Iowa, Kansas,  Kentucky,  Louisiana,  Missouri,
Nebraska,  Nevada,  New Mexico,  Oregon,  Texas and Wyoming.  A unitholder  will
likely be required to file state income tax returns and to pay applicable  state
income taxes in many of these states and may be subject to penalties for failure
to comply  with such  requirements.  Some of the states have  proposed  that the
Partnership   withhold  a  percentage  of  income  attributable  to  Partnership
operations  within the state for Unitholders who are non-residents of the state.
In the event that amounts are  required to be withheld  (which may be greater or
less than a particular  Unitholder's  income tax  liability to the state),  such
withholding  would  generally not relieve the  non-resident  Unitholder from the
obligation to file a state income tax return.



                                       25
<PAGE>


Description of the Partnership Agreeement

   The  following  paragraphs  are  a  summary  of  certain  provisions  of  the
Partnership  Agreement.  A copy of the  Partnership  Agreement  is  filed  as an
exhibit to this report.  Unless  otherwise  specifically  described,  references
herein  to  the  term  "Partnership  Agreement"  constitute  references  to  the
partnership  agreements  of  the  Partnership  and  its  operating  partnerships
collectively. The following discussion is qualified in its entirety by reference
to  the   partnership   agreements  for  the   Partnership   and  its  operating
partnerships. With regard to allocations of taxable income and taxable loss, see
"Tax Treatment of Publicly Traded Partnerships Under the Internal Revenue Code."

   Organization and Duration

   The Partnership,  and each of the operating partnerships are Delaware limited
partnerships. Unless liquidated or dissolved at an earlier time, under the terms
of the  Partnership  Agreement,  the  Partnership  and  each  of  the  operating
partnerships will dissolve on December 31, 2082.

   Purpose

   The purpose of the Partnership under the Partnership Agreement is to serve as
the  limited  partner in the  operating  partnerships  and to conduct  any other
business  that may be  lawfully  conducted  by a limited  partnership  organized
pursuant to the Delaware Act.

   Power of Attorney

   Each limited partner, and each person who acquires a Common Unit from a prior
holder and  executes and  delivers a transfer  application  with respect to such
Common  Unit,  grants to the  General  Partner  and,  if a  liquidator  has been
appointed,  the  liquidator,  a power of attorney  to, among other  things,  (i)
execute  and  file   certain   documents   required  in   connection   with  the
qualification, continuance or dissolution of the Partnership or the amendment of
the  Partnership  Agreement  in  accordance  with the  terms of the  Partnership
Agreement  and (ii) make  consents  and  waivers  contained  in the  Partnership
Agreement.

   Restrictions on Authority of the General Partner

   The authority of the General Partner is limited in certain respects under the
Partnership  Agreement.  The General  Partner is  prohibited,  without the prior
approval  of holders of record of a majority  of the  outstanding  Common  Units
from, among other things,  selling or exchanging all or substantially all of the
Partnership's assets in a single transaction or a series of related transactions
(including by way of merger, consolidation or other combination) or approving on
behalf of the  Partnership  the sale,  exchange or other  disposition  of all or
substantially  all  of  the  assets  of  the  Partnership,   provided  that  the
Partnership may mortgage,  pledge,  hypothecate or grant a security  interest in
all or substantially all of the Partnership's assets without such approval.  The
Partnership  may sell  all or  substantially  all of its  assets  pursuant  to a
foreclosure or other  realization upon the foregoing  encumbrances  without such
approval.  Except  as  provided  in  the  Partnership  Agreement  and  generally
described under "--Amendment of Partnership Agreement and Other Agreements," any
amendment to a provision of the Partnership Agreement generally will require the
approval  of the  holders of at least 66 2/3% of the Common  Units.  The General
Partner's ability to sell or otherwise  dispose of the Partnership's  assets are
restricted by the terms of the Partnership's credit facility.

   In general,  the General  Partner may not take any action,  or refuse to take
any reasonable action, without the consent of the holders of at least a majority
of each class of outstanding units of the Partnership,  including the consent of
at least a majority of the  outstanding  Common  Units  (other than Common Units
owned by the General Partner and its  affiliates),  the effect of which would be
to  cause  the  Partnership  to  be  treated  as  an  association  taxable  as a
corporation or otherwise taxed as an entity for federal income tax purposes.

   Withdrawal or Removal of the General Partner

   The General Partner has agreed not to voluntarily withdraw as general partner
of the Partnership prior to January 1, 2003 (with limited  exceptions  described
below)  without the  approval of at least a majority of the  outstanding  Common
Units  (excluding  for purposes of such  determination  Common Units held by the
General  Partner and its  affiliates)  and furnishing an opinion of counsel that
such  withdrawal  will not cause the Partnership to 



                                       26
<PAGE>

be treated as an association  taxable as a corporation or otherwise  taxed as an
entity for  federal  income tax  purposes  or result in the loss of the  limited
liability  of any  limited  partner.  On or after  January 1, 2003,  the General
Partner  may  withdraw  as  general  partner by giving 90 days'  written  notice
(without first  obtaining  approval from the holders of Common Units),  and such
withdrawal  will not  constitute a breach of the  Partnership  Agreement.  If an
opinion  of  counsel  cannot be  obtained  to the  effect  that  (following  the
selection of a successor) the General  Partner's  withdrawal would not result in
the loss of  limited  liability  of the  holders  of  Common  Units or cause the
Partnership  to be  treated  as  an  association  taxable  as a  corporation  or
otherwise  taxed as an entity for federal income tax purposes,  the  Partnership
will be dissolved  after such  withdrawal.  Notwithstanding  the foregoing,  the
General  Partner may  withdraw  without  approval of the holders of Common Units
upon 90 days' notice to the limited partners if more than 50% of the outstanding
Common Units (other than those held by the  withdrawing  General Partner and its
affiliates)  are  held  or  controlled  by one  person  and its  affiliates.  In
addition,  the  Partnership  Agreement does not restrict  Kinder Morgan,  Inc.'s
ability to sell directly or indirectly,  all or any portion of the capital stock
of the General  Partner to a third party  without the approval of the holders of
Common Units.

   The General Partner may not be removed unless such removal is approved by the
vote of the  holders of not less than  662/3% of the  outstanding  Common  Units
(excluding Common Units held by the General Partner and its affiliates) provided
that certain other conditions are satisfied.  Any such removal is subject to the
approval  of the  successor  general  partner by the same vote and receipt of an
opinion of counsel that such  removal and the  approval of a successor  will not
result in the loss of  limited  liability  of any  limited  partner or cause the
Partnership  to be  treated  as  an  association  taxable  as a  corporation  or
otherwise taxed as an entity for federal income tax purposes.

   In the event of  withdrawal  of the  General  Partner  where such  withdrawal
violates  the  Partnership  Agreement  or removal of the General  Partner by the
limited partners under  circumstances  where cause exists,  a successor  general
partner  will have the option to acquire  the  general  partner  interest of the
departing  General  Partner (the  "Departing  Partner") in the Partnership for a
cash payment  equal to the fair market value of such  interest.  Under all other
circumstances  where the General Partner  withdraws or is removed by the limited
partners,  the  Departing  Partner will have the option to require the successor
general  partner to acquire  such  general  partner  interest  of the  Departing
Partner for such amount.  In each case such fair market value will be determined
by agreement between the Departing Partner and the successor general partner, or
if no agreement is reached,  by an independent  investment banking firm or other
independent  expert selected by the Departing  Partner and the successor general
partner (or if no expert can be agreed upon,  by the expert  chosen by agreement
of the expert selected by each of them). In addition, the Partnership would also
be required to reimburse the Departing Partner for all amounts due the Departing
Partner,   including  without  limitation  all  employee  related   liabilities,
including severance liabilities,  incurred in connection with the termination of
the  employees  employed  by  the  Departing  Partner  for  the  benefit  of the
Partnership.

   If the  above-described  option  is not  exercised  by either  the  Departing
Partner or the successor general partner, as applicable, the Departing Partner's
general partner  interest in the Partnership will be converted into Common Units
equal to the fair market value of such  interest as  determined by an investment
banking firm or other independent expert selected in the manner described in the
preceding paragraph.

   The General  Partner may transfer  all, but not less than all, of its general
partner interest in the Partnership without the approval of the limited partners
to one of its affiliates or upon its merger or consolidation into another entity
or the  transfer of all or  substantially  all of its assets to another  entity,
provided in either  case that such  entity  assumes the rights and duties of the
General  Partner,  agrees  to be  bound  by the  provisions  of the  Partnership
Agreement  and  furnishes  an opinion of counsel  that such  transfer  would not
result in the loss of the limited  liability of any limited partner or cause the
Partnership  to be  treated  as  an  association  taxable  as a  corporation  or
otherwise  cause the  Partnership  to be subject to entity  level  taxation  for
federal  income tax purposes.  In the case of any other  transfer of the general
partner interest in the Partnership,  in addition to the foregoing requirements,
the approval of at least a majority of the Common  Units is required,  excluding
for  such  purposes  those  interests  held  by  the  General  Partner  and  its
affiliates.

   Upon the withdrawal or removal of the General  Partner,  the Partnership will
be dissolved,  wound up and liquidated,  unless such withdrawal or removal takes
place following the approval of a successor general partner or unless within 180
days after such  withdrawal or removal a majority of the holders of Common Units
agree  in  writing  to  continue  the  business  of the  Partnership  and to the
appointment of a successor general partner. See "-Termination and Dissolution."


                                       27
<PAGE>

   Anti-takeover and Restricted Voting Right Provisions

   The Partnership  Agreement  contains certain  provisions that are intended to
discourage a person or group from attempting to remove the General  Partner,  as
general partner,  or otherwise change the management of the Partnership.  If any
person or group  other than the  General  Partner  and its  affiliates  acquires
beneficial  ownership of 20% or more of the Common  Units,  such person or group
loses  any and  all  voting  rights  with  respect  to all of the  Common  Units
beneficially owned or held by such person.



   Transfer Agent and Registrar

   Duties. First Chicago Trust Company of New York is the registrar and transfer
agent (the  "Transfer  Agent") for the Common  Units and receives a fee from the
Partnership  for serving in such  capacities.  All fees  charged by the Transfer
Agent for transfers of Common Units are borne by the  Partnership and not by the
holders of Common Units,  except that fees similar to those  customarily paid by
holders  of  securities  for surety  bond  premiums  to  replace  lost or stolen
certificates,  taxes or other governmental charges, special charges for services
requested by a holder of a Common Unit and other similar fees or charges will be
borne  by  the  affected  holder.  There  will  be  no  charge  to  holders  for
disbursements  of the  Partnership  cash  distributions.  The  Partnership  will
indemnify  the  Transfer  Agent,   its  agents  and  each  of  their  respective
shareholders,  directors,  officers and employees  against all claims and losses
that may arise out of acts  performed or omitted in respect of its activities as
such,  except for any liability due to any  negligence,  gross  negligence,  bad
faith or intentional misconduct of the indemnified person or entity.

   Resignation or Removal.  The Transfer Agent may at any time resign, by notice
to the  Partnership,  or be  removed by the  Partnership,  such  resignation  or
removal to become  effective upon the  appointment  by the General  Partner of a
successor  transfer agent and registrar and its acceptance of such  appointment.
If no successor has been appointed and accepted such appointment  within 30 days
after notice of such  resignation or removal,  the General Partner is authorized
to act as the transfer agent and registrar until a successor is appointed.

   Transfer of Common Units;  Status as Limited  Partner or
Assignee

   Until a Common Unit has been transferred on the books of the Partnership, the
Partnership and the Transfer Agent,  notwithstanding any notice to the contrary,
may treat the record  holder  thereof as the  absolute  owner for all  purposes,
except as otherwise required by law or stock exchange regulation.  Any transfers
of a Common Unit will not be recorded by the Transfer Agent or recognized by the
Partnership unless the transferee  executes and delivers a Transfer  Application
(set forth on the reverse side of the certificate representing Common Units). By
executing and  delivering  the Transfer  Application,  the  transferee of Common
Units (i) becomes the record holder of such Common Units and shall constitute an
assignee until admitted to the Partnership as a substitute limited partner, (ii)
automatically  requests  admission  as a  substituted  limited  partner  in  the
Partnership,  (iii)  agrees to be bound by the terms  and  conditions  of and is
deemed to have executed the  Partnership  Agreement,  (iv)  represents that such
transferee  has  capacity,  power and  authority  to enter into the  Partnership
Agreement,  (v)  grants  powers  of  attorney  to the  General  Partner  and any
liquidator of the Partnership as specified in the Partnership Agreement and (vi)
makes the  consents  and waivers  contained  in the  Partnership  Agreement.  An
assignee,  pending  its  admission  as a  substituted  limited  partner  in  the
Partnership, is entitled to an interest in the Partnership equivalent to that of
a  limited  partner  with  respect  to the  right to share  in  allocations  and
distributions from the Partnership,  including  liquidating  distributions.  The
General  Partner will vote,  and exercise other powers  attributable  to, Common
Units owned by an assignee who has not become a substituted  limited  partner at
the written direction of such Assignee. See "-Meetings; Voting."

   An assignee will become a substituted  limited  partner of the Partnership in
respect of the transferred  Common Units upon the consent of the General Partner
and the  recordation of the name of the assignee on the books and records of the
Partnership.  Such consent may be withheld in the sole discretion of the General
Partner.  Common Units are securities and are transferable according to the laws
governing  transfers of  securities.  In addition to other rights  acquired upon
transfer,  the transferor gives the transferee the right to request admission as
a substituted  limited  partner in the Partnership in respect of the transferred
Common Units. A purchaser or transferee of Common Units who does not execute and
deliver a Transfer Application obtains only (a) the right to transfer the Common
Units to a purchaser or other transferee and (b) the right to transfer the right
to seek  admission as a  substituted  limited  partner in the  Partnership  with
respect to the  transferred  Common  Units.  Thus, a purchaser or  transferee of

                                       28
<PAGE>


Common  Units who does not execute and deliver a Transfer  Application  will not
receive  cash  distributions  unless the  Common  Units are held in a nominee or
street  name  account  and the nominee or broker has  executed  and  delivered a
Transfer  Application  with  respect to such  Common  Units and may not  receive
certain federal income tax information or reports furnished to record holders of
Common  Units.  The  transferor of Common Units will have a duty to provide such
transferee with all information that may be necessary to obtain  registration of
the transfer of the Common Units,  but the transferee  agrees,  by acceptance of
the certificate  representing  Common Units, that the transferor will not have a
duty to see to the execution of the Transfer  Application  by the transferee and
will have no liability or responsibility if such transferee  neglects or chooses
not to execute and forward the Transfer Application.

   Holders of Common  Units may hold  their  Common  Units in nominee  accounts,
provided  that the broker (or other  nominee)  executes  and delivers a Transfer
Application.  The Partnership  will be entitled to treat the nominee holder of a
Common Unit as the absolute  owner thereof,  and the  beneficial  owner's rights
will be limited  solely to those that it has  against  the  nominee  holder as a
result of or by reason of any understanding or agreement between such beneficial
owner and nominee holder.

   Non-citizen Assignees; Redemption

   If the Partnership is or becomes  subject to federal,  state or local laws or
regulations  that,  in the  reasonable  determination  of the  General  Partner,
provides  for the  cancellation  or  forfeiture  of any  property  in which  the
Partnership  has an interest  because of the  nationality,  citizenship or other
related status of any limited  partner or assignee,  the  Partnership may redeem
the Common Units held by such limited  partner or assignee at their Average Fair
Market Price. In order to avoid any such cancellation or forfeiture, the General
Partner may require each record holder or assignee to furnish  information about
the  holder's  nationality,  citizenship,  residency or related  status.  If the
record holder fails to furnish such  information  within 30 days after a request
for such information,  or if the General Partner  determines on the basis of the
information  furnished  by such  holder  in  response  to the  request  that the
cancellation  or  forfeiture  of any  property in which the  Partnership  has an
interest  may occur,  the  General  Partner  may be  substituted  as the limited
partner  for such  record  holder,  who will then be  treated  as a  non-citizen
assignee ("Non-citizen  Assignee"),  and the General Partner will have the right
to redeem the Common Units held by such record  holder as described  above.  The
Partnership  Agreement  sets forth the rights of such record  holder or assignee
upon redemption. Pending such redemption or in lieu thereof, the General Partner
may change  the status of any such  limited  partner  or  assignee  to that of a
Non-citizen Assignee. Further, a Non-citizen Assignee (unlike an assignee who is
not a  substitute  limited  partner)  does not have the right to direct the vote
regarding  such  Non-citizen   Assignee's  Common  Units  and  may  not  receive
distributions  in kind upon  liquidation of the  Partnership.  See "-Transfer of
Common Units; Status as Limited Partner or Assignee."

   As used in this Report,  (i) "Average Fair Market Price" of a limited partner
interest  as of any date  means  the  average  of the daily End of Day Price (as
hereinafter   defined)  for  the  20  consecutive   Unit  Transaction  Days  (as
hereinafter defined) immediately prior to such date; (ii) "End of Day Price" for
any day means the last sale price on such day,  regular  way, or in case no such
sale takes place on such day, the average of the closing bid and asked prices on
such day, regular way, in either case as reported in the principal  consolidated
transaction  reporting  system with respect to securities  listed or admitted to
trading on the  principal  national  securities  exchange  on which the  limited
partner  interests  of such class are listed or  admitted  to trading or, if the
limited partner interests of such class are not listed or admitted to trading on
any national securities exchange, the last quoted sale price on such day, or, if
not so quoted,  the average of the high bid and low asked  prices on such day in
the over-the-counter market, as reported by the NASDAQ or such other system then
in use, or if on any such day the limited  partner  interests  of such class are
not quoted by any such  organization,  the  average of the closing bid and asked
prices on such day as furnished by a  professional  market maker making a market
in the  limited  partner  interests  of such  class  selected  by the  Board  of
Directors  of the  General  Partner,  or if on any such day no  market  maker is
making  a market  in such  limited  partner  interests,  the fair  value of such
limited partner interests on such day as determined reasonably and in good faith
by the Board of Directors of the General  Partner;  and (iii) "Unit  Transaction
Day" means a day on which the principal  national  securities  exchange on which
such limited partner interests are listed or admitted to trading is open for the
transaction of business or, if the limited  partner  interests of such class are
not listed or admitted to trading on any national securities  exchange, a day on
which banking institutions in New York City generally are open.


                                       29
<PAGE>


Issuance of Additional Securities

   The Partnership's Issuance of Securities.  The Partnership Agreement does not
restrict  the  ability of the  General  Partner to issue  additional  limited or
general  partner  interests  and  authorizes  the  General  Partner to cause the
Partnership  to  issue  additional   securities  of  the  Partnership  for  such
consideration  and on such terms and  conditions as shall be  established by the
General  Partner in its sole  discretion  without  the  approval  of any limited
partners.  In accordance with Delaware law and the provisions of the Partnership
Agreement, the General Partner may issue additional partnership interests which,
in its sole discretion, may have special voting rights to which the Common Units
are not entitled.

   Limited  Pre-emptive  Right of General  Partner.  The General Partner has the
right,  which it may from time to time  assign in whole or in part to any of its
affiliates,  to  purchase  Common  Units  or  other  equity  securities  of  the
Partnership  from the  Partnership  whenever,  and on the same terms  that,  the
Partnership issues such securities to persons other than the General Partner and
its affiliates,  to the extent necessary to maintain the percentage  interest of
the General  Partner and its affiliates in the Partnership to that which existed
immediately prior to each such issuance.

   Limited Call Right

   If at any time  not  more  than 20% of the  issued  and  outstanding  limited
partner  interests  of any  class are held by  persons  other  than the  General
Partner and its affiliates,  the General  Partner will have the right,  which it
may assign and  transfer  to any of its  affiliates  or to the  Partnership,  to
purchase  all,  but not  less  than  all,  of the  outstanding  limited  partner
interests of such class held by such non-affiliated persons, as of a record date
to be selected by the General Partner, on at least 10 but not more than 60 days'
notice. The purchase price in the event of such purchase shall be the greater of
(i) the Average Fair Market Price of limited partner  interests of such class as
of the date five days prior to the mailing of written  notice of its election to
purchase limited partner interests of such class and (ii) the highest cash price
paid by the General  Partner or any of its  affiliates  for any limited  partner
interests  of such class  purchased  within the 90 days  preceding  the date the
General Partner mails notice of its election to purchase such Common Units.

   Amendment of Partnership Agreement and Other Agreements

   Amendments to the  Partnership  Agreement may be proposed only by or with the
consent of the  General  Partner.  In order to adopt a proposed  amendment,  the
General  Partner is  required  to seek  written  approval  of the holders of the
number of Common Units  required to approve such  amendment or call a meeting of
the limited partners to consider and vote upon the proposed amendment, except as
described below.  Proposed amendments (other than those described below) must be
approved by holders of at least 662/3% of the outstanding  Common Units,  except
that no  amendment  may be made which would (i) enlarge the  obligations  of any
limited  partner,  without its  consent,  (ii)  enlarge the  obligations  of the
General Partner, without its consent, which may be given or withheld in its sole
discretion,  (iii)  restrict  in any way any action by or rights of the  General
Partner as set forth in the  Partnership  Agreement,  (iv)  modify  the  amounts
distributable,  reimbursable  or  otherwise  payable by the  Partnership  to the
General Partner,  (v) change the term of the Partnership or (vi) give any person
the right to dissolve the Partnership  other than the General Partner's right to
dissolve  the  Partnership  with the  approval of a majority of the  outstanding
Common Units or change such right of the General Partner in any way.

   The General Partner may make amendments to the Partnership  Agreement without
the approval of any limited  partner or assignee of the  Partnership  to reflect
(i) a change in the name of the Partnership, the location of the principal place
of business of the Partnership, the registered agent or the registered office of
the Partnership, (ii) admission, substitution, withdrawal or removal of partners
in accordance with the Partnership  Agreement,  (iii) a change that, in the sole
discretion of the General Partner, is reasonable and necessary or appropriate to
qualify or continue the  qualification  of the  Partnership  as a partnership in
which the limited  partners  have  limited  liability  or that is  necessary  or
advisable in the opinion of the General  Partner to ensure that the  Partnership
will not be treated as an  association  taxable as a  corporation  or  otherwise
subject to  taxation  as an entity for  federal  income  tax  purposes,  (iv) an
amendment that is necessary,  in the opinion of counsel to the  Partnership,  to
prevent the Partnership or the General Partner or their respective  directors or
officers from in any manner being  subjected to the provisions of the Investment
Company  Act of 1940,  as  amended,  the  Investment  Advisors  Act of 1940,  as
amended,  or "plan asset"  regulations  adopted  under the  Employee  Retirement
Income Security Act of 1974, as amended, whether or not substantially similar to
plan asset  regulations  currently  applied  or  proposed  by the United  States
Department  of Labor,  an amendment  that in the sole  discretion of the General
Partner is  necessary  or  desirable in  


                                       30
<PAGE>

connection  with the  authorization  of  additional  limited or general  partner
interests,  (vi) any amendment expressly permitted in the Partnership  Agreement
to be made by the General  Partner  acting alone,  (vii) an amendment  effected,
necessitated  or  contemplated  by a merger  agreement  that  has been  approved
pursuant  to the  terms  of the  Partnership  Agreement  and  (viii)  any  other
amendments substantially similar to the foregoing.

   In  addition,  the General  Partner may make  amendments  to the  Partnership
Agreement  without such consent if such  amendments (i) do not adversely  affect
the limited partners in any material respect, (ii) are necessary or desirable to
satisfy any  requirements,  conditions or  guidelines  contained in any opinion,
directive,  ruling or  regulation  of any  federal or state  agency or  judicial
authority or contained in any federal or state  statute,  (iii) are necessary or
desirable  to  facilitate  the trading of the Common Units or to comply with any
rule,  regulation,  guideline or requirement of any securities exchange on which
the Common Units are or will be listed for trading, compliance with any of which
the General Partner deems to be in the best interests of the Partnership and the
holders  of Common  Units or (iv) are  required  to effect  the intent of, or as
contemplated by, the Partnership Agreement.

   The General  Partner  will not be required to obtain an opinion of counsel as
to  the  tax  consequences  or the  possible  effect  on  limited  liability  of
amendments  described  in the two  immediately  preceding  paragraphs.  No other
amendments  to the  Partnership  Agreement  will  become  effective  without the
approval of at least 95% of the Common Units unless the  Partnership  obtains an
opinion  of  counsel  to the  effect  that  such  amendment  will not  cause the
Partnership  to be  treated  as  an  association  taxable  as a  corporation  or
otherwise  cause the  Partnership  to be subject to entity  level  taxation  for
federal  income tax  purposes  and will not affect the limited  liability of any
limited  partner in the  Partnership  or the  limited  partner of the  operating
partnerships.

   Any amendment that materially and adversely affects the rights or preferences
of any type or class of limited partner  interests in relation to other types or
classes of limited  partner  interests  or the general  partner  interests  will
require the approval of at least 66 2/3% of the type or class of limited partner
interests so affected.

   Management

   General.  The General  Partner will manage and operate the  activities of the
Partnership,  and the  General  Partner's  activities  will be  limited  to such
management and operation. Holders of Common Units will not direct or participate
in the  management  or  operations  of the  Partnership  or any of the operating
partnerships  . See  "--Limited  Liability."  The  General  Partner  will  owe a
fiduciary duty to the holders of Common Units. Notwithstanding any limitation on
obligations  or duties,  the  General  Partner  will be liable,  as the  general
partner of the Partnership,  for all the debts of the Partnership (to the extent
not paid by the Partnership), except to the extent that indebtedness incurred by
the Partnership is made specifically non-recourse to the General Partner.

   The Partnership does not currently have any directors, officers or employees.
As  is  commonly  the  case  with  publicly  traded  limited  partnerships,  the
Partnership  does not currently  contemplate that it will directly employ any of
the persons responsible for managing or operating the Partnership's  business or
for providing it with services,  but will instead  reimburse the General Partner
or its  affiliates  for the services of such  persons.  See  "-Reimbursement  of
Expenses."

   Reimbursement of Expenses. The General Partner will receive no management fee
or similar  compensation  in conjunction  with its management of the Partnership
(other than cash distributions).  See "--Cash Distribution Policy." However, the
General Partner is entitled  pursuant to Partnership  Agreement to reimbursement
on a monthly basis,  or such other basis as the General Partner may determine in
its sole discretion,  for all direct and indirect expenses it incurs or payments
it makes on behalf of the  Partnership  and all other  necessary or  appropriate
expenses  allocable to the Partnership or otherwise  reasonably  incurred by the
General Partner in connection  with operating the  Partnership's  business.  The
Partnership Agreement provides that the General Partner shall determine the fees
and expenses  that are allocable to the  Partnership  in any  reasonable  manner
determined by the General Partner in its sole discretion.  The reimbursement for
such costs and expenses will be in addition to any  reimbursement to the General
Partner and its affiliates as a result of the indemnification  provisions of the
Partnership Agreement.
See "-Indemnification."

   Indemnification. The Partnership Agreement provides that the Partnership will
indemnify the General  Partner,  any Departing  Partner and any person who is or
was an officer or director of the General Partner or any Departing  Partner,  to
the fullest  extent  permitted by law, and may  indemnify,  to the extent deemed
advisable by the General  Partner,  to the fullest extent  permitted by law, any
person  who is or was an  affiliate  of the  General  Partner  or any  


                                       31
<PAGE>

Departing  Partner,  any person who is or was an  officer,  director,  employee,
partner,  agent or trustee of the General Partner,  any Departing Partner or any
such  affiliate,  or any  person  who is or was  serving  at the  request of the
General Partner or any affiliate of the General Partner or any Departing Partner
as an officer, director,  employee, partner, agent, or trustee of another person
("Indemnities")  from  and  against  any  and  all  losses,   claims,   damages,
liabilities (joint or several) expenses  (including,  without limitation,  legal
fees and expenses),  judgments, fines, penalties, interest, settlement and other
amounts arising from any and all claims, demands, actions, suits or proceedings,
whether  civil,  criminal,   administrative  or  investigative,   in  which  any
Indemnitee  may be involved,  or is  threatened  to be  involved,  as a party or
otherwise,  by reason of its  status as (i) the  General  Partner,  a  Departing
Partner or affiliate of either, (ii) an officer,  director,  employee,  partner,
agent or trustee of the General Partner,  any Departing  Partner or affiliate of
either or (iii) a person  serving at the request of the  Partnership  in another
entity in a similar capacity, provided that in each case the Indemnitee acted in
good faith and in a manner which the Indemnitee believed to be in or not opposed
to the best  interests  of the  Partnership  and,  with  respect to any criminal
proceeding,  had no reasonable  cause to believe its conduct was  unlawful.  Any
indemnification  under the  Partnership  Agreement  will only be paid out of the
assets of the Partnership, and the General Partner will not be personally liable
for,  or have any  obligation  to  contribute  or loan  funds or  assets  to the
Partnership to enable it to effectuate, such indemnification. The Partnership is
authorized  to purchase (or to reimburse the General  Partner or its  affiliates
for the cost of) insurance,  purchased on behalf of the General Partner and such
other persons as the General Partner determines,  against  liabilities  asserted
against  and  expenses   incurred  by  such  persons  in  connection   with  the
Partnership's activities, whether or not the Partnership would have the power to
indemnify such person against such  liabilities  under the provisions  described
above.

   Conflicts and Audit Committee. One or more directors who are neither officers
nor employees of the General  Partner or any of its  affiliates  will serve as a
committee of the Board of Directors of the General  Partner (the  "Conflicts and
Audit  Committee")  and will,  at the  request of the  General  Partner,  review
specific  matters  as to which  the  General  Partner  believes  there  may be a
conflict of interest in order to determine if the  resolution  of such  conflict
proposed by the General Partner is fair and reasonable to the  Partnership.  The
Conflicts  and Audit  Committee  will only review  matters at the request of the
General Partner,  which has sole discretion to determine which matters to submit
to such  Committee.  Any matters  approved by the Conflicts and Audit  Committee
will be  conclusively  deemed  to be fair  and  reasonable  to the  Partnership,
approved  by all  partners  of the  Partnership  and not a breach by the General
Partner  of  the  Partnership  Agreement  or  any  duties  it  may  owe  to  the
Partnership.  Additionally,  it is possible  that such  procedure  in itself may
constitute a conflict of interest.

   Meetings; Voting

   Holders of Common Units or assignees  who are record  holders of Common Units
on the record date set pursuant to the Partnership Agreement will be entitled to
notice of, and to vote at,  meetings of limited  partners of the Partnership and
to act with  respect to matters as to which  approvals  may be  solicited.  With
respect  to  voting  rights  attributable  to  Common  Units  that are  owned by
assignees  who have not yet been  admitted  as  limited  partners,  the  General
Partner will be deemed to be the limited  partner with respect thereto and will,
in  exercising  the voting rights in respect of such Common Units on any matter,
vote such Common  Units at the written  direction  of such record  holder.  If a
proxy is not  returned on behalf of the Common Unit record  holder,  such Common
Units will not be voted  (except  that,  in the case of Common Units held by the
General  Partner on behalf of Non-citizen  Assignees,  the General  Partner will
distribute  the votes in respect of such Common  Units in the same ratios as the
votes of limited  partners in respect of other  Common  Units are cast).  When a
proxy is returned properly executed,  the Common Units represented  thereby will
be voted in accordance with the indicated instructions.  If no instructions have
been  specified on the properly  executed and returned  proxy,  the Common Units
represented  thereby  will be voted  "FOR" the  approval  of the  matters  to be
presented.  Common  Units held by the General  Partner on behalf of  Non-citizen
Assignees,  as defined pursuant to the Partnership Agreement,  shall be voted by
the General Partner in the same ratios as the votes of the limited partners with
respect to the matter presented to the holders of Common Units.

   Any action that is required or permitted to be taken by the limited  partners
may be taken either at a meeting of the limited partners or without a meeting if
consents in writing  setting  forth the action so taken are signed by holders of
such number of limited  partner  interests as would be necessary to authorize or
take such action at a meeting of the limited  partners.  Meetings of the limited
partners of the  Partnership  may be called by the General Partner or by limited
partners  owning at least 20% of the  outstanding  Common Units of the class for
which a meeting is  proposed.  Limited  partners may vote either in person or by
proxy at meetings.  Two-thirds  (or a majority,  if that is the vote required to
take action at the  meeting in  question)  of the  outstanding  limited  partner
interests of the class for which a meeting is to be held (excluding, if such are
excluded from such vote,  limited partner  interests held by the General 


                                       32
<PAGE>

Partner and its affiliates)  represented in person or by proxy will constitute a
quorum at a meeting  of  limited  partners  of the  Partnership.  Except for any
proposal  for  removal  of the  General  Partner or  certain  amendments  to the
Partnership Agreement described above, substantially all matters submitted for a
vote are determined by the  affirmative  vote, in person or by proxy, of holders
of a majority of the outstanding limited partner interests.

   Each  record  holder of a Common  Unit has a vote  according  to such  record
holder's  percentage  interest in the Partnership,  although  additional limited
partner  interests  having  special voting rights could be issued by the General
Partner. See "--Issuance of Additional  Securities." However, Common Units owned
beneficially  by any person or group  (other  than the  General  Partner and its
affiliates)  that own  beneficially  20% or more of all Common  Units may not be
voted on any matter and will not be  considered to be  outstanding  when sending
notices  of  a  meeting  of  limited  partners,   calculating   required  votes,
determining the presence of a quorum or for other similar partnership  purposes.
The Partnership  Agreement  provides that Common Units held in nominee or street
name  accounts  will be voted by the broker (or other  nominee)  pursuant to the
instruction  of  the  beneficial  owner,  unless  the  arrangement  between  the
beneficial owner and such holder's nominee provides otherwise.

   Any notice, demand,  request, report or proxy materials required or permitted
to be given or made to record  holders  of  Common  Units  (whether  or not such
record  holder has been  admitted as a limited  partner)  under the terms of the
Partnership  Agreement will be delivered to the record holder by the Partnership
or by the Transfer Agent at the request of the Partnership.

   Limited Liability

   Except as described below, Common Units are fully paid, and holders of Common
Units will not be required to make additional contributions to the Partnership.

   Assuming that a limited  partner does not  participate  in the control of the
business of the  Partnership,  within the meaning of the Delaware  Act, and that
such partner otherwise acts in conformity with the provisions of the Partnership
Agreement,  such  partner's  liability  under the  Delaware Act will be limited,
subject to certain possible exceptions,  generally to the amount of capital such
partner  is  obligated  to  contribute  to the  Partnership  in  respect of such
holder's Common Units plus such holder's share of any undistributed  profits and
assets of the  Partnership.  However,  if it were  determined  that the right or
exercise  of the right by the  limited  partners as a group to remove or replace
the General Partner, to approve certain amendments to the Partnership  Agreement
or to take  other  action  pursuant  to the  Partnership  Agreement  constituted
"participation in the control" of the Partnership's business for the purposes of
the Delaware Act, then the limited partners could be held personally  liable for
the  Partnership's  obligations  under the laws of the State of  Delaware to the
same  extent  as  the  General  Partner.  Under  the  Delaware  Act,  a  limited
partnership  may not make a distribution  to a partner to the extent that at the
time  of  the  distribution,  after  giving  effect  to  the  distribution,  all
liabilities of the partnership, other than liabilities to partners on account of
their partnership interests and nonrecourse  liabilities,  exceed the fair value
of the assets of the limited  partnership.  For the purpose of  determining  the
fair value of the assets of a limited  partnership,  the  Delaware  Act provides
that the fair  value of  property  subject  to  nonrecourse  liability  shall be
included  in the assets of the limited  partnership  only to the extent that the
fair value of that property exceeds that nonrecourse liability. The Delaware Act
provides that a limited partner who receives such a distribution and knew at the
time of the distribution  that the distribution was in violation of the Delaware
Act  shall  be  liable  to  the  limited  partnership  for  the  amount  of  the
distribution  for  three  years  from the date of the  distribution.  Under  the
Delaware Act, an assignee who becomes a substituted limited partner of a limited
partnership is liable for the obligations of the assignor to make  contributions
to the partnership, except the assignee is not obligated for liabilities unknown
to such  assignee at the time the  assignee  became a limited  partner and which
could not be ascertained from the partnership agreement.

   The  Partnership  is  organized  under  the laws of  Delaware  and  currently
conducts  business in Arizona,  California,  Illinois,  Indiana,  Iowa,  Kansas,
Kentucky,  Louisiana,  Missouri, Nebraska, New Mexico, Nevada, Oregon, Texas and
Wyoming.  Maintenance of limited  liability will require  compliance  with legal
requirements in such  jurisdictions in which the Partnership  conducts business,
including  qualifying  the  operating   partnerships  to  do  business  therein.
Limitations  on the  liability  of limited  partners  for the  obligations  of a
limited partnership have not been clearly established in many jurisdictions.  If
it were determined  that the  Partnership  was, by virtue of its limited partner
interest in the operating partnerships or otherwise,  conducting business in any
state without compliance with the applicable  limited  partnership  statute,  or
that the right or exercise  of the right by the  limited  partners as a group to
remove or replace the General  Partner,  to approve  certain  amendments  to the
Partnership  Agreement,  or to take other  action  pursuant  to the  Partnership
Agreement  constituted  "participation  in the  control"  of  the  Partnership's



                                       33
<PAGE>


business for the purposes of the statues of any relevant jurisdiction,  then the
limited  partners  could  be  held  personally   liable  for  the  Partnership's
obligations under the law of such jurisdiction to the same extent as the General
Partner.  The  Partnership  will  operate in such manner as the General  Partner
deems reasonable and necessary or appropriate to preserve the limited  liability
of holders of Common Units.

   Books and Reports

   The General Partner is required to keep appropriate  books of the business at
the principal offices of the Partnership.  The books will be maintained for both
tax and financial reporting purposes on an accrual basis. The fiscal year of the
Partnership is the calendar year.

   As soon as  practicable,  but in no event later than 120 days after the close
of each fiscal year,  the General  Partner will furnish each record  holder of a
Common Unit (as of a record date selected by the General Partner) with an annual
report containing  audited financial  statements of the Partnership for the past
fiscal  year,   prepared  in  accordance  with  generally  accepted   accounting
principles. As soon as practicable, but in no event later than 90 days after the
close of each calendar quarter (except the fourth quarter),  the General Partner
will furnish each record holder of Common Units upon request a report containing
unaudited financial  statements of the Partnership and such other information as
may be required by law.

   The General  Partner will use all  reasonable  efforts to furnish each record
holder  of a Common  Unit  information  reasonably  required  for tax  reporting
purposes within 90 days after the close of each taxable year.  Such  information
is  expected  to  be  furnished  in a  summary  form  so  that  certain  complex
calculations normally required of partners can be avoided. The General Partner's
ability to furnish  such  summary  information  to holders of Common  Units will
depend on the  cooperation of such holders of Common Units in supplying  certain
information  to the General  Partner.  Every  holder of a Common  Unit  (without
regard to whether such holder supplies such  information to the General Partner)
will receive  information  to assist in  determining  such holder's  federal and
state tax  liability  and filing  such  holder's  federal  and state  income tax
returns.

   Right to Inspect Partnership Books and Records

   The Partnership  Agreement provides that a limited partner can, for a purpose
reasonably related to such limited partner's interest as a limited partner, upon
reasonable demand and at such partner's own expense, have furnished to him (i) a
current list of the name and last known address of each partner,  (ii) a copy of
the Partnership's tax returns, (iii) information as to the amount of cash, and a
description  and statement of the agreed value of any other property or services
contributed  or to be  contributed  by each  partner  and the date on which each
became a partner, (iv) copies of the Partnership  Agreement,  the certificate of
limited  partnership  of the  Partnership,  amendments  thereto  and  powers  of
attorney  pursuant  to which  the  same  have  been  executed,  (v)  information
regarding the status of the Partnership's  business and financial  condition and
(vi) such other information  regarding the affairs of the Partnership as is just
and reasonable.  The General Partner may, and intends to, keep confidential from
the limited partners trade secrets or other  information the disclosure of which
the General  Partner  believes in good faith is not in the best interests of the
Partnership or which the  Partnership  is required by law or by agreements  with
third parties to keep confidential.

   Termination and Dissolution

   The  Partnership  will  continue  until  December  31,  2082,  unless  sooner
terminated  pursuant  to the  Partnership  Agreement.  The  Partnership  will be
dissolved  upon  (i)  the  election  of the  General  Partner  to  dissolve  the
Partnership, if approved by a majority of the Common Units, (ii) the sale of all
or  substantially  all of the assets and properties of the  Partnership  and its
operating  partnerships,  (iii) the  bankruptcy  or  dissolution  of the General
Partner or (iv) the  withdrawal  or removal of the General  Partner or any other
event that  results in its  ceasing to be the  General  Partner  (other  than by
reason of a transfer in accordance with the Partnership  Agreement or withdrawal
or removal  following  approval of a successor),  provided that the  Partnership
will not be dissolved  upon an event  described in clause (iv) if within 90 days
after such event the  partners  agree in writing to continue the business of the
Partnership and to the appointment, effective as of the date of such event, of a
successor general partner.  Upon a dissolution pursuant to clause (iii) or (iv),
at least a majority of the Common  Units may also  elect,  within  certain  time
limitations,  to  reconstitute  the Partnership and continue its business on the
same terms and  conditions set forth in the  Partnership  Agreement by forming a
new limited partnership on terms identical to those set forth in the Partnership
Agreement  and  having as a general  partner  an entity  approved  by at least a
majority  of the Common


                                       34
<PAGE>

Units,  subject to receipt by the  Partnership of an opinion of counsel that the
exercise of such right will not result in the loss of the limited  liability  of
holders of Common Units or cause the  Partnership or the  reconstituted  limited
partnership  to be  treated  as  an  association  taxable  as a  corporation  or
otherwise subject to taxation as an entity for federal income tax purposes.

   Registration Rights

   Pursuant  to the terms of the  Partnership  Agreement  and subject to certain
limitations described therein, the Partnership has agreed to register for resale
under the Securities Act of 1933 and applicable state securities laws any Common
Units  (or  other  securities  of the  Partnership)  proposed  to be sold by the
General  Partner (or its  affiliates)  if an  exemption  from such  registration
requirements  is not  otherwise  available for such  proposed  transaction.  The
Partnership  is obligated to pay all expenses  incidental to such  registration,
excluding underwriting discounts and commissions.

   Cash Distribution Policy

   General.  A principal  objective of the  Partnership is to generate cash from
the Partnership  operations and to distribute  Available Cash to its partners in
the manner described  herein.  "Available Cash" generally means, with respect to
any calendar  quarter,  the sum of all of the cash  received by the  Partnership
from all  sources,  less  all of its cash  disbursements  and net  additions  to
reserves.  For purposes of cash  distributions  to holders of Common Units,  the
term  Available  Cash  excludes  the amount paid in respect of the 0.5%  special
limited  partner  interest in SFPP owned by the former general  partner of SFPP,
which amount will equal 0.5% of the total cash  distributions  made each quarter
by SFPP to its partners.

   The General Partner's decisions regarding amounts to be placed in or released
from reserves may have a direct impact on the amount of Available  Cash. This is
because  increases and decreases in reserves are taken into account in computing
Available Cash. The General Partner may, in its reasonable  discretion  (subject
to certain  limits),  determine  the  amounts to be placed in or  released  from
reserves each quarter.

   Cash distributions will be characterized as either distributions of Cash from
Operations or Cash from Interim Capital  Transactions.  This distinction affects
the  amounts  distributed  to holders of Common  Units  relative  to the General
Partner. See "--Quarterly Distributions of Available  Cash-Distributions of Cash
from Operations" and "-Quarterly  Distributions of Available  Cash-Distributions
of Cash from Interim Capital Transactions."

   "Cash  from  Operations"   generally  refers  to  the  cash  balance  of  the
Partnership  on the date the  Partnership  commenced  operations,  plus all cash
generated by the  operations  of the  Partnership's  business,  after  deducting
related cash expenditures, reserves, debt service and certain other items.

   "Cash from Interim Capital  Transactions" will generally be generated only by
borrowings,  sales of debt and equity securities and sales or other dispositions
of assets for cash (other than inventory,  accounts receivable and other current
assets and assets disposed of in the ordinary course of business).

   To avoid the  difficulty  of  trying  to  determine  whether  Available  Cash
distributed  by the  Partnership  is Cash from  Operations  or Cash from Interim
Capital Transactions, all Available Cash distributed by the Partnership from any
source will be treated as Cash from  Operations  until the sum of all  Available
Cash  distributed as Cash from Operations  equals the cumulative  amount of Cash
from  Operations  actually  generated  from the date the  Partnership  commenced
operations  through the end of the calendar quarter prior to such  distribution.
Any excess Available Cash (irrespective of its source) will be deemed to be Cash
from Interim Capital Transactions and distributed accordingly.

   If Cash from Interim  Capital  Transactions is distributed in respect of each
Common  Unit in an  aggregate  amount per Common Unit equal to $11.00 per Common
Unit,  (the initial  public  offering price of the Common Units adjusted to give
effect to the  2-for-1  split of Common  Units  effective  October 1, 1997) (the
Initial Common Unit Price"),  the  distinction  between Cash from Operations and
Cash from Interim Capital  Transactions  will cease, and both types of Available
Cash will be treated  as Cash from  Operations.  The  General  Partner  does not
anticipate  that there will be significant  amounts of Cash from Interim Capital
Transactions distributed.


                                       35
<PAGE>

   The discussion below indicates the percentages of cash distributions required
to be made to the  General  Partner  and the  holders  of Common  Units.  In the
following general discussion of how Available Cash is distributed, references to
Available Cash,  unless otherwise  stated,  mean Available Cash that constitutes
Cash from Operations.

   Quarterly   Distributions  of  Available  Cash.  The  Partnership  will  make
distributions  to its partners  with respect to each  calendar  quarter prior to
liquidation in an amount equal to 100% of its Available Cash for such quarter.

   Distributions  of Cash from  Operations.  Distributions by the Partnership of
Available Cash  constituting  Cash from  Operations  with respect to any quarter
will be made in the following manner:

   first,  98% to the  holders  of Common  Units pro rata and 2% to the  General
     Partner  until the holders of Common Units have received a total of $0.3025
     per Common Unit for such quarter in respect of each Common Unit (the "First
     Target Distribution"); and

   second,  85% of any such  Available  Cash then  remaining  to the  holders of
     Common Units pro rata and 15% to the General  Partner  until the holders of
     Common  Units have  received a total of  $0.3575  per Common  Unit for such
     quarter in respect of each Common Unit (the "Second Target Distribution");

   third, 75% of any such Available Cash then remaining to all holders of Common
     Units pro rata and 25% to the General  Partner  until the holders of Common
     Units have  received a total of $0.4675 per Common Unit for such quarter in
     respect of each Common Unit (the "Third Target Distribution"); and

   fourth,  50% of any such  Available  Cash then  remaining  to all  holders of
     Common Units pro rata and 50% to the General Partner.

   In addition,  if the First,  Second and Third Target  Distribution levels are
reduced  to  zero,  as  described  below  under  "--Quarterly  Distributions  of
Available   Cash-Adjustment  of  Target  Distribution   Levels,"  all  remaining
Available Cash will be distributed as Cash from  Operations,  50% to the holders
of Common Units pro rata and 50% to the General  Partner.  These  provisions are
inapplicable upon the dissolution and liquidation of the Partnership.

   Distributions of Cash from Interim Capital Transactions. Distributions on any
date by the  Partnership  of Available Cash that  constitutes  Cash from Interim
Capital  Transactions will be distributed 98% to all holders of Common Units pro
rata and 2% to the General Partner until the Partnership  shall have distributed
in respect of each Common Unit  Available  Cash  constituting  Cash from Interim
Capital Transactions in an aggregate amount per Common Unit equal to the Initial
Common Unit Price.

   As Cash from Interim Capital Transaction is distributed,  it is treated as if
it were a repayment  of the  initial  public  offering  price.  To reflect  such
repayment,  the  First,  Second and Third  Target  Distribution  levels  will be
adjusted  downward by  multiplying  each amount by a fraction,  the numerator of
which is the  Unrecovered  Initial  Common Unit Price  immediately  after giving
effect to such repayment and the denominator of which is the Unrecovered Initial
Common  Unit  Price,  immediately  prior to  giving  effect  to such  repayment.
"Unrecovered Initial Common Unit Price" includes the amount by which the Initial
Common  Unit Price  exceeds  the  aggregate  distribution  of Cash from  Interim
Capital Transactions per Common Unit.

   When  "Payback  of Initial  Common Unit Price" is  achieved,  i.e.,  when the
Unrecovered  Initial Common Unit Price is zero, then in effect the First, Second
and Third  Target  Distribution  levels  each will  have been  reduced  to zero.
Thereafter all  distributions of Available Cash from all sources will be treated
as if they were Cash from  Operations and Available Cash will be distributed 50%
to all holders of Common Units pro rata and 50% to the General Partner.

   Adjustment of Target Distribution  Levels. The First, Second and Third Target
Distribution  levels will be  proportionately  adjusted  upward or downward,  as
appropriate,  in the event of any  combination  or  subdivision  of Common Units
(whether  effected by a  distribution  payable in Common Units or otherwise) but
not by reason of the issuance of  additional  Common Units for cash or property.
For example,  in  connection  with the  Partnership's  two-for-one  split of the
Common Units on October 1, 1997, the First, Second and third Target Distribution
levels  were  each  reduced  to 50%  of  its  initial  level.  See  "--Quarterly
Distributions of Available Cash-Distributions of Cash from Operations."


                                       36
<PAGE>


   In addition,  if a distribution is made of Available Cash  constituting  Cash
from  Interim  Capital   Transactions,   the  First,  Second  and  Third  Target
Distribution  levels will be adjusted downward  proportionately,  by multiplying
each such amount, as the same may have been previously adjusted,  by a fraction,
the numerator of which is the Unrecovered  Initial Common Unit Price immediately
after giving effect to such  distribution  and the  denominator  of which is the
Unrecovered  Initial Common Unit Price immediately  prior to such  distribution.
For example,  assuming the  Unrecovered  Initial Common Unit Price is $11.00 per
Common Unit and if Cash from Interim  Capital  Transactions  of $5.50 per Common
Unit is distributed to holders of Common Units (assuming no prior  adjustments),
then the amount of the First,  Second and Third Target Distribution levels would
each be reduced to 50% of its initial level. If and when the Unrecovered Initial
Common  Unit Price is zero,  the First,  Second  and Third  Target  Distribution
levels each will have been reduced to zero, and the General  Partner's  share of
distributions  of  Available  Cash  will  increase,  in  general,  to 50% of all
distributions of Available Cash.

   The First,  Second and Third Target  Distribution levels may also be adjusted
if  legislation  is enacted which causes the  Partnership to become taxable as a
corporation or otherwise  subjects the  Partnership to taxation as an entity for
federal income tax purposes.  In such event, the First, Second, and Third Target
Distribution  levels for each quarter  thereafter  would be reduced to an amount
equal  to the  product  of (i)  each  of the  First,  Second  and  Third  Target
Distribution  levels  multiplied  by (ii) one minus  the sum of (x) the  maximum
marginal  federal  income  tax rate to which the  Partnership  is  subject as an
entity plus (y) any increase that results from such legislation in the effective
overall state and local income tax rate to which the  Partnership  is subject as
an entity for the taxable year in which such quarter  occurs  (after taking into
account the benefit of any deduction  allowable for federal  income tax purposes
with  respect to the  payment of state and local  income  taxes).  For  example,
assuming the  Partnership  was not previously  subject to state and local income
tax, if the  Partnership  were to become taxable as an entity for federal income
tax purposes and the Partnership  became subject to a maximum marginal  federal,
and effective  state and local,  income tax rate of 38%, then each of the Target
Distribution  levels,  would be reduced to 62% of the amount thereof immediately
prior to such adjustment.

   Liquidation and Distribution of Proceeds

   Upon dissolution of the Partnership,  unless the Partnership is reconstituted
and continued as a new limited partnership, the person authorized to wind up the
affairs of the  Partnership  (the  "Liquidator")  will,  acting  with all of the
powers of the General Partner that such Liquidator  deems necessary or desirable
in its good faith judgment in connection therewith,  liquidate the Partnership's
assets and apply the proceeds of the  liquidation as follows:  (i) first towards
the payment of all  creditors of the  Partnership  and the creation of a reserve
for contingent  liabilities and (ii) then to all partners in accordance with the
positive  balances  in  their  respective   capital   accounts.   Under  certain
circumstances  and  subject to certain  limitations,  the  Liquidator  may defer
liquidation or distribution of the Partnership's  assets for a reasonable period
of time and/or  distribute  assets to partners in kind if it  determines  that a
sale would be impractical or would cause undue loss to the partners.

   Generally, any gain will be allocated between the holders of Common Units and
the General  Partner in a manner that  approximates  their sharing ratios in the
various  Target  Distribution  levels.  Holders of Common  Units and the General
Partner will share in the remainder of the Partnership's assets in proportion to
their respective capital account balances in the Partnership.

   Any loss or unrealized  loss will be allocated to the General Partner and the
holders of Common Units:  first, in proportion to the positive  balances in such
partners'  capital  accounts  until all such  balances are reduced to zero;  and
thereafter, to the General Partner.

Item 3.  Legal Proceedings

  FERC Proceedings

  In   September   1992,   El  Paso   Refinery,   L.P.   ("El  Paso")   filed  a
protest/complaint  with FERC  challenging  SFPP's  East Line rates from El Paso,
Texas to Tucson and Phoenix,  Arizona,  challenging  SFPP's proration policy and
seeking  to block the  reversal  of the  direction  of flow of  SFPP's  six inch
pipeline  between  Phoenix  and Tucson.  At various  dates  following  El Paso's
September 1992 filing, other shippers on SFPP's South System,  including Chevron
U.S.A.  Products Company  ("Chevron"),  Navajo,  ARCO Products Company ("ARCO"),
Texaco Refining and Marketing Inc. ("Texaco"), Refinery Holding Company, L.P. (a
partnership  formed by El Paso's long-term  secured  creditors that purchased El
Paso's refinery in May 1993), Mobil Oil Corporation and Tosco Corporation,  have
filed separate  complaints,  and/or 



                                       37
<PAGE>

motions to intervene  in the FERC  proceeding,  challenging  SFPP's rates on its
East and West Lines.  Certain of these  parties  also  claimed  that a gathering
enhancement charge at SFPP's Watson origin pump station in Carson, California is
in violation of the Interstate  Commerce Act. In subsequent  procedural rulings,
the FERC has consolidated these challenges (Docket Nos. OR92-8-000,  et al.) and
ruled that they must proceed as a complaint proceeding, with the burden of proof
being  placed on the  complaining  parties.  Such  parties must show that SFPP's
rates and practices at issue violate the requirements of the Interstate Commerce
Act.

  Hearings in the FERC  proceeding  commenced on April 9, 1996 and  concluded on
July 19, 1996. The parties completed the filing of their post-hearing  briefs on
December 9, 1996. An initial decision by the FERC  Administrative  Law Judge was
issued on September 25, 1997 (the "Initial Decision").

  The Initial Decision upheld SFPP's position that "changed  circumstances" were
not shown to exist on the West Line,  thereby  retaining the just and reasonable
status of all West Line rates that were "grandfathered"  under the Energy Policy
Act of 1992.  Accordingly,  such rates are not subject to challenge,  either for
the past or prospectively,  in that proceeding.  The  Administrative Law Judge's
decision  specifically  excepted  from  that  ruling  SFPP's  Tariff  No. 18 for
movement of jet fuel from Los Angeles to Tucson,  which was initiated subsequent
to the enactment of EPACT.

  The Initial Decision also included rulings that were generally adverse to SFPP
on such cost of service issues as the capital  structure to be used in computing
SFPP's 1985 starting rate base under FERC Opinion 154-B, the level of income tax
allowance, and the recoverability of civil and regulatory litigation expense and
certain pipeline  reconditioning  costs. The Administrative Law Judge also ruled
that a gathering  enhancement  service at SFPP's  Watson  origin pump station in
Carson, California is subject to FERC jurisdiction and ordered that a tariff for
that service and supporting cost of service documentation be filed no later than
60 days after a final FERC order on this matter.

  Briefs on  exceptions  were filed on November  25, 1997,  and briefs  opposing
exceptions  were filed on January  23,  1998.  The matters at issue will then be
submitted to the FERC commissioners for a final decision,  which decision is not
expected before late - 1998.  Unless the FERC's final decision is  substantially
more favorable to SFPP's position on the above-described  methodological  issues
than the Initial  Decision,  SFPP will be required to pay  reparations  and file
reduced  tariff  rates,  primarily on the East Line.  The  complainants  in FERC
Docket Nos. OR92-8-000 et al. are seeking reparations, aggregating approximately
$35 million for  shipments  between 1990 and 1994 as well as rate  reductions of
between 30% and 40% for shipments in 1995 and  thereafter.  If the  complainants
were to prevail on all claims,  it is estimated that reparations  resulting from
such rate  reductions  for  shipments in 1995,  1996,  and 1997 would  aggregate
approximately an additional $80 million,  resulting in total reparations for the
period 1990-1997 of approximately  $115 million,  plus interest of approximately
$30 million.  The complainants in FERC Docket NOs OR98-1-000 and OR98-2-000 also
seek both  prospective  reductions in the rates charged by SFPP and reparations.
If the  Initial  Decision  were  affirmed  in  current  form by the  FERC,  SFPP
management  estimates  that the total  reparations  and  interest  that would be
payable as of December  31, 1997 would  approximate  the $30 million in reserves
that had been recorded as of that date.  SFPP management also estimates that the
Initial  Decision,  in its current  form,  and if also applied to the  Sepulveda
Lines rate at issue in Docket No. IS98-1-000,  would reduce prospective revenues
in the range of $8 million to $10  million  annually.  Under the  rulings in the
Initial  Decision,   reparations  and  interest  would  continue  to  accrue  at
approximately $8 million per annum until new prospective rates become effective.

  If SFPP were to lose its  "grandfathered"  rates due to a finding of  "changed
circumstances",  the losses to the Partnership could be substantially larger. As
a result, the loss of SFPP's "grandfathered" rates could have a material adverse
effect on the Partnership's  ability to make  distributions to Unitholders.  The
Partnership is aggressively defending its position before the FERC.

  Prior to issuance of the Initial Decision,  SFPP announced that it had reached
tentative  agreements with two  complainants  in Docket Nos.  OR92-8-000 et al.,
resolving  those  parties'  claims  in  that  proceeding.  Management  does  not
anticipate  that those  agreements  will be finalized in  accordance  with their
tentative terms.

  In December 1995,  Texaco filed an additional FERC  complaint,  which involves
the question of whether a tariff  filing is required for movements on certain of
SFPP's  lines  upstream  of its Watson,  California  station  origin  point (the
"Sepulveda Lines") and, if so, whether those rates may be set in that proceeding
and what those rates  should be.  Texaco's  initial  complaint  was  followed by
several other West Line shippers  filing  similar  complaints  and/or motions to
intervene,  all of which have been consolidated  into Docket Nos.  OR96-2-000 et
al. Hearings before an  Administrative  Law Judge were held in December 1996 and
the parities  completed the filing of final  post-hearing  briefs on January 31,
1997.


                                       38
<PAGE>

  On March 28, 1997,  the  Administrative  Law Judge issued an initial  decision
holding  that the  movements on SFPP's  Sepulveda  Lines are not subject to FERC
jurisdiction.  On August 5, 1997,  the FERC reversed that decision and found the
Sepulveda Lines to be subject to the  jurisdiction of the FERC. SFPP was ordered
to make a tariff  filing  within 60 days to  establish an initial rate for these
facilities.  The FERC  reserved  decision on  reparations  until it rules on the
newly-filed  rates.  On October 6, 1997,  SFPP filed a tariff  establishing  the
initial  interstate  rate for  movements on the Sepulveda  Lines from  Sepulveda
Junction  to Watson  Station at the  preexisting  rate of five cents per barrel,
along with  supporting  cost of  service  documentation.  Subsequently,  several
shippers  filed protests and motions to intervene at the FERC  challenging  that
rate. On October 27, 1997, SFPP made a responsive filing at the FERC, requesting
that these  protests be held in abeyance  until the FERC ruled on SFPP's request
for  rehearing  of the  August  5, 1997  order,  and also  indicating  that SFPP
intended  to defend the new tariff  both on the basis of its cost of service and
as a market-based  rate. On November 5, 1997, the FERC issued an order accepting
the new rate  effective  November 6, 1997,  subject to refund,  and referred the
proceeding to a settlement  judge. On December 10, 1997,  following a settlement
conference held at the direction of the FERC, the settlement  judge  recommended
that the settlement procedures be terminated.  On December 24, 1997, FERC denied
SFPP's  request for rehearing of the August 5,  decision.  On December 31, 1997,
SFPP filed an application  for market power  determination,  which,  if granted,
will enable it to charge market-based rates for this service.

  On October 22, 1997, ARCO Products  Company,  Mobil Oil Corporation and Texaco
Refining  and  Marketing,  Inc.  filed a new  complaint  at the FERC (Docket No.
OR98-1-000)  challenging  the  justness  and  reasonableness  of all  of  SFPP's
interstate  rates. The new complaint again challenges  SFPP's East and West Line
rates and raises many of the same issues,  including a renewed  challenge to the
grandfathered  status of West Line rates, that have been at issue in Docket Nos.
OR92-8-000,  et al. The new complaint includes an assertion that the acquisition
of SFPP  and the  cost  savings  anticipated  to  result  from  the  acquisition
constitute  "changed  circumstances"  that provide a basis for  terminating  the
"grandfathered"  status of SFPP's otherwise  protected rates. The complaint also
seeks to  establish  that  SFPP's  grandfathered  interstate  rates from the San
Francisco Bay area to Reno, Nevada and from Portland to Eugene,  Oregon are also
subject to "changed  circumstances" and, therefore,  can be challenged as unjust
and unreasonable.  On November 26, 1997,  Ultramar Diamond Shamrock  Corporation
filed a similar complaint at the FERC (Docket No. OR98-2-000).  Both reparations
and prospective rate deductions are sought for movements on all of the lines.

  SFPP filed answers to both  complaints  with the FERC on November 21, 1997 and
December 22, 1997,  respectively,  and intends to  vigorously  defend all of the
challenged  rates.  On January 20, 1998, the FERC issued an order  accepting the
complaints and  consolidating  both complaints into one proceeding,  but holding
them in abeyance pending a Commission decision on review of the Initial Decision
in Docket Nos.  OR92-8-000  et al. The FERC stated that it would,  at that time,
afford the  complainants  the opportunity to amend their  complaints in light of
any findings of the FERC in Docket Nos.  OR92-8-000  et al. The FERC also stated
that the complainants should identify more specifically the specific services at
issue and the rates and  charges  upon which they are  basing  their  claims for
relief.  Management  has reviewed the filings and it is their position that none
of  the  matters  raised  in  the  new  complaints  should  constitute  "changed
circumstances" within the meaning of EPACT.

  Applicable  rules and  regulations in this field are vague,  relevant  factual
issues are complex and there is little precedent available regarding the factors
to be  considered  or  the  method  of  analysis  to be  employed  in  making  a
determination of "changed circumstances", which is the showing necessary to make
"grandfathered"  rates subject to challenge.  The  Partnership  believes,  after
consultation  with FERC counsel,  that the acquisition of SFPP,  standing alone,
should  not  be  found  to  constitute  "changed  circumstances",  however,  the
realization of the cost savings  anticipated to arise from the  acquisition  may
increase the risk of a finding of "changed circumstances".

  If "changed  circumstances"  are found, SFPP rates previously  "grandfathered"
under EPACT may lose their  "grandfathered"  status and, if such rates are found
to be unjust and  unreasonable,  shippers may be entitled to a prospective  rate
reduction  together with  reparations for periods form the date of the complaint
to the date of the implementation of the new rates.

  The  Partnership  is not able to predict  with  certainty  whether  settlement
agreements  will be completed  with some or all of the  complainants,  the final
terms of any such settlement  agreements  that may be consummated,  or the final
outcome  of the  FERC  proceedings  should  they be  carried  through  to  their
conclusion,  and it is  possible  that  current or future  proceedings  could be
resolved in a manner adverse to the  Partnership.  An adverse  resolution  could
have a material adverse effect on the Partnership.



                                       39
<PAGE>


California Public Utilities Commission Proceeding

  A complaint was filed with the California Public Utilities Commission on April
7, 1997 ARCO Products  Company,  Mobil Oil  Corporation  and Texaco Refining and
Marketing Inc. vs. SFPP,L.P.  The complaint challenges rates charged by SFPP for
intrastate  transportation  of refined  petroleum  products through its pipeline
system in the State of California and requests prospective rate adjustments.  On
October 1, 1997, the  complainants  filed  testimony  seeking  prospective  rate
reductions aggregating approximately $15 million per year. On November 26, 1997,
SFPP filed responsive testimony defending the justness and reasonableness of its
rates. The rebuttal testimony was filed on December 12, 1997 and hearings before
the  Administrative  Law Judge were completed on January 15, 1998.  Briefing and
oral argument were made in March 1998, with a  Commission  decision expected  in
the  third  quarter  of  1998.  Management  believes  that the  Partnership  has
substantial  defenses  against the claims raised in the complaint and intends to
vigorously defend its California rates.

  SPTC Easements

  SFPP and SPTC are engaged in a judicial reference  proceeding to determine the
extent,  if any,  to which  the  rent  payable  by SFPP for the use of  pipeline
easements on rights-of-way  held by SPTC should be adjusted pursuant to existing
contractual  arrangements  (Southern Pacific Transportation Company vs. Santa Fe
Pacific  Corporation,  SFP Properties,  Inc., Santa Fe Pacific Pipelines,  Inc.,
SFPP,L.P.,  et al.,  Superior Court of the State of California for the County of
San Francisco,  filed August 31, 1994). This matter was tried in the latter part
of 1996 and the court  issued its  Statement  of  Tentative  Decision in January
1997. The Statement of Tentative  Decision  indicated that the court intended to
establish a new base annual  rental for the  subject  rights-of-way  at a level,
subject to inflation adjustments, that is adequately provided for by the amounts
that had been accrued by SFPP through December 31, 1997.

  On May 7, 1997,  the judge issued a Statement  of Decision  and Judgment  that
reaffirmed the  conclusions set forth in his January 1997 Statement of Tentative
Decision.  This  Statement  of Decision  and Judgment was filed on June 30, 1997
with the Superior  Court for the County of San  Francisco,  under which  court's
jurisdiction  it is subject  to appeal by SPTC.  On May 30,  1997,  SPTC filed a
motion for a new trial and the motion  was denied on June 26,  1997.  Motions of
Appeal were filed by SPTC and SFPP in July and August, 1997, respectively.

  Environmental Matters

  The Partnership is subject to  environmental  cleanup and enforcement  actions
from  time to time.  In  particular,  the  federal  Comprehensive  Environmental
Response, Compensation and Liability Act ("CERCLA" or "Superfund" law) generally
imposes joint and several liability for cleanup and enforcement  costs,  without
regard  to  fault  or the  legality  of the  original  conduct,  on  current  or
predecessor  owners and  operators  of a site.  See Items 1 and 2 "Business  and
Properties - Regulation".

  Since  August  1991,  SFPP,  along with several  other  respondents,  has been
involved in one cleanup  ordered by the United States  Environmental  Protection
Agency ("EPA") related to ground water  contamination  in the vicinity of SFPP's
storage  facilities  and truck  loading  terminal  at  Sparks,  Nevada.  The EPA
approved the respondents' remediation plan in September 1992 and the remediation
system began  operation in 1995. In addition,  SFPP is presently  involved in 18
ground water hydrocarbon  remediation efforts under administrative orders issued
by the  California  Regional  Water  Quality  Control  Board and two other state
agencies.

  The General  Partner is a defendant  in two  proceedings  (one by the State of
Illinois  and one by the  Department  of  Transportation)  relating  to  alleged
environmental  and safety violations for events relating to a fire that occurred
at the Morris storage field in September, 1994.

  Although no assurance can be given, the Partnership believes that the ultimate
resolution  of these  matters  will not have a  material  adverse  effect on its
financial position or results of operations.

  Unitholder Class Actions Related to Santa Fe Acquisition

  Four  purported   class  actions  were  filed  arising  out  of  the  proposed
acquisition by the Partnership of  substantially  all of the assets of Santa Fe.
The actions seek, among other things, rescission of the acquisition and an award
of rescissory damages. In February 1998, the parties to the actions entered into
a memorandum of  understanding  that would settle 


                                       40
<PAGE>


the actions on terms  favorable  to the  Partnership.  However,  there can be no
assurance that the court will approve the memorandum of understanding.

  Other

  The Partnership, in the ordinary course of business, is a defendant in various
lawsuits  relating to the  Partnership's  assets.  Although no assurance  can be
given,  the  Partnership  believes,  based on its  experience to date,  that the
ultimate resolution of such items will not have a material adverse impact on the
Partnership's financial position or results of operations.

  Additional  information  is  included in this report in Note 8 of the Notes to
the Consolidated  Financial  Statements of the Partnership included elsewhere in
this report.

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 1997.



                                       41
<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. All  information  has been adjusted to give
effect to the two-for-one split of Common Units effective October 1, 1997.

                               Price Range           Cash
                             High        Low      Distributions
         1997
         First Quarter     $21.3750    $13.6875     $0.3150
         Second Quarter     24.0625     19.2500      0.5000
         Third Quarter      36.8750     23.9375      0.5000
         Fourth Quarter     41.2500     32.0000      0.5625

         1996
         First Quarter     $13.1875    $12.1875     $0.3150
         Second Quarter     13.0000     12.4375      0.3150
         Third Quarter      14.0625     12.6875      0.3150
         Fourth Quarter     14.5625     12.8125      0.3150


  The Partnership  pays quarterly  distributions at a current rate of $.5625 per
quarter.  The  Partnership  currently  expects  that  it  will  continue  to pay
comparable cash distributions in the future.

  As of January 11, 1998, there were  approximately  8,700 beneficial  owners of
the  Partnership's  Common Units and there were an estimated  13,500  beneficial
owners of Santa Fe Common Units.


                                       42
<PAGE>

<TABLE>
<CAPTION>

Item 6.  Selected Financial Data (unaudited)

                      (in thousands, except per common unit and operating data)

                              1997      1996     1995    1994     1993
                              ----      ----     ----    ----     ----
    <S>                    <C>       <C>      <C>      <C>      <C>   
    Income and Cash
    Flow Data:
    Revenues               $73,932   $71,250  $64,304  $54,904  $51,180
    Cost of product sold     7,154     7,874    8,020      940      685
    Operating expense       17,982    22,347   15,928   13,644   12,932
    Fuel and power           5,636     4,916    3,934    5,481    6,875
    Depreciation            10,067     9,908    9,548    8,539    7,167
    General and              8,862     9,132    8,739    8,196    7,073
    administrative         -------   -------- -------- -------- --------
    Operating Income        24,231    17,073   18,135   18,104   16,448
    Equity in earnings       5,724     5,675    5,755    5,867    1,835
    of partnerships
    Interest (expense)     (12,605)  (12,634) (12,455) (11,989) (10,302)
    Other income              (353)    3,129    1,311      509      510
    (expense)
    Income tax                 740    (1,343)  (1,432)  (1,389)      83
    (provision) benefit    -------   -------- -------- -------- --------
    Net Income             $17,737   $11,900  $11,314  $11,102   $8,574
                           =======   ======== ======== ======== ========
    Net Income per           $1.02      $.90     $.85     $.93     $.75
                           =======   ======== ======== ======== ========
    Common Unit <F1>
    Per Common Unit
    cash distribution
         paid                $1.63     $1.26    $1.26    $1.26    $1.26
                             =====     =====    =====    =====    =====
    Additions to
    property, plant and
         equipment <F2>     $6,884    $8,575   $7,826   $5,195   $4,688

    Balance Sheet Data
    (at end of period):
    Net property, plant   $244,967  $235,994 $236,854 $238,850 $228,859
    and equipment
    Total assets           312,906   303,603  303,664  299,271  288,345
    Long-term debt         135,814   160,211  156,938  150,219  138,485
    Partners' capital      150,224   118,344  123,116  128,474  132,391

    Operating Data
    (unaudited):
    Liquids Pipelines
    transportation vols
         (MBbls)            46,309    46,601   41,613   46,078   52,600
    NGL fractionation
    volumes
         (MBbls)<F3>        71,686    59,912   59,546   57,703   53,053
    Gas processing
    volumes
         (MMcf/d)<F4>            -        14       34       34        -
    NGL revenue volumes
         (MBbls)<F5>           395     1,638      477        -        -
    CO2 transportation
    volumes
         (Bcf)                  76        63       44       32       33
    Coal transport
    volumes
         (Mtons)<F6>         9,087     6,090    6,486    4,539    1,209

<FN>
<F1> Represents net income per Common Unit adjusted for the two-for-one split of
     Common  Units  effective on October 1, 1997.  Allocation  of net income per
     Common Unit was  computed by dividing the interest of the holders of Common
     Units  in net  income  by the  weighted  average  number  of  Common  Units
     outstanding during the period.
<F2> Additions to property,  plant and equipment for 1993, 1994 and 1997 exclude
     the $25,291,  $12,825 and $11,688 of assets  acquired in the September 1993
     Cora Terminal,  June 1994 Painter Gas  Processing  Plant and September 1997
     Grand Rivers Terminal acquisitions,
     respectively.
<F3> Represents total volumes for the Mont Belvieu  Fractionator and the Painter
     Plant.
<F4> Represents  the volumes of the gas processing portion of the Painter Plant,
     which has not been operated by the Partnership since June 1996.
<F5> Represents  the  volumes of the  Bushton  facility  (beginning  in October,
     1995).
<F6> Represents  the volumes of the Cora Terminal, excluding ship or pay volumes
     of 252 Mtons for 1996, and the Grand Rivers Terminal from September 1997.
</FN>
</TABLE>

                                       43
<PAGE>


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

Results of Operations of the Partnership

  Year Ended  December  31, 1997  Compared  With Year Ended December 31, 1996

  Net  income of the  Partnership  increased  49% to $17.7  million in 1997 from
$11.9  million in 1996.  The results for 1996 included a  non-recurring  gain of
$2.5  million,  attributable  to the cash  buyout  received  from  Chevron,  USA
("Chevron")  for early  termination of a gas processing  contract at the Painter
Plant. See Note 5 of the Notes to the Consolidated  Financial  Statements of the
Partnership.

  A  significant  earnings  increase  was  attributable  to the  coal  transfer,
storage, and services segment. This segment reported net income of $10.7 million
for 1997,  $6.3 million  (143%)  higher than last year.  Earnings  from the coal
terminals  increased  81%,  primarily  the  result  of  increases  in coal  tons
transferred  and average  transfer  rates at the Cora  Terminal,  as well as the
addition of the Grand Rivers Terminal in September 1997.  Operating results from
Red Lightning,  the energy  services  business unit, also  contributed  positive
earnings.

  The liquids pipelines  segment's net income increased to $23.9 million (8%) in
1997 compared to $22.1 million in 1996. Earnings from the Central Basin Pipeline
increased  by 16%,  as a result of higher  throughput  and a decrease in cost of
products sold.  Increased  throughput on the Cypress  Pipeline,  due to a 25,000
barrel per day  expansion  which came on-line in late November  1997,  led to an
earnings  increase  of 9% over  1996.  Earnings  on the  North  System  for 1997
increased  3%  compared  to  last  year,  chiefly  due to  lower  operating  and
maintenance expenses.

  Higher earnings from the segments cited above were offset by lower earnings in
the gas processing and fractionation  segment.  Segment earnings  decreased $3.1
million in 1997,  primarily  the result of the $2.5 million  non-recurring  gain
recognized in 1996 (referred to above). Earnings from the Partnership's interest
in the Mont Belvieu Fractionator increased by 13% from a year ago. The favorable
Fractionator  results  included $.7 million of tax benefits  associated with the
partial   liquidating   distribution   of  Kinder  Morgan  Natural  Gas  Liquids
Corporation  ("KMNGL"),  the corporate entity holding the Partnership's interest
in the Fractionator,  partially offset by a $0.6 million reserve established for
a  contested  product  loss.  Lower  overall  segment  earnings  were due to the
termination  of  the  Painter  Plant's  gas  processing  agreement  by  Chevron,
effective as of August 1, 1996.

  Revenues of the Partnership  increased 4% to $73.9 million in 1997 compared to
$71.3 million in 1996.  Revenues from the coal transfer,  storage,  and services
segment  totaled $18.2  million,  up $10.1 million from 1996. The large increase
reflects the addition of the Red  Lightning  Energy  Services unit and the Grand
Rivers Terminal starting in April and September, respectively. Revenues from the
Cora Terminal  increased to $10.9 million (35%) in 1997.  The increase  resulted
from a 17%  increase  in volumes  transferred,  accompanied  by a 6% increase in
average transfer rates.

  1997 revenues reported by the liquids  pipelines  segment remained  relatively
flat  compared to 1996.  Revenues in 1997 were $53.5  million  compared to $54.0
million last year. Revenues from the Cypress Pipeline increased 11% due to a 14%
increase in throughput volumes.  The North System's revenues decreased 3% due to
a 5% decrease in barrels  transported.  Revenue from the Central Basin  Pipeline
was essentially unchanged.

  Revenues from the gas processing and  fractionation  segment  declined in 1997
compared to the previous year. The decrease was the result of the termination of
gas  processing  at the Painter  Plant in August 1996 and the  assignment of the
Mobil gas processing  agreement at the Bushton Plant ( the "Mobil Agreement") to
KN Processing, Inc. on April 1, 1997.

  Cost of products  sold  decreased 9% to $7.2 million in 1997 compared to 1996.
The decrease was due to fewer  purchase/sale  contracts on the liquids pipelines
as well as the termination of purchase/sale  contracts at the Painter Plant. The
lower  overall cost of sales was partially  offset by costs  incurred by the Red
Lightning Energy Services unit.

  Fuel and power  expense  increased  to $5.6  million in 1997  compared to $4.9
million in 1996.  The 14%  increase  from the prior period was  principally  the
result of higher  fuel  costs  reported  by the  liquids  pipelines,  as well as
increases in coal tons transferred by the coal terminals.

                                       44
<PAGE>



  Operating and maintenance  expenses,  combined with general and administrative
expenses, were $23.9 million in 1997. This amount represents a 15% decrease from
the $28.0  million  reported in 1996. A  significant  decrease in operating  and
administrative  expense  resulted  from  the gas  processing  and  fractionation
segment's  assignment of the Mobil Agreement to KN Processing,  Inc. and leasing
of the  Painter  Facility  to Amoco Oil  Company.  Operating,  maintenance,  and
administrative  expenses  for the liquids  pipelines  in 1997  decreased  by 10%
versus 1996 as a result of  increased  operating  efficiencies  and cost savings
realized by new management.  Lower overall operating,  maintenance,  and general
and  administrative  expenses were partially  offset by higher expenses from the
coal transfer,  storage,  and services segment.  Higher operating  expenses from
this segment were due to increased business activity.

  Taxes  other  than  income  decreased  $0.5  million  (15%)  in  1997  due  to
adjustments  to the liquids  pipelines' ad valorem tax valuations and prior year
ad valorem tax provisions.

  Other income which includes interest income,  other  non-operating  income and
expense, and reserves, decreased $3.4 million in 1997. The decrease reflects the
$2.5 million  buyout  payment  received  from Chevron in 1996 and a $0.6 million
contested product loss at the Mont Belvieu Fractionator.

  A decrease in the cumulative  difference between book and tax depreciation and
the effect of a partial  liquidating  distribution  resulted  in a $2.1  million
reduction in income tax expense for 1997 compared to 1996.

  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%  increase  was  primarily  due to  increased  operating
earnings from the liquids  pipelines  segment and a $2.5 million  buyout payment
received from Chevron for early termination of a gas processing  contract at the
Painter  Plant.  The liquids  pipelines  segment  reported a 15% increase in net
income for 1996,  chiefly  due to  increased  earnings  from the  Central  Basin
Pipeline and the Cypress Pipeline of 83% and 12%,  respectively.  Higher overall
Partnership  earnings were partially offset by lower operating earnings from the
gas processing and  fractionation  segment and the coal transfer,  storage,  and
services segment.

  Revenues of the Partnership increased 11% to $71.3 million in 1996 compared to
$64.3 million in 1995. The liquids  pipelines'  revenues  increased 15% in 1996,
mainly due to a 55% increase in revenues reported by the Central Basin Pipeline.
Central  Basin's  increase in revenues  was due  primarily  to a 41% increase in
transport volumes in 1996 as compared to 1995. Additionally,  the North System's
revenues  increased  7% in 1996 over  1995 due to a 12%  increase  in  transport
volumes  resulting from a favorable crop drying season and colder  weather.  The
gas processing and fractionation  segment also reported higher revenues in 1996.
Overall, the segment's revenues increased 2% over the comparable period in 1995,
mainly  due to 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. The overall  increase was somewhat  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 $0.1 million (2%) in 1996 as compared to 1995
primarily due to reduced product sales on the North System.

  Operating  expense,  including  operations and maintenance  expense,  fuel and
power costs,  and taxes other than income taxes,  increased 37% 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
$0.9 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 increased the North System's storage capacity at Bushton,  Kansas from
1.5 million barrels to 5.0 million barrels.

  Depreciation  expenses  increased $0.4 million (4%) during 1996 as compared to
1995 primarily as a result of 1996 property additions.

  General and  administrative  expenses  increased  $0.4 million (4%) 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.


                                       45
<PAGE>


  Interest  expense  increased  $0.2  million  (1%) 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.

  Interest income and Other,  net income  increased 128% 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.  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.

Outlook

  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.

*  Cost Reductions.  The Partnership has  substantially  reduced  its  operating
   expenses and will continue to seek further reductions where appropriate.

*  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:

*  The Cypress Pipeline has expanded capacity by 25,000 barrels per day starting
   in November, 1997.

*  The coal  terminals,  Cora and  Grand  Rivers,  are each  expected  to handle
   approximately 10 million tons during 1998 as a result of sales agreements and
   other new business.

*  Earnings  and cash flow as  historically  related  to the  operations  of the
   Central  Basin  Pipeline  are expected to increase in 1998 as a result of the
   partnership formed with Shell.

*  Strategic Acquisitions.  The acquisition of Santa Fe closed on March 6, 1998.
   The Partnership  intends to seek  opportunities to make additional  strategic
   acquisitions  to  expand  existing   businesses  or  to  enter  into  related
   businesses.  The Partnership  periodically  considers  potential  acquisition
   opportunities as such  opportunities  are identified by the  Partnership.  No
   assurance can be given that the  Partnership  will be able to consummate  any
   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  increased the quarterly  distribution from $0.3150 per Unit in the
first  quarter of 1997 to $0.5625 per Unit for the fourth  quarter of 1997.  The
fourth quarter  distribution was paid in February,  1998.  Management intends to
maintain the distribution at an annual level of at least $2.25 per Unit.

Liquidity and Capital Resources

  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. The Partnership expects
to fund future cash  distributions  and  sustaining  capital  expenditures  with
existing cash and cash flows from operating  activities.  Discretionary  capital
expenditures   are  expected  to  be  funded  through   additional   Partnership
borrowings.


  Cash Provided by Operating Activities

  Net cash provided by operating activities was $32.0 million for the year ended
December 31, 1997 versus $22.8 million for the comparable  period of 1996.  This
$9.2  million  period-to-period  increase  in  cash  flow  from  operations  was
primarily  the result of a $5.8 million  improvement  in net earnings and a $2.8
million increase in distributions received from the Partnership's  investment in
Mont Belvieu  Associates.  The  completion  of an expansion  project at the Mont
Belvieu  Fractionator  in 1996 enabled Mont Belvieu  Associates  to increase its
1997  distributions.  Total  

                                       46
<PAGE>

capital expenditures of $6.9 million in 1997, discussed below, include  sustain-
ing capital expenditures of $3.1 million.

  Net  changes  in working  capital  items  provided  $1.1  million in 1997,  as
compared to $1.8 million used in 1996.  This positive change in cash flow mainly
resulted from favorable changes in current payables and liabilities. The benefit
was  partially  offset by lower  deferred  tax expenses  ($2.0  million) in 1997
versus 1996. A 1997 tax benefit,  producing  an  adjustment  to deferred  taxes,
resulted from the partial liquidation of KMNGL.

  Cash Used in Investing Activities

  Cash used in investing  activities  totaled  $30.3 million in 1997 compared to
$9.1  million  in 1996.  This  $21.2  million  increase  was  mainly  due to the
Partnership's  purchase of $20.0  million of  long-term  assets  relating to the
September 1997 acquisition of the Grand Rivers Terminal.

  Excluding  the  effect of  long-term  assets  purchased  in the  Grand  Rivers
acquisition, additions to property, plant, and equipment were $6.9 million, $8.6
million,  and $7.8  million for 1997,  1996,  and 1995,  respectively.  Property
additions were highest in 1996 chiefly due to the  construction of a new propane
terminal  on the  North  System  and  pipeline  laterals  on the  Central  Basin
Pipeline.

  Contributions to partnership  investments  increased $3.0 million in 1997 over
the prior year. The increase reflects the funding of the Partnership's  share of
loan repayments  associated with the 1996 expansion  project at the Mont Belvieu
Fractionator.

  Cash Used in Financing Activities

  Net cash used in financing  activities  totaled $11.8 million in 1997 compared
to $13.6 million in 1996. This decrease of $1.8 million from the comparable 1996
period  was the  result  of $33.7  million  in net  proceeds  received  from the
issuance of Common Units,  partially  offset by debt payments,  distributions to
partners, and an increase in restricted cash.

  The proceeds  from the  issuance of Common  Units relate to the  Partnership's
issuance of 1,091,200  Common Units in the third quarter of 1997. These proceeds
were partially utilized to reduce net debt by $15.1 million in 1997. Overall net
debt financing used for capital expansion projects on the Central Basin Pipeline
and the North System  provided $3.3 million and $6.1 million in 1996,  and 1995,
respectively.

  Distributions to partners increased to $24.3 million in 1997 compared to $16.8
million for the same period last year. This increase reflects an increase in the
number  of  Unitholders,  an  increase  in paid  distributions  per  Unit and an
increase in incentive  distributions  to the General  Partner as a result of the
higher  distributions to Common Unitholders.  The Partnership paid distributions
of $1.63 per Common Unit in 1997 compared to $1.26 per Common Unit in 1996.  The
Partnership  believes  that the  increase in paid  distributions  resulted  from
favorable  operating  results in 1997.  The  Partnership  believes  that  future
operating  results will  continue to support  similar  levels of quarterly  cash
distributions, however, no assurance can be given that future distributions will
continue at such levels.

  The  Partnership's  debt  instruments  generally  require the  Partnership  to
maintain a reserve  for future  debt  service  obligations.  The  purpose of the
reserve is to lessen differences in the amount of Available Cash from quarter to
quarter due to the timing of required principal and interest payments (which may
only be required on a  semi-annual  or annual  basis) and to provide a source of
funds to make  such  payments.  The  Partnership's  debt  instruments  generally
require the  Partnership to set aside each quarter as a portion of the principal
and interest payments due in the next six to 12 months.

  Partnership Distributions

  The  Partnership  Agreement  requires the  Partnership  to distribute  100% of
"Available  Cash" (as  defined in the  Partnership  Agreement)  to the  Partners
within 45 days  following  the end of each calendar  quarter in accordance  with
their respective percentage interests.  Available Cash consists generally of all
cash  receipts of the  Partnership  and its  operating  partnerships,  less cash
disbursements  and net  additions to reserves and amounts  payable to the former
Santa Fe general partner in respect of its .5% interest in SFPP.

                                       47
<PAGE>


  Available Cash of the Partnership  generally is distributed 98% to the Limited
Partners  (including the approximate 2% limited partner  interest of the General
Partner) and 2% to the General Partner.  This general requirement is modified to
provide for  incentive  distributions  to be paid to the General  Partner in the
event that  quarterly  distributions  to unitholders  exceed  certain  specified
targets.

  In general, Available Cash for each quarter is distributed,  first, 98% to the
Limited  Partners and 2% to the General Partner until the Limited  Partners have
received  a total of  $0.3025  per Unit for  such  quarter,  second,  85% to the
Limited  Partners and 15% to the General Partner until the Limited Partners have
received a total of $0.3575 per Unit for such quarter, third, 75% to the Limited
Partners and 25% to the General Partner until the Limited Partners have received
a total of $0.4675 per Unit for such quarter, and fourth,  thereafter 50% to the
Limited Partners and 50% to the General  Partner.  Incentive  distributions  are
generally defined as all cash distributions paid to the General Partner that are
in excess of 2% of the aggregate amount of cash being  distributed.  The General
Partner's  incentive  distributions  declared by the  Partnership  for 1997 were
$3,935,852.

  Credit Facilities

  On February 17, 1998, the  Partnership  entered into a $325 million  revolving
credit  facility (the "Loan  Facility") with Goldman Sachs Credit Partners L.P.,
as  syndication  agent,  First Union  National  Bank, as  administrative  agent,
issuing bank and swingline lender, and the other financial institutions that are
lenders under the agreement.  The Partnership and OLP-B are  co-borrowers  under
the Loan Facility.  Commencing in May 2000, the amount  available under the Loan
Facility  reduces  on a  quarterly  basis,  with the  final  installment  due in
February 2005.

  The obligations of the  Partnership  under the Loan Facility are guaranteed by
the Partnership's  operating  partnerships and each other Restricted  Subsidiary
(as defined in the Loan  Facility)  of the  Partnership  (other than SFPP).  The
Partnership has guaranteed the obligations of OLP-B under the Loan Facility. The
Loan  Facility is secured by, among other things,  a first  priority lien on (i)
the  Partnership's  limited  partner  interests in the  Partnership's  operating
partnerships;  (ii) all of the assets of OLP-D  (including  its general  partner
interest  in SFPP),  (iii) the  Partnership's  ownership  interests  in the Mont
Belvieu Fractionator and Shell Co2 Company, and (iv) intercompany notes executed
by each of the Partnership's  operating  partnerships (other than SFPP) in favor
of the  Partnership  for loan proceeds lent to them by the  Partnership.  If the
Partnership  fails  to  maintain  certain  financial  ratios,  then  each of the
Partnership's  operating partnerships will secure its intercompany note with its
assets.

  Interest on loans under the Loan Facility accrues at the Partnership's  option
at a floating  rate equal to either First Union  National  Bank's base rate (but
not less than the Federal  Funds Rate plus .5% per annum) or LIBOR plus a margin
that  will vary  from  .75% to 1.5% per  annum  depending  upon the ratio of the
Partnership's  Funded  Indebtedness  to  Cash  Flow.  Interest  on  advances  is
generally payable quarterly.

  The Loan Facility includes  restrictive  covenants that are customary for this
type of facility,  including  without  limitation,  the  maintenance  of certain
financial   ratios  and   restrictions  on  (i)  the  incurrence  of  additional
indebtedness; (ii) entering into mergers,  consolidations,  and sales of assets;
(iii)  making  investments;  and (iv)  granting  liens.  In  addition,  the Loan
Facility  generally  prohibits the Partnership from making cash distributions to
holders of Common  Units  more  frequently  than  quarterly,  from  distributing
amounts  in  excess  of 100% of  Available  Cash for the  immediately  preceding
calendar quarter, and from making any distribution to holders of Common Units if
an event of default exists or would exist upon making such distribution.

  On February 18, 1998, the Partnership  borrowed  approximately $142 million to
refinance the First Mortgage Notes, including a prepayment premium, and the bank
credit facilities of OLP-A and OLP-B (the "Refinanced  Indebtedness").  On March
5, 1998, the  Partnership  borrowed  approximately  $25 million to fund its cash
investment  in Shell CO2 Company.  On March 6, 1998,  the  Partnership  borrowed
approximately  $90  million  to fund  its  acquisition  of the  general  partner
interest in Santa Fe and a portion of the transaction  costs associated with the
acquisition of Santa Fe. The remaining availability under the Loan Facility will
be used to fund the  payment at par of any VREDs not  tendered  in the  exchange
offer  described  below  and for  general  working  capital  and  other  general
partnership purposes.

  The  Partnership  First  Mortgage  Notes were incurred in connection  with the
original  formation  of  the  Partnership.   The  remainder  of  the  Refinanced
Indebtedness was incurred for working capital and general partnership  purposes.
The  Partnership's  First  Mortgage Notes bore interest at a fixed rate of 8.79%
per annum. The remaining Refinanced  Indebtedness bore interest at varying rates
(a weighted  average  rate of  approximately  7.65% per annum as of 

                                       48
<PAGE>


December 31,  1997).  The  Partnership's  First  Mortgage  Notes were payable in
10  equal  annual  installments  of  $11  million  commencing  in  June    1998.
The remaining  Refinanced  Indebtedness  was scheduled to mature in 1999.

  As of December 31,  1997,  SFPP's long term debt  aggregated  $355 million and
consisted of $276.5 million of First Mortgage Notes (the "SF Notes") and a $78.5
million  borrowing under SFPP's $175 million bank credit facility.  The SF Notes
are  payable  in annual  installments  through  December  15,  2004.  The credit
facility  matures in August 2000. The  Partnership  intends to refinance some or
all of the  remaining  SF Notes as they  become  payable.  The  credit  facility
permits SFPP to refinance the $64 million of SF Notes due on or before  December
15, 1999 (plus a $31.5 million prepayment allowed on such date). The SFPP credit
facility also provides for a working capital facility of up to $25 million.

  Capital Requirements for Recent Transactions

  Shell CO2 Company.  On March 5, 1998, the Partnership  transferred the Central
Basin  Pipeline  and $25 million in cash to Shell CO2 Company in exchange  for a
20% limited partner interest in Shell CO2 Company.  The Partnership financed its
cash investment in Shell CO2 Company through the Loan Facility.

  Santa Fe Pacific  Pipeline  Partners,  L.P. On March 6, 1998, the  Partnership
acquired  substantially  all of the  assets of Santa Fe for  approximately  26.6
million  Common Units and $84.4 million in cash.  The  Partnership  financed the
$84.4  million  cash  portion  of  the  purchase  price  and a  portion  of  the
transaction expenses through the Loan Facility.

  In September 1990, SFP Pipeline Holdings,  Inc., the parent corporation of the
general  partner of Santa Fe, ("SF  Holdings"),  issued  $218,981,000  principal
amount of Variable Rate Exchangeable Debentures ("VREDs").  Originally, the VRED
Holders were entitled to received  37.2093 Santa Fe Common Units for each $1,000
principal amount of VREDs upon the happening of certain triggering events,  such
as a change of control,  merger or sale of substantially all of the assets (each
an "Exchange Event").

  The acquisition of substantially  all of the assets of Santa Fe constituted an
Exchange Event. As a result of the acquisition, SF Holdings and the VRED trustee
entered into a  supplemental  indenture  dated as of March 6, 1998,  pursuant to
which each $1,000  principal  amount of VREDs became  exchangeable for 51.720927
Common  Units  (the  37.2093  Santa Fe Common  Units for which  such  VREDs were
previously  exchangeable multiplied by 1.39, the exchange ratio for the Santa Fe
transaction)  or an aggregate of  11,325,900  Common Units.  The VRED  Indenture
permits the  Partnership  at its option to exchange  the VREDs for cash equal to
the "value of the VREDs" in lieu of Common Units.  The "value of the VREDs" will
be equal to the average of the closing prices of the VREDs during 15 consecutive
trading days chosen by the  Partnership  during the 20 consecutive  trading days
preceding  the Exchange  Notice.  The  Partnership  currently  does not have any
intention  to  exchange  the VREDs for cash in lieu of Common  Units and has not
obtained a commitment for financing such cash payment. However, depending on the
comparative  prices of VREDs to Common  Units and the  Partnership's  ability to
obtain  financing,  the  Partnership may exercise this option to deliver cash in
lieu of Common Units.

  The Partnership agreed as part of the acquisition that it would cause OLP-D to
perform all of SF Holdings' obligations related to the VREDs.

  Prior to the  acquisition  of Santa  Fe,  the  former  general  partner  owned
8,148,148  Santa Fe Common  Units,  which was  approximately  equal to the total
number of Santa Fe Common  Units into which the VREDs  were  exchangeable.  As a
result of the  acquisition,  those  Santa Fe Common  Units were  converted  into
11,325,925  Common  Units.  The  general  partner  has  placed  the  certificate
representing  the  11,325,925  Common  Units into escrow to satisfy SF Holdings'
obligations  under the  Indenture  and these  Common  Units will be delivered in
exchange for any VREDs tendered.

  Any VREDs that are not  validly  tendered  for  exchange  will  become due and
payable in full in cash at par,  plus  accrued and unpaid  interest,  on June 4,
1998 (the  "Exchange  Date")  and the  Common  Units  into which such VREDs were
exchangeable  will be canceled.  The Loan Facility  permits the  Partnership  to
borrow up to $25 million to finance the  payment of any VREDs not  tendered  for
exchange.  Since the value of the Common  Units to be received  in the  exchange
offer currently  exceeds the face value of the VREDs,  the Partnership  does not
anticipate that such amounts will exceed $25 million.


                                       49
<PAGE>


Year 2000

  The  Partnership  is assessing its internal  computer  systems and software to
ensure that its information technology infrastructure will be Year 2000 capable.
The Partnership cannot reasonably  estimate,  at this time, the potential impact
on its financial  position and operations if key suppliers,  customers and other
third  parties with whom the  Partnership  conducts  business  (including  other
pipelines  with which it  interconnects)  do not become  Year 2000  capable on a
timely  basis.  Costs  incurred to become Year 2000  capable are not expected to
have a  material  adverse  effect on the  Partnership's  financial  position  or
results of operations.

Information Regarding Forward Looking Statements

  This filing includes forward looking  statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934.  These forward looking  statements are identified as any statement that
does not relate strictly to historical or current facts.  They use words such as
plans,  expects,  anticipates,  estimates,  will and other  words and phrases of
similar  meaning.  Although the Partnership  believes that its  expectations are
based on reasonable assumptions, it can give no assurance that its goals will be
achieved.  Such forward looking  statements  involve known and unknown risks and
uncertainties. The Partnership's actual actions or results may differ materially
from those discussed in the forward looking  statements.  Specific factors which
could  cause  actual  results  to  differ  from  those  in the  forward  looking
statements, include, among others:

  *  price trends and overall demand for NGLs, refined petroleum products,  CO2,
     and coal in the United States  (which may be affected by general  levels of
     economic activity,  weather,  alternative energy sources,  conservation and
     technological advances);

  *  changes  in the  Partnership's  tariff rates set by FERC and the California
     Public Utilities Commission;

  *  the Partnership's ability to integrate  the  operations  of  Santa  Fe (and
     other future acquisitions) into its existing operations;

  *  with  respect to the Coal  Terminals,  the ability of railroads to  deliver
     coal to the terminals on a timely basis;

  *  the Partnership's ability to  successfully  identify  and  close  strategic
     acquisitions and realize cost savings;

  *  the  discontinuation of operations  at  major  end-users  of  the  products
     transported by the  Liquids  Pipelines (such  as refineries,  petrochemical
     plants, or military bases); and

  *  the  condition  of the  capital  markets  and  equity markets in the United
     States.

  See Items 1 and 2 "Business and Properties - Risk Factors" for a more detailed
description  of these and other  factors  that may  affect the  forward  looking
statements.

Item 7A.  Quantitative  and Qualitative  Disclosures  About Market Risk

  None.

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.


                                       50
<PAGE>


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, Kinder Morgan,  Inc. 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           53    Director, Chairman, and CEO
   William V. Morgan           54    Director and Vice Chairman
   Alan L. Atterbury           55    Director
   Edward O. Gaylord           66    Director
   Thomas B. King              36    Director,  President, and Chief Operating
                                     Officer
   David G. Dehaemers, Jr.     37    Vice  President,   Treasurer,  and  Chief
                                     Financial Officer
   Clare H. Doyle              43    Vice President,  Secretary, and Corporate
                                     Counsel
   James E. Higgins            41    Vice    President,    Pacific    Business
                                     Development and Marketing
   Roger Knouse                47    Vice   President,    Houston   Commercial
                                     Operations, Pipelines
   Mary F. Morgan              45    Vice President, Pacific Customer Service
   Michael C. Morgan           29    Vice  President,   Corporate  Development
                                     and Investments
   Roger C. Mosby              50    Vice   President,   Coal  Commercial  and
                                     Terminal Operations
   William M. White            52    Vice President, Pipeline Field Operations
   Eashy Yang                  56    Vice President, Technical Services

  Richard D. Kinder was elected Director, Chairman, and Chief  Executive Officer
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 B. King was elected Director, President, and Chief Operating Officer 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  

                                       51
<PAGE>

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.

  David G. Dehaemers, Jr. was elected Vice President and Chief Financial Officer
of the General  Partner in August 1997.  He  was elected Secretary and Treasurer
of the General Partner in February  1997.  From  October  1992 to January  1997,
he was Chief  Financial Officer of Morgan Associates, Inc., an energy investment
and  pipeline management company.   Mr. Dehaemers was previously employed by the
national   CPA  firms  of  Ernst & Whinney and Arthur Young.  He is a  CPA,  and
received his undergraduate Accounting degree from Creighton University in Omaha,
Nebraska.  Mr. Dehaemers received his law degree from the University of Missouri
-Kansas City and is a member of the Missouri Bar.

  Clare H.  Doyle was  elected  Vice  President, Corporate Counsel and Secretary
of the  General  Partner in August 1997.  Prior to  that,  she was  employed  as
counsel  for Enron   Operations  Corp. from September  1996 to March 1997.  From
April 1988 to June 1996,  she was  counsel for PanEnergy Corp.(now Duke Energy).

  James E. Higgins was elected Vice President,  Pacific Business Development and
Marketing  of the General  Partner in March 1998.  Previously,  Mr.  Higgins was
Director of Business Development for Santa Fe Pacific Pipelines,  L.P. from 1993
until March 1998.  Prior to that,  he was Director of Business  Development  and
Administration  for Enron Oil Trading and Transportation in 1992 and Director of
Business  Development for GATX Terminals  Corporation  from 1989 until 1992. Mr.
Higgins held manager  positions in sales and operations for GATX from 1985 until
1989. He also held treasury and economic  analyst  positions  with Powerline Oil
Company from 1979 until 1983.

  Roger M. Knouse was elected Vice  President,  Houston  Commercial  Operations,
Pipelines  of the  General  Partner in March 1998.  Prior to that,  he served as
Director of Business  Development  for the General  Partner from  February  1997
until March 1998. Mr. Knouse was Director of Pipeline  Services for Enron Liquid
Service  Corp.  from July 1995 until  February  1997 and  Director  of  Pipeline
Transportation  for Enron Liquids  Pipeline Company from January 1987 until July
1995. He held various  operations  and  commercial  positions with Enron Liquids
Pipeline Company from November 1973 until January 1987.

  Mary F. Morgan was elected Vice  President,  Pacific  Customer  Service of the
General Partner in March 1998. Prior to that, she was Director, Customer Service
Center  for  Santa  Fe  Pacific  Pipelines,  L.P.  since  1997.  Prior  to  this
assignment,  Ms.  Morgan  served as  Director,  Products  Movement  and District
Manager,  Western  District for Santa Fe. Over the past twenty  years,  she also
served in various  engineering and operations  assignments  with Santa Fe, Exxon
Pipeline Company, and Amoco Production Company.

  Michael C. Morgan  was  elected  Vice  President,  Corporate  Development  and
Investments  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.

  Roger  C.  Mosby  was  elected   Vice  President, Coal Commercial and Terminal
Operations 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.

  William M. White was  elected  Vice  President,  Pipeline Field  Operations of
the  General  Partner in March  1998.  Previously,  Mr.  White  served  as  Vice
President of Engineering for Santa Fe Pacific  Pipelines,  L.P. from 1993  until
March 1998.  Prior to that, he held various engineering  and operation positions
with Santa Fe since December  1974.  Mr. White  graduated  from the   University
of Kentucky  with a degree in  Electrical  Engineering and he completed graduate
work in Business  Administration  at the University of Tulsa.

  Eashy  Yang  was  elected   Vice President,  Technical Services of the General
Partner in July 1997.  Mr. Yang  was   Director  of  Engineering  and  Technical
Services for Enron  Operations Corp. from June 1993 until February 1997.   Prior
to that, he was Director of Technical Operations and  held  various  engineering
positions  with Enron from September 1974 until June 1993.

                                       52
<PAGE>

Item 11.  Executive Compensation

  The Partnership has no executive  officers,  but is obligated to reimburse the
General  Partner  for  compensation  paid  to the  General  Partner's  executive
officers in connection with their operation of the Partnership's  business.  The
following table summarizes all compensation  paid to the General Partner's chief
executive  officer and to each of the General  Partner's  four other most highly
compensated  executive  officers for services rendered to the Partnership during
1997.

<TABLE>
<CAPTION>
                   Summary Compensation Table
              For the Year Ended December 31, 1997

                                     Annual Compensation
                             ------------------------------------
                                                      All Other
Name and Principal Position    Salary     Bonus<F1>  Compensation<F2>
---------------------------------------------------------------------
<S>                             <C>         <C>         <C>

Richard D. Kinder               $175,664    $           $ 12,757
  Director, Chairman, and
  CEO

William V. Morgan                175,685           -      12,757
  Director and Vice Chairman

Thomas B. King                   140,667     160,000       9,774
  Director, President, and
  COO

David G. Dehaemers, Jr.          101,910     130,000       7,598
  Vice President,
  Treasurer, and CFO

Michael C. Morgan                101,910     130,000       7,539
  Vice President

<FN>
<F1>Amounts earned in year shown and paid the following year.
<F2>Represents the General  Partner's  contributions  to the  Retirement Savings
    Plan (a 401(k) plan)  and  the  imputed  value of General Partner-paid group
    term life insurance exceeding $50,000. Note: Prior to the acquisition of the
    General  Partner by KMI, Mr. William V.  Allison  served as President of the
    General Partner. For the period January 1, 1997 until February 14, 1997, Mr.
    Allison  was  paid  approximately   $22,917  for  services  rendered  to the
    Partnership.
</FN>
</TABLE>

  Retirement  Savings  Plan.   Effective  July  1,  1997,  the  General  Partner
established the Kinder Morgan  Retirement  Savings Plan, a defined  contribution
401(k) plan,  that  permits all  full-time  employees of the General  Partner to
contribute 1% to 15% of base compensation, on a pre-tax or after-tax basis, into
participant  accounts.  In addition to a mandatory  contribution  equal to 4% of
base  compensation per year for each plan  participant,  the General Partner may
make discretionary  contributions in years when specific performance  objectives
are met.  Any  discretionary  contributions  are made  during the first  quarter
following  the  performance  year.  On  February  15,  1998,  an  additional  2%
discretionary  contribution  was  made  to  individual  accounts  based  on 1997
financial  targets to  unitholders.  All  contributions,  together with earnings
thereon, are immediately vested and not subject to forfeiture.  Participants may
direct the investment of their contributions into a variety of investments. Plan
assets are held and distributed pursuant to a trust agreement. Because levels of
future compensation,  participant contributions, and investment yields cannot be
reliably  predicted over the span of time contemplated by a plan of this nature,
it is impractical to estimate the annual  benefits  payable at retirement to the
individuals listed in the Summary Compensation Table above.

  Executive   Compensation  Plan.   Pursuant  to  the  Partnership's   Executive
Compensation  Plan (the "Plan"),  executive  officers of the General Partner are
eligible for awards equal to a percentage of the "Incentive Compensation Value",
which is defined as cash  distributions  to the General  Partner during the four
calendar  quarters  preceding  the  date  of  redemption  times  eight  (less  a
participant adjustment factor, if any). Under the Plan, no eligible employee may
receive a grant in excess of 2% and total  awards  under the Plan may not exceed
10%. In general,  participants may redeem vested awards in whole or in part from
time to time by written  notice.  The

                                       53
<PAGE>

Partnership  may, at its option,  pay the participant in Common Units (provided,
however,  the  unitholders approve the plan prior to issuing such  Units) or  in
cash. The  Partnership  may not issue  more  than  200,000 Common Units  in  the
aggregate  under  the Plan.  Common Units will not be issued  to  a  participant
unless  such  Common  Units  have  been  listed  for trading  on  the  principal
securities  exchange  on  which the  Common  Units  are  then  listed. The  Plan
terminates   January  1,  2007  and  any unredeemed awards will be automatically
redeemed. The Board of Directors of the General Partner may, however,  terminate
the Plan before such date, and upon such early termination, the Partnership will
redeem all  unpaid  grants of  compensation  at an amount  equal to the  highest
Incentive Compensation Value, using as the determination date any day within the
previous twelve months, multiplied by 1.5.

  The  following  table  sets  forth  certain  information  regarding  estimated
potential awards to named executive officers pursuant to the Plan.

<TABLE>
<CAPTION>
                   Long-Term Incentive Plans - Awards in 1997

                                            Performance or     Estimated Future Payouts
                       Percentage of        Performance or        Under Non-Stock
                         Incentive        Other Period Until        Price Based
Name                 Compensation Value  Maturation or Payout<F1>    Plans <F2> 
-----------------------------------------------------------------------------------------
<S>                          <C>              <C>                    <C>

Thomas B. King               1%               1997 - 1999            $359,884
                             1%               1997 - 2001             359,884

David G. Dehaemers,          1%               1997 - 1999             359,884
Jr.
                             1%               1997 - 2001             359,884

Michael C. Morgan            1%               1997 - 1999             359,884
                             1%               1997 - 2001             359,884

<FN>

<F1> Currently, there are two Long-Term Incentive Plan vesting cycles in effect.
The  Plan  was  established  in July  1997  and on July 1,  1997,  the  Board of
Directors of the General  Partner  granted  awards  totaling 6% of the Incentive
Compensation Value. Fifty percent of such awards vest on January 1, 2000 and the
remaining fifty percent vest on January 1, 2002.

<F2> Estimated  payouts  are based on actual cash  distributions  to the General
Partner for the preceding four quarters ended December 31, 1997.
</FN>
</TABLE>

  Common Unit Option Plan. Pursuant to the Partnership's Common Unit Option Plan
(the "Option  Plan") key personnel of the  Partnership  and its  affiliates  are
eligible to receive grants of options to acquire Common Units.  The total number
of Common Units available under the plan is 250,000. None of the options granted
under the Option Plan may be "Incentive  Stock Options" under Section 422 of the
Internal Revenue Code. If an option expires without being exercised,  the number
of Common Units covered by such option will be available for a future award. The
exercise  price for an option  may not be less than the fair  market  value of a
Common Unit on the date of grant.  Either the Board of  Directors of the General
Partner or a committee  of the Board of  Directors  will  administer  the Option
Plan. The Plan terminates on March 5, 2008.

  No  individual  employee  may be granted  options for more than 10,000  Common
Units in any year.  The Board of Directors or the committee  will  determine the
duration and vesting of the options to employees at the time of grant.  On March
6, 1998,  options for 118,000  Common Units at an exercise price of $35.4375 per
Common Unit were granted to 56 employees of the General Partner.  Forty  percent
of such  options  will  vest on the first  anniversary  of the date of grant and
twenty percent on each anniversary,  thereafter.  The options expire seven years
from the date of grant.

  The Option Plan also grants each  non-employee  director of the Partnership as
of April 1, 1998, an option to acquire  5,000 Common Units at an exercise  price
equal to the fair market  value of the Common  Units on such date.  In addition,
each new  non-employee  director  will receive  options to acquire  5,000 Common
Units on the  first  day of the  month  following  his or her  election.   Forty
percent of such options will vest on the first  anniversary of the date of grant
and twenty percent on each anniversary,  thereafter.  The non-employee  director
options will expire seven years from the date of grant.

                                       54
<PAGE>


  Directors  fees.  During  1997,  each  member  of the  Partnership's  Board of
Directors who was not also an employee of the General Partner was paid an annual
retainer of $16,000 in lieu of all attendance fees.

Item 12. Security  Ownership of Certain  Beneficial  Owners and Management

  The  following  table sets forth  certain  information  as of March 15,  1998,
regarding the  beneficial  ownership of (i) the Common Units and (ii) the common
stock of KMI, the parent company of the General Partner, by all directors of the
General  Partner,  each of the  named  executive  officers,  all  directors  and
executive  officers as a group and all persons  known by the General  Partner to
own beneficially more than 5% of the Common Units.

<TABLE>
<CAPTION>
                                                  Amount and Nature of Beneficial Ownership
                                                              KMI Voting Stock         KMI Non Voting Stock
                                    Common Units <F1>         (Class "A" Stock)          (Class "B" Stock)
                                    ----------------         -------------------       ---------------------

                                   Number     Percent         Number       Percent       Number       Percent
                                 of Units   of Class<F2>   of Shares<F3>  of Class    of Shares(3)    of Class
                                 --------   -----------    ------------   ---------   ------------    --------
<S>                               <C>             <C>               <C>       <C>          <C>          <C> 
First Union Corporation           991,200         2.43%             105       1.30%        2,541        100%
One First Union Center 
5th Floor
301 South College Street
Charlotte, NC 28288-0732

Kinder Morgan G.P., Inc.<F4>      862,000         2.12%              --         --            --          --
1301 McKinney Street
Suite 3450
Houston, Texas 77010

Richard D. Kinder <F5>             35,000              *          5,717      71.05%           --          --

William V. Morgan                   2,000              *          2,225<F6>  27.65%           --          --

Alan L. Atterbury                   8,000              *             --         --            --          --

Edward O. Gaylord                   4,000              *             --         --            --          --

David G. Dehaemers                     --              *             --         --            --          --

Michael C. Morgan                      --              *             --         --            --          --

Thomas B. King                      1,000              *             --         --            --          --

Directors and Officers             52,100              *          7,942      98.70%           --          --
  as a group (14 persons)

--------------
*Less than 1%
<FN>
<F1> All Common Units involve sole voting power and sole investment power.
<F2> As of March 6, 1998, the Partnership  had 40,727,126  Common  Units  issued
     and outstanding.
<F3> As of December 31, 1997,  Kinder  Morgan, Inc. ("KMI") had a total of 8,047
     shares of issued and outstanding  voting stock and a total of 2,541  shares
     of issued and outstanding non voting stock. 
<F4> Represents Units held by Kinder Morgan G.P., Inc., which is wholly owned by
     KMI. By virtue of its  ownership  of Kinder  Morgan  G.P., Inc., KMI may be
     deemed to indirectly own the Common Units owned by Kinder Morgan G.P., Inc.
<F5> Excludes 862,000 Common Units owned by Kinder Morgan  G.P.,  Inc.  KMI owns
     100% of the  outstanding  capital  stock  of  Kinder Morgan G.P., Inc.  Mr.
     Kinder owns  approximately  71%  of  the voting  common  stock  of KMI.  By
     virtue of his ownership  of KMI.,  Mr.  Kinder may be deemed to  indirectly
     own the Common Units owned by Kinder Morgan G.P., Inc. Mr. Kinder disclaims
     beneficial ownership of such Common Units.
<F6> These  shares  are held by Morgan  Associates,  Inc., a Kansas corporation,
     wholly owned by Mr. Morgan.
</FN>
</TABLE>

  KMI has  pledged  all of the stock of the  General  Partner to secure its bank
credit facilities.

  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 purchase,  all of the KMI stock owned by First Union
Corporation.


                                       55
<PAGE>


Item 13.  Certain Relationships and Related Transactions

  General and Administrative Expenses

  The General Partner provides the Partnership  with general and  administrative
services  and is  entitled to  reimbursement  of all direct and  indirect  costs
related  to  the  business  activities  of the  Partnership.  During  1997,  the
Partnership  paid the General  Partner  $6.9 million as  reimbursement  for such
costs.

  Partnership Distributions

  See Item 7 for information regarding Partnership Distributions.

  Odessa Lateral

  During 1996,  the Odessa  lateral was  constructed to connect 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 coterminous  and expire in 2016.  During
1997, the  Partnership  charged MAI $75,000 under the Operating and  Maintenance
Agreement  and MAI charged the  Partnership  $496,005  under the  Transportation
Agreement.  The  terms of such  agreements  are  comparable  to those  which the
Partnership would make available to unaffiliated third parties.

  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.




                                       56
<PAGE>




                                   P A R T IV

Item 15. 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
  *2.1  -Purchase   Agreement   dated   October   18, 1997 between Kinder Morgan
         Energy  Partners, L.P.,  Kinder  Morgan  G.P., Inc., Santa  Fe  Pacific
         Pipeline   Partners,   L.P.,   Santa  Fe   Pacific Pipelines, Inc.  and
         SFP  Pipeline  Holdings,  Inc. (Exhibit 2 to 1998 S-4) 
  *2.2   Master  Agreement  dated  as of  January  1,  1998 among Shell  Western
         E&P Inc., Shell Western Pipelines Inc., Shell Cortez Pipeline  Company,
         Shell CO2 , LLC,  Shell  CO2  General LLC, Shell Land & Energy Company,
         Kinder  Morgan  Operating L.P. "A" and Kinder  Morgan CO2 LLC  (Exhibit
         2.2 to the Partnership's Current Report on Form 8-K dated March 5, 1998
         (the  "March  5, 1998 Form 8-K")
  *2.3   First Amended and Restated Agreement of Limited Partnership dated as of
         March 5, 1998, by and between Shell CO2 General LLC, Kinder Morgan CO2,
         LLC and Shell CO2 LLC. (Exhibit 2.3 to the
         March 5, 1998 Form 8-K)
  *2.4   Assumption  and  Indemnification  Agreement dated as of January 1, 1998
         among Shell CO2  General LLC, Shell CO2 General  LLC, Shell Western E&P
         Inc.,  Shell  Western  Pipelines Inc., Shell Cortez  Pipeline  Company,
         Shell  Land & Energy  Company, Kinder Morgan  CO2  LLC,  Kinder  Morgan
         Operating  L.P.  "A"  and  Shell CO2 Company, Ltd. (Exhibit 2.4 to  the
         March 5 1998 Form 8-K)
  *2.5   Guaranty and  Indemnification  Agreement  dated as of January 1, 1998
         between Shell Western  E&P Inc. and Kinder Morgan Energy Partners, L.P.
         (Exhibit 2.5 to the March 5, 1998 Form 8-K)
  *3.1  -Second Amendment to Amended and Restated Agreement of Limited  Partner-
         ship  dated  as  of February 14, 1997 (Exhibit 3.1 to  Amendment No.  1
         to the Partnership's  Registration Statement on Form S-4 (File No. 333-
         44519) filed February 4, 1998 ("1998 S-4"))
  *4.1  -Specimen  Certificate  representing  Common  Units (Exhibit 4.1 to 1998
         S-4)
  *4.2  -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  10.31 to the  Partnership's  Annual
         Report on Form 10-K for the year ended December 31, 1996 ("1996 10-K")
   4.2.1-First  Amendment  to  Credit   Agreement, among Kinder Morgan Operating
         L.P. "B" and First Union National Bank dated as of September 1, 1997
   4.2.2-Second Amendment to  Credit  Agreement,  among  Kinder Morgan Operating
         L.P. "B" and First Union National Bank dated as of December 31, 1997
  *4.3  -Security  Agreement dated as of February 14, 1997 between Kinder Morgan
         Energy  Partners,  L.P. and First Union National Bank of North Carolina
         (Exhibit 10.32 to 1996 10-K)
  *4.4  -Security  Agreement dated as of February 14, 1997 between Kinder Morgan
         Operating L.P. "B" and First Union  National  Bank  of  North  Carolina
         (Exhibit 10.33 to 1996 10-K)
  *4.5  -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 10.34 to 1996 10-K)
   4.5.1-First  Amendment to Guaranty Agreement dated as of September 26, 1997
   4.5.2-Second Amendment to Guaranty  Agreement dated as of September 26, 1997
  *4.6  -Credit  Agreement  dated  as of February 14, 1997 among Kinder  Morgan,
         Inc.and  First Union National Bank of North  Carolina (Exhibit 10.35 to
         1996 10-K)
   4.6.1-First   Amendment  to  Credit   Agreement among Kinder Morgan, Inc. and
         First  Union National Bank dated as of September 1, 1997
   4.6.2-Second  Amendment  to  Credit Agreement among Kinder  Morgan,  Inc. and
         First  Union National Bank dated as of December 31, 1997 


                                       57
<PAGE>


  *4.7  -First Amendment to Mortgage and Security  Agreement with Assignment  of
         Rents  (Illinois)  dated as of February 14, 1997 between  Kinder Morgan
         Operating  L.P.  "B" and First Union  National  Bank of North  Carolina
         (Exhibit 10.37 to 1996 10-K)
  *4.8  -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 10.39 to 1996 10-K)
   4.9  -Credit  Agreement  dated  February  17, 1998 among Kinder Morgan Energy
         Partners, L.P., Kinder Morgan   Operating   L.P.   "B",  the Subsidiary
         Guarantors,  the  Lenders,  Goldman  Sachs  Credit Partners,  L.P.  and
         First Union National Bank
   4.10 -Pledge  Agreement  dated  February  17, 1998 among Kinder Morgan Energy
         Partners,  L.P.,  the  Lenders, Goldman Sachs Credit Partners, L.P. and
         First Union National Bank
   4.11 -Pledge Agreement dated February 17, 1998 among Kinder Morgan  Operating
         L.P.  "A",  the Lenders,  Goldman Sachs Credit Partners, L.P. and First
         Union National Bank
   4.12 -Pledge  Agreement dated February 17, 1998 among Kinder Morgan Operating
         L.P.  "D",  the Lenders, Goldman Sachs Credit Partners, L.P. and  First
         Union National Bank
   4.13 -Pledge  Agreement  dated  February 17, 1998 among Kinder Morgan Natural
         Gas  Liquids Corporation,  the  Lenders, Goldman Sachs Credit Partners,
         L.P. and First Union National Bank
  *4.14  First Mortgage Note Agreement  dated  December  8, 1998  among Southern
         Pacific Pipe Lines Partnership, L.P. (now known as  SFPP.L.P.)  and the
         Purchasers listed on Schedule A (a conformed  composite  of 54 separate
         agreements, identical except for signatures)(Exhibit 4.2 to  Form  10-K
         for  Santa  Fe  Pacific  Pipelines, L.P. for 1988 ("Santa Fe 1988  Form
         10-K")
  4.14.1 Consent  and  Amendment  dated as of December  19,  1997   between  the
         noteholders  and SFPP,  L.P. (a  conformed  composite  of the  separate
         agreements with each noteholder, identical except for signatures)
  *4.15  Deed of Trust, Security Agreement and Fixture Filing, dated December 8,
         1988, between SFPP, L.P., its general partner,  Chicago Title Insurance
         Company and Security  Pacific  National  Bank  (Exhibit 4.3 to Santa Fe
         1988 Form 10-K)
  *4.16  Trust  Agreement  dated  December 19, 1988,  between  SFPP,  L.P.,  its
         general  partner and Security  Pacific  National  Bank  (Exhibit 4.4 to
         Santa Fe 1988 Form 10-K)
   *4.17 Amended and Restated Credit Agreement dated as of August 11, 1997 among
         SFPP, L.P., Bank of America National Trust and Savings Association,  as
         agent, Texas Commerce Bank National Association,  as syndication agent,
         Bank of Montreal, as documentation agent, BancAmerica Securities, Inc.,
         as  arranger,  and the lenders  that are  signatories  thereto.  As the
         maximum  allowable  borrowings under this facility do not exceed 10% of
         the  Registrant's  total  assets,  this  instrument  is not filed as an
         exhibit  to this  Report,  however,  the  Registrant  hereby  agrees to
         furnish  a copy of  such  instrument  to the  Securities  and  Exchange
         Commission upon request.
  *10.1 -Employment Agreement with William V. Morgan (Exhibit 10.1  to  Partner-
         ship's  Form 10-Q Report dated March 31, 1997)
  *10.2 -Employment Agreement with Thomas B. King (Exhibit 10.2 to Partnership's
         Form 10-Q Report dated March 31, 1997)
  *10.3 -Kinder  Morgan  Energy  Partners,  L.P.  Executive  Compensation   Plan
         (Exhibit  10 to  Partnership's 10-Q dated June 30, 1997)
  *10.4 -Agreement  to Purchase Units dated August 7, 1997 between Kinder Morgan
         Energy Partners, L.P. and the Purchasers listed on Schedule  A  thereto
         (Exhibit  10.1 to Partnership's  Form 8-K  Report dated August 7, 1997)
  *10.5 -Amended and Restated Agreement to Purchase Units dated as of August 13,
         1997 between Kinder Morgan  Energy  Partners,  L.P. and   First   Union
         Investors,  Inc.  (Exhibit  10.2 to Partnership's Form 8-K Report dated
         August 7, 1997)
   10.6  Kinder Morgan Energy Partners, L.P. Common Unit Option Plan
   21   -List of subsidiaries  
   24.1 -Consent letter from Price Waterhouse LLP 
   24.2 -Consent letter from Arthur Andersen LLP 
   27   -Financial Data Schedule
---------------------
* Asterisk indicates exhibits incorporated by reference as indicated;  all other
  exhibits are filed herewith.

                                       58
<PAGE>

(b) Reports on Form 8-K

   Report  dated  October 18,  1997,  on Form 8-K was filed on October 21, 1997,
pursuant to Items 5 and 7 of that form.  An  agreement to purchase the assets of
Santa Fe Pacific Pipeline Partners,  L.P. was disclosed according to Item 5, and
exhibits of the  purchase  agreement  and  associated  press  release were filed
pursuant to Item 7.




                                       59
<PAGE>


                          INDEX TO FINANCIAL STATEMENTS


                                                             Page

KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES


Report  of  Independent  Accountants                          F-2

Report  of  Independent Public Accountants                    F-3

Consolidated  Statements of Income for the years ended
     December 31, 1997, 1996, and 1995                        F-4

Consolidated  Balance  Sheets for the years ended  December
31, 1997 and 1996                                             F-5

Consolidated  Statements  of Cash Flows for the years ended
December 31, 1997, 1996, and 1995                             F-6

Consolidated  Statements of Partners'  Capital for the
     years ended December 31, 1997, 1996, and 1995            F-7

Notes to Consolidated Financial Statements                    F-8




MONT BELVIEU ASSOCIATES


Report  of  Independent  Accountants                         F-20

Report  of  Independent Public Accountants                   F-21

Statements  of Income  for the  years  ended  December  31,
1997, 1996, and 1995                                         F-22

Balance  Sheets for the years ended  December  31, 1997 and
1996                                                         F-23

Statements of Cash Flows for the years ended  December
     31, 1997, 1996, and 1995                                F-24

Statements  of  Partners'   Capital  for  the  years  ended
December 31, 1997, 1996, and 1995                            F-25

Notes to Financial Statements                                F-26


                                      F-1
<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS






To the Partners of
Kinder Morgan Energy Partners, L.P.






In our opinion,  the  accompanying  consolidated  balance  sheet and the related
consolidated  statements  of income,  of cash flows,  and of  partners'  capital
present  fairly,  in all material  respects,  the  financial  position of Kinder
Morgan Energy Partners,  L.P. (a Delaware Limited  Partnership) and subsidiaries
(the  Partnership) at December 31, 1997, and the results of their operations and
their cash flows for the year then ended in conformity  with generally  accepted
accounting principles.  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  audit.  We  conducted  our  audit of these
statements in accordance  with  generally  accepted  auditing  standards,  which
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,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for the opinion expressed above.



/s/ Price Waterhouse LLP
Price Waterhouse LLP
Houston, Texas
March 6, 1998


                                      F-2
<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 the related  consolidated  statements  of income,  cash
flows  and  partners'  capital  for each of the two  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 the results of its  operations  and its cash
flows  for each of the two years in the  period  ended  December  31,  1996,  in
conformity with generally accepted accounting principles.



                                      /s/ Arthur Andersen LLP
                                      ARTHUR ANDERSEN LLP







Houston, Texas
February 21, 1997

                                      F-3
<PAGE>



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


                                               Year Ended December 31.
                                         ------------------------------------
                                           1997         1996         1995
                                         ---------    ----------   ----------

Revenues
    Trade                              $   73,932     $  62,561    $  57,379
    Related Party                               -         8,689        6,925
                                         ---------    ----------   ----------
                                           73,932        71,250       64,304
                                         ---------    ----------   ----------

Costs and Expenses
 Cost of products sold                      7,154         7,874        8,020
 Operations and maintenance
  Related Party                                 -         6,558        2,683
  Other                                    15,039        12,322        9,956
 Fuel and power                             5,636         4,916        3,934
 Depreciation and amortization             10,067         9,908        9,548
 General and administrative                 8,862         9,132        8,739
 Taxes other than income taxes              2,943         3,467        3,289
                                         ---------    ----------   ----------
                                           49,701        54,177       46,169
                                         ---------    ----------   ----------

Operating Income                           24,231        17,073       18,135
Other Income (Expense)
    Equity in earnings of partnerships      5,724         5,675        5,755
    Interest expense                      (12,605)      (12,634)     (12,455)
    Interest income and Other, net           (174)        3,250        1,426
Minority Interest                            (179)        (121)         (115)
                                         ----------    ---------    ----------

Income Before Income Taxes                 16,997        13,243       12,746

Income Tax Benefit (Expense)                  740       (1,343)       (1,432)
                                         ---------    ----------   ----------
Net Income                             $   17,737     $  11,900    $  11,314
                                         ---------    ----------   ----------

General Partner's interest in Net
Income                                      4,074           218          212
Limited Partners' interest in Net
Income                                     13,663        11,682       11,102
                                         ---------    ----------   ----------
Net Income                             $   17,737     $  11,900    $  11,314
                                         ---------    ----------   ----------

Allocation of Net Income per
    Limited Partner Unit               $     1.02     $    0.90    $    0.85
                                         =========    ==========   ==========

Number of Units used in Computation         13,411        13,020       13,020
                                         =========    ==========   ==========

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


                                      F-4
<PAGE>



              KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                 (In thousands)

                                               December 31,
                                           ------------------
                                            1997        1996
                                           -------    -------
                   ASSETS
     Current Assets
         Cash and cash                    $  9,612   $ 14,299
         Accounts receivable
            Trade                            8,569      7,970
            Related parties                     -       4,390
         Inventories
            Products                         1,901        882
            Materials and
            supplies                         1,710      1,827
                                           -------    -------
                                            21,792     29,368
                                           -------    -------
     Property, Plant and
     Equipment, at cost                    290,620    272,178
         Less accumulated depreciation      45,653     36,184
                                           -------    -------
                                           244,967    235,994
                                           -------    -------

     Investments in Partnerships            31,711     32,043
                                           -------    -------

     Deferred Charges and Other Assets      14,436      6,198
                                           =======    =======
     TOTAL ASSETS                        $ 312,906   $303,603
                                           =======    =======

     LIABILITIES AND PARTNERS' CAPITAL
     Current Liabilities
         Accounts payable
            Trade                        $   4,423   $  5,512
            Related parties                    507      4,520
         Current portion of 
          long-term debt                         -      1,709
         Accrued liabilities                 3,585        811
         Accrued taxes                       2,861      2,304
         Distribution payable                    -      4,210
                                           -------    -------
                                            11,376     19,066
                                           -------    -------
     Long-Term Liabilities
     and Deferred Credits
     Long-term debt                        146,824    160,211
     Other                                   2,997      3,492
                                           -------    -------
                                           149,821    163,703
                                           -------    -------
     Commitments and Contingencies 
      (Note 13)

     Minority Interest                       1,485      2,490
                                           -------    -------
     Partners' Capital
       Common unitholders                  146,840    101,000
       Deferred participation
         unitholders                             -     16,165
       General Partner                       3,384      1,179
                                           -------    -------
                                           150,224    118,344
                                           -------    -------
     TOTAL LIABILITIES AND
     PARTNERS' CAPITAL                   $ 312,906  $ 303,603
                                           =======    =======

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

                                      F-5
<PAGE>


             KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENT OF CASH FLOWS
                                (In thousands)
                                                   Year Ended December 31,
                                             -----------------------------------
                                                1997        1996         1995
                                             ----------  ----------   ----------
Cash Flows From Operating Activities
Reconciliation of net income to net 
cash provided by operating activities
    Net income                              $   17,737   $   11,900    $ 11,314
    Depreciation and amortization               10,067        9,908       9,548
    Equity in earnings of partnerships          (5,724)      (5,675)     (5,755)
    Distributions from investments in
     partnerships                                9,588        6,791       6,061
Changes in components of working capital
    Accounts receivable                          3,791       (2,264)     (2,958)
    Inventories                                   (902)         198         465
    Accounts payable                            (5,102)       2,096       1,581
    Accrued liabilities                          2,774       (1,997)      1,535
    Accrued taxes                                  557          149        (373)
Other, net                                        (834)       1,670       1,148
                                             ----------  ----------  ----------
Net Cash Provided by Operating
Activities                                       31,952      22,776      22,566
                                             ----------  ----------  ----------
Cash Flows From Investing Activities
    Acquisitions of assets                      (20,038)          -           -
    Additions to property,
    plant and equipment                          (6,884)     (8,575)     (7,826)
    Sale of property, plant and
    equipment                                       162           -           -
    Contributions to
    partnership investment                       (3,532)       (546)       (772)
                                             ----------   ---------  ----------
Net Cash Used in Investing Activities           (30,292)     (9,121)     (8,598)
                                             ----------   ---------  ----------

Cash Flows From Financing Activities
    Payment of debt                             (58,496)     (1,718)     (1,940)
    Issuance of debt                             43,400       5,000       8,000
    Net proceeds from issuance of 
    common units                                 33,678           -           - 
    Distributions to partners
        Common units                            (21,768)    (16,404)    (16,404)
        General partner                          (2,280)       (268)       (268)
        Minority interest                          (245)       (168)       (168)
    Other, net                                     (636)          -           -
                                             ----------    --------   --------- 
Net Cash Used In Financing
Activities                                       (6,347)    (13,558)    (10,780)
                                             ----------    --------   ---------

Increase (Decrease) in Cash and
Cash Equivalents                                (4,687)          97       3,188
Cash and Cash Equivalents, Beginning of
Period                                          14,299       14,202      11,014
                                             =========    =========   ========= 
Cash and Cash Equivalents, End             
of Period                                  $     9,612       14,299      14,202
                                             =========    =========   ========= 
Supplemental disclosures of cash flow
information
    Cash paid during the year for
        Interest (net of 
        capitalized interest)              $    12,611    $  12,487   $  11,870
        Income Taxes                               463          397         425


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


                                      F-6
<PAGE>



              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
                            -------   -------------    --------    ---------

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

    Net income                13,440        223           4,074       17,737

    Transfer of deferred
       participation units    16,388    (16,388)              -            -

    Net proceeds from 
       issuance of 
       common units           33,678          -               -       33,678

    Capital contributions          -          -             345          345

    Distributions accrued-
       December 31, 1996       4,102          -              66        4,168

    Distributions paid       (21,768)         -          (2,280)     (24,048)
                            --------    -------         -------      -------

Partners' capital at      
December 31, 1997          $146,840     $     -         $ 3,384     $150,224
                            =======     =======         ========    ========



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

                                      F-7
<PAGE>


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





1.  Organization

    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).

  The Partnership operates through three operating limited partnerships,  OLP-A,
OLP-B,  and Kinder  Morgan  Operating  L.P.  "C"  ("OLP-C")  (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, OLP-B,
and OLP-C.  The  Partnership  and the  Operating  Partnerships  are  governed by
Amended  and  Restated  Agreements  of Limited  Partnership  and  certain  other
agreements (collectively, the "Partnership Agreements").

  General

  The  Partnership's  assets include two interstate  common carrier  natural gas
liquids ("NGL" or "NGLs") pipelines ("North System" and "Cypress  Pipeline"),  a
carbon dioxide  ("CO2")  pipeline  ("Central Basin  Pipeline"),  two modern high
speed  rail-to-barge coal transfer facilities ("Cora Terminal" and "Grand Rivers
Terminal"),  a gas  processing  plant  ("Painter  Plant"),  and  a 25%  indirect
interest in an NGL fractionator in Mont Belvieu, Texas by means of the ownership
of the common stock of KMNGL. 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 Grand
Rivers Terminal is a coal transfer,  storage,  and blending  facility located in
Southwest Kentucky on the Tennessee River. The Painter Plant assets are operated
by Amoco Oil Company under an operating lease agreement.

  Two-for-one Common Unit Split

  On September 2, 1997, the Partnership's General Partner approved a two-for-one
Unit split of the Partnership's  outstanding Common Units  representing  limited
partner interests in the Partnership. The Unit split entitled common unitholders
to one  additional  Common  Unit for each  Common Unit held.  The  issuance  and
mailing of split Units  occurred on October 1, 1997 to  unitholders of record on
September  15, 1997.  All  references to the number of Common Units and per Unit
amounts in the  consolidated  financial  statements  and related notes have been
restated to reflect the effect of the split for all periods presented.

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

                                      F-8
<PAGE>

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


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 and coal 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.

  Revenue Recognition

  Revenues  for the  pipeline  operations  are  generally  recognized  based  on
delivery of actual  volume  transported.  Coal  transfer  service  revenues  are
recognized  based on volumes loaded.  Recognition of gas processing  revenues is
based on volumes processed or fractionated. Revenues from energy related product
sales  of the  Red  Lightning  Energy  Services  unit  are  based  on  delivered
quantities of product.

  Minority Interest

  Minority  interest  consists of the approximate 1% general partner interest in
the Operating Partnerships.

  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 or loss of the Partnership. 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.

  Certain  operations of the  partnership  are conducted  through a wholly-owned
corporate  subsidiary  which  is  taxable.  Income  before  income  tax  expense
attributable  to corporate  operations  was $2.5 million,  $3.6 million and $3.7
million for the years ended December 31, 1997, 1996 and 1995, respectively.  For
the periods ended December 31, 1997, 1996, and 1995, respectively, the provision
for income taxes consists of deferred income tax of $(1.1) million, $.9 million,
and $.9  million,  respectively,  and  current  income tax of $.3  million,  $.4
million and $.5 million,  respectively.  The net deferred tax  liability of $2.1
million and $3.2 million at December 31, 1997 and 1996,  respectively,  consists
of deferred tax liabilities of $4.6 million and $5.4 million,  respectively, and
deferred tax assets of $2.5 million and $2.2 million, respectively. The deferred
tax  liabilities  consist  primarily  of tax  depreciation  in  excess  of  book
depreciation.  The 

                                      F-9
<PAGE>

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


deferred tax assets consist primarily of alternative minimum tax credits and net
operating losses.  Net operating losses total  approximately  $2.4  million  and
substantially expire in 2008.

  Reconciling  items between  income tax expense  computed at the statutory rate
and actual  income tax expense for the year ended  December  31, 1997  primarily
include the effect of a change in estimate of prior years' provision,  a partial
liquidating distribution and state income taxes.

  The tax  attributes  of the  Partnership's  net assets  flow  directly to each
individual  partner.  Individual partners will have different  investment  bases
depending  upon the timing  and  prices of  acquisition  of  partnership  units.
Further,  each partner's tax accounting,  which is partially  dependent upon the
partner's  individual tax position,  may differ from the accounting  followed in
the financial statements.  Accordingly,  there could be significant  differences
between each  individual  partner's  tax basis and the  partner's  proportionate
share of the net assets reported in the financial  statements.  FAS 109 requires
disclosure by a publicly  held  partnership  of the aggregate  difference in the
basis of its net assets for financial and tax reporting purposes.  However,  the
Partnership does not have access to information about each individual  partner's
tax attributes in the Partnership, and the aggregate tax bases cannot be readily
deteremined.   In  any  event,   management   does  not  believe  that,  in  the
Partnership's  circumstances,  the  aggregate  difference  would  be  meaningful
information.

  Net Income Per Unit

  Allocation  of Net Income per Limited  Partner  Unit was  computed by dividing
Limited  Partner's  interest  in Net Income by the  weighted  average  number of
Common Units outstanding during the period.

3.  Property, Plant and Equipment

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

                                             December 31,
                                           -----------------
                                            1997         1996
                                           -------      -------
      Liquids pipelines                  $ 226,129    $ 223,337
      Coal transfer, storage and
      services                              36,865       24,197
      Gas processing
      and fractionation                     13,563       13,529
      Land 
                                             3,111        2,936
      Other                                 10,952        8,179
                                           -------      -------
       Total                             $ 290,620    $ 272,178
                                           =======      =======

4.  Investments in Partnerships

  Investments in partnerships accounted for under the equity method consisted of
the following (dollars in thousands):

                                                  December 31,
                                    Ownership   -----------------
                                   Percentage    1997      1996
                                   ----------   -------   -------
      Mont Belvieu Associates             50%   $27,157   $27,205
      Heartland Pipeline Company          50%     4,554     4,838
                                                -------   -------
      Total                                     $31,711   $32,043
                                                =======   =======


                                      F-10
<PAGE>

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


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

                                          -------------------------------------
                                            1997          1996         1995
                                          ----------    ---------    ----------
       Mont Belvieu Associates          $     5,009    $   4,968     $   5,208
       Heartland Pipeline
       Company                                  715          707           547
                                          ----------    ---------    ----------
       Total                            $     5,724    $   5,675    $    5,755
                                          ==========    =========    ==========

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

                                                             December 31,
                                                        -----------------------
                                                          1997         1996
                                                        ---------    ----------
       Balance Sheet
           Current assets                              $   7,353    $    7,729
           Non-current assets                          $  53,842    $   54,401
           Current liabilities                         $   4,855    $    5,043
           Non-current                                 $  11,790        15,022
           Partners' equity                            $   4,554        42,065

                                                 Year Ended December 31,
                                          -------------------------------------
                                            1997          1996         1995
                                          ----------    ---------    ----------
       Income Statement
           Revenues                      $   38,299    $  31,534    $   30,032
           Expenses                          26,040       19,563        18,074
                                          ----------    ---------    ----------
               Net income                $   12,259    $  11,971    $   11,958
                                          ==========    =========    ==========

  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.  The unamortized excess was approximately $8 million as of December
31, 1997.

5.  Gas Processing and Fractionation Transactions

  Chevron Contract Buyout

  In 1996,  the  Partnership  was notified by Chevron,  the only gas  processing
customer  of the  Painter  Plant,  that it was  terminating  the gas  processing
agreement  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 for $2.5 million.

  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   Painter   Plant
fractionator  and  the   Partnership's  Millis  Terminal  and  Storage  Facility
("Millis") with the nearby Amoco Painter Complex Gas Plant. The lease  generated
approximately  $0.9 million of cash flow in 1997. 


                                      F-11
<PAGE>

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


6. Long-Term Debt

   OLP-A

  As of December 31,  1997,  OLP-A had  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.

  OLP-A has established a $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  interest rate equal to the London  Interbank  Offered Rate ("LIBOR")
plus  1.75% per  annum,  requires  interest  payable  quarterly  on  outstanding
borrowings, and upon its June 1, 1999 termination, requires the repayment of the
entire  outstanding  principal amount. At December 31, 1997, the Partnership had
outstanding  borrowings of $11.8 million under this  facility.  During 1997, the
weighted-average interest rate was 7.49% 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   1997,   the
weighted-average  interest  rate on these  bonds was 3.71% 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.

  Debt Maturities

  Subsequent to December 31, 1997, the Partnership refinanced its First Mortgage
Notes and existing bank credit  facilities with a $325 million secured revolving
credit  facility.  Beginning in May, 2000 the amount  available under the credit
facility reduces on a quarterly basis. At that time quarterly principal payments
are  required,  as necessary to reduce the  outstanding  amount to the available
amount under the credit facility.  The final principal  payment is due February,
2005.

  Fair Value of Financial Instruments

  The estimated fair value of the long-term debt based upon prevailing  interest
rates  available to the  Partnership  at December 31, 1997 and 1996 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, 1997          December 31, 1996
                            -----------------------   ------------------------
                            Carrying     Estimated    Carrying      Estimated
                              Value        Fair         Value         Fair
                                           Value                      Value
                            ----------   ----------   ----------    ----------
                                             (in thousands)
       Long-term debt       $ 146,824    $ 158,343    $ 161,920     $ 152,631
       Interest rate                                               
       swap                 $       -    $       -    $       -     $     155


                                      F-12
<PAGE>

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


7. Partners' Capital

   At December 31, 1997,  Partners' capital consisted of 13,249,200 Common Units
held by third  parties and  862,000  Common  Units held by the General  Partner.
Together, these 14,111,200 Common Units represent the limited partners' interest
and an effective 98% interest in the Partnership.  At December 31, 1996 and 1995
there were 13,020,000 Units outstanding. The general partner interest represents
an effective 2% interest in the Partnership. On February 14, 1997, the 1,720,000
deferred  participation  units held by the General  Partner  were  converted  to
Common  Units and 858,000 of these units were sold to a third  party.  Since the
deferred  participation units owned by the General Partner are now Common Units,
they are no longer separately disclosed.  During 1997, the Partnership issued an
additional 1,091,200 Common Units.

  For  purposes  of  maintaining  partner  capital  accounts,   the  Partnership
agreement  specifies that items of income and loss, shall be allocated among the
partners  in  accordance  with their  respective  percentage  interests.  Normal
allocations  according to  percentage  interests are done only,  however,  after
giving effect to any priority income allocations in an amount equal to incentive
distributions allocated 100% to the General Partner.

  Incentive distributions allocated to the General Partner are determined by the
amount quarterly  distributions to unitholders  exceed certain  specified target
levels. For each of the four quarters of 1996 and the first quarter of 1997, the
Partnership's  cash  distribution  of  $0.315  per Unit  required  an  incentive
distribution  of  $25,143  to  the  General  Partner.   The  Partnership's  cash
distribution of $0.50 per Unit for each of the second and third quarters of 1997
required  incentive  distributions  to  the  General  Partner  of  $964,600  and
$1,045,442,  respectively.  The increased  incentive  distribution for the third
quarter reflects the issuance of additional Common Units.

  On January 14, 1998,  the  Partnership  declared a cash  distribution  for the
quarterly  period ended December 31, 1997, of $0.5625 per Unit. The distribution
will be paid on February 17, 1998,  to  unitholders  of record as of January 31,
1998,  and will  require an  incentive  distribution  to the General  Partner of
$1,900,667.  Since this  distribution was declared after the end of the quarter,
no amount is shown in the  December 31, 1997,  balance  sheet as a  Distribution
Payable.  For the year ended December 31, 1996, the fourth quarter  distribution
was declared prior to the end of the period.

8. 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.  Although 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,  management  believes  that the  Partnership  is
exposed to minimal  credit  risk.  The  Partnership  generally  does not require
collateral for its receivables.





9.  Related Party Transactions

  Revenues and Expenses

  Revenues for the years ended December 31, 1996 and 1995 include transportation
charges and product sales to an Enron  subsidiary,  Enron Gas Liquids,  Inc., of
$7.7 million and $5.9 million, respectively. Another Enron subsidiary, Enron Gas
Processing  Company  ("EGP"),   provided  services  in  connection  with  a  gas
processing  agreement  with Mobil as well as storage  and other  services to the
Partnership  and  charged  $6.6  million  and $2.7  million  for the years ended
December 31, 1996 and 1995, respectively. Management believes that these charges
were reasonable.  As a result of 

                                      F-13
<PAGE>

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


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  approximately  17 MBbls/d of North System capacity to
Heartland  Pipeline  Company  ("Heartland")  under a lease  agreement which will
expire  in 2010.  Revenues  earned  from  Heartland  for the lease  rights  were
approximately  $0.9 million for each of the years ended December 31, 1997,  1996
and 1995.

  General and Administrative Expenses

  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. For the years ended
December 31, 1996 and 1995 the amounts reimbursed to Enron were $5.8 million and
$5.5 million, respectively.

  Partnership Distributions

  Kinder Morgan G.P.,  Inc. (the "General  Partner")  serves as the sole general
partner of the three operating  partnerships as well as the sole general partner
of the Partnership.  Pursuant to the partnership agreements, the general partner
interests  represent a 1% ownership  interest in the  Partnership,  and a direct
1.0101%  ownership  interest in the operating  partnerships.  Together then, the
General Partner owns an effective 2% interest in the operating partnerships; the
1.0101% direct general  partner  ownership  interest  (accounted for as minority
interest in the  consolidated  financial  statements of the Partnership) and the
0.9899% ownership interest indirectly owned via its 1% ownership interest in the
Partnership.

  At December  31,  1997,  the  General  Partner  owned  862,000  Common  Units,
representing  approximately 6.1% of the Common Units. The partnership agreements
governing  the  operation  of the  Partnership  and the  operating  partnerships
require the  partnerships to distribute 100% of the "Available Cash" (as defined
in the partnership  agreements) to the Partners within 45 days following the end
of  each  calendar  quarter  in  accordance  with  their  respective  percentage
interests.  Available  Cash  consists  generally  of all  cash  receipts  of the
partnerships less all of their cash disbursements and net additions to reserves.

  In general, Available Cash for each quarter is distributed,  first, 98% to the
Limited  Partners and 2% to the General Partner until the Limited  Partners have
received  a total of  $0.3025  per Unit for  such  quarter,  second,  85% to the
Limited  Partners and 15% to the General Partner until the Limited Partners have
received a total of $0.3575 per Unit for such quarter, third, 75% to the Limited
Partners and 25% to the General Partner until the Limited Partners have received
a total of $0.4675 per Unit for such quarter, and fourth,  thereafter 50% to the
Limited Partners and 50% to the General  Partner.  Incentive  distributions  are
generally  defined as all cash  distributions  paid or  payable  to the  General
Partner  that  are in  excess  of 2% of  the  aggregate  amount  of  cash  being
distributed.  The General Partner's incentive  distributions for the years ended
December 31, 1997,  1996,  and 1995 were  $3,935,852,  $100,571,  and  $100,571,
respectively.

  Odessa Lateral

  During 1996,  the Odessa  lateral was  constructed to connect 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 (Vice Chairman of
the General  Partner).  The lateral was  constructed at a cost of $1.35 million,
which  amount  has been paid by MAI.  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 and requires the Partnership
to ship certain  minimum  quantities of CO2 on the lateral.  The  agreements are
coterminous  and expire in 2016. For the years ended December 31, 1997 and 1996,

                                      F-14
<PAGE>


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

the  Partnership  charged  MAI  $75,000  and  $31,250,  respectively,  under the
Operating  &   Maintenance   Agreement  and  paid  MAI  $496,005  and  $194,648,
respectively, under the Transportation Agreement.

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.

  Under a joint tariff agreement, the Partnership's North System is obligated to
pay minimum tariff revenues of  approximately  $2.3 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.   Subsequent  to  December  31,  1997,  the   Partnership
renegotiated this contract.


                                      F-15
<PAGE>

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


  The Partnership has entered into certain operating leases.  Including probable
elections to exercise renewal  options,  the leases have remaining terms ranging
from eight to forty-six  years.  Future  commitments  related to these leases at
December 31, 1997 are as follows (in thousands):

                         1998                  $    516
                         1999                       530
                         2000                       545
                         2001                       561
                         2002                       575
                       Thereafter                10,928
                                                -------
                       Total minimum payments  $ 13,655
                                                =======

  Total lease expenses,  including  related variable  charges,  incurred for the
years ended December 31, 1997,  1996,  and 1995 were $1.3 million,  $1.5 million
and $1.4 million, respectively.

11.  Reportable Segments

  The Partnership has three reportable  business  segments:  liquids  pipelines;
coal transfer, storage, and services; and gas processing and fractionation.  The
liquids  pipelines  segment  transports  natural gas liquids  ("NGLs"),  refined
petroleum  products,  and carbon dioxide  ("CO2") and includes the operations of
the North  System,  Cypress  Pipeline,  and  Central  Basin  Pipeline.  The coal
transfer, storage, and services segment transports,  stores, and markets coal by
the  use of two  coal  terminal  facilities  (Cora  Terminal  and  Grand  Rivers
Terminal) and an energy services  business unit (Red Lightning Energy Services).
The gas processing and  fractionation  segment  includes the  Partnership's  25%
indirect interest in a NGL fractionation facility and lease income realized from
an operating lease agreement at the Partnership's Painter Plant facilities.

  The accounting policies of the segments are the same as those described in the
summary  of  significant  accounting  policies  (See  Note 2).  The  Partnership
evaluates  performance based on each segments' earnings,  which excludes general
and administrative  expenses,  third-party debt costs,  non-affiliated  interest
income,  and  minority  interest.  The  Partnership's  reportable  segments  are
strategic  business units that offer different  products and services.  They are
managed   separately  because  each  segment  involves  different  products  and
marketing strategies.

<TABLE>
<CAPTION>
                                     Coal Transfer,  Gas Processing    Total
          1997             Liquids   Storage, and        and         Segments
                          Pipelines     Services     Fractionation
                         ---------------------------------------------------------
<S>                         <C>           <C>             <C>        <C>    

Revenues                    $53,511       $18,155         $2,266      $73,932
                         ---------------------------------------------------------

Operating income            $23,244       $10,709          $(855)     $33,098
Equity in earnings of
partnerships                    715             -          5,009        5,724
Other                          (75)            (1)        (1,296)      (1,372)
Income tax                       -              -            740          740
benefit/(expense)
                         ---------------------------------------------------------
     Segment earnings       $23,884       $10,708         $3,598      $38,190 <F1>
                         ---------------------------------------------------------
Assets at December 31      $209,820       $54,157        $38,021     $301,998 <F2>
Depreciation and             $8,069        $1,058           $940      $10,067
amortization
Capital expenditures         $4,253       $22,612            $57      $26,922
                         ---------------------------------------------------------

          1996

Revenues                    $54,036        $8,059         $9,155      $71,250
                         ---------------------------------------------------------


                                      F-16
<PAGE>

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



Operating income            $21,208          $4,401           $596     $26,205
Equity in earnings of 
partnerships                    707               -          4,968       5,675
Other                           156              21          2,449       2,626 <F3>
Income tax                        -               -         (1,343)     (1,343)
benefit/(expense)
                         ---------------------------------------------------------
Segment earnings            $22,071          $4,422         $6,670     $33,163 (1)
                         ---------------------------------------------------------
Assets at December 31      $216,986         $28,736        $42,276    $287,998 (2)
Depreciation and
amortization                 $7,558          $1,366           $984      $9,908
Capital expenditures         $7,673            $606           $296      $8,575
                         ---------------------------------------------------------


          1995

                         ---------------------------------------------------------
Revenues                    $46,940          $8,398         $8,966     $64,304
                         ---------------------------------------------------------

Operating income            $18,147          $5,015         $3,715     $26,877
Equity in earnings of
partnerships                    547               -          5,208       5,755
Other                           430              26            175         631
Income tax                        -               -         (1,432)     (1,432)
benefit/(expense)
                         ---------------------------------------------------------
Segment earnings            $19,124          $5,041         $7,666     $31,831 (1)
                         ---------------------------------------------------------
Assets at December 31      $214,846         $29,202        $43,995    $288,043 (2)
Depreciation and             $7,267          $1,332           $949      $9,548
amortization
Capital expenditures         $7,342            $148           $336      $7,826
                         ---------------------------------------------------------

<FN>
<F1> The following reconciles segment earnings to net income.

                                         1997     1996     1995
                                     ---------------------------
Segment earnings                      $38,190  $33,163  $31,831
Interest and corporate                (20,453) (21,263) (20,517)
administrative expenses (a)
                                     ---------------------------
Net income                            $17,737  $11,900  $11,314
                                     ---------------------------
(a) Includes  interest and debt expense,  general and  administrative  expenses,
minority interest expense, and other insignificant items.

<F2> The following reconciles segment assets to consolidated assets.

                                         1997     1996     1995
                                     ---------------------------
Segment assets                       $301,998 $287,998 $288,043
Corporate assets (a)                   10,908   15,605   15,621
                                     ---------------------------
Total Assets                         $312,906 $303,603 $303,664
                                     ---------------------------
(a) Includes cash, cash equivalents, and other insignificant assets.

<F3> Gas Processing  and  Fractionation  segment  includes a gain of $2.5 million
from early termination of a gas processing contract.
</FN>
</TABLE>
  Although the  Partnership's  1997  revenues  were derived from a wide customer
base, revenues from one customer of the Partnership's  liquids pipelines and gas
processing and  fractionation  segments  represents  approximately  $8.8 million
(11.9%) of total revenues.  For the year ended December 31, 1996,  revenues from
two customers of the  Partnership's  liquids  pipelines and gas  processing  and
fractionation  segments represented  approximately $8.9 million (12.4%) and $7.4
million (10.4%),  respectively,  of total revenues.  For the year ended December
31, 1995,  revenues from one 

                                      F-17
<PAGE>

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


customer  of  the  Partnership's   gas  processing  and  fractionation   segment
represented  approximately $6.6 million (10.2%) of total revenues,  and revenues
from one customer of the liquids  pipelines and gas processing and fractionation
segments represented approximately $6.5 million (10.2%) of total revenues.


12.  Subsequent Events

  Santa Fe Acquisition

  On March 6, 1998, the Partnership acquired substantially all of the assets and
assumed certain liabilities of Santa Fe Pacific Pipeline Partners,  L.P. ("Santa
Fe") for  approximately  26.6 million Common Units and $84.4 million in cash. At
the time of the acquisition, Santa Fe was one of the largest independent refined
petroleum  products  pipelines in the United States  serving six Western  states
with  approximately  3,300 miles of common  carrier  pipeline and thirteen truck
loading terminals.  The Partnership  intends to conduct the acquired  operations
through SFPP,  L.P., a subsidiary  partnership  which is owned 99.5% by a fourth
operating partnership, Kinder Morgan Operating L.P. "D" ("OLP-D").

  Shell CO2 Company

  On March 5, 1998, the  Partnership  and affiliates of Shell Oil Company formed
Shell CO2 Company, Ltd. which will explore,  produce,  market, and transport CO2
for  enhanced  oil  recovery  throughout  the  continental  United  States.  The
Partnership  received a 20% limited partner interest in Shell CO2 Company,  Ltd.
in exchange for  contributing the Central Basin Pipeline and  approximately  $25
million in cash.

13.  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 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.

  Morris Storage Facility

  The General  Partner is a defendant  in two  proceedings  (one by the State of
Illinois  and one by the  Department  of  Transportation)  relating  to  alleged
environmental  violations  for events  relating  to a fire that  occurred at the
Morris storage field in September, 1994. Although no assurance can be given, the
Partnership believes that the ultimate resolution of these matters will not have
a material adverse effect on its financial position or results of operations.


                                      F-18
<PAGE>

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




Class Action Filings

  Four  purported   class  actions  have  been  filed  in  connection  with  the
acquisition by the  Partnership of  substantially  all of the assets of Santa Fe
(See Note 12). In February  1998,  the  parties to the  actions  entered  into a
memorandum of understanding that would settle the actions. However, there can be
no assurance  that the court will approve the memorandum of  understanding.  The
Partnership  believes any settlement will not have a material  adverse affect on
the Partnership's financial position or results of operations.

  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.  For each of the years ended
December 31, 1997,  1996, and 1995, the application of the indexing  methodology
did not significantly affect the Partnership's rates.

14.  Quarterly Financial Data (Unaudited)

                                        Operating                 Net Income
                           Revenues      Income     Net Income     per Unit

                                     (In thousands, except per unit amounts)

1997
   First Quarter          $19,132        $5,927       $3,428        $0.26
   Second Quarter          16,036         4,800        2,866         0.15
   Third Quarter           17,385         5,315        3,754         0.20
   Fourth Quarter          21,379         8,189        7,689         0.41


1996
   First Quarter          $18,431        $5,124       $2,810        $0.21
   Second Quarter          14,668         2,860        1,353         0.10
   Third Quarter           14,422         1,948        2,346         0.18
   Fourth Quarter          23,729         7,141        5,391         0.41

1995
   First Quarter          $15,708        $5,846       $3,996        $0.30
   Second Quarter          12,322         2,852        1,615         0.12
   Third Quarter           15,215         2,830          978         0.07
   Fourth Quarter          21,059         6,607        4,725         0.36




                                      F-19
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS




To the Partners of
Mont Belvieu Associates






In our opinion,  the  accompanying  balance sheet and the related  statements of
income , of cash flows, and of partners' capital present fairly, in all material
respects,  the financial  position of Mont Belvieu  Associates,  a Texas general
partnership,  (the  Partnership)  at December 31,  1997,  and the results of its
operations  and its cash  flows  for the year  then  ended  in  conformity  with
generally accepted  accounting  principles.  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 audit. We conducted our
audit in accordance with generally  accepted auditing  standards,  which 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,   assessing  the  accounting  principles  used  and
significant  estimates made by management,  and evaluating the overall financial
statement  presentation.  We believe that our audit provides a reasonable  basis
for the opinion expressed above.






/s/ Price Waterhouse LLP
Price Waterhouse LLP
Houston, Texas
March 6, 1998





                                      F-20
<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,  (the  Partnership) as of December 31, 1996, and the
related  statements of income,  cash flows and partners' capital for each of the
two 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 the results of its operations and its cash flows for each
of the two years in the  period  ended  December  31,  1996 in  conformity  with
generally accepted accounting principles.




                                            /s/ Arthur Andersen LLP
                                            ARTHUR  ANDERSEN  LLP


Houston, Texas
February 21, 1997

                                      F-21
<PAGE>


                             MONT BELVIEU ASSOCIATES
                               STATEMENT OF INCOME
                                 (In thousands)


                                           Year Ended December 31,
                                         1997       1996       1995

Revenues                              $33,646    $26,954    $25,795

Costs and expenses
      Operations and maintenance       19,350     14,302     13,361
      Depreciation                      1,934      1,424      1,293
      Taxes, other than income taxes    1,025        634        517
      Other                                 9          -          4
                                   ---------- ----------  ---------
                                       22,318     16,360     15,175

Operating income                       11,328     10,594     10,620

Other income (expense)
      Interest expense                   (891)       (92)      (125)
      Other                               175        105        329
                                   ---------- ---------- ----------
                                         (716)        13        204
                                   ---------- ---------- ----------

Net income                            $10,612    $10,607    $10,824
                                      =======    =======    =======




















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

                                      F-22
<PAGE>


                             MONT BELVIEU ASSOCIATES
                                  BALANCE SHEET
                                 (In thousands)


                                                  December 31,
                                              1997         1996
ASSETS

Current assets
   Cash and cash equivalents                  $338           $2
   Accounts receivable 
     Due from partners                           -        1,542
     Trade                                   4,357        3,510
   Advances to fractionator                  1,430        1,448
                                             -----        -----
                                             6,125        6,502

Property, plant and equipment, at cost      70,351       68,609
   Less accumulated depreciation            24,577       22,643
                                            45,774       45,966
Deferred charges and other assets               79            -
                                         ---------  -----------

TOTAL ASSETS                               $51,978      $52,468
                                           =======      =======

LIABILITIES AND PARTNERS' CAPITAL

Current liabilities
   Accounts payable due to fractionator  $        -     $   282
   Current portion of long-term debt          3,232       2,996
   Accrued taxes other than income              915         536
   Deferred revenues                            332         732
                                            -------     -------
                                              4,479       4,546

Long-term debt (Note 3)                      11,790      15,022
                                             ------      ------

Partners' capital                            35,709      32,900
                                             ------      ------

TOTAL LIABILITIES AND PARTNERS' CAPITAL     $51,978     $52,468








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

                                      F-23
<PAGE>


                             MONT BELVIEU ASSOCIATES
                             STATEMENT OF CASH FLOWS
                                 (In thousands)


                                              Year Ended December 31,
                                           1997        1996        1995

Cash flows from operating activities
Reconciliation of net income to net 
 cash provided by operating activities
     Net income                         $10,612      $10,607    $10,824
     Depreciation and amortization        1,934        1,424      1,297
     Changes in components of working
      capital
       Advances to fractionator              18         (230)        92
       Accounts receivable                  695        1,804     (1,745)
       Accounts payable due to 
        fractionator                       (282)      (2,426)     1,161
       Accrued taxes other than income      379            -         (1)
     Other, net                            (479)         732     (1,423)
                                        -------     --------    -------
Net cash provided by operating 
activities                               12,877       11,911     10,205

Cash flows from investing activities
     Additions to property, plant 
     and equipment                       (1,742)     (11,684)    (2,089)
Net cash used in investing activities    (1,742)     (11,684)    (2,089)

Cash flows from financing activities  
     Contributions from partners          6,755          871      1,652
     Issuance of long-term debt               -       17,000        436
     Repayment of long-term debt         (2,996)        (399)      (166)
     Cash distributions                 (14,558)     (14,308)   (10,036)
     Distribution of Equity Loan
          to Enterprise                       -       (3,400)         -
Net cash used in financing activities   (10,799)        (236)    (8,114)


Increase (decrease) in cash and cash 
 equivalents                                336           (9)         2
Cash and cash equivalents, beginning of 
period                                        2           11          9
                                       --------     --------   --------
Cash and cash equivalents, end of 
period                                     $338          $ 2        $11
                                           ====          ===        ===

----------------------------------------------------------------------------

Supplemental disclosures of cash 
flow information
     Cash paid during the year 
     for interest (including 
     capitalized interest)               $1,185        $333       $125

----------------------------------------------------------------------------



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

                                      F-24
<PAGE>


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



                                                                Total
                                                Enterprise    Partners'
                                         KMNGL  Products Co.   Capital

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 loa                 --    (3,400)    (3,400)
                                         -------  --------   --------

Partners' Capital at December 31, 1996   18,150    14,750     32,900

Contributions                             3,107     3,648      6,755

Net income                                5,306     5,306     10,612

Distributions                            (7,279)   (7,279)   (14,558)
                                         -------   -------   --------

Partners' Capital at December 31, 1997  $19,284   $16,425    $35,709
                                        ========  =======    =======




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

                                      F-25
<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 over 30 years,  which approximates the estimated
economic and physical life of the assets.

    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.

3.  Long-Term Debt

    At December 31,  1997,  MBA has  outstanding  a $0.6 million 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 1997, the weighted-average interest rate on this note was 7.31%. The note
is secured by MBA's partnership interest in the Fractionator.

                                      F-26
<PAGE>

                             MONT BELVIEU ASSOCIATES
                          NOTES TO FINANCIAL STATEMENTS


    In addition,  at December  31, 1997,  MBA has  outstanding  a $14.4  million
promissory note which bears interest equal to the London Interbank  Offered Rate
("LIBOR") plus a margin of .75% per annum. The original principal balance of $17
million is payable in equal monthly  installments,  except for the final payment
due December 31, 2001, based on a six year amortization schedule which commenced
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 debt as of December 31, 1997 were as follows (in thousands):
          1998                     $3,232
          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  77% of revenues were earned from the partners of the Fractionator
in 1997. 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-27
<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 31st  day  of
March, 1998.

                            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           March 31, 1998
Richard D. Kinder            Chief Executive Officer
                             (Principal Executive Officer)

/s/ William V. Morgan        Director and Vice Chairman        March 31, 1998
William V. Morgan

/s/ Alan L. Atterbury        Director                          March 31, 1998
Alan L. Atterbury

/s/ Edward O. Gaylord        Director                          March 31, 1998
Edward O. Gaylord

/s/ Thomas B. King           Director, President, and
Thomas B. King               Chief Operating Officer           March 31, 1998

/s/ David G. Dehaemers, Jr.  Vice President, Treasurer, and
David G. Dehaemers, Jr.      Chief Financial Officer           March 31, 1998
                             (Principal Financial and 
                             Accounting Officer)


                                      S-1