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, 1998

                 KINDER MORGAN ENERGY PARTNERS, L.P.
                  KINDER MORGAN OPERATING L.P. "A"
                  KINDER MORGAN OPERATING L.P. "B"
                  KINDER MORGAN OPERATING L.P. "C"
                  KINDER MORGAN OPERATING L.P. "D"
            KINDER MORGAN NATURAL GAS LIQUIDS CORPORATION
                       KINDER MORGAN CO2, LLC
                 KINDER MORGAN BULK TERMINALS, INC.
     (Exact name of registrants as specified in their charters)


      DELAWARE                        1-11234                    76-0380342
      DELAWARE                     333-66931-01                  76-0380015
      DELAWARE                     333-66931-02                  76-0414819
      DELAWARE                     333-66931-03                  76-0547319
      DELAWARE                     333-66931-04                  76-0561780
      DELAWARE                     333-66931-05                  76-0256928
      DELAWARE                     333-66931-06                  76-0563308
      LOUISIANA                    333-66931-07                  72-1073113
(State or other jurisdiction    (Commission File              (I.R.S. Employer
of incorporation or                   Number)                Identification No.)
organization)


        1301 McKinney Street, Ste. 3400, 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 of Kinder Morgan                   New York Stock Exchange
Energy Partners, L.P.        

     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  9,  1999  was   approximately
$1,661,652,855.  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 9, 1999, the Registrant had 48,815,690 Common Units
outstanding.

                                       1
<PAGE>



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

     
                                                                        Page No.

     P A R T  I

Items 1 and 2.     Business and Properties                                     3

Item 3.            Legal Proceedings                                          37

Item 4.            Submission of Matters to a Vote of Security Holders        37

     P A R T  II

Item 5.            Market for the Registrant's Units and Related Security
                   Holder Matters                                             38

Item 6.            Selected Financial Data                                    39

Item 7.            Management's Discussion and Analysis of Financial
                   Condition and Results of Operation                         40

Item 7A.           Quantitative and Qualitative  Disclosures About
                   Market Risk                                                48

Item 8.            Financial Statements and Supplementary Data                48

Item 9.            Changes in and Disagreements on Accounting and
                   Financial Disclosure                                       48

     P A R T  III

Item 10.           Directors and Executive Officers of the Registrant         49

Item 11.           Executive Compensation                                     50

Item 12.           Security Ownership of Certain Beneficial Owners and
                   Management                                                 53

Item 13.           Certain Relationships and Related Transactions             54


     P A R T  IV

Item 14.           Exhibits, Financial Statement Schedules, and
                   Reports on Form 8-K                                        55

Financial Statements                                                         F-1

Signatures                                                                   S-1



                                       2
<PAGE>



                                   P A R T  I

Items 1. and 2. Business and Properties

   Kinder Morgan Energy Partners, L.P. ("Partnership"), a Delaware limited
partnership, is a publicly traded Master Limited Partnership ("MLP") formed in
August 1992. The Partnership manages a diversified portfolio of midstream energy
assets, including six refined products/liquids pipeline systems containing over
5,000 miles of trunk pipeline and over 20 truck loading terminals. The
Partnership also operates 24 bulk terminal facilities that transload
approximately 50 million tons of coal, petroleum coke and other bulk and liquids
products annually. In addition, the Partnership owns 24% of Plantation Pipe Line
Company, 20% of Shell CO2 Company and a 25% interest in a Y-grade fractionation
facility.

   The address of the Partnership's principal executive offices is 1301 McKinney
Street, Suite 3400, Houston, Texas 77010 and its telephone number at this
address is (713) 844-9500.

   The Partnership's operations are grouped into three reportable business
segments. These segments and their major assets are as follows:

   o Pacific Operations, a 3,300 mile refined products pipeline system operating
     in Arizona, California, Nevada, New Mexico, Oregon and Texas, consisting
     of:
        o the South Line, which has two pipeline segments: the West Line, which
          transports petroleum products from the Los Angeles Basin to Phoenix
          and Tucson, Arizona, including intermediate points, and the East Line,
          which transports petroleum products from El Paso, Texas to Tucson and
          Phoenix;
        o the San Diego Line, extending from Los Angeles to the Partnership's
          terminals in Orange and San Diego, California;
        o the North Line, which has 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; and
        o the Oregon Line, extending from its Portland, Oregon origin southward
          to the Partnership's terminal in Eugene, Oregon.

   o  Mid-Continent Operations, consisting of joint venture projects and
      products pipelines including:
        o the North System, a 1,600 mile pipeline which transports natural gas
          liquids and petroleum products between south central Kansas and the
          Chicago area and various intermediate points, including eight
          terminals;
        o a 24% interest in Plantation Pipe Line Company, which owns and
          operates a 3,100 mile petroleum products pipeline system throughout
          the southeastern United States;
        o a 20% limited partner interest in Shell CO2 Company, which transports,
          markets, produces and explores for CO2 for use in enhanced oil
          recovery throughout the continental United States;
        o the Cypress Pipeline, which transports natural gas liquids from Mont
          Belvieu, Texas to a major petrochemical producer in Lake Charles,
          Louisiana;
        o a 25% interest in a 200,000 barrels per day Y-grade
          fractionation facility located near Mont Belvieu, Texas;
        o a 50% interest in the Heartland Pipeline Company, which
          ships petroleum products in the Midwest; and
        o the Painter Gas Processing Plant, a natural gas processing plant,
          fractionator and natural gas liquids terminal with truck and rail
          loading facilities.

   o  Bulk Terminals, 24 owned or operated bulk terminal facilities, including:
        o five coal terminals located in Cora, Illinois; Paducah,
          Kentucky; Newport News, Virginia; Mount Vernon, Indiana;
          and Los Angeles, California;
        o eight petroleum coke terminals located on the lower
          Mississippi River and the United States West Coast; and
        o eleven other bulk terminals handling alumina, cement, soda ash,
          fertilizer and other dry bulk materials.

                                       3
<PAGE>



   Business Strategy

   Management's objective is to operate as a low-cost, growth-oriented, publicly
   traded MLP by:

   o  reducing operating expenses;
   o  better utilizing and expanding its asset base; and
   o  making selective, strategic acquisitions that will increase
      unitholder distributions.
   
   The general partner's incentive distributions provide it with a strong
incentive to increase unitholder distributions through successful management and
business growth. 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. Generally, the
Partnership transports and/or handles products for a fee and is not engaged in
the purchase and resale of commodity products. As a result, the Partnership does
not face significant risks relating to shifts in commodity prices.

   Pacific Operations. The Partnership plans to expand its presence in the
rapidly growing refined products market in the Western United States through
incremental expansions of the Pacific Operations and acquisitions that increase
unitholder distributions. During 1998 and in February 1999, the Partnership
announced three major expansions on the Pacific Operations' pipelines. These
expansions will total approximately $50 million and significantly increase
throughput capacity.

   Mid-Continent Operations. Because the North System serves a relatively mature
market, the Partnership intends to focus on increasing throughput by remaining a
reliable, cost-effective provider of transportation services and by continuing
to increase the range of products transported and services offered. The
Partnership believes favorable demographics in the southeastern United States
will serve as a platform for increased use and expansion of Plantation's
pipeline system. 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 intends
to compete aggressively for new supply and transportation projects. The
Partnership believes these projects will arise as other U.S. oil producing
basins mature and make the transition from primary production to enhanced
recovery methods.

   Bulk Terminals.  The Partnership plans to grow its bulk
terminals business by:

   o  expanding the use of its existing facilities, particularly
      those facilities which handle low-sulfur western coal;
   o  designing, constructing and operating new facilities for
      current and prospective customers; and
   o  making selective acquisitions where the Partnership believes it can
      leverage its operational expertise and customer relationships.

   Recent Developments

   During 1998, the Partnership completed five major transactions that resulted
in Partnership assets increasing almost seven times and net income increasing
over five times above 1997 levels. In addition, distributions per unit increased
from $0.315 for the first quarter of 1997 to $0.65 for the fourth quarter of
1998. The Partnership is now the largest publicly traded pipeline master limited
partnership in the United States and the second largest products pipeline system
in terms of volumes delivered.

   The following is a brief listing of the transactions completed during 1998.
Additional information regarding these transactions and the acquired assets is
contained in the rest of this report.

   o  On March 5, 1998, the Partnership contributed its 157 mile Central Basin
      CO2 Pipeline and approximately $25.0 million
      in cash for 20% of Shell CO2 Company.
   o  On March 6, 1998, the Partnership acquired substantially all of the assets
      of Santa Fe Pacific Pipeline Partners, L.P. Those assets currently
      comprise the Pacific Operations. The Partnership paid approximately $1.4
      billion for the Pacific Operations.

                                       4
<PAGE>


   o  Effective July 1, 1998, the Partnership acquired Hall-Buck
      Marine, Inc. for approximately $100 million.  Hall-Buck
      Marine operated 20 bulk terminals.  The Partnership has
      changed the name of Hall-Buck Marine to Kinder Morgan Bulk
      Terminals, Inc.
   o  On September 15, 1998, the Partnership acquired 24% of Plantation Pipe
      Line Company for $110 million.
   o  On December 18, 1998, the Partnership acquired the Pier IX Terminal,
      located in Newport News, Virginia, and the Shipyard River Terminal,
      located in Charleston, South Carolina for $35 million.

   Pacific Operations

   The Partnership's Pacific Operations include interstate common carrier
pipelines regulated by the Federal Energy Regulatory Commission ("FERC"),
intrastate pipeline systems regulated by the California Public Utilities
Commission ("CPUC") in California, and non-regulated terminal operations.

   The Pacific Operations are split into a South Region and a North Region.
Combined, the two regions consist of five segments that serve six western states
with approximately 3,300 miles of refined petroleum products pipeline and
related terminal facilities.

   Refined petroleum products and related uses are:

Product              Use
---------------------------------------------------------------
Gasoline             Transportation
Jet fuel             Commercial and military air transportation
Diesel fuel          Transportation (auto, rail, marine),
                     farm, industrial and commercial
---------------------------------------------------------------

   The Pacific Operations pipelines transport approximately one million barrels
per day of refined petroleum products. The three main product types transported
are gasoline (63%), diesel fuel (20%) and jet fuel (17%). The Pacific 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 southern California as well as Las Vegas, Nevada and the
Tucson-Phoenix, Arizona region. Pipeline transportation of gasoline and jet fuel
has a direct correlation with demographic patterns. The Partnership believes
that the positive demographic changes associated with the markets served by the
Pacific Operations will continue in the future.

   South Region.  The South Region consists of three pipeline segments, the West
Line, the East Line and the San Diego 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,
Arizona. 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 serves Partnership terminals located in Tucson and Phoenix, Arizona.

   In May 1998, the Partnership announced an expansion of its Southern
California products pipeline system. The expansion will involve construction of
13 miles of 16-inch diameter pipeline from Carson, California to Norwalk,
California. The new pipeline will connect to an existing 16-inch diameter
pipeline from Norwalk to Colton and provide additional capacity between Carson
and Colton. The existing pipeline between Carson and Colton is currently
operating at maximum capacity. The additional pipe will increase the capacity of
the system from 340,000

                                       5
<PAGE>


barrels per day to 520,000 barrels per day, an increase of over 50%. The project
will cost approximately $25-$30 million and should be in service by the middle
of 1999.

   The San Diego Line is a 135-mile pipeline serving major population areas in
Orange County (immediately south of Los Angeles) and San Diego. The same
refineries and terminals that supply the West Line also supply the San Diego
Line. This line extends south to serve Partnership terminals in the cities of
Orange and San Diego. On February 25, 1999, the Partnership announced an
expansion of the San Diego Line. The expansion project will cost approximately
$18 million and consists of the construction of 23 miles of 16 inch diameter
pipe, and other appurtenant facilities. The new facilities will increase
capacity on the San Diego Line by approximately 25% and will increase the
Pacific Operation's capability to transport gasoline, diesel and jet fuel to
customers in the rapidly growing Orange County and San Diego, California
markets. Permitting for the project is underway with approval expected in the
fall of 1999.

   North Region.  The North Region consists of two pipeline segments, the North
Line and the Oregon Line.

   The North Line consists of approximately 1,075 miles of pipeline in six
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 Bay and Bakersfield areas.
The North Line receives a small percentage of product transported from various
pipeline and marine terminals that deliver products from foreign and domestic
ports. A refinery located in Bakersfield supplies substantially all of the
products shipped through the Bakersfield-Fresno segment of the North Line. In
October 1998, the Partnership announced an expansion of the Northern California
products pipeline system serving the Sacramento and Chico, California, and Reno,
Nevada market areas. The expansion will include the installation of incremental
horsepower at certain pumping facilities and reconfiguration of manifold piping
and related facilities. This segment of the pipeline is currently operating at
its maximum capacity and the incremental facilities will increase the capacity
and throughput on the system by 20%. The project will cost approximately $5
million and is projected to be in service by September 1999.

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

   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. The simultaneous truck
loading capacity of each terminal ranges from 2 to 12 trucks. The Partnership
provides the following services at these terminals:

   o  short-term product storage;
   o  truck loading;
   o  vapor recovery;
   o  deposit control additive injection;
   o  dye injection;
   o  oxygenate blending; and
   o  quality control.

   The capacity of terminaling facilities varies throughout the pipeline systems
and the Partnership does not own terminal facilities at all pipeline delivery
locations. At certain locations, the Partnership makes product deliveries to
facilities owned by shippers or independent terminal operators. The Partnership
provides truck loading and other terminal services as an additional service, and
charges a separate fee (in addition to pipeline tariffs).

   Markets. Currently the Pacific Operations serve in excess of
100 shippers in the refined products market, with the largest
customers consisting of:

   o  major petroleum companies;
   o  independent refineries;

                                       6
<PAGE>


   o  the United States military; and
   o  independent marketers and distributors of products.

   A substantial portion of product volume transported is gasoline. Demand for
gasoline depends on such factors as prevailing economic conditions and
demographic changes in the markets served. The Partnership expects the majority
of the Pacific Operations' markets 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. 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 (diesel and jet fuel) 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. Of all
these volumes in these respective states, the Partnership transports over 1
million barrels of petroleum products per day.

   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 and overall volumes may be
slightly lower during the first and fourth quarters of each year.

   Supply. The majority of refined products supplied to the Pacific Operations
come from the major refining centers around Los Angeles, San Francisco and Puget
Sound, as well as waterborne terminals. The waterborne terminals have three
central locations on the Pacific Coast:

   o  terminals operated by GATX, Mobil and others on the Washington/Oregon
      coast;
   o  the Shore Terminal on the Northern California Coast; and
   o  terminals operated by GATX, Equilon and ATSC on the Southern
      California Coast.

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

   Longhorn Partners Pipeline is a proposed joint venture project that 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 the 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.

   Mid-Continent Operations

   The Mid-Continent Operations include:

   o  the North System;
   o  24% of Plantation Pipe Line Company;
   o  20% of Shell CO2 Company;
   o  the Cypress Pipeline;
   o  25% of a natural gas liquids fractionator;
   o  50% of Heartland Pipeline Company; and
   o  a gas processing plant.

                                       7
<PAGE>



   North System

   The North System is an approximate 1,600-mile interstate common carrier of
natural gas liquids ("NGLs") and refined petroleum products.

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

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

   The pipeline system 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:

   o  two parallel pipelines (except for a 50-mile segment in Nebraska)
      originating at Bushton, Kansas and continuing to a major storage and
      terminal area in Des Moines, Iowa;
   o  a third pipeline, which extends from Bushton to the Kansas
      City, Missouri area; and
   o  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 53%, 62% and
66% of capacity during 1998, 1997, and 1996, respectively. The Partnership also
has defined sole carrier rights to utilize capacity on an extensive pipeline
system owned by The Williams Company that interconnects with the North System.
The Partnership negotiated an amendment to this capacity lease agreement in
March 1998, which extended the lease term to February 2013 (with a five-year
renewal option), reduced the minimum guaranteed payment and increased the
capacity under this agreement.

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

                                      Year Ended December 31,
                         -------------------------------------------------------
                           1998      1997      1996      1995      1994 
                           ----      ----      ----      ----      ---- 
 Petrochemicals           1,040     1,200       684     1,125     2,861
 Refineries and line     10,489    10,600     9,536     9,765    10,478
 reversal                                          
 Fuels                    6,150     7,976    10,500     7,763    10,039
 Other (1)                5,532     7,399     8,126     7,114     6,551
                        -------    ------   -------   -------    ------
 Total                   23,211    27,175    28,846    25,767    29,929
                                                   

(1) NGL gathering systems and Chicago originations other than long-haul volumes
of refinery butanes.

   The North System has approximately 7.3 million barrels of storage capacity,
which includes 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-product complex at Morris, Illinois, in the Chicago
area. The Morris terminal complex can load propane, normal butane, isobutane and
natural gasoline.

   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,

                                       8
<PAGE>


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 (approximately 40-50%) of the NGLs transported through the North System.
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 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, pipelines owned and operated by others represent the
Partnership's primary competition. 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 indirectly with pipelines that deliver product to markets that the
North System does not serve, such as the Gulf Coast market area.

   Shell CO2 Company

   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) 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 the following assets in exchange for an 80%
interest in Shell CO2 Company:

   o  an approximate 45% interest in the McElmo Dome CO2 reserves;
   o  an 11% interest in the Bravo Dome CO2 reserves;
   o  an indirect 50% interest in the Cortez pipeline;
   o  a 13% interest in the Bravo pipeline; and
   o  certain other related assets.

   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. CO2 is used in enhanced oil recovery projects as a
flooding medium for recovering crude oil from mature oil fields. 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 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
during 1998 through 2001. To the extent the amount paid to the Partnership over
this period is in excess of the Partnership's percentage share (currently 20%)
of Shell CO2 Company's distributable cash flow for such period (discounted at
10%), Shell will receive a priority distribution in equal amounts of such
overpayment during 2002 and 2003.

   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. Delivery capacity exceeds one billion cubic feet per day ("Bcf/d") to
the Permian Basin and 60 million cubic feet per day ("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. The
Bravo Dome produces more than 400 MMcf/d; such production coming from more than
350 wells in the Tubb Sandstone at 2,300 feet.

   CO2 Pipelines. Shell CO2 Company owns a 50% interest in the 502-mile, 30-inch
Cortez Pipeline operated by a Shell affiliate. This pipeline carries CO2 from
the McElmo Dome source reservoir to the Denver City, Texas hub. The Cortez line
currently transports in excess of 800 MMcf/d, including approximately 90% of the
CO2 transported on the Central Basin Pipeline (see below).


                                       9
<PAGE>


   In addition, Shell CO2 Company owns 13% of the 20-inch Bravo pipeline which
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.

   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.

   Competition. Shell CO2 Company's primary competitors for the sale of CO2
include suppliers that 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. 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

   The Cypress Pipeline 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.

   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 contract requires a minimum volume of 30,000 barrels per
day and in 1997, the producer agreed to ship a minimum of an additional 13,700
barrels per day for five years. Also in 1997, the Partnership expanded the
Cypress Pipeline's capacity by 25,000 barrels per day to 57,000 barrels per day.
Management continues to pursue projects that could increase throughput on the
Cypress Pipeline.

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

   Plantation Pipe Line Company

   The Partnership owns 24% of Plantation Pipe Line Company, which owns and
operates a 3,100 mile pipeline system throughout the southeastern Unites States.
Plantation serves as a common carrier of refined petroleum products to various
metropolitan areas, including Atlanta, Georgia; Charlotte, North Carolina; and
the Washington, D.C. area. The Partnership believes favorable demographics in
the southeastern United States will serve as a platform for increased
utilization and expansion of Plantation's pipeline system.

   Markets. Plantation ships products for approximately 50 shipper companies to
terminals throughout the southeastern United States. Plantation's principal
customers are Gulf Coast refining and marketing companies, fuel wholesalers and
the United States Department of Defense. In addition, Plantation services the
Atlanta, Georgia; Charlotte, North Carolina; and Washington, D.C. airports
(National and Dulles), at which it delivers jet fuel to major airlines.

   Supply. Products shipped on Plantation originate at various Gulf Coast
refineries from which major integrated oil companies and independent refineries
and wholesalers ship refined petroleum products. The Plantation Pipe Line can
transport over 600,000 barrels of refined petroleum products per day.


                                       10
<PAGE>


   Competition. Plantation competes primarily with the Colonial Pipeline, which
also runs from Gulf Coast refineries throughout the southeastern United States,
extending into the northeastern states.

   Heartland Pipeline Company

   The Heartland pipeline was completed in the fall of 1990 and is owned by
Heartland Pipeline Company ("Heartland"). The Partnership and Conoco each own
50% of Heartland. 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 demand for, and supply of,
refined petroleum products in the geographic regions served directly affect the
volume of refined petroleum products transported by Heartland.

   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.

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

   Mont Belvieu Fractionator

   The Partnership owns a 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). Enterprise Products
Company operates the facility, which was built in 1980. 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 97%, 98% and 100% of capacity, respectively, during
1998, 1997, and 1996.

   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,
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.

   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:

   o  a natural gas processing plant;
   o  a nitrogen rejection unit;
   o  a fractionator;
   o  an NGL terminal; and
   o  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. The Painter Plant is leased to
Amoco Oil Company, which operates the Painter Plant fractionator and the
associated Millis terminal and storage facilities for its own account. Amoco
also owns and operates the nearby Amoco Painter Complex gas plant.

                                       11
<PAGE>



   Bulk Terminals

   The Bulk Terminals segment consists of 24 bulk terminals, which handle
approximately 50 million tons of dry and liquid bulk products annually. The Bulk
Terminals segment includes:

   o  Coal Terminals (5);
   o  Petroleum Coke Terminals (8); and
   o  Other Bulk Terminals (11).

   Coal Terminals

   The Cora Terminal is a high-speed, rail-to-barge coal transfer and storage
facility. Built in 1980, 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. The terminal has a throughput capacity of about 15 million tons
per year that can be expanded to 20 million tons with certain capital additions.
The terminal currently is equipped to store up to 1.0 million tons of coal. This
provides customers the flexibility to coordinate their supplies of coal with the
demand at power plants. Storage capacity at the Cora Terminal can be doubled
with additional capital investment.

   On September 4, 1997, the Partnership acquired at a cost of approximately $20
million the assets of BRT Transfer Terminal, Inc. and other assets which now
comprise the Grand Rivers Terminal. 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. The terminal has current annual throughput capacity of
approximately 12-15 million tons with a storage capacity of approximately 2
million tons. With capital improvements, the terminal could handle 25 million
tons annually.

   On December 18, 1998, the Partnership acquired the Pier IX Terminal, located
in Newport News, Virginia. The terminal originally opened on 1983 and has the
capacity to transload approximately 12 million tons of coal annually. It can
store 1.3 million tons of coal on its 30-acre storage site and can blend
multiple coals to meet an individual customer's requirements. In addition, the
Pier IX Terminal operates a cement facility, which has the capacity to transload
over 400,000 tons of cement annually.

   In addition, the Partnership operates the LAXT Coal Terminal in Los Angeles,
California and a smaller coal terminal in Mt.
Vernon, Indiana.

   Markets. Coal continues to dominate as the fuel for electric generation,
accounting for more than 55% of U.S. generation feedstock. 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 several
hundred years. Most of the Partnership's coal terminals' volume is destined for
use in coal-fired electric generation.

   Environmental legislation is currently driving changes in specification of
coal used for electric generation to low-sulfur products. 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 sulfur coal originating from mines located in the
western United States, including the Hanna and Powder River basins in Wyoming,
western Colorado and Utah. In 1998, four major customers accounted for
approximately 90% of all the coal loaded through the Cora and Grand Rivers
Terminals.

   Both Pier IX and LAXT export coal to foreign markets. Substantial portions of
the coal transloaded at these facilities are covered by long term contracts. In
addition, Pier IX serves power plants on the eastern seaboard of the United
States and imports cement pursuant to a long term contract.

   Supply. Historically, the Cora and Grand Rivers Terminals have moved coal
that originated in the mines of southern Illinois and western Kentucky. Many
shippers, however, particularly in the East, are now using western coal loaded
at the terminals or a mixture of western coal and other coals as a means of
meeting environmental restrictions. The Partnership believes that Illinois and
Kentucky coal producers and shippers will continue to be

                                       12
<PAGE>


important customers, but anticipates that growth in volume through the terminals
will be primarily due to western low sulfur coal originating in Wyoming,
Colorado and Utah.

   The Cora Terminal sits on the mainline of the Union Pacific Railroad and is
strategically well positioned to receive coal shipments from the West. Grand
Rivers provides easy access to the Ohio-Mississippi River network, the
Tennessee-Tombigbee System and major trucking routes on the interstate highway
system. The Paducah & Louisville Railroad, a short line railroad, also serves
the terminal with connections to seven Class I rail lines including the Union
Pacific, CSX, Illinois Central and Burlington Northern. The Pier IX Terminal is
served by the CSX Railroad, which transports coal from Appalachian and other
coal basins. Cement imported at the Pier IX Terminal primarily originates in
Europe. LAXT is served by the Union Pacific.

   Red Lightning Energy Services. 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
Terminal and the Grand Rivers Terminal.

   Petroleum Coke Terminals

   With the acquisition of Kinder Morgan Bulk Terminals, Inc. on July 1, 1998,
the Partnership owns or operates 8 petroleum coke terminals in the United
States. Petroleum coke is a by-product of the refining process and has
characteristics similar to coal. Petroleum coke supply in the United States has
increased in the last several years due to the increased use of coking units by
domestic refineries. Petroleum coke is used in domestic utility and industrial
steam generation facilities and is exported to foreign markets. Most of the
Partnership's customers are large integrated oil companies who choose to
outsource the storage and loading of petroleum coke for a fee.

   Other Bulk Terminals

   With the acquisition of Kinder Morgan Bulk Terminals, Inc. on July 1, 1998,
and the Shipyard River Terminal on December 18, 1998, the Partnership owns or
operates an additional 11 bulk terminals located primarily on the Mississippi
River and the West Coast. The other bulk terminals serve customers in the
alumina, cement, soda ash, ilminite, fertilizer, ore and other industries
seeking specialists who can build, own and operate bulk terminals.

   Competition

   Cora and Grand Rivers Terminals. The Cora Terminal and Grand Rivers Terminal
compete with several coal terminals located in the general geographic area,
however, no significant new coal terminals have been constructed near the Cora
Terminal or the Grand Rivers Terminal 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. The Partnership believes the Cora
Terminal and the Grand Rivers Terminal can compete successfully with other
terminals because of their favorable location, independent ownership, available
capacity, modern equipment and large storage area.

   Pier IX Terminal. The Pier IX Terminal competes primarily with two modern
coal terminals located in the same Virginian port complex as the Pier IX
Terminal.

   Other Terminals. The Partnership's other bulk terminals compete with numerous
independent terminal operators and with other terminals owned by oil companies
and other industrials opting not to outsource terminal services and with
numerous independent bulk terminal operators. However, many of the other bulk
terminals were constructed pursuant to long term contracts for specific
customers. As a result, the Partnership believes other terminal operators would
face a significant disadvantage in competing for the business.






                                       13


<PAGE>


   Major Customers of the Partnership

   Although the Partnership's 1998 revenues were derived from a wide customer
base, the following customers accounted for more than 10% of the Partnership's
1998 consolidated revenues:

   o  Equilon Enterprises(1)      13.2%
   o  Tosco Group                 12.3%
   o  Chevron                     11.0%
   o  ARCO                        10.9%

(1) Equilon is the name of the joint venture, formed in January 1998, that
combined major elements of Texaco's and Shell's mid-western and western U.S.
refining and marketing businesses and nationwide trading, transportation and
lubricants businesses.

   Amoco Corporation, including their subsidiaries, accounted for more than
11.9% of the Partnership's 1997 consolidated revenues. In 1996, revenues from
Mobil Corporation and Amoco Corporation, including their subsidiaries, accounted
for approximately 12.4% and 10.4%, respectively, of total revenues. Due to the
Partnership's acquisition of the Pacific Operations in March 1998, their
percentage of consolidated revenues has decreased significantly. For a more
complete discussion of customers, see Note 14 of the Notes to the Consolidated
Financial Statements.

   Employees

   The Partnership does not have any employees. The general partner and/or the
subsidiary entities of the Partnership employ all persons necessary for the
operation of the Partnership's business. The Partnership reimburses the general
partner for the services of its employees. As of March 6, 1999, the general
partner and the subsidiary entities had approximately 1,200 employees.
Approximately 150 hourly personnel at certain terminals are represented by four
labor unions. 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

   Some of 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. Shippers may protest rate increases made within the ceiling levels, 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, uses cost-of-service ratemaking,
market-based rates and settlement as alternatives to the indexing approach in
certain specified circumstances. In 1998, 1997, and 1996, 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 during the 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

                                       14
<PAGE>


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. Certain rates
on the Pacific Operations' pipeline system were subject to protest during the
365-day period established by the Energy Policy Act. Accordingly, certain of the
Pacific Operations' rates have been, and continue to be, subject to complaints
with the FERC, as is more fully described in Item 3.
Legal Proceedings.

   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:

   o  marketing;
   o  production;
   o  pricing;
   o  pollution;
   o  protection of the environment; and
   o  safety.

   Safety Regulation

   The Partnership's pipelines are subject to regulation by the United States
Department of Transportation ("D.O.T.") with respect to their design,
installation, testing, construction, operation, replacement and management. 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 bulk terminal loading facilities are subject to D.O.T. regulations dealing
with the transportation of hazardous materials for motor vehicles and rail cars.
The Partnership believes that it is in substantial compliance with D.O.T. and
comparable state regulations.

   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 hazardous substances.

   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

   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 compliance program. However, risks of accidental leaks or spills
are associated with the transportation of NGLs and refined petroleum products,
the handling and storage of bulk materials, the fractionation of NGLs and other
activities conducted by the Partnership. 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
and/or endangered species, such as emissions of pollutants, generation and
disposal of wastes and use and handling of chemical substances.

                                       15
<PAGE>


Increasingly strict environmental restrictions and limitations have resulted in
increased operating costs for the Partnership and other similar businesses
throughout the United States. 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
many years for the transportation and storage of refined petroleum products and
NGLs and the handling and storage of coal and other bulk materials. Solid waste
disposal practices within the petroleum industry 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 in, 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 soils and groundwater. The Partnership does
not believe that there presently exists significant surface or subsurface
contamination of its assets by hydrocarbons or other solid wastes not already
identified and addressed. The Partnership has developed and maintains a reserve
of funds to account for the costs of cleanup at these sites.

   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, the
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 or bulk terminal 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 "potentially responsible persons" for releases of "hazardous
substances" 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". By operation of law, if the Partnership is determined to be a
potentially responsible person, 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. Gasoline manufacturers use
butanes in the production of motor gasolines. Since normal butane is highly
volatile, it is now less desirable for use in blended gasolines sold during the
summer months. Although the EPA regulations have reduced demand and may have
resulted in a significant decrease in prices for normal butane, low normal
butane prices have not impacted the Partnership's pipeline 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 its pipelines, the Mont Belvieu Fractionator and the bulk terminals are in
substantial compliance with such statutes.

                                       16
<PAGE>



   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 pipelines, the bulk
terminals and the Mont Belvieu Fractionator. 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

   Pending FERC and CPUC Proceedings Seek Substantial Refunds and
Reductions in Tariff Rates.

   Some shippers have filed complaints with the Federal Energy Regulatory
Commission and the California Public Utilities Commission that seek substantial
refunds and reductions in the Pacific Operations' tariff rates. An adverse
decision could negatively impact revenues, results of operations, financial
condition, liquidity, and funds available for distribution to unitholders.
Additional challenges to tariff rates could be filed with the FERC or CPUC in
the future.

   The complaints filed before the Federal Energy Regulatory Commission allege
that some pipeline tariff rates of the Pacific Operations are not entitled to
"grandfathered" status under the Energy Policy Act of 1992 because "changed
circumstances" may have occurred under the Act. An initial decision by the FERC
Administrative Law Judge was issued on September 25, 1997. The initial decision
determined that the Pacific Operations' East Line rates were not grandfathered
under the Energy Policy Act. The initial decision also included rulings that
were generally adverse to the Pacific Operations regarding certain cost of
service issues. On January 13, 1999, the FERC issued an opinion that affirmed,
in major respects, the initial decision, but also modified certain parts of the
decision that were adverse to the Partnership. The Partnership believes the
effect of the opinion will be less than the approximate $8 million that has been
annually accrued as a reserve. Certain of the complainants have appealed the
FERC's decision to the United States Court of Appeals for the District of
Columbia circuit.

   The complaints filed before the California Public Utilities Commission
generally challenge the rates charged for intrastate transportation of refined
petroleum through the Pacific Operations' pipeline system in California. On June
18, 1998, a CPUC Administrative Law Judge issued a ruling in the Partnership's
favor and dismissed the complaints. The Administrative Law Judge's decision was
affirmed by the CPUC on August 6, 1998. The shippers have filed an appeal with
the California Supreme Court.

   For additional information about these proceedings, see Item. 3
Legal Proceedings

   Rapid Growth May Cause Difficulties Integrating New Operations

   Part of the Partnership's business strategy includes acquiring additional
businesses that will allow it to increase distributions to unitholders. During
the period from December 31, 1996 to December 31, 1998, the Partnership made
several acquisitions that increased its asset base seven times, and its net
income for the year ended December 31, 1998 was over eight times higher than the
net income for the year ended December 31, 1996. The Partnership believes that
it can profitably combine the operations of acquired businesses with its
existing operations. However, unexpected costs or challenges may arise whenever
businesses with different operations and management are combined. Successful
business combinations require management and other personnel to devote
significant amounts of time to integrating the acquired business with existing
operations. These efforts may temporarily distract management's attention from
day-to-day business, the development or acquisition of new properties and other
business opportunities. In addition, the management of the acquired business
will often not join the

                                       17
<PAGE>


Partnership's management team. The change in management may make it more
difficult to integrate an acquired business with existing operations.

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

   Kinder Morgan, Inc. owns all of the outstanding capital stock of the general
partner. KMI has pledged this stock to secure some of its debt. Presently, KMI's
only source of income to pay such debt is dividends that KMI receives from the
general partner. If KMI defaults on its debt, the lenders could acquire control
of the general partner.

   Possible Increased Costs for Pipeline Easements

  The Partnership generally does not own the land on which its pipelines are
constructed. Instead, the Partnership obtains the right to construct and operate
the pipelines on other people's land for a period of time. If the Partnership
were to lose these rights, its business could be negatively affected.

   Southern Pacific Transportation Company has allowed the Partnership to
construct and operate a significant portion of its Pacific Operations' pipeline
under their railroad tracks. Southern Pacific Transportation Company and its
predecessors were given the right to construct their railroad tracks under
federal statutes enacted in 1871 and 1875. The 1871 statute was thought to be an
outright grant of ownership that would continue until the land ceased to be used
for railroad purposes. Two United States Circuit Courts, however, ruled in 1979
and 1980 that railroad rights-of-way granted under laws similar to the 1871
statute provide only the right to use the surface of the land for railroad
purposes without any right to the underground portion. If a court were to rule
that the 1871 statute does not permit the use of the underground portion for the
operation of a pipeline, the Partnership may be required to obtain permission
from the land owners in order to continue to maintain the pipelines. Although no
assurance can be given, the Partnership believes it could obtain such permission
over time at a cost that would not have a material negative effect on its
financial position or results of operations.

   The Partnership has been advised by counsel that it has the power of eminent
domain for the liquids pipelines in the states in which it operates (except for
Illinois) assuming that it meets certain requirements, which differ from state
to state. The Partnership believes that it meets these requirements, however, it
also believes that Shell CO2 Company does not have the power of eminent domain
for its CO2 pipelines. The Partnership's inability to exercise the power of
eminent domain could have a material negative effect on its business if it were
to lose the right to use or occupy the property on which its pipelines are
located.

   Distributions From Shell CO2 Company May be Limited

   Under certain unlikely scenarios, the Partnership possibly would not receive
any distributions from Shell CO2 Company during 2002 and 2003. During 1999-2001,
the Partnership will receive a fixed, quarterly distribution from Shell CO2
Company of approximately $3.6 million ($14.5 million per year). In 2002 and
2003, Shell CO2 Company will increase or decrease such cash distributions so
that the Partnership's percentage of the total cash distribution during
1998-2003 equals its ownership percentage of Shell CO2 Company during that time
(initially 20%). These calculations will be done on a present value basis using
a discount rate of 10%. After 2003, the Partnership will participate in
distributions according to its partnership percentage.

   Environmental Regulation Significantly Affects Partnership Business

   The business operations of the Partnership are subject to federal, state and
local laws and regulations relating to environmental practices. If an accidental
leak or spill of liquid petroleum products occurs in a pipeline or at a storage
facility, the Partnership may have to pay a significant amount to clean up the
leak or spill. The resulting costs and liabilities could negatively affect the
level of cash available for distributions to unitholders. Although the
Partnership cannot predict the impact of Environmental Protection Agency
standards or future environmental measures, such costs could increase
significantly if environmental laws and regulations become stricter. Since the
costs of environmental regulation are already significant, additional regulation
could negatively affect the level of cash available for distributions to
unitholders. See "-Regulation".


                                       18
<PAGE>


   Competition

   Competition could ultimately lead to lower levels of profits and lower cash
distributions to unitholders. Propane competes with electricity, fuel, oil and
natural gas in the residential and commercial heating market. In the engine fuel
market, propane competes with gasoline and diesel fuel. Butanes and natural
gasoline used in motor gasoline blending and isobutane used in premium fuel
production compete with alternative products. Natural gas liquids used as feed
stocks for refineries and petrochemical plants compete with alternative feed
stocks. The availability and prices of alternative energy sources and feed
stocks significantly affect demand for natural gas liquids.

   Pipelines are generally the lowest cost method for intermediate and long-haul
overland product movement. Accordingly, the most significant competitors for our
pipelines are:

   o  proprietary pipelines owned and operated by major oil
      companies in the areas where our pipelines deliver products;
   o  refineries within the market areas served by our pipelines;
      and
   o  trucks.

   Additional pipelines may be constructed in the future to serve specific
markets now served by the Partnership's pipelines. Trucks competitively deliver
products in certain markets. Recently, major oil companies have increasingly
used trucking, resulting in minor but notable reductions in product volumes
delivered to certain shorter-haul destinations, primarily Orange and Colton,
California served by the South and West lines of the Pacific Operations.

      The Partnership cannot predict with certainty whether this trend towards
increased short-haul trucking will continue in the future. Demand for
terminaling services varies widely throughout the pipeline system. Certain major
petroleum companies and independent terminal operators directly compete with the
Partnership at several terminal locations. At those locations, pricing, service
capabilities and available tank capacity control market share.

      The Partnership's ability to compete also depends upon general market
conditions, which may change. The Partnership conducts its operations without
the benefit of exclusive franchises from government entities. The Partnership
provides common carrier transportation services through its pipelines at posted
tariffs and almost always without long-term contracts for transportation service
with customers. Demand for transportation services for refined petroleum
products is primarily a function of:

   o  total and per capita fuel consumption;
   o  prevailing economic and demographic conditions;
   o  alternate modes of transportation;
   o  alternate product sources; and
   o  price.

   Risks Associated with Leverage

   Debt Instruments May Limit Financial Flexibility. The instruments governing
the Partnership's debt contain restrictive covenants that may prevent it from
engaging in certain beneficial transactions. Such provisions may also limit or
prohibit distributions to unitholders under certain circumstances. The
agreements governing the Partnership's debt generally require it to comply with
various affirmative and negative covenants including the maintenance of certain
financial ratios and restrictions on:

   o  incurring additional debt;
   o  entering into mergers, consolidations and sales of assets;
   o  making investments; and
   o  granting liens.


                                       19
<PAGE>


   Additionally, the agreements governing the Partnership's debt generally
prohibit the Partnership from:

   o  making cash distributions to unitholders more often than
      quarterly;
   o  distributing amounts in excess of 100% of available cash for
      the immediately preceding calendar quarter; and
   o  making any distribution to unitholders if an event of default exists or
      would exist when such distribution is made.

   The instruments governing any additional debt incurred to refinance the debt
may also contain similar restrictions.

   Restrictions on the Ability to Prepay SFPP's Debt May Limit Financial
Flexibility. SFPP is subject to certain restrictions with respect to its debt
that may limit the Partnership's flexibility in structuring or refinancing
existing or future debt. These restrictions include the following:

   o  The Partnership may not prepay SFPP's First Mortgage Notes
      before December 15, 1999;
   o  After December 15, 1999 and before December 15, 2002, the Partnership may
      prepay the SFPP First Mortgage Notes with a make-whole prepayment premium;
   o  The Partnership agreed as part of the acquisition of the Pacific
      Operations to not take certain actions with respect to $190 million of the
      SFPP First Mortgage Notes that would cause adverse tax consequences for
      the prior general partner of SFPP.
   
   Unitholders May Have Negative Tax Consequences if a Default on Debt or Sale
of Assets Occurs. If the Partnership defaults on any of its debt, the lenders
will have the right to sue for non-payment. Such an action could cause an
investment loss and cause negative tax consequences for unitholders through the
realization of taxable income by unitholders without a corresponding cash
distribution. Likewise, if the Partnership were to dispose of assets and realize
a taxable gain while there is substantial debt outstanding and proceeds of the
sale were applied to the debt, unitholders could have increased taxable income
without a corresponding cash distribution.

   Debt Securities are Subordinated to SFPP Debt. Since SFPP, L.P. will not
guarantee any debt securities issued by the Partnership, such debt securities
will be effectively subordinated to all debt of SFPP. If SFPP defaults on its
debt, the holders of any of the Partnership's senior debt securities would not
receive any money from SFPP until SFPP repaid its debt in full.

   Limitations in Our Partnership Agreement and State Partnership Law

   Limited Voting Rights and Control of Management. Unitholders have only
limited voting rights on matters affecting the Partnership. The general partner
manages Partnership activities. Unitholders have no right to elect the general
partner on an annual or other ongoing basis. If the general partner withdraws,
however, the holders of a majority of the outstanding units (excluding units
owned by the departing general partner and its affiliates) may elect its
successor.

   The limited partners may remove the general partner only if:

   o  the holders of 66 2/3% of the units vote to remove the
      general partner.  Units owned by the general partner and its
      affiliates are not counted;
   o  the same percentage of units approves a successor general
      partner;
   o  the Partnership continues to be taxed as a partnership for
      federal income tax purposes; and
   o  the limited partners maintain their limited liability.
   
   
   Persons Owning 20% or More of the Units Cannot Vote. Any units held by a
person that owns 20% or more of the units cannot be voted. This limitation does
not apply to the general partner and its affiliates. This provision may:


                                       20
<PAGE>


   o  discourage a person or group from attempting to remove the
      general partner or otherwise change management; and
   o  reduce the price at which the units will trade under certain
      circumstances. For example, a third party will probably not attempt to
      remove the general partner and take over our management by making a tender
      offer for the units at a price above their trading market price without
      removing the general partner and substituting an affiliate.

   The General Partner's Liability to the Partnership and Unitholders May Be
Limited. The partnership agreement contains language limiting the liability of
the general partner to the Partnership or the unitholders. For example, the
partnership agreement provides that:

   o  the general partner does not breach any duty to the Partnership or the
      unitholders by borrowing funds or approving any borrowing. The general
      partner is protected even if the purpose or effect of the borrowing is to
      increase incentive distributions to the general partner;
   o  the general partner does not breach any duty to the Partnership or the
      unitholders by taking any actions consistent with the standards of
      reasonable discretion outlined in the definitions of available cash and
      cash from operations contained in the partnership agreement; and
   o  the general partner does not breach any standard of care or duty by
      resolving conflicts of interest unless the general partner acts in bad
      faith.

   The Partnership Agreement Modifies the Fiduciary Duties of the General
Partner Under Delaware Law. Such modifications of state law standards of
fiduciary duty may significantly limit the ability of unitholders to
successfully challenge the actions of the general partner as being a breach of
what would otherwise have been a fiduciary duty. These standards include the
highest duties of good faith, fairness and loyalty to the limited partners. Such
a duty of loyalty would generally prohibit a general partner of a Delaware
limited partnership from taking any action or engaging in any transaction for
which it has a conflict of interest. Under the partnership agreement, the
general partner may exercise its broad discretion and authority in the
management of the Partnership and the conduct of its operations as long as the
general partner's actions are in the best interest of the Partnership.

   Unitholders May Have Liability To Repay Distributions. Unitholders will not
be liable for assessments in addition to their initial capital investment in the
units. Under certain circumstances, however, unitholders may have to repay the
Partnership amounts wrongfully returned or distributed to them. Under Delaware
law, the Partnership may not make a distribution to unitholders if the
distribution causes all liabilities of the Partnership to exceed the fair value
of the Partnership's assets. Liabilities to partners on account of their
partnership interests and non-recourse liabilities are not counted for purposes
of determining whether a distribution is permitted. Delaware law provides that a
limited partner who receives such a distribution and knew at the time of the
distribution that the distribution violated Delaware law will be liable to the
limited partnership for the distribution amount for three years from the
distribution date. Under Delaware law, an assignee that becomes a substituted
limited partner of a limited partnership is liable for the obligations of the
assignor to make contributions to the Partnership. However, such an assignee is
not obligated for liabilities unknown to him at the time he or she became a
limited partner if the liabilities could not be determined from the partnership
agreement.

   Unitholders May be Liable if the Partnership does Not Comply With State
Partnership Law. The Partnership conducts its business in a number of states. In
some of those states, the limitations on the liability of limited partners for
the obligations of a limited partnership have not been clearly established. The
unitholders might be held liable for the Partnership's obligations as if they
were a general partner if:

   o  a court or government agency determined that the Partnership was
      conducting business in the state but had not complied with the state's
      partnership statute; or
   o  unitholders' rights to act together to remove or replace the general
      partner or take other actions under the partnership agreement constitute
      "control" of the Partnership's business.

   The General Partner May Buy Out Minority Unitholders if it Owns 80% of the
Units. If at any time the general partner and its affiliates own 80% or more of
the issued and outstanding units, the general partner will have the right to
purchase all of the remaining units. Because of this right, a unitholder may
have to sell his interest against his will or for a less than desirable price.
The general partner may only purchase all of the units. The purchase price for
such a purchase will be the greater of: o


                                       21
<PAGE>


   o  the most recent 20-day average trading price; or
   o  the highest purchase price paid by the general partner or
      its affiliates to acquire units during the prior 90 days.

The general partner can assign this right to its affiliates or to the
Partnership.

   The Partnership May Sell Additional Limited Partner Interests, Diluting
Existing Interests of Unitholders. The partnership agreement allows the general
partner to cause the Partnership to issue additional units and other equity
securities. When the Partnership issues additional equity securities, the
existing unitholders' proportionate partnership interest will decrease. Such an
issuance could negatively affect the amount of cash distributed to unitholders
and the market price of units. Issuance of additional units will also diminish
the relative voting strength of the previously outstanding units. There is no
limit on the total number of units the Partnership may issue.

   General Partner Can Protect Itself Against Dilution. Whenever the Partnership
issues equity securities to any person other than the general partner and its
affiliates, the general partner has the right to purchase additional limited
partnership interests on the same terms. This allows the general partner to
maintain its partnership interest in the Partnership. No other unitholder has a
similar right. Therefore, only the general partner may protect itself against
dilution caused by issuance of additional equity securities.

   Potential Conflicts of Interest Related to the Operation of the
Partnership

      Certain conflicts of interest could arise among the general partner, KMI
and the Partnership. Such conflicts may include, among others, the following
situations:

   o  the Partnership does not have any employees and relies
      solely on employees of the general partner and its
      affiliates, including KMI;
   o  under the partnership agreement, the Partnership reimburses
      the general partner for the costs of managing and operating
      the Partnership;
   o  the amount of cash expenditures, borrowings and reserves in
      any quarter may affect available cash to pay quarterly
      distributions to unitholders;
   o  the general partner tries to avoid being personally liable for Partnership
      obligations. The general partner is permitted to protect its assets in
      this manner by the partnership agreement. Under the partnership agreement,
      the general partner does not breach its fiduciary duty even if the
      Partnership could have obtained more favorable terms without limitations
      on the general partner's liability;
   o  under the partnership agreement, the general partner may pay its
      affiliates for any services rendered on terms fair and reasonable to the
      Partnership. The general partner may also enter into additional contracts
      with any of its affiliates on behalf of the Partnership. Agreements or
      contracts between the Partnership and the general partner (and its
      affiliates) are not the result of arms length negotiations;
   o  the general partner does not breach the partnership agreement by
      exercising its call rights to purchase limited partnership interests or by
      assigning its call rights to one of its affiliates or to the Partnership.
   
   Tax Treatment of Publicly Traded Partnerships 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.

   Tax Characterization of the Partnership. The availability of the federal
income tax benefits of an investment in the Partnership to a holder of units
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

                                       22
<PAGE>


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 the Pacific Operations, 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 and refined
petroleum products through pipelines and the handling and storage of coal.

   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 units as corporate distributions, and no income, gain, loss,
deduction or credit would flow through to the holders of units. Because tax
would be imposed upon the Partnership as an entity, the cash available for
distribution to the holders of 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 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 unitholder's proportionate share of unused
losses may be deducted when the holder of units disposes of all of such holder's
units in a fully taxable transaction with an unrelated party. Net passive income
from the Partnership may be offset by a unitholder'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 may 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 units to
calculate cost recovery and depreciation deductions by reference to the portion
of the unitholder'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
the Pacific Operations resulted in a restatement of the capital accounts of both
the former Santa Fe common unitholders and the Partnership's pre-acquisition
unitholders to fair market value ("Book-Up"). An allocation of such increased
capital account value

                                       23
<PAGE>


among the Partnership's assets was based on the values indicated by an
independent appraisal obtained by the general partner. The independent appraisal
indicated that all of such value was attributable to tangible assets. However,
if such valuations are challenged by the IRS and such challenge is successful, a
portion of this Book-Up would be allocated to intangible assets that would not
be amortizable either for tax or capital account purposes, and therefore, would
not support a curative allocation of income. This could result in a
disproportionate allocation of taxable income to either a pre-acquisition
unitholder or a former Santa Fe common unitholder.

   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
Units. A holder of 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 units will receive
cash distributions equal to their allocable share of taxable income from the
Partnership. Further, a holder of 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 IRS will not
audit the Partnership or that tax adjustments will not be made. The rights of a
unitholder 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 units and may lead to audits of unitholders'
returns and adjustments of items unrelated to the Partnership's. Each holder of
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 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. As of December 31, 1998, the Partnership conducted business in 17
states: Arizona, California, Illinois, Indiana, Iowa, Kansas, Kentucky,
Louisiana, Missouri, Nebraska, Nevada, New Mexico, Oregon, South Carolina,
Texas, Virginia 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.


                                       24
<PAGE>


   Description of the Partnership Agreement

   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 Delaware limited partnership.

   Power of Attorney

   Each limited partner, and each person who acquires a unit from a prior holder
and executes and delivers a transfer application with respect to such 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 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 units. The general partner's
ability to sell or otherwise dispose of the Partnership's assets is 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 the outstanding units of the Partnership, (other than 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 units
(excluding for purposes of such determination units held by the general partner
and its affiliates) and furnishing an opinion of counsel that such withdrawal
will not cause the Partnership to 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

                                       25
<PAGE>


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 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 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 units upon 90 days' notice to the
limited partners if more than 50% of the outstanding 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 units.

   The general partner may not be removed unless such removal is approved by the
vote of the holders of not less than 66 2/3% of the outstanding units (excluding
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 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 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 units agree
in writing to continue the business of the Partnership and to the appointment of
a successor general partner. See "-Termination and Dissolution."


                                       26
<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 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 units, such person or group loses any and all voting rights with
respect to all of the units beneficially owned or held by such person.

   Transfer of Units; Status as Limited Partner or Assignee

   Until a 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 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 units). By
executing and delivering the Transfer Application, the transferee of units:

   o  becomes the record holder of such units and shall constitute an assignee
      until admitted to the Partnership as a substitute limited partner;
   o  automatically requests admission as a substituted limited
      partner in the Partnership;
   o  agrees to be bound by the terms and conditions of and is
      deemed to have executed the partnership agreement;
   o  represents that such transferee has capacity, power and
      authority to enter into the partnership agreement;
   o  grants powers of attorney to the general partner and any
      liquidator of the Partnership as specified in the
      partnership agreement; and
   o  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, units
owned by an assignee that 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 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. 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
units. A purchaser or transferee of a unit who does not execute and deliver a
Transfer Application obtains only:

   o  the right to transfer the units to a purchaser or other
      transferee; and
   o  the right to transfer the right to seek admission as a substituted limited
      partner in the Partnership with respect to the transferred units.

   Thus, a purchaser or transferee of units who does not execute and deliver a
Transfer Application will not receive cash distributions unless the 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 units and may not
receive certain federal income tax information or reports furnished to record
holders of units. The transferor of units will have a duty to provide such
transferee with all information that may be necessary to obtain registration of
the transfer of the units, but the transferee agrees, by acceptance of the
certificate representing 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 units may hold their 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 unit as the

                                       27
<PAGE>


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 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 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 units and may not receive distributions in
kind upon liquidation of the Partnership. See "-Transfer of Units; Status as
Limited Partner or Assignee."

   As used in this Report:

   o  "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;
   o  "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
   o  "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.
   
   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 units
are not entitled.

                                       28
<PAGE>



   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 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 80% or more of the units are held by 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 of the
remaining units 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:

   o  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
   o  the highest cash price paid by the general partner or any of its
      affiliates for any units purchased within the 90 days preceding the date
      the general partner mails notice of its election to purchase such 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 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 66 2/3% of the outstanding units, except that no
amendment may be made which would:

   o  enlarge the obligations of any limited partner, without its
      consent;
   o  enlarge the obligations of the general partner, without its
      consent, which may be given or withheld in its sole
      discretion;
   o  restrict in any way any action by or rights of the general
      partner as set forth in the partnership agreement;
   o  modify the amounts distributable, reimbursable or otherwise
      payable by the Partnership to the general partner;
   o  change the term of the Partnership; or
   o  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 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:

   o  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;
   o  admission, substitution, withdrawal or removal of partners
      in accordance with the partnership agreement;
   o  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;
   o  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;

                                       29
<PAGE>


   o  an amendment that in the sole discretion of the general partner is
      necessary or desirable in connection with the authorization of additional
      limited or general partner interests;
   o  any amendment expressly permitted in the partnership
      agreement to be made by the general partner acting alone;
   o  an amendment effected, necessitated or contemplated by a merger agreement
      that has been approved pursuant to the terms of the partnership agreement;
      and
   o  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:

   o  do not adversely affect the limited partners in any material
      respect;
   o  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;
   o  are necessary or desirable to facilitate the trading of the units or to
      comply with any rule, regulation, guideline or requirement of any
      securities exchange on which the 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 units; or
   o  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 units unless the Partnership obtains an opinion
of counsel to the effect that such amendment:

   o  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
   o  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

   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 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 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 the 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

                                       30
<PAGE>


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 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:

   o  the general partner, a Departing Partner or affiliate of
      either;
   o  an officer, director, employee, partner, agent or trustee of
      the general partner, any Departing Partner or affiliate of
      either; or
   o  a person serving at the request of the Partnership in
      another entity in a similar capacity.

   In each case the Indemnitee must have 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 units or assignees who are record holders of 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 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 units on any matter, vote such units at the written direction
of such record holder. If a proxy is not returned on behalf of the unit record
holder, such units will not be voted (except that, in the case of units held by
the general partner on behalf of Non-

                                       31
<PAGE>


citizen Assignees, the general partner will distribute the votes in respect of
such units in the same ratios as the votes of limited partners in respect of
other units are cast). When a proxy is returned properly executed, the 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 units represented thereby will be voted "FOR" the approval of the
matters to be presented. Units held by the general partner on behalf of
Non-citizen Assignees 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 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 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 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 unit has a vote according to such record holder's
percentage interest in the Partnership, although the general partner could issue
additional limited partner interests having special voting rights. See
"--Issuance of Additional Securities." However, units owned beneficially by any
person or group (other than the general partner and its affiliates) that own
beneficially 20% or more of all 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
the broker (or other nominee) will vote units held in nominee or street name
accounts 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 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, units are fully paid, and holders of 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 limited
partnership act, and that such partner otherwise acts in conformity with the
provisions of the partnership agreement, such partner's liability under Delaware
law 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 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 limited partnership 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
Delaware law, 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, Delaware
law 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.
Delaware

                                       32
<PAGE>


law 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 Delaware
law shall be liable to the limited partnership for the amount of the
distribution for three years from the date of the distribution. Under Delaware
law, an assignee who becomes a substituted limited partner of a limited
partnership is liable for the obligations of the assignor to make contributions
to the Partnership, 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 a number of states. Maintenance of limited liability will
require compliance with legal requirements in all of the 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 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 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
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 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 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 units will depend on the
cooperation of such holders of units in supplying certain information to the
general partner. Every holder of a 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:

   o  a current list of the name and last known address of each
      partner;
   o  a copy of the Partnership's tax returns;
   o  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;
   o  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;

                                       33
<PAGE>


   o  information regarding the status of the Partnership's business
      and financial condition; and
   o  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:

   1. the election of the general partner to dissolve the
      Partnership, if approved by a majority of the units;
   2. the sale of all or substantially all of the assets and
      properties of the Partnership and its operating partnerships;
   3. the bankruptcy or dissolution of the general partner; or
   4. 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).
   
   However, the Partnership will not be dissolved upon an event described in
clause 4 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 3 or 4, at least a majority of the 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 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 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 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

   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, all 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 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 units relative to the general

                                       34
<PAGE>


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
unit in an aggregate amount per unit equal to $11.00 per unit (the initial
public offering price of the units adjusted to give effect to the 2-for-1 split
of units effective October 1, 1997) (the "Initial 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.

   The discussion below indicates the percentages of cash distributions required
to be made to the general partner and the holders of 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 units pro rata and 2% to the general partner
      until the holders of units have received a total of $0.3025 per unit for
      such quarter in respect of each unit (the "First Target Distribution");
      and

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

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

   fourth, 50% of any such Available Cash then remaining to all holders of 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 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

                                       35
<PAGE>


units pro rata and 2% to the general partner until the Partnership shall have
distributed in respect of each unit Available Cash constituting Cash from
Interim Capital Transactions in an aggregate amount per unit equal to the
Initial
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 Unit Price immediately after giving effect to
such repayment and the denominator of which is the Unrecovered Initial Unit
Price, immediately prior to giving effect to such repayment. "Unrecovered
Initial Unit Price" includes the amount by which the Initial Unit Price exceeds
the aggregate distribution of Cash from Interim Capital Transactions per unit.

   When "Payback of Initial Unit Price" is achieved, i.e., when the Unrecovered
Initial 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 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 units (whether
effected by a distribution payable in units or otherwise) but not by reason of
the issuance of additional units for cash or property. For example, in
connection with the Partnership's two-for-one split of the 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."

   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 Unit Price immediately after
giving effect to such distribution and the denominator of which is the
Unrecovered Initial Unit Price immediately prior to such distribution. For
example, assuming the Unrecovered Initial Unit Price is $11.00 per unit and if
Cash from Interim Capital Transactions of $5.50 per unit is distributed to
holders of 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 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:

   o  each of the First, Second and Third Target Distribution
      levels multiplied by;
   o  one minus the sum of:
   
      o  the maximum marginal federal income tax rate to which the
         Partnership is subject as an entity; plus
      o  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.


                                       36
<PAGE>


   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:

   o  first towards the payment of all creditors of the
      Partnership and the creation of a reserve for contingent
      liabilities; and
   o  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 units and the
general partner in a manner that approximates their sharing ratios in the
various Target Distribution levels. Holders of 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 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.

   Transfer Agent and Registrar

   Duties. First Chicago Trust Company of New York is the registrar and transfer
agent for the units and receives a fee from the Partnership for serving in such
capacities. The Partnership will pay fees charged by the transfer agent for
transfers of units except:

   o  fees similar to those customarily paid by holders of securities for surety
      bond premiums to replace lost or stolen certificates;
   o  taxes or other governmental charges;
   o  special charges for services requested by a holder of a
      unit; and
   o  other similar fees or charges.

The Partnership will not charge holders for disbursements of 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.

Item 3.  Legal Proceedings

   See Note 15 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 1998.

                                       37
<PAGE>


                                   P A R T  II


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

   The following table sets forth, for the periods indicated, the high and low
sale prices per unit, as reported on the New York Stock Exchange, the principal
market in which the units are traded, and the amount of cash distributions
declared per unit. All information has been adjusted to give effect to the
two-for-one split of 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

            1998
            ----
            First Quarter        $37.8750  $30.1250     $0.5625
            Second Quarter        38.1250   35.0000      0.6300
            Third Quarter         37.3750   28.5625      0.6300
            Fourth Quarter        36.9375   29.5625      0.6500


   The Partnership pays quarterly distributions at a current rate of $.65 per
quarter. The Partnership currently expects that it will continue to pay
comparable cash distributions in the future.

   As of February 20, 1999, there were approximately 35,000 beneficial owners of
the Partnership's units.

                                       38
<PAGE>


Item 6.  Selected Financial Data (unaudited)

   The following table sets forth, for the periods and at the
dates indicated, selected historical financial and operating data
for the Partnership.

<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                           1998(6)           1997            1996            1995            1994
                                         -------------   -------------    ------------    ------------    ------------
                                                      (In thousands, except per unit and operating data)
Income and Cash Flow Data:
<S>                                    <C>             <C>              <C>             <C>             <C>          
Revenues                               $      322,617  $       73,932   $      71,250   $      64,304   $      54,904
Cost of product sold                            5,860           7,154           7,874           8,020             940
Operating expense                              77,162          17,982          22,347          15,928          13,644
Fuel and power                                 22,385           5,636           4,916           3,934           5,481
Depreciation and amortization                  37,321          10,067           9,908           9,548           8,539
General and administrative                     39,984           8,862           9,132           8,739           8,196
                                         -------------   -------------    ------------    ------------    ------------
Operating income                              139,905          24,231          17,073          18,135          18,104
Earnings from equity investments               25,732           5,724           5,675           5,755           5,867
Interest (expense)                            (40,856)        (12,605)        (12,634)        (12,455)        (11,989)
Interest income and other, net                 (5,992)           (353)          3,129           1,311             509
Income tax (provision) benefit                 (1,572)            740          (1,343)         (1,432)         (1,389)
                                         -------------   -------------    ------------    ------------    ------------
Net income before extraordinary charge        117,217          17,737          11,900          11,314          11,102
Extraordinary charge                          (13,611)              -               -               -               -
                                         =============   =============    ============    ============    ============
Net income                             $      103,606  $       17,737   $      11,900   $      11,314   $      11,102
                                         =============   =============    ============    ============    ============

Net income per unit before
      extraordinary charge(1)          $         2.09  $         1.02   $        0.90   $        0.85   $        0.93
                                         =============   =============    ============    ============    ============

Net income per unit                    $         1.75  $         1.02   $        0.90   $        0.85   $        0.93
                                         =============   =============    ============    ============    ============

Per unit cash distribution paid        $         2.39  $         1.63   $        1.26   $        1.26   $        1.26
                                         =============   =============    ============    ============    ============

Additions to property, plant and equipm$nt(2)  73,188  $        6,884   $       8,575   $       7,826   $       5,195

Balance Sheet Data (at end of period):
Net property, plant and equipment      $    1,763,386  $      244,967   $     235,994   $     236,854   $     238,850
Total assets                           $    2,152,272  $      312,906   $     303,603   $     303,664   $     299,271
Long-term debt                         $      611,571  $      146,824   $     160,211   $     156,938   $     150,219
Partners' capital                      $    1,360,663  $      150,224   $     118,344   $     123,116   $     128,474

Operating Data (unaudited):
Pacific Operations volumes
(MBbls)(3)                                    325,954               -               -               -               -
Mid-Continent Operations volumes
(MBbls)(4)                                     44,783          46,309          46,601          41,613          46,078
Bulk Terminals transport volumes
(Mtons)(5)                                     24,016           9,087           6,090           6,486           4,539
</TABLE>

(1)    Represents net income before  extraordinary  charge per unit adjusted for
       the  two-for-one  split of units on October 1,  1997.  Net income  before
       extraordinary  charge per unit was  computed by dividing  the interest of
       the  holders of units in net income  before  extraordinary  charge by the
       weighted average number of units outstanding during the period.
(2)    Additions to property,  plant and equipment for 1994 and 1997 exclude the
       $12,825,  and  $11,688 of assets  acquired  in the June 1994  Painter Gas
       Processing  Plant and September 1997 Grand Rivers Terminal  acquisitions,
       respectively.
(3)    The  Partnership  acquired  the  Pacific  Operations  on March 6, 1998.
(4)    Represents  total  volumes  for the North System and the Cypress Pipeline
       only.
(5)    Represents  the volumes  of the  Cora  Terminal,  excluding  ship  or pay
       volumes of 252 Mtons for 1996,  the Grand Rivers  Terminal from September
       1997 and Kinder Morgan Bulk Terminals from July 1, 1998.
(6)    Includes  results of operations for:
       * Pacific  Operations  from March 6, 1998;
       * Kinder Morgan Bulk Terminals from July 1, 1998; and
       * Plantation Pipe Line Company from September 15, 1998.


                                       39

<PAGE>


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

Results of Operations of the Partnership

   Year Ended December 31, 1998 Compared With Year Ended December
31, 1997

   Key acquisitions and strong performance across all business segments during
1998 allowed the Partnership to realize a 105% increase in net income per unit
before extraordinary items. The Partnership reported net earnings before
extraordinary charge of $117.2 million ($2.09 per unit) for 1998 and $17.7
million ($1.02 per unit) for 1997. Included in the 1998 results was an
extraordinary charge of $13.6 million associated with debt refinancing
transactions, including both a prepayment premium and the write-off of
unamortized debt issue costs. After the extraordinary charge, net income for the
full year 1998 was $103.6 million ($1.75 per unit). The acquisition of the
Pacific Operations (formerly Santa Fe Pacific Pipeline Partners, L.P.) in March
1998 was the primary contributing factor for the increase in total Partnership
revenue to $322.6 million in 1998 from $73.9 million in 1997. Operating income
for 1998 was $139.9 million versus $24.2 million in 1997.

   For 1998, the Pacific Operations reported segment earnings of $140.1 million
and total operating revenues of $221.4 million. The amounts reflect strong
demand for gasoline, jet fuel and diesel fuel in the Partnership's West Coast
markets. Segment earnings included other expense charges of $6.4 million, mainly
the result of accrued expenses relating to the FERC Rate Case reserve.

   The Mid-Continent Operations earned $37.2 million in segment earnings for
1998 compared to $27.5 million in 1997. Mid-Continent Operations consist of the
North System, the Cypress Pipeline, the Painter gas processing plant, and the
Partnership's equity investments in Shell CO2 Company, Plantation Pipe Line
Company and the Mont Belvieu Fractionator. The 35% increase in earnings was
primarily driven by high returns from the Partnership's investment in Shell CO2
Company. Segment revenues were $38.3 million for 1998 and $55.8 million for
1997. The revenue decrease was primarily related to the Central Basin Pipeline,
which was contributed to Shell CO2 Company in March 1998 and subsequently
accounted for as an investment in partnership. Cost of products sold decreased
to $0.2 million in 1998 compared to $4.6 million in 1997 due to lower
purchase/sale contracts reported by the North System and to the transfer of the
Central Basin Pipeline. Operating and maintenance expenses, combined with fuel
and power expenses, were $14.1 million in 1998. This amount compares to $17.1
million for 1997. The decrease was attributable to the assignment of the Mobil
gas processing agreement at the Bushton Plant in April 1997, the transfer of the
Central Basin Pipeline and a slight decrease (3%) in barrels transported. The
transfer of the Central Basin Pipeline also accounted for a decrease in
depreciation expense and other tax expenses in 1998. Depreciation and
amortization expenses, combined with taxes, other than income taxes, were $10.3
million in 1998 and $11.7 million in 1997. Earnings from equity investments grew
to $24.9 million in 1998 compared to $5.7 million in 1997. The increase was
chiefly the result of the Partnership's interests in Plantation Pipe Line
Company and Shell CO2 Company, both of which are accounted for under the equity
method. Other income items increased $0.6 million in 1998 compared to 1997. This
was attributable to a $0.6 million contested product loss at the Mont Belvieu
Fractionator in 1997. Income tax expense for the segment increased $1.7 million
in 1998 over the previous year. The 1998 income tax provision includes the
Partnership's share of tax expense relating to its investment in Plantation Pipe
Line Company.

   The Bulk Terminals segment reported earnings of $19.2 million in 1998 versus
$10.7 million in 1997. Revenues from Bulk Terminal activity were $62.9 million
for 1998 and $18.2 million for 1997. The increase in operating results was
directly affected by the Partnership's acquisition of Kinder Morgan Bulk
Terminals, Inc. (formerly Hall-Buck Marine, Inc.) in July 1998 and the inclusion
of a full year of operations from the Grand Rivers coal terminal, acquired in
September 1997. The increase in total segment revenue was also driven by a 93%
increase in revenues earned by the Red Lightning energy services unit, which
began operations in April 1997. Cost of products sold for the year 1998 was $5.7
million compared to $2.6 million in 1997. The increase was due to a higher
number of coal purchase contracts as part of the coal marketing activity.
Operations and maintenance expenses, combined with fuel and power expenses,
totaled $31.3 million in 1998 and $3.6 million in 1997. The increase was the
result of 1998 business acquisitions and higher coal volumes transferred at the
Partnership's Cora coal terminal. Depreciation and amortization expense was $3.9
million in 1998 and $1.1 million in 1997. Taxes, other than income taxes, were
$1.6 million in 1998 and $0.3 million in 1997. The increase in both depreciation
and taxes was primarily due to the addition of Kinder Morgan Bulk Terminals.


                                       40
<PAGE>


   Total Partnership general and administrative expenses totaled $40.0 million
in 1998 compared to $8.9 million in 1997. The increase was attributable to
higher administrative expenses associated with new acquisitions, primarily the
Pacific Operations, made by the Partnership in 1998. The Partnership continues
to focus on productivity and expense controls.

   Total Partnership interest expense, net of interest income, was $38.6 million
in 1998 compared to $12.1 million in 1997. The increase was primarily due to
debt assumed by the Partnership as part of the acquisition of the Pacific
Operations as well as expenses related to the financing of the Partnership's
1998 investments.

   Minority interest expense increased to $1.0 million in 1998 versus $0.2
million in 1997. The increase was the result of earnings attributable to SFPP
(Pacific Operations) as well as to higher overall Partnership income.

   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 7 of the Notes to the Consolidated Financial Statements of the
Partnership. Revenues of the Partnership increased 4% to $73.9 million in 1997
compared to $71.3 million in 1996.

   A significant portion of the overall earnings increase was attributable to
the Bulk Terminals segment. The segment reported net earnings of $10.7 million
for 1997, $6.3 million (142%) higher than the previous year. Earnings from the
coal terminals increased 81%, primarily the result of increases in both 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. Segment revenues totaled $18.2 million, up $10.1 million from 1996.
The large increase reflects the addition of the Red Lightning energy services
unit starting in April 1997, the addition of the Grand Rivers Terminal, and a
35% increase in revenues earned by the Cora Terminal. The increase in revenues
from the Cora Terminal resulted from a 17% increase in volumes transferred,
accompanied by a 6% increase in average transfer rates. Cost of products sold
increased to $2.6 million in 1997 from $0.2 million in 1996. This was due to the
coal purchase contracts entered into by the Red Lightning business unit.
Operating and maintenance expenses, together with fuel and power expenses, were
$3.6 million in 1997 and $2.0 million in 1996. Excluding the effect of the Grand
Rivers Terminal, these operating costs increased 31% in 1997, mainly due to the
increase in coal tons transferred by the Cora Terminal.

   In 1997, the Mid-Continent Operations reported $27.5 million in segment
earnings from total revenues of $55.8 million. This compares to 1996 segment
earnings of $28.7 million from revenues of $63.2 million. The decline in segment
earnings was primarily the result of the $2.5 million non-recurring gain
recognized in 1996 (referred to above). The decrease in segment revenue was
mainly 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. in April 1997.
Revenues from the liquids pipelines remained relatively flat in 1997 as compared
to 1996. Pipeline revenues were $53.5 million in 1997 versus $54.0 million in
1996. 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. Cost of products sold was $4.6 million in 1997
versus $7.7 million in 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. Operating and maintenance expenses, combined
with fuel and power expenses, were $17.1 million for 1997 and $21.8 million for
1996. A significant decrease in segment operating expenses resulted from the
assignment of the Mobil Agreement and the leasing of the Painter Facility to
Amoco Oil Company in February 1997. Additionally, the decrease in volumes
transferred by the North System in 1997 resulted in a 4% decrease in its
operating and fuel costs. Taxes, other than income taxes, decreased $0.7 million
(20%) in 1997 due to adjustments to the liquids pipelines' ad valorem tax
valuations and higher 1996 ad valorem tax provisions. Other non-operating income
and expense decreased $3.3 million in 1997 versus 1996. 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 recorded in the fourth
quarter of 1997. A decrease in the cumulative difference between book and tax
depreciation and the effect of a partial liquidating distribution of Kinder
Morgan Natural Gas Liquids Corporation, the corporate entity holding the
Partnership's interest in the Fractionator, resulted in a $2.1 million reduction
in income tax expense for 1997 compared to 1996.

                                       41
<PAGE>



   Total Partnership general and administrative expenses totaled $8.9 million in
1997 compared to $9.1 million in 1996. The 2% decrease in administrative
expenses was the result of cost savings realized by new management.

   Total Partnership interest expense, net of interest income, for 1997 ($12.1
million) was relatively unchanged from the amount reported in 1996 ($11.9
million).

Outlook

   The Partnership intends to actively pursue a strategy to increase the
Partnership's operating income. The Partnership will use a three-pronged
strategy to accomplish this goal.

   o  Cost Reductions.  The Partnership has substantially reduced
      its operating expenses since the general partner was
      acquired from Enron in February 1997 and will continue to
      seek further reductions where appropriate. Since the
      acquisition of the Pacific Operations, the Partnership has
      also reduced costs by more than $20 million per year through
      the elimination of redundant general and administrative and
      other expenses.
   
   o  Internal Growth. The Partnership intends to expand the operations of its
      current facilities. The Partnership has taken a number of steps that
      management believes will increase revenues from existing operations,
      including the following:
   
      o  the Pacific Operations committed over $40 million to expand
         its pipeline and storage facilities;
      o  the Cypress Pipeline expanded its capacity by 25,000 barrels
         per day in November 1997;
      o  the Cora Terminal and the Grand Rivers Terminal handled an aggregate of
         approximately 13.5 million tons of coal during 1998 compared to 9.1
         million tons in 1997. The increase was a result of sales agreements and
         other new business; and
      o  earnings and cash flow, as historically related to the operations of
         the Central Basin Pipeline, increased in 1998 as a result of the
         partnership formed with Shell.
   
   o  Strategic Acquisitions.  During 1998, the Partnership made
      the following acquisitions:
   
      o  Shell CO2 joint venture (20%)            March 5, 1998
      o  Pacific Operations                       March 6, 1998
      o  Kinder Morgan Bulk Terminals             July 1, 1998
      o  Plantation Pipe Line Company (24%)       September 15, 1998
      o  Pier IX and Shipyard River Terminals     December 18, 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 the Partnership will finance acquisitions
temporarily by borrowings under the Credit Facility and permanently by a
combination of debt and equity funding from the issuance of new debt securities
and units.

   On January 13, 1999, the Partnership announced an increase in its quarterly
distribution to $0.65 per unit, effective with the distribution for the fourth
quarter of 1998. The distribution for the third quarter of 1998 was $0.63 per
unit. Management intends to maintain the distribution at an annual level of at
least $2.60 per unit assuming no adverse change in the Partnership's operations,
economic conditions and other factors.

Liquidity and Capital Resources

   The Partnership's primary cash requirements, in addition to normal operating
expenses, are debt service, sustaining capital expenditures, discretionary
capital expenditures, and quarterly distributions to partners. In addition to
utilizing cash generated from operations, the Partnership could meet its cash
requirements through borrowings under its credit facilities, issuing long-term
notes or issuing additional units. The Partnership expects to fund future cash
distributions and sustaining capital expenditures with existing cash and cash
flows from operating activities.


                                       42
<PAGE>


Expansion capital expenditures are expected to be funded through additional
Partnership borrowings or issuance of additional units. Interest payments are
expected to be paid from cash flows from operating activities and debt principal
payments will be met by additional borrowings as they become due or by issuance
of additional units.

   Cash Provided by Operating Activities

  Net cash provided by operating activities was $134.0 million for 1998. This
amount was $102.0 million higher than the $32.0 million of cash provided by
operating activities in 1997. The increase in cash flow from operations was
primarily the result of higher net earnings and higher non-cash depreciation and
amortization charges. Higher earnings, chiefly due to the acquisition of the
Pacific Operations, accounted for $85.9 million of the increase. Higher
depreciation and amortization expenses, directly attributable to the Pacific
Operations and the acquisition of Kinder Morgan Bulk Terminals accounted for
$27.3 million of the increase. The higher overall change in cash provided by
operating activities was partially offset by lower cash inflows relative to net
changes in operating assets and liabilities. Cash flows from the net change in
working capital components decreased $15.8 million in 1998 versus 1997. The
decrease was chiefly due to a $9.1 million employee severance payment made in
December 1998 related to the Santa Fe acquisition. In addition, under a
settlement agreement of previous litigation matters between SFPP and El Paso
Refinery L.P. and its general partner, SFPP was obligated to pay a final payment
of $8 million. The liability was paid in the second quarter of 1998.

   Cash Used in Investing Activities

   Net cash used in investing activities was $281.7 million in 1998 compared to
$30.3 million in 1997. The increase in funds utilized in investing activities
was attributable to asset acquisitions and increases in capital expenditures
driven primarily by continued investment in the Partnership's Pacific
Operations. Excluding the effect of cash used for asset acquisitions, additions
to property, plant and equipment were $38.4 million in 1998 and $6.9 million in
1997. These additions of property, plant and equipment include both expansion
and maintenance projects.

   Additionally, there were substantially higher contributions to equity
investments made during 1998 versus 1997. The period-to-period increase in
contributions was $132.7 million, reflecting the Partnership's cash investments
in Shell CO2 Company and Plantation Pipe Line Company of $25.0 million and
$110.0 million, respectively.

   Cash Provided by / (Used in) Financing Activities

   Net cash provided by financing activities amounted to $169.9 million in 1998.
This compares to $6.3 million used in financing activities in 1997. The overall
increase of $176.2 million nearly matches the $178.6 million increase in net
proceeds received from the issuance of units. The Partnership received $212.3
million in proceeds from the June 1998 issuance of approximately 6.1 million
units.

   Other financing activities included $12.3 million received as a result of
general partner contributions made to maintain its minority interest in the
operating partnerships and $16.8 million used to refinance long-term debt.
Overall debt financing activities provided $84.8 million in cash during 1998
versus cash utilization of $15.1 million during 1997.

   Distributions to all partners increased to $122.4 million in 1998 compared to
$24.3 million in 1997. Higher distributions were the result of an increase in
the number of units, an increase in paid distributions per unit and an increase
in incentive distributions to the general partner as a result of increased
distributions to unitholders. The Partnership paid distributions of $2.385 per
unit in 1998 compared to $1.63 per unit in 1997. The Partnership believes that
the increase in paid distributions resulted from favorable operating results in
1998. The Partnership also 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

                                       43
<PAGE>


generally require the Partnership to set aside each quarter 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 0.5% interest in SFPP.

   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 1998 were
$32,737,571, while the incentive distributions paid during 1998 were
$23,920,773.

   Credit Facilities

   The Partnership has a $325 million revolving credit facility (the "Credit
Facility") with a syndicate of financial institutions. First Union National Bank
is the administrative agent under the agreement. The Partnership and OLP-B are
co-borrowers under the Credit Facility. Commencing in May 2000, the amount
available under the Credit Facility reduces on a quarterly basis, with the final
installment due in February 2005.

   The Partnership's operating partnerships and each other Restricted Subsidiary
(as defined in the Credit Facility) of the Partnership (other than SFPP) have
guaranteed the Partnership's obligations under the Credit Facility. The
Partnership has guaranteed the obligations of OLP-B under the Credit Facility.
The Credit Facility is unsecured, however, it requires the Partnership, in
certain limited circumstances, to provide cash collateral to the lenders to
secure letters of credit.

   Interest on advances is generally payable quarterly. Interest on loans under
the Credit Facility accrues at the Partnership's option at a floating rate equal
to either:

  o  First Union National Bank's base rate (but not less than the Federal Funds
     Rate plus 0.5% per annum); or
  o  LIBOR, plus a margin that will vary from 0.75% to 1.25% per annum depending
     upon the ratio of the Partnership's Debt to Cash Flow.

   The Credit Facility includes restrictive covenants that are customary for
this type of facility, including without limitation:

   o  requirements to maintain certain financial ratios;
   o  restrictions on the incurrence of additional indebtedness;
   o  restrictions on entering into mergers, consolidations and
      sales of assets;
   o  restrictions on making investments;
   o  restrictions on granting liens;
   o  prohibitions on making cash distributions to holders of
      units more frequently than quarterly;

                                       44
<PAGE>


   o   prohibitions on making cash distributions in excess of 100% of
       Available Cash for the immediately preceding calendar
       quarter; and
   o   prohibitions on making any distribution to holders of units if an event
       of default exists or would exist upon making such distribution.

   As of December 31, 1998, the Partnership had outstanding borrowings under the
Credit Facility of $230 million, including the following:

   o  approximately $142 million borrowed to refinance its First Mortgage Notes,
      including a make whole prepayment premium, and the bank credit facilities
      of two of its operating partnerships (the "Refinanced Indebtedness");
   o  approximately $25 million borrowed to fund its cash
      investment in Shell CO2 Company;
   o  approximately $100 million borrowed to fund part of the
      acquisition of the Pacific Operations, including post-closing
      adjustments;
   o  $100 million borrowed to fund part of the purchase price of
      its interest in Plantation Pipe Line Company;
   o  $35 million borrowed to refinance debt of Kinder Morgan Bulk
      Terminals, Inc. that was outstanding at the time of the
      acquisition and to fund general corporate purposes; and
   o  $35 million borrowed to finance the acquisition of the Pier IX Terminal
      and the Shipyard River Terminal.
  
   The Partnership used approximately $210 million of proceeds from a public
offering of units in June 1998 to pay down outstanding balances under the Credit
Facility.

   The Partnership's First Mortgage Notes were incurred in connection with the
original formation of the Partnership. The Partnership borrowed the remainder of
the Refinanced Indebtedness 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
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, 1998, SFPP's long term debt aggregated $355 million and
consisted of $244.0 million of First Mortgage Notes (the "SF Notes") and $111.0
million borrowed 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.

   Senior Notes

   On January 29, 1999, the Partnership issued $250 million of 6.30% Senior
Notes due 2009. Interest on the senior notes is payable semi-annually on
February 1 and August 1 of each year beginning on August 1, 1999. The indenture
governing the senior notes contains restrictions on the ability of the
Partnership to enter into sale and leaseback transactions, grant liens on its
assets and merge or consolidate with other entities. Each subsidiary that
guarantees any senior debt of the Partnership must also guarantee the senior
notes. Currently, the senior notes are guaranteed by all of the Partnership's
operating partnerships (other than SFPP) and by Kinder Morgan Bulk Terminals,
Inc., Kinder Morgan Natural Gas Liquids Corporation and Kinder Morgan CO2, LLC.

   The Partnership may redeem the senior notes at any time, upon not less than
30 and not more than 60 days notice, at a price equal to 100% of the principal
amount of the senior notes plus accrued interest to the redemption date (subject
to the right of holders of record on the relevant record date to receive
interest due on an interest payment date that is on or prior to the redemption
date) plus a Make-Whole Premium, if any (the "Redemption Price"). The Redemption
Price will never be less than 100% of the principal amount of the senior notes
plus accrued interest to the redemption date.



                                       45
<PAGE>


   The amount of the Make-Whole Premium will be equal to the excess, if any, of:

(1)   the sum of the present values, calculated as of the redemption date, of:

      (a) each interest payment that, but for such redemption, would have been
          payable on the senior notes being redeemed on each interest payment
          date occurring after the redemption date (excluding any accrued
          interest for the period prior to the redemption date); and

      (b) the principal amount that would have been payable at the final
          maturity of the senior notes if they had not been redeemed;

      over

(2)   the principal amount of the senior notes being redeemed.

   The present value of interest and principal payments referred to in clause
(1) above will be calculated by discounting the amount of each payment of
interest or principal from the date that the payment would have been payable,
but for the redemption, to the redemption date at a discount rate equal to the
Treasury Yield (as defined below) plus 25 basis points.

   For purposes of determining the Make-Whole Premium, "Treasury Yield" means a
rate of interest per annum equal to the weekly average yield to maturity of
United States Treasury Notes that have a constant maturity that corresponds to
the remaining term to maturity of the senior notes, calculated to the nearest
1/12th of a year.

   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 Credit 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 $1.4
billion in aggregate consideration consisting of approximately 26.6 million
units, $84.4 million in cash and the assumption of certain liabilities. The
Partnership financed the $84.4 million cash portion of the purchase price and a
portion of the transaction expenses through the Credit Facility.

   Kinder Morgan Bulk Terminals, Inc. The Partnership, effective July 1, 1998,
acquired Kinder Morgan Bulk Terminals, Inc. for approximately $100 million,
consisting of approximately 2.1 million units and the assumption of
approximately $23 million of indebtedness. The Partnership subsequently paid off
the indebtedness with funds borrowed under the Credit Facility.

   Plantation Pipe Line Company. On September 15, 1998, the Partnership acquired
24% of Plantation Pipe Line Company for $110 million. The Partnership borrowed
$100 million under the Credit Facility, and paid $10 million from its cash
accounts.

   Pier IX Terminal and Shipyard River Terminal. On December 18, 1998, the
Partnership acquired the Pier IX Terminal, located in Newport News, Virginia,
and the Shipyard River Terminal, located in Charleston, South Carolina, for $35
million, which the Partnership borrowed under the Credit Facility.

Year 2000

   The Partnership is currently implementing a five phase program to achieve
Year 2000 compliance. The Partnership is evaluating both information technology
systems ("IT") and non-IT systems such as those that include embedded
technology.

   The Partnership has completed the system inventory phase. In the system
inventory phase, all hardware and software was inventoried and a database of
systems that need further assessment was created.


                                       46
<PAGE>


   The Partnership has begun the assessment phase. In the assessment phase,
specific Year 2000 issues and solutions are identified. The Partnership
anticipates completing the assessment phase by the end of the first quarter of
1999.

   The Partnership has begun the system testing phase. In the system testing
phase, real world tests on critical systems are run to insure that they will
operate properly after the Year 2000. The Partnership anticipates completing the
system testing phase by the end of the second quarter of 1999.

   The Partnership has begun the remediation phase. In the remediation phase,
problems that arise in the Partnership's assessment and system testing phases
are fixed. The Partnership anticipates completing the remediation phase by the
end of the third quarter of 1999.

   The Partnership has begun the contingency planning phase. The Partnership
currently has plans in place for non-Year 2000 related contingencies and will
modify these plans to address any specific contingencies related to the Year
2000 problem. Initial drill of contingency operations will be held in the first
quarter of 1999. Refinement of contingency plans and employee training will
continue throughout the year and be completed in the fourth quarter of 1999.

   The Partnership does not believe it has material exposure to third parties'
failures to remediate the Year 2000 problem. The Partnership has not sought and
does not intend to seek information from material suppliers, customers, or
service providers to determine the exact extent to which the Partnership would
be effected by third parties' failures to remediate the Year 2000 problem.

   While the Partnership has budgeted funds to address the Year 2000 problem,
the Partnership does not believe that any material expenditures will be required
to address the Year 2000 problem as it relates to existing systems. However,
uncertainty exists concerning the potential costs and effects associated with
any Year 2000 compliance. Therefore, the Partnership cannot give any assurances
that unexpected Year 2000 compliance problems of either the Partnership or its
vendors, customers and service providers would not materially and adversely
affect the Partnership's business, financial condition or operating results.

Information Regarding Forward Looking Statements

   This filing includes forward looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These forward looking statements are identified as any statement that
does not relate strictly to historical or current facts. They use words such as
"anticipate," "continue," "estimate," "expect," "may," "will," or other similar
words. These statements discuss future expectations or contain projections.
Specific factors which could cause actual results to differ from those in the
forward looking statements, include:

   o  price trends and overall demand for natural gas liquids, refined petroleum
      products, carbon dioxide, coal and other bulk materials in the United
      States. Economic activity, weather, alternative energy sources,
      conservation and technological advances may affect price trends and
      demand;
   
   o  if the Federal Energy Regulatory commission or the
      California Public Utilities Commission changes the
      Partnership's tariff rates;
   
   o  the Partnership's ability to integrate any acquired
      operations into its existing operations;
   
   o  if railroads experience difficulties or delays in delivering
      products to the bulk terminals;
   
   o  the Partnership's ability to successfully identify and close
      strategic acquisitions and make cost saving changes in
      operations;
   
   o  shut-downs or cutbacks at major refineries, petrochemical plants,
      utilities, military bases or other businesses that use the Partnership's
      services;
   
   o  the condition of the capital markets and equity markets in
      the United States; and
   
                                       47
<PAGE>



   o  the political and economic stability of the oil producing
      nations of the world.

   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. When considering forward looking statements, one should keep
in mind the risk factors described in "Risk Factors" above. The risk factors
could cause the Partnership's actual results to differ materially from those
contained in any forward looking statement. The Partnership disclaims any
obligation to update the above list or to announce publicly the result of any
revisions to any of the forward looking statements to reflect future events or
developments.

   In addition, the Partnership's classification as a partnership for federal
income tax purposes means that the Partnership does not generally pay federal
income taxes on its net income. It does, however, pay taxes on the net income of
subsidiaries that are corporations. The Partnership is relying on a legal
opinion from its counsel, and not a ruling from the Internal Revenue Service, as
to its proper classification for federal income tax purposes. See Items 1 and 2
"Business and Properties - Tax Treatment of Publicly Traded Partnerships Under
the Internal Revenue Code."

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.


                                       48
<PAGE>


                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

Directors and Executive Officers of the General Partner

   As is commonly the case with publicly-traded limited partnerships, the
Partnership does not employ any of the persons responsible for managing or
operating the Partnership, but instead reimburses the general partner for its
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
board of directors of the general partner.

   Name                       Age  Position with the General Partner
   ----                       ---  ---------------------------------
   Richard D. Kinder          54   Director, Chairman and CEO
   William V. Morgan          55   Director, Vice Chairman and President
   Alan L. Atterbury          56   Director
   Edward O. Gaylord          67   Director
   William V. Allison         51   President, Pipeline Operations
   David G. Dehaemers, Jr.    38   Vice President, Treasurer and
                                     Chief Financial Officer
   Michael C. Morgan          30   Vice President, Corporate Development
                                     and Investments
   Thomas B. Stanley          48   President, Bulk Terminals
   Dixon B. Betz              50   Chief   Executive   Officer,   River
                                     Consulting, Inc., subsidiary

   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 Director of the general partner in June 1994,
Vice Chairman of the general partner in February 1997 and President of the
general partner in November 1998. 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 Director of the general partner in February
1997. Mr. Atterbury has been the Chief Executive Officer and President of
Midland Loan Services, Inc., since its formation in April 1998. Mr. Atterbury
co-founded Midland Loan Services, L.P. (the predecessor of Midland Loan
Services, Inc.) and has served as Chief Executive Officer and President from the
partnership's inception in 1992. Mr. Atterbury has also served as the President,
Chief Executive Officer and a Director of Midland Data Systems, Inc., the
general partner of Midland Loan Services, L.P. from its inception in 1990. Mr.
Atterbury has also been the President of Midland Properties, Inc., a property
management and real estate development company, since 1980.

   Edward O. Gaylord was elected Director of the general partner in February
1997. Mr. Gaylord is the Chairman of the Board of Directors of Jacintoport
Terminal Company, a liquid bulk storage terminal on the Houston, Texas ship
channel. Mr. Gaylord also serves as Chairman of the Board for EOTT Energy
Corporation, an oil trading and transportation company also located in Houston,
Texas. Mr. Gaylord is also a Director of Seneca Foods Corporation and Imperial
Sugar Company.

   William V. Allison was elected President, Pipeline Operations of the general
partner in February 1999. He served as Vice President and General Counsel of the
general partner from April 1998 to February 1999. From 1977 to April 1998, Mr.
Allison was employed at Enron Corp. where he held various executive positions,
including President of Enron Liquid Services Corporation, Florida Gas
Transmission Company and Houston Pipeline Company and Vice President and
Associate General Counsel of Enron Corp. Prior to joining Enron Corp., he was an
attorney at the FERC.

                                       49
<PAGE>



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

   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.

   Thomas B. Stanley was elected President, Bulk Terminals of the general
partner in August 1998. From 1993 to July 1998, he was President of Hall-Buck
Marine, Inc. (now known as Kinder Morgan Bulk Terminals, Inc.), for which he has
worked since 1980. Mr. Stanley is a CPA with ten years' experience in public
accounting, banking, and insurance accounting prior to joining Hall-Buck. He
received his bachelor's degree from Louisiana State University in 1972.

   Dixon B. Betz founded River Consulting, Inc., a subsidiary of Kinder Morgan
Bulk Terminals, Inc., in 1981 and has since served as its Chief Executive
Officer. Mr. Betz received a Bachelor of Science degree in Mathematics from
Louisiana State University in 1971.

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
1998 and 1997.

                                       50
<PAGE>


                           Summary Compensation Table
<TABLE>
<CAPTION>
                                                                         Annual Compensation
                                                          ---------------------------------------------------
                                                                                               All Other
         Name and Principal Position               Year           Salary          Bonus(1)  Compensation(2)
         ----------------------------------------------------------------------------------------------------

         <S>                                         <C>        <C>                   <C>            <C>    
         Richard D. Kinder                           1998       $200,004              $ -            $13,584
            Director, Chairman and CEO               1997        175,664                -             12,757

         William V. Morgan                           1998        200,004                -             64,562
            Director, Vice Chairman and President    1997        175,685                -             12,757

         William V. Allison(3)                       1998         99,998          200,000             11,366
            President, Pipeline Operations           1997         22,917                -                  -

         David G. Dehaemers, Jr.                     1998        141,247          200,000             34,393
            Vice President, Treasurer and CFO        1997        101,910          130,000              7,598

         Michael C. Morgan                           1998        141,247          200,000             50,421
            Vice President                           1997        101,910          130,000              7,539

</TABLE>

         (1)  Amounts earned in year shown and paid the following year.
         (2)  Represents  the  general  partner's  contributions  to the Savings
              Investment  Plan  (a 401(k)  plan),  the  imputed value of general
              partner-paid  group  term  life  insurance  exceeding $50,000, and
              compensation attributable to taxable moving expenses allowed.
         (3)  Prior  to the acquisition of the general partner by Kinder Morgan,
              Inc., Mr. Allison served as President  of the general partner from
              January 1, 1997 until February 14, 1997.


   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 March 1, 1999, an additional 2% discretionary
contribution was made to individual accounts based on 1998 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 Partnership may, at its option, pay the
participant in 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 units in the aggregate under the Plan. Units will not be issued to a
participant unless such units have been listed for trading on the principal
securities exchange on which the 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 Plan was established in July 1997 and on
July 1, 1997, the board of directors of the general partner granted awards
totaling 2% of the Incentive Compensation Value to each of Thomas King, David
Dehaemers and Michael Morgan. Originally, 50% of such awards were to vest on
each of January 1, 2000 and January 1, 2002. No awards were granted during 1998.

                                       51
<PAGE>



   All of Mr. King's awards were forfeited when he resigned as President of the
general partner on December 1, 1998. On January 4, 1999 (subsequent to year
end), the awards granted to Mr. Dehaemers and Mr. Morgan were amended to provide
for the immediate vesting and pay-out of 50% of their awards, or 1% of the
Incentive Compensation Value. The board of directors of the general partner
believes that accelerating the vesting and pay-out of the awards was in the best
interest of the Partnership because it capped the total payment the participants
were entitled to receive with respect to 50% of their awards.

   Unit Option Plan. Pursuant to the Partnership's unit Option Plan (the "Option
Plan") key personnel of the Partnership and its affiliates are eligible to
receive grants of options to acquire units. The total number of 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 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 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 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. At December 31,
1998, options for 194,500 units were granted to 89 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 granted to each non-employee director of the Partnership
as of April 1, 1998, an option to acquire 5,000 units at an exercise price equal
to the fair market value of the units on such date. In addition, each new
non-employee director will receive options to acquire 5,000 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.

   The following tables set forth certain information at December 31, 1998 and
for the fiscal year then ended with respect to unit options granted to and
exercised by the individuals named in the Summary Compensation Table above. Mr.
Allison is the only person named in the Summary Compensation Table that has been
granted options. No options have been granted at an option price below fair
market value on the date of grant.

<TABLE>
<CAPTION>
                        Number of      % of Total                             Potential realizable Value
                          Units          Options                               at Assumed Annual Rates
                       Underlying      Granted to     Exercise                of Unit Price Appreciation
                         Options        Employees      Price      Expiration      for Option Term (1)
Name                     Granted         in 1998      Per Unit       Date          5%             10%
---------------------------------------------------------------------------------------------------------
<S>                      <C>              <C>         <C>         <C>           <C>            <C>
William V. Allison       10,000           5.14        $33.125     08/26/2005    $134,852       $314,263

</TABLE>

                                       52
<PAGE>

                      Aggregated Option Exercises in 1998,
                        and 1998 Year-End Option Values

<TABLE>
<CAPTION>
                                                        Underlying Unexercised          Value of Unexercised
                                                            Options at                  In-the-Money Options
                        Units Acquired     Value           1998 Year-End                 at 1998 Year-End(1)
Name                      on Exercise     Realized   Exercisable    Unexercisable    Exercisable    Unexcercisable
------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>               <C>            <C>    
William V. Allison                  -           -           -           10,000            $ -            $31,250

(1) Calculated on the basis of the fair market value of the underlying units at year-end, minus the exercise price.
</TABLE>

   Directors fees. During 1998, each member of the board of directors of the
general partner 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 9, 1999,
regarding the beneficial ownership of (i) the units and (ii) the common stock of
Kinder Morgan, Inc., 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 units.

<TABLE>
<CAPTION>
                                                     Amount and Nature of Beneficial Ownership
                                                                 KMI Voting Stock              KMI Non Voting Stock
                                      Units (1)                  (Class "A" Stock)              (Class "B" Stock)
                             ----------------------------   ----------------------------   -----------------------------
                                Number         Percent        Number         Percent         Number          Percent
                             of Units (2)     of Class      of Shares (3)    of Class      of Shares (3)    of Class
                             -------------   ------------   ------------   -------------   ------------   --------------

<S>                               <C>                  <C>        <C>            <C>             <C>             <C>   
Richard D. Kinder (4)             117,950              *          5,801          72.09%          444.8           17.50%

William V. Morgan (5)               2,000              *          2,246          27.91%          111.2            4.38%

Alan L. Atterbury (6)              28,000              *              -               -              -                -

Edward O. Gaylord (7)               6,000              *              -               -              -                -

William V. Allison                      -              -              -               -              -                -

David G. Dehaemers                      -              -              -               -              -                -

Michael C. Morgan                       -              -              -               -              -                -

Directors and Executive           311,730              *          8,047         100.00%            556           21.88%
     Officers as a group (9 persons)(8)

</TABLE>


*Less than 1%
(1) All units involve sole voting power and sole investment power.
(2) As of March 9, 1999, the Partnership had 48,815,690 units issued and
    outstanding.
(3) As of March 9, 1999, 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.
(4) Excludes 862,000 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 72% of the voting common stock of KMI. By virtue of his
    ownership of KMI, Mr. Kinder may be deemed to indirectly own the units owned
    by Kinder Morgan G.P., Inc. Mr. Kinder disclaims beneficial ownership of
    such units. Furthermore, includes 2,950 units owned by Mr. Kinder's spouse. 
    Mr. Kinder disclaims beneficial ownership of such units.
(5) The KMI voting and non-voting shares are held by Morgan Associates, Inc., a
    Kansas corporation, wholly owned by Mr. Morgan.
(6) Includes options to purchase 2,000 units exercisable within 60 days of March
    9, 1999. Includes 14,000 units owned through Westover Investment L.P., as to
    which units Mr. Atterbury disclaims beneficial ownership.
(7) Includes options to purchase 2,000 units exercisable within 60 days of March
    9, 1999.
(8) Includes options to purchase 4,000 units exercisable within 60 days of March
    9, 1999.

   KMI has pledged all of the stock of the general partner to secure its bank
credit facilities.


                                       53
<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. The general partner
incurred $38.0 million in general and administrative expenses in 1998 and $6.9
million in general and administrative expenses in 1997.

   Partnership Distributions

   See Item 7 for information regarding Partnership Distributions.

   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.




                                       54
<PAGE>


                              PART IV

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

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

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

    (a)(3) Exhibits

    *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 the Partnership's Registration
           Statement on Form S-4 (File No. 333-44519) filed February 4, 1998
           (the "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,
           19989 (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   Amendment to the Limited Partnership  Agreement of Shell
           CO2 Company, Ltd. dated as of September 30, 1998
    *2.5   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)
    *2.6   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  Partnership  dated  as  of  February  14,  1997
           (Exhibit 3.1 to Amendment No. 1 to the 1998 S-4)
    *4.1   Specimen Certificate  representing Common Units (Exhibit
           4.1 to 1998 S-4)
    *4.2   Indenture dated as of January 29, 1999 among the Partnership, the
           guarantors listed on the signature page thereto and U.S. Trust
           Company of Texas, N.A., as trustee, relating to Senior Debt
           Securities (filed as Exhibit 4.1 to the Partnership's Form 8-K dated
           January 29, 1999 (the "January 29, 1999 Form 8-K))
    *4.3   First Supplemental Indenture dated as of January 29, 1999 among the
           Partnership, the subsidiary guarantors listed on the signature page
           thereto and U.S. Trust Company of Texas, N.A., as trustee, relating
           to $250,000,000 of 6.30% Senior Notes due February 1, 2009 (filed as
           Exhibit 4.2 to the January 29, 1999 Form 8-K)
     4.4   Amended and Restated Credit Agreement dated as of December 1, 1998
           among the Partnership, Kinder Morgan Operating L.P. "B", the
           subsidiary guarantors listed on the signature page thereto, the
           lenders party thereto and First Union National Bank, as agent
     4.5   First Amendment, dated December 21, 1998 to Amended and Restated
           Credit Agreement among the Partnership, Kinder Morgan Operating L.P.
           "B", the subsidiary guarantors listed on the signature page thereto,
           the lenders party thereto and First Union National Bank, as agent
    *4.6   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   Pipeline
           Partners, L.P. for 1988 ("Santa Fe 1988 Form 10-K"))
    *4.7   Consent and Amendment dated as of December 19, 1997 between the
           noteholders and SFPP, L.P. (a conformed composite of the separate
           agreements with each noteholder, identical except for signatures)
           (Exhibit 4.14.1 to the Partnership's Form 10-K for 1997 ("1997 Form
           10-K"))

                                       55
<PAGE>


    *4.8   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)
    *4.9   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)
    *4.10  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   Kinder Morgan Energy  Partners,  L.P. Common Unit Option
           Plan (Exhibit 10.6 to 1997 Form 10-K)
    10.2   Amended and Restated  Credit  Agreement  dated as of June 18,
           1998 among Kinder Morgan,  Inc. and First Union National Bank
    10.3   First  Amendment to Credit  Agreement  dated as of August 26,
           1998 among Kinder Morgan,  Inc. and First Union National Bank
    10.4   Second  Amendment to Credit  Agreement  dated as of September
           8, 1998  among  Kinder  Morgan,  Inc.  and  First  Union
           National Bank
    21     List of subsidiaries
    23.1   Consent letter from PricewaterhouseCoopers LLP
    23.2   Consent letter from Arthur Andersen LLP
    27.1   Financial Data Schedule for Kinder Morgan Energy Partners, L.P.
    27.2   Financial Data Schedule for Kinder Morgan Operating L.P. "A"
    27.3   Financial Data Schedule for Kinder Morgan Operating L.P. "B"
    27.4   Financial Data Schedule for Kinder Morgan Operating L.P. "C"
    27.5   Financial Data Schedule for Kinder Morgan Operating L.P. "D"
    27.6   Financial Data Schedule for Kinder Morgan Natural Gas Liquids
           Corporation
    27.7   Financial Data Schedule for Kinder Morgan CO2, LLC
    27.8   Financial Data Schedule for Kinder Morgan Bulk Terminals, Inc.
---------------------
* Asterisk indicates exhibits incorporated by reference as indicated; all other
  exhibits are filed herewith.

(b) Reports on Form 8-K

   Report dated November 6, 1998, on Form 8-K, as amended December 23, 1998. A
current listing of Risk Factors was disclosed pursuant to Item 5 of that form.
The pro forma combined income statement of the Partnership for the nine month
period ended September 30, 1998 giving effect to the acquisition of Santa Fe
Pacific Pipeline Partners, L.P. and the formation of Shell CO2 Company, assuming
the acquisition had been consummated January 1, 1997, was disclosed in Item 7.

                                       56
<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               F-4
December 31, 1998, 1997, and 1996                                            



Consolidated  Balance  Sheets for the years ended December 31, 1998          F-5
and 1997                                                                     



Consolidated   Statements   of  Cash  Flows  for  the  years  ended          F-6
December 31, 1998, 1997, and 1996                               



Consolidated  Statements  of  Partners'  Capital for the years               F-7
ended December 31, 1998, 1997, and 1996                   



Notes to Consolidated Financial Statements                                   F-8


Certain supplementary financial statement schedules have been omitted because
the information required to be set forth therein is either not applicable or is
shown in the financial statements or notes thereto.


                                      F-1
<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS






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






In our opinion,  the  accompanying  consolidated  balance sheets 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,  1998 and 1997,  and the  results of their
operations  and their cash  flows for each of the two years in the period  ended
December 31, 1998 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 audits.  We conducted our audits 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 audits provide a reasonable basis for the opinion  expressed
above.



/s/ Pricewaterhouse Coopers LLP
___________________________________
PricewaterhouseCoopers LLP
Houston, Texas
March 10, 1999


                                      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 the year 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 audit.

We  conducted  our  audit   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 audit provides 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 the year  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 STATEMENTS OF INCOME
                                 (In Thousands Except Per Unit Amounts)


<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                            ---------------------------------------------
                                                                1998           1997             1996
                                                            -------------  --------------   -------------

<S>                                                       <C>            <C>              <C>           
Revenues                                                  $      322,617 $        73,932  $       71,250

Costs and Expenses
  Cost of products sold                                            5,860           7,154           7,874
  Operations and maintenance
    Related party                                                      -               -           6,558
    Other                                                         65,022          15,039          12,322
  Fuel and power                                                  22,385           5,636           4,916
  Depreciation and amortization                                   37,321          10,067           9,908
  General and administrative                                      39,984           8,862           9,132
  Taxes, other than income taxes                                  12,140           2,943           3,467
                                                            -------------  --------------   -------------
                                                                 182,712          49,701          54,177
                                                            -------------  --------------   -------------

Operating Income                                                 139,905          24,231          17,073

Other Income (Expense)
  Earnings from equity investments                                25,732           5,724           5,675
  Interest, net                                                  (38,600)        (12,078)        (11,939)
  Other, net                                                      (7,263)           (701)          2,555
Minority Interest                                                   (985)           (179)           (121)
                                                            -------------  --------------   -------------

Income Before Income Taxes and Extraordinary charge              118,789          16,997          13,243

Income Tax Benefit (Expense)                                      (1,572)            740          (1,343)
                                                            -------------  --------------   -------------

Income Before Extraordinary charge                               117,217          17,737          11,900

Extraordinary charge on early extinguishment of debt             (13,611)              -               -
                                                            -------------  --------------   -------------

Net Income                                                $      103,606 $        17,737  $       11,900
                                                            =============  ==============   =============


Calculation of Limited Partners' Interest in Net Income:
Income Before Extraordinary Charge                        $      117,217 $        17,737  $       11,900
Less: General Partner's interest in Net Income                   (33,447)         (4,074)           (218)
                                                            -------------  --------------   -------------
Limited Partners' Net Income before extraordinary charge          83,770          13,663          11,682
Less:  Extraordinary charge on early extinguishment of debt      (13,611)              -               -
                                                            =============  ==============   =============
Limited Partners' Net Income                              $       70,159 $        13,663  $       11,682
                                                            =============  ==============   =============

Net Income per Unit before extraordinary charge           $         2.09 $          1.02  $         0.90
                                                            =============  ==============   =============

Net Income per Unit for extraordinary charge              $         0.34 $             -  $            -
                                                            =============  ==============   =============

Net Income per Unit                                       $         1.75 $          1.02  $         0.90
                                                            =============  ==============   =============

Number of Units used in Computation                               40,120          13,411          13,020
                                                            =============  ==============   =============
</TABLE>

                 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 SHEETS
                                 (In Thousands)

                                                            December 31,
                                                  ------------------------------
                                                  --------------  --------------
                                                       1998            1997
                                                  --------------  --------------
ASSETS
Current Assets
   Cash and cash equivalents                    $        31,735 $         9,612
   Accounts and notes receivable                         44,125           8,569
   Inventories
     Products                                             2,901           1,901
     Materials and supplies                               2,640           1,710
                                                  --------------  --------------
                                                         81,401          21,792
                                                  --------------  --------------

Property, Plant and Equipment, at cost                1,836,719         290,620
   Less accumulated depreciation                         73,333          45,653
                                                  --------------  --------------
                                                      1,763,386         244,967
                                                  --------------  --------------

Equity Investments                                      238,608          31,711
                                                  --------------  --------------

Intangibles                                              58,536           8,291
Deferred charges and other assets                        10,341           6,145
                                                  ==============  ==============
TOTAL ASSETS                                    $     2,152,272 $       312,906
                                                  ==============  ==============


LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
   Accounts payable
     Trade                                      $        11,690 $         4,423
     Related parties                                     13,952             507
   Accrued liabilities                                   18,230           3,585
   Accrued benefits                                       9,415               -
   Accrued taxes                                          4,195           2,861
                                                  --------------  --------------
                                                         57,482          11,376
                                                  --------------  --------------

Long-Term Liabilities and Deferred Credits
   Long-term debt                                       611,571         146,824
   Other                                                104,789           2,997
                                                  --------------  --------------
                                                        716,360         149,821
                                                  --------------  --------------

Commitments and Contingencies

Minority Interest                                        17,767           1,485
                                                  --------------  --------------
Partners' Capital
   Common Units                                       1,348,591         146,840
   General Partner                                       12,072           3,384
                                                  --------------  --------------
                                                      1,360,663         150,224
                                                  --------------  --------------
                                                  ==============  ==============
TOTAL LIABILITIES AND PARTNERS' CAPITAL         $     2,152,272 $       312,906
                                                  ==============  ==============

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



                                      F-5

<PAGE>

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

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                             -------------------------------------------------
                                                                  1998               1997            1996
                                                             ----------------    -------------   -------------
<S>                                                        <C>                 <C>             <C>    
Cash Flows From Operating Activities
Reconciliation of net income to net cash provided by operating activities
    Net income                                             $         103,606   $       17,737  $       11,900
    Extraordinary charge on early extinguishment of debt              13,611                -               -
    Depreciation and amortization                                     37,321           10,067           9,908
    Earnings from equity investments                                 (25,732)          (5,724)         (5,675)
    Distributions from equity investments                             19,670            9,588           6,791
    Changes in components of working capital
      Accounts receivable                                              1,203            3,791          (2,264)
      Inventories                                                       (734)            (902)            198
      Accounts payable                                                   197           (5,102)          2,096
      Accrued liabilities                                            (14,115)           2,774          (1,997)
      Accrued taxes                                                   (1,266)             557             149
    El Paso Settlement                                                (8,000)               -               -
    Other, net                                                         8,220             (834)          1,670
                                                             ----------------    -------------   -------------
Net Cash Provided by Operating Activities                            133,981           31,952          22,776
                                                             ----------------    -------------   -------------

Cash Flows From Investing Activities
    Acquisitions of assets                                          (107,144)         (20,038)              -
    Additions to property, plant and equipment for
        expansion and maintenance projects                           (38,407)          (6,884)         (8,575)
    Sale of property, plant and equipment                                 64              162               -
    Contributions to equity investments                             (136,234)          (3,532)           (546)
                                                             ----------------    -------------   -------------
Net Cash Used in Investing Activities                               (281,721)         (30,292)         (9,121)
                                                             ----------------    -------------   -------------

Cash Flows From Financing Activities
    Issuance of debt                                                 492,612           43,400           5,000
    Payment of debt                                                 (407,797)         (58,496)         (1,718)
    Cost of refinancing long-term debt                               (16,768)               -               -
    Proceeds from issuance of common units                           212,303           33,678               -
    Contributions from General Partner's Minority Interest            12,349                -               -
    Distributions to partners
      Common Units                                                   (93,352)         (21,768)        (16,404)
      General Partner                                                (27,450)          (2,280)           (268)
      Minority Interest                                               (1,614)            (245)           (168)
    Other, net                                                          (420)            (636)              -
                                                             ----------------    -------------   -------------
Net Cash Provided by (Used in) Financing Activities                  169,863           (6,347)        (13,558)
                                                             ----------------    -------------   -------------

Increase (Decrease) in Cash and Cash Equivalents                      22,123           (4,687)             97
Cash and Cash Equivalents, Beginning of Period                         9,612           14,299          14,202
                                                             ================    =============   =============
Cash and Cash Equivalents, End of Period                   $          31,735   $        9,612  $       14,299
                                                             ================    =============   =============

Noncash Investing and Financing Activities
 Contribution of net assets to partnership investments     $          60,387   $            -  $            -
 Assets acquired by the issuance of Common Units           $       1,003,202   $            -  $            -
 Assets acquired by the assumption of liabilities          $         569,822   $            -  $            -

Supplemental disclosures of cash flow information
  Cash paid during the year for
  Interest (net of capitalized interest)                   $          47,616   $       12,611  $       12,487
  Income Taxes                                             $           1,354   $          463  $          397

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

</TABLE>


                                      F-6
<PAGE>

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

<TABLE>
<CAPTION>
                                                                    Deferred                                 Total
                                                  Common          Participation         General            Partners'
                                                  Units              Units              Partner            Capital
                                              --------------     ---------------     --------------     ---------------

<S>                                         <C>                <C>                 <C>                <C> 
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                                   (17,666)                  -             (2,214)            (19,880)
                                              --------------     ---------------     --------------     ---------------

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

    Net income                                       70,159                   -             33,447             103,606

    Net proceeds from issuance
         of common units                          1,212,421                   -                  -           1,212,421

    Capital contributions                            10,234                   -              2,678              12,912

    Distributions                                   (91,063)                  -            (27,437)           (118,500)
                                              --------------     ---------------     --------------     ---------------

Partners' capital at December 31, 1998      $     1,348,591    $              -    $        12,072    $      1,360,663
                                              ==============     ===============     ==============     ===============
</TABLE>

              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).

  General

  The Partnership is a publicly traded Master Limited Partnership that
manages a diversified portfolio of midstream energy assets. It operates through
four operating limited partnerships, OLP-A, OLP-B, Kinder Morgan Operating L.P.
"C" ("OLP-C") and Kinder Morgan Operating L.P. "D" ("OLP-D") (collectively, the
"Operating Partnerships"). Kinder Morgan Bulk Terminals, Inc. (formerly
Hall-Buck Marine, Inc.) and its consolidated subsidiaries are owned and
controlled by OLP-C. OLP-D owns 99.5% of and controls SFPP, L.P.

  Kinder Morgan G.P., Inc. is a wholly owned subsidiary of KMI and serves as the
sole general partner of the Partnership and the Operating Partnerships. The
Partnership and the Operating Partnerships are governed by Amended and Restated
Agreements of Limited Partnership and certain other agreements (collectively,
the "partnership agreements").

  Prior to 1998, the Partnership reported three business segments: Liquids
Pipelines; Coal Transfer, Storage and Services; and Gas Processing and
Fractionation. Due to the acquisitions made in 1998, the Partnership now
competes in the following three reportable business segments: Pacific
Operations; Mid-Continent Operations; and Bulk Terminals. For the periods prior
to 1998, the previous Liquids Pipelines and Gas Processing and Fractionation
segments have been combined to present the current Mid-Continent Operations
segment.

  The "Pacific Operations" include four common carrier refined petroleum
products pipelines covering approximately 3,300 miles and transporting
approximately one million barrels per day of refined petroleum products such as
gasoline, diesel and jet fuel. The Pacific Operations also include 13 truck
loading terminals. These operations serve approximately 44 customer-owned
terminals, three commercial airports and 12 military bases in six western
states.

  The "Mid-Continent Operations" include two interstate common carrier natural
gas liquids ("NGL" or "NGLs") pipelines ("North System" and "Cypress Pipeline"),
a 20% equity interest in Shell CO2 Company, a 24% equity interest in Plantation
Pipe Line Company, a gas processing plant ("Painter Plant") and a 25% indirect
interest in an NGL fractionator in Mont Belvieu, Texas. The North System
includes a 1,600 mile common carrier pipeline that 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. Additionally, the North System has eight
truck loading terminals, which primarily deliver propane throughout the upper
Midwest. The Cypress Pipeline is a 100 mile pipeline that transports ethane from
Mont Belvieu, Texas, to the Lake Charles, Louisiana area. Shell CO2 Company
produces, markets and delivers CO2 for enhanced oil recovery throughout the
continental United States. Plantation Pipe Line Company owns and operates a
3,100 mile common carrier refined petroleum products pipeline serving the
southeastern United States. Amoco Oil Company operates the Painter Plant assets
under an operating lease agreement.

  The "Bulk Terminals" segment consists of 24 bulk terminals that handle
approximately 50 million tons of coal, petroleum coke and other products
annually. The Partnership itself, or through Kinder Morgan Bulk Terminals, Inc.,
owns or operates these 24 bulk terminals located primarily on the Mississippi
River and the West Coast. The segment also includes two modern high speed
rail-to-barge coal transfer facilities ("Cora Terminal" and "Grand Rivers
Terminal"). 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 on the Tennessee

                                      F-8
<PAGE>


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


River near Paducah, Kentucky. Other activities included in Bulk Terminals
include the "Red Lightning" energy services unit, which performs specialized
coal services for both the Cora Terminal and the Grand Rivers Terminal. River
Consulting, Inc., a major engineering and construction management company
specializing in designing and construction services for dry bulk material
handling terminals is also included in the Bulk Terminals segment. On December
18, 1998 the Partnership acquired the Pier IX Terminal, located in Newport News,
Virginia, and the Shipyard River Terminal, located in Charleston, South
Carolina.

  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 units representing limited partner
interests in the Partnership. The unit split entitled common unitholders to one
additional unit for each 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 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 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 natural gas liquids, refined petroleum
products and coal. These assets 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 lives. Generally, composite depreciation rates are applied
to functional groups of property having similar economic characteristics and
range from 2.0% 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.

  Equity Method of Accounting

  Investments in significant 20-50% owned affiliates are accounted for by the
equity method of accounting, whereby the investment is carried at cost of
acquisition, plus the Partnership's equity in undistributed earnings or losses
since acquisition.


                                      F-9

<PAGE>


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


  Excess of Cost Over Fair Value

  The excess of the Partnership's cost over its underlying net assets is being
amortized using the straight-line method over the estimated remaining life of
the assets over a period not to exceed 40 years. Such amortization is reflected
primarily as amortization expense. The unamortized excess was approximately
$162.3 million and $8.3 million as of December 31, 1998 and 1997, respectively,
and such amounts are included within intangibles and equity investments on the
accompanying balance sheet.

  The Partnership periodically evaluates the propriety of the carrying amount of
the excess of cost over fair value of net assets of businesses acquired, as well
as the amortization period, to determine whether current events or circumstances
warrant adjustments to the carrying value and/or revised estimates of useful
lives. At this time, the Partnership believes no such impairment has occurred
and no reduction in estimated useful lives is warranted.

  Revenue Recognition

  Revenues for the pipeline operations are generally recognized based on
delivery of actual volume transported. Bulk terminal 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.

  Environmental Matters

  Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable, and the costs can be
reasonably estimated. Generally, the timing of these accruals coincides with the
completion of a feasibility study or the Partnership's commitment to a formal
plan of action.

  Minority Interest

  Minority interest consists of the approximate 1% general partner interest in
the Operating Partnerships, the 0.5% special limited partner interest in SFPP,
L.P. and the 50% interest in Globalplex Partners, a Louisiana joint venture
owned 50% and controlled by Kinder Morgan Bulk Terminals, Inc.

  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.

  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
determined. In any event, management does not believe that, in the Partnership's
circumstances, the aggregate difference would be meaningful information.

  Net Income Per Unit

  Net Income per Unit was computed by dividing limited partner's interest in net
income by the weighted average number of units outstanding during the period.


                                      F-10
<PAGE>


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


3. Acquisitions and Joint Ventures

  With respect to the following acquisitions and joint ventures, the results of
operations are included in the consolidated financial statements from the
effective date of acquisition.

  Santa Fe

  Kinder Morgan Operating L.P. "D" ("OLP-D"), a Delaware limited partnership,
acquired on March 6, 1998, 99.5% of SFPP, L.P. ("SFPP"), the operating
partnership of Santa Fe Pacific Pipeline Partners, L.P. ("Santa Fe"). The
transaction was accounted for under the purchase method of accounting and was
valued at more than $1.4 billion inclusive of liabilities assumed. The
Partnership acquired the interest of Santa Fe's common unit holders in SFPP in
exchange for approximately 26.6 million units (1.39 units of the Partnership for
each Santa Fe common unit). The Partnership paid $84.4 million to Santa Fe
Pacific Pipelines, Inc. (the "former SF General Partner") in exchange for the
general partner interest in Santa Fe. The $84.4 million was borrowed under the
Credit Facility (see Note 8). Also on March 6, 1998, SFPP redeemed from the
former SF General Partner a 0.5% interest in SFPP for $5.8 million. The
redemption was paid from SFPP's cash reserves. After the redemption, the former
SF General Partner continues to own a .5% special limited partner interest in
SFPP.

  Assets acquired in this transaction comprise the Partnership's Pacific
Operations, which include over 3,300 miles of pipeline and thirteen owned and
operated terminals.

  Shell CO2 Company

  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. ("Shell CO2 Company"), to be operated by a Shell
affiliate. 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. The $25 million
was borrowed under the Credit Facility (see Note 8). The Partnership accounts
for its partnership interest in Shell CO2 Company under the equity method. The
investment is included as part of the Mid-Continent Operations.

  Under the terms of the Shell CO2 Company partnership agreement, the
Partnership will receive a priority distribution of $14.5 million per year
during 1998 through 2001. To the extent the amount paid to the Partnership over
this period is in excess of the Partnership's percentage share (currently 20%)
of Shell CO2 Company's distributable cash flow for such period (discounted at
10%), Shell will receive a priority distribution in equal amounts of such
overpayment during 2002 and 2003.

  Hall-Buck Marine, Inc.

  Effective July 1, 1998, the Partnership acquired Hall-Buck Marine, Inc.
("Hall-Buck") for approximately $100 million. The transaction was accounted for
under the purchase method of accounting. Hall-Buck, headquartered in Sorrento,
Louisiana, is one of the nation's largest independent operators of dry bulk
terminals, operating twenty terminals on the Mississippi River, the Ohio River,
and the Pacific Coast. In addition, Hall-Buck owns all of the common stock of
River Consulting Incorporated, a nationally recognized leader in the design and
construction of bulk material facilities and port related structures.

  The $100 million of consideration consisted of approximately 2.1 million
units and assumed indebtedness of $23 million. After the acquisition, the
Partnership changed the name of Hall-Buck Marine, Inc. to Kinder Morgan Bulk
Terminals, Inc. and accounts for its activity as part of the Bulk Terminals
business segment.

  Pro Forma Information

  The following summarized unaudited Pro Forma Consolidated Income Statement
information for the twelve months ended December 31, 1998 and 1997, assumes the
Partnership's acquisition of SFPP, Hall-Buck and its interest in Shell CO2
Company had occurred as of January 1, 1997. The unaudited Pro Forma financial
results have been prepared for comparative purposes only and may not be
indicative of the results that would have occurred if the Partnership had
acquired the assets of SFPP, Hall-Buck and its interest in Shell CO2 Company on
the dates indicted or which will be attained in the future.


                                      F-11
<PAGE>


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


  Net Income for each of the Pro Forma periods does not include the annualized
effects of all the cost saving measures the company has achieved since its
acquisition of SFPP. Amounts presented below are in thousands, except for per
Common Unit amounts:

                                                        Pro Forma
                                                   Twelve Months Ended
                                                       December 31,
       Income Statement                               1998     1997
                                                   -------------------
        Revenues                                   $395,963   $371,033
        Operating Income                            155,057    135,816
        Net Income before extraordinary charge      126,122     87,997
        Net Income                                  112,511     87,997
        Net Income per unit before extraordinary
         charge                                       $1.89      $1.78
        Net Income per unit                           $1.60      $1.78

  Other Acquisitions

  Cardlock Fuels System, Inc.

  On August 26, 1998, the Partnership signed a series of definitive agreements
to form a joint venture with Cardlock Fuels System, Inc ("CFS"), an affiliate of
Southern Counties Oil Co., for the purpose of constructing unattended, automated
fueling stations adjacent to the Partnership's terminal facilities within its
Pacific Operations. The Partnership will provide the terminal sites, and CFS
will contribute its unattended, automated fueling station expertise including
marketing and electronic transaction processing services. At December 31, 1998,
the joint venture had selected and signed lease agreements for activity at the
Pacific Operations' Bradshaw and Reno terminals. The joint venture has a target
of up to ten sites within the next three years.

  Plantation Pipe Line Company

  On September 15, 1998, the Partnership acquired a 24% interest in Plantation
Pipe Line Company for $110 million. Plantation Pipe Line Company owns and
operates a 3,100 mile pipeline system throughout the southeastern United States
which serves as a common carrier of refined petroleum products to various
metropolitan areas, including Atlanta, Georgia; Charlotte, North Carolina; and
the Washington, D.C. area. The Partnership will account for its investment in
Plantation Pipe Line Company under the equity method of accounting and includes
its activity as part of the Mid-Continent Operations.

  Pier IX and Shipyard River Terminals

  On December 18, 1998, the Partnership acquired the Pier IX Terminal, located
in Newport News, Virginia, and the Shipyard River Terminal, located in
Charleston, South Carolina for $35 million. The Pier IX Terminal has the
capacity to transload approximately 12 million tons of coal annually. It can
store 1.3 million tons of coal on its 30 acre storage site and can blend
multiple coals to meet an individual customer's requirements. In addition, the
Pier IX Terminal operates a cement facility, which has the capacity to transload
over 400,000 tons of cement annually.

  The Shipyard River Terminal is a 52 acre import-export dry and liquid bulk
product handling facility which can transload coal, asphalt, fertilizer and
other aggregates. Annual throughput capacity at Shipyard River Terminal is 2.5
million tons, with ground storage capacity of 250,000 tons.

  The Partnership includes the activities of both terminals as part of the Bulk
Terminals business segment.

4.  Income Taxes

  Certain operations of the Partnership are conducted through wholly-owned
corporate subsidiaries, which are taxable. Income/(Loss) before income tax
expense attributable to corporate operations was $(1.3) million, $2.5 million
and $3.6 million for the years ended December 31, 1998, 1997, and 1996,
respectively. For the periods ended December 31, 1998, 1997, and 1996,
respectively, the provision for income taxes consists of deferred income tax of
$0.0 million, $(1.1) million, and $0.9 million, respectively, and current income
tax of $1.6 million, $0.3

                                      F-12
<PAGE>


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


million and $0.4 million, respectively. The 1998 income tax provision includes
$1.7 million related to the Partnership's share of Plantation Pipe Line
Company's income taxes. The net deferred tax liability of $0.5 million and $2.1
million at December 31, 1998 and 1997, respectively, consists of deferred tax
liabilities of $1.3 million and $4.6 million, respectively, and deferred tax
assets of $0.8 million and $2.5 million, respectively.

  Reconciling items between income tax expense computed at the statutory rate
and actual income tax expense primarily include for the year ended: December 31,
1998, intercompany income and expense items eliminated in the consolidation of
the Partnership, amortization of certain intangibles, a change in estimate of
prior years' provision, former Hall-Buck Marine, Inc. employees' exercise of
stock options prior to acquisition by the Partnership and inclusion of the
Partnership's share of income tax expense from Plantation Pipe Line Company;
December 31, 1997, the effect of a change in estimate of prior years' provision,
a partial liquidating distribution and state income taxes; and December 31,
1996, state income taxes.

5.  Property, Plant and Equipment

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

                                        December 31,
                                    --------------------
                                      1998       1997
                                    ---------   --------
       Pacific Operations          $1,533,741  $       -
       Mid-Continent Operations       187,235    249,092
       Bulk Terminals                 115,743     41,528
                                    ---------   --------
       Total                       $1,836,719  $ 290,620
                                    =========   ========

6.  Equity Investments

  The Partnership's significant equity investments consist of Plantation Pipe
Line Company (24%), Shell CO2 Company (20%), Mont Belvieu Associates (50%),
Colton Transmix Processing Facility (50%) and Heartland Pipeline Company (50%).
Total equity investments consisted of the following (in thousands):

                                                        1998              1997
                                                        ----              ----
                Plantation Pipe Line Company          $109,401          $   -
                Shell CO2 Company                       86,688
                Mont Belvieu Associates                 27,568           27,157
                Colton Transmix Processing Facility      5,187              -
                Heartland Pipeline Company               4,348            4,554
                All Others                               5,416              -   
                                                      --------          -------
                Total                                 $238,608          $31,711
                                                      ========          =======

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

                                             1998         1997           1996
                                             ----         ----           ----
      Plantation Pipe Line Company          $4,421       $  -           $  -
      Shell CO2 Company                     14,500          -              -
      Mont Belvieu Associates                4,577       5,009          4,968
      Colton Transmix Processing Facility      803          -              -
      Heartland Pipeline Company             1,394         715            707
              All Others                        37           -             -
                                           -------      ------         ------
              Total                        $25,732      $5,724         $5,675
                                           =======      ======         ======





                                      F-13
<PAGE>

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


  Summarized combined unaudited financial information for the Partnership's
significant equity investments is reported below (in thousands):

          Income Statement                   1998         1997           1996
                                             ----         ----           ----
             Revenues                      $236,534      $38,299        $31,534
             Earnings before income taxes   110,050       12,259         11,971
             Net income                      87,918       12,259         11,971


                                             1998         1997
                                             ----         ----
             Current assets                $117,582       $7,353
             Non-current Assets             398,073       53,842
             Current liabilities             50,669        4,885
             Non-current liabilities        159,318       11,790
             Partners'/Owners' equity       305,668       44,520

7.  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
$1.0 million of cash flow in 1998 and 1997.

8. Long-Term Debt

  OLP-B

  As of December 31, 1998, OLP-B has outstanding $23.7 million principal amount
of tax exempt bonds due 2024 issued by the Jackson-Union Counties Regional Port
District. Such bonds bear interest at a weekly floating market rate. During
1998, the weighted-average interest rate on these bonds was approximately 3.5%
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, 1999.

  SFPP

  SFPP's long-term debt primarily consists of its Series F first mortgage notes
and a bank credit facility. At December 31, 1998, the outstanding balances under
the Series F notes and bank credit facility were $244.0 million, and $111.0
million, respectively. The annual interest rate on the Series F notes is 10.70%,
the maturity is December 2004, and interest is payable semiannually in June and
December. The Series F notes are payable in annual installments of $31.5 million
in 1999, $32.5 million in 2000, $39.5 million in 2001, $42.5 million in 2002,
and $37.0 million in 2003. The first mortgage notes may also be prepaid
beginning in 1999 in full or in part at a price equal to par plus, in certain
circumstances, a premium. The first mortgage notes are secured by mortgages on
substantially all of the properties of SFPP (the "Mortgaged Property"). The
notes contain certain covenants limiting the amount of additional debt or equity
that may be issued and limiting the amount of cash distributions, investments,
and

                                      F-14
<PAGE>


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


property dispositions. The bank credit facility provides for borrowings of up to
$175 million due in August 2000 and interest, at a short-term Eurodollar rate,
payable quarterly. This bank credit facility is used primarily for financing the
first mortgage notes when due. Borrowings ($111.0 million at December 31, 1998)
under this facility are also secured by the Mortgaged Property and are generally
subject to the same terms and conditions as the first mortgage notes. At
December 31, 1998, the interest rate on the credit facility debt was 5.465%.

  Credit Facilities and Senior Notes

   In February 1998, the Partnership refinanced OLP-A's first mortgage notes and
existing bank credit facilities with a $325 million secured revolving credit
facility ("Credit Facility") expiring in February 2005. On December 1, 1998, the
Credit Facility was amended to release the collateral and the Credit Facility
became unsecured. The Credit Facility had an outstanding balance of $230 million
at December 31, 1998. The Credit Facility provides for principal payments equal
to the amount by which the outstanding balance is in excess of the amount
available, which reduces quarterly commencing in May 2000. The Credit Facility
also provides, at the Partnership's option, a floating interest rate equal to
either the administrative agent's base rate (but not less than the Federal Funds
Rate plus 0.5% per year) or LIBOR plus a margin ranging from .75% to 1.25% per
year based on the Partnership's ratio of Funded Indebtedness to Cash Flow, as
defined in the Credit Facility. The Credit Facility contains certain restrictive
covenants including, but not limited to, the incurrence of additional
indebtedness, the making of investments, and making cash distributions other
than quarterly distributions from available cash as provided by the partnership
agreement. The Partnership has used the proceeds from the Credit Facility to
refinance the existing first mortgage notes of OLP-A, including a prepayment
premium, to fund the cash investments in Shell CO2 Company and Plantation Pipe
Line Company, to refinance the debt associated with the Hall-Buck acquisition,
to fund the acquisition of the general partner interest in Santa Fe (Note 3),
and to fund the acquisition of the Pier IX Terminal and the Shipyard River
Terminal. The prepayment premium and the write-off of the associated unamortized
debt issue costs are reflected as an extraordinary charge in the accompanying
consolidated statement of income.

   On November 6, 1998, the Partnership filed with the SEC a shelf registration
statement with respect to the sale from time to time of up to $600 million in
debt and/or equity securities. On January 29, 1999, the Partnership closed a
public offering of $250 million in principal amount of 6.30% Senior Notes due
February 1, 2009 ("Notes") at a price to the public of 99.67% per Note. In the
offering, the Partnership received proceeds, net of underwriting discounts and
commissions, of approximately $248 million. The proceeds were used to pay the
outstanding balance on the Credit Facility and for working capital and other
proper partnership purposes. The Notes will be guaranteed on a full,
unconditional, and joint and several basis by all of the Partnership's
consolidating subsidiaries (excluding SFPP and the subsidiaries of Kinder Morgan
Bulk Terminals, Inc.) so long as any other debt obligations of the Partnership
are guaranteed by such subsidiaries. SFPP, which was acquired March 6, 1998,
will not be guaranteeing the public debt securities. Kinder Morgan Energy
Partners, L.P., the parent company, has operations from only investments in its
subsidiaries. The following discloses the consolidating financial information
for the Partnership:

                                      F-15
<PAGE>

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



                        CONSOLIDATING STATEMENT OF INCOME
                  FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
                                 (In Thousands)

<TABLE>
<CAPTION>
                                  Kinder Morgan      Combined         Combined
                                      Energy         Guarantor      Nonguarantor    Eliminations and
                                   Partners, LP        Subs.            Subs.        Adjustments     Consolidated
                                  ---------------  --------------   --------------  ---------------  --------------

<S>                             <C>              <C>              <C>             <C>              <C>            
Revenues                        $              - $       101,187  $       221,430 $              - $       322,617

Costs and Expenses
  Cost of products sold                        -           5,860                -                -           5,860
  Operations and maintenance                   -          39,318           25,704                -          65,022
  Fuel and power                               -           6,069           16,316                -          22,385
  Depreciation and amortization                -          12,144           25,177                -          37,321
  General and administrative                   -          11,047           28,937                -          39,984
  Taxes, other than income taxes               -           3,592            8,548                -          12,140
                                  ---------------  --------------   --------------  ---------------  --------------
                                               -          78,030          104,682                -         182,712
                                  ---------------  --------------   --------------  ---------------  --------------

Operating Income                               -          23,157          116,748                -         139,905

Other Income (Expense)
  Earnings from equity investments       103,563         109,355              803         (187,989)         25,732
  Interest, net                               47         (12,365)         (26,282)               -         (38,600)
  Other, net                                   -            (845)          (6,418)               -          (7,263)
Minority Interest                              -             496                -           (1,481)           (985)
                                  ---------------  --------------   --------------  ---------------  --------------

Income Before Taxes and
  Extraordinary charge                   103,610         119,798           84,851         (189,470)        118,789

Income Tax Benefit (Expense)                   -          (1,572)               -                -          (1,572)
                                  ---------------  --------------   --------------  ---------------  --------------

Income Before Extraordinary charge       103,610         118,226           84,851         (189,470)        117,217

Extraordinary charge on early
  extinguishment of debt                      (4)        (13,607)               -                -         (13,611)
                                  ===============  ==============   ==============  ===============  ==============
Net Income                      $        103,606 $       104,619  $        84,851 $       (189,470)$       103,606
                                  ===============  ==============   ==============  ===============  ==============

</TABLE>

  



                                    F-16


<PAGE>

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



                           CONSOLIDATING BALANCE SHEET
                              AT DECEMBER 31, 1998
                                 (In Thousands)

<TABLE>
<CAPTION>
                                      Kinder Morgan     Combined         Combined
                                         Energy         Guarantor      Nonguarantor    Eliminations and
                                      Partners, LP        Subs.           Subs.        Adjustments     Consolidated
                                      -------------   --------------  ---------------  -------------  ---------------
<S>                                 <C>             <C>             <C>              <C>            <C>    
ASSETS
Current Assets
   Cash and cash equivalents        $           93  $        16,980 $         14,662 $            - $         31,735
   Accounts and notes receivable             8,160           27,521           38,089        (29,645)          44,125
   Inventories
     Products                                    -            2,486              415              -            2,901
     Materials and supplies                      -            1,850              790              -            2,640
                                      -------------   --------------  ---------------  -------------  ---------------
                                             8,253           48,837           53,956        (29,645)          81,401
                                      -------------   --------------  ---------------  -------------  ---------------

Prop., Plant and Equip, at cost                  -          302,978        1,533,741              -        1,836,719
   Less accumulated deprec.                      -           46,145           27,188              -           73,333
                                      -------------   --------------  ---------------  -------------  ---------------
                                                 -          256,833        1,506,553              -        1,763,386
                                      -------------   --------------  ---------------  -------------  ---------------

Equity Investments                       1,356,643        1,293,478           10,534     (2,422,047)         238,608
                                      -------------   --------------  ---------------  -------------  ---------------

Intangibles                                      -           58,536                -              -           58,536
Deferred charges and other assets          233,066            5,548            1,958       (230,231)          10,341
                                      =============   ==============  ===============  =============  ===============
TOTAL ASSETS                        $    1,597,962  $     1,663,232 $      1,573,001 $   (2,681,923)$      2,152,272
                                      =============   ==============  ===============  =============  ===============


LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
   Accounts payable
     Trade                          $            -  $         5,737 $          5,953 $            - $         11,690
     Related parties                         7,046           20,950           15,601        (29,645)          13,952
   Accrued liabilities                         253            3,266           14,711              -           18,230
   Accrued benefits                              -            2,172            7,243              -            9,415
   Accrued taxes                                 -              772            3,423              -            4,195
                                      -------------   --------------  ---------------  -------------  ---------------
                                             7,299           32,897           46,931        (29,645)          57,482
                                      -------------   --------------  ---------------  -------------  ---------------

Long-Term Liabilities and Def. Credits
   Long-term debt                          230,000          256,293          355,509       (230,231)         611,571
   Other                                         -            4,921           99,868              -          104,789
                                      -------------   --------------  ---------------  -------------  ---------------
                                           230,000          261,214          455,377       (230,231)         716,360
                                      -------------   --------------  ---------------  -------------  ---------------

Minority Interest                                -           (1,365)               -         19,132           17,767
                                      -------------   --------------  ---------------  -------------  ---------------

Partners' Capital
  Limited Partner Interests                      -        1,356,643                -     (1,356,643)               -
  General Partner Interests                      -                -        1,065,404     (1,065,404)               -
  Special LP Interests                           -                -            5,289         (5,289)               -
  Common Units                           1,348,591                -                -              -        1,348,591
  Kinder Morgan General Partner             12,072           13,843                -        (13,843)          12,072
                                      -------------   --------------  ---------------  -------------  ---------------
                                         1,360,663        1,370,486        1,070,693     (2,441,179)       1,360,663
                                      -------------   --------------  ---------------  -------------  ---------------
                                      =============   ==============  ===============  =============  ===============
TOTAL LIABILITIES AND CAPITAL       $    1,597,962  $     1,663,232 $      1,573,001 $   (2,681,923)$      2,152,272
                                      =============   ==============  ===============  =============  ===============
</TABLE>


                                      F-17

<PAGE>

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


                      CONSOLIDATING STATEMENT OF CASH FLOWS
                  FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
                                 (In Thousands)

<TABLE>
<CAPTION>
                                          Kinder Morgan     Combined       Combined
                                             Energy        Guarantor     Nonguarantor   Eliminations and
                                          Partners, LP       Subs.          Subs.       Adjustments     Consolidated
                                          -------------   -------------  -------------  -------------   -------------
<S>                                     <C>             <C>            <C>            <C>             <C>    
Cash Flows From Operating Activities
Reconciliation of net income to net cash provided by operating activities
 Net income                             $      103,606  $      104,619 $       84,851 $     (189,470) $      103,606
 Extraordinary charge on early
   extinguishment of debt                            4          13,607              -              -          13,611
 Depreciation and amortization                       -          12,144         25,177              -          37,321
 Earnings from equity investments             (103,563)       (109,355)          (803)       187,989         (25,732)
 Distributions from equity investments         118,500         100,308              -       (199,138)         19,670
 Changes in components of working capital
  Accounts receivable                         (193,033)        171,386         (9,682)        32,532           1,203
  Inventories                                        -            (794)            60              -            (734)
  Accounts payable                               6,679          12,267         13,783        (32,532)            197
  Accrued liabilities                              253           1,853        (16,221)             -         (14,115)
  Accrued taxes                                      -          (2,105)           839              -          (1,266)
 El Paso Settlement                                  -               -         (8,000)             -          (8,000)
 Other, net                                        322           9,240         (2,823)         1,481           8,220
Net Cash Provided by (Used in)
                                          -------------   -------------  -------------  -------------   -------------
  Operating Activities                         (67,232)        313,170         87,181       (199,138)        133,981
                                          -------------   -------------  -------------  -------------   -------------

Cash Flows From Investing Activities
 Acquisitions of assets                           (225)       (128,418)        21,499              -        (107,144)
 Adds to prop, plant and equip. for
   expansion and maintenance projects                -         (16,001)       (22,406)             -         (38,407)
 Sale of property, plant and equipment               -              44             20              -              64
 Contributions to equity investments                 -        (145,743)          (491)        10,000        (136,234)
Net Cash Provided by (Used in)
                                          -------------   -------------  -------------  -------------   -------------
  Investing Activities                            (225)       (290,118)        (1,378)        10,000        (281,721)
                                          -------------   -------------  -------------  -------------   -------------

Cash Flows From Financing Activities
 Issuance of debt                              452,000         263,038         32,612       (255,038)        492,612
 Payment of debt                              (222,000)       (157,863)       (32,710)         4,776        (407,797)
 Cost of refinancing long-term debt             (3,160)        (13,608)             -              -         (16,768)
 Proceeds from issuance of common units        212,303               -              -              -         212,303
 Contributions from GP interests                     -          12,349         10,000        (10,000)         12,349
 Distributions to partners                                                                                         -
  Limited Partner Interests                          -        (118,500)             -        118,500               -
  General Partner Interests                          -               -        (80,638)        80,638               -
  Special LP Interests                               -               -           (405)           405               -
  Common Units                                 (93,352)              -              -              -         (93,352)
  Kinder Morgan General Partner                (27,450)         (1,209)             -          1,209         (27,450)
  Minority Interest                                  -               -              -         (1,614)         (1,614)
  Other, net                                  (250,841)            159              -        250,262            (420)
Net Cash Provided by (Used in)
                                          -------------   -------------  -------------  -------------   -------------
  Financing Activities                          67,500         (15,634)       (71,141)       189,138         169,863
                                          -------------   -------------  -------------  -------------   -------------

Incr/(Decr) in Cash and Cash Equivs.                43           7,418         14,662              -          22,123
Cash and Cash Equivs., Beg. of Period               50           9,562              -              -           9,612
                                          =============   =============  =============  =============   =============
Cash and Cash Equivs., End of Period    $           93  $       16,980 $       14,662 $            -  $       31,735
                                          =============   =============  =============  =============   =============

</TABLE>


                                      F-18

<PAGE>

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


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, 1998 and 1997 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, 1998              December 31, 1997
                       -----------------------        ----------------------
                        Carrying    Estimated          Carrying   Estimated
                         Value      Fair Value           Value    Fair Value
                       ---------    ----------        ---------   ----------
                                 (in thousands)
       Long-term debt $  611,571   $  645,873        $ 146,824    $ 158,343

9. Pensions and Other Postretirement Benefits

  In 1998, the Partnership adopted Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits", which revises and standardizes the reporting
requirements for postretirement benefits. However, SFAS No. 132 does not change
the measurement and recognition of those benefits.

  In connection with the acquisition of SFPP and Hall-Buck, the Partnership
acquired certain liabilities for pension and postretirement benefits. The
Partnership has a noncontributory defined benefit pension plan covering the
former employees of Hall-Buck. The benefits under this plan were based primarily
upon years of service and final average pensionable earnings. The Partnership
also provides medical and life insurance benefits to current employees, their
covered dependents and beneficiaries of SFPP and Kinder Morgan Bulk Terminals,
Inc. The Partnership also provides the same benefits to former salaried
employees of SFPP.

  The SFPP postretirement benefit plan is frozen as no additional participants
may join the Plan. The Partnership will continue to fund the cost associated
with those employees currently in the Plan for medical benefits and life
insurance coverage during retirement.

  Net periodic benefit costs for these plans include the following components
(in thousands):

                                                                       Other
                                                                  Postretirement
                                            Pension Benefits         Benefits
                                                 1998                  1998
                                            ----------------      --------------

Net periodic benefit cost

Service cost                                $          98         $        636
Interest cost                                          76                  983
Expected return on plan assets                        (70)                   -
Amortization of prior service cost                      -                 (493)
Actuarial loss (gain)                                   -                 (208)
                                            --------------        -------------

Net periodic benefit cost                   $         104         $        918
                                            ==============        =============

Additional amounts recognized for 1998
Curtailment (gain) loss                     $        (425)        $          -




                                      F-19

<PAGE>

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


  Information concerning benefit obligations, plan assets, funded status and
recorded values for these plans follows (in thousands):


                                                                    Other
                                                                Postretirement
                                            Pension Benefits       Benefits
                                                 1998                1998
                                            ---------------      --------------


Change in benefit obligation

Benefit obligation at January 1, 1998       $            -       $           -
Service cost                                            98                 636
Interest cost                                           76                 983
Plan participants' contributions                         -                 117
Actuarial loss                                           -                 529
Acqusitions                                          2,201              13,039
Curtailment (gain)                                    (425)                  -
Benefits paid from plan assets                         (88)               (570)
                                            ---------------      --------------

Benefit obligation at December 31, 1998     $        1,862       $      14,734
                                            ===============      ==============


Change in Plan Assets

Fair value of plan assets at January 1,
 1998                                       $            -       $           -
Actual return on plan assets                           136                   -
Acqusitions                                          1,628                   -
Employer contributions                                 157                 453
Plan participants' contributions                         -                 117
Benefits paid from plan assets                         (88)               (570)
                                            ---------------      --------------

Fair value of plan assets at December 31,
 1998                                       $        1,833       $           -
                                            ===============      ==============


Funded status                               $          (29)      $     (14,734)
Unrecognized net transition obligation                   3                   -
Unrecognized net actuarial (gain)                     (187)             (1,831)
Unrecognized prior service (benefit)                     -              (2,270)
                                            ---------------      --------------

(Accrued) benefit cost                      $         (213)      $     (18,835)
                                            ===============      ==============


Weighted-Average assumptions at December 31, 1998

Discount rate                                         7.0%                7.0%
Expected return on plan assets                        8.5%                   -
Rate of compensation increase                         4.0%                4.0%


  The unrecognized prior service credit will be amortized straight-line over the
remaining expected service to retirement (5.6 years). For 1998, the assumed
health care cost trend rate for medical costs was 9% and is assumed to decrease
gradually to 5% by 2005 and remain constant thereafter.

                                      F-20
<PAGE>


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


  A one-percentage change in assumed health care cost trend rates would have the
following effects (in thousands):


                                                                      Other
                                                                  Postretirement
                                                                     Benefits
                                                                       1998
                                                                  --------------
Effect on total of service and interest cost components
1-Percentage point increase                                       $         103
1-Percentage point decrease                                       $         (93)

Effect on postretirement benefit obligation
1-Percentage point increase                                       $       1,655
1-Percentage point decrease                                       $      (1,490)


  Multiemployer Plans and Other Benefits. With the acquisition of Hall-Buck, the
Partnership participates in multi-employer pension plans for the benefit of its
employees who are union members. Partnership contributions to these plans were
$0.6 million from the period of acquisition through December 31, 1998. These
plans are not administered by the Partnership and contributions are determined
in accordance with the provisions of negotiated labor contracts. Other benefits
include a self-insured health and welfare insurance plan and an employee health
plan where employees may contribute for their dependents' health care costs.
Amounts charged to expense for these plans were $0.5 million from the period of
acquisition through December 31, 1998.

  The Partnership terminated the Employee Stock ownership Plan (the "ESOP") held
by Hall-Buck for the benefit of its employees on August 13, 1998. All
participants became fully vested retroactive to July 1, 1998, the effective date
of the acquisition. The assets remaining in the plan will be distributed during
1999.

  The Partnership assumed River Consulting, Inc.'s (a consolidating affiliate of
Hall-Buck Marine, Inc.), savings plan under Section 401(k) of the Internal
Revenue Code. This savings plan allowed eligible employees to contribute up to
10 percent of their compensation on a pre-tax basis, with the Partnership
matching 2.5 percent of the first 5 percent of the employees' wage. Matching
contributions are vested at the time of eligibility, which is one year after
employment. Effective January 1, 1999, this savings plan was merged into the
retirement savings plan of the general partner.

10.     Partners' Capital

   At December 31, 1998, Partners' capital consisted of 47,959,690 units held by
third parties and 862,000 units held by the general partner. Together, these
48,821,690 units represent the limited partners' interest and an effective 98%
interest in the Partnership, excluding the general partner's incentive
distribution. At December 31, 1997 and 1996 there were 14,111,200 and 13,020,000
units outstanding, respectively. The general partner interest represents an
effective 2% interest in the Partnership, excluding the general partner's
incentive distribution. 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. In addition to the units issued for the
acquisition of SFPP and Hall-Buck (see Note 3), the Partnership issued 6,070,578
units in June 1998 related to a primary public offering.

  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 the years ended December 31, 1998 and 1997, the Partnership
distributed $2.4725 and $1.8775, respectively, per unit. The distributions for
1998 and 1997 required incentive distributions to the general partner in the
amount of $32,737,571 and $3,935,852, respectively. The increased incentive
distribution paid for 1998 over 1997 reflects the increase in amount distributed
per unit as well as the issuance of additional units in 1998.


                                      F-21
<PAGE>


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


  On January 13, 1999, the Partnership declared a cash distribution for the
quarterly period ended December 31, 1998, of $0.65 per unit. The distribution
was paid on February 12, 1999, to unitholders of record as of January 29, 1999,
and required an incentive distribution to the general partner of $10,717,464.
Since this distribution was declared after the end of the quarter, no amount is
shown in the December 31, 1998 balance sheet as a Distribution Payable.

11.  Concentrations of Credit Risk

  Four customers of the Partnership each accounted for over 10% of consolidated
revenues for 1998. In 1997, only one customer accounted for more than 10% of
consolidated revenues. See Note 14 for more information on major customers.
Additionally, a 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.

12.  Related Party Transactions

  Revenues and Expenses

  Revenues for the year ended December 31, 1996 include transportation charges
and product sales to an Enron subsidiary, Enron Gas Liquids, Inc., of $7.7
million. 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
for the year ended December 31, 1996. Management believes that these charges
were reasonable. As a result of KMI's acquisition of all of the common stock of
the general partner, Enron and its affiliates are no longer affiliates of the
Partnership.

  The Partnership leases 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, 1998, 1997
and 1996.

  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. Such reimbursement
was made pursuant to the terms of the Omnibus Agreement executed among Enron,
the Partnership and the general partner at the time of formation of the
Partnership. For the year ended December 31, 1996, the amounts reimbursed to
Enron were $5.8 million.

  After the sale of the general partner, 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. The general partner incurred $38.0 million in
general and administrative expenses in 1998 and $6.9 million in general and
administrative expenses in 1997.

  Partnership Distributions

  Kinder Morgan G.P., Inc. (the "general partner") serves as the sole general
partner of the four 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,
excluding incentive distributions; 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.

                                      F-22
<PAGE>



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


  At December 31, 1998, the general partner owned 862,000 units, representing
approximately 1.8% of the outstanding 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, net additions to reserves,
and amounts payable to the former Santa Fe General Partner in respect of its
0.5% interest in SFPP, L.P.

  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 declared incentive distributions for the
years ended December 31, 1998, 1997, and 1996 were $32,737,571, $3,935,852 and
$100,571, respectively.

13.  Leases and Commitments

  The Partnership has entered into certain operating leases. Including probable
elections to exercise renewal options, the leases have remaining terms ranging
from one to forty-five years. Future commitments related to these leases at
December 31, 1998 are as follows (in thousands):

                             1999              $   4,886
                             2000                  3,951
                             2001                  3,781
                             2002                  4,209
                             2003                  4,052
                          Thereafter              31,924
                                                 --------
                       Total minimum payments  $  52,803
                                                 ========

  Total minimum payments have not been reduced for future minimum sublease
rentals aggregating approximately $3.2 million. Total lease expenses, including
related variable charges, incurred for the years ended December 31, 1998, 1997,
and 1996 were $3.7 million, $1.3 million and $1.5 million, respectively.

  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 $2.0 million per contract year to
an unaffiliated pipeline company subject to certain adjustments. This agreement
expires March 1, 2013, but provides for a five-year extension at the option of
the Partnership.

  During 1998, the Partnership established a unit option plan, which provides
that key personnel are eligible to receive grants of options to acquire units.
The number of units available under the option plan is 250,000. The option plan
terminates in March 2008. As of December 31, 1998, 194,500 options were granted
to certain personnel with a term of seven years at exercise prices equal to the
market price of the units at the grant date ($34.56 weighted average price). In
addition, 10,000 options were granted to non-employee directors of the
Partnership. The options granted generally vest forty percent in the first year
and twenty percent each year thereafter.

  The Partnership applies Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for unit options granted under the
Partnership's option plan.  Pro forma information regarding
changes in net income and per unit data if the accounting
prescribed by Statement

                                      F-23
<PAGE>


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


of Financial Accounting Standards No.123 "Accounting for Stock Based
Compensation," had been applied is not material. No compensation expense has
been recorded since the options were granted at exercise prices equal to the
market prices at the date of grant.

  During 1997, the Partnership established an Executive Compensation Plan for
certain executive officers of the general partner. The Partnership may, at its
option and with the approval of the unitholders, pay the participants in units
instead of cash. Eligible awards are equal to a formula based upon the cash
distributions paid to the general partner during the four calendar quarters
preceding the date of redemption multiplied by eight (the "Calculated Amount").
Calculated amounts are accrued as compensation expense and adjusted quarterly.
Under the plan, no eligible employee may receive a grant in excess of 2% and
total awards under the Plan may not exceed 10% of the Calculated Amount. The
plan terminates January 1, 2007, and any unredeemed awards will be automatically
redeemed.

  At December 31, 1998, certain executive officers of the general partner had
outstanding awards totaling 2% of the Calculated Amount eligible to be granted
under the Plan. On January 4, 1999 (subsequent to year end) 50% of the awards
granted to these executive officers were vested and paid out. Each participant
continues to have a grant of 1% under the plan.

14.  Reportable Segments

  The Partnership has adopted SFAS No. 131 -- "Disclosures About Segments of an
Enterprise and Related Information". The Partnership competes in three
reportable business segments: Pacific Operations, Mid-Continent Operations and
Bulk Terminals (see Note 1). 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,
unallocable non-affiliated interest income and expense, and minority interest.
The Partnership's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
segment involves different products and marketing strategies.
  Financial information by segment follows (in thousands):

                                        1998            1997            1996
                                   -------------  ---------------  -------------
Revenues
   Pacific Operations             $     221,430  $             -  $           -
   Mid-Continent Operations              38,271           55,777         63,191
   Bulk Terminals                        62,916           18,155          8,059
                                   =============  ===============  =============
   Total Segments                 $     322,617  $        73,932  $      71,250
                                   =============  ===============  =============
                                                                  
Operating Income                                                  
   Pacific Operations             $     145,685  $             -  $           -
   Mid-Continent Operations              13,632           22,389         21,804
   Bulk Terminals                        20,572           10,709          4,401
                                   =============  ===============  =============
   Total Segments                 $     179,889  $        33,098  $      26,205
                                   =============  ===============  =============
                                                                  
Earnings from equity investments                                  
   Pacific Operations             $         803  $             -  $           -
   Mid-Continent Operations              24,892            5,724          5,675
   Bulk Terminals                            37                -              -
                                   =============  ===============  =============
   Total Segments                 $      25,732  $         5,724  $       5,675
                                   =============  ===============  =============
                                                                  
                                                                  
                                      F-24                        
<PAGE>                                                            


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


                                       1998            1997            1996
                                   -------------  ---------------  -------------
Other, net                                                        
   Pacific Operations             $      (6,418) $             -  $           -
   Mid-Continent Operations                 (80)            (707)         2,605
   Bulk Terminals                          (765)              (1)            21
                                   =============  ===============  =============
   Total Segments                 $      (7,263) $          (708) $       2,626
                                   =============  ===============  =============
                                                                  
Income tax benefit (expense)                                      
   Pacific Operations             $           -  $             -  $           -
   Mid-Continent Operations                (972)             740         (1,343)
   Bulk Terminals                          (600)               -              -
                                   =============  ===============  =============
   Total Segments                 $      (1,572) $           740  $      (1,343)
                                   =============  ===============  =============
                                                                  
Segment earnings                                                  
   Pacific Operations             $     140,070  $             -  $           -
   Mid-Continent Operations              37,156           27,482         28,741
   Bulk Terminals                        19,244           10,708          4,422
                                   =============  ===============  =============
   Total Segments (1)             $     196,470  $        38,190  $      33,163
                                   =============  ===============  =============
                                                                  
Assets at December 31                                             
   Pacific Operations             $   1,549,523  $             -  $           -
   Mid-Continent Operations             381,881          254,084        255,679
   Bulk Terminals                       186,298           54,710         33,625
                                   =============  ===============  =============
   Total Segments (2)             $   2,117,702  $       308,794  $     289,304
                                   =============  ===============  =============
                                                                  
Depreciation and amortization                                     
   Pacific Operations             $      25,177  $             -  $           -
   Mid-Continent Operations               8,274            9,009          8,542
   Bulk Terminals                         3,870            1,058          1,366
                                   =============  ===============  =============
   Total Segments                 $      37,321  $        10,067  $       9,908
                                   =============  ===============  =============
                                                                  
Capital expenditures                                              
   Pacific Operations             $      23,925  $             -  $           -
   Mid-Continent Operations               4,531            4,310          7,969
   Bulk Terminals                         9,951            2,574            606
                                   =============  ===============  =============
   Total Segments                 $      38,407  $         6,884  $       8,575
                                   =============  ===============  =============
                                                                  
                                                                  
(1)  The following reconciles segment earnings to net income.    
                                        1998            1997            1996
                                   -------------  ---------------  -------------
Segment earnings                  $     196,470  $        38,190  $      33,163
Interest and corporate                                            
   administrative expenses (a)          (92,864)         (20,453)       (21,263)
                                   =============  ===============  =============
Net Income                        $     103,606  $        17,737  $      11,900
                                   =============  ===============  =============
(a)  Includes interest and debt expense, general and administrative expenses,
minority interest expense and other insignificant items.


(2)  The following reconciles segment assets to consolidated assets.
                                        1998            1997            1996
                                    ------------  ---------------  -------------
Segment assets                    $   2,117,702  $       308,794  $     289,304
Corporate assets (a)                     34,570            4,112         14,299
                                    ============  ===============  =============
Total assets                      $   2,152,272  $       312,906  $     303,603
                                    ============  ===============  =============
(a)  Includes cash, cash equivalents and certain unallocable deferred charges.

                                      F-25

<PAGE>


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


  Although the Partnership's 1998 revenues were derived from a wide customer
base, revenues from one customer of the Partnership's Pacific Operations and
Bulk Terminals segments represented approximately $42.5 million (13.2%) of the
Partnership's consolidated revenues. Three other customers of the Pacific
Operations accounted for more than 10% of total revenues. These customers had
revenues of approximately $39.7 million (12.3%), $35.29 million (11.0%) and
$35.28 million (10.9%), respectively, of total revenues. For the year ended
December 31, 1997, revenues from one customer of the Mid-Continent Operations
segment represented approximately $8.8 million (11.9%) of total revenues. For
the year ended December 31, 1996, revenues from two customers of the
Mid-Continent Operations segment represented approximately $8.9 million (12.4%)
and $7.4 million (10.4%), respectively, of total revenues.

15.  Litigation and Other Contingencies

  The tariffs charged for interstate common carrier pipeline transportation for
the Partnership's pipelines are subject to rate regulation by the Federal Energy
Regulatory Commission ("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, 1998, 1997, and 1996, the application of
the indexing methodology did not significantly affect the Partnership's rates.
Tariffs charged by SFPP are subject to certain proceedings involving shippers'
protests regarding the interstate rates, as well as practices and the
jurisdictional nature of certain facilities and services on the Pacific
Operations' pipeline systems.

  FERC Proceedings

  In September 1992, El Paso Refinery, L.P. ("El Paso") filed a
protest/complaint with the 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, filed
separate complaints, and/or 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 was charged in violation of the Interstate
Commerce Act. In subsequent procedural rulings, the FERC 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 ("EPACT"). 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 was subject to FERC jurisdiction and ordered that a tariff
for that

                                      F-26
<PAGE>


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


service and supporting cost of service documentation be filed no later than 60
days after a final FERC order on this matter.

  As of December 31, 1998, the matters at issue were pending before the FERC
commissioners for a final decision. On January 13, 1999, the FERC issued its
Opinion No. 435, which affirmed in part and modified in part the Initial
Decision. In Opinion No. 435, the FERC ruled that all but one of the West Line
rates are "grandfathered" as just and reasonable and that "changed
circumstances" had not been shown to satisfy the complainants' threshold burden
necessary to challenge those rates. The FERC further held that the one
"non-grandfathered" West Line tariff did not require rate reduction.
Accordingly, all complaints against the West Line rates were dismissed without
any requirement that SFPP reduce, or pay any reparations for, any West Line
rate.

  With respect to the East Line rates, Opinion No. 435 reversed in part and
affirmed in part the Initial Decision's ruling regarding the methodology of
calculating the rate base for the East Line. Among other things, Opinion No. 435
modified the Initial Decision concerning the date in reference to which the
starting rate base would be calculated and the income tax allowance and
allowable cost of equity used to calculate the rate base. In addition, Opinion
No. 435 ruled that no reparations would be owed to any complainant for any
period prior to the date on which that complainant's complaint was filed, thus
reducing the potential reparations period for most complainants by two years. On
January 19, 1999, ARCO Products Company filed a petition with the United States
Court of Appeals for the District of Columbia circuit for review of Opinion No.
435. SFPP has not yet determined if it will seek rehearing or appellate review
of Opinion No. 435. The Partnership believes Opinion No. 435 substantially
reduces the negative impact of the Initial Decision.

  In December 1995, Texaco filed an additional FERC complaint, which involves
the question of whether a tariff filing was 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 parties completed the filing of final post-hearing briefs on January 31,
1997.

  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 ruled 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, 1997 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. SFPP's
application has been set for hearing before a FERC Administrative Law Judge.

  On October 22, 1997, ARCO Products Company, Mobil Oil Corporation and Texaco
Refining and Marketing, Inc. filed another complaint at the FERC (Docket No.
OR98-1-000) challenging the justness and reasonableness of all of SFPP's
interstate rates. The 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 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

                                      F-27
<PAGE>


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


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. In a companion order to Opinion No. 435, the
FERC directed the complainants to amend their complaints, as may be appropriate,
consistent with the terms and conditions of its orders, including Opinion No.
435.

  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 from 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.

  California Public Utilities Commission Proceeding

  A complaint was filed with the California Public Utilities Commission on April
7, 1997 by ARCO Products Company, Mobil Oil Corporation and Texaco Refining and
Marketing Inc. against 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 arguments were made in March 1998, and on June 18, 1998, a California
Public Utilities Commission ("CPUC") Administrative Law Judge issued a ruling in
the Partnership's favor and dismissed the complaints. On August 6, 1998, the
CPUC affirmed the Judge's decision. The shippers have appealed the CPUC's
decision to the California Supreme Court. The Partnership believes it has
adequate reserves recorded for any adverse decision related to this matter.

  SPTC Easements

  SFPP and Southern Pacific Transportation Company ("SPTC") are engaged in a
judicial reference proceeding to determine the extent, if any, to which the rent
payable by SFPP for the use of pipeline easements on rights-of-way held by SPTC
should be adjusted pursuant to existing contractual arrangements (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 accrued by SFPP through December 31,
1998.

  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

                                      F-28
<PAGE>


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


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. SPTC
and SFPP filed motions of appeal in July and August 1997, respectively. The case
is currently pending before the Court of Appeals for the First Appellate
District of the State of California. The Partnership believes it has adequate
reserves recorded for any adverse decision related to this matter.

  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. The operations of the Partnership
are also subject to Federal, state and local laws and regulations relating to
protection of the environment. Although the Partnership believes its operations
are in general compliance with applicable environmental regulations, risks of
additional costs and liabilities are inherent in pipeline and terminal
operations, and there can be no assurance significant costs and liabilities will
not be incurred by the Partnership. Moreover, it is possible that other
developments, such as increasingly stringent environmental laws, regulations and
enforcement policies thereunder, and claims for damages to property or persons
resulting from the operations of the Partnership, could result in substantial
costs and liabilities to the Partnership.

  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 Partnership has recorded a reserve for environmental claims in the
amount of $26.1 million at December 31, 1998.

  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.

  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.



                                      F-29



<PAGE>


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


16.  Quarterly Financial Data (unaudited)

                          Operating     Operating                  Net Income
                           Revenues       Income    Net Income      per Unit
                                  (In thousands, except per unit amounts)       
     ---------------------------------------------------------------------------

1998
  First Quarter (1)        $36,741      $15,091       $353          $(0.12)
  Second Quarter            82,044       39,371     30,313            0.50
  Third Quarter            101,900       41,623     35,116            0.52
  Fourth Quarter           101,932       43,820     37,824            0.55


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


(1) Note: 1998 First Quarter includes an extraordinary charge of $13,611 due to
  an early extinguishment of debt. Net Income before extraordinary charge was
  $13,964 and Net Income per Unit before extraordinary charge was $0.52.


                                      F-30
<PAGE>


                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrants  have duly caused this report to be signed
on their behalf by the undersigned,  thereunto duly  authorized  on the 15th day
of March 1999.

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


                       By: /s/ William V. Morgan
                          ____________________________________________
                          William V. Morgan,
                          Vice Chairman and President

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


                       By: /s/ William V. Morgan
                          _____________________________________________
                          William V. Morgan,
                          Vice Chairman and President

                       KINDER MORGAN OPERATING L.P. "B"
                       (A Delaware Limited Partnership)
                       By: KINDER MORGAN G.P., INC.
                       as General Partner

                       By: /s/ William V. Morgan
                          _____________________________________________
                          William V. Morgan,
                          Vice Chairman and President

                       KINDER MORGAN OPERATING L.P. "C"
                       (A Delaware Limited Partnership)
                       By: KINDER MORGAN G.P., INC.
                       as General Partner

                       By: /s/ William V. Morgan
                          _____________________________________________
                          William V. Morgan,
                          Vice Chairman and President

                       KINDER MORGAN OPERATING L.P. "D"
                       (A Delaware Limited Partnership)
                       By: KINDER MORGAN G.P., INC.
                       as General Partner

                       By: /s/ William V. Morgan
                          _____________________________________________
                          William V. Morgan,
                          Vice Chairman and President


                                      S-1
<PAGE>


                       KINDER MORGAN NATURAL GAS LIQUIDS CORPORATION
                       (A Delaware Corporation)

                       By: /s/ William V. Morgan
                          _____________________________________________ 
                          William V. Morgan,
                          President

                       KINDER MORGAN CO2, LLC
                       (A Delaware Limited Liability Company)
                       By: KINDER MORGAN OPERATING L.P. "A"
                       As sole Member
                       By: KINDER MORGAN G.P., INC.
                       as General Partner

                       By: /s/ William V. Morgan
                          ______________________________________________
                          William V. Morgan,
                          Vice Chairman and President

                       KINDER MORGAN BULK TERMINALS, INC.
                       (A Louisiana Corporation)

                       By: /s/ William V. Morgan
                          ______________________________________________
                          William V. Morgan,
                          Vice Chairman


    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.

                     KINDER MORGAN G.P., INC.
   (General Partner to Kinder Morgan Operating L.P. "A," General
  Partner to Kinder Morgan Operating L.P. "B," General Partner to
    Kinder Morgan Operating L.P. "C," General Partner to Kinder
 Morgan Operating L.P. "D," and Kinder Morgan Operating L.P. "A"as
            the sole Member of Kinder Morgan CO2, LLC.)

    Name                        Title                                 Date
    ----                        -----                                 ----

/s/ Richard D. Kinder
_________________       Chairman of the Board and Chief           March 15, 1999
Richard D. Kinder       Executive Officer of Kinder Morgan G.P.,
                        Inc.

/s/ William V. Morgan
_________________       Director, Vice Chairman and President     March 15, 1999
William V. Morgan       of Kinder Morgan G.P., Inc.

/s/ Alan L. Atterbury
_________________       Director of Kinder Morgan G.P., Inc.      March 15, 1999
Alan L. Atterbury

/s/ Edward O. Gaylord
_________________       Director of Kinder Morgan G.P., Inc.      March 15, 1999
Edward O. Gaylord


/s/ David G. Dehaemers, Jr.

_________________       Vice President, Chief Financial Officer   March 15, 1999
David G. Dehaemers, Jr. of Kinder Morgan G.P., Inc. (principal
                        financial officer and principal
                        accounting officer)




                                      S-2
<PAGE>


                  KINDER MORGAN NATURAL GAS LIQUIDS CORPORATION

    Name                        Title                                 Date
    ----                        -----                                 ----

/s/ Richard D. Kinder
_________________       Director and Chief Executive Officer of   March 15, 1999
Richard D. Kinder       Kinder Morgan Natural Gas Liquids
                        Corporation

/s/ William V. Morgan
_________________       Director and President of                 March 15, 1999
William V. Morgan       Kinder Morgan Natural Gas Liquids
                        Corporation

/s/ David G. Dehaemers, Jr.

_________________       Chief Financial Officer of Kinder         March 15, 1999
David G. Dehaemers, Jr. Morgan Natural Gas Liquids Corporation
                        (principal financial officer and
                        principal accounting officer)


                       KINDER MORGAN BULK TERMINALS, INC.

    Name                        Title                                 Date
    ----                        -----                                 ----

/s/ Richard D. Kinder
__________________      Director and Chairman of                  March 15, 1999
Richard D. Kinder       Kinder Morgan Bulk Terminals, Inc.

/s/ William V. Morgan
__________________      Director and Vice Chairman of             March 15, 1999
William V. Morgan       Kinder Morgan Bulk Terminals, Inc.

/s/ Thomas B. Stanley
__________________      President of Kinder Morgan Bulk           March 15, 1999
Thomas B. Stanley       Terminals, Inc. (chief executive
                        officer)

/s/ David G. Dehaemers, Jr.

__________________      Treasurer of Kinder Morgan Bulk
David G. Dehaemers, Jr. Terminals, Inc. (principal financial      March 15, 1999
                        officer and principal accounting
                        officer)