-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NFPb4lb7TIQJJfZJJDQed7Phzjf2a/J7Y22IqYEAr9vvU6EBmCDqoctdNYb1lXtL yfDdoMw0igU6omypHUCONg== 0000950129-01-500165.txt : 20010430 0000950129-01-500165.hdr.sgml : 20010430 ACCESSION NUMBER: 0000950129-01-500165 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 15 REFERENCES 429: 333-55868 FILED AS OF DATE: 20010427 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KINDER MORGAN INC CENTRAL INDEX KEY: 0000054502 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 480290000 STATE OF INCORPORATION: KS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-55866 FILM NUMBER: 1612562 BUSINESS ADDRESS: STREET 1: 500 DALLAS STREET 2: SUITE 1000 CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 3039144752 MAIL ADDRESS: STREET 1: 500 DALLAS STREET 2: SUITE 1000 CITY: HUSTON STATE: TX ZIP: 77002 FORMER COMPANY: FORMER CONFORMED NAME: K N ENERGY INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: KN ENERGY INC DATE OF NAME CHANGE: 19920430 FORMER COMPANY: FORMER CONFORMED NAME: KANSAS NEBRASKA NATURAL GAS CO INC DATE OF NAME CHANGE: 19830403 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KINDER MORGAN ENERGY PARTNERS L P CENTRAL INDEX KEY: 0000888228 STANDARD INDUSTRIAL CLASSIFICATION: PIPE LINES (NO NATURAL GAS) [4610] IRS NUMBER: 760380342 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-55866-01 FILM NUMBER: 1612563 BUSINESS ADDRESS: STREET 1: 500 DALLAS ST SUITE 1000 CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7138449500 MAIL ADDRESS: STREET 1: 370 VAN GORDON STREET STREET 2: 2600 GRAND AVENUE CITY: LAKEWOOD STATE: CO ZIP: 80228-8304 FORMER COMPANY: FORMER CONFORMED NAME: ENRON LIQUIDS PIPELINE L P DATE OF NAME CHANGE: 19970304 S-3/A 1 h84143a2s-3a.txt KINDER MORGAN INC - AMEND.NO.2 - REG NO.333-55866 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 27, 2001 REGISTRATION NO. 333-55868 REGISTRATION NO. 333-55866 REGISTRATION NO. 333-55866 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ AMENDMENT NO. 2 TO
FORM S-1 FORM S-3 KINDER MORGAN MANAGEMENT, LLC KINDER MORGAN, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED KINDER MORGAN ENERGY PARTNERS, L.P. IN CHARTER) (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) DELAWARE (STATE OR OTHER JURISDICTION OF KANSAS INCORPORATION OR ORGANIZATION) DELAWARE (STATE OR OTHER JURISDICTION OF 76-0669886 INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER) 48-0290000 4610 76-0380342 (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION CLASSIFICATION CODE NUMBER) NUMBER) 4923 4610 (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
ONE ALLEN CENTER, SUITE 1000 500 DALLAS STREET HOUSTON, TEXAS 77002 (713) 369-9000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF EACH REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) JOSEPH LISTENGART ONE ALLEN CENTER, SUITE 1000 500 DALLAS STREET HOUSTON, TEXAS 77002 (713) 369-9000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ Please send copies of communications to: GARY W. ORLOFF MIKE ROSENWASSER BRACEWELL & PATTERSON, L.L.P. VINSON & ELKINS L.L.P. 711 LOUISIANA STREET, SUITE 2900 666 FIFTH AVENUE HOUSTON, TX 77002-2781 NEW YORK, NY 10103 (713) 221-1306 (917) 206-8000 (713) 221-2166 (FAX) (917) 206-8100 (FAX)
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this registration statement becomes effective. ------------------------ If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE SECURITIES TO BE REGISTERED OFFERING PRICE(1) AMOUNT OF REGISTRATION FEE(6) - ------------------------------------------------------------------------------------------------------------------------- 10,350,000 Shares representing limited liability company interests(2).............................................. i-units(3)(4)............................................... Exchange Feature(5)......................................... $625,887,500 $156,472 Purchase Obligation(5)...................................... Common Units(3)............................................. - ------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------
(1)Determined by adding (a) the $586,500,000 aggregate offering price of the 9,775,000 Shares for which a fee was previously paid, to (b) the $39,387,500 aggregate offering price of an additional 575,000 Shares to be registered. Based on the average of the high and low price of the Common Units on the NYSE on April 23, 2001. Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a), (i), (n) and (o) of the Securities Act of 1933, as amended. (2)To be issued by Kinder Morgan Management, LLC. (3)To be issued by Kinder Morgan Energy Partners, L.P. (4)The i-units are being registered solely due to the "co-registrant" status of Kinder Morgan Energy Partners, L.P. (5)To be issued by Kinder Morgan, Inc. (6)$146,625 of this fee has been previously paid with respect to 9,775,000 Shares. THE REGISTRANTS HEREBY AMEND THESE REGISTRATION STATEMENTS ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY THEIR EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THESE REGISTRATION STATEMENTS SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THESE REGISTRATION STATEMENTS SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 EXPLANATORY NOTE This registration statement contains a prospectus to be used in connection with the offer and sale of Kinder Morgan Management, LLC shares. This registration statement also registers: - the deemed offer and sale by Kinder Morgan Energy Partners, L.P. of i-units to be acquired by Kinder Morgan Management, LLC with most of the net proceeds of the offering of its shares, pursuant to Rule 140 of the Securities Act of 1933, as amended; - the obligation of Kinder Morgan, Inc. to deliver common units of Kinder Morgan Energy Partners, L.P. to owners of shares of Kinder Morgan Management, LLC in exchange for their shares pursuant to the terms of an agreement between Kinder Morgan, Inc. and Kinder Morgan Management, LLC, for itself and for the express benefit of the owners of its shares; - the delivery by Kinder Morgan, Inc. of the common units of Kinder Morgan Energy Partners, L.P. pursuant to the exchange feature; and - the obligation of Kinder Morgan, Inc. to purchase shares of Kinder Morgan Management, LLC under specified circumstances pursuant to the terms of an agreement between Kinder Morgan, Inc. and Kinder Morgan Management, LLC, for itself and for the express benefit of the owners of its shares. 3 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ARE EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION. DATED APRIL 27, 2001 9,000,000 SHARES REPRESENTING LIMITED LIABILITY COMPANY INTERESTS [KINDER MORGAN MANAGEMENT, LLC LOGO] ---------------------- This is an initial public offering of our shares representing limited liability company interests, a class of our equity with limited voting rights. We are offering 9,000,000 of our shares through the underwriters named below, including 900,000 shares to be offered to our affiliate, Kinder Morgan, Inc. We are a recently formed limited liability company that has elected to be treated as a corporation for United States income tax purposes. We will manage and control the business and affairs of Kinder Morgan Energy Partners, L.P. and will use substantially all of the proceeds of this offering to acquire limited partner interests, referred to as i-units, in Kinder Morgan Energy Partners, L.P. When Kinder Morgan Energy Partners, L.P. makes distributions on its common units, we will make distributions on our shares in the form of additional shares. As an owner of our shares, you will receive that number of additional shares equal to the amount of cash distributions you would have received had you owned Kinder Morgan Energy Partners, L.P. common units divided by the average market price of our shares. On April 18, 2001, Kinder Morgan Energy Partners, L.P. announced an increase in its quarterly distribution for the first quarter of 2001 to $1.05 per common unit, or $4.20 per common unit on an annualized basis. Kinder Morgan, Inc. has agreed that at any time after the 45th day following the closing of this offering, owners of our shares may exchange each of their shares for a common unit of Kinder Morgan Energy Partners, L.P. owned by Kinder Morgan, Inc. and its affiliates. This exchange feature is subject to Kinder Morgan, Inc.'s right to settle the exchange in cash rather than in common units. Prior to this offering, there has been no public market for our shares. We expect our shares to be offered at a price within approximately 5% of the last reported sales price of Kinder Morgan Energy Partners, L.P. common units on the New York Stock Exchange prior to the determination of the offering price. The common units trade on the NYSE under the symbol "KMP". The last reported sales price of the common units on the NYSE on April 26, 2001 was $70.00 per common unit. We have applied to have our shares listed for trading on the NYSE under the symbol "KMR". INVESTING IN THE SHARES OR IN THE COMMON UNITS FOR WHICH THEY MAY BE EXCHANGED INVOLVES RISK. A DISCUSSION OF RISK FACTORS BEGINS ON PAGE 20. These risks include the following: - Our success will be dependent upon our operation and management of Kinder Morgan Energy Partners, L.P. and its resulting performance. - Our management may have different interests than you and may not always conduct our business as you would wish. - As an owner of shares, you will have limited voting rights and therefore will have little opportunity to influence or change our management. - Your shares are subject to mandatory and optional purchase provisions which could result in your having to sell your shares at a time or price which you do not like. - The fiduciary duties owed by our board of directors to our shareholders and the fiduciary duties of the general partner of Kinder Morgan Energy Partners, L.P. to its unitholders have been restricted or eliminated. ---------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ----------------------
PER SHARE TOTAL --------- ----- Initial public offering price............................... $ $ Underwriting discount(1).................................... $ $ Proceeds, before expenses, to Kinder Morgan Management, $ $ LLC ......................................................
- --------------- (1) The underwriters will receive no discount or commission on the sale of 900,000 shares to Kinder Morgan, Inc. To the extent that the underwriters sell more than 9,000,000 shares, the underwriters have the option to purchase up to an additional 1,350,000 shares from Kinder Morgan Management, LLC at the initial public offering price less the underwriting discount. ---------------------- The underwriters expect to deliver the shares against payment in New York, New York on , 2001. GOLDMAN, SACHS & CO. CREDIT SUISSE FIRST BOSTON LEHMAN BROTHERS DAIN RAUSCHER WESSELS FIRST UNION SECURITIES, INC. ---------------------- Prospectus dated , 2001 4 TABLE OF CONTENTS
Page ---- PROSPECTUS SUMMARY.......................................... 1 Risk Factors.............................................. 3 Organizational Structures................................. 6 The Offering.............................................. 8 The Shares................................................ 8 Summary Financial Data.................................... 15 RISK FACTORS................................................ 20 Risks Related to Kinder Morgan Management, LLC Shares; i-Units and Kinder Morgan Management, LLC............... 20 Risks Related to the Common Units of Kinder Morgan Energy Partners, L.P. ......................................... 23 Risks Related to Kinder Morgan Energy Partners, L.P.'s Business................................................ 25 Risks Related to Conflicts of Interest and Limitations on Liability............................................... 28 INFORMATION REGARDING FORWARD LOOKING STATEMENTS............ 29 USE OF PROCEEDS............................................. 30 OUR POLICY REGARDING SHARE DISTRIBUTIONS.................... 30 KINDER MORGAN ENERGY PARTNERS, L.P.'S DISTRIBUTION POLICY... 31 Requirement to Distribute Available Cash Less Reserves.... 31 Definition of Available Cash.............................. 31 Establishment of Reserves................................. 31 Cash, i-Unit and Share Distributions...................... 31 Two Different Types of Distributions...................... 31 General Procedure for Quarterly Distributions............. 32 Adjustment of Target Distribution Levels.................. 35 Distributions in Liquidation.............................. 36 CAPITALIZATION OF KINDER MORGAN MANAGEMENT, LLC............. 37 CAPITALIZATION OF KINDER MORGAN ENERGY PARTNERS, L.P........ 38 CAPITALIZATION OF KINDER MORGAN, INC........................ 39 SELECTED FINANCIAL DATA OF KINDER MORGAN ENERGY PARTNERS, L.P....................................................... 40 SELECTED PRO FORMA FINANCIAL DATA OF KINDER MORGAN ENERGY PARTNERS, L.P............................................. 42 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................. 44 Kinder Morgan Management, LLC............................. 44 Kinder Morgan Energy Partners, L.P. ...................... 45 DESCRIPTION OF OUR SHARES................................... 61 Distributions............................................. 61 Limited Voting Rights..................................... 63 Anti-dilution Adjustments................................. 64 Covenants................................................. 65 Optional Purchase......................................... 66 Mandatory Purchase........................................ 67 Exchange Feature.......................................... 68 Registration Rights....................................... 70 Tax Indemnity of Kinder Morgan, Inc. ..................... 70 Transfer Agent and Registrar.............................. 70 Replacement of Share Certificates......................... 71 Fractional Shares......................................... 71 DESCRIPTION OF THE i-UNITS.................................. 72 Voting Rights............................................. 72 Distributions and Payments................................ 72 Merger, Consolidation or Sale of Assets................... 73 Federal Income Tax Characteristics........................ 73 BUSINESS.................................................... 74 Kinder Morgan Management, LLC............................. 74 Kinder Morgan Energy Partners, L.P. ...................... 76 Kinder Morgan, Inc. ...................................... 83 MANAGEMENT OF KINDER MORGAN MANAGEMENT, LLC................. 83 Directors and Executive Officers.......................... 83 Board of Directors and Committees......................... 86 Director Compensation..................................... 86 Executive Compensation.................................... 86
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Page ---- RELATIONSHIPS AND RELATED PARTY TRANSACTIONS................ 87 Our Relationship with Kinder Morgan, Inc. and Kinder Morgan Energy Partners, L.P. ........................... 87 Tax Indemnification and Other Agreement................... 90 CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES........ 92 Conflicts of Interest..................................... 92 Situations in Which a Conflict of Interest Could Arise.... 92 Fiduciary Duties Owed to Our Shareholders and to the Owners of Units......................................... 93 LIMITED LIABILITY COMPANY AGREEMENT......................... 96 Formation................................................. 96 Purpose and Powers........................................ 96 Federal Income Tax Status as a Corporation................ 96 Power of Attorney......................................... 96 Members................................................... 96 Limited Liability......................................... 97 The Board................................................. 97 Officers and Employees.................................... 97 Capital Structure......................................... 97 Dissolution and Liquidation............................... 97 Exculpation and Indemnification........................... 98 Amendments................................................ 98 Meetings; Voting.......................................... 98 Books and Records; List of Shareholders................... 98 No Removal................................................ 99 Distributions............................................. 99 Exchange.................................................. 99 Optional and Mandatory Purchase........................... 99 DESCRIPTION OF UNITS AND COMPARISON WITH OUR SHARES......... 100 Summary of Partnership Agreement.......................... 100 Comparison Of Common Units and Our Shares................. 100 SHARES ELIGIBLE FOR FUTURE SALE............................. 103 INCOME TAX CONSIDERATIONS RELATING TO THE SHARES AND THE COMMON UNITS.............................................. 103 Legal Opinions............................................ 104 Federal Income Tax Considerations Associated with the Ownership and Disposition of Shares..................... 104 Tax Consequences of Share Ownership....................... 105 Federal Income Tax Considerations Associated with the Ownership and Disposition of Common Units............... 107 Limited Partner Status.................................... 109 Tax Consequences of Common Unit Ownership................. 110 Tax Treatment of Operations............................... 116 Disposition of Common Units............................... 117 Uniformity of Common Units................................ 119 Tax-Exempt Organizations, Mutual Funds and Non U.S. Investors............................................... 119 Administrative Matters.................................... 120 Foreign, State, Local and Other Tax Considerations........ 123 ERISA CONSIDERATIONS........................................ 123 UNDERWRITING................................................ 126 LEGAL MATTERS............................................... 129 EXPERTS..................................................... 129 WHERE YOU CAN FIND ADDITIONAL INFORMATION................... 130 INDEX TO FINANCIAL STATEMENTS............................... F-1
Until , 2001, all dealers that buy, sell or trade our shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligations to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ii 6 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before buying shares in this offering. Therefore, you should read this entire prospectus carefully, including the risks discussed under the "Risk Factors" section and our financial statements and the related notes. This prospectus also incorporates by reference important information about Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc., including information about their businesses and financial and operating data, and certain financial information with respect to Kinder Morgan G.P., Inc., the general partner of Kinder Morgan Energy Partners, L.P. You should also read carefully the information, including the financial statements and the footnotes to those statements, which is incorporated by reference in this prospectus. KINDER MORGAN Management, LLC We are a recently formed limited liability company that has elected to be treated as a corporation for United States income tax purposes. We have applied to have our shares listed on the New York Stock Exchange under the symbol "KMR". We will be a limited partner in Kinder Morgan Energy Partners, L.P. and will manage and control its business and affairs. All of our voting shares are owned by Kinder Morgan G.P., Inc., the general partner of Kinder Morgan Energy Partners, L.P. Upon the closing of this offering, Kinder Morgan G.P., Inc., will delegate to us, to the fullest extent permitted under Delaware law and the Kinder Morgan Energy Partners, L.P. partnership agreement, all of its rights and powers to manage and control the business and affairs of Kinder Morgan Energy Partners, L.P. and the operating partnerships owned by Kinder Morgan Energy Partners, L.P., subject to Kinder Morgan G.P., Inc.'s right to approve specified actions. We were formed in Delaware on February 14, 2001. For more information regarding our management and control of the business and affairs of Kinder Morgan Energy Partners, L.P., please read "Business -- Kinder Morgan Management, LLC." KINDER MORGAN ENERGY PARTNERS, L.P. BUSINESS DESCRIPTION Kinder Morgan Energy Partners, L.P., a Delaware limited partnership with its common units traded on the New York Stock Exchange under the symbol "KMP", was formed in August 1992. Kinder Morgan Energy Partners, L.P. is the largest publicly-traded pipeline limited partnership in the United States in terms of market capitalization. It owns and operates one of the largest refined petroleum products pipeline systems in the United States. Since February 1997, when current management assumed control of the operations of Kinder Morgan Energy Partners, L.P., quarterly common unit distributions have more than tripled from $0.315 per common unit to $1.05 per common unit for the first quarter of 2001. Its operations are grouped into the following business segments: - PRODUCT PIPELINES: Over 10,000 miles of pipelines and associated terminals delivering gasoline, diesel fuel, jet fuel and natural gas liquids to various markets; - NATURAL GAS PIPELINES: Transports, treats, processes and stores natural gas on approximately 12,000 miles of pipeline; - CO(2) PIPELINES: Markets and transports carbon dioxide, commonly called CO(2), to oil fields which use CO(2) to increase production of oil; - BULK TERMINALS: 29 bulk terminal facilities which handle more than 40 million tons of coal, petroleum coke and other products annually; and - LIQUIDS TERMINALS: Handles refined petroleum products, chemicals, and other liquid products. 1 7 GATX TRANSACTION In March 2001, Kinder Morgan Energy Partners, L.P. completed the acquisition of GATX Corporation's domestic pipeline and terminal business for approximately $1.17 billion. The primary assets acquired include CALNEV Pipe Line Company, a 550-mile petroleum products pipeline system extending from Colton, California to Las Vegas, Nevada; Central Florida Pipeline Company, a 195-mile petroleum products pipeline system extending from Tampa, Florida to Orlando, Florida; and 12 liquids terminals with a storage capacity of 35.6 million barrels. CALNEV Pipe Line Company, Central Florida Pipeline Company, and those terminals located on the West Coast are now included in Kinder Morgan Energy Partners, L.P.'s Product Pipelines segment. The remaining terminals comprise a new business segment of Kinder Morgan Energy Partners, L.P. called Liquids Terminals. BUSINESS STRATEGY Kinder Morgan Energy Partners, L.P.'s objective is to grow by: - providing, for a fee, transportation, storage and handling services which are core to the energy infrastructure of growing markets; - increasing utilization of assets while controlling costs; - leveraging economies of scale from incremental acquisitions; and - maximizing the benefits of its financial structure. Kinder Morgan Energy Partners, L.P. primarily transports and/or handles products for a fee and generally is not engaged in the purchase and resale of commodity products. As a result, Kinder Morgan Energy Partners, L.P. does not face significant risks relating directly to movements in commodity prices. Generally, as utilization of its pipelines and terminals increases, Kinder Morgan Energy Partners, L.P.'s fee-based revenues increase. Increases in utilization are principally driven by increases in demand for gasoline, jet fuel, natural gas and other energy products transported and handled by Kinder Morgan Energy Partners, L.P. Increases in demand for these products are generally driven by demographic growth in markets served by Kinder Morgan Energy Partners, L.P., including the rapidly growing western and southeastern United States. Since February 1997, Kinder Morgan Energy Partners, L.P. has closed 21 acquisitions valued at approximately $4.8 billion. These acquisitions have assisted Kinder Morgan Energy Partners, L.P. in growing distributions to all partners from $30.1 million for 1997 to $333.3 million for 2000. Kinder Morgan Energy Partners, L.P. intends to make additional acquisitions of pipelines, terminals and other energy-related transportation assets. KINDER MORGAN, INC. Kinder Morgan, Inc., a Kansas corporation, with its stock traded on the NYSE under the symbol "KMI", is one of the largest energy transportation and storage companies in America in terms of market capitalization, miles of pipeline and net income, operating more than 30,000 miles of natural gas and products pipelines. Kinder Morgan, Inc. also provides retail natural gas distribution service to approximately 225,000 customers, and develops, owns and operates power plants fueled by natural gas. Kinder Morgan, Inc.'s ownership of both general and limited partner interests in Kinder Morgan Energy Partners, L.P. contributed $140.9 million of earnings in 2000 representing 46% of Kinder Morgan, Inc.'s income from continuing operations before income taxes. OFFICES The principal executive offices of Kinder Morgan Management, LLC, Kinder Morgan, Inc. and Kinder Morgan Energy Partners, L.P. are located at One Allen Center, Suite 1000, 500 Dallas Street, Houston, Texas 77002, and the phone number at this address is (713) 369-9000. 2 8 RISK FACTORS You should be aware that there are various risks relating to an investment in our shares. For more information about these risks, see "Risk Factors." You should carefully consider these risk factors together with all of the other information included in this prospectus before you invest in our shares. RISKS RELATED TO KINDER MORGAN MANAGEMENT, LLC SHARES, I-UNITS AND KINDER MORGAN MANAGEMENT, LLC - The market price of our shares may be volatile and may be less than the market price of the common units of Kinder Morgan Energy Partners, L.P. - The value of the quarterly per-share distribution of an additional fractional share may be less than the cash distribution on a common unit. - Kinder Morgan Energy Partners, L.P. could be treated as a corporation for United States income tax purposes. The treatment of Kinder Morgan Energy Partners, L.P. as a corporation would substantially reduce the cash distributions on the common units and the value of i-units that Kinder Morgan Energy Partners, L.P. will distribute quarterly to us and the value of our shares that we will distribute quarterly to you. - If owners of Kinder Morgan Management, LLC shares exchange their shares for common units of Kinder Morgan Energy Partners, L.P., the market for our shares may become less liquid. - Kinder Morgan Energy Partners, L.P. may issue additional common or other units and we may issue additional shares, which would dilute your ownership interest. - Our success will be dependent upon our operation and management of Kinder Morgan Energy Partners, L.P. and its resulting performance. - Your shares are subject to optional and mandatory purchase provisions which could result in your having to sell your shares at a time or price you do not like. - Our board of directors will have the discretion and power to change the terms of the shares in ways our board determines, in its sole discretion, are not materially adverse to the owners of our shares. You may not like the changes, and even if you believe the changes are materially adverse to the owners of shares, you may have no recourse to prevent them. - Kinder Morgan, Inc. may be unable to satisfy its obligation to exchange common units or cash for shares or to purchase shares upon the occurrence of the mandatory purchase events, resulting in a loss in value of your shares. - As an owner of i-units, we may not receive value equivalent to the common unit value for our i-unit interest in Kinder Morgan Energy Partners, L.P. if Kinder Morgan Energy Partners, L.P. is liquidated. As a result, you may receive less per share in our liquidation than is received by an owner of a common unit in a liquidation of Kinder Morgan Energy Partners, L.P. - A person or group owning 20% or more of the aggregate number of issued and outstanding common units and Kinder Morgan Management, LLC shares, other than Kinder Morgan, Inc. and its affiliates, may not vote common units or shares; as a result, you are less likely to receive a premium for your shares in a hostile takeover. - The exercise of the exchange feature or the mandatory or optional purchase right associated with our shares is a taxable event to the owners of Kinder Morgan Management, LLC shares who dispose of their shares pursuant to that exercise. - Owners of Kinder Morgan Management, LLC shares have limited voting rights and therefore will have little or no opportunity to influence or change our management. 3 9 - Our management and control of the business and affairs of Kinder Morgan Energy Partners, L.P. and its operating partnerships could result in our being liable for obligations to third parties who transact business with Kinder Morgan Energy Partners, L.P. and its operating partnerships and who reasonably believe that we are a general partner. - If we are not fully indemnified by Kinder Morgan Energy Partners, L.P. for all the liabilities we incur in performing our obligations under the delegation of control agreement, we could face material difficulties in paying those liabilities, and the net value of our assets could be adversely affected. RISKS RELATED TO THE COMMON UNITS OF KINDER MORGAN ENERGY PARTNERS, L.P. - Common unitholders have limited voting rights and therefore have little or no opportunity to influence or change the management of Kinder Morgan Energy Partners, L.P. - There are tax risks to common unitholders of Kinder Morgan Energy Partners, L.P. that do not exist for owners of our shares. For example, the ownership of common units will result in unrelated business taxable income to tax exempt persons, nonqualifying income to mutual funds and withholding of taxes on distributions made to non U.S. persons. If you are one of these persons, this may reduce the value to you of the right to exchange your shares for common units. - Common unitholders may have negative tax consequences if Kinder Morgan Energy Partners, L.P. defaults on its debt or sells assets. - There is the potential for a change of control of Kinder Morgan Energy Partners, L.P. if Kinder Morgan, Inc. defaults on its debt. - Common unitholders may have liability to repay distributions by Kinder Morgan Energy Partners, L.P. - Common unitholders may be liable if Kinder Morgan Energy Partners, L.P. has not complied with state partnership law. - The general partner of Kinder Morgan Energy Partners, L.P. can protect itself against dilution. RISKS RELATED TO KINDER MORGAN ENERGY PARTNERS, L.P.'S BUSINESS - Pending Federal Energy Regulatory Commission and California Public Utilities Commission proceedings seek substantial refunds and reductions in tariff rates on some of Kinder Morgan Energy Partners, L.P.'s pipelines. If these proceedings are determined adversely, they could have a material adverse impact on us. - Kinder Morgan Energy Partners, L.P.'s acquisition strategy requires access to new capital. Tightened credit markets or more expensive capital would impair Kinder Morgan Energy Partners, L.P.'s ability to grow. - Environmental regulation could result in increased operating and capital costs for Kinder Morgan Energy Partners, L.P. - Competition could ultimately lead to lower levels of profits and lower Kinder Morgan Energy Partners, L.P.'s cash flow. - Kinder Morgan Energy Partners, L.P. does not own approximately 97.5% of the land on which its pipelines are constructed and Kinder Morgan Energy Partners, L.P. is subject to the possibility of increased costs to retain necessary land use. - Kinder Morgan Energy Partners, L.P.'s rapid growth may cause difficulties integrating new operations. - Kinder Morgan Energy Partners, L.P.'s debt instruments may limit its financial flexibility and increase its financing costs. 4 10 - Restrictions on Kinder Morgan Energy Partners, L.P.'s ability to prepay the debt of SFPP, L.P. may limit its financial flexibility and increase its financing costs. RISKS RELATED TO CONFLICTS OF INTEREST AND LIMITATIONS ON LIABILITY - The interests of Kinder Morgan, Inc. may differ from our interests, the interests of our shareholders and the interests of unitholders of Kinder Morgan Energy Partners, L.P. - Our limited liability company agreement restricts or eliminates a number of the fiduciary duties that would otherwise be owed by our board of directors to our shareholders and the partnership agreement of Kinder Morgan Energy Partners, L.P. restricts or eliminates a number of the fiduciary duties that would otherwise be owed by the general partner to the unitholders. 5 11 ORGANIZATIONAL STRUCTURE The following charts depict the current organizational structure of Kinder Morgan, Inc. and Kinder Morgan Energy Partners, L.P. and the organizational structure following the offering. [FLOW CHART] 6 12 [FLOW CHART] OWNERSHIP OF KINDER MORGAN ENERGY PARTNERS, L.P. AND ITS SUBSIDIARY OPERATING PARTNERSHIPS, ON A COMBINED BASIS AFTER THE OFFERING: i-units (entire class owned by Kinder Morgan Management, LLC)...................................... 11.5% Common units owned by the public....................... 68.6% Common units and Class B units owned by Kinder Morgan, Inc. and affiliates................................... 17.9% General partner interest............................... 2.0% ------ Total........................................ 100.0%
The above chart assumes that no holder of our shares has exercised its right to exchange its shares for common units of Kinder Morgan Energy Partners, L.P. 7 13 THE OFFERING Shares offered................ 9,000,000 shares representing limited liability company interests Shares offered to the public........................ 8,100,000 shares representing limited liability company interests Shares offered to Kinder Morgan, Inc................... 900,000 shares representing limited liability company interests Shares outstanding after this offering.................... - 9,000,000 shares representing limited liability company interests; and - one voting share owned by Kinder Morgan G.P., Inc. Use of proceeds............... We will use all of the net proceeds of the offering of our shares, expected to be approximately $594 million based on the assumed public offering price of $70.00 per share, as follows: - approximately $593 million for the purchase of a number of i-units from Kinder Morgan Energy Partners, L.P. that will equal the number of our shares to be sold in this offering; and - approximately $1 million to compensate Kinder Morgan, Inc. for its purchase, exchange and tax indemnity obligations, which we refer to as the "related rights". The i-units are a new class of Kinder Morgan Energy Partners, L.P.'s limited partner interests. Kinder Morgan Energy Partners, L.P. will use the cash it receives from the sale of i-units to us to reduce short-term debt it incurred in its acquisition of the domestic pipeline and terminal businesses of GATX Corporation. Kinder Morgan Energy Partners, L.P.'s total debt prior to this offering is approximately $3 billion. This total debt will be reduced to approximately $2.4 billion following the close of this offering. Kinder Morgan, Inc. will use the proceeds it receives from Kinder Morgan Management, LLC for general corporate purposes. Proposed NYSE Trading Symbol........................ KMR Unless otherwise indicated, all information in this prospectus assumes no exercise of the underwriters' option to purchase up to 1,350,000 additional shares to cover over-allotments. THE SHARES Kinder Morgan Management, LLC .......................... Our shares are interests in Kinder Morgan Management, LLC, a limited liability company treated as a corporation for United States income tax purposes. Kinder Morgan Management, LLC will be a limited partner in Kinder Morgan Energy Partners, L.P. and will manage and control that partnership's business and affairs. 8 14 Federal Income Tax Matters Associated with our Shares...................... Because we will be treated as a corporation for United States income tax purposes, an owner of our shares will not report on its United States income tax return any of our items of income, gain, loss and deduction. As a result of owning our shares, you will not receive a Schedule K-1 and will not be subject to state tax filings in the various states in which Kinder Morgan Energy Partners, L.P. conducts business. A tax-exempt investor's ownership or sale of our shares will not generate income derived from an unrelated trade or business regularly carried on by the tax-exempt investor, which is generally referred to as unrelated business taxable income or "UBTI", unless its ownership of our shares is debt financed by it. The ownership or sale of our shares by a mutual fund will generate qualifying income to it, which generally includes interest, dividends and gains from the sale of stock or securities. Furthermore, the ownership of our shares by a mutual fund will be treated as a qualifying asset, which generally includes cash, certain receivables, government securities and other securities. There will not be any withholding taxes imposed on quarterly or other distributions of additional shares to non U.S. persons or gain from the sale of our shares by a non U.S. person provided it owns fewer than 5% of our shares and our shares are traded on a nationally recognized securities exchange. Income Tax Matters Associated with i-units................ We will be subject to income taxes on our taxable income; however, the i-units owned by us generally will not be entitled to allocations of income, gain, loss or deduction of Kinder Morgan Energy Partners, L.P. Therefore, we do not anticipate that we generally will have material amounts of taxable income resulting from our ownership of the i-units. In the event that we do have taxable income, Kinder Morgan, Inc. has agreed to indemnify us for the related tax liability to the extent that liability exceeds the cash we receive relating to that income. Distributions................. We will make distributions on our shares only in additional shares except upon our liquidation. The fraction of an additional share distributed each quarter per share outstanding will be calculated by dividing the amount of the cash distribution declared by Kinder Morgan Energy Partners, L.P. on each common unit for that quarter by the average market price of one of our shares as determined for a ten-trading day period ending on the trading day immediately prior to the ex-dividend date for the shares. Exchange Feature.............. At any time after the 45th day following the closing of this offering, owners of our shares may exchange some or all 9 15 of their whole shares for common units of Kinder Morgan Energy Partners, L.P. owned by Kinder Morgan, Inc. and its subsidiaries on a one for one basis. Upon exercise of this right to exchange, Kinder Morgan, Inc. may elect to deliver cash rather than common units. As of the date of this prospectus, Kinder Morgan, Inc. and its subsidiaries own 11,312,000 common units and 2,656,700 Class B units which are convertible into common units under some circumstances. Mandatory Purchase............ If any of the events listed below occurs, Kinder Morgan, Inc. will be required to purchase all of our then outstanding shares not owned by it or its affiliates at a purchase price equal to the higher of the average market price of the shares and the common units as determined for a ten-trading day period ending on the trading day immediately prior to the date of the applicable event. The events include: - aggregate distributions or other payments by Kinder Morgan Energy Partners, L.P. on its common units, including pursuant to an issuer tender offer by Kinder Morgan Energy Partners, L.P., during a 360-day period exceeding 50% of the average market price of a common unit for the ten trading days ending on the trading day immediately prior to the beginning of that 360-day period; - an event resulting in Kinder Morgan, Inc. and its affiliates ceasing to be the beneficial owners of more than 50% of the total voting power of all shares of capital stock of the general partner of Kinder Morgan Energy Partners, L.P., unless: -- a new person or entity that becomes the beneficial owner of more than 50% of that total voting power is organized under the laws of a state in the United States and has long term unsecured debt with an investment grade credit rating (as determined by Moody's and Standard & Poor's) immediately prior to the closing of the transaction; and -- that beneficial owner assumes all obligations of Kinder Morgan, Inc. to us and to the owners of our shares; - Kinder Morgan Energy Partners, L.P. merges with another entity where Kinder Morgan Energy Partners, L.P. is not the surviving entity, or sells substantially all of its assets, unless in the transaction: -- the owners of common units receive a security that has in all material respects the same rights and privileges as the common units; -- we receive a security that has in all material respects the same rights and privileges as the i-units; 10 16 -- an owner of common units receives no consideration other than securities of the type described above and/or cash, and the amount of cash received per common unit does not exceed 33 1/3% of the average market price of a common unit for the ten-day trading period ending on the trading day immediately prior to the date of execution of the definitive agreement for the transaction; and -- no consideration is received by us, as the owner of i-units, other than the securities referred to above. For purposes of the mandatory purchase provisions, including the definitions of the mandatory purchase events, and the optional purchase provisions and the exchange provisions, Kinder Morgan, Inc. will be deemed to include Kinder Morgan, Inc., its successors by merger, and any entity that succeeds to Kinder Morgan, Inc.'s obligations under the purchase provisions, the exchange provisions, the registration rights agreement and the tax indemnification agreement in connection with an acquisition of all or substantially all of the assets of Kinder Morgan, Inc. Optional Purchase............. Kinder Morgan, Inc. has the right to purchase all of our shares not owned by it or its affiliates in two circumstances: - when Kinder Morgan, Inc. and its affiliates own 80% or more of our outstanding shares, and - when Kinder Morgan, Inc. and its affiliates own a number of our shares and common units which equals 80% or more of the sum of the aggregate number of our outstanding shares and the aggregate number of outstanding common units. In this second case, however, Kinder Morgan, Inc. has the right to purchase both the shares and the common units not owned by it or its affiliates, and cannot purchase either the shares or the common units alone. In these two circumstances, the purchase price per share is calculated differently. If the first circumstance exists and Kinder Morgan, Inc. elects to purchase the shares, the purchase price per share will equal 110% of the higher of: - the average closing price for the shares for the ten consecutive trading days ending five days prior to the date the notice of the purchase is mailed to the owners of our shares; and - the highest price Kinder Morgan, Inc. or its affiliates paid for such shares during the 90 days prior to the giving of the notice, excluding exchanges or cash settlements pursuant to the exchange feature of the shares. If the second circumstance exists and Kinder Morgan, Inc. elects to purchase both the shares and the common units, 11 17 the purchase price per share and the purchase price per common unit will both equal the higher of: - the average closing price for the shares or common units for the 20 consecutive trading days ending five days prior to the date the notice of the purchase is mailed to the owners; and - the highest price Kinder Morgan, Inc. or its affiliates paid for such shares or common units during the 90 days prior to the giving of the notice, excluding exchanges or cash settlements pursuant to the exchange feature of the shares. Voting Rights................. Kinder Morgan G.P., Inc. owns all of our shares eligible to vote for the election of our directors. Owners of the class of shares issued in this offering may vote on the following matters: - on any matter submitted by Kinder Morgan Energy Partners, L.P. for a vote of the i-units as a class or as part of a vote of all units, the i-units we own will be voted proportionately to the number of affirmative and negative votes cast and abstentions and non-votes by the owners of our shares, including the voting shares. In general the i-units vote with the Kinder Morgan Energy Partners, L.P. common units and Class B units on all matters the common units and Class B units vote on, and also, as a class, on additional matters related to the i-units alone, such as amendments to the Kinder Morgan Energy Partners, L.P. partnership agreement that would have a material adverse effect on owners of the i-units in relation to the owners of other then existing classes of limited partner interests; and - on amendments to our limited liability company agreement, including the purchase or exchange provisions, the Kinder Morgan Energy Partners, L.P. registration rights agreement, the Kinder Morgan, Inc. tax indemnification agreement and the delegation of control agreement, each as described below, but only if any of these amendments would have a material adverse effect on us or the owners of our shares, except for limited amendments or changes required by law or to accomodate mergers, recapitalizations and similar transactions. Kinder Morgan, Inc. and its affiliates may not vote any shares owned by them: - on any matter involving a class vote of i-units as well as some other matters principally involving the general partner of Kinder Morgan Energy Partners, L.P. where a class vote is not required; and - on any amendment of the agreements under the circumstances described in the second bullet point in the preceding paragraph. 12 18 When Kinder Morgan, Inc. and its affiliates may not vote as described above, the relevant agreements provide that the approval of the specified percentage of the shares not owned by Kinder Morgan, Inc. and its affiliates is required. A person or group owning shares, common units or both common units and shares which constitute 20% or more of the aggregate number of issued and outstanding common units and shares cannot vote. This particular limitation, however, does not apply to Kinder Morgan, Inc. and its affiliates. However, as described above, there are a number of circumstances in which Kinder Morgan, Inc. and its affiliates may not vote their shares. Anti-dilution Adjustments..... Through the combined effect of the provisions in the Kinder Morgan Energy Partners, L.P. partnership agreement and the provisions of our limited liability company agreement, the number of our outstanding shares and the number of outstanding i-units will always be equal. Our Covenants................. Our limited liability company agreement provides: - that our activities will be limited to being a limited partner in Kinder Morgan Energy Partners, L.P. and managing and controlling its business and affairs; - that we may not issue other classes of shares; and - for the maintenance of a one-to-one relationship between the number of i-units owned by us and the number of our outstanding shares. Covenants of Kinder Morgan Energy Partners, L.P........ Upon the closing of this offering, the Kinder Morgan Energy Partners, L.P. partnership agreement will be amended to provide that Kinder Morgan Energy Partners, L.P. will not: - except in liquidation, make a distribution on an i-unit other than in additional i-units or a security that has in all material respects the same rights and privileges as the i-units; - make a distribution on a common unit or Class B unit other than in cash, additional common units or Class B units or a security that has in all material respects the same rights and privileges as the common units or Class B units; - allow an owner of common units or Class B units to receive any consideration other than cash, common units or a security that has in all material respects the same rights and privileges as the common units or Class B units, or allow us as the owner of the i-units to receive any consideration other than i-units or a security that has in all material respects the same rights and privileges as the i-units, in a: 13 19 -- merger in which Kinder Morgan Energy Partners, L.P. is not the survivor, if the unitholders of Kinder Morgan Energy Partners, L.P. immediately prior to the transaction own more than 50% of the common equity securities of the survivor immediately after the transaction; -- merger in which Kinder Morgan Energy Partners, L.P. is the survivor if the unitholders of Kinder Morgan Energy Partners, L.P. immediately prior to the transaction own more than 50% of the limited partner interests in Kinder Morgan Energy Partners, L.P. immediately after the transaction; or -- recapitalization, reorganization or similar transaction; - be a party to a merger, sell substantially all of its assets to another person, or enter into similar transactions, if: -- the survivor of the merger or the other person is to be controlled by Kinder Morgan, Inc. or its affiliates after the transaction; and -- the transaction would be a mandatory purchase event; - make a tender offer for common units unless the consideration: -- is exclusively cash; and -- together with any cash payable in respect of any tender offer by Kinder Morgan Energy Partners, L.P. for the common units concluded within the preceding 360 days and the aggregate amount of any cash distributions to all owners of common units made within the preceding 360-day period is less than 12% of the aggregate average market value of all classes of units of Kinder Morgan Energy Partners, L.P. determined on the trading day immediately preceding the commencement of the tender offer; or - issue any of its i-units to any person other than us. 14 20 SUMMARY FINANCIAL DATA You should read the following financial data together with the financial statements and related notes, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in or incorporated by reference in this prospectus. Kinder Morgan Management, LLC Balance Sheet Data
PRO FORMA AS ADJUSTED FEBRUARY 16, 2001 FOR THE OFFERING HISTORICAL (UNAUDITED) ----------------- ---------------- (IN THOUSANDS) BALANCE SHEET DATA: ASSETS Cash..................................................... $100 $ 100 i-units and related rights............................... -- 593,000 ---- -------- Total assets............................................... $100 $593,100 ==== ======== LIABILITIES AND EQUITY Liabilities:............................................... -- -- Equity: Voting shares............................................ $100 $ 100 Outstanding non-voting shares............................ -- 593,000 ---- -------- Total liabilities and equity............................... $100 $593,100 ==== ========
The pro forma as adjusted balance sheet reflects the sale of 9,000,000 shares offered at an assumed initial public offering price of $70.00 per share, after deducting underwriting discounts and estimated offering expenses, and the application of all those funds to purchase i-units from Kinder Morgan Energy Partners, L.P. and to acquire the related rights from Kinder Morgan, Inc. 15 21 KINDER MORGAN ENERGY PARTNERS, L.P. SELECTED FINANCIAL DATA You should read the following selected financial data of Kinder Morgan Energy Partners, L.P. in connection with the financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere or incorporated by reference in this prospectus. Our historical results are not necessarily indicative of results to be expected for future periods.
YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 1996 1997 1998(4) 1999(5) 2000(6) ---- ---- ------- ------- ------- (IN THOUSANDS, EXCEPT PER UNIT) INCOME AND CASH FLOW DATA: Revenues..................................... $ 71,250 $ 73,932 $ 322,617 $ 428,749 $ 816,442 Cost of product sold......................... 7,874 7,154 5,860 16,241 124,641 Operating expense............................ 22,347 17,982 77,162 111,275 190,329 Fuel and power............................... 4,916 5,636 22,385 31,745 43,216 Depreciation and amortization................ 9,908 10,067 36,557 46,469 82,630 General and administrative................... 9,132 8,862 39,984 35,612 60,065 -------- -------- ---------- ---------- ---------- Operating income............................. 17,073 24,231 140,669 187,407 315,561 Earnings from equity investments............. 5,675 5,724 25,732 42,918 71,603 Amortization of excess cost of equity investments................................ -- -- (764) (4,254) (8,195) Interest (expense)........................... (12,634) (12,605) (40,856) (54,336) (97,102) Interest income and other, net............... 3,129 (353) (5,992) 22,988 10,415 Income tax (provision) benefit............... (1,343) 740 (1,572) (9,826) (13,934) -------- -------- ---------- ---------- ---------- Income before extraordinary charge........... 11,900 17,737 117,217 184,897 278,348 Extraordinary charge......................... -- -- (13,611) (2,595) -- -------- -------- ---------- ---------- ---------- Net income................................... $ 11,900 $ 17,737 $ 103,606 $ 182,302 $ 278,348 ======== ======== ========== ========== ========== General partner's interest in net income..... $ 218 $ 4,074 $ 33,447 $ 56,273 $ 109,470 Limited partners' interest in net income..... $ 11,682 $ 13,663 $ 70,159 $ 126,029 $ 168,878 Basic Limited Partners' income per unit before extraordinary charge (1)............ $ 0.90 $ 1.02 $ 2.09 $ 2.63 $ 2.68 ======== ======== ========== ========== ========== Basic Limited Partners' net income per unit....................................... $ 0.90 $ 1.02 $ 1.75 $ 2.57 $ 2.68 ======== ======== ========== ========== ========== Diluted Limited Partners' net income per unit(2).................................... $ 0.90 $ 1.02 $ 1.75 $ 2.57 $ 2.67 ======== ======== ========== ========== ========== Per unit cash distribution(3)................ $ 1.26 $ 1.88 $ 2.47 $ 2.85 $ 3.43 ======== ======== ========== ========== ========== Additions to property, plant and equipment... $ 8,575 $ 6,884 $ 38,407 $ 82,725 $ 125,523 BALANCE SHEET DATA (AT END OF PERIOD): Net property, plant and equipment............ $235,994 $244,967 $1,763,386 $2,578,313 $3,306,305 Total assets................................. $303,603 $312,906 $2,152,272 $3,228,738 $4,625,210 Long-term debt............................... $160,211 $146,824 $ 611,571 $ 989,101 $1,255,453 Partners' capital............................ $118,344 $150,224 $1,360,663 $1,774,798 $2,117,067
- --------------- (1) Represents income before extraordinary charge per unit adjusted for the two-for-one split of units on October 1, 1997. Basic Limited Partners' income per unit before extraordinary charge was computed by dividing the interest of our unitholders in income before extraordinary charge by the weighted average number of units outstanding during the period. (2) Diluted Limited Partners' net income per unit reflects the potential dilution, by application of the treasury stock method, that could occur if options to issue units were exercised, which would result in the issuance of additional units that would then share in Kinder Morgan Energy Partners, L.P.'s net income. (3) Represents cash distributions declared for the four quarters of the calendar year. Actual cash distributions paid during each year is slightly different since distributions are paid 45 days after the end of the respective quarter. (4) Includes results of operations for the Pacific operations, Kinder Morgan Bulk Terminals, Inc. and the 24% interest in Plantation Pipe Line Company since the respective dates of acquisition. The Pacific 16 22 operations were acquired on March 6, 1998, Kinder Morgan Bulk Terminals, Inc. was acquired effective July 1, 1998 and our 24% interest in Plantation Pipe Line Company was acquired on September 15, 1998. (5) Includes results of operations for the 51% interest in Plantation Pipe Line Company, Product Pipelines' transmix operations and the 33 1/3% interest in Trailblazer Pipeline Company since the respective dates of acquisition. Our second investment in Plantation Pipe Line Company, representing a 27% interest was made on June 16, 1999. The Product Pipelines' transmix operations were acquired on September 10, 1999, and our initial 33 1/3% investment in Trailblazer was made on November 30, 1999. (6) Includes results of operations for Kinder Morgan Interstate Gas Transmission LLC, the 66 2/3% interest in Trailblazer Pipeline Company, the 49% interest in Red Cedar Gathering Company, Kinder Morgan CO(2) Company acquisitions, Milwaukee and Dakota bulk terminals, Kinder Morgan Transmix Company, LLC, the 32.5% interest in Cochin Pipeline System and Delta Terminal Services since dates of acquisition. Kinder Morgan Interstate Gas Transmission, LLC, Trailblazer Pipeline Company assets, and our 49% interest in Red Cedar Gathering Company were acquired effective December 31, 1999. Milwaukee Bulk Terminals, Inc. and Dakota Bulk Terminal, Inc. were acquired effective January 1, 2000. Our remaining 80% interest in Kinder Morgan CO(2) Company, was acquired on April 1, 2000. The Devon Energy carbon dioxide properties were acquired on June 1, 2000. Kinder Morgan Transmix Company, LLC (formerly Buckeye Transmix) was acquired on October 25, 2000. Our 32.5% interest in Cochin Pipeline System was acquired effective November 3, 2000, and Delta Terminal Services, Inc. was acquired effective December 1, 2000. 17 23 KINDER MORGAN ENERGY PARTNERS, L.P. PRO FORMA FINANCIAL DATA The following table shows selected income and cash flow data and balance sheet data for Kinder Morgan Energy Partners, L.P.: - for the year ended December 31, 2000; - pro forma to reflect: -- the acquisition of the U.S. terminals and pipeline operations of GATX Corporation; and -- the issuance of $700 million of 6.75% notes due 2011 and $300 million of 7.40% notes due 2031, and the application of the proceeds to retire short-term debt; and - as adjusted to reflect the payment by Kinder Morgan Management, LLC of substantially all of the net proceeds of our public offering of the shares to purchase a number of i-units from Kinder Morgan Energy Partners, L.P. equal to the number of outstanding shares of Kinder Morgan Management, LLC. These proceeds are expected to be $593 million, which represents 9 million shares sold at $70.00 per share, net of underwriting discount, expected expenses and $1 million paid to Kinder Morgan, Inc. for the related rights. Kinder Morgan Energy Partners, L.P. will use its share of those net proceeds to retire short-term debt. The unaudited pro forma data for GATX have been derived from the historical balance sheets and income statements of Kinder Morgan Energy Partners, L.P. and GATX Terminals Companies as of December 31, 2000 and for the year then ended. The unaudited pro forma data have been prepared using the purchase method of accounting to give effect to the acquisition of the domestic terminals and pipeline operations of GATX Terminals Companies for $1.17 billion, consisting of $988.5 million in cash and assumed debt and other liabilities of $181.5 million, exclusive of working capital. On March 1, 2001, Kinder Morgan Energy Partners, L.P. closed the acquisition of all of the assets purchased from GATX other than the CALNEV Pipe Line Company. Kinder Morgan Energy Partners, L.P. completed the acquisition of the CALNEV Pipe Line Company on March 30, 2001. The unaudited pro forma data have been prepared assuming the acquisition had been consummated on January 1, 2000. The purchase price allocated in the unaudited pro forma data is based on management of Kinder Morgan Energy Partners, L.P.'s estimate of the fair market values of assets acquired and liabilities assumed. The unaudited pro forma data include assumptions and adjustments as described in the notes to the unaudited pro forma combined financial statements incorporated by reference and should be read in conjunction with the historical financial statements and related notes of Kinder Morgan Energy Partners, L.P. and GATX Terminals Companies incorporated by reference into this prospectus. The unaudited pro forma data may not be indicative of the results that would have occurred if the GATX acquisition had been consummated on the date indicated or which will be obtained in the future. (continued on next page) 18 24
PRO FORMA PRO FORMA YEAR ENDED FOR GATX AS ADJUSTED DECEMBER 31, AND DEBT FOR SALE OF 2000 OFFERING I-UNITS ------------ --------- ----------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS) INCOME AND CASH FLOW DATA: Revenues................................................ $ 816,442 $1,075,632 $1,075,632 Cost of product sold.................................... 124,641 124,641 124,641 Operations and maintenance.............................. 164,379 263,125 263,125 Fuel and power.......................................... 43,216 43,216 43,216 Depreciation and amortization........................... 82,630 109,583 109,583 General and administrative.............................. 60,065 91,728 91,728 Taxes, other than income taxes.......................... 25,950 25,950 25,950 ---------- ---------- ---------- Operating income...................................... 315,561 417,389 417,389 Earnings from equity investments........................ 71,603 71,603 71,603 Amortization of excess cost of equity investments....... (8,195) (8,195) (8,195) Interest, net........................................... (93,284) (174,393) (130,507) Other, net.............................................. 14,584 14,584 14,584 Minority interest....................................... (7,987) (8,167) (8,611) ---------- ---------- ---------- Income before income taxes.............................. 292,282 312,821 356,263 Income tax benefit (expense)............................ (13,934) (13,934) (13,934) ---------- ---------- ---------- Net income.............................................. $ 278,348 $ 298,887 $ 342,329 ========== ========== ========== General partner's interest in net income................ $ 109,470 $ 122,094 $ 139,209 Limited partner's interest in net income................ $ 168,878 $ 176,793 $ 203,120 Basic limited partners' net income per unit............. $ 2.68 $ 2.80 $ 2.82 ========== ========== ========== Number of units used in computation..................... 63,107 63,107 72,107 Diluted limited partners' net income per unit........... $ 2.67 $ 2.80 $ 2.82 ========== ========== ========== Number of units used in computation..................... 63,150 63,150 72,150 Additions to property, plant and equipment.............. $ 125,523 $ 180,760 $ 180,760 BALANCE SHEET DATA (AT END OF PERIOD): Net property, plant and equipment....................... $3,306,305 $4,433,818 $4,433,818 Total assets............................................ $4,625,210 $5,829,015 $5,829,015 Short-term debt......................................... $ 648,949 $ 654,678 $ 55,627 Long-term debt.......................................... $1,255,453 $2,375,203 $2,375,203 Partners' capital....................................... $2,117,067 $2,117,067 $2,710,067
19 25 RISK FACTORS Any investment in our shares involves a high degree of risk. You should carefully consider the following risks and all of the information contained in, or incorporated by reference into, this prospectus before deciding whether to purchase our shares. If any of the following risks actually occur the trading price of our shares could decline, and you may lose all or part of your investment in our shares. RISKS RELATED TO KINDER MORGAN MANAGEMENT, LLC SHARES, I-UNITS AND KINDER MORGAN MANAGEMENT, LLC THE MARKET PRICE OF OUR SHARES MAY BE VOLATILE AND MAY BE LESS THAN THE MARKET PRICE OF THE COMMON UNITS OF KINDER MORGAN ENERGY PARTNERS, L.P. Prior to this offering, you could not buy or sell Kinder Morgan Management, LLC shares. An active public trading market for our shares may not develop or continue after this offering. The market price after this offering may vary significantly from the initial public offering price in response to any of the following factors, some of which are beyond our control: - the complexity of the terms of our shares, including the exchange feature, optional and mandatory purchases, and the tax indemnity, and - announcements by Kinder Morgan Energy Partners, L.P. or its competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments. THE VALUE OF THE QUARTERLY PER-SHARE DISTRIBUTION OF AN ADDITIONAL FRACTIONAL SHARE MAY BE LESS THAN THE CASH DISTRIBUTION ON A COMMON UNIT. The fraction of a Kinder Morgan Management, LLC share to be issued in distributions per share outstanding will be based on the average closing price of the shares for the ten consecutive trading days preceding the ex-dividend date. Because the market price of our shares may vary substantially over time, the market value on the date you receive a distribution of additional shares may vary substantially from the cash you would have received had you owned common units instead of shares. KINDER MORGAN ENERGY PARTNERS, L.P. COULD BE TREATED AS A CORPORATION FOR UNITED STATES INCOME TAX PURPOSES. THE TREATMENT OF KINDER MORGAN ENERGY PARTNERS, L.P. AS A CORPORATION WOULD SUBSTANTIALLY REDUCE THE CASH DISTRIBUTIONS ON THE COMMON UNITS AND THE VALUE OF I-UNITS THAT KINDER MORGAN ENERGY PARTNERS, L.P. WILL DISTRIBUTE QUARTERLY TO US AND THE VALUE OF OUR SHARES THAT WE WILL DISTRIBUTE QUARTERLY TO YOU. The anticipated benefit of an investment in our shares depends largely on the treatment of Kinder Morgan Energy Partners, L.P. as a partnership for income tax purposes. Kinder Morgan Energy Partners, L.P. has not requested, and does not plan to request, a ruling from the IRS on this or any other matter affecting Kinder Morgan Energy Partners, L.P. Current law requires Kinder Morgan Energy Partners, L.P. to derive at least 90% of its annual gross income from specific activities to continue to be treated as a partnership for income tax purpose. Kinder Morgan Energy Partners, L.P. may not find it possible, regardless of its efforts, to meet this income requirement or may inadvertently fail to meet this income requirement. Current law may change so as to cause Kinder Morgan Energy Partners, L.P. to be treated as a corporation for United States income tax purposes without regard to its sources of income or otherwise subject Kinder Morgan Energy Partners, L.P. to entity-level taxation. If Kinder Morgan Energy Partners, L.P. were to be treated as a corporation for United States income tax purposes, it would pay United States income tax on its income at the corporate tax rate, which is currently a maximum of 35% and would pay state income taxes at varying rates. Distributions to us of additional i-units would generally be taxed as a corporate distribution. Because a tax would be imposed upon Kinder Morgan Energy Partners, L.P. as a corporation, the cash available for distribution to a common unitholder would be substantially reduced which would reduce the values of i-units distributed quarterly to us and our shares distributed quarterly 20 26 to you. Treatment of Kinder Morgan Energy Partners, L.P. as a corporation would cause a substantial reduction in the value of our shares. IF OWNERS OF KINDER MORGAN MANAGEMENT, LLC SHARES EXCHANGE THEIR SHARES FOR COMMON UNITS OF KINDER MORGAN ENERGY PARTNERS, L.P., THE MARKET FOR OUR SHARES MAY BECOME LESS LIQUID. Subject to Kinder Morgan, Inc.'s election to deliver cash in lieu of common units, an owner of our shares may exchange some or all of the whole shares that it owns at any time after the 45th day following the closing of this offering for common units of Kinder Morgan Energy Partners, L.P. on a one for one basis. If any owners of our shares exercise their exchange features, the number of shares owned by parties that are not our affiliates will decrease. Therefore, fewer shares may be available in the open market, reducing the liquidity of our shares. If a liquid market does not develop for our shares, the value of your investment may be reduced. KINDER MORGAN ENERGY PARTNERS, L.P. MAY ISSUE ADDITIONAL COMMON OR OTHER UNITS AND WE MAY ISSUE ADDITIONAL SHARES, WHICH WOULD DILUTE YOUR OWNERSHIP INTEREST. The issuance of additional common units or shares other than in our quarterly distributions to you may have the following effects: - the amount available for distributions on each share may decrease; - the relative voting power of each previously outstanding share will be decreased; and - the market price of shares may decline. OUR SUCCESS WILL BE DEPENDENT UPON OUR OPERATION AND MANAGEMENT OF KINDER MORGAN ENERGY PARTNERS, L.P. AND ITS RESULTING PERFORMANCE. After this offering we will be a limited partner in Kinder Morgan Energy Partners, L.P. In the event that Kinder Morgan Energy Partners, L.P. decreases its cash distributions to its common unitholders, distributions of i-units on our i-units will decrease correspondingly, and distributions to holders of our shares will decrease as well. YOUR SHARES ARE SUBJECT TO OPTIONAL AND MANDATORY PURCHASE PROVISIONS WHICH COULD RESULT IN YOUR HAVING TO SELL YOUR SHARES AT A TIME OR PRICE YOU DO NOT LIKE. If either of the optional purchase rights are exercised by Kinder Morgan, Inc., or if there is a mandatory purchase event, you will be required to sell your shares at a time or price that may be undesirable, and could receive less than you paid for your shares. You may also incur a tax liability upon the sale of your shares. For further information regarding the optional and mandatory purchase rights, please read "Description of Our Shares -- Optional Purchase" and "Description of Our Shares -- Mandatory Purchase." OUR BOARD OF DIRECTORS WILL HAVE THE POWER TO CHANGE THE TERMS OF THE SHARES IN WAYS OUR BOARD DETERMINES, IN ITS SOLE DISCRETION, ARE NOT MATERIALLY ADVERSE TO THE OWNERS OF OUR SHARES. YOU MAY NOT LIKE THE CHANGES, AND EVEN IF YOU BELIEVE THE CHANGES ARE MATERIALLY ADVERSE TO THE OWNERS OF SHARES, YOU MAY HAVE NO RECOURSE TO PREVENT THEM. As an owner of our shares, you may not like the changes made to the terms of the shares and you may disagree with the board's decision that the changes are not materially adverse to you as a shareholder. Your recourse if you disagree will be limited because our limited liability company agreement gives broad latitude and discretion to the board of directors and eliminates or reduces the fiduciary duties that our board of directors would otherwise owe to you. KINDER MORGAN, INC. MAY BE UNABLE TO SATISFY ITS OBLIGATION TO EXCHANGE COMMON UNITS OR CASH FOR SHARES OR TO PURCHASE SHARES UPON THE OCCURRENCE OF THE MANDATORY PURCHASE EVENTS, RESULTING IN A LOSS IN VALUE OF YOUR SHARES. The obligations of Kinder Morgan, Inc. to exchange common units or cash for shares or to purchase shares following a purchase event is dependent on Kinder Morgan, Inc.'s financial ability to meet its obligations. There is no requirement for Kinder Morgan, Inc. to secure its obligations or comply with financial covenants 21 27 to ensure its performance of these obligations. In either of these circumstances you may not receive cash or common units in exchange for your shares. AS AN OWNER OF I-UNITS, WE MAY NOT RECEIVE VALUE EQUIVALENT TO THE COMMON UNIT VALUE FOR OUR I-UNIT INTEREST IN KINDER MORGAN ENERGY PARTNERS, L.P. IF KINDER MORGAN ENERGY PARTNERS, L.P. IS LIQUIDATED. AS A RESULT, YOU MAY RECEIVE LESS PER SHARE IN OUR LIQUIDATION THAN IS RECEIVED BY AN OWNER OF A COMMON UNIT IN A LIQUIDATION OF KINDER MORGAN ENERGY PARTNERS, L.P. If Kinder Morgan Energy Partners, L.P. is liquidated and Kinder Morgan, Inc. does not satisfy its obligation to purchase your shares which is triggered by a liquidation, then the value of your shares will depend on the liquidating distribution received by us as the owner of i-units. The terms of the i-units provide that no allocations of income, gain, loss or deduction will be made in respect of the i-units until such time as there is a liquidation of Kinder Morgan Energy Partners, L.P. If there is a liquidation of Kinder Morgan Energy Partners, L.P., it is intended that we will receive allocations of income and gain in an amount necessary for the capital account attributable to each i-unit to be equal to that of a common unit. As a result, we will likely realize taxable income upon the liquidation of Kinder Morgan Energy Partners, L.P. However, there may not be sufficient amounts of income and gain to cause the capital account attributable to each i-unit to be equal to that of a common unit. If they are not equal, we and therefore you may receive less value than would be received by an owner of common units. Further, the tax indemnity provided to us by Kinder Morgan, Inc. only indemnifies us for our tax liabilities to the extent we have not received sufficient cash in the transaction generating the tax liability to pay the tax. Prior to liquidation of Kinder Morgan Energy Partners, L.P. we do not expect to receive cash in a taxable transaction. If a liquidation of Kinder Morgan Energy Partners, L.P. occurs, however, we would likely receive cash which would need to be used at least in part to pay taxes. As a result our residual value and the value of our shares could be reduced. A PERSON OR GROUP OWNING 20% OR MORE OF THE AGGREGATE NUMBER OF ISSUED AND OUTSTANDING COMMON UNITS AND KINDER MORGAN MANAGEMENT, LLC SHARES, OTHER THAN KINDER MORGAN, INC. AND ITS AFFILIATES, MAY NOT VOTE COMMON UNITS OR SHARES; AS A RESULT, YOU ARE LESS LIKELY TO RECEIVE A PREMIUM FOR YOUR SHARES IN A HOSTILE TAKEOVER. Any common units and shares owned by a person or group that owns 20% or more of the aggregate number of issued and outstanding common units and shares cannot be voted. This limitation does not apply to Kinder Morgan, Inc. and its affiliates. This provision may: - discourage a person or group from attempting to take over control of us or Kinder Morgan Energy Partners, L.P.; and - reduce the price at which the common units will trade under certain circumstances. For example, a third party will probably not attempt to remove the general partner of Kinder Morgan Energy Partners, L.P. and take over our management of Kinder Morgan Energy Partners, L.P. by making a tender offer for the common units at a price above their trading market price. THE EXERCISE OF THE EXCHANGE FEATURE OR THE MANDATORY OR OPTIONAL PURCHASE RIGHT ASSOCIATED WITH OUR SHARES IS A TAXABLE EVENT TO THE OWNERS OF KINDER MORGAN MANAGEMENT, LLC SHARES WHO DISPOSE OF THEIR SHARES PURSUANT TO THAT EXERCISE. Any sale or exchange of our shares, with Kinder Morgan, Inc. or otherwise, for common units or cash will be a taxable transaction to the owner of the shares sold or exchanged. Accordingly, a gain or loss will be recognized on the sale or exchange equal to the difference between the fair market value of the common units or cash received and the owner's tax basis in the shares sold or exchanged. OWNERS OF KINDER MORGAN MANAGEMENT, LLC SHARES HAVE LIMITED VOTING RIGHTS AND THEREFORE WILL HAVE LITTLE OR NO OPPORTUNITY TO INFLUENCE OR CHANGE OUR MANAGEMENT. Kinder 22 28 Morgan G.P., Inc., owns all of our shares eligible to vote on the election of our directors and, therefore, is entitled to elect all of the members of our board of directors. For a description of the limited voting rights you will have as an owner of shares, see "Description of the Shares -- Limited Voting Rights." Upon the closing of this offering Kinder Morgan G.P., Inc. will delegate to us, to the fullest extent permitted under Delaware law and the Kinder Morgan Energy Partners, L.P. partnership agreement, all of its rights and powers to manage and control the business and affairs of Kinder Morgan Energy Partners, L.P., subject to Kinder Morgan G.P., Inc.'s right to approve specified actions. For a more detailed description of these approval rights, please see "Business -- Kinder Morgan Management, LLC." OUR MANAGEMENT AND CONTROL OF THE BUSINESS AND AFFAIRS OF KINDER MORGAN ENERGY PARTNERS, L.P. AND ITS OPERATING PARTNERSHIPS COULD RESULT IN OUR BEING LIABLE FOR OBLIGATIONS TO THIRD PARTIES WHO TRANSACT BUSINESS WITH KINDER MORGAN ENERGY PARTNER, L.P. AND ITS OPERATING PARTNERSHIPS AND WHO REASONABLY BELIEVE THAT WE ARE A GENERAL PARTNER. We have broad rights of reimbursement and indemnity from Kinder Morgan Energy Partners, L.P. which would in most cases protect us from the effects of a third party claim. Kinder Morgan Energy Partners, L.P. may not, however, be able to reimburse or indemnify us as a result of its insolvency or bankruptcy. The primary adverse impact of that insolvency or bankruptcy on us will be the decline in or elimination of the value of our i-units, which are our only assets. Assuming under these circumstances that we have some residual value in our i-units, a direct claim against us could further reduce our net asset value and cause us also to declare bankruptcy. Another risk with respect to third party claims will come, however, under the circumstances when Kinder Morgan Energy Partners, L.P. is financially able to pay us but for some other reason does not reimburse or indemnify us. For additional information, see the following risk factor. IF WE ARE NOT FULLY INDEMNIFIED BY KINDER MORGAN ENERGY PARTNERS, L.P. FOR ALL THE LIABILITIES WE INCUR IN PERFORMING OUR OBLIGATIONS UNDER THE DELEGATION OF CONTROL AGREEMENT, WE COULD FACE MATERIAL DIFFICULTIES IN PAYING THOSE LIABILITIES, AND THE NET VALUE OF OUR ASSETS COULD BE ADVERSELY AFFECTED. Under the delegation of control agreement, we have been delegated management and control of Kinder Morgan Energy Partners, L.P. and the operating partnerships. There are circumstances under which we may not be indemnified by Kinder Morgan Energy Partners, L.P. or Kinder Morgan G.P., Inc. for liabilities we incur in managing the business of Kinder Morgan Energy Partners, L.P. These circumstances include: - if we act in bad faith; and - if we breach laws like the federal securities laws where indemnification may not be allowed. RISKS RELATED TO THE COMMON UNITS OF KINDER MORGAN ENERGY PARTNERS, L.P. COMMON UNITHOLDERS HAVE LIMITED VOTING RIGHTS AND THEREFORE HAVE LITTLE OR NO OPPORTUNITY TO INFLUENCE OR CHANGE THE MANAGEMENT OF KINDER MORGAN ENERGY PARTNERS, L.P. Owners of common units have only limited voting rights on matters affecting Kinder Morgan Energy Partners, L.P. Kinder Morgan Management, LLC, will manage and control the business and affairs of Kinder Morgan Energy Partners, L.P. as the delegatee of Kinder Morgan, G.P., Inc., the general partner of Kinder Morgan Energy Partners, L.P., to the extent permitted by Delaware law and the Kinder Morgan Energy Partners, L.P. partnership agreement. Owners of common units have no right to elect the general partner of Kinder Morgan Energy Partners, L.P. on an annual or other ongoing basis. If the general partner of Kinder Morgan Energy Partners, L.P. withdraws, however, its successor may be elected by the owners of a majority of the outstanding units, excluding units owned by the departing general partner and its affiliates. The withdrawal or removal of the general partner of Kinder Morgan Energy Partners, L.P. will simultaneously 23 29 terminate our power and authority to manage and control the business and affairs of Kinder Morgan Energy Partners, L.P. The limited partners may remove the general partner of Kinder Morgan Energy Partners, L.P. only if: - the owners of at least 66 2/3% of the outstanding common units, excluding common units owned by the departing general partner and its affiliates, vote to remove the general partner; - a successor general partner is approved by at least 66 2/3% of the outstanding common units, excluding common units owned by the departing general partner and its affiliates; and - Kinder Morgan Energy Partners, L.P. receives an opinion of counsel that the removal would not result in the loss of limited liability to any limited partner or the limited partner of the operating partnerships or cause the partnership or its operating partnerships to be taxed other than as a partnership for federal income tax purposes. THERE ARE TAX RISKS TO COMMON UNITHOLDERS OF KINDER MORGAN ENERGY PARTNERS, L.P. THAT DO NOT EXIST FOR OWNERS OF OUR SHARES. FOR EXAMPLE, THE OWNERSHIP OF COMMON UNITS WILL RESULT IN UNRELATED BUSINESS TAXABLE INCOME TO TAX EXEMPT PERSONS, NONQUALIFYING INCOME TO MUTUAL FUNDS AND WITHHOLDING OF TAXES ON DISTRIBUTIONS MADE TO NON U.S. PERSONS. IF YOU ARE ONE OF THOSE PERSONS, THIS MAY REDUCE THE VALUE TO YOU OF THE RIGHT TO EXCHANGE YOUR SHARES FOR COMMON UNITS. The income tax consequences of owning common units in an entity like Kinder Morgan Energy Partners, L.P. which is treated as a partnership for income tax purposes are different than those associated with owning shares in an entity like ours which is treated as a corporation for income tax purposes. Likewise, there is different tax treatment for sales of common units in Kinder Morgan Energy Partners, L.P. than for the sale of our shares. Before exercising a right to exchange our shares for common units in Kinder Morgan Energy Partners, L.P., you should read "Federal Income Tax Considerations Associated with the Ownership and Disposition of Common Units" for a more complete discussion of the federal income tax risks and consequences related to owning and disposing of common units of Kinder Morgan Energy Partners, L.P. These risks include the impact of the IRS challenging federal income tax positions taken by Kinder Morgan Energy Partners, the fact that more taxable income and gain will be allocated to common unitholders upon the issuance of additional i-units by Kinder Morgan Energy Partners, L.P., and the fact that tax-exempt entities, regulated investment companies, mutual funds, or non U.S. persons may have adverse tax consequences from owning and selling common units. For example, virtually all of Kinder Morgan Energy Partners, L.P.'s income allocated to organizations exempt from federal income tax, including individual retirement accounts and other retirement plans, will be unrelated business taxable income and will be taxable to them. Very little of Kinder Morgan Energy Partners, L.P.'s income will be qualifying income to a regulated investment company or mutual fund. Distributions to non U.S. persons will be reduced by withholding taxes, currently at the rate of 39.6%, and non U.S. persons will be required to file United States federal income returns and pay tax on their share of Kinder Morgan Energy Partners, L.P.'s taxable income. COMMON UNITHOLDERS MAY HAVE NEGATIVE TAX CONSEQUENCES IF KINDER MORGAN ENERGY PARTNERS, L.P. DEFAULTS ON ITS DEBT OR SELLS ASSETS. If Kinder Morgan Energy Partners, L.P. defaults on any of its debt, the lenders will have the right to sue it for non-payment. Such an action could cause an investment loss and cause negative tax consequences for common unitholders through the realization of taxable income by common unitholders without a corresponding cash distribution. Likewise, if Kinder Morgan Energy Partners, L.P. 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, common unitholders could have increased taxable income without a corresponding increase in cash distribution. 24 30 THERE IS THE POTENTIAL FOR A CHANGE OF CONTROL OF KINDER MORGAN ENERGY PARTNERS, L.P. IF KINDER MORGAN, INC. DEFAULTS ON ITS DEBT. Kinder Morgan, Inc. indirectly owns all of the outstanding capital stock of the general partner. Kinder Morgan, Inc. has significant operations which provide cash independent of dividends that Kinder Morgan, Inc. receives from the general partner of Kinder Morgan Energy Partners, L.P. Nevertheless, if Kinder Morgan, Inc. defaults on its debt, its lenders could acquire control of the general partner of Kinder Morgan Energy Partners, L.P. COMMON UNITHOLDERS MAY HAVE LIABILITY TO REPAY DISTRIBUTIONS BY KINDER MORGAN ENERGY PARTNERS, L.P. Common unitholders will not be liable for assessments in addition to their initial capital investment in common units. Under certain circumstances, however, common unitholders may have to repay amounts wrongfully returned or distributed to them. Under Delaware law, Kinder Morgan Energy Partners, L.P. may not make a distribution to the owners of common units if the distribution causes its liabilities to exceed the fair value of its assets. Liabilities to partners on account of their partnership interests and non-recourse liabilities are not counted for purposes of determining whether a distribution is permitted. Delaware law provides that for a period of three years from the date of such a distribution, a limited partner who receives the distribution and knew at the time of the distribution that the distribution violated Delaware law will be liable to the limited partnership for the distribution amount. Under Delaware law, an assignee who becomes a substituted limited partner of a limited partnership is liable for the obligations of the assignor to make contributions to the partnership. However, such an assignee is not obligated for liabilities unknown to the assignee at the time the assignee became a limited partner if the liabilities could not be determined from the partnership agreement. COMMON UNITHOLDERS MAY BE LIABLE IF KINDER MORGAN ENERGY PARTNERS, L.P. HAS NOT COMPLIED WITH STATE PARTNERSHIP LAW. Kinder Morgan Energy Partners, L.P. 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. Common unitholders might be held liable for Kinder Morgan Energy Partners, L.P.'s obligations as if they were a general partner if: - a court or government agency determined that Kinder Morgan Energy Partners, L.P. was conducting business in the state but had not complied with the state's partnership statute; or - common unitholders' rights to act together to remove or replace the general partner or take other actions under Kinder Morgan Energy Partners, L.P.'s partnership agreement constitute "control" of Kinder Morgan Energy Partners, L.P.'s business. THE GENERAL PARTNER OF KINDER MORGAN ENERGY PARTNERS, L.P. CAN PROTECT ITSELF AGAINST DILUTION. Whenever Kinder Morgan Energy Partners, L.P. issues equity securities to any person other than its general partner and its affiliates, its general partner has the right to purchase additional limited partnership interests on the same terms. RISKS RELATED TO KINDER MORGAN ENERGY PARTNERS, L.P.'S BUSINESS PENDING FEDERAL ENERGY REGULATORY COMMISSION AND CALIFORNIA PUBLIC UTILITIES COMMISSION PROCEEDINGS SEEK SUBSTANTIAL REFUNDS AND REDUCTIONS IN TARIFF RATES ON SOME OF KINDER MORGAN ENERGY PARTNERS, L.P.'S PIPELINES. IF THE PROCEEDINGS ARE DETERMINED ADVERSELY, THEY COULD HAVE A MATERIAL ADVERSE IMPACT ON US. In 1992, 1995 and 1999, some shippers on Kinder Morgan Energy Partners, L.P.'s pipelines filed complaints with the Federal Energy Regulatory Commission and California Public Utilities Commission that seek substantial refunds for alleged overcharges during the years in question and prospective reductions in the tariff rates on our Pacific operations. 25 31 The complaints predominantly attacked the interstate pipeline tariff rates of the Kinder Morgan Energy Partners, L.P.'s Pacific operations, contending that the rates were not just and reasonable under the Interstate Commerce Act and should not be entitled to "grandfathered" status under the Energy Policy Act. Complaining shippers seek substantial reparations for alleged overcharges during the years in question and request prospective rate reductions on each of the challenged facilities. These complaints are expected to proceed to hearing in August 2001, with an initial decision by the administrative law judge expected in the first half of 2002. The complaints filed before the California Public Utilities Commission challenge the rates charged for intrastate transportation of refined petroleum through the Pacific operations' pipeline system in California. After the California Public Utilities Commission dismissed these complaints and subsequently granted a limited rehearing on April 10, 2000, the complainants filed a new complaint with the California Public Utilities Commission asserting SFPP, L.P.'s intrastate rates were not just and reasonable. The Federal Energy Regulatory Commission complaint seeks approximately $105 million in tariff refunds and approximately $35 million in prospective annual tariff reductions. The California Public Utilities Commission complaint seeks approximately $17 million in tariff refunds and approximately $10 million in prospective annual tariff reductions. Decisions regarding these complaints could negatively impact Kinder Morgan Energy Partners, L.P.'s cash flow. Additional challenges to tariff rates could be filed with the Federal Energy Regulatory Commission and California Public Utilities Commission in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Kinder Morgan Energy Partners, L.P." KINDER MORGAN ENERGY PARTNERS, L.P.'S ACQUISITION STRATEGY REQUIRES ACCESS TO NEW CAPITAL. TIGHTENED CREDIT MARKETS OR MORE EXPENSIVE CAPITAL WOULD IMPAIR KINDER MORGAN ENERGY PARTNERS, L.P.'S ABILITY TO GROW. Part of Kinder Morgan Energy Partners, L.P.'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, 2000, Kinder Morgan Energy Partners, L.P. made several acquisitions that increased its asset base over 14 times and increased its net income over 23 times. Kinder Morgan Energy Partners, L.P. regularly considers and enters into discussions regarding potential acquisitions and is currently contemplating potential acquisitions. These transactions can be effected quickly, may occur at any time and may be significant in size relative to Kinder Morgan Energy Partners, L.P.'s existing assets. Kinder Morgan Energy Partners, L.P. may need new capital to finance these acquisitions. Limitations on Kinder Morgan Energy Partners, L.P.'s access to capital will impair its ability to execute this strategy. Expensive capital will limit Kinder Morgan Energy Partners, L.P.'s ability to make acquisitions that increase net income and distributable cash on a per unit basis. Kinder Morgan Energy Partners, L.P.'s ability to maintain its capital structure may impact the market value of its common units. ENVIRONMENTAL REGULATION COULD RESULT IN INCREASED OPERATING AND CAPITAL COSTS FOR KINDER MORGAN ENERGY PARTNERS, L.P. Kinder Morgan Energy Partners, L.P.'s business operations are subject to federal, state and local laws and regulations relating to environmental protection. If an accidental leak or spill of liquid petroleum products occurs from Kinder Morgan Energy Partners, L.P.'s pipelines or at its storage facilities, it may have to pay a significant amount to clean up the leak or spill. The resulting costs and liabilities could negatively affect Kinder Morgan Energy Partners, L.P.'s level of cash flow. In addition, emission controls required under the Federal Clean Air Act and other similar federal and state laws could require significant capital expenditures at Kinder Morgan Energy Partners, L.P.'s facilities. The impact of Environmental Protection Agency standards or future environmental measures on Kinder Morgan Energy Partners, L.P. could increase its costs significantly if environmental laws and regulations become stricter. Since the costs of environmental regulation are already significant, additional regulation could negatively affect Kinder Morgan Energy Partners, L.P.'s business. 26 32 COMPETITION COULD ULTIMATELY LEAD TO LOWER LEVELS OF PROFITS AND LOWER KINDER MORGAN ENERGY PARTNERS, L.P.'S CASH FLOW. Kinder Morgan Energy Partners, L.P. faces competition from other pipelines and terminals in the same markets as Kinder Morgan Energy Partners, L.P.'s assets, as well as from other means of transporting and storing energy products. For a description of the competitive factors facing the business of Kinder Morgan Energy Partners, L.P., please see "Business -- Kinder Morgan Energy Partners, L.P. -- Competition." KINDER MORGAN ENERGY PARTNERS, L.P. DOES NOT OWN APPROXIMATELY 97.5% OF THE LAND ON WHICH ITS PIPELINES ARE CONSTRUCTED AND KINDER MORGAN ENERGY PARTNERS, L.P. IS SUBJECT TO THE POSSIBILITY OF INCREASED COSTS TO RETAIN NECESSARY LAND USE. Instead, it obtains the right to construct and operate the pipelines on other people's land for a period of time. If Kinder Morgan Energy Partners, L.P. were to lose these rights, its business could be affected negatively. Southern Pacific Transportation Company has allowed Kinder Morgan Energy Partners, L.P. 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, Kinder Morgan Energy Partners, L.P. may be required to obtain permission from the land owners in order to continue to maintain the pipelines. Approximately 10% of Kinder Morgan Energy Partners, L.P.'s pipeline assets are located in the ground underneath railroad rights-of-way. Whether Kinder Morgan Energy Partners, L.P. has the power of eminent domain for its pipelines varies from state to state depending upon the type of pipeline -- petroleum liquids, natural gas or carbon dioxide -- and the laws of the particular state. Kinder Morgan Energy Partners, L.P.'s inability to exercise the power of eminent domain could negatively affect its business if it were to lose the right to use or occupy the property on which its pipelines are located. KINDER MORGAN ENERGY PARTNERS, L.P.'S RAPID GROWTH MAY CAUSE DIFFICULTIES INTEGRATING NEW OPERATIONS. Part of Kinder Morgan Energy Partners, L.P.'s business strategy includes acquiring additional businesses that will allow it to increase distributions to its unitholders. During the period from December 31, 1996 to December 31, 2000, Kinder Morgan Energy Partners, L.P. made several acquisitions that increased its asset base over 14 times and increased its net income over 23 times. Unexpected costs or challenges may arise whenever businesses with different operations and management are combined. Successful business combinations require management and other personnel to devote significant amounts of time to integrating the acquired business with existing operations. These efforts may temporarily distract their attention from day-to-day business, the development or acquisition of new properties and other business opportunities. In addition, the management of the acquired business often will not join our management team. The change in management may make it more difficult to integrate an acquired business with Kinder Morgan Energy Partners, L.P.'s existing operations. KINDER MORGAN ENERGY PARTNERS, L.P.'S DEBT INSTRUMENTS MAY LIMIT ITS FINANCIAL FLEXIBILITY AND INCREASE ITS FINANCING COSTS. The instruments governing Kinder Morgan Energy Partners, L.P. debt contain restrictive covenants that may prevent it from engaging in certain transactions that it deems beneficial and that may be beneficial to us. The agreements governing Kinder 27 33 Morgan Energy Partners, L.P.'s debt generally require it to comply with various affirmative and negative covenants, including the maintenance of certain financial ratios and restrictions on: - incurring additional debt; - entering into mergers, consolidations and sales of assets; and - granting liens. The instruments governing any future debt may contain similar restrictions. RESTRICTIONS ON KINDER MORGAN ENERGY PARTNERS, L.P.'S ABILITY TO PREPAY THE DEBT OF SFPP, L.P. MAY LIMIT ITS FINANCIAL FLEXIBILITY AND INCREASE ITS FINANCING COSTS. SFPP, L.P. is subject to restrictions with respect to its debt that may limit Kinder Morgan Energy Partners, L.P.'s flexibility in structuring or refinancing existing or future debt. These restrictions include the following: - before December 15, 2002, Kinder Morgan Energy Partners, L.P. may prepay SFPP, L.P.'s first mortgage notes with a make-whole prepayment premium; and - Kinder Morgan Energy Partners, L.P. agreed as part of the acquisition of the Pacific operations not to take actions with respect to $190 million of SFPP, L.P.'s debt that would cause adverse tax consequences for the prior general partner of SFPP, L.P. RISKS RELATED TO CONFLICTS OF INTEREST AND LIMITATIONS ON LIABILITY THE INTERESTS OF KINDER MORGAN, INC. MAY DIFFER FROM OUR INTERESTS, THE INTERESTS OF OUR SHAREHOLDERS AND THE INTERESTS OF UNITHOLDERS OF KINDER MORGAN ENERGY PARTNERS, L.P. Kinder Morgan, Inc. owns all of the stock of the general partner of Kinder Morgan Energy Partners, L.P. and elects all of its directors. The general partner of Kinder Morgan Energy Partners, L.P. owns all of our voting shares and elects all of our directors. Furthermore, some of our directors and officers are also directors and officers of Kinder Morgan, Inc. and the general partner of Kinder Morgan Energy Partners, L.P. and have fiduciary duties to manage the businesses of Kinder Morgan, Inc. and Kinder Morgan Energy Partners, L.P. in a manner that may not be in the best interest of our shareholders. Kinder Morgan, Inc. has a number of interests that differ from the interests of our shareholders and the interests of the common unitholders. As a result, there is a risk that important business decisions will not be made in your best interest as one of our shareholders. For a description of the situations in which a conflict of interest could arise, please read "Conflicts of Interest and Fiduciary Responsibilities." OUR LIMITED LIABILITY COMPANY AGREEMENT RESTRICTS OR ELIMINATES A NUMBER OF THE FIDUCIARY DUTIES THAT WOULD OTHERWISE BE OWED BY OUR BOARD OF DIRECTORS TO OUR SHAREHOLDERS AND THE PARTNERSHIP AGREEMENT OF KINDER MORGAN ENERGY PARTNERS, L.P. RESTRICTS OR ELIMINATES A NUMBER OF THE FIDUCIARY DUTIES THAT WOULD OTHERWISE BE OWED BY THE GENERAL PARTNER TO THE UNITHOLDERS. Modifications of state law standards of fiduciary duties may significantly limit the ability of our shareholders and the unitholders to successfully challenge the actions of our board of directors and the general partner, respectively, in the event of a breach of their fiduciary duties. These state law standards include the highest duties of good faith, fairness and loyalty to the shareholders and to the unitholders, as applicable. The duty of loyalty would generally prohibit our board of directors or the general partner from taking any action or engaging in any transaction as to which it has a conflict of interest. Our limited liability company agreement provides that none of our directors or officers will be liable to us or any other person for any act or omission taken or omitted in the reasonable belief that the act or omission is in or is not contrary to our best interests and is within his scope of authority, provided that the act or omission does not constitute fraud, willful misconduct, bad faith or gross negligence. For further information on the limitation of liability of our board of directors, our voting shareholder and the general partner of Kinder Morgan Energy Partners, L.P., please read "Conflicts of Interest and Fiduciary Responsibilities." 28 34 INFORMATION REGARDING FORWARD LOOKING STATEMENTS This prospectus and the documents of Kinder Morgan, Inc. and Kinder Morgan Energy Partners, L.P. incorporated in this prospectus by reference include forward-looking statements. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. They use words such as "anticipate," "believe," "intend," "plan," "projection," "forecast," "strategy," "position," "continue," "estimate," "expect," "may," "will," or the negative of those terms or other variations of them or by comparable terminology. In particular, statements, express or implied, concerning future actions, conditions or events or future operating results or the ability to generate sales, income or cash flow are forward-looking statements. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Future actions, conditions or events and future results of operations may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results are beyond the ability of us, Kinder Morgan Energy Partners, L.P., Kinder Morgan, Inc. and their affiliates to control or predict. Specific factors which could cause actual results to differ from those in the forward-looking statements, include: - price trends and overall demand for natural gas liquids, refined petroleum products, oil, carbon dioxide, natural gas, coal and other bulk materials in the United States; economic activity, weather, alternative energy sources, conservation and technological advances may affect price trends and demand; - changes in Kinder Morgan Energy Partners, L.P.'s tariff rates implemented by the Federal Energy Regulatory Commission or the California Public Utilities Commission; - Kinder Morgan, Inc.'s and Kinder Morgan Energy Partners, L.P.'s ability to integrate any acquired operations into their respective existing operations; - any difficulties or delays experienced by railroads in delivering products to the bulk terminals; - Kinder Morgan Energy Partners, L.P.'s ability to successfully identify and close strategic acquisitions and make cost saving changes in operations; - shut-downs or cutbacks at major refineries, petrochemical plants, utilities, military bases or other businesses that use or supply Kinder Morgan Energy Partners, L.P.'s services; - changes in laws or regulations, third party relations and approvals, decisions of courts, regulators and governmental bodies may adversely affect Kinder Morgan, Inc.'s and Kinder Morgan Energy Partners, L.P.'s respective business or their ability to compete; - Kinder Morgan, Inc.'s and Kinder Morgan Energy Partners, L.P.'s respective indebtedness could make each of them vulnerable to general adverse economic and industry conditions, limit their ability to borrow additional funds, place them at competitive disadvantages compared to their competitors that have less debt or have other adverse consequences; - the condition of the capital markets and equity markets in the United States; and - the political and economic stability of the oil producing nations of the world. You should not put undue reliance on any forward-looking statements. When considering forward-looking statements, please review the risk factors described under "Risk Factors" in this prospectus. 29 35 USE OF PROCEEDS KINDER MORGAN MANAGEMENT, LLC We expect that we will receive net proceeds of approximately $594 million from the sale of the 9 million shares we are offering, based on the assumed initial public offering price of $70.00 per share and after deducting underwriting discounts and estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full, we will receive net proceeds of approximately $683.5 million. We will use approximately $593 million of the net proceeds of this offering to purchase a number of i-units from Kinder Morgan Energy Partners, L.P. equal to the number of shares we sell in this offering and approximately $1 million to acquire the exchange and purchase rights and tax indemnity from Kinder Morgan, Inc. KINDER MORGAN ENERGY PARTNERS, L.P. Kinder Morgan Energy Partners, L.P. will use all of the proceeds it receives to reduce by approximately $593 million the short-term debt it incurred in its acquisition of the domestic terminal and pipeline businesses of GATX Corporation. Kinder Morgan Energy Partners, L.P.'s total debt prior to this offering is approximately $3.0 billion. This total debt will be reduced to approximately $2.4 billion following the close of this offering. As of April 3, 2001, the weighted average interest rate of the short-term debt to be retired was 5.8%. KINDER MORGAN, INC. Kinder Morgan, Inc. will use the approximately $1 million of proceeds it receives for general corporate purposes. OUR POLICY REGARDING SHARE DISTRIBUTIONS Prior to our liquidation: - we will only make distributions to owners of shares in additional shares or fractions of shares; - we will calculate the fraction of a share to be distributed per outstanding share by dividing: -- the cash distribution to be made by Kinder Morgan Energy Partners, L.P. on each common unit by -- the average market price of a share during the ten consecutive trading days preceding the date on which the shares begin to trade ex-dividend under the rules of the principal exchange on which they are listed; - we will issue our distributions of shares at the same time as Kinder Morgan Energy Partners, L.P. makes its quarterly distributions of cash to owners of common units; and - we will simultaneously make a distribution of an equivalent fraction of a voting share on each voting share or fraction owned by the general partner of Kinder Morgan Energy Partners, L.P. When we issue our quarterly distribution of shares, Kinder Morgan Energy Partners, L.P. will simultaneously issue to us i-units equal in number to the number of all shares and voting shares we distribute. 30 36 KINDER MORGAN ENERGY PARTNERS, L.P.'S DISTRIBUTION POLICY REQUIREMENT TO DISTRIBUTE AVAILABLE CASH LESS RESERVES The partnership agreement of Kinder Morgan Energy Partners, L.P. provides that it will distribute its available cash to its partners on a quarterly basis. Distributions for a quarter are made within 45 days after the end of the quarter. DEFINITION OF AVAILABLE CASH Available cash generally means, for any calendar quarter, all cash received by Kinder Morgan Energy Partners, L.P. from all sources, less all of its cash disbursements and net additions to or reductions in reserves. The term available cash excludes the amount paid in respect of the 0.5% special limited partner interest in SFPP, L.P. owned by the former general partner of SFPP, L.P., which amount will equal 0.5% of the total cash distributions made each quarter by SFPP, L.P. to its partners. ESTABLISHMENT OF RESERVES Decisions regarding amounts to be placed in or released from reserves have a direct impact on the amount of available cash for distribution. This is because increases and decreases in reserves are taken into account in computing available cash. Each quarter we may, in our reasonable discretion, determine the amounts to be placed in or released from reserves, subject to restrictions on the purposes of the reserves and to the approval of Kinder Morgan G.P., Inc. CASH, I-UNIT AND SHARE DISTRIBUTIONS Typically, the general partner and owners of common units and Class B units will receive distributions in cash, while we will receive our distributions in additional i-units. When we receive additional i-units from Kinder Morgan Energy Partners, L.P., we will issue and distribute an equal number of our shares to all of our shareholders. For each outstanding i-unit and share, a fraction of an i-unit and share will be issued. The fraction will be calculated by dividing the amount of cash being distributed per common unit by the average market price of a share over the ten consecutive trading days preceding the date on which the shares begin to trade ex-dividend under the rules of the principal exchange on which the shares are listed. The cash equivalent of distributions of i-units will be treated as if it had actually been distributed for purposes of determining the distributions to Kinder Morgan Energy Partners, L.P.'s general partner. Kinder Morgan Energy Partners, L.P. will not distribute the related cash but will retain the cash and use the cash in its business. TWO DIFFERENT TYPES OF DISTRIBUTIONS Distributions by Kinder Morgan Energy Partners, L.P. will be characterized either as distributions of cash from operations or as distributions of cash from interim capital transactions. This distinction affects the distributions to owners of common units, Class B units and i-units relative to the distributions to the general partner. Cash from Operations. Cash from operations generally refers to the cash balance of Kinder Morgan Energy Partners, L.P. on the date it commenced operations, plus all cash generated by the operations of its business, after deducting related cash expenditures, net additions to or reductions in reserves, debt service and various other items. Cash from Interim Capital Transactions. Cash from interim capital transactions will generally result only from distributions that are funded from 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. 31 37 Rule for Characterizing Distributions. To avoid the difficulty of trying to determine whether available cash distributed by Kinder Morgan Energy Partners, L.P. is cash from operations or cash from interim capital transactions, all available cash distributed by Kinder Morgan Energy Partners, L.P. from any source will be treated as distributions of cash from operations until the sum of all available cash distributed equals the cumulative amount of cash from operations actually generated from the date Kinder Morgan Energy Partners, L.P. commenced operations through the end of the calendar quarter prior to that distribution. Any distribution of available cash which, when added to the sum of all prior distributions, is in excess of the cumulative amount of cash from operations, will be considered a distribution of cash from interim capital transactions. For purposes of calculating the sum of all distributions of available cash, the total equivalent cash amount of all distributions of i-units to us as the holder of all i-units will be treated as distributions of available cash, even though the distributions to us are made in additional i-units rather than cash. Kinder Morgan Energy Partners, L.P. will retain this cash and use the cash in its business. GENERAL PROCEDURES FOR QUARTERLY DISTRIBUTIONS The following illustrates the implementation of the provisions described above. For each quarter, we will use the following procedures to determine distributions to the limited partners and general partner of Kinder Morgan Energy Partners, L.P. and to us: - first, we will determine the amount of cash receipts less cash disbursements during the quarter; - second, we will establish the net change in the reserves that will be retained from or added to this cash. The unreserved and remaining balance of cash will be the amount of available cash to be distributed; - third, we will determine whether the distribution will be characterized as cash from operations or cash from interim capital transactions; - fourth, we will calculate how this available cash will be divided and distributed among the partners of Kinder Morgan Energy Partners, L.P. If the available cash is characterized as cash from operations, we will apply the amount of available cash to the various percentage distribution levels described below in "Allocation of Distributions from Operations." If the available cash is characterized as cash from interim capital transactions, then distributions will be made according to the percentages described under "Allocation of Distributions from Interim Capital Transactions" below. As a result of this process, we will determine the amounts of cash to be distributed to the general partner and holders of the common units and Class B units. We will also determine the total cash equivalent amount that will be used to calculate the number of additional i-units to be distributed to us; - fifth, we will divide our total cash equivalent amount by the average market price of one of our shares to determine the number of additional i-units that will be distributed to us; - sixth, we will cause Kinder Morgan Energy Partners, L.P. to make the cash distributions to the general partner and holders of common units and Class B units and to distribute to us the additional i-units; and - seventh, we will issue pro rata to owners of our shares and voting shares an aggregate number of additional shares equal to the number of i-units we receive from Kinder Morgan Energy Partners, L.P. Allocation of Distributions. The discussion below indicates the percentages of distributions required to be made to the limited partners and general partner of Kinder Morgan Energy Partners, L.P. All distributions to the general partner and owners of common units and Class B units will be made in cash. 32 38 Except in liquidation, distributions to us as the owner of all i-units will be made in additional i-units or fractions of i-units. These distributions of additional i-units will be treated as if their cash equivalent amount had actually been distributed for purposes of determining the distributions to be made to the general partner. Kinder Morgan Energy Partners, L.P. will not distribute the cash related to the i-units but will retain the cash and use the cash in its business. Allocation of Distributions from Operations. Kinder Morgan Energy Partners, L.P. will make the following distributions of cash from operations for each quarter: - first, 98% to the owners of all classes of units pro rata and 2% to the general partner until the owners of all classes of units have received a total of $0.3025 per unit in cash or equivalent i-units for that quarter; - second, 85% of any available cash then remaining to the owners of all classes of units pro rata and 15% to the general partner until the owners of all classes of units have received a total of $0.3575 per unit in cash or equivalent i-units for that quarter; - third, 75% of any available cash then remaining to the owners of all classes of units pro rata and 25% to the general partner until the owners of all classes of units have received a total of $0.4675 per unit in cash or equivalent i-units for that quarter; and - fourth, 50% of any available cash then remaining to the owners of all classes of units pro rata, to owners of common units and Class B units in cash and to us in the equivalent number of i-units, and 50% to the general partner. 33 39 Illustration of a Distribution of Cash from Operations. The following tables depict a hypothetical example of a quarterly distribution of cash from operations to the partners of Kinder Morgan Energy Partners, L.P. and the related distribution of i-units and our distribution of shares to our shareholders. The example assumes that Kinder Morgan Energy Partners, L.P. has a total of 76.5 million units outstanding; composed of 64.8 million common units, 2.7 million Class B units and 9.0 million i-units, and assumes that 9.0 million of our shares are outstanding. The amounts shown for "cash receipts less cash disbursements for the quarter" and "reserves" are hypothetical and were selected to produce a quarterly distribution of exactly $1.05 of cash per common unit of Kinder Morgan Energy Partners, L.P. DETERMINATION OF AVAILABLE CASH FOR DISTRIBUTION
Cash receipts less cash disbursements for the quarter....... $130,000,000 Less reserves............................................... (1,093,980) ------------ Available cash for distribution to all partners............. $128,906,020 ============
ALLOCATION BETWEEN GENERAL PARTNER AND LIMITED PARTNERS
LIMITED PARTNERS GENERAL PARTNER TOTAL CASH FOR TOTAL CASH TO PER UNIT AMOUNT PERCENTAGE PERCENTAGE LIMITED PARTNERS GENERAL PARTNER TOTAL --------------- ---------------- --------------- ---------------- --------------- ----- First................ $0.0000-$0.3025 98% 2% $23,141,250 $ 472,270 $ 23,613,520 Second............... $0.3025-$0.3575 85% 15% 4,207,500 742,500 4,950,000 Third................ $0.3575-$0.4675 75% 25% 8,415,000 2,805,000 11,220,000 Fourth............... $0.4675-$1.0500 50% 50% 44,561,250 44,561,250 89,122,500 --------------- -- -- ----------- ----------- ------------ Total................ $ 1.05 $80,325,000 $48,581,020 $128,906,020 ============
PRO RATA ALLOCATION AMONG CLASSES OF LIMITED PARTNERS
TOTAL PER UNIT ----------- -------- Cash distributions to all owners of common units............ $68,040,000 $1.05 Cash distributions to all owners of Class B units........... 2,835,000 $1.05 Cash retained for use in Kinder Morgan Energy Partners, L.P.'s business (represents equivalent value of distributions to us as owner of all i-units).............. 9,450,000 $1.05 ----------- ----- Total....................................................... $80,325,000 ===========
DETERMINATION OF I-UNIT AND SHARE DISTRIBUTIONS (ASSUMING $70.00 AVERAGE SHARE PRICE)
CASH EQUIVALENT TOTAL CASH VALUE PER UNIT OR EQUIVALENT PER UNIT OR TOTAL PER SHARE VALUE PER SHARE ------- ----------- ---------- ----------- i-units distributed to us as owner of all i-units........... 135,000 .015000 $9,450,000 $1.05 Additional shares distributed to owners of our outstanding shares.................................................... 135,000 .015000 $9,450,000 $1.05
Allocation of Distributions from Interim Capital Transactions. Any distribution by Kinder Morgan Energy Partners, L.P. of available cash that constitutes cash from interim capital transactions will be distributed: - 98% to all owners of common units and Class B units pro rata with a distribution to us being made instead in the form of i-units; and - 2% to the general partner, until Kinder Morgan Energy Partners, L.P. has distributed cash from this source in respect of each common unit outstanding since the original public offering of Kinder Morgan Energy Partners, L.P. in an aggregate amount per unit equal to the initial common unit price of $11.50. Distribution from interim capital transactions to us, as the owner of all i-units, will not be made in cash but will be made in additional i-units. 34 40 As cash from interim capital transactions is distributed, it is treated as if it were a repayment of the initial public offering price of the common units. To reflect that repayment, the first three distribution levels will be adjusted downward proportionately by multiplying each distribution amount by a fraction, the numerator of which is the unrecovered initial common unit price immediately after giving effect to that distribution and the denominator of which is the unrecovered initial common unit price immediately prior to giving effect to that distribution. The unrecovered initial common unit price includes the amount by which the initial common unit price exceeds the aggregate distribution of cash from interim capital transactions per common unit. When the initial common unit price is fully recovered, then each of the first three distribution levels 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 classes of units pro rata with a distribution to i-units being made instead in the form of i-units and 50% to the general partner. As the owner of all i-units, we will receive our distribution in additional i-units rather than cash. ADJUSTMENT OF TARGET DISTRIBUTION LEVELS The first three 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 any type of units or otherwise, but not by reason of the issuance of additional i-units in lieu of distributions of available cash from operations or interim capital transactions or the issuance of additional common units, Class B units or i-units for cash or property. For example, in connection with Kinder Morgan Energy Partners, L.P.'s 2-for-1 split of the common units on October 1, 1997, each of the first three distribution levels was reduced to 50% of its initial level. In addition, if a distribution is made of available cash constituting cash from interim capital transactions, the first three distribution levels will be adjusted downward proportionately, by multiplying each distribution level, as the same may have been previously adjusted, by a fraction, the numerator of which is the unrecovered initial common unit price immediately after giving effect to that distribution and the denominator of which is the unrecovered initial common unit price immediately prior to that distribution. For example, assuming the unrecovered initial common unit price is $11.50 per common unit and if cash from the first interim capital transaction of $5.75 per unit is distributed to owners of common units, then the amount of the first three distribution levels would each be reduced to 50% of its initial level. If the unrecovered initial common unit price is zero, the first three distribution levels each will have been reduced to zero, and the general partner's share of distributions of available cash will increase to 50% of all distributions of available cash. The first three distribution levels may also be adjusted if legislation is enacted which causes Kinder Morgan Energy Partners, L.P. to become taxable as a corporation or otherwise subjects Kinder Morgan Energy Partners, L.P. to taxation as an entity for federal income tax purposes. In that event, the first three distribution levels for each quarter thereafter would be reduced to an amount equal to - the product of each of the first three distribution levels, - multiplied by a number which is equal to one minus the sum of: -- the highest effective federal income tax rate to which Kinder Morgan Energy Partners, L.P. is subject as an entity; plus -- any increase that results from that legislation in the effective overall state and local income tax rate to which Kinder Morgan Energy Partners, L.P. is subject as an entity, after taking into account the benefit of any deduction allowable for federal income tax purposes for the payment of state and local income taxes. 35 41 For example, assuming Kinder Morgan Energy Partners, L.P. were not previously subject to state and local income tax, if Kinder Morgan Energy Partners, L.P. were to become taxable as an entity for federal income tax purposes and Kinder Morgan Energy Partners, L.P. became subject to a highest effective federal, and effective state and local, income tax rate of 38% then each of the distribution levels would be reduced to 62% of the amount immediately prior to that adjustment. DISTRIBUTIONS IN LIQUIDATION In the event of a liquidation of Kinder Morgan Energy Partners, L.P., Kinder Morgan, Inc. will be required to purchase all of our outstanding shares for cash at a price equal to the greater of the market value per unit of the common units and the market value per share of our shares. Only if Kinder Morgan, Inc. does not meet its purchase obligations will the following be important to you as an owner of shares of Kinder Morgan Management, LLC: Upon dissolution of Kinder Morgan Energy Partners, L.P., unless Kinder Morgan Energy Partners, L.P. is reconstituted and continued, the authorized liquidator will liquidate Kinder Morgan Energy Partners, L.P.'s assets and apply the proceeds of the liquidation as follows: - first, towards the payment of all creditors of Kinder Morgan Energy Partners, L.P. and the creation of a reserve for contingent liabilities; and - then, to all partners in accordance with the positive balances in their respective capital accounts. Under some circumstances and subject to various limitations, the liquidator may defer liquidation or distribution of Kinder Morgan Energy Partners, L.P.'s assets for a reasonable period of time if the liquidator determines that an immediate sale would be impractical or would cause undue loss to the partners. If there is a liquidation of Kinder Morgan Energy Partners, L.P., it is intended that, to the extent available, we will receive allocations of income and gain, or deduction and loss, in an amount necessary for the capital account attributable to each i-unit to be equal to that of a common unit and a Class B unit. Thus, generally, any gain will be allocated: - first, to owners of the i-units until the capital account of each i-unit equals the capital account of a common unit and a Class B unit; and - thereafter, between the owners of common units, Class B units and i-units, as limited partners, and Kinder Morgan G.P., Inc., as the general partner, in a manner that approximates their sharing ratios in the various distribution levels and equally on a per unit basis between the i-units and the common and Class B units. Any loss or unrealized loss will be allocated to the general partner and the owners of common units, Class B and i-units: - first, to the common units and Class B units until the per unit balance in a common unit and Class B unit capital account equals the per unit balance in an i-unit capital account; - second, in proportion to the positive balances in the partners' capital accounts until all the balances are reduced to zero; and - thereafter, to the general partner. 36 42 CAPITALIZATION OF KINDER MORGAN MANAGEMENT, LLC The following table describes our capitalization as of February 16, 2001: - on an historical basis; and - on an as adjusted basis to give effect to the sale of 9,000,000 shares offered by us at an assumed initial public offering price of $70.00 per share, after deducting underwriting discounts and estimated offering expenses, and the application of the net proceeds as described in this prospectus. You should read this table together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes appearing elsewhere in this prospectus.
PRO FORMA AS ADJUSTED FEBRUARY 16, FOR THIS 2001 OFFERING ------------ ----------- (UNAUDITED) (IN THOUSANDS) Equity: Voting shares............................................. $100 $ 100 Non-voting shares......................................... -- 593,000 ---- -------- Total equity........................................... $100 $593,100 ==== ========
The historical and as adjusted information in the table excludes 1,350,000 shares issuable upon the exercise of the underwriters' over-allotment option. 37 43 CAPITALIZATION OF KINDER MORGAN ENERGY PARTNERS, L.P. The following table sets forth Kinder Morgan Energy Partners, L.P.'s historical capitalization as of December 31, 2000, and its capitalization as adjusted to give effect to: - the acquisition of the U.S. terminals and pipeline operations of GATX Corporation; - the issuance of $700 million of 6.75% notes due 2011 and $300 million of 7.40% notes due 2031, and the application of the proceeds to retire short-term debt; and - the payment by Kinder Morgan Management, LLC of substantially all of the net proceeds from our offering of shares to purchase a number of i-units from Kinder Morgan Energy Partners, L.P. equal to the number of outstanding shares of Kinder Morgan Management, LLC. These proceeds are expected to be $593 million, which represents 9 million shares sold at $70.00 per share, net of the underwriting discount, expected expenses and $1 million paid to Kinder Morgan, Inc. for the related rights, Kinder Morgan Energy Partners, L.P. will use those net proceeds to retire short-term debt. See "Use of Proceeds."
DECEMBER 31, PRO FORMA 2000 AS ADJUSTED ------------ (UNAUDITED) (IN THOUSANDS) Short-term debt............................................. $ 648,949 $ 55,627 Long-term debt.............................................. 1,255,453 2,375,203 Minority interest(1)........................................ 58,169 64,220 Partners' capital: Common units, 64,858,109 issued and outstanding........... 1,957,357 1,957,357 Class B units, 2,656,700 issued and outstanding........... 125,961 125,961 i-units, 9,000,001 issued and outstanding after the offering............................................... -- 593,000 General partner interest.................................. 33,749 33,749 ---------- ---------- Total partners' capital..................................... 2,117,067 2,710,067 ---------- ---------- Total capitalization........................................ $4,079,638 $5,205,117 ========== ==========
- --------------- (1) The change in minority interest results from the capital contribution by our general partner required pursuant to the partnership agreement. The unit numbers do not include: - the i-units issuable if the underwriters exercise their over-allotment option to purchase additional shares of Kinder Morgan Management, LLC; - the 218,900 common units issuable, subject to vesting, upon exercise of options granted by Kinder Morgan Energy Partners, L.P. and outstanding on December 31, 2000; and - the 5,000 units issued upon exercise of options since December 31, 2000. 38 44 CAPITALIZATION OF KINDER MORGAN, INC. The following table sets forth Kinder Morgan, Inc.'s historical capitalization as of December 31, 2000, and its capitalization as adjusted to give effect to: - the formation of Kinder Morgan Management, LLC, which will be consolidated on Kinder Morgan, Inc.'s financial statements, and the offering, which will result in additional Minority Interest in Equity of Subsidiaries amounting to the net proceeds of the offering less the net proceeds from the 900,000 offered shares that will be purchased by Kinder Morgan, Inc., and - the $1 million received by Kinder Morgan, Inc. from us for the exchange and purchase rights associated with our shares and the tax indemnity.
PRO FORMA DECEMBER 31, AS ADJUSTED 2000 (UNAUDITED) ------------ ----------- (IN THOUSANDS) Short-term debt............................................. $ 100,000 $ 168,051 ========== ========== Current portion of long-term debt........................... $ 808,167 $ 808,167 Long-term debt.............................................. 2,478,983 2,478,983 Kinder Morgan-obligated mandatorily redeemable preferred capital trust securities of subsidiary trust holding solely debentures of Kinder Morgan........................ 275,000 275,000 Minority interest in equity of subsidiaries................. 4,910 538,610 Stockholders' equity: Preferred stock........................................... -- -- Common stock; 150,000,000 shares authorized; par value $5 per share; outstanding 114,578,800 before deducting 96,140 shares held in treasury......................... 572,894 572,894 Additional paid-in capital................................ 1,189,270 1,190,270 Retained earnings......................................... 37,584 37,584 Other, including shares held in treasury.................. (2,327) (2,327) ---------- ---------- Total stockholders' equity........................ 1,797,421 1,798,421 ---------- ---------- Total capitalization........................................ $5,364,481 $5,899,181 ========== ==========
39 45 SELECTED FINANCIAL DATA OF KINDER MORGAN ENERGY PARTNERS, L.P. You should read the following selected financial data of Kinder Morgan Energy Partners, L.P. below in conjunction with the financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere or incorporated by reference in this prospectus. Our historical results are not necessarily indicative of results to be expected for future periods.
YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 1996 1997 1998(4) 1999(5) 2000(6) ---- ---- ------- ------- ------- (IN THOUSANDS EXCEPT PER UNIT AMOUNTS) INCOME AND CASH FLOW DATA: Revenues........................... $ 71,250 $ 73,932 $ 322,617 $ 428,749 $ 816,442 Cost of product sold............... 7,874 7,154 5,860 16,241 124,641 Operating expense.................. 22,347 17,982 77,162 111,275 190,329 Fuel and power..................... 4,916 5,636 22,385 31,745 43,216 Depreciation and amortization...... 9,908 10,067 36,557 46,469 82,630 General and administrative......... 9,132 8,862 39,984 35,612 60,065 -------- -------- ---------- ---------- ---------- Operating income................... 17,073 24,231 140,669 187,407 315,561 Earnings from equity investments... 5,675 5,724 25,732 42,918 71,603 Amortization of excess cost of equity investments............... -- -- (764) (4,254) (8,195) Interest (expense)................. (12,634) (12,605) (40,856) (54,336) (97,102) Interest income and other, net..... 3,129 (353) (5,992) 22,988 10,415 Income tax (provision) benefit..... (1,343) 740 (1,572) (9,826) (13,934) -------- -------- ---------- ---------- ---------- Income before extraordinary charge........................... 11,900 17,737 117,217 184,897 278,348 Extraordinary charge............... -- -- (13,611) (2,595) -- -------- -------- ---------- ---------- ---------- Net income......................... $ 11,900 $ 17,737 $ 103,606 $ 182,302 $ 278,348 ======== ======== ========== ========== ========== General partner's interest in net income........................... $ 218 $ 4,074 $ 33,447 $ 56,273 $ 109,470 Limited partners' interest in net income........................... $ 11,682 $ 13,663 $ 70,159 $ 126,029 $ 168,878 Basic limited partners' net income per unit before extraordinary charge(1)........................ $ 0.90 $ 1.02 $ 2.09 $ 2.63 $ 2.68 ======== ======== ========== ========== ========== Basic limited partners' net income per unit......................... $ 0.90 $ 1.02 $ 1.75 $ 2.57 $ 2.68 ======== ======== ========== ========== ========== Diluted limited partners' net income per unit(2)............... $ 0.90 $ 1.02 $ 1.75 $ 2.57 $ 2.67 ======== ======== ========== ========== ========== Per unit cash distribution(3)...... $ 1.26 $ 1.80 $ 2.47 $ 2.85 $ 3.43 ======== ======== ========== ========== ========== Additions to property, plant and equipment........................ $ 8,575 $ 6,884 $ 38,407 $ 82,725 $ 125,523 BALANCE SHEET DATA (AT END OF PERIOD): Net property, plant and equipment........................ $235,994 $244,967 $1,763,386 $2,578,313 $3,306,305 Total assets....................... $303,603 $312,906 $2,152,272 $3,228,738 $4,625,210 Long-term debt..................... $160,211 $146,824 $ 611,571 $ 989,101 $1,255,453 Partners' capital.................. $118,344 $150,224 $1,360,663 $1,774,798 $2,117,067
- --------------- (1) Represents income before extraordinary charge per unit adjusted for the two-for-one split of units on October 1, 1997. Basic limited partners' income per unit before extraordinary charge was computed by dividing the interest of our unitholders in income before 40 46 extraordinary charge by the weighted average number of units outstanding during the period. (2) Diluted limited partners' net income per unit reflects the potential dilution, by application of the treasury stock method, that could occur if options to issue units were exercised, which would result in the issuance of additional units that would then share in Kinder Morgan Energy Partners, L.P.'s net income. (3) Represents cash distributions declared for the four quarters of the calendar year. Actual cash distributions made during each year is different since distributions are paid 45 days after the end of the respective quarter. (4) Includes results of operations for Pacific operations, Kinder Morgan Bulk Terminals Inc. and 24% interest in Plantation Pipe Line Company since dates of acquisition. Pacific operations were acquired on March 6, 1998. Kinder Morgan Bulk Terminals was acquired effective July 1, 1998 and our 24% interest in Plantation Pipe Line Company Inc. was acquired on September 15, 1998. (5) Includes results of operations for 51% interest in Plantation Pipe Line Company, Product Pipelines' transmix operations and 33 1/3% interest in Trailblazer Pipeline Company since dates of acquisition. Our second investment in Plantation, representing a 27% interest was made on June 16, 1999. The Product Pipelines' transmix operations were acquired on September 10, 1999, and our initial 33 1/3% investment in Trailblazer was made effective November 30, 1999. (6) Includes results of operations for Kinder Morgan Interstate Gas Transmission LLC, 66 2/3% interest in Trailblazer Pipeline Company, 49% interest in Red Cedar Gathering Company, Kinder Morgan CO(2) Company acquisitions, Kinder Morgan Transmix Company, Milwaukee and Dakota bulk terminals, 32.5% interest in Cochin Pipeline System and Delta Terminal Services since dates of acquisition. Kinder Morgan Interstate Gas Transmission, LLC, Trailblazer assets, and our 49% interest in Red Cedar were acquired effective December 31, 1999. Milwaukee Bulk Terminals, Inc. and Dakota Bulk Terminal, Inc. were acquired effective January 1, 2000. Our remaining 80% interest in Kinder Morgan CO(2) Company was acquired on April 1, 2000. The Devon Energy carbon dioxide properties were acquired on June 1, 2000. Kinder Morgan Transmix Company, LLC was acquired on October 25, 2000. Our 32.5% interest in Cochin was acquired effective November 3, 2000, and Delta Terminal Services, Inc. was acquired effective December 1, 2000. 41 47 SELECTED PRO FORMA FINANCIAL DATA OF KINDER MORGAN ENERGY PARTNERS, L.P. The following table shows selected income and cash flow data and balance sheet data for Kinder Morgan Energy Partners, L.P.: - for the year ended December 31, 2000; - pro forma to reflect: -- the acquisition of the U.S. terminals and pipeline operations of GATX Corporation; and -- the issuance of $700 million of 6.75% notes due 2011 and $300 million of 7.40% notes due 2031, and the application of the proceeds to retire short-term debt; and - as adjusted to reflect the payment by Kinder Morgan Management, LLC of substantially all of the net proceeds from our public offering of the shares to purchase i-units from Kinder Morgan Energy Partners, L.P. These proceeds are expected to be $593 million, which represents 9 million shares sold at $70.00 per share, net of the underwriting discount, expected expenses and $1 million paid to Kinder Morgan, Inc. for the related rights. Kinder Morgan Energy Partners, L.P. will use those net proceeds to retire short-term debt. The unaudited pro forma for GATX data have been derived from the historical balance sheets and income statements of Kinder Morgan Energy Partners, L.P. and GATX Terminals Companies as of December 31, 2000 and for the year then ended. The unaudited pro forma data have been prepared to give effect to the acquisition of the U.S. terminals and pipeline operations of GATX Terminals Companies for $1.170 billion, consisting of $988.5 million in cash and assumed debt and other liabilities of $181.5 million, exclusive of working capital, using the purchase method of accounting. The acquisition was consummated on March 1, 2001, except for CALNEV Pipeline Company which was consummated March 30, 2001. The unaudited pro forma data have been prepared assuming the acquisition had been consummated on January 1, 2000. The purchase price allocated in the unaudited pro forma data is based on management of Kinder Morgan Energy Partners, L.P.'s estimate of the fair market values of assets to be acquired and liabilities to be assumed. The unaudited pro forma data include assumptions and adjustments as described in the notes to the unaudited pro forma combined financial statements incorporated in this prospectus by reference and should be read in conjunction with the historical financial statements and related notes of Kinder Morgan Energy Partners, L.P. and GATX Terminals Companies incorporated in this prospectus by reference. The unaudited pro forma data may not be indicative of the results that would have occurred if the GATX acquisition had been consummated on the date indicated or which will be obtained in the future. 42 48
PRO FORMA PRO FORMA YEAR ENDED FOR GATX AS ADJUSTED DECEMBER 31, 2000 AND DEBT OFFERING FOR SALE OF I-UNITS ----------------- ----------------- ------------------- (HISTORICAL) (UNAUDITED) (UNAUDITED) (IN THOUSANDS EXCEPT PER UNIT AMOUNTS) INCOME AND CASH FLOW DATA: Revenues................................. $ 816,442 $1,075,632 $1,075,632 Cost of product sold..................... 124,641 124,641 124,641 Operations and maintenance............... 164,379 263,125 263,125 Fuel and power........................... 43,216 43,216 43,216 Depreciation and amortization............ 82,630 109,583 109,583 General and administrative............... 60,065 91,728 91,728 Taxes, other than income taxes........... 25,950 25,950 25,950 ---------- ---------- ---------- Operating income................. 315,561 417,389 417,389 Earnings from equity investments......... 71,603 71,603 71,603 Amortization of excess cost of equity investments........................... (8,195) (8,195) (8,195) Interest, net............................ (93,284) (174,393) (130,507) Other, net............................... 14,584 14,584 14,584 Minority interest........................ (7,987) (8,167) (8,611) ---------- ---------- ---------- Income before income taxes............... 292,282 312,821 356,263 Income tax benefit (expense)............. (13,934) (13,934) (13,934) ---------- ---------- ---------- Net income............................... $ 278,348 $ 298,887 $ 342,329 ========== ========== ========== General partner's interest in net income................................ $ 109,470 $ 122,094 $ 139,209 Limited partners' interest in net income................................ $ 168,878 $ 176,793 $ 203,120 Basic limited partners' net income per unit.................................. $ 2.68 $ 2.80 $ 2.82 ========== ========== ========== Number of units used in computation...... 63,107 63,107 72,107 Diluted limited partners' net income per unit.................................. $ 2.67 $ 2.80 $ 2.82 ========== ========== ========== Number of units used in computation...... 63,150 63,150 72,150 Additions to property, plant and equipment............................. $ 125,523 $ 180,760 $ 180,760 BALANCE SHEET DATA (AT END OF PERIOD): Net property, plant and equipment........ $3,306,305 $4,433,818 $4,433,818 Total assets............................. $4,625,210 $5,829,015 $5,829,015 Short-term debt.......................... $ 648,949 $ 654,678 $ 55,627 Long-term debt........................... $1,255,453 $2,375,203 $2,375,203 Partners' capital........................ $2,117,067 $2,117,067 $2,710,067
43 49 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis in conjunction with our "Selected Financial Data" and our financial statements and the related notes appearing elsewhere in this prospectus. You should also read the Selected Financial Data of Kinder Morgan Energy Partners, L.P. included in this prospectus as well as the financial statements and related notes of Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc. incorporated by reference in this prospectus. Kinder Morgan Management, LLC GENERAL Kinder Morgan Management, LLC is a limited liability company, formed on February 14, 2001, that has elected to be treated as a corporation for United States income tax purposes. All of our voting shares are owned indirectly by Kinder Morgan, Inc. BUSINESS On the closing of the initial offering of our shares to the public and our acquisition of an equal number of i-units from Kinder Morgan Energy Partners, L.P., Kinder Morgan G.P., Inc. will delegate to us, to the fullest extent permitted under Delaware law and the Kinder Morgan Energy Partners, L.P. partnership agreement, all of its power and authority to manage and control the business and affairs of Kinder Morgan Energy Partners, L.P., subject to Kinder Morgan G.P., Inc.'s right to approve specified actions. LIQUIDITY AND CAPITAL RESOURCES Our authorized capital structure consists of two classes of membership interests: (1) equity interests with limited voting rights and (2) voting equity interests. Additional classes of equity interests may be approved by our board, provided that such additional class shall be owned only by Kinder Morgan G.P., Inc. At February 16, 2001, the issued capitalization consisted of $100,000 contributed by Kinder Morgan, G.P., Inc. for its voting equity interest. We expect to issue shares of equity interests with limited voting rights for cash to the public, using all of the net proceeds to purchase i-units from Kinder Morgan Energy Partners, L.P. and acquire the exchange and purchase rights and tax indemnity from Kinder Morgan, Inc. The number of our shares outstanding, including the voting equity interest owned by Kinder Morgan G.P., Inc., will at all times equal the number of i-units we own. All quarterly distributions from operations and from interim capital transactions will be made to us as the holder of i-units in additional i-units rather than cash. Each time Kinder Morgan Energy Partners, L.P. issues i-units to us, we will also distribute an equal number of shares to owners of our shares. The number of i-units and shares will remain equal. We expect that our expenditures associated with managing and controlling the business and affairs of Kinder Morgan Energy Partners, L.P. and the reimbursement received from Kinder Morgan Energy Partners, L.P. will be equal. Kinder Morgan Energy Partners, L.P. will also reimburse us for our general and administrative expenses associated with securities filings and related costs. As stated above, the distributions we expect to receive on the i-units we will own will be in the form of additional i-units. Therefore, we expect neither to generate nor to require significant amounts of cash in ongoing operations. Any cash received from the sale of additional shares will be immediately used to purchase additional i-units. Accordingly, we do not anticipate any other sources or needs for additional liquidity. 44 50 RESULTS OF OPERATIONS Upon completion of our initial offering of shares to the public and the purchase of i-units from Kinder Morgan Energy Partners, L.P., our results of operations will consist of (1) the offsetting expenses and revenues associated with managing and controlling the business and affairs of Kinder Morgan Energy Partners, L.P. and (2) our share of the earnings of Kinder Morgan Energy Partners, L.P. attributable to the i-units we will hold. If this offering is completed for 9,000,000 shares (assuming no exercise of the underwriters' overallotment option), we will own approximately 11.8% of all of Kinder Morgan Energy Partners, L.P.'s outstanding limited partner interests. We will use the equity method of accounting for our investment and, therefore, will record earnings equal to approximately 11.8% of Kinder Morgan Energy Partners, L.P.'s limited partners' net income. Our percentage ownership could change over time if our number of units held becomes a different percent of the total units outstanding due to, among other things, the distribution of additional i-units to us and other issuances of additional common units by Kinder Morgan Energy Partners, L.P. As shown in the historical financial statements of Kinder Morgan Energy Partners, L.P. incorporated by reference into this prospectus, the limited partners' interest in net income was $168.9 million, $126 million and $70.2 million for the years ended December 31, 2000, 1999 and 1998, respectively. These historical amounts are not necessarily indicative of the level of earnings to be expected in the future. KINDER MORGAN ENERGY PARTNERS, L.P. RESULTS OF OPERATIONS Kinder Morgan Energy Partners, L.P.'s financial results over the past three years reflect significant growth in revenues, operating income and net income. During this timeframe, Kinder Morgan Energy Partners, L.P. made numerous strategic business acquisitions and experienced strong growth in its pipeline and terminal operations. The combination of targeted business acquisitions, higher capital spending, favorable economic conditions and management's continuing focus on controlling general and operating expenses across Kinder Morgan Energy Partners, L.P.'s entire business portfolio led the way to strong growth in all four of its business segments. In 2000, Kinder Morgan Energy Partners, L.P. reported record levels of revenue, operating income, net income and earnings per unit. Kinder Morgan Energy Partners, L.P.'s net income was $278.3 million ($2.67 per diluted unit) on revenues of $816.4 million in 2000, compared to net income of $182.3 million ($2.57 per diluted unit) on revenues of $428.7 million in 1999, and net income of $103.6 million ($1.75 per diluted unit) on revenues of $322.6 million in 1998. Included in Kinder Morgan Energy Partners, L.P.'s net income for 1999 and 1998 were extraordinary charges associated with debt refinancing transactions in the amount of $2.6 million in 1999 and $13.6 million in 1998. In addition, Kinder Morgan Energy Partners, L.P.'s 1999 net income included a benefit of $10.1 million related to the sale of its 25% interest in the Mont Belvieu Fractionator, which separates natural gas liquids from natural gas, partially offset by special non-recurring charges. Kinder Morgan Energy Partners, L.P.'s total consolidated operating income was $315.6 million in 2000, $187.4 million in 1999 and $140.7 million in 1998. Kinder Morgan Energy Partners, L.P.'s total consolidated net income before extraordinary charges was $278.3 million in 2000, $184.9 million in 1999 and $117.2 million in 1998. Kinder Morgan Energy Partners, L.P.'s increase in overall net income and revenues in 2000 compared to 1999 primarily resulted from its inclusion of the Natural Gas Pipelines segment, acquired from Kinder Morgan, Inc. on December 31, 1999, and its acquisition of the remaining 80% ownership interest in Kinder Morgan CO(2) Company, L.P. (formerly Shell CO(2) Company, Ltd.) effective April 1, 2000. Prior to that date, Kinder Morgan Energy Partners, L.P. owned a 20% equity interest in Kinder Morgan CO(2) Company, L.P. and reported its results under the equity method of accounting. The results of Kinder Morgan CO(2) Company, L.P. are included in 45 51 Kinder Morgan Energy Partners, L.P.'s CO(2) Pipelines segment. Kinder Morgan Energy Partners, L.P.'s acquisition of substantially all of its Product Pipelines' transmix operations in September 1999, and Milwaukee Bulk Terminals, Inc. and Dakota Bulk Terminal, Inc. in January 2000, also contributed to its overall increase in period-to-period revenues and net income. The inclusion of a full year of activity for Kinder Morgan Energy Partners, L.P.'s Pacific operations and Bulk Terminals segment was the largest contributing factor for the increase in total revenues and earnings in 1999 compared with 1998. Kinder Morgan Energy Partners, L.P. acquired its Pacific operations in March 1998, Kinder Morgan Bulk Terminals, Inc. in July 1998 and the Pier IX and Shipyard River terminals in December 1998. PRODUCT PIPELINES Kinder Morgan Energy Partners, L.P.'s Product Pipelines' segment revenues increased 34%, from $314.1 million in 1999 to $421.4 million in 2000, and net income increased 6%, from $209.0 million in 1999 to $221.2 million in 2000. The $107.3 million increase in year-to-year segment revenues includes a $90.7 million increase in revenues earned from transmix operations. The increase in transmix revenues resulted primarily from the inclusion of a full year of operations from our initial acquisition of transmix assets, acquired in September 1999, and the inclusion of two months of operations from additional transmix assets acquired in late October 2000. The segment also reported revenues of $3.8 million from the inclusion of two months of operations from our investment in the Cochin pipeline system, which was acquired in November 2000. Furthermore, higher throughput volumes on both Kinder Morgan Energy Partners, L.P.'s Pacific operations and North System pipelines contributed to a $12.7 million increase in segment revenues. On Kinder Morgan Energy Partners, L.P.'s Pacific operations, average tariff rates remained relatively flat between 2000 and 1999, with an almost 3% increase in mainline delivery volumes resulting in a 3% increase in revenues. On Kinder Morgan Energy Partners, L.P.'s North System, revenues grew 14% in 2000 compared to 1999. The increase was due to an almost 10% increase in throughput revenue volumes, primarily due to strong demand from refineries in the Midwest, as well as a 5% increase in average tariff rates. In 1998, the Product Pipelines segment earned $156.9 million on revenues of $258.7 million. The $55.4 million increase in revenues in 1999 over 1998 relates to the inclusion in 1999 of a full year of results from Kinder Morgan Energy Partners, L.P.'s Pacific operations, acquired in March 1998, and the inclusion of almost four months of transmix operations, which were acquired in early September 1999. The acquired transmix assets produced revenues of $18.3 million in 1999. Kinder Morgan Energy Partners, L.P.'s Pacific operations reported a revenue increase of $35.3 million in 1999 versus 1998. With a full 12 months of activity reported in 1999, total mainline throughput volumes on Kinder Morgan Energy Partners, L.P.'s Pacific operations pipelines increased 22% in 1999 compared to 1998. The higher 1999 segment revenues were partly offset by an almost 4% decrease in average tariff rates on Kinder Morgan Energy Partners, L.P.'s Pacific pipelines. The decrease in average tariff rates was mainly due to the reduction in transportation rates, effective April 1, 1999, on Kinder Morgan Energy Partners, L.P.'s Pacific operation's East Line. Combined operating expenses for the Product Pipelines segment, which include the segment's cost of sales, fuel, power and operating and maintenance expenses, were $172.5 million in 2000, $76.5 million in 1999 and $56.3 million in 1998. The increase in expenses in each year resulted mainly from the inclusion of Kinder Morgan Energy Partners, L.P.'s transmix operations and the higher delivery volumes on its Pacific operations pipelines. Depreciation and amortization expense was $41.7 million in 2000, $38.9 million in 1999 and $32.7 million in 1998, reflecting Kinder Morgan Energy Partners, L.P.'s acquisitions, continued investments in capital additions and pipeline expansions. Segment operating income was $193.5 million in 2000, $186.1 million in 1999 and $159.2 million in 1998. Earnings from Kinder Morgan Energy Partners, L.P.'s equity investments, net of amortization of excess costs, were $29.1 million in 2000, $21.4 million 46 52 in 1999 and $5.9 million in 1998. The increases in Kinder Morgan Energy Partners, L.P.'s equity earnings each year were chiefly due to Kinder Morgan Energy Partners, L.P.'s investments in Plantation Pipe Line Company. Kinder Morgan Energy Partners, L.P. acquired a 24% ownership interest in Plantation Pipe Line Company in September 1998 and an additional 27% ownership interest in June 1999. Additionally, the Product Pipelines segment benefited from favorable changes in non-operating income/expense in 1999 compared to 1998, primarily the result of lower 1999 expense accruals made for Kinder Morgan Energy Partners, L.P.'s Federal Energy Regulatory Commission rate case reserve (as a result of the Federal Energy Regulatory Commission's opinion relating to an outstanding rate case dispute), 1999 insurance recoveries and favorable adjustments to employee post-retirement benefit liabilities. We are parties to proceedings at the Federal Energy Regulatory Commission and the California Public Utilities Commission that challenge our tariffs on our Pacific operations. The Federal Energy Regulatory Commission complaint seeks approximately $105 million in tariff refunds and approximately $35 million in prospective annual tariff reductions. The California Public Utilities Commission complaint seeks approximately $17 million in tariff refunds and approximately $10 million in prospective annual tariff reductions. Decisions regarding these complaints could negatively impact Kinder Morgan Energy Partners, L.P.'s cash flow. Additional challenges to tariff rates could be filed with the Federal Energy Regulatory Commission and California Public Utilities Commission in the future. Kinder Morgan Energy Partners, L.P. believes it has meritorious defenses in the proceedings challenging its pipeline tariffs, and it is defending these proceedings vigorously. Kinder Morgan Energy Partners, L.P. believes the ultimate resolutions of these proceedings will be materially more favorable than the outcomes sought by the protesting shippers and expects these resolutions will not have a material adverse effect on Kinder Morgan Energy Partners, L.P.'s financial condition or results of operations; nonetheless, a decision by either or both of the California Public Utilities Commission and Federal Energy Regulatory Commission granting the complaining shippers the relief they seek may have a material adverse effect. NATURAL GAS PIPELINES Kinder Morgan Energy Partners, L.P.'s Natural Gas Pipelines segment reported earnings of $112.9 million on revenues of $173.0 million in 2000. These results were produced from assets that Kinder Morgan Energy Partners, L.P. acquired from Kinder Morgan, Inc. on December 31, 1999. For comparative purposes, transported gas volumes on our natural gas assets increased almost 6% in 2000 compared with 1999 when these assets were owned by Kinder Morgan, Inc. The overall increase includes an almost 9% increase in volumes shipped on the Trailblazer Pipeline. Higher capacity to receive natural gas on the Trailblazer Pipeline during 2000 resulted in an increase in the available quantity of gas delivered to the Trailblazer Pipeline. Segment operating expenses totaled $51.2 million in 2000 and segment operating income was $97.2 million. Earnings for 2000 from the segment's 49% equity investment in Red Cedar Gathering Company, net of amortization of excess costs, were $15.0 million. Segment results from 1999 and 1998 primarily represent activity from Kinder Morgan Energy Partners, L.P.'s since divested partnership interest in the Mont Belvieu fractionation facility. Segment earnings of $16.8 million in 1999 includes $2.5 million in equity earnings from its 25% interest in the Mont Belvieu Fractionator and $14.1 million from Kinder Morgan Energy Partners, L.P.'s third quarter gain on the sale of that interest to Enterprise Products Partners, L.P. In 1998, the segment reported earnings of $4.9 million, including equity income of $4.6 million. This amount represents earnings from our interest in the Mont Belvieu facility for a full twelve-month period. 47 53 CO(2) PIPELINES Kinder Morgan Energy Partners, L.P.'s CO(2) Pipelines segment consists of Kinder Morgan CO(2) Company, L.P. After Kinder Morgan Energy Partners, L.P.'s acquisition of the remaining 80% interest in Kinder Morgan CO(2) Company, L.P., on April 1, 2000, Kinder Morgan Energy Partners, L.P. no longer accounted for its investment on an equity basis. Kinder Morgan Energy Partners, L.P.'s 2000 results also include the segment's acquisition of significant CO(2) pipeline assets and oil-producing property interests on June 1, 2000. For the year 2000, the segment reported earnings of $68.0 million on revenues of $89.2 million. CO(2) Pipelines reported operating expenses of $26.8 million and operating income of $47.9 million. Equity earnings from the segment's 50% interest in the Cortez Pipeline Company, net of amortization of excess costs, were $19.3 million. Segment results from 1999 and 1998 primarily represent equity earnings from Kinder Morgan Energy Partners, L.P.'s original 20% interest in Kinder Morgan CO(2) Company, L.P. Segment earnings of $15.2 million in 1999 include $14.5 million in equity earnings from Kinder Morgan Energy Partners, L.P.'s interest in Kinder Morgan CO(2) Company, L.P. In 1998, Kinder Morgan Energy Partners, L.P.'s CO(2) Pipelines segment reported earnings of $15.5 million, including $14.5 million in equity earnings from Kinder Morgan Energy Partners, L.P.'s Kinder Morgan CO(2) Company, L.P. investment. Under the terms of the prior Kinder Morgan CO(2) Company, L.P. partnership agreement, Kinder Morgan Energy Partners, L.P. received a priority distribution of $14.5 million per year during 1998, 1999 and the first quarter of 2000. After Kinder Morgan Energy Partners, L.P.'s acquisition of the remaining 80% ownership interest, it amended this partnership agreement, among other things, to eliminate the priority distribution and other provisions rendered irrelevant by its sole ownership. BULK TERMINALS Kinder Morgan Energy Partners, L.P.'s Bulk Terminals segment reported its highest amount of revenues, operating income and earnings in 2000. Following Kinder Morgan Energy Partners, L.P.'s acquisition of Kinder Morgan Bulk Terminals, Inc. effective July 1, 1998, it continued to make selective acquisitions and increase capital spending in order to grow and expand its bulk terminal businesses. Kinder Morgan Energy Partners, L.P.'s 2000 results include the operations of Milwaukee Bulk Terminals, Inc. and Dakota Bulk Terminal, Inc., effective January 1, 2000, and Delta Terminal Services, Inc., acquired on December 1, 2000. The 1999 results include the full-year of operations for Kinder Morgan Bulk Terminals, Inc. and the Pier IX and Shipyard River terminals, acquired on December 18, 1998. The Bulk Terminals segment reported earnings of $37.6 million in 2000, $35.0 million in 1999 and $19.2 million in 1998. Segment revenues were $132.8 million in 2000, $114.6 million in 1999 and $62.9 million in 1998. In addition to Kinder Morgan Energy Partners, L.P.'s acquisitions made in 2000, which generated revenues of $11.4 million, its Bulk Terminals segment's overall increases in year-to-year revenues were due to a 10% increase in coal transfer revenues earned by the segment's Cora and Grand Rivers coal terminals in 1999 and 2000. Combined, these two coal terminals reported a $2.0 million increase in transfer revenues in 2000 over 1999 due to a 6% increase in coal volumes accompanied by a 4% increase in average coal transfer rates. A $1.7 million increase in 1999 transfer revenues over 1998 transfer revenues resulted from an 18% increase in coal volumes handled at the terminals, partially offset by a 7% decrease in average transfer rates. The growth in the Bulk Terminals segment revenues over the two-year period was partially offset by lower revenue from coal marketing activities. Bulk Terminals combined operating expenses totaled $81.7 million in 2000 compared to $66.6 million in 1999 and $36.9 million in 1998. The increase in 2000 versus 1999 was the result of acquisitions made in 2000, higher operating expenses associated with the transfer of higher coal volumes and an increase in fuel costs. The increase in 1999 compared to 1998 was the 48 54 result of including a full year of operations for Kinder Morgan Bulk Terminals, Inc., partially offset by higher 1998 cost of sales expenses related to purchase/sale marketing contracts. Depreciation and amortization expense was $9.6 million in 2000, $7.5 million in 1999 and $3.9 million in 1998. The increases in depreciation were primarily due to the addition of Kinder Morgan Bulk Terminals, Inc. and the Pier IX and Shipyard River terminal in 1998 and the Milwaukee and Dakota Bulk Terminals in 2000, and higher property balances as a result of increased capital spending. OTHER Items not attributable to any segment include general and administrative expenses, interest income and expense and minority interest. General and administrative expenses totaled $60.1 million in 2000 compared with $35.6 million in 1999 and $40.0 million in 1998. The increase in Kinder Morgan Energy Partners, L.P.'s 2000 general and administrative expenses over the prior year was mainly due to its larger and more diverse operations. During 2000, Kinder Morgan Energy Partners, L.P. assimilated the operations of its Natural Gas Pipelines and CO(2) Pipelines business segments. Kinder Morgan Energy Partners, L.P. continues to manage aggressively its infrastructure expense and to focus on its productivity and expense controls. Kinder Morgan Energy Partners, L.P.'s total interest expense, net of interest income, was $93.3 million in 2000, $52.6 million in 1999 and $38.6 million in 1998. The increases were primarily due to debt Kinder Morgan Energy Partners, L.P. assumed as part of the acquisition of its Pacific operations as well as additional debt related to the financing of its 2000 and 1999 investments. Minority interest increased to $8.0 million in 2000 compared with $2.9 million in 1999 and $1.0 million in 1998. The $5.1 million increase in 2000 over 1999 primarily resulted from the inclusion of earnings attributable to the Trailblazer Pipeline Company. The $1.9 million increase in 1999 over 1998 resulted from higher earnings attributable to Kinder Morgan Energy Partners, L.P.'s Pacific operations as well as to Kinder Morgan Energy Partners, L.P.'s higher overall income. OUTLOOK Kinder Morgan Energy Partners, L.P. actively pursues a strategy to increase its operating income. Kinder Morgan Energy Partners, L.P. will use a three-pronged strategy to accomplish this goal. - Cost Reductions. Kinder Morgan Energy Partners, L.P. has reduced by approximately 15 percent the total operating, maintenance, general and administrative expenses of those operations that it owned at the time Kinder Morgan (Delaware), Inc. acquired Kinder Morgan Energy Partners, L.P.'s general partner in February 1997. In addition, Kinder Morgan Energy Partners, L.P. has made similar percentage reductions in the operating, maintenance, general and administrative expenses of many of the businesses and assets that it acquired since February 1997, including its Pacific operations and Plantation Pipe Line Company. Generally, these reductions in expense have been achieved by eliminating functions which Kinder Morgan Energy Partners, L.P. and the acquired businesses each maintained prior to their combination. Kinder Morgan Energy Partners, L.P. expects to make similar percentage reductions in expenses of the recently acquired GATX pipelines and terminals and intends to continue to seek further reductions throughout its businesses where appropriate. - Internal Growth. Kinder Morgan Energy Partners, L.P. intends to expand the operations of its current facilities. Kinder Morgan Energy Partners, L.P. has taken a number of steps that management believes will increase revenues from existing operations, including the following: - completed the expansion of Kinder Morgan Energy Partners, L.P.'s San Diego Line in June 2000. The expansion project cost approximately $18 million and consisted of the 49 55 construction of 23 miles of 16-inch diameter pipe and other appurtenant facilities. The new facilities will increase capacity on Kinder Morgan Energy Partners, L.P.'s San Diego Line by approximately 25%; - entered into an agreement to provide pipeline transportation services on the North System for Aux Sable Liquid Products, L.P. in the Chicago area beginning in the first quarter 2001; - constructed a multi-million dollar cement import and distribution facility at the Shipyard River terminal, which was completed in the fourth quarter 2000, as part of a 30 year cement contract with Blue Circle Cement; - announced an expansion project on the Trailblazer Pipeline in August 2000. The project will involve the installation of two new compressor stations and the addition of horsepower at an existing compressor station; and - continued a $13 million upgrade to the coal loading facilities at the Cora and Grand Rivers coal terminals. The two terminals handled an aggregate of 17.0 million tons of coal during 2000 compared with 16.0 million tons in 1999. - Strategic Acquisitions. Since January 1, 2000, Kinder Morgan Energy Partners, L.P. has made the following acquisitions: - - Milwaukee Bulk Terminals, Inc. January 1, 2000 - - Dakota Bulk Terminal, Inc. January 1, 2000 - - Kinder Morgan CO(2) Company, L.P. (80%) April 1, 2000 - - CO(2) Assets June 1, 2000 - - Transmix Assets October 25, 2000 - - Cochin Pipeline System November 3, 2000 - - Delta Terminal Services, Inc. December 1, 2000 - - Kinder Morgan Texas Pipeline, L.P. December 21, 2000 - - Casper-Douglas Gas Gathering and Processing Assets December 21, 2000 - - Coyote Gas Treating, LLC (50%) December 21, 2000 - - Thunder Creek Gas Services, LLC (25%) December 21, 2000 - - CO(2) Investment to be contributed to Joint Venture December 28, 2000 with Marathon - - Colton Transmix Processing Facility (50%) December 31, 2000 - - GATX Domestic Pipelines and Terminals March 1, 2001 and March 30, 2001 - - Pinney Dock and Transportation Company March 13, 2001
The costs and methods of financing for each significant acquisition are discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Kinder Morgan Energy Partners, L.P. -- Capital Requirements for Recent Transactions." Kinder Morgan Energy Partners, L.P. regularly seeks opportunities to make additional strategic acquisitions, to expand existing businesses and to enter into related businesses. Kinder Morgan Energy Partners, L.P. periodically considers potential acquisition opportunities as they are identified. We cannot assure you that Kinder Morgan Energy Partners, L.P. will be able to consummate any such acquisition. Kinder Morgan Energy Partners, L.P.'s management anticipates that it will finance acquisitions by borrowings under its bank credit facilities or by issuing commercial paper, and subsequently reduce these short-term borrowings by issuing new debt securities and/or units. 50 56 On February 14, 2001, Kinder Morgan Energy Partners, L.P. paid a quarterly distribution of $0.95 per unit for the fourth quarter of 2000. The distribution for the fourth quarter of 1999 was $0.725 per unit. On April 18, 2001, Kinder Morgan Energy Partners, L.P. declared a distribution for the first quarter of 2001 of $1.05. This distribution will be paid on May 15, 2001 to unitholders of record on April 30, 2001. This distribution is 35% greater than the $0.775 distributed for the first quarter of 2000 and 11% greater than the $0.95 distributed for the fourth quarter of 2000. LIQUIDITY AND CAPITAL RESOURCES Kinder Morgan Energy Partners, L.P.'s primary cash requirements, in addition to normal operating expenses, are debt service, sustaining capital expenditures, expansion capital expenditures, and quarterly distributions to its unitholders and general partner. In addition to utilizing cash generated from operations, Kinder Morgan Energy Partners, L.P. could meet its cash requirements through borrowings under its credit facilities or issuing short-term commercial paper, long-term notes or additional units. Kinder Morgan Energy Partners, L.P. expects to fund: - future cash distributions and sustaining capital expenditures with existing cash and cash flows from operating activities; - expansion capital expenditures through additional borrowings or issuance of additional units; - interest payments from cash flows from operating activities; and - debt principal payments with additional borrowings as they become due or by the issuance of additional units. The scheduled maturities of Kinder Morgan Energy Partners, L.P.'s outstanding debt at March 31, 2001, are summarized as follows (in thousands): 2001........................................................ $1,117,554 2002........................................................ 248,066 2003........................................................ 37,016 2004........................................................ 17 2005........................................................ 199,690 Thereafter.................................................. 1,657,608 ---------- Total............................................. $3,259,951 ==========
Kinder Morgan Energy Partners, L.P. expects to use the proceeds it will receive from the offering to repay approximately $593 million of its short-term indebtedness. If the offering is not closed on a timely basis Kinder Morgan Energy Partners, L.P. expects to refinance most of its short-term debt on a short term basis with the objective of ultimately repaying the short-term debt from equity proceeds or refinancing it on a long-term basis. At December 31, 2000, Kinder Morgan Energy Partners, L.P.'s current commitments for capital expenditures were approximately $37 million. This amount has primarily been committed for the purchase of plant and equipment. Kinder Morgan Energy Partners, L.P. expects to fund these commitments through additional borrowings or the issuance of additional units. All of Kinder Morgan Energy Partners, L.P.'s capital expenditures, with the exception of sustaining capital expenditures, are discretionary. 51 57 OPERATING ACTIVITIES Net cash provided by operating activities was $301.6 million in 2000 compared to $182.9 million in 1999. The $118.7 million increase in Kinder Morgan Energy Partners, L.P.'s period-to-period cash flows from operations resulted from a net increase of $118.5 million in cash receipts from the sales of services and products, net of cash operating expenses. Higher net cash flows generated from sales and expenses were primarily due to the business acquisitions and capital investments made during 2000. Other significant year-to-year changes in cash from operating activities include: - a $52.5 million payment of accrued rate refund liabilities; - a $20.3 million increase in collections of trade receivables, net of payments on trade payables; - a $13.8 million increase in distributions from equity investments; and - a $11.3 million net increase in insurance receivables. The payment of the rate refunds was made under settlement agreements with shippers on Kinder Morgan Energy Partners, L.P.'s natural gas pipelines. Higher cash inflows from collections on accounts receivable, net of accounts payable payments, were mainly due to collections from Kinder Morgan Energy Partners, L.P.'s natural gas pipelines, which were included in Kinder Morgan Energy Partners, L.P.'s 2000 operating results. The increase in distributions from equity investments was mainly due to distributions Kinder Morgan Energy Partners, L.P. received in 2000 from its 50% ownership interest in Cortez Pipeline Company and its 49% ownership interest in Red Cedar Gathering Company. Following its acquisition of the remaining ownership interest in Kinder Morgan CO(2) Company, L.P. on April 1, 2000, Kinder Morgan Energy Partners, L.P. accounted for its investment in Cortez Pipeline Company under the equity method of accounting. Kinder Morgan Energy Partners, L.P. acquired its interest in Red Cedar Gathering Company from Kinder Morgan, Inc. on December 31, 1999. The overall increase in distributions from equity investments was partially offset by the absence of distributions from Kinder Morgan Energy Partners, L.P.'s original 20% interest in Kinder Morgan CO(2) Company, L.P. from April 1, 2000 through December 31, 2000 due to the fact it no longer accounted for this investment on an equity basis. The increase in cash flows from insurance receivables reflects higher collections on its Pacific operations' insurance receivables. INVESTING ACTIVITIES Net cash used in investing activities was $1,197.6 million in 2000 compared to $196.5 million in 1999, an increase of $1,001.1 million chiefly attributable to the $1,008.6 million of asset acquisitions Kinder Morgan Energy Partners, L.P. made in 2000. Kinder Morgan Energy Partners, L.P.'s 2000 acquisition outlays included: - a $478.3 million payment to Kinder Morgan, Inc. for the Natural Gas Pipelines assets; - a $188.9 million net payment for the remaining 80% interest in Kinder Morgan CO(2) Company, L.P.; - a $120.5 million payment for its 32.5% ownership interest in the Cochin Pipeline System; - a $114.3 million payment for Bulk Terminal acquisitions, including Milwaukee Bulk Terminals, Inc., Dakota Bulk Terminal, Inc. and Delta Terminal Services, Inc.; - a $53.4 million payment for its interests in the Canyon Reef Carriers CO(2) pipeline and SACROC oil field; and - a $45.7 million payment for the acquisition of Kinder Morgan Transmix Company, LLC, formerly Buckeye Refining Company, LLC. 52 58 Kinder Morgan Energy Partners, L.P. expended an additional $42.8 million for capital expenditures in 2000 compared to 1999. Including expansion and maintenance projects, Kinder Morgan Energy Partners, L.P.'s capital expenditures were $125.5 million in 2000 and $82.7 million in 1999. The increase was driven primarily by continued investment in Kinder Morgan Energy Partners, L.P.'s Pacific operations and in its Bulk Terminals business segment. Proceeds from the sale of investments, property, plant and equipment, net of removal costs, were lower by $29.7 million in 2000 versus 1999. Proceeds received from sales and retirements of investments, property, plant and equipment were $13.4 million in 2000 and $43.1 million in 1999. The decrease was due to the $41.8 million Kinder Morgan Energy Partners, L.P. received for the sale of its interest in the Mont Belvieu fractionation facility in September 1999. The overall increase in funds used in investing activities was offset by a $82.4 million decrease in cash used for acquisitions of investments. Kinder Morgan Energy Partners, L.P. used $79.4 million for acquisitions of investments in 2000 compared with $161.8 million in 1999. Kinder Morgan Energy Partners, L.P.'s 2000 investment outlays included: - $34.2 million for a 7.5% interest in the Yates oil field subsequently contributed to the CO(2) joint venture with Marathon Oil Company; - $44.6 million for its 25% interest in Thunder Creek Gas Services, LLC and its 50% interest in Coyote Gas Treating, LLC. Kinder Morgan Energy Partners, L.P.'s 1999 investment outlays consisted of: - $124.2 million for a 27% interest in Plantation Pipe Line Company (increasing Kinder Morgan Energy Partners, L.P.'s interest to 51%); and - $37.6 million for a one-third interest in Trailblazer Pipeline Company. FINANCING ACTIVITIES Net cash provided by financing activities amounted to $915.3 million in 2000, an increase of $893.3 million from the prior year that was mainly the result of an additional $817.1 million Kinder Morgan Energy Partners, L.P. received from overall debt financing activities. The increase in borrowings was mainly due to 2000 acquisitions. Kinder Morgan Energy Partners, L.P. completed a private placement of $400 million in debt securities during the first quarter of 2000, resulting in a cash inflow of $397.9 million net of discounts and issuing costs. Kinder Morgan Energy Partners, L.P. completed a second private placement of $250 million in debt securities during the fourth quarter of 2000, resulting in a cash inflow of $246.8 million net of discounts and issuing costs. In addition, Kinder Morgan Energy Partners, L.P. received $171.4 million as proceeds from Kinder Morgan Energy Partners, L.P.'s issuance of units during 2000, most significantly realized from Kinder Morgan Energy Partners, L.P.'s public offering of 4,500,000 common units on April 4, 2000. The overall increase in funds provided by Kinder Morgan Energy Partners, L.P.'s financing activities was partially offset by a $102.8 million increase in its distributions to partners. Distributions to all partners increased to $293.6 million in 2000 compared to $190.8 million in 1999. The increase in distributions was due to: - an increase in its per unit distributions paid; - an increase in its number of units outstanding; - Kinder Morgan Energy Partners, L.P.'s general partner incentive distributions, which resulted from increased distributions to its unitholders; and - distributions paid by Trailblazer Pipeline Company, which were included in Kinder Morgan Energy Partners, L.P.'s consolidated results following the acquisition of its controlling 66 2/3% interest on December 31, 1999. 53 59 Kinder Morgan Energy Partners, L.P. paid distributions of $3.20 per unit in 2000 compared to $2.775 per unit in 1999. The 15% increase in paid distributions per unit resulted from favorable operating results in 2000. PARTNERSHIP DISTRIBUTIONS Kinder Morgan Energy Partners, L.P.'s partnership agreement requires that it distribute 100% of its available cash to its partners within 45 days following the end of each calendar quarter in accordance with their respective percentage interests. Kinder Morgan Energy Partners, L.P.'s available cash consists generally of all of its cash receipts, including cash received by its operating partnerships, less cash disbursements and net additions to reserves (including any reserves required under debt instruments for future principal and interest payments) and amounts payable to the former general partner of Santa Fe Pacific Pipeline, L.P. in respect of its 0.5% interest in SFPP, L.P. Kinder Morgan Energy Partners, L.P.'s general partner is granted discretion by the Kinder Morgan Energy Partners, L.P. partnership agreement, which discretion has been delegated to us, subject to the approval of the general partner, to establish, maintain and adjust reserves for future operating expenses, debt service, maintenance capital expenditures, rate refunds and distributions for the next four quarters. These reserves are not restricted by magnitude, but only by type of future cash requirements with which they can be associated. When we determine Kinder Morgan Energy Partners, L.P.'s quarterly distributions, we consider current and expected reserve needs along with current and expected cash flows to identify the appropriate sustainable distribution level. For 1998, 1999, and 2000 Kinder Morgan Energy Partners, L.P. distributed 93%, 97%, and 102%, of the total of cash receipts less cash disbursements, respectively. The difference between these numbers and 100% reflects net additions to or reductions in reserves. Kinder Morgan Energy Partners, L.P.'s available cash is initially distributed 98% to its limited partners and 2% to its general partner, Kinder Morgan G.P., Inc. These distribution percentages are modified to provide for incentive distributions to be made to Kinder Morgan Energy Partners, L.P.'s general partner in the event that quarterly distributions to unitholders exceed certain specified targets. Kinder Morgan Energy Partners, L.P.'s available cash for each quarter is distributed: - first, 98% to the owners of all classes of units pro rata and 2% to the general partner until the owners of all classes of units have received a total of $0.3025 per unit in cash or equivalent i-units for that quarter; - second, 85% of any available cash then remaining to the owners of all classes of units pro rata and 15% to the general partner until the owners of all classes of units have received a total of $0.3575 per unit in cash or equivalent i-units for that quarter; - third, 75% of any available cash then remaining to the owners of all classes of units pro rata and 25% to the general partner until the owners of all classes of units have received a total of $0.4675 per unit in cash or equivalent i-units for that quarter; and - fourth, 50% of any available cash then remaining to the owners of all classes of units pro rata, in cash to owners of common units and Class B units and to us in the equivalent number of i-units, and 50% in cash to the general partner. Except in liquidation, distributions to us as the owner of all i-units will be made in additional i-units or fractions of i-units. These distributions of additional i-units will be treated as if their cash equivalent amount had actually been distributed for purposes of determining the percentage of distributions to be made to the general partner. Kinder Morgan Energy Partners, L.P. will not distribute the related cash but will retain the cash and use the cash in its business. 54 60 Incentive distributions are generally defined as all cash distributions made to Kinder Morgan Energy Partners, L.P.'s general partner that are in excess of 2% of the aggregate amount of cash being distributed. The general partner's incentive distributions declared by Kinder Morgan Energy Partners, L.P. for 2000 were $107,764,885, while the incentive distributions paid during 2000 were $89,399,771. Concurrently with the closing of this offering, the Kinder Morgan Energy Partners, L.P. partnership agreement will be amended to provide for distributions to common unitholders, Class B unitholder, the i-unitholders and the general partner as described under "Kinder Morgan Energy Partners, L.P.'s Distribution Policy." Except upon the liquidation of Kinder Morgan Energy Partners, L.P., distributions will be made in cash to holders of common units, Class B units and to the general partner and in additional i-units to us as the owner of i-units. DEBT AND CREDIT FACILITIES Kinder Morgan Energy Partners, L.P.'s debt and credit facilities as of December 31, 2000, consist primarily of: - a $600 million unsecured 364-day credit facility due October 25, 2001, which also supports a commercial paper program of equivalent size; - a $300 million unsecured five-year credit facility due September 29, 2004; - $200 million of Floating Rate Senior Notes due March 22, 2002; - $200 million of 8.00% Senior Notes due March 15, 2005; - $250 million of 6.30% Senior Notes due February 1, 2009; - $250 million of 7.50% Senior Notes due November 1, 2010; - $20.2 million of Senior Secured Notes due September 2002 (Trailblazer Pipeline Company, of which Kinder Morgan Energy Partners, L.P. owns 66 2/3%, is the obligor on the notes); - $119 million of Series F First Mortgage Notes due December 2004 (Kinder Morgan Energy Partners, L.P.'s subsidiary, SFPP, L.P., is the obligor on the notes); and - $23.7 million of tax-exempt bonds due 2024 (Kinder Morgan Energy Partners, L.P.'s subsidiary, Kinder Morgan Operating L.P. "B," is the obligor on these bonds). First Union National Bank is the administrative agent under the $600 million and $300 million credit facilities referred to above. Interest on borrowings is payable quarterly. Interest on the credit facilities accrues at Kinder Morgan Energy Partners, L.P.'s option at a floating rate equal to either: - First Union National Bank's base rate (but not less than the Federal Funds Rate, plus .5%) (As of March 31, 2001, First Union National Bank's base rate was 8.0%); or - LIBOR, plus a margin, which varies depending upon the credit rating of its long-term senior unsecured debt (As of March 31, 2001, Kinder Morgan Energy Partners, L.P. could borrow for one month at a rate of 5.5% under the 364-day facility and 5.55% under the 5-year facility). These rates have decreased since the beginning of the year as short term interest rates have fallen. The five-year credit facility also permits Kinder Morgan Energy Partners, L.P. to obtain bids for fixed rate loans from members of the lending syndicate. 55 61 The credit facilities include the following restrictive covenants: - requirements to maintain certain financial ratios; total debt divided by EBITDA for the prior four quarters may not exceed 4.5 prior to July 1, 2001 and 4.0 thereafter and EBITDA for the prior four quarters divided by interest expense for the prior four quarters may not fall below 3.0 prior to July 1, 2001 and 3.5 thereafter; - restrictions on the ability of Kinder Morgan Energy Partners, L.P. to incur additional debt having a senior position to the indebtedness under its credit facilities and on the amount of additional indebtedness that may be incurred by our subsidiaries. - restrictions on entering into mergers, consolidations and sales of assets; - restrictions on granting liens; - prohibitions on making cash distributions to holders of units more frequently than quarterly; - prohibitions on making cash distributions in excess of 100% of available cash for the immediately preceding calendar quarter; and - prohibitions on making any distribution to holders of units if an event of default exists or would exist upon making such distribution. Kinder Morgan Energy Partners, L.P. is in compliance with these covenants. As of December 31, 2000, Kinder Morgan Energy Partners, L.P. had outstanding borrowings under its credit facilities of $789.6 million. At December 31, 2000, the interest rate on Kinder Morgan Energy Partners, L.P.'s credit facilities was 7.115% per annum. Kinder Morgan Energy Partners, L.P.'s borrowings at December 31, 2000 included the following: - $193 million borrowed to fund the purchase price of natural gas pipelines assets acquired in December 2000; - $175 million used to pay the outstanding balance on SFPP, L.P.'s credit facility; - $118 million borrowed to fund the purchase price of its 32.5% interest in the Cochin Pipeline system in December 2000; - $114 million borrowed to fund the purchase price of Delta Terminal Services, Inc. in December 2000; - $72 million borrowed to fund principal and interest payments on SFPP, L.P.'s Series F First Mortgage Notes in December 2000; - $34 million borrowed to fund the purchase price of Kinder Morgan Energy Partners, L.P.'s 7.5% interest in the Yates oil field in December 2000; and - $83.6 million borrowed to fund expansion capital projects. Kinder Morgan Energy Partners, L.P.'s short-term debt at December 31, 2000, consisted of: - $582 million of borrowings under its unsecured 364-day credit facility due October 25, 2001; - $52 million of commercial paper borrowings; - $35 million under SFPP, L.P.'s 10.70% Series F First Mortgage Notes; and - $14.6 million in other borrowings. 56 62 During 2000, Kinder Morgan Energy Partners, L.P.'s cash used for acquisitions and expansions exceeded $600 million. Historically, Kinder Morgan Energy Partners, L.P. has utilized its short-term credit facilities to fund acquisitions and expansions and then refinanced its short-term borrowings utilizing long-term credit facilities and by issuing equity or long-term debt securities. Kinder Morgan Energy Partners, L.P. intends to refinance its short-term debt during 2001 through a combination of long-term debt and equity. Based on prior successful short-term debt refinancings and current market conditions, Kinder Morgan Energy Partners, L.P. does not anticipate any liquidity problems. Kinder Morgan Energy Partners, L.P. has an outstanding letter of credit issued under its five-year credit facility in the amount of $23.7 million that backs-up its tax-exempt bonds due 2024. The letter of credit reduces the amount available for borrowing under that credit facility. The $23.7 million principal amount of tax-exempt bonds due 2024 were issued by the Jackson-Union Counties Regional Port District. These bonds bear interest at a weekly floating market rate. At December 31, 2000, the interest rate was 5.00%. In addition, as of December 31, 1999, Kinder Morgan Energy Partners, L.P. financed $330 million through Kinder Morgan, Inc. to fund part of the acquisition of assets acquired from Kinder Morgan, Inc. on December 31, 1999. In accordance with the Closing Agreement entered into as of January 20, 2000, Kinder Morgan Energy Partners, L.P. paid Kinder Morgan, Inc. a per diem fee of $180.56 for each $1,000,000 financed. Kinder Morgan Energy Partners, L.P. paid Kinder Morgan, Inc. $200 million on January 21, 2000, and the remaining $130 million on March 23, 2000 with a portion of the proceeds from its issuance of notes on March 22, 2000. In December 1999, Kinder Morgan Energy Partners, L.P. established a commercial paper program providing for the issuance of up to $200 million of commercial paper, subsequently increased to $300 million in January, 2000 and then on October 25, 2000, in conjunction with Kinder Morgan Energy Partners, L.P.'s new 364-day credit facility, we increased the commercial paper program to provide for the issuance of up to $600 million of commercial paper. Borrowings under Kinder Morgan Energy Partners, L.P.'s commercial paper program reduce the borrowings allowed under its 364-day and five-year credit facilities combined. As of December 31, 2000, Kinder Morgan Energy Partners, L.P. had $52 million of commercial paper outstanding with an interest rate of 7.02%. At December 31, 2000, the outstanding balance under SFPP, L.P.'s Series F notes was $119.0 million. The annual interest rate on the Series F notes is 10.70%, the maturity is December 2004, and interest is payable semiannually in June and December. The Series F notes are payable in annual installments of $39.5 million in 2001, $42.5 million in 2002 and $37.0 million in 2003. The Series F notes may also be prepaid in full or in part at a price equal to par plus, in certain circumstances, a premium. The Series F notes are secured by mortgages on substantially all of the properties of SFPP, L.P. The Series F notes contain certain covenants limiting the amount of additional debt or equity that may be issued by SFPP, L.P. and limiting the amount of cash distributions, investments, and property dispositions by SFPP, L.P. At December 31, 1999, the outstanding balance under SFPP, L.P.'s bank credit facility was $174 million. On August 11, 2000, Kinder Morgan Energy Partners, L.P. replaced the outstanding balance under SFPP, L.P.'s secured credit facility with a $175 million unsecured borrowing under Kinder Morgan Energy Partners, L.P.'s five-year credit facility. SFPP, L.P. executed a $175 million intercompany note in favor of Kinder Morgan Energy Partners, L.P. to evidence this obligation. In December 1999, Trailblazer Pipeline Company entered into a 364-day revolving credit agreement with Toronto Dominion, Inc. providing for loans up to $10 million. At December 26, 2000, the outstanding balance due under Trailblazer Pipeline Company's bank credit facility was $10 million. On December 27, 2000, Trailblazer Pipeline Company paid the outstanding balance under its credit facility with a $10 million borrowing under an intercompany account payable in favor of Kinder Morgan, Inc. In January 2001, Trailblazer Pipeline Company entered into a 57 63 364-day revolving credit agreement with Credit Lyonnais New York Branch, providing for loans up to $10 million. The agreement expires December 27, 2001. The borrowings were used to pay the account payable to Kinder Morgan, Inc. At January 31, 2001, the outstanding balance under Trailblazer Pipeline Company's revolving credit agreement was $10 million. The agreement provides for an interest rate of LIBOR plus 0.875%. At January 31, 2001 the interest rate on the credit facility debt was 6.625%. Pursuant to the terms of the revolving credit agreement with Credit Lyonnais New York Branch, Trailblazer Pipeline Company partnership distributions are restricted by certain financial covenants. From time to time Kinder Morgan Energy Partners, L.P. issues long-term debt securities. All of Kinder Morgan Energy Partners, L.P.'s long term debt securities issued to date, other than those issued under its revolving credit facilities, generally have the same terms except for interest rates, maturity dates and prepayment restrictions. All of Kinder Morgan Energy Partners, L.P.'s outstanding debt securities are unsecured obligations that rank equally with all of its other senior debt obligations. Kinder Morgan Energy Partners, L.P.'s outstanding debt securities as of December 31, 2000, consist of the following: - $250 million in principal amount of 6.3% senior notes due February 1, 2009. These notes were issued on January 29, 1999 at a price to the public of 99.67% per note. In the offering, Kinder Morgan Energy Partners, L.P. received proceeds, net of underwriting discounts and commissions, of approximately $248 million. Kinder Morgan Energy Partners, L.P. used the proceeds to pay the outstanding balance on its credit facility and for working capital and other partnership purposes. At December 31, 2000, the unamortized liability balance on the 6.30% senior notes was $249.3 million; - $200 million of floating rate notes due March 22, 2002 and $200 million of 8.0% notes due March 15, 2005. Kinder Morgan Energy Partners, L.P. used the proceeds to reduce outstanding commercial paper. At December 31, 2000, the interest rate on its floating rate notes was 7.0%; and - $250 million of 7.5% notes due November 1, 2010. These notes were issued on November 8, 2000. The proceeds from this offering, net of underwriting discounts, were $246.8 million. These proceeds were used to reduce Kinder Morgan Energy Partners, L.P.'s outstanding commercial paper. At December 31, 2000, the unamortized liability balance on the 7.5% notes was $248.4 million. The fixed rate notes provide that Kinder Morgan Energy Partners, L.P. may redeem the notes at any time at a price equal to 100% of the principal amount of the notes plus accrued interest to the redemption date plus a make-whole premium. Kinder Morgan Energy Partners, L.P. may not prepay the floating rate notes prior to their maturity. On September 23, 1992, pursuant to the terms of a Note Purchase Agreement, Trailblazer Pipeline Company issued and sold an aggregate principal amount of $101 million of Senior Secured Notes to a syndicate of fifteen insurance companies. Trailblazer Pipeline Company provided security for the notes principally by an assignment of certain Trailblazer Pipeline Company transportation contracts. Effective April 29, 1997, Trailblazer Pipeline Company amended the Note Purchase Agreement. This amendment allowed Trailblazer Pipeline Company to include several additional transportation contracts as security for the notes, added a limitation on the amount of additional money that Trailblazer Pipeline Company could borrow and relieved Trailblazer Pipeline Company from its security deposit obligation. At December 31, 2000, Trailblazer Pipeline Company's outstanding balance under the Senior Secured Notes was $20.2 million. The Senior Secured Notes have a fixed annual interest rate of 8.03% and will be repaid in semiannual installments of $5.05 million from March 1, 2001 through September 1, 2002, the final maturity date. Interest is payable semiannually in March and September. Pursuant to the terms of this Note Purchase Agreement, Trailblazer Pipeline Company partnership distributions are 58 64 restricted by certain financial covenants. Currently, Trailblazer Pipeline Company's proposed expansion project is pending before the Federal Energy Regulatory Commission. If the expansion is approved, which is expected in the first quarter of 2001, Kinder Morgan Energy Partners, L.P. plans to refinance these notes. CAPITAL REQUIREMENTS FOR RECENT TRANSACTIONS Milwaukee Bulk Terminals, Inc. Effective January 1, 2000, Kinder Morgan Energy Partners, L.P. acquired Milwaukee Bulk Terminals, Inc. for approximately $14.6 million in aggregate consideration consisting of $0.6 million and 0.3 million common units. Dakota Bulk Terminal, Inc. Effective January 1, 2000, Kinder Morgan Energy Partners, L.P. acquired Dakota Bulk Terminal, Inc. for approximately $9.5 million in aggregate consideration consisting of $0.2 million and 0.2 million common units. Kinder Morgan CO(2) Company, L.P. On April 1, 2000, Kinder Morgan Energy Partners, L.P. acquired the remaining 80% ownership interest in Shell CO(2) Company, Ltd. that it did not own for approximately $212.1 million before purchase price adjustments. Kinder Morgan Energy Partners, L.P. paid this amount with approximately $171.4 million received from its public offering of 4.5 million units on April 4, 2000 and approximately $40.7 million received from the issuance of commercial paper. CO(2) Assets. On June 1, 2000, Kinder Morgan Energy Partners, L.P. acquired an interest in SACROC oil field and Canyon Reef Carrier CO(2) Pipeline assets from Devon Energy Production Company, L.P. for approximately $55 million before purchase price adjustments. Kinder Morgan Energy Partners, L.P. borrowed the necessary funds under its commercial paper program. Transmix Operations. On October 25, 2000, Kinder Morgan Energy Partners, L.P. acquired Kinder Morgan Transmix Company, LLC, formerly known as Buckeye Refining Company, LLC, for $45.6 million after purchase price adjustments. Kinder Morgan Energy Partners, L.P. borrowed the necessary funds under its commercial paper program. Delta Terminal Services, Inc. Effective December 1, 2000, Kinder Morgan Energy Partners, L.P. acquired Delta Terminal Services, Inc. for $114.1 million. Kinder Morgan Energy Partners, L.P. borrowed $114 million under its credit facilities and its commercial paper program to fund this acquisition. Cochin Pipeline. On November 3, 2000, Kinder Morgan Energy Partners, L.P. acquired a 32.5% ownership interest in the Cochin Pipeline system for $120.5 million from NOVA Chemicals Corporation. Kinder Morgan Energy Partners, L.P. borrowed $118 million under its credit facilities to partially fund this acquisition. Colton Transmix Processing Facility. On December 31, 2000 Kinder Morgan Energy Partners, L.P. acquired an additional 50% ownership interest in the Colton Transmix Processing Facility from Duke Energy Merchants for $11.2 million. Kinder Morgan Energy Partners, L.P. borrowed the necessary funds under its commercial paper program. CO(2) Joint Venture With Marathon Oil Company. On December 28, 2000, Kinder Morgan Energy Partners, L.P. paid $34.2 million for a 7.5% interest in the Yates oil field which was subsequently contributed to a CO(2) joint venture with Marathon Oil Company. The joint venture was formed on January 1, 2001. Kinder Morgan Energy Partners, L.P. borrowed $34 million under its credit facilities to fund this acquisition. Natural Gas Pipelines. On December 31, 2000, Kinder Morgan Energy Partners, L.P. acquired certain assets of Kinder Morgan, Inc. for approximately $349.0 million in aggregate consideration consisting of $192.7 million, 0.64 million common units and 2.7 million class B units. Kinder Morgan Energy Partners, L.P. borrowed $193 million under its credit facilities to fund the cash portion of the purchase price. 59 65 GATX Acquisition. On February 22, 2001, Kinder Morgan Energy Partners, L.P. entered into an additional $1.1 billion unsecured credit facility that expires on December 31, 2001 with a syndicate of financial institutions to fund the GATX acquisition. With the proceeds from issuing $1 billion in notes described below, on March 23, 2001, this facility was reduced by $600 million to $500 million. This facility supports the issuance of commercial paper used to finance the GATX acquisition. Following the closing of this offering, Kinder Morgan Energy Partners, L.P. expects to terminate this facility. First Union National Bank, an affiliate of First Union Securities, Inc., is the administrative agent under this facility. As of March 31, 2001, Kinder Morgan Energy Partners, L.P. could borrow for one month at a rate of 5.5% under this 364-day facility. Kinder Morgan Energy Partners, L.P. issued $700 million of 6.75% notes due 2011 and $300 million of 7.40% notes due 2031 and applied the proceeds to retire short-term debt used to fund the GATX acquisition. Pinney Dock. On March 13, 2001, Kinder Morgan Energy Partners, L.P. purchased Pinney Dock and Transportation Company for approximately $41.5 million in cash. Kinder Morgan Energy Partners, L.P. borrowed the necessary funds under its commercial paper program. 60 66 DESCRIPTION OF OUR SHARES The following is a summary of the principal documents which relate to our shares, as well as documents which relate to the i-units to be purchased by us upon completion of the offering. Copies of those documents are on file with the SEC as part of our registration statement. See "Where You Can Find Additional Information" for information on how to obtain copies. You should refer to the provisions of each of the following agreements because they, and not this summary, will govern your rights as a holder of shares. These agreements include: - our limited liability company agreement, which provides for the issuance of the shares, distributions and limited voting rights and which establishes the rights, obligations and limited circumstances for the mandatory and optional purchase of the shares by Kinder Morgan, Inc. as provided in the Kinder Morgan, Inc. purchase provisions and the ability to exchange shares with Kinder Morgan, Inc. for common units of Kinder Morgan Energy Partners, L.P. as provided in the Kinder Morgan, Inc. exchange provisions; - the Kinder Morgan, Inc. purchase provisions, which are part of our limited liability company agreement and which provide for the optional and mandatory purchase of our shares in the limited circumstances set forth in our limited liability company agreement; - the Kinder Morgan, Inc. exchange provisions, which are part of our limited liability company agreement and which provide the owners of our shares the right to exchange their shares for common units of Kinder Morgan Energy Partners, L.P., subject to Kinder Morgan, Inc.'s election to deliver cash rather than common units on the exercise of that right; - the Kinder Morgan Energy Partners, L.P. registration rights agreement, which provides for the registration with the SEC of the exchange by Kinder Morgan, Inc. of common units for shares, as contemplated in the Kinder Morgan, Inc. exchange provisions; - the Kinder Morgan, Inc. tax indemnification agreement, which provides that Kinder Morgan, Inc. will indemnify us for any tax liability attributable to our formation or our management of the business and affairs of Kinder Morgan Energy Partners, L.P., and for any taxes arising out of a transaction involving our i-units to the extent the transaction does not generate sufficient cash to pay our taxes; - the Kinder Morgan Energy Partners, L.P. limited partnership agreement which establishes the i-units as a class and specifies the relative rights and preferences of the i-units; and - the delegation of control agreement among Kinder Morgan G.P., Inc., Kinder Morgan Management, LLC and Kinder Morgan Energy Partners, L.P. and its operating partnerships, which delegates to us, to the fullest extent permitted under Delaware law and the Kinder Morgan Energy Partners, L.P. partnership agreement, the power and authority to manage and control the business and affairs of Kinder Morgan Energy Partners, L.P. and its operating partnerships, subject to Kinder Morgan G.P., Inc.'s right to approve specified actions. DISTRIBUTIONS General. Under the terms of our limited liability company agreement, except in connection with our liquidation, we will not pay distributions on our shares in cash but we will make distributions of additional shares or fractions of shares. At the same time Kinder Morgan Energy Partners, L.P. makes a distribution on the common units, we will distribute on each of our shares that fraction of a share determined by dividing the amount of the cash distribution to be made by Kinder Morgan Energy Partners, L.P. on each common unit by the average market price of a share determined for a ten trading day period ending on the trading day immediately prior to the ex-dividend date for the shares. 61 67 Kinder Morgan Energy Partners, L.P. has been distributing all of its "available cash" to its common unitholders of record on the applicable record date and the general partner within approximately 45 days after the end of each quarter. "Available cash" is generally, for any calendar quarter, all cash received by Kinder Morgan Energy Partners, L.P. from all sources less all of its cash disbursements and net additions to reserves. On February 14, 2001, Kinder Morgan Energy Partners, L.P. made a quarterly distribution to owners of its common units of $0.95 per common unit, or $3.80 on an annual basis. On April 18, 2001, Kinder Morgan Energy Partners, L.P. announced an increase in its quarterly distribution for the first quarter of 2001 to $1.05 per common unit, or $4.20 per common unit on an annual basis. Concurrently with the closing of this offering, the Kinder Morgan Energy Partners, L.P. partnership agreement will be amended to provide for distributions to the extent of available cash to common unitholders, Class B unitholders and the general partner in cash and to us in additional i-units except in the event of a liquidation or dissolution. Therefore, generally, future, non-liquidating distributions will be made in cash to owners of common units, Class B unitholders and the general partner and in additional i-units to us. We also will distribute to owners of shares additional shares if owners of common units receive a cash distribution or other cash payment on their common units other than a regular quarterly distribution. In that event, we will distribute on each share that fraction of a share determined by dividing the cash distribution declared by Kinder Morgan Energy Partners, L.P. on each common unit by an average market price of a share determined for a ten trading day period ending on the trading day immediately prior to the ex-dividend date for the shares. Our limited liability company agreement provides that we may not declare any distribution on our shares after Kinder Morgan, Inc. gives notice to us of an optional purchase of our shares or after the occurrence of an event triggering a mandatory purchase of our shares. There will be no public market for trading fractional shares. We will issue fractional shares in payment of the distribution to owners of our shares. No fraction of a share can be traded on any exchange on which our shares are listed until a holder acquires the remainder of the fraction and has a whole share. The term "average market price" is used above in connection with the share distributions and it is used below in connection with optional and mandatory purchase of our shares. When we refer to the average market price of a share or a common unit, we mean the average closing price of a share or common unit during the ten consecutive trading days prior to the determination date but not including that date, unless a longer or shorter number of trading days is expressly noted. The "closing price" of securities on any day means: - for securities listed on a national or regional securities exchange, the last sale price for that day, regular way, or, if there are no sales on that day, the average of the closing bid and asked prices for that day, regular way, in either case as reported in the principal composite transactions reporting system for the principal United States national or regional securities exchange on which the securities are listed; - if the securities are not listed on a United States national or regional securities exchange on that day, the last quoted price on that day, or, if no price is quoted, the average of the high bid and low asked prices on that day, each as reported by the NASDAQ; - if on that day the securities are not so quoted, the average of the closing bid and asked prices on that day furnished by a professional market maker in the securities selected by our board of directors (or, in the cases of exchanges for common units or mandatory or optional purchases, the board of directors of Kinder Morgan, Inc.); or 62 68 - if on that day no market maker is making a market in the securities, the fair value of the securities as determined by our board of directors (or, in the cases of exchanges for common units or mandatory or optional purchases, the board of directors of Kinder Morgan, Inc.). A "trading day" for securities means a day on which: - the principal United States national or regional securities exchange on which the securities are listed is open for business, or - if the securities are not listed on any United States national or regional securities exchange, a day in which banking institutions in New York, New York generally are open. Distributions will be made in accordance with the New York Stock Exchange's distribution standards. LIMITED VOTING RIGHTS The shares you own will not entitle you to vote on the election of our directors. Kinder Morgan G.P., Inc. owns all shares eligible to elect our directors and will elect all of our directors. Owners of our shares will vote on the specified matters described in the following paragraph. Actions Requiring Vote of Owners of Our Shares. Our limited liability company agreement provides that we will not, without the approval of a majority of the shares owned by persons other than Kinder Morgan, Inc. and its affiliates, amend, alter or repeal any of the provisions of our limited liability company agreement, including the purchase and exchange provisions, the Kinder Morgan Energy Partners, L.P. registration rights agreement, the Kinder Morgan, Inc. tax indemnification agreement or the delegation of control agreement, in a manner that materially adversely affects the preferences or rights of the owners of our shares as determined in the discretion of our board of directors, or reduces the time for any notice to which the holders of our shares may be entitled, except as provided below under "Actions Not Requiring the Vote of Holders." Under the terms of the Kinder Morgan Energy Partners, L.P.'s partnership agreement, the i-units are entitled to vote on all matters on which the common units are entitled to vote. We will submit to a vote of our shareholders any matter submitted to us by Kinder Morgan Energy Partners, L.P. for a vote of i-units. We will vote our i-units in this same way that our shareholders vote their shares for or against a proposal, including non-votes or abstentions. In general, except as more fully described above, the i-units, common units and Class B units will vote together as a single class, with each i-unit, common unit and Class B unit having one vote. Limitations on Voting Rights of Kinder Morgan, Inc. and its Affiliates. On any matter submitted to us as the owner of i-units, the shares owned by Kinder Morgan, Inc. and its affiliates generally will be entitled to vote. Shares owned by Kinder Morgan, Inc. or its affiliates will not, however, be entitled to vote on the matters described below so long as Kinder Morgan, Inc. is the entity that is primarily obligated on all of the agreements related to the shares to which Kinder Morgan, Inc. is obligated as of the closing of this offering: - any matters on which the i-units vote as a separate class; - a proposed removal of the general partner of Kinder Morgan Energy Partners, L.P.; - a proposed transfer of all of the general partner's interest and the admission of any successor transferee as a successor general partner; and - a proposed withdrawal of the general partner of Kinder Morgan Energy Partners, L.P. 63 69 When the shares owned by Kinder Morgan, Inc. and its affiliates are not entitled to vote as described above, they will be treated as not outstanding. Therefore, they will not be included in the numerator of the number of shares voting for approval or the denominator of the number of shares outstanding in determining whether the required percentage has been voted to approve a matter. The same is true with respect to the i-units. In other words, in this circumstance a number of i-units equal to the number of our shares owned by Kinder Morgan, Inc. and its affiliates will be treated as not being outstanding and will not be included in the numerator or denominator in determining if the required percentage of i-units or total units has been voted to approve a matter. Limitations on Voting Rights of 20% or More Holders. A person or group owning 20% or more of the aggregate number of issued and outstanding common units and shares will not be entitled to vote its shares. Therefore, such shares will not be included in the numerator of the number of shares voting for approval or the denominator of the numbers of shares outstanding in determining whether the required percentage has been voted to approve a matter. This limitation does not apply to Kinder Morgan, Inc. and its affiliates, including Kinder Morgan G.P., Inc., although as described above there are a number of matters on which Kinder Morgan, Inc. and its affiliates may not vote. Actions Not Requiring the Vote of Holders. The relevant agreements provide that notwithstanding the voting provisions described above, we may make changes in the terms of the shares, our limited liability company agreement (including the purchase and exchange provisions), the shares, the tax indemnification agreement, the registration rights agreement and the delegation of control agreement without any approval of holders of shares, in order to meet the requirements of applicable securities and other laws and regulations and exchange rules, to effect the intent of the provisions of the limited liability company agreement and to make other changes which our board of directors determines in its sole discretion will not have a material adverse effect on the preferences or rights associated with the shares. The agreements provide that we are also permitted, in the good faith discretion of our board, to amend the terms of the shares and these agreements without the approval of holders of shares to accommodate the assumption of the obligations of Kinder Morgan, Inc. by a person, other than Kinder Morgan, Inc. and its affiliates, who becomes the beneficial owner of more than 50% of the total voting power of all shares of capital stock of the general partner of Kinder Morgan Energy Partners, L.P. in a transaction that does not constitute a mandatory purchase event but that requires the vote of the holders of the outstanding common units and shares, or to accommodate changes resulting from a merger, recapitalization, reorganization or similar transaction involving Kinder Morgan Energy Partners, L.P. which in each case does not constitute a mandatory purchase event but that requires the vote of the holders of the outstanding common units and shares. We believe that amendments made pursuant to these agreements, except in some cases in the context of a merger, recapitalization, reorganization or similar transaction, would not be significant enough to constitute the issuance of a new security; but, if an amendment constituted the issuance of a new security, we would have to register the securities with the SEC or rely on an exemption from registration. ANTI-DILUTION ADJUSTMENTS Concurrently with the closing of this offering, Kinder Morgan Energy Partners, L.P. will amend its partnership agreement to provide that Kinder Morgan Energy Partners, L.P. will adjust proportionately the number of i-units held by us through the payment to us of an i-unit distribution or by causing an i-unit subdivision, split or combination if various events occur, including: - the payment of a common unit distribution on the common units; and - a subdivision, split or combination of the common units. 64 70 Our limited liability company agreement provides that the number of all of our outstanding shares shall at all times equal the number of i-units we own. If there is a change in the number of i-units we own, we will pay to all shareholders a share distribution or effect a share split or combination to provide that at all times the number of shares outstanding equals the number of i-units we own. Through the combined effect of the provisions in the Kinder Morgan Energy Partners, L.P. partnership agreement and the provisions of our limited liability company agreement, the number of outstanding shares and i-units will be equal. COVENANTS Our limited liability company agreement provides that our activities will be limited to being a limited partner in, and controlling and managing the business and affairs of, Kinder Morgan Energy Partners, L.P. and its operating partnerships and subsidiaries. It also includes provisions that are intended to maintain a one-to-one relationship between the number of i-units we own and our outstanding shares, including provisions: - prohibiting our sale, pledge or other transfer of i-units; - requiring the proceeds from our sale of shares in this offering to be used for the purchase of i-units from Kinder Morgan Energy Partners, L.P.; - prohibiting our issuance of options, warrants or other securities entitling the holder to subscribe for or purchase shares; - prohibiting us from borrowing money or issuing debt; - prohibiting a liquidation, merger or recapitalization or similar transactions involving our company; and - prohibiting our purchase of any of our shares, including voting shares. Under the terms of the Kinder Morgan Energy Partners, L.P. partnership agreement, Kinder Morgan Energy Partners, L.P. agrees that it will not: - except in liquidation, make a distribution on an i-unit other than in additional i-units or a security that has in all material respects the same rights and privileges as the i-units; - make a distribution on a common unit or Class B unit other than in cash, in additional common units or Class B units or a security that has in all material respects the same rights and privileges as the common units or Class B units; - allow an owner of common units or Class B units to receive any consideration other than cash, common units or Class B units or a security that has in all material respects the same rights and privileges as the common units or Class B units, or allow us, as the owners of the i-units, to receive any consideration other than i-units or a security that has in all material respects the same rights and privileges as the i-units in a: -- merger in which Kinder Morgan Energy Partners, L.P. is not the survivor, if the unitholders of Kinder Morgan Energy Partners, L.P. immediately prior to the transaction own more than 50% of the common equity securities of the survivor immediately after the transaction; -- merger in which Kinder Morgan Energy Partners, L.P. is the survivor if the unitholders of Kinder Morgan Energy Partners, L.P. immediately prior to the transaction own more than 50% of the limited partner interests in Kinder Morgan Energy Partners, L.P. immediately after the transaction; or -- recapitalization, reorganization or similar transaction; or 65 71 - be a party to a merger, sell substantially all of its assets to another person or enter into similar transactions if: -- the survivor of the merger or the other person is to be controlled by Kinder Morgan, Inc. or its affiliates after the transaction; and -- the transaction would be a mandatory purchase event; - make a tender offer for common units unless the consideration: -- is exclusively cash; and -- together with any cash payable in respect of any tender offer by Kinder Morgan Energy Partners, L.P. for the common units concluded within the preceding 360 days and the aggregate amount of any cash distributions to all owners of common units made within the preceding 360 day period is less than 12% of the aggregate average market value of all classes of units of Kinder Morgan Energy Partners, L.P. determined on the trading day immediately preceding the commencement of the tender offer; or - issue any of its i-units to any person other than us. The Kinder Morgan Energy Partners, L.P. partnership agreement provides that when any cash is to be received by a common unitholder as a result of a merger, recapitalization, reorganization or similar transaction, that payment will require Kinder Morgan Energy Partners, L.P. to issue additional i-units to us except in liquidation. The fraction of an additional unit distributed will be equal to the cash distribution on each common unit divided by the average market price of one of our shares determined for a ten trading day period ending immediately prior to the effective date of the transaction. This will result in us also issuing an equal number of shares to the holders of our shares. OPTIONAL PURCHASE The Kinder Morgan, Inc. purchase provisions, which are part of our limited liability company agreement, provide that if at any time Kinder Morgan, Inc. and its affiliates own 80% or more of our outstanding shares, then Kinder Morgan, Inc. has the right but not the obligation to purchase for cash all of the outstanding shares that it and its affiliates do not own. Kinder Morgan, Inc. can exercise its right to make that purchase by giving notice to the transfer agent for the shares of its election to make the purchase not less than ten days and not more than 60 days prior to the date which it selects for the purchase. We will cause the transfer agent to mail the notice of the purchase to the record holders of the shares. Upon closing of this offering, Kinder Morgan, Inc. and its affiliates will own approximately 10% of our outstanding shares. The price at which Kinder Morgan, Inc. may make the optional purchase is equal to 110% of the higher of: - the average closing price for the shares for the ten consecutive trading days ending on the fifth trading day prior to the date the notice of the purchase is given; and - the highest price Kinder Morgan, Inc. or its affiliates paid for the shares during the 90 days prior to the giving of the notice of purchase, excluding exchanges or cash settlements pursuant to the exchange feature of the shares. Our limited liability company agreement and Kinder Morgan Energy Partners, L.P.'s partnership agreement each provides that if at any time Kinder Morgan, Inc. and its affiliates own 80% or more of the outstanding common units and the shares on a combined basis, then Kinder Morgan, Inc. has the right to purchase all of the shares and common units that it and its affiliates do not own. Upon closing of this offering, Kinder Morgan, Inc. and its affiliates will own, 66 72 excluding the general partner's net 2% interests, approximately 19.5% of the outstanding common and Class B units and shares on a combined basis. The price at which Kinder Morgan, Inc. may make the optional purchase is equal to the highest of: - the average closing price of the shares or the common units for the 20 consecutive trading days ending five days prior to the date on which the notice of the purchase is given; and - the highest price Kinder Morgan, Inc. or its affiliates paid for such shares or common units during the 90 days prior to the giving of the notice of purchase, excluding exchanges or cash settlements pursuant to the exchange feature of the shares. Kinder Morgan, Inc. may exercise its right to make the optional purchase by giving notice to the transfer agent for the shares and for the common units of its election to make the optional purchase not less than ten days and not more than 60 days prior to the date which it selects for the purchase. We and the general partner or Kinder Morgan, Inc. will also cause the transfer agents to mail that notice of the purchase to the record holders of the shares and common units. If it elects to purchase either the shares or the combination of the common units and shares, Kinder Morgan, Inc. will deposit the aggregate purchase price for the shares and the common units, as the case may be, with the respective transfer agents. On and after the date set for the purchase, the holders of the shares or the common units, as the case may be, will have no rights as holders of shares or common units, except to receive the purchase price, and their shares or common units will be deemed to be transferred to Kinder Morgan, Inc. for all purposes. MANDATORY PURCHASE General. Under the terms of the Kinder Morgan, Inc. purchase provisions, upon the occurrence of any of the following mandatory purchase events, Kinder Morgan, Inc. will be required to purchase for cash all of our shares that it and its affiliates do not own at a purchase price equal to the higher of the average market price for the shares and the average market price for common units as determined for the ten-day trading period immediately prior to the date of the applicable event. A mandatory purchase event means any of the following: - the aggregate distributions or other payments by Kinder Morgan Energy Partners, L.P. on the common units, other than in common units or in securities which have in all material respects the same rights and privileges as common units but including pursuant to an issuer tender offer by Kinder Morgan Energy Partners, L.P., during a 360-day period exceed 50% of the average market price of a common unit during the ten consecutive trading day period ending on the last trading day prior to the first day of that 360-day period. - the occurrence of an event resulting in Kinder Morgan, Inc. and its affiliates ceasing to be the beneficial owner, as defined in Rule 13d-3 and 13d-5 under the Securities Exchange Act of 1934, of more than 50% of the total voting power of all shares of capital stock of the general partner of Kinder Morgan Energy Partners, L.P., unless: -- the event results in another person becoming the beneficial owner of more than 50% of the total voting power of all shares of capital stock of the general partner of Kinder Morgan Energy Partners, L.P.; -- that other person is organized under the laws of a state in the United States; -- that other person has long term unsecured debt with an investment grade credit rating, as determined by Moody's Investor Services, Inc. and Standard & Poor's Rating Service, immediately prior to the closing of the transaction; and 67 73 -- that other person assumes all obligations of Kinder Morgan, Inc. to us and to the owners of the shares under the purchase provisions, the exchange provisions, the registration rights agreement and the tax indemnification agreement. - the merger of Kinder Morgan Energy Partners, L.P. with or into another person in any case where Kinder Morgan Energy Partners, L.P. is not the surviving entity, or the sale of all or substantially all of the assets of Kinder Morgan Energy Partners, L.P. and its subsidiaries, taken as a whole, to another person, unless in the transaction: -- the owners of common units receive in exchange for their common units a security of such other person that has in all material respects the same rights and privileges as the common units; -- we receive in exchange for all of the i-units a security of such other person that has in all material respects the same rights and privileges as the i-units; -- no consideration is received by an owner of common units other than securities that have in all material respects the same rights and privileges as the common units and/or cash, and the amount of cash received per common unit does not exceed 33 1/3% of the average market price of a common unit during the ten trading day period ending immediately prior to the date of execution of the definitive agreement for the transaction; and -- no consideration is received by us or the owners of i-units other than securities of such other person that have in all material respects the same rights and privileges as the i-units. Procedure. Within three business days following any purchase event requiring a mandatory purchase by Kinder Morgan, Inc., Kinder Morgan, Inc. will mail to each holder of record of the shares on the earlier of the date of the purchase event and the most recent practicable date, a notice stating, among other things: - that a mandatory purchase event has occurred and that Kinder Morgan, Inc. will purchase such holder's shares for the purchase price described above; - the circumstances and relevant facts regarding the mandatory purchase event; - the purchase date, which shall be no later than five business days from the date such notice is mailed; and - the instructions a holder must follow in order to have its shares purchased. On or prior to the date of the purchase, Kinder Morgan, Inc. will irrevocably deposit with the transfer agent funds sufficient to pay the purchase price. Following the purchase date, a share owned by any person other than Kinder Morgan, Inc. and its affiliates will only represent the right to receive the purchase price. For purposes of the mandatory purchase provisions, including the definitions of the mandatory purchase events, and the optional purchase provisions and the exchange provisions, Kinder Morgan, Inc. will be deemed to include Kinder Morgan, Inc., its successors by merger, and any entity that succeeds to Kinder Morgan, Inc.'s obligations under the purchase provisions, the exchange provisions, the registration rights agreement and the tax indemnification agreement in connection with an acquisition of all or substantially all of the assets of Kinder Morgan, Inc. EXCHANGE FEATURE Concurrently with the closing of this offering, Kinder Morgan, Inc. and we will enter into the Kinder Morgan, Inc. exchange provisions, which will constitute a part of our limited liability company agreement. Pursuant to the Kinder Morgan, Inc. exchange provisions, you will have the 68 74 right, at your option, after the 45th day following the closing of this offering, to exchange any or all of your whole shares for common units of Kinder Morgan Energy Partners, L.P. owned by Kinder Morgan, Inc., directly or indirectly through its subsidiaries, at an exchange rate of one common unit per one share. Any shares received for exchange after the occurrence of a mandatory purchase event or after Kinder Morgan, Inc. has given notice of optional purchase of the shares will not be exchanged but will be held for purchase as if they had been delivered for that purpose. At any time, instead of delivering a common unit, Kinder Morgan, Inc. may elect to make a cash payment in respect of any share surrendered for exchange by giving notice of the election to the tendering holder not more than three trading days after such share is surrendered for exchange. This cash payment shall be in an amount, per share delivered for exchange, equal to the average of the closing price of common units on the three trading days commencing two trading days after Kinder Morgan, Inc. gives such notice to such holder. Kinder Morgan, Inc. will make this cash payment as promptly as practicable after the completion of such three trading day period. The decision to deliver common units or make a cash payment upon the tender of shares for exchange will be made solely by Kinder Morgan, Inc. at the time of each exchange. Kinder Morgan, Inc. will make this decision based on what it believes to be in its best interests at the time, rather than the best interests of the owner of the shares. Kinder Morgan, Inc. expects to consider such factors as the number of common units it and its affiliates own, the market price of the common units, the tax cost to it of delivering common units, whether a registration statement is in effect at the time with respect to the common units to be delivered, its financial condition, cash flows and results of operations, and other matters which at the time it believes are relevant. The right of exchange attaching to any share may be exercised by the owner by delivering the certificate representing the share to Kinder Morgan, Inc., duly endorsed and accompanied by a duly signed and completed notice of exchange, a copy of which may be obtained from the transfer agent for the shares. Only whole shares may be tendered for exchange. Any notice of exchange will be irrevocable. The exchange date will be immediately prior to the close of business on the date on which the share and the duly signed and completed notice of exchange are so delivered. Unless Kinder Morgan, Inc. has elected to make a cash payment, Kinder Morgan, Inc. will, within three trading days after the exchange date, deliver to the transfer agent for mailing to the owner a certificate or certificates for the number of full common units deliverable upon exchange. Common units deliverable upon exchange of the shares will be fully paid and nonassessable. Although the exchange is a taxable event for federal and state income tax purposes to the exchanging shareholder, an owner delivering a share for exchange will not be required to pay any transfer taxes or duties in respect of the issue or delivery of common units on exchange. However, we and Kinder Morgan, Inc. will not be required to pay any tax or duty which may be payable in respect of any transfer involved in the issue or delivery of the common units in a name other than that of the registered owner of the share. Certificates representing common units will not be issued or delivered unless the person requesting such issue has paid to us the amount of any such tax or duty or has established to our satisfaction that such tax or duty has been paid. An exchange of shares for common units or cash will be a taxable event for federal and state income tax purposes to the exchanging shareholder. Kinder Morgan, Inc. from time to time may increase the exchange rate by any amount for any period of at least 20 days, in which case we shall give at least 15 days' notice of such increase. Owners of shares have no rights in respect of the common units unless and until the shares are exchanged and common units registered in the name of the owner have been issued and delivered as described above. 69 75 Kinder Morgan, Inc. and its subsidiaries currently own 11,312,000 common units and approximately 2,656,700 Class B units which are convertible into common units on a one-for-one basis at the time Kinder Morgan Energy Partners, L.P. is advised by the New York Stock Exchange that the common units issuable upon conversion are eligible for listing on the New York Stock Exchange. Kinder Morgan, Inc. agrees that it will at all times own either directly or through its subsidiaries common units equal to 20% of the number of outstanding shares not held by Kinder Morgan, Inc. and its affiliates. This ownership will serve as a source of common units that will be available to satisfy the exchange obligation of Kinder Morgan, Inc. Kinder Morgan, Inc. may use those common units or other common units acquired by it to satisfy its exchange obligations with you. Kinder Morgan Energy Partners, L.P. has agreed to indemnify Kinder Morgan, Inc. for all costs and expenses associated with any claims arising out of the exchange of shares for common units or cash between a shareholder and Kinder Morgan, Inc. REGISTRATION RIGHTS Concurrently with the closing of this offering, Kinder Morgan, Inc. and Kinder Morgan Energy Partners, L.P. will enter into a registration rights agreement. Pursuant to the Kinder Morgan Energy Partners, L.P. registration rights agreement, Kinder Morgan Energy Partners, L.P. agrees to file, and to use its best efforts to cause to become effective no later than the effective date of our registration statement, a registration statement for a continuous offering of common units delivered by Kinder Morgan, Inc. upon the exchange of shares, and to maintain the effectiveness of that registration statement or a replacement registration statement. Pursuant to the registration rights agreement, Kinder Morgan Energy Partners, L.P. has the right at any time and from time to time after such registration statement has been filed and declared effective, to require us to suspend the use of any resale prospectus or prospectus supplement included therein for a reasonable period of time, not to exceed 90 days in any one instance or an aggregate of 120 days in any 12-month period, if Kinder Morgan Energy Partners, L.P. would be required to disclose information regarding Kinder Morgan Energy Partners, L.P. it was not otherwise then required by law to publicly disclose where such disclosure would reasonably be expected to adversely affect any material business transaction or negotiation in which Kinder Morgan Energy Partners, L.P. is then engaged. Kinder Morgan, Inc. will be required to satisfy share exchanges for cash if there is a suspension of the Kinder Morgan Energy Partners, L.P. registration statement. Kinder Morgan Energy Partners, L.P. has filed such a registration statement with the Securities and Exchange Commission. TAX INDEMNITY OF KINDER MORGAN, INC. Concurrently with the closing of this offering, we will enter into a tax indemnification agreement with Kinder Morgan, Inc. Pursuant to this tax indemnification agreement, Kinder Morgan, Inc. has agreed to indemnify us for any tax liability attributable to our formation or our management of Kinder Morgan Energy Partners, L.P., and for any taxes arising out of a transaction involving our i-units to the extent the transaction does not generate sufficient cash to pay our taxes. TRANSFER AGENT AND REGISTRAR EquiServe Trust Company, N.A., whose address is 525 Washington Blvd., Jersey City, NJ 07310, has agreed to serve as transfer agent and registrar for our shares and will receive a fee from us for serving in those capacities. All fees charged by the transfer agent for transfers of shares will be borne by us and not by you, except that fees similar to those customarily paid by shareholders for surety bond premiums to replace lost or stolen certificates, taxes and other governmental charges, special charges for services requested by you and other similar fees or charges will be borne by you. There will be no charge to you for disbursements by us of cash distributions. We will indemnify the transfer agent and registrar, our agents and each of their 70 76 respective shareholders, directors, officers and employees against all claims and losses that may arise out of acts performed or omitted in respect of our activities, except for any liability due to any negligence, gross negligence, bad faith or intentional misconduct of the indemnified person or entity. The transfer agent and registrar may at any time resign, by notice to us, or be removed by us, that resignation or removal to become effective upon the appointment by us of a successor transfer agent and registrar and its acceptance of that appointment. If no successor has been appointed and accepted that appointment within 30 days after notice of that resignation or removal, we are authorized to act as the transfer agent and registrar until a successor is appointed. REPLACEMENT OF SHARE CERTIFICATES We will replace any mutilated certificate at your expense upon surrender of that certificate to the transfer agent. We will replace certificates that become destroyed, lost or stolen at your expense upon delivery to us and the transfer agent of satisfactory evidence that the certificate has been destroyed, lost or stolen, together with any indemnity that may be required by us. FRACTIONAL SHARES We will make distributions of additional shares, including fractional shares. Records of fractional interests held by the holders of shares will be maintained by the Depositary Trust Company or the broker or other nominees through which you hold your shares. You will be able to sell such fractional shares on the New York Stock Exchange only when they equal, in the aggregate, whole shares. Certificates representing fractional shares will not be issued under any condition. Fractional shares will receive distributions when distributions are made on our shares. All fractional shares will be rounded down, if necessary, and stated in six decimal places. 71 77 DESCRIPTION OF THE i-UNITS The i-units are a separate class of limited partner interests in Kinder Morgan Energy Partners, L.P. All the i-units will be owned by us and will not be publicly traded. A number of the covenants in our limited liability company agreement and in Kinder Morgan Energy Partners, L.P.'s partnership agreement affect us as the holder of i-units. For a description of the material covenants, see "Description of Our Shares -- Covenants." VOTING RIGHTS Owners of i-units generally will vote together with the common units and Class B units as a single class and sometimes will vote as a class separate from the holders of common units and Class B units. The i-units will have the same voting rights as the common units and Class B units voting together as a single class on the following matters: - a sale or exchange of all or substantially all of Kinder Morgan Energy Partners, L.P.'s assets; - the election of a successor general partner in connection with the removal of the general partner; - a dissolution or reconstitution of Kinder Morgan Energy Partners, L.P.; - a merger of Kinder Morgan Energy Partners, L.P.; and - some amendments to the partnership agreement, including any amendment that would cause Kinder Morgan Energy Partners, L.P. to be treated as a corporation for income tax purposes. The i-units will vote separately as a class on the following: - Amendments to the Kinder Morgan Energy Partners, L.P. partnership agreement that would have a material adverse effect on the holders of the i-units in relation to the other classes of units. This kind of an amendment requires the approval of two-thirds of the outstanding i-units other than the number of i-units corresponding to the number of shares owned by Kinder Morgan, Inc. and its affiliates. - The approval of the withdrawal of the general partner or the transfer to a non-affiliate of all of its interest as a general partner. These matters require the approval of a majority of the outstanding i-units other than the number of i-units corresponding to the number of shares owned by Kinder Morgan, Inc. and its affiliates. In all cases, i-units will be voted in proportion to the affirmative and negative votes, abstentions and non-votes of owners of our shares. For further information regarding the voting rights of i-units and shares of Kinder Morgan Management, LLC, see "Description of Our Shares -- Limited Voting Rights." DISTRIBUTIONS AND PAYMENTS The number of i-units distributed to us by Kinder Morgan Energy Partners, L.P. will be based upon the amount of cash to be distributed by Kinder Morgan Energy Partners, L.P. to an owner of a common unit. Kinder Morgan Energy Partners, L.P. will distribute to us a number of i-units equal to the number of shares distributed by us. Typically, if cash is paid to the holders of common units, we, as the owner of i-units, will receive additional i-units instead of cash. The fraction of an i-unit received per i-unit owned by us will be determined as if the cash payment on the common unit were a cash distribution. If additional units are distributed to the owners of common units, as the owner of i-units, we will receive an equivalent amount of units based on the number of i-units that we own. 72 78 MERGER, CONSOLIDATION OR SALE OF ASSETS In the case of any of the following events: - any consolidation or merger of Kinder Morgan Energy Partners, L.P. with or into another person, - any merger of another person into Kinder Morgan Energy Partners, L.P., except a merger which does not result in any reclassification, conversion, exchange or cancellation of the common units of Kinder Morgan Energy Partners, L.P., or - any sale, transfer or lease of all or substantially all the properties and assets of Kinder Morgan Energy Partners, L.P., if the owners of the common units receive cash in the transaction, a distribution on each i-unit will be made in additional i-units determined by dividing the cash received on a common unit by the average market price of one of our shares determined for a ten day trading period ending immediately prior to the effective time of the transaction, except that in the case of a liquidation, as the owner of the i-units, we will receive the distribution provided pursuant to the liquidation provisions in Kinder Morgan Energy Partners, L.P.'s partnership agreement. FEDERAL INCOME TAX CHARACTERISTICS The terms of the i-units provide that no allocations of income, gain, loss or deduction will be made in respect of the i-units until such time as there is a liquidation of Kinder Morgan Energy Partners, L.P. If there is a liquidation of Kinder Morgan Energy Partners, L.P., it is intended that we will receive allocations of income and gain, or deduction and loss, in an amount necessary for the capital account attributable to each i-unit to be equal to that of a common unit. As a result, we would likely realize taxable income upon the liquidation of Kinder Morgan Energy Partners, L.P. However, no assurance can be given that there will be sufficient amounts of income and gain to cause the capital account attributable to each i-unit to be equal to that of a common unit. If they are not equal, we may receive less value than would be received by a holder of common units. 73 79 BUSINESS KINDER MORGAN MANAGEMENT, LLC We are a limited liability company formed in Delaware on February 14, 2001. We will have no operations prior to the closing of the offering. Pursuant to a delegation of control agreement among Kinder Morgan G.P., Inc., Kinder Morgan Energy Partners, L.P., the operating partnerships owned by Kinder Morgan Energy Partners, L.P. and us, the parties have agreed that: - Kinder Morgan G.P., Inc., as general partner of Kinder Morgan Energy Partners, L.P., will delegate to us, to the fullest extent permitted under Delaware law and the Kinder Morgan Energy Partners, L.P. partnership agreement, and we will assume, on the closing of this offering, all of Kinder Morgan G.P., Inc.'s power and authority to manage and control the business and affairs of Kinder Morgan Energy Partners, L.P. and the operating partnerships owned by Kinder Morgan Energy Partners, L.P.; and - We will not take any of the following actions without the approval of Kinder Morgan G.P., Inc.: -- amend or propose an amendment to the Kinder Morgan Energy Partners, L.P. partnership agreement, -- change the amount of the distribution made on the Kinder Morgan Energy Partners, L.P. common units, -- allow a merger or consolidation involving Kinder Morgan Energy Partners, L.P., -- allow a sale or exchange of all or substantially all of the assets of Kinder Morgan Energy Partners, L.P., -- dissolve or liquidate Kinder Morgan Energy Partners, L.P., -- take any action requiring unitholder approval, -- call any meetings of the Kinder Morgan Energy Partners, L.P. common unitholders, -- take any action that, under the terms of the partnership agreement of Kinder Morgan Energy Partners, L.P., must or should receive a special approval of the conflicts and audit committee of Kinder Morgan G.P., Inc., -- take any action that, under the terms of the partnership agreement of Kinder Morgan Energy Partners, L.P., cannot be taken by the general partner without the approval of all outstanding units, -- settle or compromise any claim or action directly against or otherwise relating to indemnification of our or the general partner's (and respective affiliates) officers, directors, managers or members or relating to our structure or securities, -- settle or compromise any claim or action involving tax matters, -- allow Kinder Morgan Energy Partners, L.P. to incur indebtedness if the aggregate amount of its indebtedness then exceeds 50% of the market value of then outstanding units of Kinder Morgan Energy Partners, L.P., or -- allow Kinder Morgan Energy Partners, L.P. to issue units in one transaction, or in a series of related transactions, having a market value in excess of 20% of the market value of then outstanding units of Kinder Morgan Energy Partners, L.P. 74 80 - Kinder Morgan G.P., Inc.: -- is not relieved of any responsibilities or obligations to Kinder Morgan Energy Partners, L.P. or its unitholders as a result of such delegation, -- will own or one of its affiliates will own all of our voting shares, and -- will not withdraw as general partner of Kinder Morgan Energy Partners, L.P. or transfer to a non-affiliate all of its interest as general partner, unless approved by both the holders of a majority of each of the i-units and the holders of a majority of all units voting as a single class, other than Kinder Morgan, Inc. and its affiliates. - Kinder Morgan Energy Partners, L.P. will: -- recognize the delegation of rights and powers to us, -- indemnify and protect us and our officers and directors to the same extent as it does with respect to Kinder Morgan G.P., Inc. as general partner; and -- reimburse our expenses to the same extent as it does with respect to Kinder Morgan G.P., Inc. as general partner. These agreements will continue as long as Kinder Morgan G.P., Inc. has not withdrawn or been removed as the general partner of Kinder Morgan Energy Partners, L.P. and all of our shares are not owned by Kinder Morgan, Inc. and its affiliates. The partnership agreement of Kinder Morgan Energy Partners, L.P. will be amended to reflect these agreements. These agreements will also apply to the operating subsidiary partnerships or other entities of Kinder Morgan Energy Partners, L.P. and their partnership agreements will be amended accordingly. Kinder Morgan G.P., Inc. will remain the only general partner of Kinder Morgan Energy Partners, L.P. and all of its operating partnerships. Kinder Morgan G.P., Inc. will retain all of its general partner interests and shares in the profits, losses and distributions from all of these partnerships or other entities. The withdrawal or removal of Kinder Morgan G.P., Inc. as general partner of Kinder Morgan Energy Partners, L.P. will simultaneously result in the termination of our power and authority to manage and control the business and affairs of Kinder Morgan Energy Partners, L.P. Similarly, if Kinder Morgan G.P., Inc.'s power and authority as general partner are modified in the partnership agreement of Kinder Morgan Energy Partners, L.P., then the power and authority delegated to us will be modified on the same basis. The delegation of control agreement can be amended by all parties to the agreement, but on any amendment that would reduce the time for any notice to which owners of our shares are entitled or would have a material adverse effect on the shares, as determined by our board of directors in its discretion, the approval of the owners of a majority of the shares, excluding shares owned by Kinder Morgan, Inc. and its affiliates is required. We are a limited partner in Kinder Morgan Energy Partners, L.P. We do not expect to have any cash flow attributable to our ownership of the i-units, but we expect that we will receive quarterly distributions of additional i-units from Kinder Morgan Energy Partners, L.P. The number of additional i-units we receive will be based on the amount of cash to be distributed by Kinder Morgan Energy Partners, L.P. to an owner of a common unit. The amount of cash distributed by Kinder Morgan Energy Partners, L.P. to its holders of common units will be determined by the operations of Kinder Morgan Energy Partners, L.P. and its operating limited partnerships and subsidiaries. We have elected to be treated as a corporation for federal income tax purposes. Because we will be treated as a corporation for federal income tax purposes, an owner of our shares will not report on its federal income tax return any of our items of income, gain, loss and deduction. We will be subject to federal income tax on our taxable income; however, the i-units owned by us generally will not be entitled to allocations of income, gain, loss or deduction of Kinder 75 81 Morgan Energy Partners, L.P. until such time as there is a liquidation of Kinder Morgan Energy Partners, L.P. Therefore, we do not anticipate that we will have material amounts of taxable income resulting from our ownership of the i-units unless we enter into a sale or exchange of the i-units or Kinder Morgan Energy Partners, L.P. is liquidated. We are not a party to any litigation. KINDER MORGAN ENERGY PARTNERS, L.P. Kinder Morgan Energy Partners, L.P. is a Delaware limited partnership formed in August 1992. Kinder Morgan Energy Partners, L.P. is the largest publicly-traded pipeline master limited partnership in the United States in terms of market capitalization and has one of the largest products pipeline systems in the United States based on volumes delivered. Its operations are grouped into five reportable business segments. These segments and their major assets are as follows: - Product Pipelines, consisting of: -- the Pacific operations, including approximately 3,300 miles of pipelines which transport over one million barrels per day of refined petroleum products to some of the faster growing population centers in the United States, including Los Angeles, San Diego and Orange County, California; the San Francisco Bay area; Las Vegas, Nevada and Tucson and Phoenix, Arizona; and 13 truck-loading terminals with an aggregate usable tankage capacity of approximately 8.2 million barrels; -- a 51% operating interest in Plantation Pipe Line Company, which owns and operates a 3,100 mile refined petroleum products pipeline system throughout the southeastern United States, serving major metropolitan areas including Birmingham, Alabama; Atlanta, Georgia; Charlotte, North Carolina; and the Washington, D.C. area; -- the North System, a 1,600 mile pipeline that transports natural gas liquids and refined petroleum products between south central Kansas and the Chicago area and various intermediate points, including eight terminals; -- the Cypress Pipeline, which transports natural gas liquids from Mont Belvieu, Texas to Westlake Petrochemicals Corporation in Lake Charles, Louisiana; -- a 32.5% interest in the Cochin Pipeline System, a 1,900 mile natural gas liquids pipeline originating in Alberta, Canada extending through seven U.S. states and terminating in Ontario, Canada; -- transmix operations, which separates, for a fee, different types of refined petroleum products that become blended together when shipped through pipelines via processing plants in Colton, California; Richmond, Virginia; Dorsey Junction, Maryland; Indianola, Pennsylvania; and Wood River, Illinois; and -- a 50% interest in Heartland Pipeline Company, which ships refined petroleum products in the Midwest; - Natural Gas Pipelines, consisting of assets acquired in late 1999 and 2000, including: -- Kinder Morgan Interstate Gas Transmission LLC, which owns a 6,700-mile natural gas pipeline, including the Pony Express pipeline facilities, that extends from northwestern Wyoming east into Nebraska and Missouri and south through Colorado and Kansas; -- Kinder Morgan Texas Pipeline, L.P., which owns a 2,700-mile intrastate pipeline along the Texas Gulf Coast; 76 82 -- a 66 2/3% interest in Trailblazer Pipeline Company, which transports natural gas from Colorado through southeastern Wyoming to Beatrice, Nebraska; -- a 49% interest in Red Cedar Gathering Company, which gathers natural gas in La Plata County, Colorado and owns and operates a carbon dioxide processing plant; -- the Casper and Douglas Gathering Systems, consisting of approximately 1,560 miles of natural gas gathering pipelines and 210 million cubic feet per day of natural gas processing capability at two facilities located in Wyoming; -- a 25% interest in Thunder Creek Gas Services LLC, which gathers, transports and processes coal bed methane gas in the Powder River Basin of Wyoming; and -- a 50% interest in Coyote Gas Treating Limited Liability Company, which owns a 250 million cubic feet per day natural gas treating facility in La Plata County, Colorado; - CO(2) Pipelines, consisting of: -- interests in four CO(2) pipelines, including: a 50% interest in Cortez Pipeline, a 100% interest in Central Basin Pipeline, an 81% interest in Canyon Reef Carriers CO(2) Pipeline, a 13% interest in Bravo Pipeline; -- interests in two CO(2) reserve fields, including a 45% interest in McElmo Dome and an 11% interest in Bravo Dome; and -- interests in four oil fields in West Texas, including in 71% working interest in the SACROC oil field, and minority interests in the Sharon Ridge oil field, the Reirecke oil field, and the Yates oil field. - Bulk Terminals, consisting of 29 owned and operated terminal facilities that load, unload and store bulk materials such as coal, petroleum coke and other dry aggregate products, including: -- coal terminals located in Cora, Illinois; Paducah, Kentucky; Newport News, Virginia; Mount Vernon, Indiana; and Los Angeles, California; -- liquid bulk storage terminals in New Orleans and Cincinnati, Ohio; -- petroleum coke terminals located on the lower Mississippi River; and -- other bulk terminals handling alumina, cement, salt, soda ash, fertilizer and other dry bulk materials. - Liquids Terminals, a new business segment beginning in 2001, consisting of five petroleum products and chemicals terminals recently acquired from GATX located in Houston, Texas; Carteret, New Jersey; Philadelphia, Pennsylvania; and Chicago, Illinois. For a description of the debt incurred in acquisitions, please see "Capital Requirements for Recent Transactions" under "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Kinder Morgan Energy Partners, L.P." BUSINESS STRATEGY Kinder Morgan Energy Partners, L.P.'s management's objective is to operate Kinder Morgan Energy Partners, L.P. as a low-cost, growth-oriented master limited partnership by: - focusing on stable, fee-based assets which are core to the energy infrastructure of growing markets; - increasing utilization of assets while controlling costs; - leveraging economies of scale from incremental acquisitions; and 77 83 - maximizing the benefits of the unique financial structure of Kinder Morgan Energy Partners, L.P. Since February 1997, Kinder Morgan Energy Partners, L.P. has closed 21 acquisitions valued at approximately $4.8 billion. These acquisitions have assisted Kinder Morgan Energy Partners, L.P. in growing distributions to all partners from $30.1 million for 1997 to $333.3 million for 2000. Kinder Morgan Energy Partners, L.P. regularly considers and enters into discussions regarding potential acquisitions, including from Kinder Morgan, Inc. or its affiliates, and is currently contemplating potential acquisitions. Kinder Morgan Energy Partners, L.P. primarily transports and/or handles products for a fee and largely is not engaged in the purchase and resale of commodity products. As a result, Kinder Morgan Energy Partners, L.P. does not face significant risks relating directly to shifts in commodity prices. Product Pipelines. Kinder Morgan Energy Partners, L.P. plans to continue to expand its presence in the rapidly growing refined products markets in the western and southeastern United States through incremental expansions of its Pacific operations and its Plantation system and through acquisitions that increase its unitholder distributions. Because the North system serves a relatively mature market, Kinder Morgan Energy Partners, L.P. intends to focus on increasing throughput within the system by remaining a reliable, cost-effective provider of transportation services and by continuing to increase the range of products transported and services offered. Kinder Morgan Energy Partners, L.P. recently assumed operation of Plantation Pipe Line Company and expects to increase cash flows from Plantation through cost savings and operating efficiencies. The acquisition of the transmix operations in September 1999, October 2000 and December 2000 strengthened Kinder Morgan Energy Partners, L.P.'s existing business of separating, for a fee, different types of refined petroleum products that become blended together when shipped through pipelines and added fee-based services related to its core refined products pipeline business. Natural Gas Pipeline. Kinder Morgan Interstate Gas Transmission also serves a stable, mature market, and thus Kinder Morgan Energy Partners, L.P. is focused on reducing costs and securing natural gas volumes for this pipeline. New measurement systems and other improvements will aid in managing expenses. Kinder Morgan Energy Partners, L.P. will explore expansion and storage opportunities to increase utilization levels. Kinder Morgan Texas Pipeline, L.P. intends to grow its transportation and storage businesses by identifying and serving significant new customers with demand for capacity on its intrastate pipeline system. Trailblazer Pipeline Company is currently pursuing an expansion of its system supported by volume commitments secured in August 2000. Red Cedar Gathering Company, a partnership with the Southern Ute Indian Tribe, is pursuing additional gathering and processing opportunities on tribal land. CO(2) Pipelines. Kinder Morgan CO(2) Company's Permian Basin strategy is to offer customers "one-stop shopping" for carbon dioxide supply, transportation and technical support service. Outside the Permian Basin, Kinder Morgan CO(2) Company intends to compete aggressively for new supply and transportation projects. Kinder Morgan Energy Partners, L.P.'s management believes these projects will arise as other U.S. oil producing basins mature and make the transition from traditional production to methods involving the injection of other products, such as carbon dioxide, to increase production of oil from the basins. Bulk Terminals. Kinder Morgan Energy Partners, L.P. is dedicated to growing its bulk terminals business through selective acquisitions, expansions, and the development of new terminals. The bulk terminals industry in the United States is highly fragmented, leading to opportunities for us to make selective, accretive acquisitions. Kinder Morgan Energy Partners, 78 84 L.P. will make investments to expand and improve existing facilities, particularly those facilities that handle low-sulfur western coal. Additionally, Kinder Morgan Energy Partners, L.P. plans to design, construct and operate new facilities for current and prospective customers. Kinder Morgan Energy Partners, L.P.'s management believes Kinder Morgan Energy Partners, L.P. can use newly acquired or developed facilities to leverage its operational expertise and customer relationships. Liquids Terminals. Kinder Morgan Energy Partners, L.P. intends to grow its liquids terminals business through selective acquisitions, expansions and the development of new terminals. Kinder Morgan Energy Partners, L.P.'s management believes it can leverage its relationships with major oil companies, petrochemical companies, and other customers who store liquid petroleum and chemical products to increase utilization of its existing facilities and acquire new assets. COMPETITION Kinder Morgan Energy Partners, L.P.'s ability to compete depends on general market conditions, which may change. Generally, demand for Kinder Morgan Energy Partners, L.P.'s transportation and storage services is a function of one or more of the following factors: - total and per capita consumption; - prevailing economic and demographic conditions; - alternate modes of transportation and/or storage; - alternate sources; and - price. Product Pipelines. Kinder Morgan Energy Partners, L.P. operates its refined petroleum products pipelines without the benefit of exclusive franchises from government entities. Kinder Morgan Energy Partners, L.P. provides common carrier transportation services through its pipelines at posted tariffs and, with respect to its Pacific operations, almost always without long-term contracts for transportation service with customers. Kinder Morgan Energy Partners, L.P. 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. The most significant competitors of Kinder Morgan Energy Partners, L.P.'s Pacific operations' pipeline system are proprietary pipelines owned and operated by major oil companies in the area where its pipeline system delivers products as well as refineries with related trucking arrangements within its market areas. In addition, major oil companies recently have increased the usage of trucks, resulting in minor but notable reductions in product volumes delivered to certain shorter-haul destinations, primarily Orange County and Colton, California served by the South and West lines of the Pacific operations. Kinder Morgan Energy Partners, L.P. cannot predict with certainty whether this trend towards increased short-haul trucking will continue in the future. Demand for terminaling services varies widely throughout Kinder Morgan Energy Partners, L.P.'s product pipeline system. Certain major petroleum companies and independent terminal operators directly compete with Kinder Morgan Energy Partners, L.P. at several terminal locations. At those locations, pricing, service capabilities and available tank capacity control market share. Plantation Pipe Line Company competes primarily with the Colonial Pipeline, which also runs from Gulf Coast refineries throughout the southeastern United States, extending into the northeastern states. 79 85 Heartland competes with other refined product carriers in the geographic market served. Heartland's principal competitor is Williams Pipeline Company. In addition, Kinder Morgan Energy Partners, L.P.'s North System competes with other liquids pipelines and to a lesser extent with rail carriers. In the Chicago area, Kinder Morgan Energy Partners, L.P.'s North System competes with other natural gas liquid pipelines that deliver into the area and with rail car deliveries primarily from Canada. Other Midwest pipelines and area refineries compete with Kinder Morgan Energy Partners, L.P.'s North System for propane terminal deliveries. Kinder Morgan Energy Partners, L.P.'s North System also competes indirectly with pipelines that deliver product to markets that Kinder Morgan Energy Partners, L.P.'s North System does not serve, such as the Gulf Coast market area. Kinder Morgan Energy Partners, L.P.'s transmix operations compete mainly with like operations serving common markets. Placid Refining is a major competitor in the Gulf Coast area, and Tosco Refining is a major competitor in the New York harbor area. There are various processors in the Mid-Continent area, mainly Phillips and Williams Brothers, who will compete with its expansion efforts into that market. A number of smaller organizations operate in the West and Southwest. These operations compete for supply, which we envision as the basis for growth in the West and Southwest. Kinder Morgan Energy Partners, L.P.'s Colton Processing Facility competes with major oil company refineries and other transmix processing facilities in California and Arizona. Natural Gas Pipelines. Kinder Morgan Energy Partners, L.P.'s natural gas pipelines compete against other existing natural gas pipelines originating from the same sources or serving the same markets as Kinder Morgan Energy Partners, L.P.'s natural gas pipelines. In addition, Kinder Morgan Energy Partners, L.P. may face competition from natural gas pipelines that are built in the future. Kinder Morgan Interstate Gas Transmission LLC competes with other interstate and intrastate gas pipelines transporting gas from the supply sources in the Rocky Mountain and Hugoton Basins to mid-continent pipelines and market centers. Kinder Morgan Texas Pipeline, L.P. competes with marketing companies, interstate and intrastate pipelines for sales and transport customers in the Houston, Beaumont and Port Arthur areas, and or acquiring gas supply in South Texas, the Gulf coast of Texas and the Gulf of Mexico. While competing pipelines have been announced that would move gas east out of the Rocky Mountains, the main competition that Trailblazer faces is that the gas supply in the Rocky Mountain area either stays in the area or is moved west and therefore not transported on Trailblazer's pipeline. CO(2) Pipelines. Kinder Morgan Energy Partners, L.P.'s primary competitors for the sale of carbon dioxide include suppliers that have an ownership interest in McElmo Dome, Bravo Dome and Sheep Mountain Dome carbon dioxide reserves. Kinder Morgan Energy Partners, L.P.'s ownership interests in the Cortez and Bravo pipelines are in direct competition with Sheep Mountain pipeline and Petrosource Carbon Company's carbon dioxide pipeline. Kinder Morgan Energy Partners, L.P. also competes with other interests in McElmo Dome and Cortez Pipeline for transportation of carbon dioxide to the Denver City, Texas market area. There is no assurance that new carbon dioxide source fields will not be discovered which could compete with Kinder Morgan Energy Partners, L.P. or that new methodologies for enhanced oil recovery could replace carbon dioxide flooding. Bulk Terminals. Kinder Morgan Bulk Terminals faces competition from numerous factors throughout the United States. Kinder Morgan Energy Partners, L.P.'s Cora Terminal and its Grand Rivers Terminal compete with several coal terminals located in the general geographic area. No significant new coal terminals have been constructed near Kinder Morgan Energy Partners, L.P.'s Cora Terminal or its Grand Rivers Terminal in the last ten years. Kinder Morgan Energy Partners, L.P. believes its Cora Terminal and its Grand Rivers Terminal can compete successfully with other terminals because of their favorable location, independent ownership, available capacity, modern equipment and large storage areas. Kinder Morgan Energy Partners, L.P.'s Pier IX Terminal competes primarily with two modern coal terminals located in the same 80 86 Virginian port complex as its Pier IX Terminal. 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. Kinder Morgan Energy Partners, L.P.'s petroleum coke and other bulk terminals compete with numerous independent terminal operators, with other terminals owned by oil companies and other industrials opting not to outsource terminal services. Competition facing the petroleum coke terminals that Kinder Morgan Energy Partners, L.P. operates but does not own has increased significantly, primarily from companies that also market and sell the product. This increased competition will likely decrease profitability in this segment. Many of Kinder Morgan Energy Partners, L.P.'s other bulk terminals were constructed pursuant to long-term contracts for specific customers. As a result, Kinder Morgan Energy Partners, L.P. believes other terminal operators would face a significant disadvantage in competing for this business. Liquids Terminals. Kinder Morgan Energy Partners, L.P.'s liquids terminals compete with independent and proprietary terminals located in the same market as Kinder Morgan Energy Partners, L.P.'s terminals. Significant competitors include Vopak, Oiltanking, Intercontinental Terminals Co. and Williams in the Houston ship channel; IMTT-Bayonne and Stolthaven Terminals in New York harbor; and IMTT and Stolthaven Terminals in Argo, Illinois. RECENT DEVELOPMENTS On October 25, 2000, Kinder Morgan Energy Partners, L.P. acquired from a subsidiary of Buckeye Partners, L.P. transmix processing plants in Indianola, Pennsylvania and Wood River, Illinois for approximately $37 million plus net working capital. The two facilities are projected to process over 4.3 million barrels of transmix in 2000. On October 25, 2000, Kinder Morgan Energy Partners, L.P. entered into a new $600 million 364-day bank revolving facility that replaced and expanded its then existing $300 million facility and contains substantially the same covenants. On December 4, 2000, Kinder Morgan Energy Partners, L.P. announced that it had purchased Delta Terminal Services, Inc. for approximately $114 million in cash. The acquisition included two liquid bulk storage terminals in New Orleans, Louisiana, and Cincinnati, Ohio. The facilities provide services to producers of petroleum, chemicals and other products. The New Orleans terminal has a storage capacity of 2.5 million barrels. It is located at the 98.5-mile point on the Mississippi River close to the Harvey Canal and the Greater New Orleans Bridge. The terminal serves the New Orleans/Baton Rouge corridor and is situated on approximately 100 acres of land. The Cincinnati terminal has a storage capacity of 500,000 barrels. It is located at the 465.7-mile point on the Ohio River and is situated on approximately 60 acres of land. On December 21, 2000, Kinder Morgan Energy Partners, L.P. completed a transaction whereby Kinder Morgan, Inc. contributed approximately $300 million of its assets to Kinder Morgan Energy Partners, L.P. As consideration for these assets, Kinder Morgan Energy Partners, L.P. paid Kinder Morgan, Inc. approximately 50% of the fair value of the assets in cash and the remaining 50% of the fair value of the assets in units. The largest asset contributed was Kinder Morgan Texas Pipeline, L.P., a 2,600-mile natural gas pipeline system that extends from south Texas to Houston along the Texas gulf coast. Other assets contributed included the Casper and Douglas Natural Gas Gathering and Processing Systems, Kinder Morgan, Inc.'s 50% interest in Coyote Gas Treating, LLC and Kinder Morgan, Inc.'s 25% interest in Thunder Creek Gas Services, LLC. On December 21, 2000, Kinder Morgan Energy Partners, L.P. reached agreement with the other owner of Plantation Pipe Line Company to become the operator of Plantation, a 3,100 mile pipeline system throughout the southeastern United States. 81 87 On December 28, 2000, Kinder Morgan Energy Partners, L.P. completed the purchase of a 32.5% interest in the Cochin Pipeline system from NOVA Chemicals Corporation. The Cochin Pipeline consists of approximately 1,900 miles of 12-inch pipeline operating between Fort Saskatchewan, Alberta and Sarnia, Ontario. It transports high vapor pressure ethane, ethylene, propane, butane and natural gas liquids to the midwestern United States and eastern Canadian petrochemical and fuel markets, and is a joint venture of Kinder Morgan Energy Partners, L.P.'s subsidiary and subsidiaries of BP Amoco, Conoco, Shell and NOVA Chemicals. On December 28, 2000, Kinder Morgan Energy Partners, L.P. entered into a definitive agreement to form a joint venture with Marathon Oil Company in the southern Permian Basin of West Texas. The joint venture will consist of a nearly 13% interest in the SACROC oil field and a 49.9% interest in the Yates Field oil field, the largest single interest in that oil field. The joint venture will be owned 85% by Marathon Oil Company and 15% by Kinder Morgan CO(2) Company. In connection with the formation of the joint venture, Kinder Morgan Energy Partners, L.P. entered into a 10-year contract to supply Marathon with an aggregate of 30 Bcf of carbon dioxide expected to be used to enhance oil recovery in the area. On December 31, 2000, Kinder Morgan Energy Partners, L.P. increased its ownership in the Colton, California transmix processing facility to 100% by purchasing Duke Energy Merchants' 50% interest in the facility. The facility's processing agreements with third parties were transferred to Duke, and in turn, Kinder Morgan Energy Partners, L.P. entered into a ten-year fee-based processing agreement to process transmix for Duke at the facility. Duke will market all of the products Kinder Morgan Energy Partners, L.P. processes for it at the Colton facility. On March 13, 2001, Kinder Morgan Energy Partners, L.P. purchased the Pinney Dock and Transportation Company for approximately $41.5 million in cash. Pinney Dock and Transportation Company has six docks with 15,000 feet of vessel berthing space, 300 acres of outside storage space, 350,000 feet of warehouse space and two 45-ton gentry cranes. In two closings on March 1, 2001 and March 30, 2001, Kinder Morgan Energy Partners, L.P. purchased GATX Corporation's U.S. pipeline and terminal businesses for approximately $1.17 billion, consisting of cash, assumed debt and other obligations. Primary assets included in the transaction are the CALNEV Pipe Line Company and the Central Florida Pipeline Company, along with 12 terminals that store refined petroleum products and chemicals. CALNEV is a 550-mile refined petroleum products pipeline system originating in Colton, California and extending to the Las Vegas, Nevada market. The central Florida pipeline is a 195-mile refined petroleum products pipeline system consisting of a 16-inch gasoline pipeline and a 10-inch jet fuel and diesel pipeline, transporting product from Tampa to the Orlando, Florida market. The 12 liquids terminals have a storage capacity of 35.6 million barrels, and the largest of these terminals are located in Houston, New York Harbor, Los Angeles and Chicago, with a total capacity of approximately 31.2 million barrels. The other terminals are located in Philadelphia, Portland, Oregon, San Francisco and Seattle. In addition, six other terminals acquired from GATX with a capacity of 3.6 million barrels that are part of the CALNEV and Central Florida pipeline systems. Kinder Morgan Energy Partners, L.P. entered into an additional $1.1 billion unsecured 364-day credit facility with a syndicate of financial institutions on February 22, 2001 to fund the GATX Acquisition. On March 23, 2001 this facility was reduced by $600 million to $500 million. Following the close of this offering, Kinder Morgan Energy Partners, L.P. expects to terminate this facility. First Union National Bank, an affiliate of First Union Securities, Inc., is the administrative agent under this agreement. On March 12, 2001, Kinder Morgan Energy Partners, L.P. sold $700 million aggregate principal amount of its 6.75% Notes due March 15, 2011 and $300 million aggregate principal amount of its 7.40% Notes due March 15, 2031. The proceeds of the sale of the notes were used to repay short-term debt incurred to complete the GATX acquisition. 82 88 On April 18, 2001, Kinder Morgan Energy Partners, L.P. announced an increase in its quarterly cash distribution per common unit for the first quarter from $0.95 (an annualized rate of $3.80) to $1.05 (an annualized rate of $4.20). This distribution will be payable on May 15, 2001 to common unitholders of record on April 30, 2001. KINDER MORGAN, INC. Kinder Morgan, Inc., a Kansas corporation, with its common stock traded on the New York Stock Exchange under the symbol "KMI", is one of the largest energy transportation and storage companies in America in terms of market capitalization, miles of pipeline and net income, operating more than 30,000 miles of natural gas and products pipelines. It also has significant retail natural gas distribution and electric generation assets. Kinder Morgan, Inc. through an indirect general partner interest, operates Kinder Morgan Energy Partners, L.P. Kinder Morgan also holds a significant limited partnership interest in Kinder Morgan Energy Partners, L.P. MANAGEMENT OF KINDER MORGAN MANAGEMENT, LLC DIRECTORS AND EXECUTIVE OFFICERS Our business and affairs will be managed by a board of managers whom we call our directors. Our directors and executive officers have served since our formation on February 14, 2001. The following table sets forth specific information for our executive officers and directors. All of our directors are elected annually by, and may be removed by, Kinder Morgan G.P., Inc. as the sole owner of our voting shares. Executive officers are elected for one-year terms. The table also sets forth the percentage of professional time each officer intends to devote solely to Kinder Morgan Management, LLC, which is almost exclusively composed of time spent managing the business and affairs of Kinder Morgan Energy Partners, L.P.
PERCENTAGE OF OFFICERS' TIME DEVOTED TO KINDER MORGAN NAME AGE POSITION WITH KINDER MORGAN MANAGEMENT, LLC MANAGEMENT, LLC - ---- --- ------------------------------------------- ----------------- Richard D. Kinder.............. 56 Director, Chairman and CEO 50% William V. Morgan.............. 57 Director, Vice Chairman and President 50% Edward O. Gaylord.............. 69 Director NA Gary L. Hultquist.............. 57 Director NA Perry Waughtal................. 65 Director NA William V. Allison............. 53 President, Natural Gas Pipeline Operations 75% Thomas A. Bannigan............. 47 President, Products Pipeline Operations 100% David G. Dehaemers, Jr......... 40 Vice President, Corporate Development 75% Joseph Listengart.............. 32 Vice President, General Counsel and 60% Secretary Michael C. Morgan.............. 32 Vice President, Strategy and Investor 60% Relations C. Park Shaper................. 32 Vice President, Treasurer and Chief 60% Financial Officer Thomas B. Stanley.............. 50 President, Bulk Terminals 100% James E. Street................ 44 Vice President, Human Resources and 50% Administration
83 89 Richard D. Kinder was elected Director, Chairman, and Chief Executive Officer of Kinder Morgan Management, LLC upon its formation. Mr. Kinder was appointed to Kinder Morgan, Inc.'s Board of Directors upon completion of its acquisition by merger of Kinder Morgan (Delaware), Inc. on October 7, 1999. Mr. Kinder has been Kinder Morgan, Inc.'s Chairman of the Board of Directors and Chief Executive Officer since October 7, 1999. Mr. Kinder was elected Director, Chairman, and Chief Executive Officer of Kinder Morgan G.P., Inc. 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. Mr. Kinder is also a director of TransOcean Offshore Inc. and Baker Hughes Incorporated. William V. Morgan was elected Director, Vice Chairman and President of Kinder Morgan Management, LLC upon its formation. Mr. Morgan was appointed to Kinder Morgan, Inc.'s Board of Directors upon completion of its acquisition by merger of Kinder Morgan (Delaware), Inc. on October 7, 1999. Mr. Morgan is Kinder Morgan, Inc.'s Vice Chairman of the Board and its President. Mr. Morgan was President and a Director of Kinder Morgan (Delaware), Inc. since October 1996. In February 1997, he was also elected Vice Chairman of Kinder Morgan (Delaware), Inc. In addition, Mr. Morgan was elected as Director of Kinder Morgan G.P., Inc. in June 1994, Vice Chairman of Kinder Morgan G.P., Inc. in February 1997 and President of Kinder Morgan G.P., Inc. in November 1998. Mr. Morgan 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 part of Enron Corp. (namely, 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. Mr. Morgan is the father of Michael C. Morgan, our Vice President, Strategy and Investor Relations. Edward O. Gaylord was elected Director of Kinder Morgan Management, LLC upon its formation. Mr. Gaylord was elected Director of Kinder Morgan G.P., Inc. in February 1997. Mr. Gaylord is, and since 1989 has been, the Chairman of the Board of Directors and Chief Executive Officer of Jacintoport Terminal Company, a liquid bulk storage terminal on the Houston, Texas ship channel. Since January 1993, Mr. Gaylord has served on the Board of Directors of EOTT Energy Corporation, an oil trading and transportation company also located in Houston, Texas, including a term as chairman from February 1993 until May 2000. Mr. Gaylord serves on the Board of Directors of Imperial Sugar Company, Seneca Foods Corporation and Federal Reserve Bank of Dallas -- Houston Branch. Gary L. Hultquist was elected Director of the Kinder Morgan Management, LLC upon its formation. Mr. Hultquist was elected Director of Kinder Morgan G.P., Inc. in October 1999. Since 1995, Mr. Hultquist has been the Managing Director of Hultquist Capital, LLC, a San Francisco-based strategic and merger advisory firm. Since 1996, he also has served as Chairman and Chief Executive Officer of TitaniumX Corporation, a supplier of high-performance storage disk substrates and magnetic media to the disk drive industry. He is also a member of the Board of Directors of Rodel, Inc. Previously, Mr. Hultquist practiced law in two San Francisco area firms for over 15 years, specializing in business, intellectual property, securities and venture capital litigation. Perry M. Waughtal was elected Director of Kinder Morgan Management, LLC upon its formation. Mr. Waughtal was elected Director of Kinder Morgan G.P., Inc. in April 2000. Mr. Waughtal is a Limited Partner and 40% owner of Songy Partners Limited, an Atlanta, Georgia based real estate investment company. Mr. Waughtal advises Songy's management on real estate investments and has overall responsibility for strategic planning, management and operations. Previously, Mr. Waughtal served for over 30 years as Vice Chairman of Development and Operations and as Chief Financial Officer for Hines Interests Limited Partnership, a real estate and development entity based in Houston, Texas. 84 90 William V. Allison was elected President, Natural Gas Pipeline Operations of Kinder Morgan Management, LLC upon its formation. Mr. Allison was elected President, Natural Gas Pipeline Operations of Kinder Morgan G.P., Inc. in September 1999. He served as President, Pipeline Operations of Kinder Morgan G.P., Inc. from February 1999 to September 1999. From April 1998 to February 1999, he served as Vice President and General Counsel of Kinder Morgan G.P., Inc. From April 1996 through May 1997, Mr. Allison served as President of Enron Liquid Services Corporation. Prior to that, Mr. Allison served as Vice President and General Counsel of Florida Gas Transmission Company and Houston Pipeline Company. Thomas A. Bannigan was elected President, Product Pipeline Operations of Kinder Morgan Management, LLC upon its formation. Mr. Bannigan was elected President, Products Pipeline Operations of the Kinder Morgan G.P., Inc. in October 1999. Mr. Bannigan has served as President and Chief Executive Officer of Plantation Pipe Line since May 1998. From 1985 through 1998, Mr. Bannigan was Vice President, General Counsel and Secretary of Plantation Pipe Line Company. David G. Dehaemers, Jr. was elected Vice President, Corporate Development of Kinder Morgan Management, LLC upon its formation. Mr. Dehaemers was elected Vice President, Corporate Development of Kinder Morgan, Inc. in January 2000. Mr. Dehaemers was elected Vice President, Corporate Development of Kinder Morgan G.P., Inc. in January 2000. He was Treasurer of Kinder Morgan G.P., Inc. from February 1997 to January 2000 and Vice President and Chief Financial Officer of Kinder Morgan G.P., Inc. from July 1997 to January 2000. 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. Joseph Listengart was elected Vice President and General Counsel of Kinder Morgan Management, LLC upon its formation. Mr. Listengart was elected Vice President, Secretary and General Counsel of Kinder Morgan, Inc. in October 1999. Mr. Listengart was elected Vice President and General Counsel of Kinder Morgan G.P., Inc. in October 1999. Mr. Listengart became an employee of Kinder Morgan G.P., Inc. in March 1998 and was elected its Secretary in November 1998. From March 1995 through February 1998, Mr. Listengart worked as an attorney for Hutchins, Wheeler & Dittmar, a Professional Corporation. Mr. Listengart received his Juris Doctor, magna cum laude, from Boston University in May 1994, his Masters in Business Administration from Boston University in January 1995 and his Bachelors of Arts degree in Economics from Stanford University in June 1990. Michael C. Morgan was elected Vice President, Strategy and Investor Relations Kinder Morgan Management, LLC upon its formation. Mr. Morgan was elected Vice President, Strategy and Investor Relations of Kinder Morgan, Inc. in January 2000. Mr. Morgan was elected Vice President, Strategy and Investor Relations of Kinder Morgan G.P., Inc. in January 2000. He was Vice President, Corporate Development of Kinder Morgan G.P., Inc. from February 1997 to January 2000. From August 1995 until February 1997, Mr. Morgan was a consultant with McKinsey & Company, an international management consulting firm. In 1995, Mr. Morgan received a Masters in Business Administration from the Harvard Business School. 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. C. Park Shaper was elected Vice President, Treasurer and Chief Financial Officer of Kinder Morgan Management, LLC upon its formation. Mr. Shaper was elected Vice President, Treasurer and Chief Financial Officer of Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. in January 2000. 85 91 Previously, Mr. Shaper was President and Director of Altair Corporation, an enterprise focused on the distribution of web-based investment research for the financial services industry, from June 1999 to December 1999. He also served as Vice President and Chief Financial Officer of First Data Analytics, a wholly-owned subsidiary of First Data Corporation, from 1997 until June 1999. From 1995 to 1997, he was a consultant with The Boston Consulting Group. Mr. Shaper has prior experience with TeleCheck Services, Inc. and as a management consultant with the Strategic Services Division of Andersen Consulting. Mr. Shaper has a Bachelor of Science degree in Industrial Engineering and a Bachelor of Arts degree in Quantitative Economics from Stanford University. He also received a Master of Management degree from the J. L. Kellogg Graduate School of Management at Northwestern University. Thomas B. Stanley was elected President, Bulk Terminals of Kinder Morgan Management, LLC upon its formation. Mr. Stanley was elected President, Bulk Terminals of Kinder Morgan G.P., Inc. 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. James E. Street was elected Vice President, Human Resources and Administration of Kinder Morgan Management, LLC upon its formation. Mr. Street was elected Vice President, Human Resources and Administration of the Kinder Morgan G.P., Inc. in August 1999. Mr. Street was elected Vice President, Human Resources and Administration of Kinder Morgan, Inc. in October 1999. From August 1993 to September 1996, Mr. Street was President of BRI Consulting, Inc., a benefits and compensation consulting firm. From October 1996 to August 1999, Mr. Street was Senior Vice President, Human Resources and Administration for Coral Energy. Prior to joining Coral Energy, he was Vice President, Human Resources of Enron from August 1988 to August 1993. BOARD OF DIRECTORS AND COMMITTEES We anticipate that we will have an audit committee composed of our three independent directors, Perry Waughtal, Edward Gaylord and Gary Hultquist, upon the closing of the sale of shares offered by this prospectus. DIRECTOR COMPENSATION Directors of Kinder Morgan Management, LLC, other than our independent directors, do not receive compensation for their services as directors nor do they receive compensation for attending our board meetings. However, each director will be reimbursed for travel expenses incurred for each meeting of the board or for each board committee meeting attended. Each of our three independent directors receives $40,000 per year to serve as directors. EXECUTIVE COMPENSATION Because Kinder Morgan Management, LLC was formed in 2001, our directors and executive officers received no compensation in 2000. We have made no decision regarding 2001 compensation for our executive officers. We will be reimbursed for the aggregate amount of compensation we pay our executive officers and other employees by Kinder Morgan Energy Partners, L.P. 86 92 RELATIONSHIPS AND RELATED PARTY TRANSACTIONS OUR RELATIONSHIP WITH KINDER MORGAN, INC. AND KINDER MORGAN ENERGY PARTNERS, L.P. The following charts depict the current organizational structure of Kinder Morgan, Inc. and Kinder Morgan Energy Partners, L.P. and the organizational structure following the offering. [FLOW CHART] 87 93 [FLOW CHART] OWNERSHIP OF KINDER MORGAN ENERGY PARTNERS, L.P. AND ITS SUBSIDIARY OPERATING PARTNERSHIPS, ON A COMBINED BASIS AFTER THE OFFERING: i-units (entire class owned by Kinder Morgan Management, LLC)...................................................... 11.5% Common units owned by the public............................ 68.6% Common units and Class B units owned by Kinder Morgan, Inc. and affiliates............................................ 17.9% General partner interest.................................... 2.0% ------ Total............................................. 100.0%
The above chart assumes that no holder of our shares has exercised its right to exchange its shares for common units of Kinder Morgan Energy Partners, L.P. 88 94 The following table sets forth certain information, as of March 31, 2001, regarding the beneficial ownership by Kinder Morgan, Inc. and its affiliates of our shares sold in this offering and our voting shares.
KINDER MORGAN MANAGEMENT, LLC -- SHARES -------------------------------------------------------------------- CURRENT CURRENT PERCENT PRO FORMA PRO FORMA # OF SHARES OF CLASS NUMBER OF SHARES PERCENT OF CLASS ----------- ---------------- ---------------- ---------------- Kinder Morgan, Inc. ............ 0 0% 900,000 10%
KINDER MORGAN MANAGEMENT, LLC -- VOTING SHARES -------------------------------------------------------------------- CURRENT CURRENT PERCENT PRO FORMA PRO FORMA # OF SHARES OF CLASS NUMBER OF SHARES PERCENT OF CLASS ----------- ---------------- ---------------- ---------------- Kinder Morgan G.P., Inc. ....... 1 100% 1 100%
The following table sets forth information as of February 15, 2001, regarding (a) the beneficial ownership of (i) our units and (ii) the common stock of Kinder Morgan, Inc., the parent company of our general partner, by all directors of Kinder Morgan G.P., Inc., each of the named executive officers and all directors and executive officers as a group and (b) all persons known by Kinder Morgan G.P., Inc. to own beneficially more than 5% of Kinder Morgan Energy Partners, L.P.'s units. AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(1)
KINDER MORGAN, INC. COMMON UNITS CLASS B UNITS VOTING STOCK --------------------- -------------------- --------------------- NUMBER OF PERCENT NUMBER OF PERCENT NUMBER OF PERCENT UNITS(2) OF CLASS UNITS(3) OF CLASS SHARES(4) OF CLASS ---------- -------- --------- -------- ---------- -------- Richard D. Kinder(5)....... 147,987 * -- -- 23,992,492 20.87% William V. Morgan(6)....... 2,000 * -- -- 4,500,000 3.92% Edward O. Gaylord(7)....... 19,000 * -- -- -- -- Gary L. Hultquist(8)....... 2,500 * -- -- -- -- Perry M. Waughtal.......... 10,000 * -- -- 10,000 * William V. Allison(9)...... 6,000 * -- -- 85,000 * David G. Dehaemers, Jr.(10).................. 4,000 * -- -- 197,500 * Joseph Listengart(11)...... 4,699 * -- -- 49,050 * Michael C. Morgan(12)...... 2,500 * -- -- 223,500 * Directors and Executive Officers as a group (13 persons)(13)............. 262,752 * -- -- 29,230,190 25.29% Kinder Morgan, Inc.(14).... 11,312,000 17.44% 2,656,700 100.00% -- --
- --------------- * Less than 1%. (1) Except as noted otherwise, all units and Kinder Morgan, Inc. shares involve sole voting power and sole investment power. (2) As of February 15, 2001, we had 64,861,509 common units issued and outstanding. (3) As of February 15, 2001, we had 2,656,000 Class B units issued and outstanding. (4) As of February 15, 2001, Kinder Morgan, Inc. had a total of 114,931,387 shares of outstanding voting common stock. (5) Includes (a) 2,987 common units owned by Mr. Kinder's spouse, Nancy G. Kinder and (b) 2,500 Kinder Morgan, Inc. shares held by Mrs. Kinder. Does not include 463,683 Kinder Morgan, Inc. shares held by a Kinder family charitable foundation, a charitable not-for-profit 89 95 corporation. Mr. Kinder disclaims any and all beneficial or pecuniary interest in these units and shares owned by his spouse and the charitable foundation. Mr. Kinder's business address is One Allen Center, Suite 1000, 500 Dallas St., Houston, Texas 77002. (6) Morgan Associates, Inc., a Kansas corporation, wholly owned by Mr. Morgan, holds the Kinder Morgan, Inc. shares. Mr. Morgan may be deemed to own the 4,500,000 Kinder Morgan, Inc. shares and thereby shares in the voting and disposition power with Morgan Associates, Inc. (7) Includes options to purchase 4,000 common units exercisable within 60 days of February 15, 2001. (8) Includes options to purchase 2,000 common units exercisable within 60 days of February 15, 2001. (9) Includes options to purchase 6,000 common units and 75,000 Kinder Morgan, Inc. shares exercisable within 60 days of February 15, 2001, and includes 10,000 shares of restricted Kinder Morgan, Inc. stock, 25% of which vests on each of the first four anniversaries after January 17, 2001. (10) Includes options to purchase 187,500 Kinder Morgan, Inc. shares exercisable within 60 days of February 15, 2001, and includes 10,000 shares of restricted Kinder Morgan, Inc. stock, 25% of which vests on each of the first four anniversaries after January 17, 2001. (11) Includes options to purchase 4,000 common units and 39,050 Kinder Morgan, Inc. shares exercisable within 60 days of February 15, 2001, and includes 10,000 shares of restricted Kinder Morgan, Inc. stock, 25% of which vests on each of the first four anniversaries after January 17, 2001. (12) Includes options to purchase 212,500 Kinder Morgan, Inc. shares exercisable within 60 days of February 15, 2001, and includes 10,000 shares of restricted Kinder Morgan, Inc. stock, 25% of which vests on each of the first four anniversaries after the date of grant. (13) Includes options to purchase 20,000 common units and 656,200 Kinder Morgan, Inc. shares exercisable within 60 days of February 15, 2001, and includes 65,000 shares of restricted Kinder Morgan, Inc. stock, 25% of which vests on each of the first four anniversaries after January 17, 2001. (14) Kinder Morgan, Inc.'s address is One Allen Center, Suite 1000, 500 Dallas St., Houston, Texas 77002. Common units owned include units owned by Kinder Morgan, Inc. and its subsidiaries, including 862,000 common units held by Kinder Morgan G.P., Inc. TAX INDEMNIFICATION AND OTHER AGREEMENTS. We have entered into the tax indemnification agreement, exchange agreement and purchase agreement with Kinder Morgan, Inc. and a registration rights agreement with Kinder Morgan Energy Partners, L.P. which are described under "Description of Our Shares." Conflicts of interest may arise because of the relationships between Kinder Morgan, Inc., Kinder Morgan G.P., Inc., Kinder Morgan Energy Partners, L.P. and us. Our directors and officers have fiduciary duties to manage our business in a manner beneficial to us and to the holders of our shares; but these fiduciary duties have been limited pursuant to the terms of our limited liability company agreement. Simultaneously, some of our managers and officers are also directors and officers of Kinder Morgan, Inc. and Kinder Morgan G.P., Inc. and have fiduciary duties to manage the businesses of Kinder Morgan, Inc. or Kinder Morgan G.P., Inc. and Kinder Morgan Energy Partners, L.P. in a manner beneficial to Kinder Morgan, Inc. and its shareholders or Kinder Morgan G.P., Inc., Kinder Morgan Energy Partners, L.P. and their respective 90 96 shareholders or unitholders, as the case may be. The resolution of these conflicts may not always be in our best interest or in the interest of the holders of our shares. Kinder Morgan G.P., Inc. owns 100% of our shares eligible to elect our directors. For more information regarding voting rights, please read "Description of Our Shares -- Limited Voting Rights." 91 97 CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES CONFLICTS OF INTEREST Kinder Morgan, Inc. owns all of the stock of the general partner of Kinder Morgan Energy Partners, L.P. and elects all of its directors. The general partner of Kinder Morgan Energy Partners, L.P. owns all of our voting stock and elects all of our directors. Kinder Morgan, Inc. has a number of interests which differ from your interests as a shareholder of ours. As a result, there is a risk that important business decisions will not be made in your best interest. SITUATIONS IN WHICH A CONFLICT OF INTEREST COULD ARISE WE AND KINDER MORGAN ENERGY PARTNERS, L.P. MAY COMPETE FOR THE TIME AND EFFORT OF OUR DIRECTORS AND OFFICERS WHO ARE ALSO DIRECTORS AND OFFICERS OF KINDER MORGAN, INC. Kinder Morgan, Inc. and its affiliates conduct business and activities of their own in which we have no economic interest. There could be material competition for the time and effort of the directors, officers and employees who provide services to us. Our officers are not required to work full time on our affairs and will devote significant time to the affairs of Kinder Morgan, Inc. or its affiliates, and are compensated by them for the services rendered to them. KINDER MORGAN, INC. MAY SELL ASSETS OR PROVIDE SERVICES TO KINDER MORGAN ENERGY PARTNERS, L.P., GIVING RISE TO CONFLICTS OF INTEREST. Kinder Morgan, Inc.'s interest as seller of these assets or provider of services in these transactions would conflict with Kinder Morgan Energy Partners, L.P.'s interests as buyer of the assets or recipient of services. Kinder Morgan, Inc. would want to receive the highest possible price and Kinder Morgan Energy Partners, L.P. would want to pay the lowest possible price. The same type of conflict would arise if Kinder Morgan Energy Partners, L.P. were the seller of services or assets and Kinder Morgan, Inc. were the purchaser. THE FIDUCIARY DUTIES OF OUR BOARD OF DIRECTORS TO US AND OF THE GENERAL PARTNER OF KINDER MORGAN ENERGY PARTNERS, L.P. TO THE UNITHOLDERS HAS BEEN LIMITED UNDER THE LIMITED LIABILITY COMPANY AGREEMENT AND THE PARTNERSHIP AGREEMENT, RESPECTIVELY. Our limited liability company agreement and the Kinder Morgan Energy Partners, L.P. partnership agreement limit the fiduciary duties of our board of directors and of the general partner of Kinder Morgan Energy Partners, L.P., respectively. This limitation reduces the rights of our shareholders under the limited liability company agreement and the unitholders under the Kinder Morgan Energy Partners, L.P. partnership agreement to sue the board of directors and the general partner of Kinder Morgan Energy Partners, L.P., respectively, should they act in a way that, were it not for this limitation of liability, would be a breach of fiduciary duties. OWNERS OF THE SHARES WILL HAVE NO RIGHT TO ENFORCE OBLIGATIONS OF KINDER MORGAN, INC. AND ITS AFFILIATES UNDER AGREEMENTS WITH US. Any agreements between us, on the one hand, and Kinder Morgan, Inc. and its affiliates, on the other hand, will not grant to holders of our shares any right to enforce the obligations of Kinder Morgan, Inc. and its affiliates in our favor. CONTRACTS BETWEEN US AND KINDER MORGAN ENERGY PARTNERS, L.P., ON THE ONE HAND, AND KINDER MORGAN, INC. AND ITS AFFILIATES, ON THE OTHER, WILL NOT BE THE RESULT OF ARM'S-LENGTH NEGOTIATIONS. Neither the limited liability company agreement nor any of the other contracts or arrangements between us and Kinder Morgan, Inc. and its affiliates are or will be the result of arm's-length negotiations. THE SIMILARITY OF THE ACQUISITION STRATEGY OF KINDER MORGAN, INC. TO THE STRATEGY OF KINDER MORGAN ENERGY PARTNERS, L.P. CREATES CONFLICTS OF INTEREST. Since Kinder Morgan, Inc. and Kinder Morgan Energy Partners, L.P. plan to grow their business through acquisitions, conflicts of interest may arise because Kinder Morgan, Inc. is not prohibited from making acquisitions which would also be of interest to Kinder Morgan Energy Partners, L.P. Therefore, regardless of 92 98 any arrangement for sharing or allocating investment opportunities which may be established between them, this conflict may result in Kinder Morgan Energy Partners, L.P. being unable to make all of the favorable acquisitions it would otherwise make. KINDER MORGAN, INC. AND ITS AFFILIATES MAY COMPETE WITH KINDER MORGAN ENERGY PARTNERS, L.P. Kinder Morgan, Inc. and its affiliates are not prohibited from engaging in other businesses or activities, including those that might be in direct competition with Kinder Morgan Energy Partners, L.P. THERE COULD BE A CONFLICT AS TO WHETHER KINDER MORGAN ENERGY PARTNERS, L.P. SHOULD ISSUE EQUITY DILUTING KINDER MORGAN, INC.'S OWNERSHIP. It may be in the best interests of Kinder Morgan Energy Partners, L.P. to finance a transaction or operation by means of the issuance of equity which would result in a reduction of Kinder Morgan, Inc.'s percentage ownership of Kinder Morgan Energy Partners, L.P. Kinder Morgan, Inc. may not find it in its interest to have its percentage interest in the partnership reduced at that time. This could result in Kinder Morgan Energy Partners, L.P. either having to forego a transaction that would otherwise be beneficial to it or to finance the transaction or operations in whole or in part by indebtedness which could increase its leverage. KINDER MORGAN, INC. MAY EXERCISE ITS PURCHASE RIGHTS AT A TIME OR PRICE THAT MAY BE UNDESIRABLE TO YOU. Kinder Morgan, Inc. or its affiliates may exercise its optional purchase rights to acquire your shares at any time in its sole discretion after the conditions for such exercise have been satisfied. In exercising the rights, Kinder Morgan, Inc. and its affiliates do not have to consider whether the exercise is in your best interest. As a result, a shareholder may have his shares purchased from him at an undesirable time or price. For more information, please read "Description of Our Shares -- Optional Purchase." FIDUCIARY DUTIES OWED TO OUR SHAREHOLDERS AND TO THE OWNERS OF UNITS The fiduciary duties owed to you by our board of directors are prescribed by Delaware law and our limited liability company agreement. Similarly, the fiduciary duties owed to the owners of common units of Kinder Morgan Energy Partners, L.P. by the board of directors of the general partner of Kinder Morgan Energy Partners, L.P. are prescribed by Delaware law and the partnership agreement. The Delaware Limited Liability Company Act and the Delaware Limited Partnership Act provide that Delaware limited liability companies and Delaware limited partnerships, respectively, may, in their limited liability company agreements and partnership agreements, as applicable, restrict the fiduciary duties owed by the board of directors to the shareholders and us and by the general partner to the limited partners. Our limited liability company agreement and the Kinder Morgan Energy Partners, L.P. partnership agreement contain various provisions restricting the fiduciary duties that might otherwise be owed. The following is a summary of the material restrictions of the fiduciary duties owed by our board of directors to us and the other shareholders and by Kinder Morgan G.P., Inc. to the limited partners. Any fiduciary duties owed to you by Kinder Morgan, Inc. and its affiliates, as the beneficial owner of all our voting shares, are similarly restricted or eliminated. 93 99
State-law fiduciary duty standards... Fiduciary duties are generally considered to include an obligation to act with due care and loyalty. The duty of care, unless the limited liability company agreement or partnership agreement provides otherwise, would generally require a manager or general partner to act for the limited liability company or limited partnership, as applicable, in the same manner as a prudent person would act on his behalf. The duty of loyalty, in the absence of a provision in a limited liability company agreement or partnership agreement providing otherwise, would generally prohibit a manager of a Delaware limited liability company or a general partner of a Delaware limited partnership from taking any action or engaging in any transaction where a conflict of interest is present. Our limited liability company agreement modifies these standards.......................... Our limited liability company agreement contains provisions that prohibit the shareholders from advancing claims arising from conduct by our board of directors that might otherwise raise issues as to compliance with fiduciary duties or applicable law. For example, our limited liability company agreement permits the board of directors to make a number of decisions in its "sole discretion." This entitles the board of directors to consider only the interests and factors that it desires, and it has no duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or any shareholder. Kinder Morgan, Inc., its affiliates, and their officers and directors who are also our officers or directors are not required to offer to us any business opportunity. In addition to the other more specific provisions limiting the obligations of our board of directors, our limited liability company agreement further provides that our board of directors will not be liable for monetary damages to us or our shareholders for any acts or omissions if our board of directors acted in good faith. Please read "Limited Liability Company Agreement -- Exculpation and Indemnification." Kinder Morgan Energy Partners, L.P. limited partnership agreement modifies these standards........... The general partner of Kinder Morgan Energy Partners, L.P. is permitted to attempt to avoid personal liability in connection with the management of Kinder Morgan Energy Partners, L.P., pursuant to the partnership agreement of Kinder Morgan Energy Partners, L.P. This partnership agreement provides that 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.
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The partnership agreement of Kinder Morgan Energy Partners, L.P. contains provisions that allow the general partner to take into account the interests of parties in addition to Kinder Morgan Energy Partners, L.P. in resolving conflicts of interest, thereby limiting its fiduciary duty to the limited partners. Also, this partnership agreement contains provisions that may restrict the remedies available to limited partners for actions taken that might, without such limitations, constitute breaches of fiduciary duty. The duty of the directors and officers of Kinder Morgan, Inc. to the shareholders of Kinder Morgan, Inc. may, therefore, come into conflict with the duties of the general partner, to the limited partners. The general partner's conflicts and audit committee of the board of directors will, at the request of the general partner, review and resolve conflicts of interest that may arise between Kinder Morgan, Inc. or its subsidiaries, on the one hand, and Kinder Morgan Energy Partners, L.P., on the other hand.
By becoming one of our shareholders, a shareholder agrees to be bound by the provisions in the limited liability company agreement, including the provisions discussed above. This is in accordance with the policy of the Delaware Limited Liability Company Act favoring the principle of freedom of contract and the enforceability of limited liability company agreements. It is not necessary for a shareholder to sign the limited liability company agreement in order for the limited liability company agreement to be enforceable against that person. 95 101 LIMITED LIABILITY COMPANY AGREEMENT FORMATION Our certificate of formation has been filed in the office of the Secretary of State of the State of Delaware and is effective. PURPOSE AND POWERS Our business purpose is to be a limited partner in and, directly or through one or more affiliates, to manage and control the business and affairs of, Kinder Morgan Energy Partners, L.P. and its operating partnerships and to engage in any lawful business purpose or activity related thereto. We possess and may exercise all the powers and privileges granted by the Delaware Limited Liability Company Act, by any other law or by our limited liability company agreement, together with any incidental powers necessary, appropriate, advisable or convenient to the conduct, promotion or attainment of our business purposes or activities. FEDERAL INCOME TAX STATUS AS A CORPORATION We have elected to be treated as a corporation for federal income tax purposes. The i-units owned by us will not be entitled to allocations of income, gain, loss or deduction of Kinder Morgan Energy Partners, L.P. until such time as Kinder Morgan Energy Partners, L.P. is liquidated. Thus, we do not expect to have material amounts of taxable income resulting from our ownership of the i-units unless we dispose of the i-units in a taxable transaction or Kinder Morgan Energy Partners, L.P. is liquidated. Please read "Kinder Morgan Management, LLC -- Status as a Corporation For Federal Income Tax Purposes" below. POWER OF ATTORNEY Each shareholder appoints any person specifically authorized by our board of directors to act as its true and lawful representative and attorney-in-fact, in its name, place and stead, to make, execute, sign, deliver and file: - any amendment of the organizational certificate required because of an amendment to the limited liability company agreement or in order to effectuate any change in the ownership of our securities; - any amendments to the limited liability company agreement made in accordance with the terms of that agreement; and - all such other instruments, documents and certificates which may from time to time be required by law to effectuate, implement and continue our valid and subsisting existence or to dissolve us or for any other purpose consistent with the limited liability company agreement and this offering. The power of attorney is irrevocable and coupled with an interest, and it survives and is not affected by the subsequent death, incompetency, disability, incapacity, dissolution, bankruptcy or termination of any shareholder or the transfer of any of the shareholder's shares. The power of attorney also extends to the shareholder's heirs, successors, assigns and personal representatives. MEMBERS Kinder Morgan G.P., Inc. is our organizational shareholder and owns all of our voting shares as our sole voting member. Our other members are the owners of the class of shares being sold in this offering. 96 102 The voting member may approve a matter or take any action at a meeting or without a meeting by written consent. It may call meetings of the organizational shareholder at any time. In limited circumstances described in "Description of Our Shares -- Limited Voting Rights," the holders of our outstanding shares, by a majority vote, have the right to approve a number of significant actions. LIMITED LIABILITY All of our debts, obligations and liabilities, whether arising in contract, tort or otherwise, will be our debts, obligations and liabilities alone, and no owner of shares will be obligated for any of these debts, obligations or liabilities as a result of being an owner of shares. THE BOARD Our business and affairs will be managed by a board of managers whom we call our directors. Members of the board will be selected only by the owner of the voting shares. The number of directors will be at all times one more than the number of directors of Kinder Morgan G.P., Inc. The initial board will consist of six directors. The board will hold regular and special meetings at any time as may be necessary. Regular meetings may be held without notice on dates set by the board from time to time. Special meetings of the board may be called on one day's notice to each director upon request of the chairman of the board, the chief executive officer if he is also a director or upon the written request of any two directors. A quorum for a regular or special meeting will exist when a majority of the directors are participating in the meeting either in person or by conference telephone. Any action required or permitted to be taken at a meeting may be taken without a meeting, without prior notice and without a vote if a majority of the directors sign a written consent authorizing the action. The board can establish committees composed of two or more directors and can delegate power and authority to these committees. OFFICERS AND EMPLOYEES Subject to the terms of any employment agreements we might have in the future, the board can appoint and terminate officers and retain and terminate employees, agents and consultants. The board can delegate power and authority to officers, employees, agents and consultants, including the power to represent us and bind us in accordance with the scope of their duties. An affiliate of Kinder Morgan G.P., Inc. provides us, Kinder Morgan G.P., Inc. and Kinder Morgan Limited Partners, L.P. with our employees. The costs of these employees will be borne directly or reimbursed by Kinder Morgan Energy Partners, L.P. without profit to the affiliate. CAPITAL STRUCTURE Our present capital structure consists of two classes of membership equity interests: (1) the class of nonvoting shares being sold in this offering; and (2) the class of voting shares held by Kinder Morgan G.P., Inc. We are authorized to issue an unlimited number of additional shares of the voting shares and the class of shares being sold in this offering. Additional classes of equity interests may be created with the approval of the board, provided that any such additional class must be approved by a vote of the owners of a majority of our shares sold in this offering excluding shares held by Kinder Morgan, Inc. and its affiliates. DISSOLUTION AND LIQUIDATION We will be dissolved only upon (1) a judicial decree, (2) upon the approval by the owner of the voting shares and by the holders of a majority of the outstanding shares of the class sold in this offering, or (3) upon the approval of holders of 66 2/3% of our outstanding shares of the class sold in this offering. In the event that we are dissolved, we will be liquidated and our affairs will be wound up. All proceeds from the liquidation will be distributed in equal amounts to the holders of the outstanding shares of all classes. 97 103 EXCULPATION AND INDEMNIFICATION Notwithstanding any express or implied provision of our limited liability company agreement, or any other legal duty or obligation, none of our directors, officers or other owners of the voting shares will be liable to us, our affiliates or any other person for any act or omission taken or omitted by the person if such person acted in good faith. Our limited liability company agreement provides that we will indemnify our directors, officers and the owners of the voting shares from liabilities arising in the course of such persons' service to us, provided that the indemnitee acted in good faith and in a manner which such indemnitee believed to be in or not opposed to our best interests and, with respect to any criminal proceeding, had no reasonable cause to believe such indemnitee's conduct was unlawful. We expect that the directors and officers will be covered by directors' and officers' liability insurance for potential liability under such indemnification. The owners of shares will not be personally liable for such indemnification. AMENDMENTS Amendments to our limited liability company agreement and to our certificate of formation can be approved in writing solely by the owner of voting shares, except for amendments which have a material adverse effect on us or the class of shares being sold in this offering. This type of amendment must also be approved by the owners of a majority of the outstanding shares of the class being sold in this offering excluding shares held by Kinder Morgan, Inc. and its affiliates. For more information regarding the voting rights of the shares, please read "Description of Our Shares -- Limited Voting Rights." MEETINGS; VOTING Meetings of the shareholders may be called by the board of directors, the chairman of the board or by the owner of voting shares. Within 60 days after such a call or within such greater time as may be reasonably necessary for us to comply with applicable law or the regulations of any securities exchange on which the shares are listed, the board of directors will send a notice of the meeting to the shareholders owning shares for which a meeting is being called either directly or indirectly through the transfer agent. The meeting will be held at a time and place determined by the board of directors on a date not more than 60 nor less than ten days after the mailing of notice of the meeting. The owners of the class of shares being sold in this offering do not have the right to call a meeting of the shareholders. A majority of the shares entitled to vote at a meeting constitutes a quorum. The act of a majority of a quorum at a meeting constitutes the act of the shareholders, except with respect to any proposed action which we have covenanted not to take without the approval of a majority of all outstanding shares of class sold in this offering and any proposed amendment to the limited liability company agreement, the registration rights agreement, the tax indemnification agreement, and the delegation of control agreement, which requires the approval of the owners of a majority of all outstanding shares of the class sold in this offering. For more information on the voting rights of owners of Kinder Morgan Management, LLC shares, please see "Description of Our Shares -- Limited Voting Rights." BOOKS AND RECORDS; LIST OF SHAREHOLDERS We will keep at our principal office complete and accurate books and records, supporting documentation of the transactions with respect to the conduct of our business and affairs and minutes of the proceedings of our board of directors, the shareholders and each committee of the board of directors. The records will include: - complete and accurate information regarding the state of our business and financial condition; 98 104 - a copy of the limited liability company agreement and the organizational certificate, and any amendments thereto; - a current list of the names and last known business, residence, or mailing addresses of all directors and officers; and - our federal, state and local tax returns for our six most recent tax years. Subject to reasonable standards (including standards governing what information and documents are to be furnished and at what time and location and at whose expense) as may be established by the board of directors or any officer, each shareholder is entitled to all information to which a member of a Delaware limited liability company is entitled to have access pursuant to the Delaware Limited Liability Company Act under the circumstances and subject to the conditions stated in that statute. Specifically, each shareholder will have access to: - true and full information regarding the status of our business and financial condition; - a copy of our federal, state and local income tax returns for each year; - a current list of the name and last known business, residence or mailing address of each director and shareholder; - a copy of our limited liability company agreement and certificate of formation, including all amendments, together with executed copies of any written powers of attorney pursuant to which our limited liability company agreement and any certificate and all amendments have been executed; - true and full information regarding the amount of cash and a description and statement of the agreed value of any other property or services contributed by each shareholder and which each shareholder has agreed to contribute in the future, and the date on which each became a shareholder; and - other information regarding our affairs as is just and reasonable. Our board of directors will have the right to keep confidential from the shareholders, for such period of time as the board of directors deems reasonable, any information which the board of directors reasonably believes to be in the nature of trade secrets or other information the disclosure of which the board of directors in good faith believes is not in our best interest or could damage us or our business or which the we are required by law or by agreement with a third party to keep confidential. NO REMOVAL A shareholder may not be expelled or removed. DISTRIBUTIONS For information regarding distributions payable on each Kinder Morgan Management, LLC share, please see "Description of Our Shares -- Distributions." EXCHANGE For information regarding the right of owners of our shares to exchange their shares, please see "Description of Our Shares -- Exchange Feature." OPTIONAL AND MANDATORY PURCHASE For information regarding the obligation of owners of Kinder Morgan Management, LLC shares to sell their shares under specified circumstances, please see "Description of Our Shares -- Optional Purchase" and "Description of Our Shares -- Mandatory Purchase." 99 105 DESCRIPTION OF UNITS AND COMPARISON WITH OUR SHARES SUMMARY OF PARTNERSHIP AGREEMENT A summary of the important provisions of Kinder Morgan Energy Partners, L.P.'s partnership agreement is included under the caption "Description of the Partnership Agreement" in the Form 10-K for Kinder Morgan Energy Partners, L.P. filed with the SEC on March 14, 2001. COMPARISON OF UNITS AND OUR SHARES The following table compares important features of the units of Kinder Morgan Energy Partners, L.P. and our shares.
UNITS OUR SHARES ----- ---------- Numbers of Units 64,858,109 common units now 1 voting share now outstanding and Shares outstanding 9,000,000 shares to be issued in 2,656,700 Class B units now this offering outstanding 9,000,001 i-units to be outstanding after this offering Distributions On a quarterly basis Kinder Morgan We will distribute additional shares Energy Partners, L.P. will or fractions of shares whenever distribute to the owners of all Kinder Morgan Energy Partners, L.P. classes of its units an amount equal distributes cash to owners of common to its available cash. Distributions units and Class B units and to owners of common units and Class additional i-units to us. B units will be made in cash. Distributions to us will be made in additional i-units. For more information, please read For more information, please read "Kinder Morgan Energy Partners, "Description of Our Shares -- L.P.'s Distribution Policy." Distributions." Liquidation Kinder Morgan Energy Partners, L.P. We will dissolve upon any of the will dissolve upon any of the following: following: -entry of a decree of judicial -certain events of withdrawal of the dissolution of us; general partner of Kinder Morgan -the approval of our voting shares Energy Partners, L.P.; and the owners of at least a -an election to dissolve Kinder majority of our other shares; or Morgan Energy Partners, L.P. by its -the approval of at least two-thirds general partner that is approved by of our shares other than the voting at least a majority of all shares. outstanding units; -entry of a decree of judicial dissolution of Kinder Morgan Energy Partners, L.P.; or -the sale of all or substantially all of the assets of Kinder Morgan Energy Partners, L.P. and its operating partnerships.
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UNITS OUR SHARES ----- ---------- Voting Owners of common units and Class B Owners of our shares are entitled to units vote with owners of i-units as direct how our i-units will be voted a combined class on the following: on the matters listed in the "Units" column. Except for matters described -the transfer of the general partner under "Description of Our Shares -- interest; Limited Voting Rights -- Actions Not -the sale of all or substantially Requiring the Vote of Holders," all of the assets of Kinder Morgan owners of our shares, excluding the Energy Partners, L.P.; and voting shares, are entitled to vote -the withdrawal of the general as a separate class on amendments to partner in some circumstances. our limited liability company agreement that would have a material As the owner of the i-units, we vote adverse effect on the owners of as a separate class, as directed by those shares. the owners of our shares, on amendments to Kinder Morgan Energy For more information, please read Partners, L.P.'s partnership "Description of Our agreement that would have a material Shares -- Limited Voting Rights." adverse effect on the i-units that we own in relation to other classes of units and on the matters described in the first and third bullet points in the preceding paragraph. Removal Kinder Morgan Energy Partners, Neither the directors nor Kinder L.P.'s general partner may be Morgan G.P., Inc. as the owner of removed by the vote of owners of at all voting shares may be removed. least two-thirds of the outstanding units of all classes. In voting on removal of the general partner of Kinder Morgan Energy Partners, L.P., the owners of our shares, excluding shares owned by Kinder Morgan, Inc. and its affiliates, direct how the i-units will be voted. Optional Rights to If Kinder Morgan Energy Partners, If Kinder Morgan, Inc. and its Purchase Securities L.P.'s general partner and its affiliates own 80% or more of the of Public Owners affiliates own 80% or more of the aggregate of the number of aggregate of the number of outstanding common units and the outstanding common units and the number of our outstanding shares, number of our outstanding shares, then Kinder Morgan, Inc. is entitled excluding the voting shares, then to purchase for cash all, but not Kinder Morgan Energy Partners, less than all, of the outstanding L.P.'s general partner is entitled shares that it and its affiliates do to purchase for cash all, but not not own if the general partner less than all, of the common units purchases all, but not less than if Kinder Morgan, Inc. purchases all, the common units. In addition, all, but not less than all, of the if Kinder Morgan, Inc. and its shares. affiliates own 80% or more of our outstanding shares, excluding the voting shares, then Kinder Morgan, Inc. is entitled to purchase for cash all, but not less than all, of the outstanding shares that it and its affiliates do not own.
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UNITS OUR SHARES ----- ---------- Mandatory None. Kinder Morgan, Inc. will be required Obligation to to purchase all of our outstanding Purchase Securities shares, excluding the voting shares, of Public Owners that it and its affiliates do not own in the circumstances described in "Description of Our Shares -- Mandatory Purchase." Preemptive Rights Whenever Kinder Morgan Energy No holder of any of our shares has to Acquire Partners, L.P. issues equity any similar preemptive right. Securities securities to any person other than the general partner and its affiliates, the general partner has a preemptive right to purchase additional limited partnership interests on the same terms in order to maintain its percentage interest. Special Rights to None. Owners of our shares will have the Exchange Securities right, after the 45th day following the closing of this offering, to exchange any or all of their whole shares for common units of Kinder Morgan Energy Partners, L.P. owned by Kinder Morgan, Inc., or its affiliates, at an exchange rate of one common unit for one share. However, in any exchange, instead of delivering a common unit, Kinder Morgan, Inc. may instead elect to make a cash payment. For more information, please read "Description of Our Shares -- Exchange Feature." Fractional None. Distributions on our shares can be Securities made in fractional shares. For more information, please read "Description of Our Shares -- Fractional Shares." Where Traded Common units are traded on New York The voting shares owned by Kinder Stock Exchange under the symbol Morgan G.P., Inc. will not be listed "KMP." for trading on any stock exchange. All Class B units are owned by an We have applied for our other shares affiliate of Kinder Morgan, Inc. to be listed for trading on the New They will not be listed for trading York Stock Exchange under the symbol on any stock exchange. "KMR." All i-units will be owned by us. They will not be listed for trading on any stock exchange. Transfer Agent and EquiServ Trust Company, N.A. EquiServ Trust Company, N.A. Registrar 525 Washington Blvd. 525 Washington Blvd. Jersey City, NJ 07310 Jersey City, NJ 07310
102 108 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering there has been no public market for or holders of our shares, and no predictions can be made regarding the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. After the closing of this offering, Kinder Morgan, Inc. will hold the 900,000 shares. The future resale of these shares by Kinder Morgan, Inc. could have an adverse impact on the price of the shares or on any trading market that may develop. The shares sold in the offering will generally be freely transferable without restriction or further registration under the Securities Act of 1933, except that any shares owned by an "affiliate" of our company, including Kinder Morgan, Inc., may not be resold publicly other than in compliance with the registration requirements of the Securities Act of 1933 or under an exemption under Rule 144 or otherwise. Rule 144 permits securities acquired by an affiliate of the issuer to be sold into the market in an amount that does not exceed, during any three-month period, the greater of: - 1% of the total number of the securities outstanding; or - the average weekly reported trading volume of the securities for the four calendar weeks prior to the sale. Sales under Rule 144 are also subject to specific manner of sale provisions, notice requirements and the availability of current public information about us. Under a registration rights agreement, Kinder Morgan, Inc. and its affiliates have the right to cause us to register under the Securities Act of 1933 and state laws the offer and sale of any shares that they hold. Subject to the terms and conditions of the registration rights agreement, these registration rights allow Kinder Morgan, Inc. and its affiliates or their assignees holding any shares to require registration of any of these shares and to include any of these shares in a registration by us of other shares, including shares offered by us or by any shareholder. In connection with any registration of this kind, we will indemnify each shareholder participating in the registration and its officers, directors and controlling persons from and against any liabilities under the Securities Act of 1933 or any state securities laws arising from the registration statement or prospectus. Kinder Morgan Energy Partners, L.P. will bear or reimburse us for all costs and expenses incidental to any registration, excluding any underwriting discounts and commissions. Except as described below, Kinder Morgan, Inc. and its affiliates may sell their shares in private transactions at any time, subject to compliance with applicable laws. Kinder Morgan, Inc. and its affiliates, have agreed not to sell any shares they beneficially own for a period of 180 days from the date of this prospectus. Please read "Underwriting" for a description of these lock-up provisions. INCOME TAX CONSIDERATIONS RELATING TO THE SHARES AND THE COMMON UNITS This section is a summary of material income tax considerations that may be relevant to prospective owners of shares or common units and, unless otherwise noted in the following discussion, expresses the opinion of our counsel, Bracewell & Patterson, L.L.P., in so far as it relates to matters of the United States federal income tax law and legal conclusions with respect to those matters. All statements as to matters of law and legal conclusions, but not as to factual matters, contained in this section, unless otherwise noted, constitute the opinion of Bracewell & Patterson, L.L.P. and are based on the accuracy of the representations made by us and Kinder Morgan G.P., Inc. This section is based upon current provisions of the Internal Revenue Code of 103 109 1986, as amended, existing and proposed regulations thereunder and current administrative rulings and court decisions. The following discussion does not address all federal income tax matters affecting us or the owners of shares or common units, nor does it address all state, local or foreign tax matters. Moreover, the discussion does not address the federal income tax consequences that may be relevant to certain types of investors subject to special treatment under the federal income tax laws, such as financial institutions, insurance companies, estates, trusts, dealers and persons entering into hedging transactions. ACCORDINGLY, PROSPECTIVE HOLDERS OF SHARES OR COMMON UNITS SHOULD CONSULT, AND DEPEND ON, THEIR OWN TAX ADVISORS IN ANALYZING THE TAX CONSEQUENCES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY FEDERAL, STATE, LOCAL OR FOREIGN TAX LAWS, PARTICULAR TO THEIR OWNERSHIP OR DISPOSITION OF SHARES OR COMMON UNITS. LEGAL OPINIONS Bracewell & Patterson, L.L.P. is of the opinion that, based on the accuracy of the representations made by us and Kinder Morgan G.P., Inc. and subject to the qualifications set forth in the detailed discussion that follows, for federal income tax purposes (1) Kinder Morgan Energy Partners, L.P. and the operating partnerships will each be treated as a partnership, and (2) owners of units (with certain exceptions, as described in "Limited Partner Status" below) will be treated as partners of Kinder Morgan Energy Partners, L.P. In addition, all statements as to matters of law and legal conclusions contained in this section, unless otherwise noted, reflect the opinion of Bracewell & Patterson, L.L.P. No ruling has been or will be requested from the IRS regarding any matter affecting us or prospective owners of shares or common units. The opinion of Bracewell & Patterson, L.L.P. represents only its best legal judgment and does not bind the IRS or the courts. Accordingly, the opinions and statements made here may not be sustained by a court if contested by the IRS. Any contest of this sort with the IRS may materially and adversely impact the market for shares and common units and the prices at which shares and common units trade. The cost of any contest with the IRS will be borne directly or indirectly by us and the owners of shares and common units. Furthermore, the tax considerations discussed herein may be significantly modified by future legislative or administrative changes or court decisions. Any modification may or may not be retroactively applied. FEDERAL INCOME TAX CONSIDERATIONS ASSOCIATED WITH THE OWNERSHIP AND DISPOSITION OF SHARES Kinder Morgan Management, LLC STATUS AS A CORPORATION FOR FEDERAL INCOME TAX PURPOSES An election has been made with the IRS to treat us as a corporation for federal income tax purposes. Thus, we will be subject to federal income tax on our taxable income at tax rates up to 35%. Additionally, in certain instances we could be subject to the alternative minimum tax of 20% on our alternative minimum taxable income to the extent that the alternative minimum tax exceeds our regular tax. The i-units owned by us will not be entitled to allocations of income, gain, loss or deduction of Kinder Morgan Energy Partners, L.P. until such time as it is liquidated. See "Ownership of i-units by Kinder Morgan Management, LLC" below. Thus, we do not anticipate that we will have material amounts of either taxable income or alternative minimum taxable income resulting from our ownership of the i-units unless we dispose of the i-units in a taxable transaction or Kinder Morgan Energy Partners, L.P. is liquidated. See "Income Tax Considerations Relating to the Shares and Common Units -- Federal Income Tax Considerations Associated with the Ownership and Disposition of Shares -- Ownership of i-units by Kinder Morgan Management, LLC." 104 110 TAX CONSEQUENCES OF SHARE OWNERSHIP NO FLOW-THROUGH OF TAXABLE INCOME OF Kinder Morgan Management, LLC. Because we will be treated as a corporation for federal income tax purposes, an owner of shares will not report on its federal income tax return any of our items of income, gain, loss and deduction. DISTRIBUTIONS OF ADDITIONAL SHARES. Under the terms of our limited liability company agreement, except in connection with our liquidation, we will not make distributions of cash in respect of shares but rather will make distributions of additional shares. Because these distributions of additional shares will be made proportionately to all owners of shares, the receipt of these additional shares will not be includable in the gross income of an owner of shares for federal income tax purposes. As each owner of shares receives distributions of additional shares, it will be required to allocate its basis in the shares in the manner described below. See "Income Tax Considerations Relating to the Shares and Common Units -- Tax Consequences of Share Ownership -- Basis of Shares." BASIS OF SHARES. A holder's initial tax basis for its shares will be the amount paid for them. As additional shares are distributed to an owner of shares, that owner will be required to allocate its tax basis in its shares equally between the old shares and the new shares received. If the old shares were acquired for different prices, and the owner can identify each separate lot, then the basis of each old lot of shares can be used separately in the allocation. If an owner of shares cannot identify each lot, then it must use the first-in first-out tracing approach. DISPOSITION OF SHARES OR EXCHANGE OF SHARES FOR COMMON UNITS OR CASH. Gain or loss will be recognized on a sale or other disposition of shares, whether to a third party or to Kinder Morgan, Inc. pursuant to the Kinder Morgan, Inc. purchase agreement or in connection with the liquidation of us, equal to the difference between the amount realized and the owner's tax basis for the shares sold or otherwise disposed of. An owner's amount realized will be measured by the sum of the cash and the fair market value of other property received by it. Any sale or exchange of shares with Kinder Morgan, Inc. for common units or cash will be a taxable transaction to the owner of the shares sold or exchanged. Accordingly, gain or loss will be recognized on the sale or exchange equal to the difference between the fair market value of the common units or cash received and the owner's tax basis in the shares sold or exchanged. Except as noted below, gain or loss recognized by an owner, other than a "dealer" in shares, on the sale or exchange of a share will generally be taxable as capital gain or loss. Capital gain recognized by an individual on the sale of shares held more than 12 months will generally be taxed at a maximum rate of 20%, subject to the discussion below relating to straddles. Capital gain recognized by a corporation on the sale of shares will generally be taxed at a maximum rate of 35%. Net capital loss may offset capital gains and no more than $3,000 of ordinary income, in the case of individuals, and may only be used to offset capital gain in the case of corporations. Capital gain treatment may not result from a disposition of shares if our shareholders as a group own 50% or more of the stock of Kinder Morgan, Inc. In this case, if either we or Kinder Morgan, Inc. has earnings and profits, then the amount received by a seller of shares may be taxed as ordinary income to the extent of its portion of those earnings and profits, but only if the seller sells less than all of its shares or is a shareholder of Kinder Morgan, Inc. after applying the ownership attribution rules. For purposes of determining whether capital gains or losses on the disposition of shares are long or short term, subject to the discussion below relating to straddles, an owner's holding period begins on its acquisition of shares pursuant to this offering. As additional shares are distributed to an owner of shares, the holding period of each new share received will also include the period for which the owner held the old shares to which the new share relates. 105 111 Because the purchase and exchange rights in respect of the shares arise as a result of agreements other than solely with us, these rights do not appear to constitute inherent features of the shares for tax purposes, See "Description of the Shares -- Optional Purchase, -- Mandatory Purchase, -- Exchange Feature." As such, it is possible that the IRS would assert that shares and the related purchase and exchange rights constitute a straddle for federal income tax purposes to the extent that such rights are viewed as resulting in a substantial diminution of a share purchaser's risk of loss from owning its shares. In that case, any owner who incurs interest or other carrying charges that are allocable to the shares (as would be the case if the owner finances its acquisition of shares with debt) would have to capitalize such interest or carrying charges to the basis of the related shares and purchase and exchange rights rather than deducting them currently. In addition, the holding period of the shares would be suspended, resulting in short-term capital gain or loss (generally taxed at ordinary income rates) upon a taxable disposition even if the shares were held for more than 12 months. However, we believe that the purchase and exchange rights have minimal value and do not result in a substantial diminution of a share purchaser's risk of loss from owning shares. Based on that, the shares and the related purchase and exchange rights should not constitute a straddle for federal income tax purposes and therefore should not result in any suspension of an owner's holding period or interest and carrying charge capitalization, although there can be no assurance that the IRS or the courts would agree with this conclusion. If an owner receives common units in exchange for its shares, it will then own common units in Kinder Morgan Energy Partners, L.P. which is treated as a partnership for federal income tax purposes. For a discussion of the federal income tax consequences of owning common units, see "Federal Income Tax Considerations Associated with the Ownership and Disposition of Common Units" below. INVESTMENT IN SHARES BY TAX-EXEMPT INVESTORS, REGULATED INVESTMENT COMPANIES AND NON-U.S. PERSONS. Employee benefit plans and most other organizations exempt from federal income tax, including individual retirement accounts and other retirement plans, are subject to federal income tax on unrelated business taxable income. Because we will be treated as a corporation for federal income tax purposes, an owner of shares will not report on its federal income tax return any of our items of income, gain, loss and deduction. Therefore, a tax-exempt investor will not have unrelated business taxable income attributable to its ownership or sale of shares unless its ownership of the shares is debt financed. In general, a share would be debt financed if the tax-exempt owner of shares incurs debt to acquire a share or otherwise incurs or maintains a debt that would not have been incurred or maintained if that share had not been acquired. A regulated investment company, or "mutual fund," is required to derive 90% or more of its gross income from interest, dividends and gains from the sale of stocks or securities or foreign currency or specified related sources. As stated above, an owner of shares will not report on its federal income tax return any of our items of income, gain, loss and deduction. Thus, ownership of shares will not result in income which is not qualifying income to a mutual fund. Furthermore, any gain from the sale or other disposition of the shares, and the associated purchase and exchange rights, will constitute gain from the sale of stock or securities and will qualify for purposes of that 90% test. Finally, shares, and the associated purchase and exchange rights, will constitute qualifying assets to mutual funds which also must own at least 50% qualifying assets at the end of each quarter. Because distributions of additional shares will be made proportionately to all owners of shares, the receipt of these additional shares will not be includable in the gross income of an owner of shares for United States federal income tax purposes. Therefore, no withholding taxes will be imposed on distributions of additional shares to non-resident aliens and foreign corporations, trust or estates. A non-United States owner of shares generally will not be subject 106 112 to United States federal income tax or subject to withholding on any gain recognized on the sale or other disposition of shares unless: - the gain is considered effectively connected with the conduct of a trade or business by the non-United States owner within the United States and, where a tax treaty applies, is attributable to a United States permanent establishment of that owner (and, in which case, if the owner is a foreign corporation, it may be subject to an additional branch profits tax equal to 30% or a lower rate as may be specified by an applicable income tax treaty); - the non-United States owner is an individual who holds the shares as a capital asset and is present in the United States for 183 or more days in the taxable year of the sale or other disposition and other conditions are met; or - we are or have been a "United States real property holding corporation," or a USRPHC, for United States federal income tax purposes. We believe that we will be a USRPHC for United States federal income tax purposes. Therefore, any gain on the sale or other disposition of shares by a non-United States owner will be subject to United States federal income tax unless the shares are regularly traded on established securities market and the non-United States owner does not actually or constructively own more than 5% of the shares during the shorter of the five-year period preceding the disposition or that owner's holding period. We expect our shares to be traded on such an established securities market. OWNERSHIP OF i-UNITS BY Kinder Morgan Management, LLC. A partner in a partnership is generally required to report on its federal income tax return its share of the partnership's income, gain, loss and deduction. However, the terms of the i-units provide that no allocations of income, gain, loss or deduction will be made in respect of the i-units until such time as there is a liquidation of Kinder Morgan Energy Partners, L.P. If there is a liquidation of Kinder Morgan Energy Partners, L.P., it is intended that we will receive allocations of income and gain, or deduction and loss, in an amount necessary for the capital account attributable to each i-unit to be equal to that of a common unit. As a result, we would likely realize taxable income or loss upon the liquidation of Kinder Morgan Energy Partners, L.P. However, no assurance can be given that there will be sufficient amounts of income and gain, or deduction or loss, to cause the capital account attributable to each i-unit to be equal to that of a common unit. If they are not equal, we may receive less value than would be received by a holder of common units upon such a liquidation. We would also likely realize taxable income or loss upon any sale or other disposition of our i-units. FEDERAL INCOME TAX CONSIDERATIONS ASSOCIATED WITH THE OWNERSHIP AND DISPOSITION OF COMMON UNITS PARTNERSHIP STATUS A partnership is not a taxable entity and incurs no federal income tax liability. Instead, each partner of a partnership is required to take into account that partner's share of items of income, gain, loss and deduction of the partnership in computing the partner's own federal income tax liability, regardless of whether cash distributions are made to the partner by the partnership. Distributions by a partnership to a partner are generally not taxable unless the amount of cash distributed is in excess of the partner's adjusted tax basis in that partner's partnership interest. Pursuant to Treasury Regulations Sections 301.7701-1, 301.7701-2 and 301.7701-3, effective January 1, 1997 (the "Check-the-Box Regulations"), an entity in existence on January 1, 1997, will generally retain its current treatment for federal income tax purposes. As of January 1, 1997, Kinder Morgan Energy Partners, L.P. and the operating partnerships were each treated as a 107 113 partnership for federal income tax purposes. Pursuant to the Check-the-Box Regulations, this prior treatment will be respected for all periods prior to January 1, 1997, if: - the entity had a reasonable basis for the claimed treatment; - the entity recognized the federal tax consequences of any change in treatment within five years prior to January 1, 1997; and - the entity was not notified prior to May 8, 1996 that the entity treatment was under examination. Based on these regulations and the applicable federal income tax law, counsel is of the opinion that Kinder Morgan Energy Partners, L.P. and the operating partnerships each have been and will be treated as a partnership for federal income tax purposes. In rendering its opinion, counsel has relied on certain factual representations made by Kinder Morgan Energy Partners, L.P. and its general partner, including: - neither Kinder Morgan Energy Partners, L.P. nor the operating partnerships has elected or will elect to be treated as a corporation for tax purposes; - prior to January 1, 1997, Kinder Morgan Energy Partners, L.P. and the operating partnerships were operated in accordance with all applicable partnership statutes and their partnership agreements and in the manner described herein; - prior to January 1, 1997, except as otherwise required by Section 704 of the Internal Revenue Code and regulations promulgated thereunder, the general partner had an interest in each material item of Kinder Morgan Energy Partners, L.P.'s income, gain, loss, deduction or credit equal to at least 1% at all times during Kinder Morgan Energy Partners, L.P.'s existence; - prior to January 1, 1997, the general partner had, in the aggregate, a minimum capital account balance in Kinder Morgan Energy Partners, L.P. equal to 1% of Kinder Morgan Energy Partners, L.P.'s total positive capital account balances; - for each taxable year, less than 10% of Kinder Morgan Energy Partners, L.P.'s gross income has been and will be derived from sources other than (i) the exploration, development, production, processing, refining, transportation or marketing of any mineral or natural resource, including oil, gas or products thereof and naturally occurring carbon dioxide or (ii) other items of income which counsel has opined or will opine is "qualifying income" within the meaning of Section 7704(d) of the Internal Revenue Code. Counsel's opinion is valid even in the event of a change in the general partner, assuming the new general partner will satisfy the same representations. Section 7704 of the Internal Revenue Code provides that publicly-traded partnerships will, as a general rule, be taxed as corporations. However, an exception, referred to as the "Qualifying Income Exception," exists with respect to publicly-traded partnerships of which 90% or more of the gross income for every taxable year consists of "qualifying income." Qualifying income includes income and gains derived from the exploration, development, mining or production, processing, refining, transportation or marketing of any mineral or natural resource. Other types of qualifying income include interest other than from a financial business, dividends, gains from the sale of real property, real property rents and gains from the sale or other disposition of assets held for the production of income that otherwise constitutes qualifying income. Kinder Morgan Energy Partners, L.P. has represented that in excess of 90% of its gross income has been and will be derived from fees and charges for transporting natural gas, refined petroleum products, natural gas liquids, naturally occurring carbon dioxide and other hydrocarbons through its pipelines, dividends and interest (other than from a financial business). Based upon that 108 114 representation, counsel is of the opinion that at least 90% of Kinder Morgan Energy Partners, L.P.'s current gross income constitutes qualifying income. Kinder Morgan Energy Partners, L.P. believes that less than 1% of its gross income is not qualifying income. If Kinder Morgan Energy Partners, L.P. fails to meet the Qualifying Income Exception, other than a failure which is determined by the IRS to be inadvertent and which is cured within a reasonable time after discovery, it will be treated as if it had transferred all of its assets, subject to liabilities, to a newly formed corporation, on the first day of the year in which it fails to meet the Qualifying Income Exception, in return for stock in that corporation, and then distributed that stock to the unitholders in liquidation of their interests in it. This contribution and liquidation should be tax-free to unitholders and Kinder Morgan Energy Partners, L.P., so long as it, at that time, does not have liabilities in excess of the tax basis of its assets. Thereafter, it would be treated as a corporation for federal income tax purposes. If Kinder Morgan Energy Partners, L.P. were treated as a corporation in any taxable year, as a result of a failure to meet the Qualifying Income Exception or otherwise, its items of income, gain, loss and deduction would be reflected only on its tax return rather than being passed through to its unitholders, and its net income would be taxed to it at corporate rates. In addition, any distribution made to a unitholder would be treated as either taxable dividend income, to the extent of Kinder Morgan Energy Partners, L.P.'s current or accumulated earnings and profits, or, in the absence of earnings and profits, a nontaxable return of capital, to the extent of the unitholders's tax basis in its units, or taxable capital gain, after the unitholder's tax basis in its units is reduced to zero. Accordingly, Kinder Morgan Energy Partners, L.P.'s treatment as an association taxable as a corporation would result in a material reduction in a unitholder's cash flow and after-tax return and thus would likely result in a substantial reduction of the value of the units. The discussion below is based on the conclusion of counsel that Kinder Morgan Energy Partners, L.P. and the operating partnerships will be classified as partnerships for federal income tax purposes. LIMITED PARTNER STATUS Unitholders, including an owner of i-units, who have become limited partners of Kinder Morgan Energy Partners, L.P. will be treated as partners of Kinder Morgan Energy Partners, L.P. for federal income tax purposes. Moreover, the IRS has ruled that assignees of partnership interests who have not been admitted to a partnership as partners, but who have the capacity to exercise substantial dominion and control over the assigned partnership interests, will be treated as partners for federal income tax purposes. On the basis of this ruling, except as otherwise described herein, (a) assignees who have executed and delivered transfer applications and are awaiting admission as limited partners and (b) unitholders whose common units are held in street name or by a nominee and who have the right to direct the nominee in the exercise of all substantive rights attendant to the ownership of their units will be treated as partners of Kinder Morgan Energy Partners, L.P. for federal income tax purposes. Because this ruling does not extend, on its facts, to assignees of units who are entitled to execute and deliver transfer applications and thereby become entitled to direct the exercise of attendant rights, but who fail to execute and deliver transfer applications, counsel's opinion does not extend to these persons. Furthermore, a purchaser or other transferee of common units who does not execute and deliver a transfer application may not receive certain federal income tax information or reports furnished to record holders of common units unless the units are held in a nominee or street name account and the nominee or broker has executed and delivered a transfer application for those units. A beneficial owner of common units whose units have been transferred to a short seller to complete a short sale may lose the beneficial owner's status as a partner with respect to those 109 115 units for federal income tax purposes. See "Tax Consequences of Common Unit Ownership -- Treatment of Short Sales." Income, gain, deductions, losses or credits would not appear to be reportable by a common unitholder who is not a partner for federal income tax purposes, and any cash distributions received by a common unitholder who is not a partner for federal income tax purposes would therefore be fully taxable as ordinary income. These holders should consult their own tax advisors with respect to their status as partners in Kinder Morgan Energy Partners, L.P. for federal income tax purposes. TAX CONSEQUENCES OF COMMON UNIT OWNERSHIP FLOW-THROUGH OF TAXABLE INCOME. Kinder Morgan Energy Partners, L.P. will not pay any federal income tax. Instead, each unitholder will be required to report on that unitholder's federal income tax return its share of Kinder Morgan Energy Partners, L.P.'s income, gains, losses and deductions without regard to whether corresponding cash distributions are received by it. Consequently, Kinder Morgan Energy Partners, L.P. may allocate income to a common unitholder even if the unitholder has not received a cash distribution. Each common unitholder will be required to include in income its share of Kinder Morgan Energy Partners, L.P.'s income, gains, losses and deductions for its taxable year ending with or within the unitholder's taxable year. TREATMENT OF DISTRIBUTIONS. Distributions by Kinder Morgan Energy Partners, L.P. to a common unitholder will not be taxable to the unitholder for federal income tax purposes to the extent of the unitholder's tax basis in its common units immediately before the distribution, unless the distribution reduces the unitholder's share of Kinder Morgan Energy Partners, L.P.'s "unrealized receivables," including depreciation recapture, and/or substantially appreciated "inventory items," both as defined in the Internal Revenue Code, and known collectively as "Section 751 Assets." Kinder Morgan Energy Partners, L.P.'s cash distributions in excess of a common unitholder's tax basis will be considered to be gain from the sale or exchange of the units except to the extent the gain is attributable to Section 751 Assets of Kinder Morgan Energy Partners, L.P., taxable in accordance with the rules described under "Disposition of Common Units" below. Any reduction in a common unitholder's share of Kinder Morgan Energy Partners, L.P.'s liabilities for which no partner, including the general partner, bears the economic risk of loss, known as "nonrecourse liabilities," will be treated as a distribution of cash to that unitholder. To the extent Kinder Morgan Energy Partners, L.P.'s distributions cause a common unitholder's "at risk" amount to be less than zero at the end of any taxable year, the unitholder must recapture as additional income any losses from Kinder Morgan Energy Partners, L.P. deducted in previous years. See "Limitations on Deductibility of Losses" below. A decrease in a common unitholder's percentage interest in Kinder Morgan Energy Partners, L.P. because of its issuance of additional units will decrease the unitholder's share of nonrecourse liabilities, and thus will result in a corresponding deemed distribution of cash. A non-pro rata distribution of money or property may result in ordinary income to a common unitholder, regardless of the unitholder's tax basis in the unitholder's units, if the distribution reduces the unitholder's share of Kinder Morgan Energy Partners, L.P.'s Section 751 Assets. To that extent, the common unitholder will be treated as having been distributed the unitholder's proportionate share of the Section 751 Assets and having exchanged those assets with Kinder Morgan Energy Partners, L.P. in return for the non-pro rata portion of the actual distribution made to the unitholder. This latter deemed exchange will generally result in the common unitholder's realization of ordinary income. That income will equal the excess of (i) the non-pro rata portion of that distribution over (ii) the common unitholder's tax basis for the share of Section 751 Assets deemed relinquished in the exchange. BASIS OF UNITS. A common unitholder's initial tax basis for its units will be the amount paid for the units plus its share of Kinder Morgan Energy Partners, L.P.'s nonrecourse liabilities. That 110 116 basis will be increased by its share of Kinder Morgan Energy Partners, L.P.'s income and by any increases in its share of Kinder Morgan Energy Partners, L.P.'s nonrecourse liabilities. That basis will be decreased, but not below zero, by distributions to it from Kinder Morgan Energy Partners, L.P., by any decreases in its share of Kinder Morgan Energy Partners, L.P.'s nonrecourse liabilities, by its share of Kinder Morgan Energy Partners, L.P.'s losses and by its share of Kinder Morgan Energy Partners, L.P.'s expenditures that are not deductible in computing taxable income and are not required to be capitalized. A common unitholder will have no share of Kinder Morgan Energy Partners, L.P.'s debt which is recourse to the general partner, but will have a share, generally based on the unitholder's share of its profits, of its nonrecourse liabilities. LIMITATIONS ON DEDUCTIBILITY OF LOSSES. The deduction by a common unitholder of its share of Kinder Morgan Energy Partners, L.P.'s losses will be limited to the tax basis in the unitholder's units and, in the case of an individual unitholder or a corporate unitholder, if more than 50% of the value of the corporate unitholder's stock is owned directly or indirectly by five or fewer individuals or some tax-exempt organizations, to the amount for which the unitholder is considered to be "at risk" with respect to Kinder Morgan Energy Partners, L.P.'s activities, if that is less than the unitholder's tax basis. A common unitholder must recapture its share of Kinder Morgan Energy Partners, L.P. losses deducted in previous years to the extent that distributions cause the unitholder's at risk amount to be less than zero at the end of any taxable year. Losses disallowed to a common unitholder or recaptured as a result of these limitations will carry forward and will be allowable to the extent that the unitholder's tax basis or at risk amount, whichever is the limiting factor, is subsequently increased. Upon the taxable disposition of a common unit, any gain recognized by a common unitholder can be offset by losses that were previously suspended by the at risk limitation but may not be offset by losses suspended by the basis limitation. Any excess loss above that gain previously suspended by the at risk or basis limitations is no longer utilizable. In general, a common unitholder will be at risk to the extent of the tax basis of the unitholder's units, excluding any portion of that basis attributable to the unitholder's share of Kinder Morgan Energy Partners, L.P.'s nonrecourse liabilities, reduced by any amount of money the unitholder borrows to acquire or hold the unitholder's units, if the lender of those borrowed funds owns an interest in Kinder Morgan Energy Partners, L.P., is related to the unitholder or can look only to the units for repayment. A common unitholder's at risk amount will increase or decrease as the tax basis of the unitholder's units increases or decreases, other than tax basis increases or decreases attributable to increases or decreases in the unitholder's share Kinder Morgan Energy Partners, L.P.'s nonrecourse liabilities. The passive loss limitations generally provide that individuals, estates, trusts and some closely held corporations and personal service corporations can deduct losses from passive activities, which are generally activities in which the taxpayer does not materially participate, only to the extent of the taxpayer's income from those passive activities. The passive loss limitations are applied separately with respect to each publicly-traded partnership. Consequently, any passive losses Kinder Morgan Energy Partners, L.P. generates will only be available to offset its passive income generated in the future and will not be available to offset income from other passive activities or investments, including its investments or investments in other publicly-traded partnerships, or salary or active business income. Passive losses that are not deductible because they exceed a common unitholder's share of the passive income Kinder Morgan Energy Partners, L.P. generates may be deducted in full when the unitholder disposes of its entire investment in Kinder Morgan Energy Partners, L.P. in a fully taxable transaction with an unrelated party. The passive activity loss rules are applied after other applicable limitations on deductions, including the at risk rules and the basis limitation. A common unitholder's share of Kinder Morgan Energy Partners, L.P.'s net passive income may be offset by any of its suspended passive losses, but it may not be offset by any other 111 117 current or carryover losses from other passive activities, including those attributable to other publicly-traded partnerships. LIMITATIONS ON INTEREST DEDUCTIONS. The deductibility of a non-corporate taxpayer's "investment interest expense" is generally limited to the amount of that taxpayer's "net investment income." The IRS has announced that treasury regulations will be issued that characterize net passive income from a publicly-traded partnership as investment income for purposes of the limitations on the deductibility of investment interest. In addition, the common unitholder's share of Kinder Morgan Energy Partners, L.P.'s portfolio income will be treated as investment income. Investment interest expense includes: - interest on indebtedness properly allocable to property held for investment; - Kinder Morgan Energy Partners, L.P.'s interest expense attributed to portfolio income; and - the portion of interest expense incurred to purchase or carry an interest in a passive activity to the extent attributable to portfolio income. The computation of a common unitholder's investment interest expense will take into account interest on any margin account borrowing or other loan incurred to purchase or carry a unit. Net investment income includes gross income from property held for investment and amounts treated as portfolio income under the passive loss rules, less deductible expenses, other than interest, directly connected with the production of investment income, but generally does not include gains attributable to the disposition of property held for investment. ENTITY-LEVEL COLLECTIONS. If Kinder Morgan Energy Partners, L.P. or an operating partnership is required or elects under applicable law to pay any federal, state, local or foreign income tax on behalf of any common unitholder, the general partner or any former unitholder, the general partner is authorized to pay such taxes from Kinder Morgan Energy Partners, L.P.'s or the operating partnerships' funds. That payment, if made, will be treated as a distribution of cash to the partner on whose behalf the payment was made. The general partner is authorized to amend the partnership agreement in the manner necessary to maintain uniformity of intrinsic tax characteristics of units and to adjust later distributions, so that after giving effect to these distributions, the priority and characterization of distributions otherwise applicable under the partnership agreement is maintained as nearly as is practicable. Payments by Kinder Morgan Energy Partners, L.P. as described above could give rise to an overpayment of tax on behalf of an individual partner in which event the partner would be required to file a claim in order to obtain a credit or refund. ALLOCATION OF INCOME, GAIN, LOSS AND DEDUCTION. In general, if Kinder Morgan Energy Partners, L.P. has a net profit, its items of income, gain, loss and deduction will be allocated among the general partner and the common unitholders in accordance with their percentage interests in Kinder Morgan Energy Partners. A class of Kinder Morgan Energy Partners, L.P.'s unitholders that receives more cash than another class, other than i-units, on a per unit basis, with respect to a year, will be allocated additional income equal to that excess. If Kinder Morgan Energy Partners, L.P. has a net loss, that loss will generally be allocated, first, to the general partner and the common unitholders in accordance with their percentage interests in Kinder Morgan Energy Partners, L.P. to the extent of their positive capital accounts and, second, to the general partner. Notwithstanding the above, as required by Section 704(c) of the Internal Revenue Code, certain items of Kinder Morgan Energy Partners, L.P.'s income, deduction, gain and loss will be allocated to account for the difference between the tax basis and fair market value of property contributed to Kinder Morgan Energy Partners, L.P., or owned by Kinder Morgan Energy Partners, L.P. at the time new units are issued, referred to in this discussion as "Contributed Property." In addition, certain items of recapture income will be allocated to the extent possible 112 118 to the unitholder who was allocated the deduction giving rise to the treatment of the gain as recapture income in order to minimize the recognition of ordinary income by some unitholders, but these allocations may not be respected by the IRS or the courts. If these allocations of recapture income are not respected, the amount of the income or gain allocated to a unitholder will not change, but instead a change in the character of the income allocated to a unitholder would result. Finally, although Kinder Morgan Energy Partners, L.P. does not expect that its operations will result in the creation of negative capital accounts, if negative capital accounts nevertheless result, items of its income and gain will be allocated in an amount and manner sufficient to eliminate the negative balance as quickly as possible. An allocation of items of Kinder Morgan Energy Partners, L.P.'s income, gain, loss or deduction, other than an allocation required by the Internal Revenue Code to eliminate the difference between a common unitholder's "book" capital account, credited with the fair market value of Contributed Property, and "tax" capital account, credited with the tax basis of Contributed Property, referred to in this discussion as the "Book-Tax Disparity," will generally be given effect for federal income tax purposes in determining a unitholder's share of an item of income, gain, loss or deduction only if the allocation has substantial economic effect. In any other case, a unitholder's share of an item will be determined on the basis of the unitholder's interest in Kinder Morgan Energy Partners, L.P., which will be determined by taking into account all the facts and circumstances, including the unitholder's relative contributions to Kinder Morgan Energy Partners, L.P., the interests of all the unitholders in profits and losses, the interest of all the unitholders in cash flow and other nonliquidating distributions and rights of all the unitholders to distributions of capital upon liquidation. Under the Internal Revenue Code, the partners in a partnership cannot be allocated more depreciation, gain or loss than the total amount of any such item recognized by that partnership in a particular taxable period. This rule, often referred to as the "ceiling limitation," is not expected to have significant application to allocations with respect to Contributed Property and, thus, is not expected to prevent Kinder Morgan Energy Partners, L.P. common unitholders from receiving allocations of depreciation, gain or loss from such properties equal to that which they would have received had such properties actually had a basis equal to fair market value at the outset. However, to the extent the ceiling limitation is or becomes applicable, Kinder Morgan Energy Partners, L.P.'s partnership agreement requires that certain items of income and deduction be allocated in a way designed to effectively "cure" this problem and eliminate the impact of the ceiling limitation. Such allocations will not have substantial economic effect because they will not be reflected in the capital accounts of our unitholders. The legislative history of Section 704(c) of the Internal Revenue Code states that Congress anticipated that treasury regulations would permit partners to agree to a more rapid elimination of Book-Tax Disparities than required provided there is no tax avoidance potential. Further, under final treasury regulations under Section 704(c) of the Internal Revenue Code, allocations similar to the curative allocations would be allowed. Although the curative allocations are consistent with the final treasury regulations, since the final treasury regulations are not applicable to Kinder Morgan Energy Partners, L.P., counsel is unable to opine on the validity of the curative allocations. Counsel is of the view, however, that such curative allocations are consistent with the policy underlying these final regulations. Counsel is of the opinion that, with the exception of curative allocations and the allocation of recapture income discussed above and the issues described in "Tax Consequences of Common Unit Ownership -- Section 754 Election" and "Disposition of Common Units -- Allocations Between Transferors and Transferees," allocations under Kinder Morgan Energy Partners, L.P.'s partnership agreement will be given effect for federal income tax purposes in determining a partner's share of an item of income, gain, loss or deduction. There are, however, uncertainties in the treasury regulations relating to allocations of partnership income, and investors should be 113 119 aware that some of the allocations in Kinder Morgan Energy Partners, L.P.'s partnership agreement could be successfully challenged by the IRS. TREATMENT OF SHORT SALES. A common unitholder whose units are loaned to a "short seller" to cover a short sale of units may be considered as having disposed of those units. If so, the unitholder would no longer be a partner for federal income tax purposes for those units during the period of the loan and may recognize gain or loss from the disposition. As a result, during this period, any of Kinder Morgan Energy Partners, L.P.'s income, gain, deduction and loss with respect to those common units would not be reportable by the unitholder, any cash distributions received by the unitholder as to those units would be fully taxable and all of these distributions would likely be ordinary income. Counsel has not rendered an opinion regarding the treatment of a common unitholder where units are loaned to a short seller to cover a short sale of the units; therefore, unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller should modify any applicable brokerage account agreements to prohibit their brokers from loaning their units. The IRS has announced that it is studying issues relating to the tax treatment of short sales of partnership interests. ALTERNATIVE MINIMUM TAX. Each common unitholder will be required to take into account its share of any items of Kinder Morgan Energy Partners, L.P.'s income, gain or loss for purposes of the alternative minimum tax. A portion of Kinder Morgan Energy Partners, L.P.'s depreciation deductions may be treated as an item of tax preference for this purpose. A common unitholder's alternative minimum taxable income derived from Kinder Morgan Energy Partners, L.P. may be higher than that unitholder's share of Kinder Morgan Energy Partners, L.P.'s net income because Kinder Morgan Energy Partners, L.P. may use more accelerated methods of depreciation for purposes of computing federal taxable income or loss. The current minimum tax rate for noncorporate taxpayers is 26% on the first $175,000 of alternative minimum taxable income in excess of the exemption amount and 28% on any additional alternative minimum taxable income. For corporations, the current minimum tax rate is 20% on alternative minimum taxable income in excess of the exemption amount. Prospective common unitholders should consult with their tax advisors as to the impact of an investment in common units on their liability for the alternative minimum tax. SECTION 754 ELECTION. Kinder Morgan Energy Partners, L.P. has made the election permitted by Section 754 of the Internal Revenue Code. That election is irrevocable without the consent of the IRS. The election will generally permit Kinder Morgan Energy Partners, L.P. to adjust a common unit purchaser's tax basis in Kinder Morgan Energy Partners, L.P.'s assets ("inside basis") under Section 743(b) of the Internal Revenue Code to reflect the purchase price. The Section 743(b) adjustment belongs to the purchaser and not to other unitholders. For purposes of this discussion, a common unitholder's inside basis in Kinder Morgan Energy Partners, L.P.'s assets will be considered to have two components: (1) unitholder's share of Kinder Morgan Energy Partners, L.P.'s actual basis in such assets (the "Common Basis"); and (2) unitholder's Section 743(b) adjustment to that basis. Treasury regulations under Section 743 of the Internal Revenue Code require a portion of the Section 743(b) adjustment attributable to property subject to cost recovery deductions under Section 168 to be recovered over the remaining cost recovery period for the Section 704(c) built-in gain in such property. Recently finalized treasury regulations under Section 197 similarly require a portion of the Section 743(b) adjustment attributable to amortizable Section 197 intangibles to be amortized over the remaining amortization period for the Section 704(c) built-in gain in such intangibles. These treasury regulations apply only to partnerships that have adopted the remedial method, which Kinder Morgan Energy Partners, L.P. may adopt with respect to certain recovery property. If a different method is adopted, the Section 743(b) adjustment attributable to property subject to cost recovery deductions under Section 168 or amortization 114 120 under Section 197 must be taken into account as if it were a newly-purchased property placed in service when the transfer giving rise to the Section 743(b) adjustment occurs. Regardless of the method adopted, Treasury Regulation Section 1.167(c)-1(a)(6) requires the portion of a Section 743(b) adjustment attributable to property subject to depreciation under Section 167 of the Internal Revenue Code to be depreciated using either the straight-line or the 150% declining balance method. Pursuant to Kinder Morgan Energy Partners, L.P.'s partnership agreement, the general partner is authorized to adopt a position intended to preserve the uniformity of units even if that position is not consistent with specified treasury regulations. See "Disposition of Common Units -- Uniformity of Common Units." Although counsel is unable to opine as to the validity of such an approach, Kinder Morgan Energy Partners, L.P.'s intends to adopt a method to depreciate and amortize the Section 743(b) adjustment attributable to unrealized appreciation in the value of Contributed Property or Adjusted Property, to the extent of any unamortized Book-Tax Disparity, using a rate of depreciation or amortization derived from the depreciation or amortization method and useful life applied to the Common Basis of the property, or treat that portion as non-amortizable to the extent attributable to property the Common Basis of which is not amortizable, despite its inconsistency with treasury regulations. If Kinder Morgan Energy Partners, L.P. determines that this position cannot reasonably be taken, it may adopt a depreciation or amortization position under which all purchasers acquiring common units in the same month would receive depreciation or amortization, whether attributable to the Common Basis or a Section 743(b) adjustment, based upon the same applicable rate as if they had purchased a direct interest in Kinder Morgan Energy Partners, L.P.'s assets. This kind of aggregate approach may result in lower annual depreciation or amortization deductions than would otherwise be allowable to certain of its unitholders. See "Disposition of Common Units -- Uniformity of Common Units." If the IRS successfully challenged Kinder Morgan Energy Partners, L.P.'s method for depreciating or amortizing the Section 743(b) adjustment, the uniformity of common units might be affected, and the gain realized by a unitholder from the sale of units might be increased without the benefit of additional deductions. See "Disposition of Common Units -- Uniformity of Common Units." A Section 754 election is advantageous if the transferee's basis in the transferee's common units is higher than the units' share of the aggregate tax basis of Kinder Morgan Energy Partners, L.P.'s assets immediately prior to the transfer. In that case, as a result of the election, the transferee would have, among other items, a greater amount of depreciation deductions and the transferee's share of any gain or loss on a sale of Kinder Morgan Energy Partners, L.P.'s assets would be less. Conversely, a Section 754 election is disadvantageous if the transferee's basis in such common units is lower than those units' share of the aggregate tax basis of Kinder Morgan Energy Partners, L.P.'s assets immediately prior to the transfer. Thus, the fair market value of the units may be affected either favorably or unfavorably by the election. The calculations involved in the Section 754 election are complex and will be made on the basis of the general partner's determination of the value of Kinder Morgan Energy Partners, L.P.'s assets and other matters. For example, the allocation of the Section 743(b) adjustment among Kinder Morgan Energy Partners, L.P.'s assets must be made in accordance with the Internal Revenue Code. The IRS could seek to reallocate some or all of any Section 743(b) adjustment allocated by Kinder Morgan Energy Partners, L.P. to tangible assets to goodwill instead. Goodwill, as an intangible asset, may be unamortizable and, if amortizable, is generally amortizable over a longer period of time, or under a less accelerated method than Kinder Morgan Energy Partners, L.P.'s tangible assets. Kinder Morgan Energy Partners, L.P. cannot assure you that the determinations it makes will not be successfully challenged by the IRS and that the deductions attributable to them will not be reduced or disallowed altogether. Should the IRS require a different basis adjustment to be made, and should, in the general partner's opinion, the expense of compliance exceed the benefit of the election, the general partner may seek 115 121 permission from the IRS to revoke Kinder Morgan Energy Partners, L.P.'s Section 754 election. If permission is granted, a subsequent purchaser of common units may be allocated more income than the purchaser would have been allocated had the election not been revoked. TAX TREATMENT OF OPERATIONS ACCOUNTING METHOD AND TAXABLE YEAR. Kinder Morgan Energy Partners, L.P. uses the year ending December 31 as its taxable year and the accrual method of accounting for federal income tax purposes. Each common unitholder will be required to include in income its share of Kinder Morgan Energy Partners, L.P.'s income, gain, loss and deduction for its taxable year ending within or with that unitholder's taxable year. In addition, a common unitholder who has a taxable year ending on a date other than December 31 and who disposes of all of that unitholder's units following the close of Kinder Morgan Energy Partners, L.P.'s taxable year but before the close of that unitholder's taxable year must include its share of Kinder Morgan Energy Partners, L.P.'s income, gain, loss and deduction in income for that unitholder's taxable year, with the result that the unitholder will be required to include in income for its taxable year its share of more than one year of Kinder Morgan Energy Partners, L.P.'s income, gain, loss and deduction. TAX BASIS, DEPRECIATION AND AMORTIZATION. The tax basis of Kinder Morgan Energy Partners, L.P.'s assets will be used for purposes of computing depreciation and cost recovery deductions and, ultimately, gain or loss on the disposition of these assets. The IRS may challenge either the fair market values or the useful lives assigned to Kinder Morgan Energy Partners, L.P.'s assets or seek to characterize intangible assets as nonamortizable goodwill. If any such challenge or characterization were successful, the deductions allocated to a common unitholder in respect of Kinder Morgan Energy Partners, L.P.'s assets would be reduced, and a unitholder's share of taxable income received from it would be increased accordingly. Any increase could be material. To the extent allowable, the general partner may elect to use the depreciation and cost recovery methods that will result in the largest deductions being taken in the early years after assets are placed in service. If Kinder Morgan Energy Partners, L.P. disposes of depreciable property by sale, foreclosure, or otherwise, all or a portion of any gain, determined by reference to the amount of depreciation previously deducted and the nature of the property, may be subject to the recapture rules and taxed as ordinary income rather than capital gain. Similarly, a common unitholder who has taken cost recovery or depreciation deductions with respect to property Kinder Morgan Energy Partners, L.P.'s owns will likely be required to recapture some or all of those deductions as ordinary income upon a sale of any of the unitholder's interest in Kinder Morgan Energy Partners, L.P. See "Tax Consequences of Common Unit Ownership -- Allocation of Income, Gain, Loss and Deduction" and "Disposition of Common Units -- Recognition of Gain or Loss." The costs incurred in selling Kinder Morgan Energy Partners, L.P.'s units, called "syndication expenses," must be capitalized and cannot be deducted currently, ratably or upon its termination. There are uncertainties regarding the classification of costs as organization expenses, which may be amortized by Kinder Morgan Energy Partners, L.P., and as syndication expenses, which may not be amortized by it. The underwriting discounts and commissions Kinder Morgan Energy Partners, L.P. incurs will be treated as a syndication cost. VALUATION AND TAX BASIS OF KINDER MORGAN ENERGY PARTNERS, L.P.'S PROPERTIES. The federal income tax consequences of the ownership and disposition of common units will depend in part on Kinder Morgan Energy Partners, L.P.'s estimates of the relative fair market values, and the tax bases, of Kinder Morgan Energy Partners, L.P.'s assets. Although Kinder Morgan Energy Partners, L.P. may from time to time consult with professional appraisers regarding valuation matters, it will make many of the relative fair market value estimates itself. These estimates are 116 122 subject to challenge and will not be binding on the IRS or the courts. If the estimates of fair market value or basis are later found to be incorrect, the character and amount of items of income, gain, loss, deductions or credits previously reported by Kinder Morgan Energy Partners, L.P.'s common unitholders might change, and unitholders might be required to adjust their tax liability for prior years and incur interest and penalties with respect to those adjustments. DISPOSITION OF COMMON UNITS RECOGNITION OF GAIN OR LOSS. Gain or loss will be recognized on a sale of common units equal to the difference between the amount realized and the unitholder's tax basis for the units sold. A common unitholder's amount realized will be measured by the sum of the cash or the fair market value of other property received by it plus the its share of any Kinder Morgan Energy Partners, L.P.'s nonrecourse liabilities. Because the amount realized includes a common unitholder's share of Kinder Morgan Energy Partners, L.P.'s nonrecourse liabilities, the gain recognized on the sale of units may result in a tax liability in excess of any cash received from such sale. Prior distributions from Kinder Morgan Energy Partners, L.P. in excess of cumulative net taxable income for a unit that decreased a common unitholder's tax basis in that unit will, in effect, become taxable income if the unit is sold at a price greater than the unitholder's tax basis in that unit, even if the price received is less than the unitholder's original cost. Except as noted below, gain or loss recognized by a common unitholder, other than a "dealer" in units, on the sale or exchange of a unit will generally be taxable as capital gain or loss. Capital gain recognized by an individual on the sale of common units held more than 12 months will generally be taxed at a maximum rate of 20%. A portion of this gain or loss, which will likely be substantial, however, will be separately computed and taxed as ordinary income or loss to the extent attributable to Section 751 Assets Kinder Morgan Energy Partners, L.P. owns. Ordinary income attributable to Section 751 Assets may exceed net taxable gain realized upon the sale of a common unit and may be recognized even if there is a net taxable loss realized on the sale of a unit. Thus, a common unitholder may recognize both ordinary income and a capital loss upon a sale of units. Net capital loss may offset capital gains and no more than $3,000 of ordinary income, in the case of individuals, and may only be used to offset capital gain in the case of corporations. The IRS has ruled that a partner who acquires interests in a partnership in separate transactions must combine those interests and maintain a single adjusted tax basis for all those interests. Upon a sale or disposition of less than all of those interests, a portion of that tax basis must be allocated to the interests sold based upon its value. Although the ruling is unclear as to how the holding period of these interests is determined once they are combined, recently finalized treasury regulations allow a selling unitholder who can identify units transferred with an ascertainable holding period to elect to use the actual holding period of the units transferred. Thus, according to the ruling, a unitholder will be unable to select high or low basis units to sell as would be the case with corporate stock, but, according to the regulations, may designate specific units sold for purposes of determining the holding period of units transferred. A unitholder electing to use the actual holding period of units transferred must consistently use that identification method for all subsequent sales or exchanges of units. A unitholder considering the purchase of additional units or a sale of units purchased in separate transactions should consult the unitholder's tax advisor as to the possible consequences of this ruling and application of the final treasury regulations. Specific provisions of the Internal Revenue Code affect the taxation of some financial positions, including partnership interests, by treating a taxpayer as having sold an "appreciated" 117 123 partnership interest, one in which gain would be recognized if it were sold, assigned or terminated at its fair market value, if the taxpayer or related persons enter(s) into: - a short sale; - an offsetting notional principal contract; or - a futures or forward contract with respect to the partnership interest or substantially identical property. Moreover, if a taxpayer has previously entered into a short sale, an offsetting notional principal contract or a futures or forward contract with respect to the partnership interest, the taxpayer will be treated as having sold that position if the taxpayer or a related person then acquires the partnership interest or substantially identical property. The Secretary of the Treasury is also authorized to issue regulations that treat a taxpayer that enters into transactions or positions that have substantially the same effect as the preceding transactions as having constructively sold the appreciated financial position. ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, Kinder Morgan Energy Partners, L.P.'s taxable income and losses will be determined annually, will be prorated on a monthly basis and will be subsequently apportioned among the common unitholders in proportion to the number of units owned by each of them as of the opening of the New York Stock Exchange on the first business day of the month. However, gain or loss realized on a sale or other disposition of Kinder Morgan Energy Partners, L.P.'s assets other than in the ordinary course of business will be allocated among the common unitholders of record as of the opening of the New York Stock Exchange on the first business day of the month in which such gain or loss is recognized. As a result, a common unitholder transferring units may be allocated income, gain, loss, deduction, and credit realized after the date of transfer. The use of this method is uncertain under existing treasury regulations. Accordingly, counsel is unable to opine on the validity of this method of allocating income and deductions between common unitholders. If this method is not allowed under the treasury regulations, Kinder Morgan Energy Partners, L.P.'s taxable income or losses might be reallocated among Kinder Morgan Energy Partners, L.P.'s unitholders. Kinder Morgan Energy Partners, L.P. is authorized to revise its method of allocation between common unitholders to conform to a method permitted under future treasury regulations. A common unitholder who owns units at any time during a quarter and who disposes of them prior to the record date set for a cash distribution for that quarter will be allocated items of our income, gain, loss and deductions attributable to that quarter, but will not be entitled to receive that cash distribution. NOTIFICATION REQUIREMENTS. A common unitholder who sells or exchanges units is required to notify Kinder Morgan Energy Partners, L.P. in writing of that sale or exchange within 30 days after the sale or exchange. Kinder Morgan Energy Partners, L.P. is required to notify the IRS of that transaction and to furnish certain information to the transferor and transferee. However, these reporting requirements do not apply to a sale by an individual who is a citizen of the United States and who effects the sale or exchange through a broker. Additionally, a transferor and a transferee of a common unit will be required to furnish statements to the IRS, filed with their income tax returns for the taxable year in which the sale or exchange occurred, that describe the amount of the consideration received for the unit that is allocated to Kinder Morgan Energy Partners, L.P.'s goodwill or going concern value. Failure to satisfy these reporting obligations may lead to the imposition of substantial penalties. CONSTRUCTIVE TERMINATION. Kinder Morgan Energy Partners, L.P. will be considered to have been terminated for tax purposes if there is a sale or exchange of 50% or more of the total interests in its capital and profits within a 12-month period. A constructive termination results in 118 124 the closing of Kinder Morgan Energy Partners, L.P.'s taxable year for all unitholders. In the case of a common unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of Kinder Morgan Energy Partners, L.P.'s tax year may result in more than 12 months of Kinder Morgan Energy Partners, L.P.'s taxable income or loss being includable in that unitholder's taxable income for the year of termination. Kinder Morgan Energy Partners, L.P. would be required to make new tax elections after a termination, including a new election under Section 754 of the Internal Revenue Code, and a termination would result in a deferral of Kinder Morgan Energy Partners, L.P.'s deductions for depreciation. A termination could also result in penalties if Kinder Morgan Energy Partners, L.P. was unable to determine that the termination had occurred. Moreover, a termination might either accelerate the application of, or subject Kinder Morgan Energy Partners, L.P. to, any tax legislation enacted before the termination. UNIFORMITY OF COMMON UNITS Because Kinder Morgan Energy Partners, L.P. cannot match transferors and transferees of units, Kinder Morgan Energy Partners, L.P. must maintain uniformity of the economic and tax characteristics of the common units to a purchaser of these units. In the absence of uniformity, Kinder Morgan Energy Partners, L.P. may be unable to completely comply with a number of federal income tax requirements, both statutory and regulatory. A lack of uniformity can result from a literal application of Treasury Regulation Section 1.167(c)-1(a)(6) or Treasury Regulations under Sections 743 and 197 of the Internal Revenue Code and from the application of the "ceiling limitation" on Kinder Morgan Energy Partners, L.P.'s ability to make allocations to eliminate Book-Tax Disparities attributable to Contributed Property. Any non-uniformity could have a negative impact on the value of the common units. Kinder Morgan Energy Partners, L.P. intends to depreciate and amortize the portion of a Section 743(b) adjustment attributable to unrealized appreciation in the value of Contributed Property, to the extent of any unamortized Book-Tax Disparity, using a rate of depreciation or amortization derived from the depreciation or amortization method and useful life applied to the Common Basis of that property, or treat that portion as non-amortizable to the extent attributable to property the Common Basis of which is not amortizable, despite its inconsistency with treasury regulations which apply, in part, to its assets. See "Tax Consequences of Common Unit Ownership -- Section 754 Election." If Kinder Morgan Energy Partners, L.P. determines that this position cannot reasonably be taken, it may adopt depreciation and amortization positions under which all purchasers acquiring common units in the same month would receive depreciation and amortization deductions, whether attributable to the Common Basis or the Section 743(b) adjustment, based upon the same applicable rate as if they had purchased a direct interest in Kinder Morgan Energy Partners, L.P.'s property. If this position is adopted, it may result in lower annual depreciation and amortization deductions than would otherwise be allowable to some common unitholders and risk the loss of depreciation and amortization deductions not taken in the year that these deductions are otherwise allowable. If Kinder Morgan Energy Partners, L.P. chooses not to utilize this aggregate method, it may adopt any other reasonable depreciation and amortization positions to preserve the uniformity of the intrinsic tax characteristics of any units that would not have a material adverse effect on the common unitholders. The IRS may challenge any method of depreciating or amortizing the Section 743(b) adjustment described in this paragraph. If this challenge were sustained, the uniformity of common units might be affected, and the gain from the sale of units might be increased without the benefit of additional deductions. TAX-EXEMPT ORGANIZATIONS, MUTUAL FUNDS AND NON U.S. INVESTORS Ownership of common units by employee benefit plans, other tax-exempt organizations, non-resident aliens, foreign corporations, other foreign persons and regulated investment companies 119 125 or mutual funds raises issues unique to those investors and, as described below, may have substantially adverse tax consequences to them. Employee benefit plans and most other organizations exempt from federal income tax, including individual retirement accounts and other retirement plans, are subject to federal income tax on unrelated business taxable income. Virtually all of Kinder Morgan Energy Partners, L.P.'s income allocated to a common unitholder which is a tax-exempt organization will be unrelated business taxable income and will be taxable to it. A regulated investment company or "mutual fund" is required to derive 90% or more of its gross income from interest, dividends and gains from the sale of stocks or securities or foreign currency or specified related sources. It is not anticipated that any significant amount of Kinder Morgan Energy Partners, L.P.'s gross income will include that type of income. Non-resident aliens and foreign corporations, trusts or estates that own common units will be considered to be engaged in business in the United States because of the ownership of units. As a consequence they will be required to file federal tax returns to report their share of Kinder Morgan Energy Partners, L.P.'s income, gain, loss and deduction and pay federal income tax at regular rates on their share of Kinder Morgan Energy Partners, L.P.'s net income or gain. Under rules applicable to publicly traded partnerships, Kinder Morgan Energy Partners, L.P. will withhold, currently at the rate of 39.6%, on cash distributions made quarterly to foreign common unitholders. Each foreign unitholder must obtain a taxpayer identification number from the IRS and submit that number to Kinder Morgan Energy Partners, L.P.'s transfer agent on a Form W-8 or applicable substitute form in order to obtain credit for these withholding taxes. Subsequent adoption of treasury regulations or the issuance of other administrative pronouncements may require Kinder Morgan Energy Partners, L.P. to change these procedures. In addition, because a foreign corporation that owns common units will be treated as engaged in a United States trade or business, that corporation may be subject to the United States branch profits tax at a rate of 30%, in addition to regular federal income tax, on its share of Kinder Morgan Energy Partners, L.P.'s income and gain, as adjusted for changes in the foreign corporation's "U.S. net equity," which are effectively connected with the conduct of a United States trade or business. That tax may be reduced or eliminated by an income tax treaty between the United States and the country in which the foreign corporate unitholder is a "qualified resident." In addition, this type of unitholder is subject to special information reporting requirements under Section 6038C of the Internal Revenue Code. Under an IRS ruling, a foreign common unitholder who sells or otherwise disposes of a unit will be subject to federal income tax on gain realized on the sale or disposition of that unit to the extent that this gain is effectively connected with a United States trade or business of the foreign unitholder. Apart from this ruling, a foreign common unitholder will not be taxed or subject to withholding upon the sale or disposition of a unit if the foreign unitholder has owned less than 5% in value of the units during the five-year period ending on the date of the disposition and if the units are regularly traded on an established securities market at the time of the sale or disposition. ADMINISTRATIVE MATTERS KINDER MORGAN ENERGY PARTNERS, L.P.'S INFORMATION RETURNS AND AUDIT PROCEDURES. Kinder Morgan Energy Partners, L.P. intends to furnish to each unitholder, within 90 days after the close of each calendar year, specific tax information, including a Schedule K-1, which describes that unitholder's share of Kinder Morgan Energy Partners, L.P.'s income, gain, loss and deduction for Kinder Morgan Energy Partners, L.P.'s preceding taxable year. In preparing this information, which will not be reviewed by counsel, Kinder Morgan Energy Partners, L.P. will take various accounting and reporting positions, some of which have been mentioned earlier, to determine that unitholder's share of income, gain, loss and deduction. Kinder Morgan Energy Partners, L.P. 120 126 cannot assure you that those positions will yield a result that conforms to the requirements of the Internal Revenue Code, regulations or administrative interpretations of the IRS. No assurance can be given to prospective unitholders that the IRS will not successfully contend in court that those positions are impermissible. Any challenge by the IRS could negatively affect the value of the common units. The IRS may audit Kinder Morgan Energy Partners, L.P.'s federal income tax information returns. Adjustments resulting from an IRS audit may require each common unitholder to adjust a prior year's tax liability, and possibly may result in an audit of the unitholder's own return. Any audit of a unitholder's return could result in adjustments not related to Kinder Morgan Energy Partners, L.P.'s returns as well as those related to its returns. Partnerships generally are treated as separate entities for purposes of federal tax audits, judicial review of administrative adjustments by the IRS and tax settlement proceedings. The tax treatment of partnership items of income, gain, loss, deduction and credit are determined in a partnership proceeding rather than in separate proceedings with the partners. The Internal Revenue Code requires that one partner be designated as the "Tax Matters Partner" for these purposes. Kinder Morgan Energy Partners, L.P.'s partnership agreement appoints the general partner as the Tax Matters Partner. The Tax Matters Partner has made and will make some elections on our behalf and on behalf of the unitholders. In addition, the Tax Matters Partner can extend the statute of limitations for assessment of tax deficiencies against unitholders for items in Kinder Morgan Energy Partners, L.P.'s returns. The Tax Matters Partner may bind a unitholder with less than a 1% profits interest in Kinder Morgan Energy Partners, L.P. to a settlement with the IRS unless that unitholder elects, by filing a statement with the IRS, not to give that authority to the Tax Matters Partner. The Tax Matters Partner may seek judicial review, by which all the unitholders are bound, of a final partnership administrative adjustment and, if the Tax Matters Partner fails to seek judicial review, judicial review may be sought by any unitholder having at least a 1% interest in profits or by any group of unitholders having in the aggregate at least a 5% interest in profits. However, only one action for judicial review will go forward, and each unitholder with an interest in the outcome may participate. A unitholder must file a statement with the IRS identifying the treatment of any item on that unitholder's federal income tax return that is not consistent with the treatment of the item on Kinder Morgan Energy Partners, L.P.'s return. Intentional or negligent disregard of this consistency requirement may subject a unitholder to substantial penalties. NOMINEE REPORTING. Persons who hold an interest in Kinder Morgan Energy Partners, L.P. as a nominee for another person are required to furnish to Kinder Morgan Energy Partners, L.P.: - the name, address and taxpayer identification number of the beneficial owner and the nominee; - whether the beneficial owner is (i) a person that is not a United States person, (ii) a foreign government, an international organization or any wholly owned agency or instrumentality of either of the foregoing or (iii) a tax-exempt entity; - the amount and description of units held, acquired or transferred for the beneficial owner; and - specific information including the dates of acquisitions and transfers, means of acquisitions and transfers, and acquisition cost for purchases, as well as the amount of net proceeds from sales. Brokers and financial institutions are required to furnish additional information, including whether they are United States persons and specific information on units they acquire, hold or transfer for their own account. A penalty of $50 per failure, up to a maximum of $100,000 per 121 127 calendar year, is imposed by the Internal Revenue Code for failure to report that information to Kinder Morgan Energy Partners, L.P. The nominee is required to supply the beneficial owner of the units with the information furnished to Kinder Morgan Energy Partners, L.P. REGISTRATION AS A TAX SHELTER. The Internal Revenue Code requires that "tax shelters" be registered with the Secretary of the Treasury. The temporary treasury regulations interpreting the tax shelter registration provisions of the Internal Revenue Code are extremely broad. It is arguable that Kinder Morgan Energy Partners, L.P. is not subject to the registration requirement on the basis that (i) it does not constitute a tax shelter or (ii) it constitutes a projected income investment exempt from registration. However, Kinder Morgan Energy Partners, L.P. has registered as a tax shelter with the Secretary of the Treasury because of the absence of assurance that it will not be subject to tax shelter registration and in light of the substantial penalties which might be imposed if registration is required and not undertaken. ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN KINDER MORGAN ENERGY PARTNERS, L.P. OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS. Kinder Morgan Energy Partners, L.P.'s tax shelter registration number is 9228900496. A unitholder who sells or otherwise transfers a unit in a later transaction must furnish the registration number to the transferee. The penalty for failure of the transferor of a unit to furnish the registration number to the transferee is $100 for each failure. The unitholders must disclose Kinder Morgan Energy Partners, L.P.'s tax shelter registration number on Form 8271 to be attached to the tax return on which any deduction, loss, credit or other benefit Kinder Morgan Energy Partners, L.P. generates is claimed or on which any of Kinder Morgan Energy Partners, L.P.'s income is included. A unitholder who fails to disclose the tax shelter registration number on the unitholder's return, without reasonable cause for that failure, will be subject to a $250 penalty for each failure. Any penalties discussed are not deductible for federal income tax purposes. ACCURACY-RELATED PENALTIES. An additional tax equal to 20% of the amount of any portion of an underpayment of tax that is attributable to one or more specified causes, including negligence or disregard of rules or regulations, substantial understatements of income tax and substantial valuation misstatements, is imposed by the Internal Revenue Code. No penalty will be imposed, however, for any portion of an underpayment if it is shown that there was a reasonable cause for that portion and that the taxpayer acted in good faith regarding that portion. A substantial understatement of income tax in any taxable year exists if the amount of the understatement exceeds the greater of 10% of the tax required to be shown on the return for the taxable year or $5,000 ($10,000 for most corporations). The amount of any understatement subject to penalty generally is reduced if any portion is attributable to a position adopted on the return (i) for which there is, or was, "substantial authority," or (ii) as to which there is a reasonable basis and the pertinent facts of that position are disclosed on the return. More stringent rules apply to "tax shelters," a term that in this context does not appear to include Kinder Morgan Energy Partners, L.P. If any item of income, gain, loss, deduction or credit included in the distributive shares of unitholders might result in that kind of an "understatement" of income for which no "substantial authority" exists, Kinder Morgan Energy Partners, L.P. must disclose the pertinent facts on its return. In addition, Kinder Morgan Energy Partners, L.P. will make a reasonable effort to furnish sufficient information for unitholders to make adequate disclosure on their returns to avoid liability for this penalty. A substantial valuation misstatement exists if the value of any property, or the adjusted basis of any property, claimed on a tax return is 200% or more of the amount determined to be the correct amount of the valuation or adjusted basis. No penalty is imposed unless the portion of the underpayment attributable to a substantial valuation misstatement exceeds $5,000 ($10,000 for most corporations). If the valuation claimed on a return is 400% or more than the correct valuation, the penalty imposed increases to 40%. 122 128 FOREIGN, STATE, LOCAL AND OTHER TAX CONSIDERATIONS In addition to federal income taxes, common unitholders will be subject to other taxes, including state and local income taxes, foreign taxes, unincorporated business taxes, and estate, inheritance or intangible taxes that may be imposed by the various jurisdictions in which Kinder Morgan Energy Partners, L.P. does business or owns property or in which a common unitholder is a resident. Although an analysis of those various taxes is not presented here, each prospective common unitholder should consider their potential impact on an investment in Kinder Morgan Energy Partners, L.P. Kinder Morgan Energy Partners, L.P. currently owns property or is doing business in Canada and in various states including Arizona, California, Colorado, Delaware, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Missouri, Nebraska, Nevada, New Mexico, North Carolina, Oregon, Pennsylvania, South Carolina, Texas, Virginia and Wyoming. A common unitholder will likely be required to file Canadian federal income tax returns and to pay Canadian federal and provincial income taxes and to file state income tax returns and to pay taxes in many of these states and may be subject to penalties for failure to comply with those requirements. In some states, tax losses may not produce a tax benefit in the year incurred and also may not be available to offset income in subsequent taxable years. Some states may require Kinder Morgan Energy Partners, L.P., or it may elect, to withhold a percentage of income from amounts to be distributed to a unitholder who is not a resident of the state. Withholding, the amount of which may be greater or less than a particular unitholder's income tax liability to the state, generally does not relieve a nonresident unitholder from the obligation to file an income tax return. Amounts withheld may be treated as if distributed to unitholders for purposes of determining the amounts distributed by Kinder Morgan Energy Partners, L.P. Based on current law and Kinder Morgan Energy Partners, L.P.'s estimate of its future operations, the general partner anticipates that any amounts required to be withheld will not be material. Kinder Morgan Energy Partners, L.P. may also own property or do business in other states in the future. It is the responsibility of each common unitholder to investigate the legal and tax consequences, under the laws of pertinent states, localities and foreign jurisdictions, of an investment in Kinder Morgan Energy Partners, L.P. Accordingly, each prospective common unitholder should consult, and must depend upon, that unitholder's own tax counsel or other advisor with regard to those matters. Further, it is the responsibility of each common unitholder to file all foreign, state and local, as well as United States federal tax returns, that may be required of the unitholder. Counsel has not rendered an opinion on the foreign, state or local tax consequences of an investment in Kinder Morgan Energy Partners, L.P. ERISA CONSIDERATIONS The following is a summary of material considerations arising under the Employee Retirement Income Security Act of 1974, as amended, commonly known as "ERISA", and the prohibited transaction provisions of section 4975 of the Internal Revenue Code that may be relevant to a prospective purchaser of shares. The discussion does not purport to deal with all aspects of ERISA or section 4975 of the Internal Revenue Code that may be relevant to particular shareholders in light of their particular circumstances. The discussion is based on current provisions of ERISA and the Internal Revenue Code, existing and currently proposed regulations under ERISA and the Internal Revenue Code, the legislative history of ERISA and the Internal Revenue Code, existing administrative rulings of the Department of Labor ("DOL") and reported judicial decisions. No assurance can be given that legislative, judicial, or administrative changes will not affect the accuracy of any statements herein with respect to transactions entered into or contemplated prior to the effective date of such changes. A FIDUCIARY MAKING A DECISION TO INVEST IN THE SHARES ON BEHALF OF A PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A TAX-QUALIFIED RETIREMENT PLAN, OR AN IRA IS ADVISED TO 123 129 CONSULT ITS OWN LEGAL ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE INTERNAL REVENUE CODE, AND STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, SALE OR EXCHANGE OF THE shareS BY SUCH PLAN OR IRA. Each fiduciary of a pension, profit-sharing, or other employee benefit plan, known as an "ERISA Plan", subject to Title I of ERISA should consider carefully whether an investment in the shares is consistent with his fiduciary responsibilities under ERISA. In particular, the fiduciary requirements of Part 4 of Title I of ERISA require an ERISA Plan's investments to be (1) prudent and in the best interests of the ERISA Plan, its participants, and its beneficiaries, (2) diversified in order to minimize the risk of large losses, unless it is clearly prudent not to do so, and (3) authorized under the terms of the ERISA Plan's governing documents (provided the documents are consistent with ERISA). In determining whether an investment in the shares is prudent for purposes of ERISA, the appropriate fiduciary of an ERISA Plan should consider all of the facts and circumstances, including whether the investment is reasonably designed, as a part of the ERISA Plan's portfolio for which the fiduciary has investment responsibility, to meet the objectives of the ERISA Plan, taking into consideration the risk of loss and opportunity for gain (or other return) from the investment, the diversification, cash flow, and funding requirements of the ERISA Plan's portfolio. The fiduciary of an individual retirement account, commonly called an "IRA", or of a qualified retirement plan not subject to Title I of ERISA because it is a governmental or church plan or because it does not cover common law employees (a "Non-ERISA Plan") should consider that such an IRA or Non-ERISA Plan may only make investments that are authorized by the appropriate governing documents and under applicable state law. Fiduciaries of ERISA Plans and persons making the investment decision for an IRA or other Non-ERISA Plan should consider the application of the prohibited transaction provisions of ERISA and the Internal Revenue Code in making their investment decision. A "party in interest" or "disqualified person" with respect to an ERISA Plan or with respect to a Non-ERISA Plan or IRA subject to Internal Revenue Code section 4975 is subject to (1) an initial 15% excise tax on the amount involved in any prohibited transaction involving the assets of the plan or IRA and (2) an excise tax equal to 100% of the amount involved if any prohibited transaction is not corrected. If the disqualified person who engages in the transaction is the individual on behalf of whom an IRA is maintained (or his beneficiary), the IRA will lose its tax-exempt status and its assets will be deemed to have been distributed to such individual in a taxable distribution (and no excise tax will be imposed) on account of the prohibited transaction. In addition, a fiduciary who permits an ERISA Plan to engage in a transaction that the fiduciary knows or should know is a prohibited transaction may be liable to the ERISA Plan for any loss the ERISA Plan incurs as a result of the transaction or for any profits earned by the fiduciary in the transaction. The following section discusses certain principles that apply in determining whether the fiduciary requirements of ERISA and the prohibited transaction provisions of ERISA and the Internal Revenue Code apply to an entity because one or more investors in the equity interests in the entity is an ERISA Plan or is a Non-ERISA Plan or IRA subject to section 4975 of the Internal Revenue Code. An ERISA Plan fiduciary also should consider the relevance of those principles to ERISA's prohibition on improper delegation of control over or responsibility for "plan assets" and ERISA's imposition of co-fiduciary liability who participates in, permits (by action or inaction) the occurrence of, or fails to remedy a known breach by another fiduciary. Regulations of the DOL defining "plan assets" (the "Plan Asset Regulations") generally provide that when an ERISA Plan or Non-ERISA Plan or IRA acquires a security that is an equity interest in an entity and the security is neither a "publicly-offered security" nor a security issued by an investment company registered under the Investment Company Act of 1940, the ERISA or Non-ERISA Plan's or IRA's assets include both the equity interest and an undivided interest in 124 130 each of the underlying assets of the issuer of such equity interest, unless one or more exceptions specified in the Plan Asset Regulations are satisfied. The Plan Asset Regulations define a publicly-offered security as a security that is "widely-held," "freely transferable," and either part of a class of securities registered under the Exchange Act, or sold pursuant to an effective registration statement under the Securities Act, provided the securities are registered under the Exchange Act within 120 days after the end of the fiscal year of the issuer during which the offering occurred. The Plan Asset Regulations provide that a security is "widely held" only if it is part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another. A security will not fail to be widely held because the number of independent investors falls below 100 subsequent to the initial public offering as a result of events beyond the issuer's control. The Plan Asset Regulations provide that whether a security is "freely transferable" is a factual question to be determined on the basis of all relevant facts and circumstances. It is anticipated that the shares will meet the criteria of publicly offered securities under the Plan Asset Regulations. The Underwriters expect (although no assurance can be given) that the shares will be held beneficially by more than 100 independent persons by the conclusion of the offering; there are no restrictions imposed on the transfer of shares; and the shares will be sold as part of an offering pursuant to an effective registration statement under the Securities Act of 1933, and thus will be timely registered under the Securities Exchange Act of 1934. 125 131 UNDERWRITING We and the underwriters named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co., Credit Suisse First Boston Corporation, Lehman Brothers Inc., Dain Rauscher Incorporated and First Union Securities, Inc. are the representatives of the underwriters.
Number of Underwriters shares ------------ --------- Goldman, Sachs & Co. ....................................... Credit Suisse First Boston Corporation...................... Lehman Brothers Inc. ....................................... Dain Rauscher Incorporated.................................. First Union Securities, Inc. ............................... --------- Total............................................. 9,000,000 =========
As part of this offering, the underwriters will sell 900,000 shares to Kinder Morgan, Inc. The underwriters are not entitled to any discount or commission on these shares. Under the terms and conditions of the underwriting agreement, the underwriters are committed to take and pay for all of the shares offered hereby if any are taken. If the underwriters sell more shares than the total number set forth in the table above, the underwriters have an option to buy up to an additional 1,350,000 shares from us to cover such sales. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. The following table shows the per share and total underwriting discounts and commissions to be paid by us to the underwriters. Such amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase 1,350,000 additional shares.
Paid by Kinder Morgan Management, LLC No Exercise Full Exercise ----------------------------- ----------- ------------- Per Share.................................. $ $ $ Total...................................... $ $ $
Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. Any such securities dealers may resell any shares purchased from the underwriters to certain other brokers or dealers at a discount of up to $ per share from the initial public offering price. If all the shares are not sold at the initial offering price, the representatives may change the offering price and the other selling terms. Kinder Morgan, Inc., Kinder Morgan Energy Partners, L.P., Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. and their directors and executive officers have agreed with the underwriters not to dispose of or hedge any securities of Kinder Morgan Energy Partners, L.P. or Kinder Morgan Management, LLC that are substantially similar to the shares, i-units or common units, including, but not limited to, any securities that are convertible or exchangeable for shares, i-units or common units or any substantially similar securities, without the prior written consent of Goldman, Sachs & Co. in its sole discretion. Goldman, Sachs & Co. has no set 126 132 criteria for the waiver of these restrictions and currently has no intention to waive these restrictions. With respect to shares and i-units and securities of such issuers that are substantially similar to the shares and i-units as described above, but specifically excluding common units, the lock-up period will be from the date of this prospectus and continuing through the date 180 days after the date of this prospectus. With respect to the common units and securities of such issuers that are substantially similar to the common units as described above, the lock-up period will be from the date of this prospectus and continuing through the date of 60 days after the date of this prospectus. This agreement does not apply to (1) the sale of i-units by Kinder Morgan Energy Partners, L.P. to Kinder Morgan Management, LLC and subsequent quarterly distributions of i-units and shares as contemplated by the prospectus, (2) the disposal of such securities in connection with the acquisition of assets (other than cash), businesses or the capital stock or other ownership interests of businesses by any of Kinder Morgan, Inc., Kinder Morgan Energy Partners, L.P., or any operating subsidiary of Kinder Morgan Energy Partners, L.P. owning common units or Class B units on the date of this prospectus if the recipient of such securities agrees not to dispose of the securities received in connection with such acquisitions during the lock-up period, and (3) the disposal of such securities pursuant to an employee stock or unit option plan existing on, or upon the conversion or exchange of convertible or exchangeable securities outstanding as of, the date of this prospectus. Prior to the offering, there has been no public market for the shares. The initial public offering price will be negotiated among Kinder Morgan Management, LLC and the representative. The factors to be considered in determining the initial public offering price of the shares, in addition to prevailing market conditions and the recent market price of the common units, will be Kinder Morgan Energy Partners, L.P.'s historical performance, estimates of the business potential and earnings prospects of Kinder Morgan Management, LLC and Kinder Morgan Energy Partners, L.P., an assessment of Kinder Morgan Management, LLC's management and the consideration of the above factors in relation to market valuation of companies in related businesses. Kinder Morgan Management, LLC has applied to have its shares listed on the New York Stock Exchange under the symbol "KMR". In order to meet one of the requirements for listing the shares on the New York Stock Exchange, the underwriters have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial holders. Each underwriter has represented and agreed that (1) it has not offered or sold and prior to the date six months after the date of issue of the shares will not offer or sell any shares to persons in the United Kingdom, except to persons whose ordinary activities involve acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances that have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (2) it has complied, and will comply with, all applicable provisions of the Financial Services Act 1986 of Great Britain with respect to anything done by it in relation to the shares in, from or otherwise involving the United Kingdom; and (3) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issuance of the shares to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 of Great Britain or is a person to whom the document may lawfully be issued or passed on. In connection with the offering, the underwriters may purchase and sell shares and common units in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Shorts sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. "Covered" short sales are sales made in an amount not greater than the underwriters' option to purchase additional shares from us in the offering. The underwriters may close out any covered 127 133 short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the overallotment option. "Naked" short sales are any sales in excess of such option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of shares or common units made by the underwriters in the open market prior to the completion of the offering. The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representative has repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions. Purchases to cover a short position and stabilizing transactions may have the effect of preventing or retarding a decline in the market price of the shares or the common units, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of the shares or the common units. As a result, the price of the shares or the common units may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued at any time. These transactions may be effected on the New York Stock Exchange in the over-the-counter market or otherwise. Because the National Association for Securities Dealers, Inc. views the common units offered pursuant to the exchange feature as interests in a direct participation program, the offering is being made in compliance with Rule 2810 of the NASD's Conduct Rules. Accordingly, the representative of the underwriters has informed Kinder Morgan Management, LLC and its affiliates that the underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority without the prior written approval of the transaction by the customer. Investor suitability with respect to the common units should be judged similarly to the suitability with respect to other securities that are listed for trading on a national securities exchange. The underwriters do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered. A prospectus in electronic format may be made available on the Internet web sites maintained by one or more of the underwriters. The representatives of the underwriters may agree to allocate a number of shares to the underwriters for sale to their online brokerage account holders. Any Internet distribution will be allocated by the representatives to the underwriters that may make Internet distributions on the same basis as other allocations. We estimate that our share of the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $4 million. Each of Kinder Morgan Management, LLC, Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc. has agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act of 1933. Some of the underwriters have from time to time performed various investment banking and financial advisory services, participated in the underwriting of debt and equity securities offerings and served as lender or agent under credit facilities for Kinder Morgan Energy Partners, L.P., Kinder Morgan, Inc. and their affiliates for which they have received customary fees and reimbursement of their out of pocket expenses. The underwriters may, from time to time in the future, engage in transactions with and perform services for Kinder Morgan Management, LLC, Kinder Morgan Energy Partners, L.P., Kinder Morgan, Inc. and their affiliates in the ordinary course of business. 128 134 LEGAL MATTERS The validity of the shares, i-units and common units offered by this prospectus will be passed upon for us by Bracewell & Patterson, L.L.P., Houston, Texas. Various legal matters relating to the offering will be passed upon for the underwriters by Vinson & Elkins L.L.P. EXPERTS The financial statement as of February 16, 2001 of Kinder Morgan Management, LLC included in this prospectus and registration statement, has been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements of Kinder Morgan Energy Partners, L.P. incorporated in this prospectus and registration statement by reference to its Amendment No. 2 on Form 10-K/A for the year ended December 31, 2000 have been so incorporated in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements of Kinder Morgan, Inc. incorporated in this prospectus and registration statement by reference to its Amendment No. 1 on Form 10-K/A for the year ended December 31, 2000 have been so incorporated in reliance on the report (which contains an explanatory paragraph relating to the adjustments described in Note 2 that were applied to restate the 1998 financial statements) of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. In addition, (1) the balance sheet of Kinder Morgan G.P., Inc. as of December 31, 2000 which appears in Kinder Morgan Energy Partners, L.P.'s Current Report on Form 8-K/A (Amendment No. 2) dated April 27, 2001; (2) the statements of income, cash flows and changes in member's equity of Kinder Morgan Interstate Gas Transmission LLC for the year ended December 31, 1999 which appear in the Form 8-K/A (Amendment No. 3) dated April 27, 2001; and (3) the statements of income, cash flows and changes in partners' equity of Trailblazer Pipeline Company for the year ended December 31, 1999 which appear in the Form 8-K/A (Amendment No. 3) dated April 27, 2001 incorporated in this prospectus and registration statement by reference have been so incorporated in reliance on the reports of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements of Kinder Morgan, Inc. for the year ended December 31, 1998 (prior to the restatement of the 1998 financial statements described in Note 2) included in Kinder Morgan, Inc.'s December 31, 2000 Amendment No. 1 on Form 10-K/A, incorporated by reference in this prospectus and registration statement, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. The financial statements of Red Cedar Gathering Company as of and for the years ended December 31, 1999 and 1998 included in Kinder Morgan Energy Partners, L.P.'s Form 8-K/A (Amendment No. 3) dated April 27, 2001, incorporated by reference in this prospectus and registration statement, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report dated March 24, 2000, with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. The combined financial statements of GATX Terminals Companies as of and for the year ended December 31, 2000, included in the Kinder Morgan Energy Partners, L.P. Current Report on Form 8-K/A (Amendment No. 2) dated April 27, 2001, and incorporated by reference in this prospectus and registration statement have been audited by Ernst & Young LLP, independent 129 135 auditors, to the extent indicated in their report thereon also incorporated herein by reference. Such combined financial statements have been incorporated herein by reference in reliance upon such report given on the authority of such firm as experts in accounting and auditing. WHERE YOU CAN FIND ADDITIONAL INFORMATION Kinder Morgan Management, LLC has filed on Form S-1, and Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc. have filed on Form S-3, a registration statement with the SEC under the Securities Act of 1933 with respect to the securities offered in this offering. This prospectus, which is a part of the registration statement, does not contain all of the information set forth in the registration statement, or the exhibits which are part of the registration statement, parts of which are omitted as permitted by the rules and regulations of the SEC. For further information about Kinder Morgan Management, LLC, Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc. and about the securities to be sold in this offering, please refer to the registration statement and the exhibits which are part of the registration statement. Upon completion of this offering, Kinder Morgan Management, LLC will become subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934 and, in accordance therewith, will file periodic reports, proxy and information statements and other information with the SEC. Kinder Morgan Management, LLC's periodic reports, proxy and information statements and other information will be available for inspection and copying at the regional offices, public references facilities and web site of the SEC referred to below. We intend to furnish our shareholders with annual reports containing audited financial statements and an opinion thereon expressed by independent certified public accountants. We also intend to furnish other reports as we may determine or as required by law. Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc. file annual, quarterly and other reports, proxy statements and other information with the SEC. Their current SEC filings are available to the public over the Internet at the SEC's web site at http://www.sec.gov. You may also read and copy any document they file at the SEC's public reference rooms located at: 450 Fifth Street, N.W. Washington, D.C. 20549 Seven World Trade Center New York, New York 10048; and Northwest Atrium Center 500 West Madison Street Chicago, Illinois 60661 Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. Because Kinder Morgan Energy Partners, L.P.'s common units and Kinder Morgan, Inc.'s common stock are listed on the New York Stock Exchange, Kinder Morgan Energy Partners, L.P.'s and Kinder Morgan, Inc.'s reports, proxy statements and other information can be reviewed and copied at the office of that exchange at 20 Broad Street, New York, New York 10005. The SEC allows Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc. to "incorporate by reference" the information they file with them, which means that Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc. can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this prospectus, and information that Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc. file later with the SEC will automatically update and supersede this information. Kinder 130 136 Morgan Energy Partners, L.P. and Kinder Morgan, Inc. incorporate by reference the documents listed below and any future filings made with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until the termination of the offering:
KINDER MORGAN ENERGY PARTNERS, L.P. SEC FILINGS (FILE NO. 1-11234) PERIOD - ----------------------------------- ------ Annual Report on Form 10-K Year ended December 31, 2000 Annual Report on Form 10-K/A Dated April 4, 2001 Annual Report on Form 10-K/A Dated April 27, 2001 Current Report on Form 8-K Filed February 1, 2001 Current Report on Form 8-K Filed February 20, 2001 Current Report on Form 8-K Filed March 5, 2001 Current Report on Form 8-K/A Dated April 4, 2001 Current Report on Form 8-K/A Dated April 4, 2001 Current Report on Form 8-K/A Dated April 27, 2001 Current Report on Form 8-K/A Dated April 27, 2001 Registration Statement on Form 8-A, as Filed July 2, 1992 thereafter amended
KINDER MORGAN, INC. SEC FILINGS (FILE NO. 1-06446) PERIOD - ------------------------------- ------ Annual Report on Form 10-K Year Ended December 31, 2000 Annual Report on Form 10-K/A Dated April 4, 2001 Current Report on Form 8-K Filed February 1, 2001 Current Report on Form 8-K Filed February 20, 2001 Current Report on Form 8-K Filed March 6, 2001 Current Report on Form 8-K Filed March 14, 2001 Current Report on Form 8-K/A Dated April 4, 2001
Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc., respectively, will provide a copy of any document incorporated by reference in this prospectus and any exhibit specifically incorporated by reference in those documents at no cost by request directed to them at the following address and telephone number: Kinder Morgan Energy Partners, L.P. Kinder Morgan, Inc. Investor Relations Department One Allen Center, Suite 1000 500 Dallas Street Houston, Texas 77002 (713) 369-9000 The information concerning Kinder Morgan Energy Partners, L.P. contained or incorporated by reference in this document has been provided by Kinder Morgan Energy Partners, L.P., and the information concerning Kinder Morgan, Inc. contained or incorporated by reference in this document has been provided by Kinder Morgan, Inc. You should rely only on the information contained or incorporated by reference in this prospectus to purchase the securities offered by this prospectus. Kinder Morgan Management, LLC, Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc. have not authorized anyone to provide you with information that is different from what is contained in this prospectus. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the cover, and the mailing of the prospectus to shareholders shall not create any implication to the contrary. 131 137 INDEX TO FINANCIAL STATEMENT KINDER MORGAN MANAGEMENT, LLC
PAGE ---- Report of Independent Accountants........................... F-2 Balance Sheet............................................... F-3 Notes to Balance Sheet...................................... F-4
F-1 138 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Member of Kinder Morgan Management, LLC: In our opinion, the accompanying balance sheet presents fairly, in all material respects, the financial position of Kinder Morgan Management, LLC at February 16, 2001 in conformity with accounting principles generally accepted in the United States of America. This financial statement is the responsibility of the company's management; our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit of this statement in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet, assessing the accounting principles used and significant estimates made by management, and evaluating the overall balance sheet presentation. We believe that our audit of the balance sheet provides a reasonable basis for our opinion. PricewaterhouseCoopers LLP Houston, Texas February 16, 2001 F-2 139 KINDER MORGAN MANAGEMENT, LLC BALANCE SHEET FEBRUARY 16, 2001 ASSETS Cash........................................................ $100,000 -------- Total Assets...................................... $100,000 ======== EQUITY Voting shares; unlimited shares authorized; 1 share issued and outstanding........................................... $100,000 Nonvoting shares; unlimited shares authorized; no shares issued.................................................... -- -------- Total Equity...................................... $100,000 ========
The accompanying Notes are an integral part of this statement. F-3 140 KINDER MORGAN MANAGEMENT, LLC NOTES TO BALANCE SHEET 1. FORMATION AND OWNERSHIP Kinder Morgan Management, LLC is a Delaware limited liability company formed on February 14, 2001 under the Delaware Limited Liability Company Act. Kinder Morgan G.P., Inc., ("KMGP") a wholly owned subsidiary of Kinder Morgan, Inc. (a major energy company traded on the New York Stock Exchange under the ticker symbol "KMI"), owns all of Kinder Morgan Management, LLC's voting securities and is its sole managing member. 2. CAPITALIZATION Kinder Morgan Management, LLC's authorized capital structure consists of two classes of membership interests: (1) nonvoting shares and (2) voting shares. Additional equity interests may be approved by the board and the vote of the holders of a majority of the outstanding shares of nonvoting equity interests. As of February 16, 2001, the issued capitalization consists of $100,000 contributed by Kinder Morgan, G.P., Inc. for its voting equity interest. We expect to issue shares of nonvoting shares for cash to the public as discussed in Note 3, using all of the net proceeds to purchase a number of i-units from Kinder Morgan Energy Partners, L.P. (the nation's largest publicly-traded pipeline limited partnership, traded on the New York Stock Exchange under the ticker symbol "KMP") equal to the number of shares we have outstanding and related rights from Kinder Morgan, Inc. These i-units are similar to Kinder Morgan Energy Partners, L.P. common limited partner units, except that quarterly distributions from operations and from interim capital transactions will be received in additional i-units rather than cash. Each time Kinder Morgan Energy Partners, L.P. issues i-units to us, we will also distribute an equal number of shares to holders of our shares. The number of i-units and shares will remain equal. 3. BUSINESS Kinder Morgan Management, LLC proposes to file a registration statement with respect to an initial public offering of shares. At no time after our formation and prior to the public offering have we had or do we expect to have any operations or own any interest in Kinder Morgan Energy Partners, L.P. After the public offering, we will be a limited partner in Kinder Morgan Energy Partners, L.P. and pursuant to a delegation of control agreement we will manage and control its business and affairs. Under the delegation of control agreement, KMGP will delegate to us, to the fullest extent permitted under Delaware law and the KMP partnership agreement, all of KMGP's power of authority to manage and control the business and affairs of KMP, except that we cannot take certain specified actions without the approval of KMGP. KMP will either pay directly or reimburse us for all of our expenses incurred in performing under the delegation of control agreement and will be obligated to indemnify us against claims and liabilities except in cases in which we have acted in bad faith or in which indemnity is not permitted by law. KMP will consent to the terms of the delegation of control agreement including KMP's indemnity and reimbursement obligations. We will not be paid a fee for our service under the delegation of control agreement, nor will we receive any margin or profit on the expense reimbursement. The expense reimbursements by KMP to us will be accounted for as a reduction to the expense incurred. After the public offering, we will own all of the i-units issued by Kinder Morgan Energy Partners, L.P., which will represent an approximate 11.5% ownership interest in Kinder Morgan Energy Partners, L.P. KMGP Services Company, Inc. ("Services") is a wholly-owned subsidiary of KMGP and provides employees and related centralized payroll and employee benefits services to us, KMGP, F-4 141 KINDER MORGAN MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) KMP and KMP's operating partnerships and subsidiaries (collectively, the "Group"). Regular employees of Services are assigned to work for one or more members of the Group. The direct costs of all compensation, benefits expenses, employer taxes and other employer expenses for these regular employees are allocated and charged by Services to the appropriate member of the Group; and the members of the Group reimburse Services Company for their allocated shares of these direct costs. There is no profit or margin charged by Services to the members of the Group. The administrative work necessary to implement these payroll and benefits services is performed by the human resource department of KMI, and the related administrative costs are allocated to members of the Group in accordance with existing expense allocation procedures. The effect of these arrangements is that each member of the Group bears the direct compensation and employee benefits costs of its assigned employees, while also bearing its allocable share of administrative costs. Pursuant to its limited partnership agreement, KMP reimburses us for our share of these administrative costs and such reimbursements will be accounted for as described above. 4. INCOME TAX We are a limited liability company that has elected to be treated as a corporation for federal income tax purposes. F-5 142 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. ---------------------- TABLE OF CONTENTS
Page ---- Prospectus Summary................................... 1 Risk Factors......................................... 20 Information Regarding Forward Looking Statements..... 29 Use of Proceeds...................................... 30 Our Policy Regarding Share Distributions............. 30 Kinder Morgan Energy Partners, L.P.'s Distribution Policy............................................. 31 Capitalization of Kinder Morgan Management, LLC...... 37 Capitalization of Kinder Morgan Energy Partners, L.P................................................ 38 Capitalization of Kinder Morgan, Inc................. 39 Selected Financial Data of Kinder Morgan Energy Partners, L.P...................................... 40 Selected Pro Forma Financial Data of Kinder Morgan Energy Partners, L.P............................... 42 Management's Discussion and Analysis of Financial Condition and Results of Operations................ 44 Description of Our Shares............................ 61 Description of the i-Units........................... 72 Business............................................. 74 Management of Kinder Morgan Management, LLC.......... 83 Relationships and Related Party Transactions......... 87 Conflicts of Interest and Fiduciary Responsibilities................................... 92 Limited Liability Company Agreement.................. 96 Description of Units and Comparison With Our Shares............................................. 100 Shares Eligible for Future Sale...................... 103 Income Tax Considerations Relating to the Shares and the Common Units................................... 103 ERISA Considerations................................. 123 Underwriting......................................... 126 Legal Matters........................................ 129 Experts.............................................. 129 Where You Can Find Additional Information............ 130 Index to Financial Statements........................ F-1
---------------------- Through and including , 2001 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 9,000,000 SHARES KINDER MORGAN MANAGEMENT, LLC Representing Limited Liability Company Interests GOLDMAN, SACHS & CO. CREDIT SUISSE FIRST BOSTON LEHMAN BROTHERS DAIN RAUSCHER WESSELS FIRST UNION SECURITIES, INC. Representatives of the Underwriters - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 143 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (FORM S-1; ITEM 14 OF FORM S-3). Shown below are the expenses (other than underwriting discounts) expected to be incurred by Kinder Morgan Management, LLC (the "Company") in connection with the issuance and distribution of the securities being registered. With the exception of the Securities and Exchange Commission registration fee, the NASD filing fee and the securities exchange listing fee, the amounts shown below are estimates: Securities and Exchange Commission registration fee......... $ 156,472 NASD filing fee............................................. 30,500 Securities exchange listing fee............................. 62,450 Printing and engraving expenses............................. 650,000 Legal fees and expenses..................................... 2,000,000 Accounting fees and expenses................................ 600,000 Blue Sky fees and expenses.................................. 25,000 Transfer agent and registrar fees........................... 50,000 Miscellaneous............................................... 425,578 ---------- TOTAL............................................. $4,000,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS (FORM S-1; ITEM 15 OF FORM S-3). Kinder Morgan Management, LLC Section 18-108 of the Delaware Limited Liability Act provides that, subject to such standards and restrictions, if any, as are set forth in its limited liability company agreement, a limited liability company may, and shall have the power to, indemnify and hold harmless any member or manager or other person from and against any and all claims and demands whatsoever. The Company's limited liability company agreement provides that the Company will indemnify the members of the board and the officers of the Company from liabilities arising in the course of such persons' service to the Company, provided that the indemnitee acted in good faith and in a manner which such indemnitee believed to be in or not opposed to the best interests of the Company and, with respect to any criminal proceeding, had no reasonable cause to believe such indemnitee's conduct was unlawful. Such liabilities include all losses, claims, damages, expenses (including, without limitation, legal fees and expenses), judgments, fines, penalties, interests, settlements and other amounts, provided that with respect to any criminal proceeding, the indemnitee had no reasonable cause to believe its conduct was unlawful. The Company expects to be included within the same coverage available to Kinder Morgan G.P., Inc. for directors' and officers' liability insurance for potential liability under such indemnification. The holders of shares will not be personally liable for such indemnification. KINDER MORGAN ENERGY PARTNERS, L.P. Section 17-108 of the Delaware Limited Partnership Act provides that, subject to such standards and restrictions, if any, as are set forth in its partnership agreement, a limited partnership may, and shall have the power to, indemnify and hold harmless any partner or other person from and against any and all claims and demands whatsoever. The Partnership Agreement for Kinder Morgan Energy Partners, L.P. ("Kinder Morgan Energy Partners, L.P.") provides that Kinder Morgan Energy Partners, L.P. will indemnify any person who is or was an officer or director of Kinder Morgan G.P., Inc. (the "KM General Partner") or any departing partner, to the fullest extent permitted by law. In addition, Kinder Morgan Energy Partners, L.P. II-1 144 may indemnify, to the extent deemed advisable by the KM General Partner and to the fullest extent permitted by law, any person who is or was serving at the request of the KM General Partner or any affiliate of the KM General Partner or any departing partner as an officer or director of the KM General Partner, a departing partner or any of their Affiliates (as defined in Kinder Morgan Energy Partners, L.P. Partnership Agreement) ("Indemnitees") from and against any and all losses, claims, damages, liabilities (joint or several), expenses (including, without limitation, legal fees and expenses), judgement, fines, settlements 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 an officer or director or a person serving at the request of Kinder Morgan Energy Partners, L.P. in another entity in a similar capacity, provided that in each case the Indemnitee acted in good faith and in a manner which such Indemnitee believed to be in or not opposed to the best interests of Kinder Morgan Energy Partners, L.P. and, with respect to any criminal proceeding, had no reasonable cause to believe its conduct was unlawful. Any indemnification under these provisions will be only out of the assets of Kinder Morgan Energy Partners, L.P. and the KM General Partner shall not be personally liable for, or have any obligation to contribute or loan funds or assets to Kinder Morgan Energy Partners, L.P. to enable it to effectuate such indemnification. Kinder Morgan Energy Partners, L.P. is authorized to purchase (or to reimburse the KM General Partner or its affiliates for the cost of) insurance against liabilities asserted against and expenses incurred by such person to indemnify such person against such liabilities under the provisions described above. Article XII(c) of the Certificate of Incorporation of the KM General Partner (the "corporation" therein), contains the following provisions relating to indemnification of directors and officers: "(c) Each director and each officer of the corporation (and such holder's heirs, executors and administrators) shall be indemnified by the corporation against expenses reasonably incurred by him in connection with any claim made against him or any action, suit or proceeding to which he may be made a party, by reason of such holder being or having been a director or officer of the corporation (whether or not he continues to be a director or officer of the corporation at the time of incurring such expenses), except in cases where the claim made against him shall be admitted by him to be just, and except in cases where such action, suit or proceeding shall be settled prior to the adjudication by payment of all or a substantial part of the amount claimed, and except in cases in which he shall be adjudged in such action, suit or proceeding to be liable or to have been derelict in the performance of such holder's duty as such director or officer. Such right of indemnification shall not be exclusive of other rights to which he may be entitled as a matter of law." Officers and directors of the KM General Partner who are also officers and directors of Kinder Morgan, Inc. are entitled to similar indemnification from Kinder Morgan, Inc. pursuant to Kinder Morgan, Inc.'s certificate of incorporation and bylaws. KINDER MORGAN, INC. Section 17-6305 of the Kansas General Corporation Law provides that a Kansas corporation shall have power to indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action or suit (including an action by or in the right of the corporation to procure a judgment in its favor) or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit by or in the right of the II-2 145 corporation, including attorney fees, and against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, including attorney fees, if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation; and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. Article Ninth of Kinder Morgan, Inc.'s articles of incorporation requires it to provide substantially the same indemnification of its directors and officers as that authorized by Kansas General Corporation Law. Kinder Morgan, Inc. has insurance policies which, among other things, include liability insurance coverage for directors and officers, with a $200,000 corporation reimbursement deductible clause, under which directors and officers are covered against "loss" arising from any claim or claims which may be made against a director or officer by reason of any "wrongful act" in their respective capacities as directors and officers. "Loss" is defined so as to exclude, among other things, fines or penalties, as well as matters deemed uninsurable under the law pursuant to which the policy is to be construed. "Wrongful act" is defined to include any actual or alleged breach of duty, neglect, error, misstatement, misleading statement or omission done or wrongfully attempted. The policy also contains other specific definitions and exclusions and provides an aggregate of more than $20,000,000 of insurance coverage. Kinder Morgan Management, LLC, KINDER MORGAN ENERGY PARTNERS, L.P., AND KINDER MORGAN, INC. The Form of Underwriting Agreement filed herewith as Exhibit 1.1, under certain circumstances, provides for indemnification by the underwriters of the directors, officers and controlling persons of the Company, Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc. Each of the Company, Kinder Morgan Energy Partners, L.P., and Kinder Morgan, Inc. has purchased liability insurance policies covering the members or directors, as the case may be, and officers of each of the respective entities, including, to provide protection where the entity cannot legally indemnify a director or officer and where a claim arises under the Employee Retirement Income Security Act of 1974 against a director or officer based on an alleged breach of fiduciary duty or other wrongful act. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (FORM S-1 ONLY). The Company's sole voting share was sold to Kinder Morgan G.P., Inc. on February 16, 2001. Such sale was completed without registration under the Securities Act in reliance upon the exemption provided by Section 4(2) of the Securities Act. ITEM 16. EXHIBITS (BOTH FORMS S-1 AND S-3) AND FINANCIAL STATEMENT SCHEDULES (FORM S-1 ONLY). (a) Exhibits: Unless otherwise indicated, all exhibits are filed herewith. 1.1* Form of Underwriting Agreement. 3.1* Form of Certificate of Formation of the Company. 3.2 Form of Amended and Restated Limited Liability Company Agreement of the Company. 4.1 Form of certificate representing shares of the Company. 4.2 Form of certificate representing the common units of Kinder Morgan Energy Partners, L.P. (filed as Exhibit 4 to Kinder Morgan Energy Partners, L.P.'s Registration Statement on Form S-1 (File No. 33-48142) and incorporated by reference herein). 4.3 Form of certificate representing the i-units of Kinder Morgan Energy Partners, L.P. (included as an exhibit to the Third Amended and Restated Agreement of Limited Partnership filed as Exhibit 4.7 hereto).
II-3 146 4.4 Form of Purchase Provisions between the Company and Kinder Morgan, Inc. (included as Annex B to the Amended and Restated Limited Liability Company Agreement filed as Exhibit 3.2 hereto). 4.5 Form of Exchange Provisions between the Company and Kinder Morgan, Inc. (included as Annex A to the Amended and Restated Limited Liability Company Agreement filed as Exhibit 3.2 hereto). 4.6 Form of Registration Rights Agreement between Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc. 4.7 Form of Third Amended and Restated Agreement of Limited Partnership of Kinder Morgan Energy Partners, L.P. 5 Opinion of Bracewell & Patterson, L.L.P. as to the legality of the securities being offered. 8 Opinion of Bracewell & Patterson, L.L.P. as to certain federal income tax matters. 10.1 Form of Tax Indemnity Agreement between the Company and Kinder Morgan, Inc. 10.2 Form of Delegation of Control Agreement among Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. Kinder Morgan Energy Partners, L.P. and its operating partnerships. 23.1 Consent of Bracewell & Patterson, L.L.P. (included in their opinions filed as Exhibits 5 and 8). 23.2 Consent of PricewaterhouseCoopers LLP. 23.3 Consent of PricewaterhouseCoopers LLP. 23.4 Consent of PricewaterhouseCoopers LLP. 23.5 Consent of Arthur Andersen LLP. 23.6 Consent of Arthur Andersen LLP. 23.7 Consent of Ernst & Young LLP. 24.1* Powers of Attorney with respect to the Company. 24.2* Powers of Attorney with respect to Kinder Morgan Energy Partners, L.P. 24.3* Powers of Attorney with respect to Kinder Morgan, Inc.
- --------------- * Previously filed. (b) Financial Statement Schedules of Kinder Morgan Management, LLC. All financial statement schedules are omitted because the information is not required, is inapplicable, is not material or is otherwise included in the financial statements or related notes thereto. ITEM 17. UNDERTAKINGS (BOTH FORMS S-1 AND S-3). Kinder Morgan Management, LLC (a) Kinder Morgan Management, LLC hereby undertakes to provide at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of Kinder Morgan Management, LLC under the foregoing provisions, or otherwise, Kinder Morgan Management, LLC has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Kinder Morgan Management, LLC in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, Kinder Morgan Management, LLC will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-4 147 (c) Kinder Morgan Management, LLC hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by Kinder Morgan Management, LLC under Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. KINDER MORGAN ENERGY PARTNERS, L.P. AND KINDER MORGAN, INC. (a) Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc. each hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc. each hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of their respective annual reports pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of each of Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc. pursuant to the foregoing or otherwise, each company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than payment by the respective company of expenses incurred or paid by a director, officer or controlling person of the respective company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the respective company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-5 148 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement on Form S-3 or amendment thereto to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, State of Texas on April 27, 2001. KINDER MORGAN ENERGY PARTNERS, L.P. (A Delaware Limited Partnership) By: Kinder Morgan G.P., Inc. as General Partner By: /s/ JOSEPH LISTENGART ---------------------------------- Joseph Listengart Vice President, General Counsel and Secretary ------------------------ Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form S-3 or amendment thereto has been signed below by the following persons in the indicated capacities on April 27, 2001:
SIGNATURE TITLE --------- ----- /s/ RICHARD D. KINDER Director, Chairman of the Board and Chief - --------------------------------------------------- Executive Officer of Kinder Morgan G.P., Inc. Richard D. Kinder (Principal Executive Officer) /s/ WILLIAM V. MORGAN* Director, Vice Chairman of the Board and - --------------------------------------------------- President of Kinder Morgan G.P., Inc. William V. Morgan /s/ GARY L. HULTQUIST* Director of Kinder Morgan G.P., Inc. - --------------------------------------------------- Gary L. Hultquist /s/ PERRY M. WAUGHTAL* Director of Kinder Morgan G.P., Inc. - --------------------------------------------------- Perry M. Waughtal /s/ C. PARK SHAPER Vice President, Treasurer and Chief Financial - --------------------------------------------------- Officer of Kinder Morgan G.P., Inc. (Principal C. Park Shaper Financial Officer and Principal Accounting Officer) (Constituting a majority of the Board of Directors) *By: /s/ JOSEPH LISTENGART --------------------------------------------- Joseph Listengart Attorney-in-fact for persons indicated
II-6 149 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement on Form S-3 or amendment thereto to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, State of Texas on April 27, 2001. KINDER MORGAN, INC. By: /s/ JOSEPH LISTENGART ------------------------------------ Joseph Listengart Vice President, General Counsel and Secretary ------------------------ Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form S-3 or amendment thereto has been signed below by the following persons in the indicated capacities on April 27, 2001:
SIGNATURE TITLE --------- ----- /s/ EDWARD H. AUSTIN, JR.* Director - --------------------------------------------------- Edward H. Austin, Jr. /s/ STEWART A. BLISS* Director - --------------------------------------------------- Stewart A. Bliss /s/ RICHARD D. KINDER Director, Chairman and Chief Executive Officer - --------------------------------------------------- (Principal Executive Officer) Richard D. Kinder /s/ WILLIAM V. MORGAN Director, Vice Chairman and President - --------------------------------------------------- William V. Morgan /s/ EDWARD RANDALL, III* Director - --------------------------------------------------- Edward Randall, III /s/ C. PARK SHAPER Vice President and Chief Financial Officer - --------------------------------------------------- (Principal Financial and Accounting Officer) C. Park Shaper /s/ H. A. TRUE, III* Director - --------------------------------------------------- H. A. True, III (Constituting a majority of the Board of Directors) * By: /s/ JOSEPH LISTENGART -------------------------------------------- Joseph Listengart Attorney-in-fact for persons indicated
II-7 150 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement on Form S-1 or amendment thereto to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, State of Texas on April 27, 2001. Kinder Morgan Management, LLC By: /s/ JOSEPH LISTENGART ------------------------------------ Joseph Listengart Vice President, General Counsel and Secretary ------------------------ Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form S-1 or amendment thereto has been signed below by the following persons in the indicated capacities on April 27, 2001:
SIGNATURE TITLE --------- ----- /s/ RICHARD D. KINDER Director, Chairman and Chief Executive Officer - --------------------------------------------------- (Principal Executive Officer) Richard D. Kinder /s/ WILLIAM V. MORGAN* Director, Vice Chairman of the Board and - --------------------------------------------------- President William V. Morgan /s/ GARY L. HULTQUIST* Director - --------------------------------------------------- Gary L. Hultquist* /s/ PERRY M. WAUGHTAL* Director - --------------------------------------------------- Perry M. Waughtal* /s/ C. PARK SHAPER Vice President, Treasurer and Chief Financial - --------------------------------------------------- Officer C. Park Shaper Kinder Morgan, Inc. Director By: /s/ C. PARK SHAPER --------------------------------------------- C. Park Shaper Vice President and Chief Financial Officer (Constituting a majority of the Board of Directors) *By: /s/ JOSEPH LISTENGART --------------------------------------------- Joseph Listengart Attorney-in-fact for persons indicated
II-8 151 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1* Form of Underwriting Agreement. 3.1* Form of Certificate of Formation of the Company. 3.2 Form of Amended and Restated Limited Liability Company Agreement of the Company. 4.1 Form of certificate representing shares of the Company. 4.2 Form of certificate representing the common units of Kinder Morgan Energy Partners, L.P. (filed as Exhibit 4 to Kinder Morgan Energy Partners, L.P.'s Registration Statement on Form S-1 (File No. 33-48142) and incorporated by reference herein). 4.3 Form of certificate representing the i-units of Kinder Morgan Energy Partners, L.P. (included as an exhibit to the Third Amended and Restated Agreement of Limited Partnership filed as Exhibit 4.7 hereto). 4.4 Form of Purchase Provisions between the Company and Kinder Morgan, Inc. (included as Annex B to the Amended and Restated Limited Liability Company Agreement filed as Exhibit 3.2 hereto). 4.5 Form of Exchange Provisions between the Company and Kinder Morgan, Inc. (included as Annex A to the Amended and Restated Limited Liability Company Agreement filed as Exhibit 3.2 hereto). 4.6 Form of Registration Rights Agreement between Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc. 4.7 Form of Third Amended and Restated Agreement of Limited Partnership of Kinder Morgan Energy Partners, L.P. 5 Opinion of Bracewell & Patterson, L.L.P. as to the legality of the securities being offered. 8 Opinion of Bracewell & Patterson, L.L.P. as to certain federal income tax matters. 10.1 Form of Tax Indemnity Agreement between the Company and Kinder Morgan, Inc. 10.2 Form of Delegation of Control Agreement among Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. and Kinder Morgan Energy Partners, L.P. and Its operating partnerships. 23.1 Consent of Bracewell & Patterson, L.L.P. (included in their opinions filed as Exhibits 5 and 8). 23.2 Consent of PricewaterhouseCoopers LLP. 23.3 Consent of PricewaterhouseCoopers LLP. 23.4 Consent of PricewaterhouseCoopers LLP. 23.5 Consent of Arthur Andersen LLP. 23.6 Consent of Arthur Andersen LLP. 23.7 Consent of Ernst & Young LLP. 24.1* Powers of Attorney with respect to the Company. 24.2* Powers of Attorney with respect to Kinder Morgan Energy Partners, L.P. 24.3* Powers of Attorney with respect to Kinder Morgan, Inc.
- --------------- * Previously filed. EX-3.2 2 h84143a2ex3-2.txt FORM OF AMENDED LIMITED LIABILITY COMPANY AGRMT 1 EXHIBIT 3.2 AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF KINDER MORGAN MANAGEMENT, LLC Dated as of [__________ __], 2001 2 AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF KINDER MORGAN MANAGEMENT, LLC A DELAWARE LIMITED LIABILITY COMPANY TABLE OF CONTENTS ARTICLE 1 DEFINITIONS.................................................................................... 1 1.1 Definitions.................................................................................... 1 1.2 Construction................................................................................... 7 ARTICLE 2 ORGANIZATION................................................................................... 8 2.1 Continuation................................................................................... 8 2.2 Name........................................................................................... 8 2.3 Registered Office; Registered Agent; Principal Office; Other Offices........................... 8 2.4 Purpose; Powers................................................................................ 8 2.5 Foreign Qualification.......................................................................... 8 2.6 Power of Attorney.............................................................................. 9 2.7 Term........................................................................................... 9 2.8 Taxation as Corporation; No State-Law Partnership.............................................. 9 2.9 Title to Company Assets........................................................................ 9 ARTICLE 3 SHAREHOLDERS; CERTIFICATES; TRANSFER OF COMPANY SECURITIES................................... 10 3.1 Shareholders.................................................................................. 10 3.2 No Liability to Third Parties................................................................. 10 3.3 No Expulsion.................................................................................. 10 3.4 Certificates.................................................................................. 10 3.5 Register, Registration of Transfer and Exchange............................................... 11 3.6 Mutilated, Destroyed, Lost or Stolen Certificates............................................. 12 ARTICLE 4 AUTHORIZATION AND ISSUANCE OF COMPANY SECURITIES.............................................. 13 4.1 Company Securities............................................................................ 13 4.2 Voting Shares................................................................................. 14 4.3 Listed Shares................................................................................. 16 4.4 Splits and Combinations....................................................................... 19 4.5 Withholding................................................................................... 19 ARTICLE 5 MANAGEMENT.................................................................................... 20 5.1 Management of the Company's Affairs........................................................... 20 5.2 Board of Directors............................................................................ 20 5.3 Restrictions on the Board of Directors' Authority............................................. 22 5.4 Officers...................................................................................... 22 5.5 Compensation.................................................................................. 24 5.6 Business Opportunities........................................................................ 25 5.7 Interested Officers or Directors.............................................................. 25
-i- 3 5.8 Duties of Record Holders of Voting Shares and Directors....................................... 26 5.9 Indemnification............................................................................... 26 5.10 Liability of Indemnitees...................................................................... 28 5.11 Facsimile Signatures.......................................................................... 28 ARTICLE 6 BOOKS AND RECORDS, INFORMATION AND ACCOUNTS................................................... 29 6.1 Maintenance of Books and Records.............................................................. 29 6.2 Information................................................................................... 29 6.3 Accounts...................................................................................... 29 ARTICLE 7 DISSOLUTION, WINDING-UP AND TERMINATION....................................................... 29 7.1 Dissolution................................................................................... 29 7.2 Winding-Up and Termination.................................................................... 30 ARTICLE 8 AMENDMENT OF AGREEMENT; SHAREHOLDER MEETINGS; RECORD DATE..................................... 30 8.1 Amendment Procedures.......................................................................... 30 8.2 Meetings...................................................................................... 31 8.3 Notice of a Meeting........................................................................... 31 8.4 Record Date................................................................................... 31 8.5 Adjournment................................................................................... 31 8.6 Waiver of Notice; Approval of Meeting; Approval of Minutes.................................... 31 8.7 Quorum; Voting................................................................................ 32 8.8 Special Voting Requirements................................................................... 32 8.9 Conduct of Meeting............................................................................ 32 8.10 Action Without a Meeting...................................................................... 32 8.11 Voting and Other Rights....................................................................... 33 ARTICLE 9 COVENANTS..................................................................................... 33 ARTICLE 10 GENERAL PROVISIONS............................................................................ 34 10.1 Fiscal Year................................................................................... 34 10.2 Offset........................................................................................ 34 10.3 Notices....................................................................................... 34 10.4 Entire Agreement.............................................................................. 34 10.5 Waiver........................................................................................ 34 10.6 Binding Effect................................................................................ 34 10.7 Governing Law; Severability................................................................... 34 10.8 Further Action................................................................................ 35 10.9 No Right to Action for Dissolution or Partition............................................... 35 10.10 Third-Party Beneficiaries..................................................................... 35 10.11 Creditors..................................................................................... 35 10.12 Counterparts.................................................................................. 35 ANNEX A - Exchange Provisions ANNEX B - Purchase Provisions ANNEX C - Delegation of Control Agreement
-ii- 4 AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF KINDER MORGAN MANAGEMENT, LLC This Amended and Restated Limited Liability Company Agreement of Kinder Morgan Management, LLC, a Delaware limited liability company (the "Company"), dated as of [__________ __], 2001, is adopted, executed and agreed to, for good and valuable consideration, by and among Kinder Morgan G.P., Inc., a Delaware corporation (the "Organizational Shareholder"), and any other Persons (as defined below) who become Shareholders (as defined below) of the Company or parties hereto as provided herein. ARTICLE 1 Definitions 1.1 Definitions. As used in this Agreement, except as defined otherwise in the Exchange Provisions and the Purchase Provisions (within each of which the definitions in which shall control), the following terms shall have the following respective meanings: "Act" means the Delaware Limited Liability Company Act, as amended from time to time, and any successor to such statute. "Affiliate" means, with respect to any Person, any other Person that directly or indirectly controls, is controlled by or is under common control with, the Person in question. As used in this definition of "Affiliate," the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. "Agreement" means this Amended and Restated Limited Liability Company Agreement, including the Exchange Provisions and the Purchase Provisions, as amended, supplemented or restated from time to time. "Assignee" means a Person to whom one or more Company Securities have been transferred in a manner permitted under this Agreement. "Average Market Price" means, except as otherwise provided in the Purchase Provisions, the average Closing Price of a Listed Share during the ten consecutive Trading Days prior to the applicable ex-dividend date, but not including that date. For the purpose of this definition, the term "ex-dividend date" means the date on which "ex-dividend" trading commences for a Share Distribution on the principal National Securities Exchange on which the Listed Shares are then listed. "Bankruptcy" or "Bankrupt" means, with respect to any Person, that (a) such Person (i) makes a general assignment for the benefit of creditors; (ii) files a voluntary petition in bankruptcy; (iii) is insolvent or has entered against such Person an order for relief in any 5 bankruptcy or insolvency proceeding; (iv) files a petition or answer seeking for such Person any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any Law; (v) files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against such Person in a proceeding of the type described in subclauses (i) through (iv) of this clause (a); or (vi) seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator of such Person or of all or any substantial part of such Person's properties; or (b) 120 days have passed after the commencement of any proceeding seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any Law, if the proceeding has not been dismissed, or 90 days have passed after the appointment without such Person's consent or the acquiescence of a trustee, receiver or liquidator of such Person or of all or any substantial part of such Person's properties, if the appointment is not vacated or stayed, or 90 days have passed after the date of expiration of any such stay, if the appointment has not been vacated. "Beneficial Owner" has the meaning set forth in Rules 13d-3 and 13d-5 under the Exchange Act, as in effect on the date of this Agreement, and the terms "Beneficial Ownership," "Beneficially Own," "Beneficially Owned" and similar terms have correlative meanings. "Board of Directors" has the meaning assigned to it in Subsection 5.1(a). "Business Day" means any day other than a Saturday, a Sunday or a day on which national banking associations in the State of New York or the State of Texas are closed. "Certificate" has the meaning assigned to it in Subsection 3.4(a). "Chairman of the Board" has the meaning assigned to it in Subsection 5.2(g). "Class B Unit" has the meaning assigned to it in the Partnership Agreement. "Closing Date" means the date of the sale by the Company of Listed Shares to the Underwriters pursuant to the Underwriting Agreement. "Closing Price" means (a) for securities that are listed on a National Securities Exchange, the last sale price for that day, regular way, or, if there are no sales on that day, the average of the closing bid and asked prices for that day, regular way, in either case as reported in the principal composite transactions reporting system for the principal National Securities Exchange on which the securities are listed; or (b) for securities that are not listed on a National Securities Exchange, (i) the last quoted price on that day, or if no price is quoted, the average of the high bid and low asked prices on that day, each as reported by the NASDAQ; (ii) if on that day the securities are not so quoted, the average of the closing bid and asked prices on that day furnished by a professional market maker in the securities selected by the Board of Directors in its sole discretion; or (iii) if on that day no market maker is making a market in the securities, the fair value of the securities as determined by the Board of Directors in its sole discretion. "Code" means the United States Internal Revenue Code of 1986, as amended from time to time and as interpreted by the applicable regulations thereunder. All references herein to a -2- 6 specific section or sections of the Code shall be deemed to include a reference to any corresponding provision or provisions of future Law. "Common Unit" has the meaning assigned to it in the Partnership Agreement. "Company" means Kinder Morgan Management, LLC, a Delaware limited liability company. "Company Securities" means the shares into which the interest in the Company is divided and includes Voting Shares, Listed Shares and any other shares that may be approved in accordance with Subsection 4.1(a), as the context requires. "Delegation of Control Agreement" means the Delegation of Control Agreement dated as of [___________ __], 2001 among the Organizational Shareholder, KMEP, the Operating Partnerships and the Company, attached hereto as Annex C, as amended, supplemented or restated from time to time. "Director" means a member of the Board of Directors elected as provided in Section 5.2, but such term does not include any Person who has ceased to be a member of the Board of Directors. Directors are "managers" (as such term is defined in the Act) of the Company. "Dissolution Event" has the meaning assigned to it in Subsection 7.1(a). "Entity" means a corporation, limited liability company, venture, partnership, trust, unincorporated organization, association or other entity. "Exchange Act" means the United States Securities Exchange Act of 1934, as amended from time to time, and any successor to such statute and all rules and regulations promulgated thereunder. "Exchange Provisions" means the Exchange Provisions executed and adopted by KMI and attached hereto as Annex A, as amended, supplemented or restated from time to time, which are an integral part of this Agreement. "Group" means a "group" of Persons as defined in Section 13(d)(3) of the Exchange Act. "Indemnitees" means (a) the Record Holders of Voting Shares; (b) any Person who is or was an Affiliate of the Record Holders of Voting Shares; (c) any Person who is or was an officer, director, employee, partner, agent or trustee of the Record Holders of Voting Shares, the Company or any of their respective Affiliates; or (d) any Person who is or was serving at the request of the Record Holders of Voting Shares, the Company or any of their respective Affiliates as a director, officer, employee, partner, agent or trustee of another Person. "Initial Public Offering" means the consummation of the first underwritten public offering of Listed Shares pursuant to an effective registration statement filed under the Securities Act, as underwritten by the Underwriters pursuant to the Underwriting Agreement. -3- 7 "I-Unit" has the meaning assigned to it in the Partnership Agreement. "KMEP" means Kinder Morgan Energy Partners, L.P., a Delaware limited partnership. "KMI" means Kinder Morgan, Inc., a Kansas corporation, and its successor by merger, consolidation or acquisition of all or substantially all of its assets. "Law" means any applicable constitutional provision, statute, act, code (including the Code), law, regulation, rule, ordinance, order, decree, ruling, proclamation, resolution, judgment, decision, declaration or interpretative or advisory opinion or letter of a governmental authority, and includes any applicable rule of any National Securities Exchange on which Company Securities are traded or listed. "Listed Share" has the meaning assigned to it in Subsection 4.1(a). "NASDAQ" means the National Association of Securities Dealers Automatic Quotation System. "National Securities Exchange" means an exchange registered with the Securities and Exchange Commission under Section 6(a) of the Exchange Act. "Officer" means any Person elected as an officer of the Company as provided in Section 5.4, but such term does not include any Person who has ceased to be an officer of the Company. Officers are "managers" (as such term is defined in the Act) of the Company. "Operating Partnerships" has the meaning assigned to it in the Partnership Agreement. "Opinion of Counsel" means a written opinion of counsel (who may be regular counsel to the Company or any Affiliate thereof) acceptable to the Board of Directors, any committee thereof or any Officer. "Organizational Certificate" has the meaning assigned to it in Section 2.1. "Organizational Shareholder" means Kinder Morgan G.P., Inc., a Delaware corporation. "Outstanding" means, with respect to any Company Securities and any Units, all Company Securities or Units that are issued by the Company or KMEP, respectively, and reflected as outstanding on the books and records of the Company (including the Transfer Agent) or KMEP (including any transfer agent), respectively, as of the date of determination, excluding Company Securities and Units held in the treasury; provided, however, that if any Listed Shares are Beneficially Owned: (a) by any Person or Group, excluding the Record Holders of Voting Shares and their Affiliates, if the sum of the number of Listed Shares Beneficially Owned by such Person or Group plus the number of Common Units Beneficially Owned by such -4- 8 Person or Group equals 20% or more of the sum of the aggregate number of Listed Shares that are issued by the Company and reflected as outstanding on the books and records of the Company (including the Transfer Agent) as of the date of determination, but not including Listed Shares held in the treasury, plus the aggregate number of Common Units that are issued by KMEP and reflected as outstanding on the books and records of KMEP (including any transfer agent) as of the date of determination, but not including Common Units held in the treasury; or (b) by the Record Holders of Voting Shares or their Affiliates with respect to (i) a matter that is presented to the Record Holders of Listed Shares pursuant to Subsection 4.3(c) in order to determine the manner in which I-Units shall be voted with respect to (A) the proposed removal of the general partner of KMEP, (B) any vote required to be taken under Subsection 11.2(a) of the Partnership Agreement with respect to the transfer of all, but not less than all, of the Partnership Interest (as defined in the Partnership Agreement) of the general partner of KMEP and the admission of any such transferee as a general partner of KMEP, (C) a proposed amendment to the terms of the I-Units pursuant to Subsection 15.2 of the Partnership Agreement that would have a material adverse effect on the rights and preferences of the I-Units in relation to other classes of Units, as determined in the sole discretion of the Board of Directors, or (D) the proposed withdrawal of the general partner of KMEP pursuant to Section 13.1(b) of the Partnership Agreement, or (ii) a matter that the Record Holders of Listed Shares vote upon pursuant to Subsection 4.3(d), then such Listed Shares so Beneficially Owned pursuant to clauses (a) and (b) above shall not be considered to be Outstanding for the purposes of Subsections 7.1(a)(ii) and 7.1(a)(iii) and Articles 8 and 9. "Partnership Agreement" means the Third Amended and Restated Agreement of Limited Partnership of KMEP dated as of [__________ __], 2001, as amended, supplemented or restated from time to time. "Partnerships" means KMEP and the Operating Partnerships. "Person" means a natural person or an Entity. "Purchase Provisions" means the Purchase Provisions executed and adopted by KMI and attached hereto as Annex B, as amended, supplemented or restated from time to time, which are an integral part of this Agreement. "Record Date" means the date established by the Board of Directors for determining (a) the identity of the Record Holders entitled to notice of, or to vote at, any meeting of the Shareholders or entitled to vote by ballot or give approval of a Company action in writing without a meeting or entitled to exercise rights in respect of any lawful action of the Shareholders, (b) the identity of the Record Holders entitled to notice with respect to any other matter, or (c) the identity of the Record Holders entitled to receive any distribution, including a Share Distribution. -5- 9 "Record Holder" means the Person in whose name a Company Security is registered on the books and records of the Company or the Transfer Agent as contemplated in Section 3.5. "Registration Rights Agreement" means the Registration Rights Agreement dated as of [___________ __], 2001 among KMEP, KMI and the Company, as amended, supplemented or restated from time to time. "Securities Act" means the United States Securities Act of 1933, as amended from time to time, and any successor to such statute and all rules and regulations promulgated thereunder. "Securities and Exchange Commission" means the Securities and Exchange Commission of the United States and any successor thereto. "Share Distribution" means a distribution in respect of a Company Security made or required to be made in an additional Company Security or a fraction thereof to any Shareholder pursuant to the terms of the Company Securities held by such Shareholder. "Shareholder" means any Person admitted as a shareholder in accordance with Subsection 3.1(a), but such term does not include any Person who has ceased to be a Record Holder of any Company Security. Shareholders are "members" (as such term is defined in the Act) of the Company. "Shareholder Interest" means a limited liability company interest (as such term is defined in the Act) of a Shareholder, including the right to receive Share Distributions and other distributions from the Company, together with all other rights, benefits and privileges enjoyed by the Shareholder (under the Act, the Organizational Certificate, this Agreement or otherwise) in its capacity as a Shareholder, including the right to vote, consent and approve, and all obligations, duties and liabilities imposed on the Shareholder (under the Act, the Organizational Certificate, this Agreement or otherwise) in its capacity as a Shareholder. "Tax Indemnification Agreement" means the Tax Indemnification Agreement dated as of [____________ __], 2001 between KMI and the Company, as amended, supplemented or restated from time to time. "Trading Day" means, with respect to Listed Shares or Common Units, a day on which the principal National Securities Exchange on which the Listed Shares or Common Units, as the case may be, are listed is open for business or, if the Listed Shares or Common Units, as the case may be, are not listed on any National Securities Exchange, a day on which banking institutions in New York, New York generally are open. "Transfer Agent" means any bank, trust company or other Person (including the Company or any Affiliate) appointed from time to time by the Board of Directors to act as registrar and transfer agent for the Company Securities. Initially, EquiServe Trust Company, N.A. shall be the Transfer Agent for the Listed Shares. -6- 10 "Treasury Regulations" means the regulations promulgated by the United States Department of the Treasury pursuant to and in respect of provisions of the Code. All references herein to sections of the Treasury Regulations shall include any corresponding provisions of succeeding, similar, substitute, proposed or final Treasury Regulations. "Underwriters" means Goldman, Sachs & Co., Credit Suisse First Boston Corporation, Lehman Brothers Inc., Dain Rauscher Incorporated, and First Union Securities, Inc., as representatives of the several underwriters named in Schedule I to the Underwriting Agreement. "Underwriting Agreement" means the Underwriting Agreement dated as of [_______ __], 2001 among the Underwriters, the Company, the Organizational Shareholder, KMI and KMEP, providing for the purchase of Listed Shares by the Underwriters, as amended, supplemented or restated from time to time. "Unit" has the meaning assigned to it in the Partnership Agreement. "Voting Share" has the meaning assigned to it in Subsection 4.1(a). 1.2 Construction. Unless the context requires otherwise: (a) terms defined in Section 1.1 have the meanings assigned to them in that Section for purposes of this Agreement; terms defined in the Exchange Provisions and also in this Agreement shall in the Exchange Provisions have the meanings ascribed to them therein; and terms defined in the Purchase Provisions and also in this Agreement shall in the Purchase Provisions have the meanings ascribed to them therein; (b) the gender (or lack of gender) of all words used in this Agreement includes the masculine, feminine and neuter; (c) references to Articles, Sections and Subsections (other than in connection with the Code, the Treasury Regulations or the Act) refer to Articles, Sections and Subsections, respectively, of this Agreement; (d) the words "herein," "hereof," "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or Subsection, except as otherwise provided in the Exchange Provisions and the Purchase Provisions; (e) "include," "includes" and "including" mean "include, without limitation," "includes, without limitation" and "including, without limitation," respectively; (f) terms defined herein include the plural as well as the singular; and (g) "or" is not exclusive. -7- 11 ARTICLE 2 Organization 2.1 Continuation. The Company was organized as a Delaware limited liability company by the filing of a Certificate of Formation on February 14, 2001, as amended by a Certificate of Amendment filed on February 16, 2001 (as amended, supplemented or restated from time to time, the "Organizational Certificate"), pursuant to the Act. The Organizational Shareholder, as the initial Shareholder, hereby continues the existence of the Company as a limited liability company pursuant to the provisions of the Act. 2.2 Name. The name of the Company is "Kinder Morgan Management, LLC" and all Company business must be conducted in that name or such other names that comply with Law and as the Board of Directors may select. 2.3 Registered Office; Registered Agent; Principal Office; Other Offices. The registered office of the Company required by the Act to be maintained in the State of Delaware shall be the office of the initial registered agent for service of process named in the Organizational Certificate or such other office (which need not be a place of business of the Company) as the Board of Directors may designate in the manner provided by Law. The registered agent for service of process of the Company in the State of Delaware shall be the initial registered agent for service of process named in the Organizational Certificate or such other Person or Persons as the Board of Directors may designate in the manner provided by Law. The principal office of the Company in the United States shall be located at One Allen Center, Suite 1000, 500 Dallas Street, Houston, Texas 77002, or such other place as the Board of Directors may from time to time designate, which need not be in the State of Delaware, and the Company shall maintain records there and shall keep the street address of such principal office at the registered office of the Company in the State of Delaware. The Company may have such other offices as the Board of Directors may designate. 2.4 Purpose; Powers. The purposes of the Company are to be a limited partner in KMEP, to manage and control, directly or through one or more Affiliates, the business and affairs of KMEP and the Operating Partnerships pursuant to the Delegation of Control Agreement and to engage in any lawful business, purpose or activity related thereto. The Company shall possess and may exercise all the powers and privileges granted by the Act, by any other Law or by this Agreement, together with any powers incidental thereto, including such powers and privileges as are necessary or convenient to the conduct, promotion or attainment of the business, purposes or activities of the Company. 2.5 Foreign Qualification. Prior to the Company's conducting business in any jurisdiction other than Delaware, the Board of Directors shall cause the Company to comply, to the extent procedures are available and those matters are reasonably within the control of the Board of Directors, with all requirements necessary to qualify the Company as a foreign limited liability company in that jurisdiction. -8- 12 2.6 Power of Attorney. (a) Each Shareholder does hereby constitute and appoint each Person specifically authorized by the Board of Directors to act as its true and lawful representative and attorney-in-fact, in its name, place and stead, to make, execute, sign, deliver and file (i) any amendment of the Organizational Certificate; (ii) any amendment to this Agreement, including any amendment to the Exchange Provisions and the Purchase Provisions, made in accordance with the terms of this Agreement; and (iii) all such other instruments, documents and certificates that may from time to time be required by Law to effectuate, implement and continue the valid and subsisting existence of the Company or to dissolve the Company or for any other purpose consistent with this Agreement and the transactions contemplated hereby. (b) The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, and it shall survive and not be affected by the subsequent death, incompetency, disability, incapacity, dissolution, bankruptcy or termination of any Shareholder and the transfer of all or any portion of such Shareholder's Shareholder Interest, and shall extend to all Assignees. Each Shareholder hereby agrees to be bound by any representation made by the Board of Directors or any Person authorized by the Board of Directors acting in good faith pursuant to such power of attorney, and each Shareholder hereby waives any and all defenses that may be available to contest, negate or disaffirm the action of the Board of Directors or such authorized Person taken in good faith under such power of attorney. Each Shareholder shall execute and deliver to the Board of Directors or such authorized Person, within 15 days after receipt of a request therefor from the Board of Directors or such authorized Person, such further designation, powers of attorney and other instruments as the Board of Directors or such authorized Person deems necessary to effectuate this Agreement and the purposes of the Company. 2.7 Term. The term of the Company commenced on February 14, 2001, which was the date of the filing of the Organizational Certificate in the office of the Secretary of State of the State of Delaware, and the Company's existence shall be perpetual, unless and until the Company is dissolved in accordance with Article 7. 2.8 Taxation as Corporation; No State-Law Partnership. The Company shall elect pursuant to Sections 301.7701-2 and 301.7701-3 of the Treasury Regulations to be treated as a corporation for all purposes under the Code. The Shareholders intend that the Company not be a partnership (including a limited partnership) or joint venture, that no Shareholder be a partner or joint venturer of any other Shareholder, and that this Agreement may not be construed to suggest otherwise. 2.9 Title to Company Assets. Title to Company assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Company as an entity, and no Shareholder, Director or Officer, individually or collectively, shall have any ownership interest in such Company assets or any portion thereof. Title to any or all of the Company assets may be held in the name of the Company or one or more of its Affiliates or one or more nominees, as the Board of Directors may determine. All Company assets shall be -9- 13 recorded as the property of the Company in its books and records, irrespective of the name in which record title to such Company assets is held. ARTICLE 3 Shareholders; Certificates; Transfer of Company Securities 3.1 Shareholders. (a) A Person shall be admitted as a Shareholder, and shall become bound by this Agreement, if such Person executes this Agreement or, without such execution, if such Person purchases or otherwise acquires a Company Security and becomes the Record Holder of such Company Security in accordance with the provisions of Section 3.5. Unless otherwise provided in this Agreement, a Person may become a Record Holder without the consent or approval of any of the Shareholders. All rights of Shareholders under this Agreement are owned, and may be exercised, only by Record Holders. (b) The name and mailing address of each Record Holder shall be listed on the books and records of the Company or the Transfer Agent. The Secretary of the Company shall be required to update the books and records from time to time as necessary to reflect accurately the information therein or to cause the Transfer Agent to do so, as applicable. Company Securities shall be represented by the Certificates held by the Shareholders, except as provided in Subsection 3.4(b). 3.2 No Liability to Third Parties. No Record Holder, Shareholder or Beneficial Owner of any Company Security shall be liable for the debts, obligations or liabilities of the Company, whether arising in contract, tort or otherwise, by reason of being a Record Holder, Shareholder or Beneficial Owner. 3.3 No Expulsion. A Shareholder may not be expelled or removed as a Shareholder. 3.4 Certificates. (a) Certificates evidencing any of the Company Securities ("Certificates") shall be in such form, not inconsistent with that required by the Act or any other Law and this Agreement, as shall be approved by the Board of Directors. Each Certificate shall certify the number of Company Securities and the class of such Company Securities which the Certificate represents and shall be signed by (i) the Chairman of the Board, the President or any Vice President and (ii) the Secretary, any Assistant Secretary, the Treasurer or any Assistant Treasurer of the Company and countersigned by the Transfer Agent (in the event that the Company is not the Transfer Agent); provided, however, that any or all of the signatures, including the countersignature, on the Certificate may be facsimile. In the event that any Officer or Transfer Agent who shall have signed, or whose facsimile signature or signatures shall have been placed upon, any such Certificate shall have ceased to be such Officer or Transfer Agent before such Certificate is issued -10- 14 by the Company, such Certificate may nevertheless be issued by the Company with the same effect as if such person were such Officer or Transfer Agent on the date of issue. Certificates for each class of Company Securities shall be consecutively numbered and shall be entered in the books and records of the Company as they are issued and shall exhibit the holder's name and number of Company Securities, except as provided in Subsection 3.4(b). No Certificate shall be valid for any purpose until it has been countersigned by the Transfer Agent (in the event that the Company is not the Transfer Agent). (b) The Company Securities may be represented by global certificates issued in the name of Cede & Co. (or such other name as the depositary may direct), as nominee for the Depositary Trust Company, as depositary for the Company Securities, and Certificates shall not be issued to owners of beneficial interests in global certificates held by the depositary. Any provision herein calling for delivery of Certificates for Company Securities may be satisfied by delivering such Company Securities by book-entry transfer to such owners of beneficial interests at an account maintained for that purpose by the Transfer Agent with the depositary, in accordance with arrangements among the depositary and its participants and subject to the various policies and procedures that may be adopted by the depositary from time to time. 3.5 Register, Registration of Transfer and Exchange. (a) The Company shall keep or cause to be kept on behalf of the Company a register that, subject to any requirement of the Board of Directors and subject to the provisions of Subsection 3.5(b), shall provide for the registration and transfer of Company Securities. The Transfer Agent is hereby appointed registrar and transfer agent for the purpose of registering Company Securities and transfers of Company Securities as herein provided. At any time the Transfer Agent may resign, by notice to the Board of Directors, or may be removed, with or without cause, by the Board of Directors. Such resignation or removal shall be effective upon the earlier of (i) the appointment by the Board of Directors of a successor Transfer Agent and the acceptance by such successor of such appointment, or (ii) the 30th day after notice of such resignation or removal was given, whereupon the Company shall act as the Transfer Agent until a successor is appointed. The Company shall not recognize transfers of Company Securities unless the same are effected in the manner described in this Section 3.5. Upon surrender for registration of transfer of any Certificate, and subject to the provisions of Subsection 3.5(b), the appropriate Officers of the Company shall execute, and the Transfer Agent shall countersign and deliver, in the name of the holder or the designated transferee or transferees, as required pursuant to the Record Holder's instructions, one or more new Certificates evidencing the same aggregate number and type of Company Securities as were evidenced by the Certificate so surrendered. (b) The Company shall not recognize any transfer of Company Securities until (i) the Certificates evidencing such Company Securities are surrendered to the Transfer Agent for registration of transfer or (ii) such Company Securities are delivered by book- entry transfer to the Shareholder in accordance with Section 3.4(b). No charge shall be -11- 15 imposed by the Company for such transfer; provided, however, that, as a condition to the issuance of any new Certificate under this Section 3.5, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge, surety bond premium, special charges for services requested by the transferor or transferee, or similar fees or charges that may be imposed with respect thereto. (c) By transfer of Company Securities in accordance with this Section 3.5, the transferor shall be deemed to have given the transferee the right to be admitted to the Company as a Shareholder, and each transferee of Company Securities (including any nominee holder or an agent acquiring such Company Securities for the account of another Person) shall become a Shareholder with respect to the Company Securities so transferred to such Person when any such transfer and admission is reflected in the books and records of the Transfer Agent, and such Person thereby becomes a Record Holder of such Company Securities. (d) The Company shall be entitled to recognize the Record Holder as the owner of Company Securities and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Company Securities on the part of any other Person, whether or not the Company shall have actual or other notice thereof, except as otherwise provided by Law. Except as otherwise provided in this Agreement or by Law, including the Securities Act, Company Securities shall be freely transferable to any Person. The transfer of any Company Securities and the admission of any new Shareholder shall not constitute an amendment to this Agreement. (e) Any Share Distribution or other distribution in respect of Company Securities shall be made by the Company, directly or through the Transfer Agent or through any other Person or agent, only to the Record Holders thereof as of the Record Date set by the Board of Directors for the Share Distribution or other distribution. The making of such Share Distribution or other distribution shall constitute full payment and satisfaction of the Company's liability in respect of such Share Distribution or other distribution regardless of any claim of any Person who may have an interest in such Share Distribution or other distribution by reason of an assignment or otherwise. 3.6 Mutilated, Destroyed, Lost or Stolen Certificates. (a) If any mutilated Certificate is surrendered to the Transfer Agent, then the appropriate Officers on behalf of the Company shall execute, and upon the Company's request the Transfer Agent shall countersign and deliver in exchange for, a new Certificate evidencing the same aggregate number and type of Company Securities as the Certificate so surrendered. (b) The appropriate Officers on behalf of the Company shall execute, and upon the Company's request the Transfer Agent shall countersign and deliver, a new Certificate in place of any Certificate previously issued if the Record Holder of the Certificate: -12- 16 (i) makes proof by affidavit in form and substance satisfactory to an Officer that a previously issued Certificate has been lost, destroyed or stolen; (ii) requests the issuance of a new Certificate before the Company has notice that the Certificate has been acquired by a purchaser for value in good faith and without notice of an adverse claim; (iii) if requested, delivers to the Company a bond, in form and substance satisfactory to the Company, with surety or sureties and with fixed or open penalty as the Company may reasonably direct, in its sole discretion, to indemnify the Company and the Transfer Agent against any claim that may be made on account of the alleged loss, destruction or theft of the Certificate; and (iv) satisfies any other reasonable requirements imposed by the Company, including the requirement to make a payment pursuant to Subsection 3.6(c). If a Shareholder fails to notify the Company within a reasonable time after such Shareholder has notice of the loss, destruction or theft of a Certificate, and a transfer of the Company Securities represented by the Certificate is registered before the Company or the Transfer Agent receives such notification, the Shareholder shall be precluded from making any claim against the Company or the Transfer Agent for such transfer or for a new Certificate. (c) As a condition to the issuance of any new Certificate under this Section 3.6, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Transfer Agent) reasonably connected therewith. ARTICLE 4 Authorization and Issuance of Company Securities 4.1 Company Securities. (a) The Company shall have authority to issue an unlimited number of Company Securities, including Company Securities with the rights set forth in Section 4.2 (the "Voting Shares") and Company Securities with the rights set forth in Section 4.3, the Exchange Provisions and the Purchase Provisions (the "Listed Shares"). Subject to the requirements of the Act and other applicable Law, the Board of Directors shall have the power to cause the Company to issue additional Listed Shares and Voting Shares. The Board of Directors shall also have the power to cause the Company to issue shares into which the interest in the Company may be further divided other than the Voting Shares and the Listed Shares, subject to the requisite approval by the Record Holders of Listed Shares pursuant to Subsection 4.3(d)(ii). -13- 17 (b) The total number of Company Securities that are issued by the Company and reflected as outstanding on the books and records of the Company (including the Transfer Agent) as of the date of determination, excluding Company Securities held in the treasury, shall at all times equal the number of I-Units held by the Company. If the number of I-Units held by the Company increases or decreases, the Company shall by the same number increase or decrease, as the case may be, the number of Company Securities that are issued by the Company and reflected as outstanding on the books and records of the Company (including the Transfer Agent) as of the date of determination, excluding Company Securities held in the treasury, (i) in the event of an increase in the number of I-Units, by making to each Record Holder of Company Securities a pro rata Share Distribution or by effecting a split of Company Securities pursuant to Section 4.5, or (ii) in the event of a decrease in the number of I-Units, by effecting a combination of Company Securities pursuant to Section 4.5. (c) Company Securities issued as Share Distributions or issued for such consideration as the Board of Directors determines to be appropriate shall be deemed to be fully paid, and except to the extent specified in Section 18-607(b) of the Act, non-assessable if the entire amount of such consideration has been received by the Company for such Company Securities. 4.2 Voting Shares. (a) Prior to the execution of this Agreement, one (1) Voting Share was issued to the Organizational Shareholder. The Organizational Shareholder and its Affiliates shall be the sole Record Holders of Voting Shares. The designations, preferences and relative, participating, optional or other special rights, powers and duties relating to the Voting Shares are as set forth in this Section 4.2. Each Voting Share shall be identical in every respect with each other Voting Share. (b) The Record Holders of Voting Shares shall be entitled to one vote per Voting Share on matters submitted to a vote or consent of the Record Holders of Voting Shares, as provided in Subsection 4.2(d) and elsewhere in this Agreement; provided, however, that neither any Record Holder of Voting Shares nor any of its Affiliates may vote any Voting Shares with respect to a matter that is presented to the Record Holders of Voting Shares pursuant to Subsection 4.2(d) in order to determine the manner in which I-Units shall be voted with respect to (i) the proposed removal of the general partner of KMEP, (ii) any vote required to be taken under Section 11.2(a) of the Partnership Agreement with respect to the transfer of all, but not less than all, of the Partnership Interest (as defined in the Partnership Agreement) of the general partner of KMEP and the admission of any such transferee as a general partner of KMEP, (iii) a proposed amendment to the terms of the I-Units pursuant to Subsection 15.3(c) of the Partnership Agreement that would have a material adverse effect on the rights and preferences of the I-Units in relation to other classes of Units, as determined in the sole discretion of the Board of Directors, or (iv) the proposed withdrawal of the general partner of KMEP pursuant to Section 13.1(b) of the Partnership Agreement. -14- 18 (c) Except as otherwise provided in Subsection 4.1(b) and Section 4.5, a Share Distribution in respect of each Voting Share shall be made only in the event that (i) KMEP makes a cash distribution in respect of each Common Unit and makes a corresponding distribution of an additional I-Unit, or fraction thereof, in respect of each I-Unit, or (ii) in a merger, consolidation, exchange, reorganization, recapitalization or similar transaction the record holders of Common Units and Class B Units receive a cash distribution and the record holder of I-Units receives a corresponding distribution of additional I-Units, or fractions thereof; and no other Share Distribution shall be made in respect of Voting Shares. Such Share Distribution in respect of each Voting Share shall be made on the date on which KMEP makes a cash distribution in respect of each Common Unit. Each such Share Distribution per Voting Share shall be an additional Voting Share, or a fraction thereof, equal to the amount of the cash distribution made by KMEP in respect of each Common Unit divided by the Average Market Price per Listed Share. Except as otherwise provided in Section 7.2, no distribution in respect of Voting Shares shall be made in cash. Each fractional Voting Share that is created as a result of any Share Distribution in respect of Voting Shares pursuant to this Subsection 4.2(c) shall be equal to and represented by a fraction that is calculated to six decimal places (without rounding), and any calculation that would result in a fractional interest in excess of one-millionth (1/1,000,000) of a Voting Share shall be disregarded without payment or other consideration and shall not be accumulated. Each Voting Share or fraction thereof issued as a Share Distribution shall bear a date of original issuance which is the same as the date on which such Share Distribution was made and shall be duly authorized, fully paid and nonassessable. The Company shall identify the Record Holders entitled to receive any Share Distributions pursuant to this Subsection 4.2(c) in accordance with Section 3.5. (d) The Partnership Agreement provides that, except with respect to certain matters, including certain amendments to the Partnership Agreement, the transfer of all, but not less than all, of the Partnership Interest (as defined in the Partnership Agreement) of the general partner of KMEP, the withdrawal of the general partner of KMEP and the treatment of KMEP as an association taxable as a corporation or other entity for federal income tax purposes, I-Units, Class B Units and Common Units are entitled to vote together as a single class, and each I-Unit is entitled to one vote. The Company or the Board of Directors shall submit to the vote of the Record Holders of Voting Shares any matter on which the Company is entitled to vote as a record holder of I-Units in order to ascertain the manner in which such I-Units shall be voted. For each Voting Share or fraction thereof that has been voted "for" the matter presented to the Record Holders of Voting Shares, the Company shall vote one I-Unit or an equivalent fraction "for" such corresponding matter when presented to the record holder of I-Units, such that the number of Voting Shares voted "for" such matter presented to the Record Holders of Voting Shares, in addition to the number of Listed Shares voted "for" such matter presented to the Record Holders of Listed Shares pursuant to Subsection 4.3(c), shall equal the number of I-Units voting "for" such corresponding matter when presented to the record holder of I-Units. For each Voting Share or fraction thereof that has been voted "against" the matter presented to the Record Holders of Voting Shares, the Company shall vote one I-Unit or an equivalent fraction "against" such matter when presented to the record holder of I-Units, such that the number of Voting Shares voted "against" such matter presented to the Record Holders of Voting Shares, in addition to the number of Listed Shares voted -15- 19 "against" such matter presented to the Record Holders of Listed Shares pursuant to Subsection 4.3(c), shall equal the number of I-Units voting "against" such corresponding matter when presented to the record holder of I-Units. For each Voting Share or fraction thereof that has abstained from the vote or has not been voted, whether by broker non-vote or otherwise, on the matter presented to the Record Holders of Voting Shares, the Company shall abstain from voting one I-Unit or an equivalent fraction on such matter when presented to the record holder of I-Units, such that the number of Voting Shares that have abstained from voting or have not been voted on such matter presented to the Record Holders of Voting Shares, in addition to the number of Listed Shares that have abstained from voting or have not been voted on such matter presented to the Record Holders of Listed Shares pursuant to Subsection 4.3(c), shall equal the number of I-Units abstaining from voting on such corresponding matter when presented to the record holder of I-Units. 4.3 Listed Shares. (a) As of the Closing Date, there shall be Outstanding [_________] Listed Shares, and, in the event that the Underwriters exercise their option to purchase additional Listed Shares pursuant to the Underwriting Agreement, there shall be Outstanding up to [_________] Listed Shares. The Listed Shares shall initially be listed on a National Securities Exchange. The designations, preferences and relative, participating, optional or other special rights, powers and duties relating to the Listed Shares are as set forth in this Section 4.3. Each Listed Share shall be identical in every respect with each other Listed Share. (b) The Record Holders of Listed Shares, in their capacity as such, shall not be entitled to vote except that each Record Holder of Listed Shares shall be entitled to one vote per Listed Share on any matter submitted by the Company to the Record Holders of Listed Shares pursuant to Subsections 4.3(c) or (d) or Article 9 of this Agreement, Section 6 of the Exchange Provisions or Section 8 of the Purchase Provisions, subject to Subsection 4.3(e). (c) The Partnership Agreement provides that, except with respect to certain matters, including certain amendments to the Partnership Agreement, the transfer of all, but not less than all, of the Partnership Interest (as defined in the Partnership Agreement) of the general partner of KMEP, the withdrawal of the general partner of KMEP and the treatment of KMEP as an association taxable as a corporation or other entity for federal income tax purposes, the I-Units, Class B Units and Common Units are entitled to vote together as a single class, and each I-Unit is entitled to one vote. The Company or the Board of Directors shall submit to the vote of the Record Holders of Listed Shares entitled to vote any matter on which the Company is entitled to vote as a record holder of I-Units in order to ascertain the manner in which such I-Units shall be voted. For each Listed Share or fraction thereof that has been voted "for" the matter presented to Record Holders of Listed Shares entitled to vote thereon, the Company shall vote one I-Unit or an equivalent fraction "for" such corresponding matter when presented to the record -16- 20 holder of I-Units, such that the number of Listed Shares voted "for" such matter presented to the Record Holders of Listed Shares, in addition to the number of Voting Shares voted "for" such matter presented to the Record Holders of Voting Shares pursuant to Subsection 4.2(d), shall equal the number of I-Units voting "for" such corresponding matter when presented to the record holder of I-Units. For each Listed Share or fraction thereof that has been voted "against" the matter presented to Record Holders of Listed Shares entitled to vote thereon, the Company shall vote one I-Unit or an equivalent fraction "against" such matter when presented to the record holder of I-Units, such that the number of Listed Shares voted "against" such matter presented to the Record Holders of Listed Shares, in addition to the number of Voting Shares voted "against" such matter presented to the Record Holders of Voting Shares pursuant to Subsection 4.2(d), shall equal the number of I-Units voting "against" such corresponding matter when presented to the record holder of I-Units. For each Listed Share or fraction thereof that has abstained from the vote or has not been voted, whether by broker non-vote or otherwise, on the matter presented to Record Holders of Listed Shares entitled to vote thereon, the Company shall abstain from voting one I-Unit or an equivalent fraction on such matter when presented to the record holder of I-Units, such that the number of Listed Shares that have abstained from voting or have not been voted on such matter presented to the Record Holders of Listed Shares, in addition to the number of Voting Shares that have abstained from voting or have not been voted on such matter presented to the Record Holders of Voting Shares pursuant to Subsection 4.2(d), shall equal the number of I-Units abstaining from voting on such corresponding matter when presented to the record holder of I-Units. (d) The Company or the Board of Directors shall submit to the vote of Record Holders of Listed Shares entitled to vote thereon, in addition to the matters referred to in Subsection 4.3(c), (i) any matter for which the approval of the Record Holders of Listed Shares is required pursuant to Article 9, (ii) any proposed issuance of any new shares into which the interest in the Company may be divided other than the Voting Shares and the Listed Shares, and (iii) any proposed amendment to, or alteration or repeal of, this Agreement, including the Exchange Provisions and the Purchase Provisions, the Registration Rights Agreement, the Delegation of Control Agreement, or the Tax Indemnification Agreement if such proposed amendment, alteration or repeal would (A) reduce the time for any notice to which Record Holders of Listed Shares would be entitled, or (B) have a material adverse effect on the Company or the rights or preferences of Listed Shares, as determined in the sole discretion of the Board of Directors; provided, however, that any of the following amendments shall not be deemed to have a material adverse effect on the rights and preferences of Listed Shares: (1) any amendment that is necessary or desirable to comply with applicable Law, compliance with which the Board of Directors determines in its sole discretion to be in the best interests of the Company and the Shareholders, and (2) any amendment that is required to effect the intent of the provisions of this Agreement or is otherwise contemplated by this Agreement. (e) The following Persons or Groups, as the case may be, shall not be entitled to vote in their capacities as Record Holders of Listed Shares: (i) any Person or Group, excluding the Record Holders of Voting Shares and their Affiliates, if the sum of the -17- 21 number of Listed Shares Beneficially Owned by such Person or Group plus the number of Common Units Beneficially Owned by such Person or Group equals 20% or more of the sum of the aggregate number of Listed Shares that are Outstanding plus the aggregate number of Common Units that are Outstanding, and (ii) the Record Holders of Voting Shares and their Affiliates with respect to (A) a matter that is presented to the Record Holders of Listed Shares pursuant to Subsection 4.3(c) in order to determine the manner in which I-Units shall be voted with respect to (1) the proposed removal of the general partner of KMEP, (2) any vote required to be taken under Section 11.2(a) of the Partnership Agreement with respect to the transfer of all, but not less than all, of the Partnership Interest (as defined in the Partnership Agreement) of the general partner of KMEP and the admission of any such transferee as a general partner of KMEP, (3) a proposed amendment to the terms of the I-Units pursuant to Subsection 15.3(c) of the Partnership Agreement that would have a material adverse effect on the rights and preferences of the I-Units in relation to other classes of Units, as determined in the sole discretion of the Board of Directors, or (4) the proposed withdrawal of the general partner of KMEP pursuant to Section 13.1(b) of the Partnership Agreement, and (B) a matter that is presented to the Record Holders of Listed Shares pursuant to Subsection 4.3(d). (f) Except as otherwise provided in Subsection 4.1(b) and Section 4.5, a Share Distribution in respect of each Listed Share shall be made only in the event that (i) KMEP pays a cash distribution in respect of each Common Unit and pays a corresponding distribution of additional I-Units, or fractions thereof, in respect of the I-Units, or (ii) in a merger, consolidation, exchange, reorganization, recapitalization or similar transaction, the record holders of Common Units and Class B Units receive a cash distribution and the record holder of I-Units receives a corresponding distribution of additional I-Units, or fractions thereof; and no other Share Distribution shall be made in respect of each Listed Share. Except as provided in the Purchase Provisions, such Share Distribution in respect of each Listed Share shall be made on the date on which KMEP makes a cash distribution in respect of each Common Unit. Each such Share Distribution per Listed Share shall be an additional Listed Share, or a fraction thereof, equal to the amount of the cash distribution made by KMEP in respect of each Common Unit divided by the Average Market Price per Listed Share. Except as otherwise provided in Subsection 7.2(b), no distribution in respect of Listed Shares shall be made in cash. Each fractional Listed Share that is created as a result of any Share Distribution in respect of Listed Shares pursuant to this Subsection 4.3(f) shall be equal to and represented by a fraction that is calculated to six decimal places (without rounding), and any calculation that would result in a fractional interest in excess of one-millionth (1/1,000,000) of a Listed Share shall be disregarded without payment or other consideration and shall not be accumulated. Each Listed Share or fraction thereof issued as a Share Distribution shall bear a date of original issuance which is the same as the date on which such Share Distribution was made and shall be duly authorized, fully paid and nonassessable. The Company shall identify the Record Holders entitled to receive any Share Distribution in accordance with Section 3.5. -18- 22 (g) Record Holders of Listed Shares are entitled to exchange any or all of their Listed Shares for Common Units held by KMI or its Affiliates or, at the election of KMI, for cash, subject to the terms and conditions set forth in the Exchange Provisions. (h) Under certain circumstances set forth in the Purchase Provisions, Shareholders may be required to sell their Listed Shares to the Purchaser (as defined in the Purchase Provisions). The Purchase Provisions also set forth the rights of the Record Holders of Listed Shares to any distributions, including Share Distributions, on Listed Shares that have been declared (or a record date for which has been set) but that have not been paid or made. The Purchase Provisions are attached as Annex B and are an integral part of this Agreement. (i) Fractions of Listed Shares shall not be sold on a National Securities Exchange until they equal, in the aggregate, whole Listed Shares. 4.4 Splits and Combinations. The Board of Directors may make a pro rata distribution of Company Securities to all Record Holders or may effect a subdivision or combination of Company Securities; provided, however, that after such distribution, subdivision or combination, each Shareholder shall have the same relative Shareholder Interest as before such distribution, subdivision or combination. In the event that (a) KMEP makes a pro rata distribution of KMEP securities to the record holder of all I-Units, (b) KMEP effects a subdivision or combination of the I-Units, or (c) KMEP is involved in a merger or similar transaction which has the effect of converting, subdividing or combining the I-Units, then the Board of Directors shall be required to make a corresponding distribution, adjustment, conversion, subdivision or combination of the Company Securities so that the number of outstanding I-Units and the aggregate number of Company Securities that are issued by the Company and reflected as outstanding on the books and records of the Company (including the Transfer Agent) as of the date of determination, excluding Company Securities held in the treasury, shall always be equal. Each fractional Company Security that is created as a result of any distribution, subdivision or combination pursuant to this Section 4.5 shall be equal to and represented by a fraction that is calculated to six decimal places (without rounding), and any calculation that would result in a fractional interest in excess of one-millionth (1/1,000,000) of a Company Security shall be disregarded without payment or other consideration and shall not be accumulated. 4.5 Withholding. Notwithstanding any other provision of this Agreement, the Company shall comply with any withholding requirements under any Law in connection with the payment of Share Distributions and other distributions in respect of Company Securities and shall remit amounts withheld to and file required forms with applicable taxing authorities. In the event of any claimed over-withholding, Shareholders shall be limited to an action against the applicable taxing authority. If an amount required to be withheld was not withheld from an actual Share Distribution or other distribution, the Company may reduce subsequent Share Distributions or other distributions by the amount of such required withholding. Each Shareholder agrees to furnish the Company such forms or other documentation as are necessary to assist the Company in determining the extent of, and in fulfilling, its withholding obligations. -19- 23 ARTICLE 5 Management 5.1 Management of the Company's Affairs. (a) As provided in this Agreement, all management powers over the business and affairs of the Company shall be vested exclusively in a board of directors (the "Board of Directors") and, subject to the direction of the Board of Directors, the Officers. Officers and Directors constitute "managers" of the Company within the meaning of the Act. (b) No Shareholder, in its capacity as a Shareholder, shall have any management power over the business and affairs of the Company or actual or apparent authority to enter into contracts on behalf of, or to otherwise bind, the Company. (c) The Board of Directors (subject to Section 5.3 and Article 9) and the Officers (subject to Section 5.4 and the direction of the Board of Directors) shall have full power and authority, in addition to the powers that now or hereafter can be granted to managers under the Act and to all other powers granted under any other provision of this Agreement or the Partnership Agreement to do all things on such terms as they, in their individual sole discretion, may deem necessary or appropriate, to conduct, or cause to be conducted, the business and affairs of the Company, except as set forth in the Delegation of Control Agreement. (d) It is expected that KMEP shall pay, or shall reimburse the Company for the payment of, all expenses incurred by the Company, including expenses in connection with (i) audits; (ii) filings with the Securities and Exchange Commission and any state securities agency; (iii) meetings of the Record Holders of Company Securities; (iv) the preparation, filing and distribution of proxy materials; (v) compensation to, and reimbursement of expenses incurred by, Officers and Directors, as provided under Section 5.5; (vi) winding up, as provided under Section 7.2; and (vii) foreign, state and local taxes not paid or reimbursed pursuant to the Tax Indemnification Agreement. However, to the extent that KMEP does not pay, or reimburse the Company for the payment of, the aforementioned expenses, Organizational Shareholder shall pay, or shall reimburse the Company for the payment of, all such expenses. 5.2 Board of Directors. (a) Number. The number of Directors of the Company shall be established from time to time by the Record Holders of Voting Shares. Each Director shall be elected as provided in Subsection 5.2(b) and shall serve in such capacity until his successor has been elected and qualified or until such Director dies, resigns or is removed. The initial Board of Directors shall consist of six Directors. (b) Election of Directors; Term. The Record Holders of Voting Shares shall elect annually, whether at a meeting of the Record Holders of Voting Shares or by -20- 24 consent in accordance with Section 8.10, new Directors or shall re-elect existing Directors, each to serve a one-year term. (c) Vacancies and Removal. Subject to applicable Law, vacancies existing on the Board of Directors (including a vacancy created by virtue of an increase in the size of the Board of Directors) shall be filled by the Record Holders of Voting Shares or by the affirmative vote of a majority of the Directors then serving, even if less than a quorum. Each Director elected to fill any vacancy shall serve in such capacity until his successor has been elected and qualified or until such Director dies, resigns or is removed. Any Director, or the entire Board of Directors, may be removed from office at any time, with or without cause, but only by the approval of the Record Holders of Voting Shares. (d) Voting; Quorum; Required Vote for Action. Unless otherwise required by the Act, other Law, or the provisions hereof: (i) each member of the Board of Directors shall have one vote; (ii) the presence at a meeting of a majority of the members of the Board of Directors shall constitute a quorum at any such meeting for the transaction of business; and (iii) the act of a majority of the members of the Board of Directors present at a meeting at which a quorum is present shall be deemed to constitute the act of the Board of Directors. (e) Meetings. Regular meetings of the Board of Directors shall be held at such times and places as shall be designated from time to time by resolution of the Board of Directors. Notice of such regular meetings shall not be required. Special meetings of the Board of Directors or meetings of any committee thereof may be called by the Chairman of the Board, the President (should the President be a Director) or on the written request of any two Directors or committee members, as applicable, by the Secretary, in each case on at least 24 hours personal, written, telegraphic, cable or wireless notice to each Director or committee member, as applicable. Any such notice, or waiver thereof, need not state the purpose of such meeting except as may otherwise be required by Law. Attendance of a Director at a meeting (including pursuant to the last sentence of this Subsection 5.2(e)) shall constitute a waiver of notice of such meeting, except where such Director attends the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Any action required or permitted to be taken at a meeting of the Board of Directors or any committee thereof may be taken without a meeting, without prior notice and without a vote if a consent or consents in writing, setting forth the action so taken, are signed by a majority of the members of the Board of Directors or committee. Members of the Board of Directors or any committee thereof may participate in and hold a meeting by means of conference telephone, video conference or similar communications equipment by means of which all Persons participating in the meeting -21- 25 can hear each other, and participation in such meetings shall constitute presence in person at the meeting. (f) Committees. The Board of Directors, by a majority of the whole Board of Directors, may appoint one or more other committees of the Board of Directors to consist of two or more Directors, which committee(s) shall have and may exercise such of the powers and authority of the Board of Directors with respect to the management of the business and affairs of the Company as may be provided in a resolution of the Board of Directors. Any committee designated pursuant to this Subsection 5.2(f) shall choose its own chairman, shall keep regular minutes of its proceedings and report the same to the Board of Directors when requested, shall fix its own rules or procedures and shall meet at such times and at such place or places as may be provided by such rules or by resolution of such committee or resolution of the Board of Directors. At every meeting of any such committee, the presence of a majority of all the members thereof shall constitute a quorum and the act of a majority of such members present shall be deemed to constitute the act of such committee. The Board of Directors may designate one or more Directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of such committee. In the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. (g) Chairman. The Board of Directors shall elect a chairman of the Board of Directors (the "Chairman of the Board"). The Chairman of the Board, if present and acting, shall preside at all meetings of the Board of Directors and of the Shareholders. Otherwise, the President, if present, and a Director, or any other Director chosen by the Board of Directors, shall preside. Unless the Board of Directors provides otherwise, the Chairman of the Board shall be an Officer of the Company and shall have the same power and authority as the President. 5.3 Restrictions on the Board of Directors' Authority. Except as otherwise specifically provided in this Agreement or by resolution of the Board of Directors, (1) no Director or group of Directors shall have any actual or apparent authority to enter into contracts on behalf of, or to otherwise bind, the Company, nor to take any action in the name of or on behalf of the Company or conduct any business of the Company other than by action of the Board of Directors taken in accordance with the provisions of this Agreement, and (2) no Director shall have the power or authority to delegate to any Person such Director's rights and powers as a Director to manage the business and affairs of the Company. 5.4 Officers. (a) Generally. The Board of Directors shall appoint agents of the Company, referred to as "Officers" of the Company, to serve in the offices set forth in this Section 5.4. Unless provided otherwise by resolution of the Board of Directors, the -22- 26 Officers shall have the titles, power, authority and duties described below in this Section 5.4. (b) Titles and Number. The Officers of the Company shall be the Chairman of the Board, the President, any and all Vice Presidents, the Secretary, the Treasurer, any and all Assistant Secretaries, and any and all Assistant Treasurers and any other officer position or title as the Board of Directors may desire. Any person may hold two or more offices simultaneously. (c) Appointment and Term of Office. The Officers shall be appointed by the Board of Directors at such time and for such term as the Board of Directors shall determine. Any Officer may be removed, with or without cause, only by the Board of Directors. Vacancies in any office may be filled only by the Board of Directors. (d) Chairman of the Board. Subject to the limitations imposed by this Agreement, any employment agreement, any employee plan or any determination of the Board of Directors, the Chairman of the Board, subject to the direction of the Board of Directors, shall preside at all meetings of the Shareholders and the Board of Directors, shall supervise generally the President and shall have full authority to execute all documents and take all actions that the Company may legally take. The Chairman of the Board shall exercise such other powers and perform such other duties as may be assigned to him by this Agreement or the Board of Directors, including any duties and powers stated in any employment agreement approved by the Board of Directors. (e) President. The President shall be the Chief Executive Officer of the Company unless the Chairman of the Board is so designated, in which event the President shall be the Chief Operating Officer of the Company. In the absence of the Chairman of the Board, or if there be no Chairman of the Board, he shall preside at all meetings of the Shareholders and Directors. The Chief Executive Officer, whether the Chairman of the Board or the President, shall be ex officio a member of all standing committees, shall have general and active management and control of the business and affairs of the Company subject to the control of the Board of Directors, and shall see that all orders and resolutions of the Board of Directors are carried into effect. (f) Vice Presidents. In the absence of the President and the Chairman of the Board, each Vice President appointed by the Board of Directors shall have all of the powers and duties conferred upon the President, including the same power as the President to execute documents on behalf of the Company. Each such Vice President shall perform such other duties and may exercise such other powers as may from time to time be assigned to him by the Board of Directors, the Chairman of the Board or the President. (g) Secretary and Assistant Secretaries. The Secretary shall record or cause to be recorded in books provided for that purpose the minutes of the meetings or actions of the Board of Directors and Shareholders, shall see that all notices are duly given in accordance with the provisions of this Agreement and as required by Law, shall be -23- 27 custodian of all records (other than financial), shall see that the books, reports, statements, certificates and all other documents and records required by Law are properly kept and filed, and, in general, shall perform all duties incident to the office of Secretary and such other duties as may, from time to time, be assigned to him by this Agreement, the Board of Directors, the Chairman of the Board or the President. The Assistant Secretaries shall exercise the powers of the Secretary during that Officer's absence or inability or refusal to act. (h) Treasurer and Assistant Treasurers. The Treasurer shall keep or cause to be kept the books of account of the Company and shall render statements of the financial affairs of the Company in such form and as often as required by this Agreement, the Board of Directors, the Chairman of the Board or the President. The Treasurer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the Company. The Treasurer shall perform all other duties commonly incident to his office and shall perform such other duties and have such other powers as this Agreement, the Board of Directors, the Chairman of the Board or the President shall designate from time to time. The Assistant Treasurers shall exercise the power of the Treasurer during that Officer's absence or inability or refusal to act. Each of the Assistant Treasurers shall possess the same power as the Treasurer to sign all certificates, contracts, obligations and other instruments of the Company. If no Treasurer or Assistant Treasurer is appointed and serving or in the absence of the appointed Treasurer and Assistant Treasurer, such other Officer as the Board of Directors shall select shall have the powers and duties conferred upon the Treasurer. (i) Powers of Attorney. The Company may grant powers of attorney or other authority as appropriate to establish and evidence the authority of the Officers and other Persons. (j) Delegation of Authority. Unless otherwise provided by resolution of the Board of Directors, no Officer shall have the power or authority to delegate to any Person such Officer's rights and powers as an Officer to manage the business and affairs of the Company. 5.5 Compensation. The Officers shall receive such compensation for their services as may be designated by the Board of Directors. In addition, the Officers shall be entitled to be reimbursed for out-of-pocket costs and expenses incurred in the course of their service hereunder. The members of the Board of Directors who are not employees of the Company or any Affiliate thereof shall receive such compensation for their services as Directors or committee members as the Board of Directors shall determine. The members of the Board of Directors who are employees of the Company or any Affiliate thereof shall receive no compensation for their services as Directors or committee members. All the members of the Board of Directors shall be entitled to be reimbursed for out-of-pocket costs and expenses incurred in the course of their service hereunder. -24- 28 5.6 Business Opportunities. (a) No Indemnitee shall be expressly or implicitly restricted or proscribed pursuant to this Agreement, by Law or otherwise from engaging in other activities for profit, whether in the businesses engaged in by the Company or any Shareholder or anticipated to be engaged in by the Company or any Shareholder. Without limitation of and subject to the foregoing, each Indemnitee shall have the right to engage in businesses of every type and description and to engage in and possess an interest in other business ventures of any and every type or description, independently or with others, including, without limitation, business interests and activities in direct competition with the Company or any Shareholder, and none of the same shall breach any duty to the Company or any Shareholder. Neither the Company, the Shareholder nor any other Person shall have any rights by virtue of this Agreement, by Law or otherwise in any business ventures of any Indemnitee and such Indemnitees shall have no obligation to offer any interest in any such business ventures to the Company, any Shareholder or any other Person. (b) Without limitation of Subsection 5.6(a), and notwithstanding anything to the contrary in this Agreement, the competitive activities of Indemnitees and the restrictions on the Company's activities described in Section 2.4 are hereby approved by the Company and all Shareholders, and it shall not be deemed to be a breach of the fiduciary duty (if any such duty is owed) of the Board of Directors or the Record Holders of Voting Shares for the Board of Directors or the Record Holders of Voting Shares to permit an Indemnitee to engage in a business opportunity in preference to or to the exclusion of the Company or any other Shareholder, if such activities are permitted by this Agreement. 5.7 Interested Officers or Directors. No contract or transaction between the Company, on one hand, and the Record Holders of Voting Shares, any Affiliate thereof or any other Entity, on the other, in which an Officer or Director Beneficially Owns an interest or of which such Officer or Director is an Affiliate, or between the Company, on one hand, and any of its Officers or Directors, on the other, shall be void or voidable for this reason or because the Officer or Director is present at or participates in the meeting of the Board of Directors or committee thereof that authorizes the contract or transaction, or because his vote is counted for such purpose, if such contract or transaction is: (a) approved by a committee of the Board composed solely of members who have no interest in the contract or transaction; (b) on terms no less favorable than those generally being provided to or available from unrelated third parties, as determined in the sole discretion of the Board of Directors; or (c) fair, taking into account the totality of the relationships between the parties involved, including other transactions between the parties, as determined in the sole discretion of the Board of Directors. -25- 29 5.8 Duties of Record Holders of Voting Shares and Directors. (a) Except as otherwise provided in this Agreement, the Record Holders of Voting Shares, the Directors and any of their Affiliates shall have no obligations whatsoever, by virtue of the relationships established pursuant to this Agreement, to take or refrain from taking any action that may impact the Company, the Shareholders or any Affiliate of the Company or a Shareholder. (b) The provisions of this Agreement, including Sections 5.6, 5.7 and 5.8, constitute an agreement to restrict or eliminate fiduciary and other duties pursuant to the provisions of Section 18-1101 of the Act. 5.9 Indemnification. (a) The Indemnitees shall be entitled to mandatory indemnification and shall be entitled to be held harmless by KMEP and the Operating Partnerships to the extent and subject to the conditions provided in Section 6 of the Delegation of Control Agreement with the Organizational Shareholder, in its capacity as general partner of KMEP and the Operating Partnerships, hereby deeming it advisable that such indemnification and holding harmless shall (rather than may) be done and provided by KMEP and the Operating Partnerships to the fullest extent and subject to the conditions provided therein. (b) To the extent that the indemnification provisions of Section 6 of the Delegation of Control Agreement do not fully hold harmless any of the Indemnitees, then to the fullest extent permitted by Law but subject to the limitations expressly provided in this Agreement, such Indemnitees shall be indemnified and held harmless by the Company, to the extent deemed advisable by the Board of Directors, from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including legal fees and expenses), judgments, fines, penalties, interest, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, whether civil, criminal, administrative or investigative, in which any Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, by reason of its status as (i) a Record Holder of Voting Shares or any Affiliate thereof; (ii) an officer, director, employee, partner, agent or trustee of a Record Holder of Voting Shares, the Company or any of their Affiliates; or (iii) a Person serving at the request of the Company in another Entity in a similar capacity, provided, that in each case the Indemnitee acted or failed to act in good faith and in the manner which such Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Company, and, with respect to any criminal proceeding, had no reasonable cause to believe such conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that the Indemnitee acted in a manner contrary to that specified above. Any indemnification pursuant to this Subsection 5.9(b) shall be made only out of the assets of the Company, it being agreed that no Shareholder, in its capacity as such, shall be personally liable for such indemnification nor shall it have any obligation to contribute or loan any monies or property to the Company to enable the -26- 30 Company to effectuate such indemnification. The indemnification provided by this Subsection 5.9(b) shall be secondary to any other rights to which an Indemnitee may be entitled as contemplated under the Delegation of Control Agreement or any other agreement, pursuant to any vote of the Record Holders of Voting Shares, as a matter of Law or otherwise, both as to actions in the Indemnitee's capacity as (A) a Record Holder of Voting Shares or an Affiliate thereof; (B) an officer, director, employee, partner, agent or trustee of a Record Holder of Voting Shares, the Company or any of their Affiliates; or (C) a Person serving at the request of the Company in another Entity in a similar capacity, and as to actions in any other capacity (including any capacity under the Underwriting Agreement), and shall continue as to an Indemnitee who has ceased to serve in such capacity and shall inure to the benefit of the heirs, successors, assigns and administrators of the Indemnitee. (c) To the fullest extent permitted by Law, expenses (including legal fees and expenses) incurred by an Indemnitee who is indemnified pursuant to Subsections 5.9(a) or 5.9(b) in defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by the Company prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the Company of a written undertaking by or on behalf of the Indemnitee to repay such amount if it shall be determined that the Indemnitee is not entitled to be indemnified as authorized in this Section 5.9. (d) The Organizational Shareholder may purchase and maintain insurance, on behalf of the Persons as the Board of Directors shall determine, against any liability that may be asserted against, or expense that may be incurred by, such Person in connection with the Company's activities, regardless of whether the Company would have the power to indemnify such Person against such liability under the provisions of this Agreement. (e) For purposes of this Section 5.9, the Company shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by it of its duties to the Company also imposes duties on, or otherwise involves services by, it to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute "fines" for purposes of indemnities contemplated by Subsections 5.9(a) and 5.9(b); and action taken or omitted by it with respect to an employee benefit plan in the performance of its duties for a purpose reasonably believed by it to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is in, or not opposed to, the best interests of the Company. (f) In no event may an Indemnitee subject the Shareholders to personal liability by reason of the indemnification provisions set forth in this Agreement. (g) An Indemnitee shall not be denied indemnification in whole or in part contemplated under this Section 5.9 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement. -27- 31 (h) The provisions of this Section 5.9 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons. (i) No amendment, modification or repeal of this Section 5.9 or any provision hereof shall in any manner terminate, reduce or impair the right of any past, present or future Indemnitee to be indemnified by the Company, nor the obligation of the Company to indemnify any such Indemnitee under and in accordance with the provisions of this Section 5.9 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. Notwithstanding the foregoing, nothing herein shall limit the power or authority of the Partnership or any Operating Partnership to amend any provisions of the Partnership Agreement regarding indemnification and reimbursement or similar provisions. 5.10 Liability of Indemnitees. (a) Notwithstanding anything to the contrary set forth in this Agreement, no Indemnitee shall be liable for monetary damages to the Company, the Shareholders or any other Person for losses sustained or liabilities incurred as a result of any act or omission constituting a breach of such Indemnitee's fiduciary duty, in the event that such a duty is found to exist, if such Indemnitee acted in good faith and in the manner which such Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Company, and, with respect to any criminal proceeding, had no reasonable cause to believe such conduct was unlawful. (b) Subject to its obligations and duties as set forth in this Article 5, the Board of Directors and any committee thereof may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through the Company's agents, and neither the Board of Directors nor any committee thereof shall be responsible for any misconduct or negligence on the part of any such agent appointed by the Board of Directors or any committee thereof in good faith. (c) Any amendment, modification or repeal of this Section 5.10 or any provision hereof shall be prospective only and shall not in any way affect the limitations on liability under this Section 5.10 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. 5.11 Facsimile Signatures. In addition to the provisions for the use of facsimile signatures elsewhere specifically authorized in this Agreement, facsimile signatures of any Officer of the Company may be used whenever and as authorized by the Board of Directors. -28- 32 ARTICLE 6 Books and Records; Information and Accounts 6.1 Maintenance of Books and Records. The Company shall keep at its principal office complete and accurate books and records of the Company, supporting documentation of the transactions with respect to the conduct of the Company's business and affairs and minutes of the proceedings of the Board of Directors, the Shareholders and each committee of the Board of Directors. The records shall include: (a) complete and accurate information regarding the state of the business and financial condition of the Company; (b) a copy of this Agreement and the Organizational Certificate; (c) a current list of the names and last known business, residence, or mailing addresses of all Directors and Officers; and (d) the Company's federal, state and local tax returns for the Company's six most recent tax years. 6.2 Information. In addition to the other rights specifically set forth in this Agreement and subject to such reasonable standards (including standards governing what information and documents are to be furnished and at what time and location and at whose expense) as may be established by the Board of Directors or any Officer, each Shareholder is entitled to all information to which a member of a Delaware limited liability company is entitled to have access pursuant to the Act under the circumstances and subject to the conditions therein stated. 6.3 Accounts. The Board of Directors may establish, or direct or authorize any Officer to establish, one or more separate bank and investment accounts and arrangements for the Company, which shall be maintained in the Company's name with financial institutions and firms that the Board of Directors, or any Officer so directed or authorized, determines. ARTICLE 7 Dissolution, Winding-Up and Termination 7.1 Dissolution. (a) The Company shall dissolve and its affairs shall be wound up on the first to occur of the following events (each a "Dissolution Event"): (i) entry of a decree of judicial dissolution of the Company under Section 18-802 of the Act; (ii) the approval of the Record Holders of Voting Shares and the Record Holders of a majority of the Listed Shares then Outstanding; or (iii) the approval of Record Holders of Listed Shares owning at least 66 2/3% of the Listed Shares then Outstanding. -29- 33 (b) Neither the death, dissolution or Bankruptcy of any Shareholder nor the occurrence of any other event that causes a Shareholder to cease to be a member of the Company shall constitute a Dissolution Event, and the business of the Company shall be continued after such event. 7.2 Winding-Up and Termination. (a) On the occurrence of a Dissolution Event, the Board of Directors shall select one or more Persons to act as liquidator. The liquidator shall proceed diligently to wind up the affairs of the Company and make final distributions as provided herein and in the Act. The costs of winding up shall be borne as a Company expense. Until final distribution, the liquidator shall continue to operate the Company's properties with all of the power and authority of the Board of Directors. (b) Any assets of the Company remaining after satisfaction of the liabilities of the Company (whether by payment or by reasonable provisions for payment) shall be distributed on a share-for-share basis on all Outstanding Company Securities. (c) On completion of such final distribution, the liquidator shall file a Certificate of Cancellation with the Secretary of State of the State of Delaware, cancel any other filings made pursuant to Section 2.5, and take such other actions as may be necessary to terminate the existence of the Company. ARTICLE 8 Amendment of Agreement; Shareholder Meetings; Record Date 8.1 Amendment Procedures. (a) Any provision of this Agreement, including the Exchange Provisions and the Purchase Provisions, may be amended by the Record Holders of Voting Shares without the approval of any other Shareholder; provided, however, that with respect to any matter for which the approval of the Record Holders of Listed Shares entitled to vote thereon is required pursuant to Subsection 4.3(d), then such amendment shall be not be effective until such Record Holders of Listed Shares have so approved. (b) Any proposed amendment that requires the approval of the Record Holders of any Company Securities shall be explained in a writing that contains the text of the proposed amendment. If such an amendment is proposed, the Board of Directors shall seek the written approval of the Record Holders of the requisite percentage of Company Securities or call a meeting of the Shareholders entitled to vote thereon to consider and vote on such proposed amendment. (c) The Board of Directors shall notify all Record Holders of Company Securities upon final adoption of any such proposed amendment. -30- 34 8.2 Meetings. Except as otherwise provided in this Agreement, all acts of the Shareholders to be taken hereunder shall be taken in the manner provided in this Article 8. A meeting of the Record Holders of Company Securities for the transaction of such business as may properly come before the meeting shall be held at such time and place as the Board of Directors, the Chairman of the Board or a Record Holder of Voting Shares shall specify in the notice of the meeting; provided, however, that a meeting of the Record Holders of Voting Shares and Listed Shares at which such Record Holders shall vote pursuant to Subsections 4.2(d) and 4.3(c), respectively, shall be held at the same time and place as a meeting of the record holder of I-Units at which the Company shall be entitled to vote as the record holder of I-Units. 8.3 Notice of a Meeting. Notice of a meeting called pursuant to Section 8.2 shall be given in writing by mail or other means of written communication in accordance with Section 10.3 to the Record Holders of Company Securities for whom the meeting is called. The notice shall be deemed to have been given at the time when deposited in the mail or sent by other means of written communication. 8.4 Record Date. For purposes of determining the Shareholders entitled to notice of, or to vote at, any meeting of the Shareholders or entitled to vote by ballot or give approval of Company action in writing without a meeting or entitled to exercise rights in respect of any lawful action of the Shareholders, the Record Date shall not be less than 10 nor more than 60 days before (a) the date of the meeting (unless such requirement conflicts with any Law, in which case the Law shall govern), or (b) in the event that approvals are sought without a meeting, the date by which the Shareholders are requested in writing by the Board of Directors to give such approvals. 8.5 Adjournment. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting and a new Record Date need not be fixed if the time and place thereof are announced at the meeting at which the adjournment is taken, unless such adjournment shall be for more than 45 days. At the adjourned meeting, the Company may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 45 days or if a new Record Date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given in accordance with this Article 8. 8.6 Waiver of Notice; Approval of Meeting; Approval of Minutes. The transactions of any meeting of the Shareholders, however called and noticed, and whenever held, shall be as valid as if they had been authorized at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, Shareholders representing such quorum who were present in person or by proxy and entitled to vote, sign a written waiver of notice or an approval of the holding of the meeting or an approval of the minutes thereof. All waivers and approvals shall be filed with the Company records or made a part of the minutes of the meeting. Attendance of a Shareholder at a meeting shall constitute a waiver of notice of the meeting, except (a) when the Shareholder does not approve, at the beginning of the meeting, of the transaction of any business because the meeting is not lawfully called or convened; and (b) that attendance at a meeting is not a waiver of any right to disapprove the consideration of matters required to be included in the notice of the meeting, but not so included, if the disapproval is expressly made at the meeting. -31- 35 8.7 Quorum; Voting. The Record Holders of a majority of those Outstanding Company Securities for which a meeting has been called who are entitled to vote and be present in person or by proxy shall constitute a quorum at a meeting of the Shareholders of such class or classes. At any meeting of the Shareholders duly called and held in accordance with this Agreement at which a quorum is present, the act of the Record Holders of a majority of all Outstanding Company Securities present and entitled to vote thereon shall be deemed to constitute the act of the Record Holders of such Company Securities, except as approval by holders of a different amount of Company Securities is required by any other provision of this Agreement, including Section 8.8, or by the Act, in which case the act of the Shareholders holding a number of Outstanding Company Securities representing at least such different amount shall be required. The Shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough Shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by the required percentage of Company Securities specified in this Agreement. In the absence of a quorum, any meeting of the Shareholders may be adjourned from time to time by the affirmative vote of the Record Holders of a majority of the Company Securities represented either in person or by proxy. 8.8 Special Voting Requirements. Without regard to any provision to the contrary in Section 8.7, with respect to any matter that shall be submitted to the Record Holders of Listed Shares entitled to vote thereon pursuant to Subsection 4.3(d), the act of the Record Holders of a majority of the Listed Shares then Outstanding shall be deemed to constitute the act of the Record Holders of Listed Shares. 8.9 Conduct of Meeting. The Board of Directors shall have full power and authority concerning the manner of conducting any meeting of the Shareholders or the solicitation of approvals in writing, including the determination of Persons entitled to vote, the existence of a quorum, the satisfaction of the requirements of this Article 8, the conduct of voting, the validity and effect of any proxies and the determination of any controversies, votes or challenges arising in connection with or during the meeting or voting. The Board of Directors shall designate a Person to serve as chairman of any meeting and shall further designate a Person to take the minutes of any meeting. All minutes shall be kept with the records of the Company. The Board of Directors may make such other regulations consistent with applicable Law and this Agreement as it may deem advisable concerning the conduct of any meeting of the Shareholders or the solicitation of approvals in writing, including regulations in regard to the appointment of proxies, the appointment and duties of inspectors of votes and approvals, the submission and examination of proxies and other evidence of the right to vote and the revocation of approvals in writing. 8.10 Action Without a Meeting. Any action that may be taken at a meeting of Shareholders may be taken without a meeting if consents in writing setting forth such action are signed by the Record Holders holding not less than the minimum percentage of the Company Securities that would be necessary to authorize or take such action at a meeting at which all the Company Securities entitled to vote on such matter were present and voted. Prompt notice of the taking of action without a meeting shall be given to the Record Holders who were entitled to, but -32- 36 did not, authorize the action taken. The Board of Directors may specify that any written consent submitted to Record Holders for the purpose of taking any action without a meeting shall be returned to the Company within the time period, which shall be not less than 20 days, specified by the Board of Directors. If a ballot returned to the Company does not vote all of the Company Securities held by the Shareholder, the Company shall be deemed to have failed to receive a ballot for the Company Securities that were not voted. If approval of the taking of any action by the Shareholders is solicited by any Person other than by or on behalf of the Board of Directors, the written approvals shall have no force and effect unless and until (a) they are deposited with the Company in care of the Board of Directors, (b) approvals sufficient to take the action proposed are dated as of a date not more than 90 days prior to the date sufficient approvals are deposited with the Company and (c) an Opinion of Counsel is delivered to the Board of Directors to the effect that the exercise of such right and the action proposed to be taken with respect to any particular matter is otherwise permissible under applicable Law, including any statutes then governing the rights, duties and liabilities of the Company and the Shareholders. 8.11 Voting and Other Rights. (a) Only those Record Holders of Company Securities on the Record Date set pursuant to Section 8.4 (and also subject to Subsection 4.3(e)) shall be entitled to notice of, and to vote at, a meeting of the Shareholders or to act with respect to matters as to which the holders of the Company Securities have the right to vote or to act. All references in this Agreement to votes of, or other acts that may be taken by, the Company Securities shall be deemed to be references to the votes or acts of the Record Holders of such Company Securities. (b) With respect to Company Securities that are held for a Person's account by another Person (such as a broker, dealer, bank, trust company or clearing corporation, or an agent of any of the foregoing), in whose name such Company Securities are registered, such broker, dealer or other agent shall, in exercising the voting rights in respect of such Company Securities on any matter, and unless the arrangement between such Persons provides otherwise, vote such Company Securities on the behalf, and at the direction, of the Person who is the Beneficial Owner, and the Company shall be entitled to assume it is so acting without further inquiry. (c) With respect to any Shareholder action, broker non-votes and other non-votes shall not be counted as votes "for" or "against" any matter unless otherwise required by Law. ARTICLE 9 Covenants The Company (a) shall use the net proceeds from the Initial Public Offering for the purchase of I-Units and other rights as contemplated by this Agreement; (b) shall not sell, pledge or otherwise transfer any I-Units or such other rights except as contemplated by this Agreement; (c) shall not issue options, warrants or other securities entitling the holder thereof to subscribe for or purchase Company Securities; (d) shall not borrow money or issue debt; (e) shall not effect a -33- 37 liquidation, merger, recapitalization or similar transaction involving the Company; and (f) shall not purchase Company Securities; provided, however, that the Company may take or abstain from taking any of the actions prohibited or required, as applicable, in this Article 9 upon obtaining the approval of the Record Holders who (i) are entitled to vote thereon and (ii) are the Record Holders of a majority of the Listed Shares then Outstanding. ARTICLE 10 General Provisions 10.1 Fiscal Year. The fiscal year of the Company shall be the calendar year. 10.2 Offset. Whenever the Company is to pay any sum to any Shareholder, any amounts that Shareholder owes the Company may be deducted from that sum before payment. 10.3 Notices. Except as expressly set forth to the contrary in this Agreement, all notices, requests or consents provided for or permitted to be given under this Agreement must be in writing and must be delivered to the recipient in person, by courier or mail or by facsimile, telegram, telex, cablegram or similar transmission, and a notice, request or consent given under this Agreement is effective on receipt by the Person to receive it. Whenever any notice is required to be given by Law, the Organizational Certificate or this Agreement, a written waiver thereof, signed by the Person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. 10.4 Entire Agreement. This Agreement, including the Exchange Provisions and the Purchase Provisions, constitutes the entire agreement of the Shareholders pertaining to the subject matter hereof and supersedes all prior agreements and understandings pertaining thereto. 10.5 Waiver. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition. 10.6 Binding Effect. This Agreement is binding upon and shall inure to the benefit of the Shareholders, the Assignees and their respective executors, administrators, successors and legal representatives. 10.7 Governing Law; Severability. This Agreement shall be construed in accordance with, and governed by, the laws of the State of Delaware without regard to the principles of conflicts of law. In the event of a direct conflict between the provisions of this Agreement and (a) any provision of the Organizational Certificate, or (b) any mandatory, non-waivable provision of the Act, such provision of the Organizational Certificate or the Act shall control. If any provision of the Act provides that it may be varied or superseded in the limited liability company agreement (or otherwise by agreement of the members or managers of a limited liability company), such provision shall be deemed superseded and waived in its entirety if this Agreement contains a provision addressing the same issue or subject matter. If any provision of -34- 38 this Agreement or the application thereof to any Person or circumstance is held invalid or unenforceable to any extent, the remainder of this Agreement and the application of that provision to other Persons or circumstances is not affected thereby and that provision shall be enforced to the greatest extent permitted by Law. 10.8 Further Action. The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement. 10.9 No Right to Action for Dissolution or Partition. No Shareholder has any right to maintain any action for dissolution of the Company or for partition of the property of the Company. 10.10 Third-Party Beneficiaries. The Shareholders, the Assignees, the Indemnitees and their respective executors, administrators, successors and legal representatives shall be considered to be third-party beneficiaries of this Agreement, including the Exchange Provisions and the Purchase Provisions. 10.11 Creditors. None of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Company in its capacity as such. 10.12 Counterparts. This Agreement may be executed in counterparts, all of which together shall constitute an agreement binding on all parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing its signature hereto or, in the case of a Person acquiring a Company Security, upon (a) the acquisition by such Person of the Certificate evidencing such Company Security, or (b) the transfer of such Company Security to such Person by book-entry transfer in accordance with Subsection 3.4(b). -35- 39 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first set forth above. Organizational Shareholder: KINDER MORGAN G.P., INC. By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- All holders of Listed Shares By: ---------------------------------------- By: ------------------------------- Attorney-in-fact authorized by the Board of Directors -36- 40 ANNEX A EXCHANGE PROVISIONS -37- 41 ANNEX B PURCHASE PROVISIONS -38- 42 ANNEX C DELEGATION OF CONTROL AGREEMENT -39- 43 ANNEX A TO EXHIBIT 3.2 EXCHANGE PROVISIONS ANNEX A TO THE AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF KINDER MORGAN MANAGEMENT, LLC These Exchange Provisions, dated as of _____________, 2001, are an integral part of the Amended and Restated Limited Liability Company Agreement of Kinder Morgan Management, LLC, dated as of ____________, 2001. SECTION 1 Definitions 1.1 Definitions. In these Exchange Provisions, the following terms have the following respective meanings: "Affiliate" means, with respect to any Person, any other Person that directly or indirectly controls, is controlled by or is under common control with, the Person in question. As used herein, the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. "Average Market Price" for any security means the average of the Closing Prices for such security for the consecutive Trading Days in the period specified in the relevant Section of these Exchange Provisions ending on the Trading Day specified in the relevant Section of these Exchange Provisions. "Beneficial Owner" has the meaning set forth in Rules 13d-3 and 13d-5 under the Securities Exchange Act, as in effect on the date of these Exchange Provisions, and the terms "Beneficial Ownership," "Beneficially Own," "Beneficially Owned" and similar terms have correlative meanings. "Board of Directors of the Company" means the board of directors of the Company established pursuant to the LLC Agreement, and any committee of such board duly authorized to act in respect thereof. "Board of Directors of the Exchange Party" means (a) if KMI is the Exchange Party, the board of directors of KMI; (b) if the Exchange Party is a limited partnership with a corporate general partner or any other corporation, the board of directors of such corporate general partner or corporation; (c) if the Exchange Party is any other form of entity, the board of directors or 44 other comparable governing body of such entity; and (d) in each case, any committee of such board or body duly authorized to act in respect thereof. "Cash Settlement" has the meaning set forth in Section 2.1(c). "Cash Settlement Amount" for a Common Unit means the Average Market Price for a Common Unit for the three consecutive Trading Day period beginning on the second Trading Day next following the date on which the Exchange Party gives notice of its election to settle the Exchange Feature in cash pursuant to Section 2.1(c). "Closing" means the closing of the initial public offering of the Listed Shares, effected pursuant to the Registration Statement of the Company on Form S-1 (Registration No. 333-55866), which occurred on the date of these Exchange Provisions. "Closing Price" for a security on any day means: (a) for securities listed on a National Securities Exchange, the last sale price for that day, regular way, or if there are no sales on that day, the average of the closing bid and asked prices for that day, regular way, in either case as reported in the principal composite transactions reporting system for the principal National Securities Exchange on which such securities are listed; or (b) if such securities are not listed on a National Securities Exchange on that day, the last quoted price on that day, or if no price is quoted, the average of the high bid and low asked prices on that day, each as reported by the National Association of Securities Dealers Automated Quotation system; or (c) if such securities are not so quoted on that day, the average of the closing bid and asked prices on that day furnished by a professional market maker in such securities selected by the Board of Directors of the Exchange Party; or (d) if on that day no market maker is making a market in such securities, the fair value of such securities on such day as determined by the Board of Directors of the Exchange Party. "Common Units" has the meaning assigned to it in the Partnership Agreement. "Company" means Kinder Morgan Management, LLC, a Delaware limited liability company. "Controlling Entity" has the meaning set forth in clause (b)(i) of the definition of Mandatory Purchase Event. "Distribution Date" means the payment date for regular quarterly distributions or any special distributions with respect to the Listed Shares pursuant to the LLC Agreement. "Entity" means a corporation, limited liability company, venture, partnership, trust, unincorporated organization, association or other entity. -2- 45 "Exchange Date" means, with respect to any Listed Share, the time immediately prior to the close of business on the date on which a certificate representing such Listed Share and a duly signed Exchange Notice have been received by the Exchange Party or its office or agency maintained for such purpose pursuant to Section 3.2, all in accordance with Section 2.2. "Exchange Feature" has the meaning set forth in Section 2.1(a).0 "Exchange Notice" means the notice described in Section 2.7. "Exchange Party" means the Person with the obligation pursuant to these Exchange Provisions to deliver Common Units or cash to the holder of Listed Shares surrendering such Listed Shares for exchange in accordance with these Exchange Provisions. The initial Exchange Party is KMI. "Exchange Provisions" means these exchange provisions attached to the LLC Agreement as Annex A and hereby made a part of the LLC Agreement. "Exchange Rate" has the meaning set forth in Section 2.1(b). "General Partner" means the general partner of the Partnership. On the date of these Exchange Provisions, the General Partner is Kinder Morgan G.P., Inc. "Holder" means the holder of record of a Listed Share. "I-Units" has the meaning assigned to it in the Partnership Agreement. "KMI" means Kinder Morgan, Inc., a Kansas corporation, its successors by merger and any Person who succeeds to its obligations under these Exchange Provisions, the Purchase Provisions, the Registration Rights Agreement and the Tax Indemnification Agreement in connection with an acquisition of all or substantially all of its assets by such Person. "LLC Agreement" means the Amended and Restated Limited Liability Company Agreement of the Company dated as of __________, 2001, including these Exchange Provisions and the Purchase Provisions. "Listed Shares" means the limited liability company interests in the Company designated in the LLC Agreement as "Listed Shares." "Mandatory Purchase Event" means any one of the following: (a) the occurrence of the first day on which the aggregate amount of distributions or other payments by the Partnership on the Common Units (other than distributions or payments made in Common Units or Similar Common Unit Securities, but including distributions and other payments pursuant to an issuer tender offer by the Partnership) during the immediately preceding 360-day period exceeds 50% of the Average Market Price of a Common Unit during the ten consecutive Trading Day period ending on the last Trading Day prior to the first day of such 360-day period; -3- 46 (b) the occurrence of an event resulting in KMI and its Affiliates ceasing to be the Beneficial Owners of more than 50% of the total voting power of all shares of capital stock of the General Partner, unless: (i) the event results in another Person becoming the Beneficial Owner of more than 50% of the total voting power of all shares of capital stock of the General Partner (such other Person being referred to herein as the "Controlling Entity"); (ii) the Controlling Entity is organized under the laws of a state in the United States; (iii) the Controlling Entity has long term unsecured debt with an investment grade credit rating, as determined by Moody's Investor Services, Inc. and Standard & Poor's Rating Service, immediately prior to the event that results in the Controlling Entity becoming the Beneficial Owner of more than 50% of the total voting power of all shares of capital stock of the General Partner; and (iv) the Controlling Entity assumes all obligations of KMI and the Exchange Party to the Company and to the holders of the Listed Shares under these Exchange Provisions, the Purchase Provisions, the Registration Rights Agreement and the Tax Indemnification Agreement. (c) the merger of the Partnership with or into another Person in any case where the Partnership is not the surviving entity, or the sale of all or substantially all of the assets of the Partnership and its subsidiaries, taken as a whole, to another Person, unless: (i) in the transaction the holders of Common Units receive in exchange for all of their Common Units a Similar Common Unit Security of the Person that is the surviving Entity or that purchased the assets; (ii) in the transaction the Company receives in exchange for all of its I-Units a Similar I-Unit Security of the Person that is the surviving Entity or that purchased the assets; (iii) no consideration is received in the transaction in respect of Common Units other than Similar Common Unit Securities and/or cash and the amount of cash received per Common Unit does not exceed 33-1/3% of the Average Market Price of a Common Unit for the ten consecutive Trading Day period ending on the Trading Day immediately preceding the date of the execution of the definitive agreement for the transaction; and (iv) no consideration is received in the transaction in respect of I-Units other than Similar I-Unit Securities of the Person that is the surviving Entity or that purchased the assets. "National Securities Exchange" means an exchange registered with the Securities and Exchange Commission under Section 6(a) of the Securities Exchange Act. -4- 47 "Partnership" means Kinder Morgan Energy Partners, L.P., a Delaware limited partnership. "Partnership Agreement" means the Third Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of _________, 2001. "Person" means a natural person or an Entity. "Purchase Date" means either a Mandatory Purchase Date or an Optional Purchase Date, each as defined in the Purchase Provisions. "Purchase Notice" means a Mandatory Purchase Notice, an Optional Purchase Notice or an Optional Purchase Notice for Common Units and Listed Shares, each as defined in the Purchase Provisions. "Purchase Provisions" means the purchase provisions attached to the LLC Agreement as Annex B and thereby made a part of the LLC Agreement. "Record Date" means, with respect to any Distribution Date, the date fixed for determining the holders of Listed Shares entitled to receive the distribution on such Distribution Date. "Registration Rights Agreement" means the Registration Rights Agreement dated as of the Closing between KMI and the Partnership. "Section" means a section of these Exchange Provisions. "Securities Act" means the United States Securities Act of 1933, as amended from time to time and any successor to such statute and all rules and regulations promulgated thereunder. "Securities Exchange Act" means the United States Securities Exchange Act of 1934, as amended from time to time and any successor to such statute and all rules and regulations promulgated thereunder. "Similar Common Unit Security" means a security that has in all material respects the same rights and privileges as the Common Units. "Similar I-Unit Security" means a security that has in all material respects the same rights and privileges as the I-Units. "Subsidiary," when used in connection with the Partnership, means any Affiliate of the Partnership which the Partnership controls, and of which the Partnership owns, directly or indirectly, a majority of the aggregate shares, partnership interests or other equity interests. "Tax Indemnification Agreement" means the Tax Indemnification Agreement dated as of the Closing between KMI and the Company. -5- 48 "Trading Day" for any security means a day on which: (a) the principal National Securities Exchange on which such security is listed is open for business, or (b) if such security is not listed on any National Securities Exchange, a day in which banking institutions in The City of New York generally are open. "Transfer Agent" means any bank, trust company or other Person (including the Company or any Affiliate of the Company) appointed from time to time by the Board of Directors of the Company to act as registrar and transfer agent for the Listed Shares. On the date of these Exchange Provisions, First Chicago Trust Company of New York is the Transfer Agent. 1.2 Rules of Construction. Unless the context otherwise clearly requires: (a) the terms defined in Section 1.1 have the meanings assigned to them in that Section for purposes of these Exchange Provisions; terms defined in the Purchase Provisions and also in these Exchange Provisions shall in the Purchase Provisions have the meanings ascribed to them therein; terms defined elsewhere in the LLC Agreement and also in these Exchange Provisions shall in such other portions of the LLC Agreement have the meanings ascribed to them therein; (b) terms defined include the plural as well as the singular and vice versa; (c) references to any document, agreement, instrument or provision thereof mean such document, agreement, instrument or provisions thereof as the same may be duly amended, supplemental or restated from time to time; (d) "including" means including without limitation; (e) "or" is not exclusive; and (f) the words "herein," "hereof," "hereunder" and other words of similar import refer to these Exchange Provisions as a whole and not to any particular Section or other subdivision. SECTION 2 Exchange of Listed Shares 2.1 Exchange Feature and Exchange Rate; Cash Settlement. (a) Subject to and upon compliance with these Exchange Provisions, at the option of the Holder thereof, each Listed Share may be exchanged with the Exchange Party for fully paid and nonassessable Common Units of the Partnership (calculated in Common Units as to each exchange to seven decimal places and rounded down to six decimal places) at the Exchange Rate, determined as hereinafter provided, in effect at the time of exchange. Such exchange right (the "Exchange Feature") shall commence on the date which is 45 days after the Closing and shall terminate on the earlier of (i) the occurrence of a Mandatory Purchase Event, -6- 49 and (ii) the date on which the Exchange Party has either mailed to the Holders of Listed Shares, or delivered to the Transfer Agent for mailing to the Holders of Listed Shares, a Purchase Notice in accordance with the Purchase Provisions. From and after the occurrence of either of the events in clauses (i) or (ii) in the preceding sentence, any Listed Share surrendered for exchange shall not be exchanged, but shall be held for purchase pursuant to the Purchase Provisions, and shall be so purchased on the relevant Purchase Date. The right to exchange Listed Shares for Common Units is subject to Section 2.1(c). (b) The rate at which Common Units shall be delivered by the Exchange Party upon exchange for Listed Shares (herein called the "Exchange Rate") shall be initially one Common Unit for each one Listed Share. The Exchange Rate may be adjusted in certain instances as provided in Section 2.4. (c) At any time, the Exchange Party may elect to make a cash settlement ("Cash Settlement") in respect of any Listed Share surrendered for exchange by giving notice of such election to the tendering Holder not more than three Trading Days after such Listed Share is surrendered for exchange. Any such notice mailed to the Holder of the Listed Shares at his address as reflected in the records of the Transfer Agent, or as shown on the Exchange Notice, shall be deemed to be validly given, whether or not actually received by such Holder. Such Cash Settlement shall be in an amount per Listed Share equal to the Cash Settlement Amount and shall be paid as promptly as practicable after the completion of the three Trading Day period used to calculate the Cash Settlement Amount. Such payment may be mailed to the Holder of the Listed Shares surrendered for exchange at his address as reflected in the records of the Transfer Agent, or as shown on the Exchange Notice, or made in such other fashion as the Exchange Party may elect. 2.2 Exercise of Exchange Feature. (a) In order to exercise the Exchange Feature, the Holder of any Listed Share to be exchanged shall surrender the certificate representing such Listed Share, duly endorsed or assigned to the Exchange Party or in blank, at any office or agency of the Exchange Party maintained for that purpose pursuant to Section 3.2 (which may be the Transfer Agent), accompanied by a duly signed Exchange Notice substantially in the form provided in Section 2.7, stating that the Holder elects to exchange the Listed Shares represented by such certificate, or, if less than the entire number of Listed Shares represented by such certificate are to be exchanged, the whole number of such Listed Shares to be exchanged. Any such delivery of certificates and the Exchange Notice shall be irrevocable. Only whole numbers of Listed Shares may be exchanged. If a Listed Share is surrendered for exchange during the period from the close of business on any Record Date next preceding any Distribution Date to the opening of business on such Distribution Date, the distribution payable on such Distribution Date shall be paid to the Holder of such Listed Share on the Record Date, notwithstanding that such Listed Share has been surrendered for exchange or the Exchange Date with respect to such Listed Share has occurred. If a Listed Share is surrendered for exchange and the Exchange Date with respect to such Listed Share occurs prior to a Record Date, such Listed Share will, as provided below, have been deemed transferred to the Exchange Party on such Exchange Date, and therefore the Exchange Party will be the holder of such Listed Share on the Record Date and the Exchange Party will receive the distribution on the related Distribution Date, whether or not the Exchange -7- 50 Party has yet delivered to the Holder the certificates representing Common Units (or cash, if the Exchange Party elects Cash Settlement) deliverable upon the exchange. Except as provided in this Section 2.2, no cash or other payment or adjustment shall be made upon any exchange on account of any Distribution declared from the Distribution Date next preceding the Exchange Date in respect of any Listed Share surrendered for exchange, or on account of any distribution declared or payable on the Common Units deliverable upon exchange. (b) Listed Shares shall be deemed to have been exchanged on the Exchange Date, and at such time the rights of the Holders of such Listed Shares as Holders shall cease, including any rights under the LLC Agreement, except the right to receive Common Units or the Cash Settlement Amount from the Exchange Party in exchange for such Listed Shares in accordance with these Exchange Provisions, and such Listed Shares shall upon the Exchange Date be deemed to be transferred to the Exchange Party and shall be transferred to the Exchange Party on the record books of the Transfer Agent, and the Exchange Party shall be deemed to be the owner of such Listed Shares from and after the Exchange Date and shall have all rights as the owner of such Listed Shares. Unless the Exchange Party has elected to make a Cash Settlement, within three Trading Days after the Exchange Date, the Exchange Party shall deliver to the Transfer Agent, for delivery to the Holder, a certificate or certificates for the number of full Common Units deliverable upon exchange, together with payment in lieu of any fraction of a Common Unit, if any, as provided in Section 2.3. Such certificate or certificates for Common Units shall be registered in the name of the Holder of the Listed Shares surrendered for exchange, or duly endorsed to such Holder or accompanied by a duly executed stock power or other appropriate instrument of transfer in favor of such Holder. Holders of Listed Shares have no rights in respect of Common Units unless and until the Listed Shares are exchanged and Common Units registered in the name of the Holder have been issued and delivered to such Holder or to the Transfer Agent as described above. Unless the Exchange Party has elected to make a Cash Settlement, if a record date with respect to Common Units occurs between the Exchange Date and the earlier of the date on which such Common Units are registered in the name of the Holder and the date on which the Exchange Party delivers to the Transfer Agent the certificates for Common Units deliverable upon such exchange as provided above, the Exchange Party shall (i) with respect to a record date for a distribution to be made with respect to the Common Units deliverable by the Exchange Party with respect to such exchange, forward such distribution with respect to such Common Units to the Holder surrendering such Listed Shares for exchange at the address reflected on the records of the Transfer Agent, or as shown on the Exchange Notice, promptly upon the Exchange Party's receipt of such distribution, and (ii) with respect to a record date for voting or consent of Common Units, provide the Holder surrendering such Listed Shares for exchange a proxy enabling such Holder to vote or consent with respect to the vote or consent of such Common Units for the matters related to such record date. (c) In the case of any certificate representing Listed Shares which is exchanged in part only, upon such exchange the Transfer Agent shall authenticate and deliver to the Holder thereof, at the expense of the Company, a new certificate representing the number of Listed Shares not so exchanged. 2.3 Fractions of Common Units. No fractional Common Units shall be delivered upon exchange of any Listed Shares. If more than one certificate representing Listed Shares shall be surrendered for exchange with the same Exchange Date by the same Holder, the number -8- 51 of full Common Units which shall be deliverable upon exchange thereof shall be computed on the basis of the aggregate number of whole Listed Shares so surrendered. Instead of any fractional Common Unit which would otherwise be issuable upon exchange of any Listed Shares, the Exchange Party shall calculate and pay a cash adjustment in respect of such fraction (calculated with respect to a Common Unit to seven decimal places and rounded down to six decimal places) in an amount equal to the same fraction of the Closing Price on the Exchange Date (or, if such day is not a Trading Day, on the Trading Day immediately preceding such day), or at the Exchange Party's option, the Exchange Party may round the number of Common Units delivered up to the next higher whole Common Unit. 2.4 Adjustment of Exchange Rate. The Exchange Rate shall be subject to adjustment from time to time as follows: (a) In the case of (i) any merger of the Partnership, whether or not the Partnership is the survivor, that does not constitute a Mandatory Purchase Event, (ii) any recapitalization, reorganization or similar transaction of the Partnership, in each case that does not constitute a Mandatory Purchase Event, (iii) the Partnership makes a distribution to holders of Common Units of Similar Common Unit Securities, or (iv) if any Person becomes a Controlling Entity in a transaction complying with the requirements of clauses (b)(i) through (b)(iv) of the definition of "Mandatory Purchase Event" in these Exchange Provisions, if all holders of Common Units, or all holders of Common Units other than the Exchange Party and its Affiliates, are to receive, in addition to their Common Units or in exchange for or in place of all of their Common Units, a Similar Common Unit Security, then such adjustments may be made to the Exchange Rate (including providing for the receipt upon exchange of a Listed Share of Similar Common Unit Securities in place of or in addition to Common Units) as the Board of Directors of the Company in its good faith discretion deems appropriate and are agreed to by the Exchange Party. (b) The Exchange Party may at its election, but shall have no obligation to, at any time when the Listed Shares are exchangeable as provided in Section 2.1, increase the then current Exchange Rate by any amount selected by the Exchange Party. If the Exchange Party elects so to increase the then current Exchange Rate, such increase shall remain in effect for at least 20 days following the effective date of such election, after which time the Exchange Party may, at its election (which may be made at the same time as the election to increase the Exchange Rate), reinstate the Exchange Rate in effect prior to the time of such increase. Whenever the Exchange Rate is so to be increased, the Exchange Party shall deliver to the Transfer Agent at least 15 days before the effective date of such increase copies of a notice for mailing to the Holders of the Listed Shares, stating the increased Exchange Rate, the date on which such increase will take effect and the period for which such increased Exchange Rate will be in effect. 2.5 Notice of Adjustments of Exchange Rate. Whenever the Exchange Rate is adjusted as provided in Section 2.4, a notice stating that the Exchange Rate has been adjusted and setting forth the adjusted Exchange Rate shall forthwith be prepared by the Exchange Party, and as soon as practicable after it is prepared, such notice shall be provided by the Exchange Party to the Transfer Agent and to the Holders of Listed Shares. Upon the request of the -9- 52 Exchange Party, the Transfer Agent shall, and the Company shall use its reasonable efforts to cause the Transfer Agent to, mail such notice to the Holders of the Listed Shares. 2.6 Ownership of Exchanged Listed Shares. All Listed Shares delivered for exchange shall be transferred to the Exchange Party and registered in the name of the Exchange Party on the books and records of the Transfer Agent on the related Exchange Date and will not be cancelled but will remain outstanding. -10- 53 2.7 Exchange Notice. The Exchange Notice shall be in substantially the following form: EXCHANGE NOTICE The undersigned record holder of Listed Shares of Kinder Morgan Management, LLC (the "Company") hereby surrenders for exchange pursuant to Section 2.1 of the Exchange Provisions of the Limited Liability Company Agreement of the Company the Listed Shares represented by the certificates described below. Name of Record Holder: ------------------------------------------------- Title: ----------------------------------------------------------------- Address: --------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------- Telephone Number: ------------------------------------------------------ Tax Identification or Social Security Number: ------------------------- Certificates Surrendered
Certificate Number Number of Listed Shares Represented by Certificate ------------------ -------------------------------------------------- - -------------------------------------- -------------------------------------------------- - -------------------------------------- -------------------------------------------------- - -------------------------------------- -------------------------------------------------- - -------------------------------------- -------------------------------------------------- - -------------------------------------- -------------------------------------------------- Total Number of Listed Shares --------------------------------------------------
(If you desire to exchange less than all Listed Shares scheduled above, complete the blank below with respect to the number of Listed Shares to be exchanged.) Number of Listed Shares to be exchanged: --------------------------------------- Note: If no number of Listed Shares is indicated, all Listed Shares represented by the certificates scheduled above will be exchanged. Signatures This Exchange Notice must be signed by the record holder(s) exactly as the name(s) appear on the certificate(s) representing the Listed Shares scheduled above, or if delivered by a participant in the depositary for the Listed Shares, exactly as such participant's name appears on the security position listing as the owner of Listed Shares. If signature is by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, please set forth the full title. Proper evidence of such person's authority may be required by the Exchange Party. Dated: ---------------------------------------------- Signature(s) of Record Holders: ----------------------------------------- ----------------------------------------- Print name(s) of Record Holders: ----------------------------------------- ----------------------------------------- Print title(s) of Signatories: ----------------------------------------- ----------------------------------------- -11- 54 SECTION 3 Certain Covenants 3.1 Notice of Certain Action. In case: (a) the Partnership shall declare a dividend or any other distribution on Common Units payable otherwise than exclusively in cash or Common Units; or (b) of the voluntary or involuntary dissolution, liquidation or winding up of the Partnership; or (c) the Partnership or any Affiliate of the Partnership shall commence a tender offer for all or a portion of the outstanding Common Units; then the Company shall cause to be delivered to the Transfer Agent a soon as reasonably practicable after the Company has become aware of such event, copies of a notice for mailing to the Holders of (x) the date on which a record is to be taken for the purpose of such distribution or, if a record is not to be taken, the date as of which the holders of Common Units to be entitled to such distribution are to be determined; (y) the date on which such dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Units shall be entitled to exchange their Common Units for securities, cash or other property deliverable upon such dissolution, liquidation or winding up; or (z) the date on which the right to make tenders under such tender offer expires. Neither the failure to give such notice nor any defect therein shall affect the legality or validity of the proceedings described in clauses (a) through (c) of this Section 3.1. 3.2 Maintenance of Office or Agency. (a) The Exchange Party will maintain in the Borough of Manhattan, The City of New York an office or agency where Listed Shares may be surrendered for exchange and where notices and demands to or upon the Exchange Party in respect of the Listed Shares and these Exchange Provisions may be served. The Exchange Party will give prompt written notice to the Transfer Agent of the location, and any change in the location, of such office or agency. As of the date of these Exchange Provisions, such office or agency shall be the Transfer Agent at its office at ______________, New York, New York 100__. If at any time the Exchange Party shall fail to maintain any such required office or agency or shall fail to furnish the Transfer Agent with the address thereof, such surrenders may be made or served at the office of the Transfer Agent, and the Exchange Party hereby appoints the Transfer Agent as its agent to receive all such surrenders in any such case. (b) The Exchange Party may also from time to time designate one or more other offices or agencies (in or outside the Borough of Manhattan, The City of New York) where -12- 55 the Listed Shares may be presented or surrendered for such purpose and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Exchange Party of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York for such purpose as provided in Section 3.2(a). The Exchange Party will give prompt written notice to the Transfer Agent of any such designation or rescission and of any change in the location of any such other office or agency. 3.3 Covenants as to Common Units. The Exchange Party agrees that all Common Units that are delivered upon exchange of Listed Shares, upon such delivery, will have been duly authorized and validly issued and will be fully paid and nonassessable and, except as provided in Section 3.5 of these Exchange Provisions, the Exchange Party will pay all taxes, liens and charges with respect to the delivery thereof. The Exchange Party agrees that it will at all times own, directly or indirectly through subsidiaries, a number of Common Units equal to no less than 20% of the number of outstanding Listed Shares not owned by the Exchange Party and its Affiliates. 3.4 Registration. The Company and the Exchange Party will use reasonable efforts to effect or cause to be effected all registrations and filings with, and obtain all consents, authorizations, approvals or failures to object by, all governmental authorities that may be necessary for such party and its subsidiaries and Affiliates under any United States Federal or state law (including the Securities Act, the Securities Exchange Act and state securities and Blue Sky laws) for any exchange pursuant to the Exchange Feature and for the Common Units deliverable upon exchange of Listed Shares to be lawfully made and delivered as provided herein. 3.5 Taxes on Exchanges. Except as provided in the next sentence, the Exchange Party will pay any and all taxes and duties that may be payable in respect of the delivery of Common Units pursuant hereto. The Exchange Party shall not, however, be required to pay any tax or duty which may be payable in respect of any transfer involved in the delivery of Common Units in a name other than that of the Holder of the Listed Shares to be exchanged, and no such delivery shall be made unless and until the Person requesting such delivery has paid to the Exchange Party the amount of any such tax or duty, or has established to the satisfaction of the Exchange Party that such tax or duty has been paid. 3.6 Performance by Subsidiaries. The Exchange Party may cause any one or more of its Subsidiaries to deliver Common Units or cash that the Exchange Party may be required to deliver hereunder. Such delivery shall constitute performance of the obligations of the Exchange Party to the same extent as delivery by the Exchange Party, but the ability of the Exchange Party to cause a Subsidiary to make such deliveries shall not relieve the Exchange Party of its obligation for such deliveries to be made. SECTION 4 Responsibility of Transfer Agent 4.1 Responsibility of Transfer Agent for Exchange Provisions. The Transfer Agent, in such capacity, shall not at any time be under any duty or responsibility to any Holder of Listed Shares to determine whether any facts exist which may require any adjustment of the Exchange -13- 56 Rate, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed, or herein provided to be employed, in making the same. The Transfer Agent, in such capacity, shall not be accountable with respect to the validity or value (or the kind or amount) of any Common Units, or of any other securities or property or cash, which may at any time be delivered upon the exchange of any Listed Shares; and it does not make any representation with respect thereto. The Transfer Agent, in such capacity, shall not be responsible for any failure of the Exchange Party to make or calculate any cash payment or to transfer or deliver any Common Units or certificates for Common Units or other securities or property or cash upon the surrender of any Listed Share for the purpose of exchange; and the Transfer Agent, in such capacity, shall not be responsible for any failure of the Exchange Party to comply with any of the covenants of the Exchange Party contained in these Exchange Provisions. 4.2 Deliveries to Holders and Former Holders. Whenever the Exchange Party or the Company may deliver to the Transfer Agent for mailing or delivery to the Holders or former Holders of Listed Shares any notice, communication, certificate for Common Units or Listed Shares, Cash Settlement Amount or other payment or other matter deliverable to Holders or former Holders of Listed Shares under the Exchange Provisions, the Transfer Agent shall promptly mail or deliver such notice, communication, certificate, cash or other payment or matter to the relevant Holder or former Holder, and the Company shall use its reasonable efforts to cause the Transfer Agent to do so. SECTION 5 Binding Effect on the Exchange Party 5.1 Adoption of Exchange Provisions by Exchange Party. KMI, as the initial Exchange Party pursuant to these Exchange Provisions, has executed in the place provided below and delivered to the Company a copy of these Exchange Provisions, pursuant to which KMI has, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, agreed to be subject to and bound be these Exchange Provisions. KMI further acknowledges and agrees that these Exchange Provisions and its obligations hereunder are for the benefit of and shall be enforceable by any Holder of Listed Shares. SECTION 6 Amendments 6.1 Amendments. These Exchange Provisions may be amended by an agreement in writing signed by the Company and the Exchange Party without the vote, approval or consent of the Holders of any of the Listed Shares, unless such amendment would (a) reduce the time for any notice to which the Holders of the Listed Shares would be entitled under these Exchange Provisions, or (b) have a material adverse effect on the powers, preferences or rights of the Listed Shares as determined in the sole discretion of the Board of Directors of the Company, in which case such amendment must be approved by such vote or consent of the Holders of Listed Shares, if any, as may be required by the LLC Agreement. Any amendment required by reason of an adjustment to the Exchange Rate pursuant to Section 2.4 shall be deemed not to have such a material adverse effect or reduce the time for any notice and therefore may be made without the vote, consent or approval of the Holders of any of the Listed Shares. -14- 57 6.2 Amendment Without Vote. Notwithstanding the foregoing provisions and the other provisions of the LLC Agreement with respect to amendments, the Board of Directors of the Company has reserved the right to make, with the written consent of the Exchange Party, and may make, with the written consent of the Exchange Party, changes in the Listed Shares and these Exchange Provisions, to meet the requirements of applicable securities and other laws and regulations and stock exchange rules and to effect the intent of the provisions of the LLC Agreement, and also may make other changes which the Board of Directors of the Company determines in its sole discretion will not have a material adverse effect on the rights and privileges of the Listed Shares, in each case without the vote, consent or approval of the Holders of any Listed Shares. In addition, notwithstanding the foregoing provisions with respect to amendments, (a) in the case of (i) any merger of the Partnership, whether or not the Partnership is the survivor, that is the subject of a unitholder vote and does not constitute a Mandatory Purchase Event, and (ii) any recapitalization, reorganization or similar transaction of the Partnership, in each case that is the subject of a unitholder vote and does not constitute a Mandatory Purchase Event, or (b) if any Person becomes a Controlling Entity in a transaction complying with the requirements of clauses (b)(i) through (b)(iv) of the definition of "Mandatory Purchase Event" in these Exchange Provisions, such amendments as of the Board of Directors of the Company in its good faith discretion deems appropriate and are agreed to by the Exchange Party may be made in these Purchase Provisions to accommodate, in the case of clause (a), such merger, recapitalization, reorganization, or similar transaction, or, in the case of clause (b), the assumption by such Person of the obligations of the Exchange Party under these Exchange Provisions, and any such amendment shall be deemed not to have such a material adverse effect or reduce the time for any notice, and therefore may be made without the vote, consent or approval of the Holders of any of the Listed Shares. -15- 58 ADOPTION BY KINDER MORGAN, INC. KMI, as the initial Exchange Party pursuant to these Exchange Provisions, has executed in the place provided below and delivered to the Company a copy of these Exchange Provisions, pursuant to which KMI has, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, adopted and agreed to be subject to and bound by these Exchange Provisions as the Exchange Party hereunder. KMI further acknowledges and agrees that these Exchange Provisions and its obligations hereunder are for the benefit of and shall be enforceable by any record holder of Listed Shares. Dated: , 2001 ---------------- KINDER MORGAN, INC. By: --------------------------------- Authorized Officer -16- 59 ANNEX B TO EXHIBIT 3.2 PURCHASE PROVISIONS ANNEX B TO THE AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF KINDER MORGAN MANAGEMENT, LLC These Purchase Provisions, dated as of __________, 2001, are an integral part of the Amended and Restated Limited Liability Company Agreement of Kinder Morgan Management, LLC, dated as of ____________, 2001. SECTION 1 Definitions 1.1 Definitions. In these Purchase Provisions, the following terms shall have the following respective meanings: "Affiliate" means, with respect to any Person, any other Person that directly or indirectly controls, is controlled by or is under common control with, the Person in question. As used herein, the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. "Average Market Price" for any security means the average of the Closing Prices for such security for the consecutive Trading Days in the period specified in the relevant Section of these Purchase Provisions ending on the Trading Day specified in the relevant Section of these Purchase Provisions. "Beneficial Owner" has the meaning set forth in Rules 13d-3 and 13d-5 under the Securities Exchange Act, as in effect on the date of these Purchase Provisions, and the terms "Beneficial Ownership," "Beneficially Own," "Beneficially Owned" and similar terms have correlative meanings. "Board of Directors of the Company" means the board of directors of the Company established pursuant to the LLC Agreement, and any committee of such board duly authorized to act in respect thereof. "Board of Directors of the Purchaser" means (a) if the Purchaser is KMI, the board of directors of KMI; (b) if the Purchaser is a limited partnership with a corporate general partner or any other corporation, the board of directors of such corporate general partner or corporation; (c) if the Purchaser is any other form of entity, the board of directors or other comparable 60 governing body of such entity; and (d) in each case, any committee of such board or body duly authorized to act in respect thereof. "Business Day" means any day other than a Saturday or Sunday or a day on which banking institutions in the State of New York or the State of Texas are authorized or required by law to close. "Closing Price" for a security on any day means: (a) for securities listed on a National Securities Exchange, the last sale price for that day, regular way, or if there are no sales on that day, the average of the closing bid and asked prices for that day, regular way, in either case as reported in the principal composite transactions reporting system for the principal National Securities Exchange on which such securities are listed; or (b) if such securities are not listed on a National Securities Exchange on that day, the last quoted price on that day, or if no price is quoted, the average of the high bid and low asked prices on that day, each as reported by the National Association of Securities Dealers Automated Quotation system; or (c) if such securities are not so quoted on that day, the average of the closing bid and asked prices on that day furnished by a professional market maker in such securities selected by the Board of Directors of the Purchaser; or (d) if on that day no market maker is making a market in such securities, the fair value of such securities on such day as determined by the Board of Directors of the Purchaser. "Common Units" has the meaning assigned to it in the Partnership Agreement. "Company" means Kinder Morgan Management, LLC, a Delaware limited liability company. "Controlling Entity" has the meaning set forth in clause (b)(i) of the definition of Mandatory Purchase Event in this Section 1.1. "Entity" means a corporation, limited liability company, venture, partnership, trust, unincorporated organization, association or other entity. "Exchange Provisions" means the exchange provisions attached to the LLC Agreement as Annex A and thereby made a part of the LLC Agreement. "General Partner" means the general partner of the Partnership. On the date of these Purchase Provisions, the General Partner is Kinder Morgan G.P., Inc. "I-Units" has the meaning assigned to it in the Partnership Agreement. -2- 61 "KMI" means Kinder Morgan, Inc., a Kansas corporation, its successors by merger and any Person who succeeds to its obligations under the Exchange Provisions, these Purchase Provisions, the Registration Rights Agreement and the Tax Indemnification Agreement in connection with an acquisition of all or substantially all of its assets by such Person. "LLC Agreement" means the Amended and Restated Limited Liability Company Agreement of the Company dated as of __________, 2001, including these Purchase Provisions and the Exchange Provisions. "Listed Shares" means the limited liability company interests in the Company designated in the LLC Agreement as "Listed Shares." "Mandatory Purchase" means the purchase of Listed Shares pursuant to Section 2. "Mandatory Purchase Date" has the meaning set forth in Section 2.3(d). "Mandatory Purchase Event" means any one of the following: (a) the occurrence of the first day on which the aggregate amount of distributions or other payments by the Partnership on the Common Units (other than distributions or payments made in Common Units or Similar Common Unit Securities, but including distributions and other payments pursuant to an issuer tender offer by the Partnership) during the immediately preceding 360-day period exceeds 50% of the Average Market Price of a Common Unit during the ten consecutive Trading Day period ending on the last Trading Day prior to the first day of such 360-day period; (b) the occurrence of an event resulting in KMI and its Affiliates ceasing to be the Beneficial Owners of more than 50% of the total voting power of all shares of capital stock of the General Partner, unless: (i) the event results in another Person becoming the Beneficial Owner of more than 50% of the total voting power of all shares of capital stock of the General Partner (such other Person being referred to herein as the "Controlling Entity"); (ii) the Controlling Entity is organized under the laws of a state in the United States; (iii) the Controlling Entity has long term unsecured debt with an investment grade credit rating, as determined by Moody's Investor Services, Inc. and Standard & Poor's Rating Service, immediately prior to the event that results in the Controlling Entity becoming the Beneficial Owner of more than 50% of the total voting power of all shares of capital stock of the General Partner; and -3- 62 (iv) the Controlling Entity assumes all obligations of KMI and the Purchaser to the Company and to the holders of the Listed Shares under these Purchase Provisions, the Exchange Provisions, the Registration Rights Agreement and the Tax Indemnification Agreement. (c) the merger of the Partnership with or into another Person in any case where the Partnership is not the surviving entity, or the sale of all or substantially all of the assets of the Partnership and its subsidiaries, taken as a whole, to another Person, unless: (i) in the transaction the holders of Common Units receive in exchange for all of their Common Units a Similar Common Unit Security of the Person that is the surviving Entity or that purchased the assets; (ii) in the transaction the Company receives in exchange for all of its I-Units a Similar I-Unit Security of the Person that is the surviving Entity or that purchased the assets; (iii) no consideration is received in the transaction in respect of Common Units other than Similar Common Unit Securities and/or cash and the amount of cash received per Common Unit does not exceed 33-1/3% of the Average Market Price of a Common Unit for the ten consecutive Trading Day period ending on the Trading Day immediately preceding the execution of the definitive agreement for the transaction; and (iv) no consideration is received in the transaction in respect of I-Units other than Similar I-Unit Securities of the Person that is the surviving Entity or that purchased the assets. "Mandatory Purchase Notice" has the meaning set forth in Section 2.3. "Mandatory Purchase Price" means the higher of the Average Market Price for the Listed Shares and the Average Market Price for the Common Units, in each case for the ten consecutive Trading Day period ending on the Trading Day immediately prior to the date of the Mandatory Purchase Event. "National Securities Exchange" means an exchange registered with the Securities and Exchange Commission under Section 6(a) of the Securities Exchange Act. "Notice Date" means the date on which the Purchaser either mails the relevant Purchase Notice to the holders of Listed Shares or delivers copies of the relevant Purchase Notice to the Transfer Agent for mailing to the holders of Listed Shares. "Optional Purchase" means the purchase of Listed Shares at the election of the Purchaser pursuant to Section 3 or Section 4. "Optional Purchase Condition for Common Units and Listed Shares" means any time at which the sum of the number of Common Units held by the Purchaser and its Affiliates plus the -4- 63 number of Listed Shares held by the Purchaser and its Affiliates equals 80% or more of the sum of the aggregate number of Common Units then outstanding plus the aggregate number of Listed Shares then outstanding. "Optional Purchase Condition for Listed Shares" means any time at which the Purchaser and its Affiliates hold 80% or more of the then outstanding Listed Shares. "Optional Purchase Date" means the date selected by the Purchaser for the Optional Purchase of Listed Shares pursuant to Section 3.2 or Section 4.2. "Optional Purchase Notice" has the meaning set forth in Section 3.2. "Optional Purchase Notice for Common Units and Listed Shares" has the meaning set forth in Section 4.2. "Optional Purchase Price for Common Units and Listed Shares" means a price which is equal to the greatest of: (a) the Average Market Price for the Common Units for the 20 consecutive Trading Day period ending on the fifth Trading Day prior to the Notice Date, (b) the highest price the Purchaser or its Affiliates paid for Common Units during the 90 calendar day period ending on the day prior to the Notice Date, (c) the Average Market Price for the Listed Shares for the 20 consecutive Trading Day period ending on the fifth Trading Day prior to the Notice Date, and (d) the highest price the Purchaser or its Affiliates paid for Listed Shares (other than pursuant to the Exchange Provisions) during the 90 calendar day period ending on the day prior to the Notice Date. To the extent that the price paid for Listed Shares or Common Units in clauses (b) or (d) is paid in securities, the value of such securities shall be the Closing Price for such securities on the day the purchase of the Listed Shares or Common Units is effected. To the extent that the price paid for Listed Shares or Common Units in clauses (b) or (d) is paid other than in cash or securities, the value of such the other consideration (and therefore the price paid for such Listed Shares or Common Units) shall be as determined by the Board of Directors of the Purchaser. "Optional Purchase Price for Listed Shares" means a price which is equal to 110% of the greater of: (a) the Average Market Price for the Listed Shares for the ten consecutive Trading Day period ending on the fifth Trading Day prior to the Notice Date, and (b) the highest price Purchaser or its Affiliates paid for Listed Shares (other than pursuant to the Exchange Provisions) during the 90 calendar day period ending on the day prior to the Notice Date. To the extent that the price paid for Listed Shares in clause (b) is paid in securities, the value of such securities shall be the Closing Price for such securities on the day the purchase of the Listed Shares is effected. To the extent that the price paid for Listed Shares in clause (b) is paid other than in cash or securities, the value of such the other consideration (and therefore the price paid for such Listed Shares) shall be as determined by the Board of Directors of the Purchaser. "Partnership" means Kinder Morgan Energy Partners, L.P., a Delaware limited partnership. -5- 64 "Partnership Agreement" means the Third Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of _________, 2001. "Partnership Notice" has the meaning set forth in Section 4.2. "Person" means a natural person or an Entity. "Purchase Date" means either a Mandatory Purchase Date or an Optional Purchase Date. "Purchase Notice" means a Mandatory Purchase Notice, an Optional Purchase Notice, or an Optional Purchase Notice for Common Units and Listed Shares. "Purchase Price" means the Mandatory Purchase Price, the Optional Purchase Price for Listed Shares or the Optional Purchase Price for Common Units and Listed Shares. "Purchase Provisions" means these Purchase Provisions, which are attached to the LLC Agreement as Annex B and hereby made a part of the LLC Agreement. "Purchaser" means the Person with the obligation to make the Mandatory Purchase and the right to make an Optional Purchase pursuant to these Purchase Provisions. The Purchaser initially is KMI. "Registration Rights Agreement" means the Registration Rights Agreement between KMI and the Partnership, dated as of ___________, 2001. "Section" means a section of these Purchase Provisions. "Securities Act" means the United States Securities Act of 1933, as amended from time to time and any successor to such statute and all rules and regulations promulgated thereunder. "Securities Exchange Act" means the United States Securities Exchange Act of 1934, as amended from time to time and any successor to such statute and all rules and regulations promulgated thereunder. "Similar Common Unit Security" means a security which has in all material respects the same rights and privileges as the Common Units. "Similar I-Unit Security" means a security that has in all material respects the same rights and privileges as the I-Units. "Subsidiary," when used in connection with the Partnership, means any Affiliate of the Partnership which the Partnership controls, and of which the Partnership owns, directly or indirectly, a majority of the aggregate shares, partnership interests or other equity interests. "Tax Indemnification Agreement" means the Tax Indemnification Agreement dated as of ___________, 2001, between KMI and the Company. -6- 65 "Trading Day" for any security means a day on which: (a) the principal National Securities Exchange on which such security is listed is open for business, or (b) if such security is not listed on any National Securities Exchange, a day on which banking institutions in The City of New York generally are open. "Transfer Agent" means any bank, trust company or other Person (including the Company or any Affiliate of the Company) appointed from time to time by the Board of Directors of the Company to act as registrar and transfer agent for the Listed Shares. On the date of these Purchase Provisions, First Chicago Trust Company of New York is the Transfer Agent. 1.2 Rules of Construction. Unless the context otherwise clearly requires: (a) the terms defined in Section 1.1 have the meanings assigned to them in that Section for purposes of these Purchase Provisions; terms defined in the Exchange Provisions and also in these Purchase Provisions shall in the Exchange Provisions have the meanings ascribed to them therein; terms defined elsewhere in the LLC Agreement and also in these Purchase Provisions shall in such other portions of the LLC Agreement have the meanings ascribed to them therein; (b) terms defined include the plural as well as the singular and vice versa; (c) references to any document, agreement, instrument or provision thereof mean such document, agreement, instrument or provisions thereof as the same may be duly amended, supplemented or restated from time to time; (d) "including" means including without limitation; (e) "or" is not exclusive; and (f) the words "herein," "hereof," "hereunder" and other words of similar import refer to these Purchase Provisions as a whole and not to any particular Section or other subdivision. SECTION 2 Mandatory Purchase 2.1 Mandatory Purchase Event. Upon the occurrence of a Mandatory Purchase Event, the Purchaser shall purchase all, but not less than all, of the outstanding Listed Shares that are not held by the Purchaser or its Affiliates at the Mandatory Purchase Price, pursuant to the provisions of this Section 2. The Mandatory Purchase Price for any fractional Listed Share shall be the Mandatory Purchase Price for a whole Listed Share times the fraction of the Listed Share -7- 66 to be purchased. In determining whether any fractional Listed Shares are outstanding, all certificates registered in the name of the same holder of Listed Shares shall be aggregated. 2.2 Notice to Transfer Agent. Promptly, but in no case later than three Business Days, following the occurrence of a Mandatory Purchase Event, the Purchaser shall give notice to the Transfer Agent that a Mandatory Purchase Event has occurred, and request that the Transfer Agent mail the Mandatory Purchase Notice to the record holders of the Listed Shares as of earlier of the date of the Mandatory Purchase Event or the most recent practicable date. If the Purchaser so requests, the Transfer Agent shall, and the Company shall use its reasonable efforts to cause the Transfer Agent to, mail the Mandatory Purchase Notice to such record holders of Listed Shares. 2.3 Purchase Notice. Within three Business Days following the occurrence of a Mandatory Purchase Event, the Purchaser shall mail, or deliver to the Transfer Agent for mailing and cause the Transfer Agent to mail, to the record holders of the Listed Shares described in Section 2.2(a), a notice (the "Mandatory Purchase Notice") which shall state: (a) That a Mandatory Purchase Event has occurred and that pursuant to the provisions of the LLC Agreement and these Purchase Provisions the Purchaser will purchase all of the outstanding Listed Shares that are not held by the Purchaser or its Affiliates at the Mandatory Purchase Price; (b) A brief description of the circumstances and relevant facts regarding the Mandatory Purchase Event; (c) The dollar amount per Listed Share of the Mandatory Purchase Price; (d) The date on which the Listed Shares will be purchased (the "Purchase Date"), which shall be no later than five Business Days from the date the Mandatory Purchase Notice is mailed by the Purchaser or the Transfer Agent; and (e) The instructions a holder of Listed Shares must follow, including any other documents such holder must deliver, in order to receive the Mandatory Purchase Price. Any such Mandatory Purchase Notice mailed to a record holder of Listed Shares at such holder's address as reflected in the records of the Transfer Agent as of the time set forth in Section 2.2, or delivered by the Purchaser to the Transfer Agent for mailing to such holders, shall be conclusively presumed to have been given, whether or not such holder receives such notice. Failure to give any such notice to any particular holder or holders shall not affect the validity of the Mandatory Purchase pursuant to these Purchase Provisions. 2.4 Deposit of Funds; Effect of Purchase. On or prior to the Mandatory Purchase Date, the Purchaser shall irrevocably deposit with the Transfer Agent funds sufficient to pay the Mandatory Purchase Price for all outstanding Listed Shares that on the date of such deposit are not held by the Purchaser or its Affiliates. After the date of such deposit and prior to the Mandatory Purchase Date, neither the Purchaser nor any of its Affiliates shall dispose of any -8- 67 Listed Shares held by them, other than to the Purchaser or any of its Affiliates. The Transfer Agent shall return to the Purchaser any funds not so required for the purchase of Listed Shares that on the Mandatory Purchase Date are not held by the Purchaser or its Affiliates. If the Purchaser so deposits such funds with the Transfer Agent, and if the Purchaser has delivered the Mandatory Purchase Notice to the Transfer Agent for mailing to the record holders of the Listed Shares, then from and after the Mandatory Purchase Date, notwithstanding that any certificate representing Listed Shares shall not have been surrendered for purchase, all rights of the holders of such Listed Shares as such, including any other rights under the LLC Agreement and the rights to receive any distributions on Listed Shares that have been declared (or a record date for which has been set) but that have not been paid or made, shall thereupon cease, except the right to receive the Mandatory Purchase Price, without interest, upon surrender to the Transfer Agent of the certificates representing such Listed Shares, with such other documents as may be required by the Mandatory Purchase Notice, in compliance with the instructions in the Mandatory Purchase Notice, and such Listed Shares shall from and after the Mandatory Purchase Date be deemed to be purchased by the Purchaser and shall be transferred to the Purchaser on the record books of the Transfer Agent, and the Purchaser shall be deemed to be the owner of such Listed Shares from and after the Mandatory Purchase Date and shall have all rights as the owner and record holder of such Listed Shares. As provided in the Exchange Provisions, the ability of a holder of Listed Shares to exchange such Listed Shares for Common Units shall terminate on the earlier of (i) the occurrence of a Mandatory Purchase Event and (ii) the date on which the Purchaser has either mailed to the record holders of Listed Shares, or delivered to the Transfer Agent for mailing to the record holders of Listed Shares, a Purchase Notice. From and after the occurrence of the earlier of clause (i) or clause (ii) in the preceding sentence, any Listed Share surrendered for exchange shall not be exchanged but shall be held for purchase pursuant to these Purchase Provisions, and shall be so purchased on the relevant Purchase Date. SECTION 3 Optional Purchase 3.1 Optional Purchase Condition for Listed Shares. At any time when the Optional Purchase Condition for Listed Shares exists, the Purchaser may elect, but shall not be obligated, to purchase all, but not less than all, of the outstanding Listed Shares that are not held by the Purchaser or its Affiliates at the Optional Purchase Price for Listed Shares pursuant to the provisions of this Section 3. The Purchase Price for any fractional Listed Share purchased pursuant to this Section 3 shall be the Optional Purchase Price for Listed Shares times the fraction of the Listed Share to be purchased. In determining whether any fractional Listed Shares are outstanding, all certificates registered in the name of the same holder of Listed Shares shall be aggregated. 3.2 Optional Purchase Notice. The Purchaser may exercise its election to make an Optional Purchase by delivering copies of a notice (the "Optional Purchase Notice") to the Transfer Agent not less than ten days and not more than 60 days prior to the date the Purchaser selects for the Optional Purchase (the "Optional Purchase Date"). The Transfer Agent shall, and the Company will use its reasonable efforts to cause the Transfer Agent to, mail the Optional Purchase Notice to the record holders of Listed Shares as of the most recent practicable date. Any such Optional Purchase Notice mailed to a record holder of Listed Shares at his address as -9- 68 reflected in the records of the Transfer Agent, or delivered by the Purchaser to the Transfer Agent for mailing to such holders, shall be conclusively presumed to have been given, whether or not such holder receives such notice. Failure to give such notice to any particular holder or holders shall not affect the validity of the Optional Purchase pursuant to these Purchase Provisions. So long as the Optional Purchase Condition for Listed Shares exists on the date of the Optional Purchase Notice, the Purchaser may purchase such Listed Shares pursuant to these Optional Purchase provisions, whether or not the Optional Purchase Condition for Listed Shares continues to exist on the Optional Purchase Date. The Optional Purchase Notice shall state: (a) that as of the date of such Optional Purchase Notice, the Optional Purchase Condition for Listed Shares exists, and that the Purchaser has elected to make the Optional Purchase pursuant to the terms of the LLC Agreement and these Purchase Provisions; (b) the Optional Purchase Price; (c) the Optional Purchase Date; and (d) the instructions a holder of Listed Shares must follow, including any other documents a holder of Listed Shares must deliver, in order to receive the Optional Purchase Price. 3.3 Deposit of Funds; Effect of Purchase. On or prior to the Optional Purchase Date, the Purchaser shall irrevocably deposit with the Transfer Agent funds sufficient to pay the Optional Purchase Price for Listed Shares for all outstanding Listed Shares that on the date of such deposit are not held by the Purchaser or its Affiliates. After the date of such deposit and prior to the Optional Purchase Date, neither the Purchaser nor any of its Affiliates shall dispose of any Listed Shares held by them, other than to the Purchaser or any of its Affiliates. The Transfer Agent shall return to the Purchaser any funds not so required for the purchase of Listed Shares that on the Optional Purchase Date are not held by the Purchaser or its Affiliates. If the Purchaser so deposits such funds with the Transfer Agent, and if the Purchaser has delivered the Optional Purchase Notice to the Transfer Agent for mailing to the record holders of the Listed Shares, then from and after the Optional Purchase Date, notwithstanding that any certificate representing Listed Shares shall not have been surrendered for purchase, all rights of the holders of such Listed Shares as such, including any other rights under the LLC Agreement and the rights to receive any distributions on Listed Shares that have been declared (or a record date for which has been set) but that have not been paid or made, shall thereupon cease, except the right to receive the Optional Purchase Price for Listed Shares, without interest, upon surrender to the Transfer Agent of the certificates representing such Listed Shares, with such other documents as may be required by the Optional Purchase Notice, in compliance with the instructions in the Optional Purchase Notice, and such Listed Shares shall from and after the Optional Purchase Date be deemed to be purchased by the Purchaser and shall be transferred to the Purchaser on the record books of the Transfer Agent, and the Purchaser shall be deemed to be the owner of such Listed Shares from and after the Optional Purchase Date and shall have all rights as the owner of such Listed Shares. As provided in the Exchange Provisions, the ability of a holder of Listed Shares to exchange such Listed Shares for Common Units shall terminate on the earlier of (i) the occurrence of a Mandatory Purchase Event, and (ii) the date on which the Purchaser has either -10- 69 mailed to the record holders of Listed Shares, or delivered to the Transfer Agent for mailing to the record holders of Listed Shares, a Purchase Notice. From and after the occurrence of the earlier of clause (i) or clause (ii) in the preceding sentence, any Listed Share surrendered for exchange shall not be exchanged, but shall be held for purchase pursuant to these Purchase Provisions, and shall be so purchased on the relevant Purchase Date. SECTION 4 Optional Purchase of Common Units and Listed Shares 4.1 Optional Purchase Condition for Common Units and Listed Shares. If at any time when the Optional Purchase Condition for Common Units and Listed Shares exists, the Purchaser may elect, but shall not be obligated, to purchase all, but not less than all, of the outstanding Listed Shares that are not held by the Purchaser or its Affiliates at the Optional Purchase Price for Common Units and Listed Shares pursuant to the provisions of this Section 4, but only if the General Partner or its assignee elects to purchase all, but not less than all, of the outstanding Common Units that are not held by the Purchaser or its Affiliates pursuant to the provisions of the Partnership Agreement. The Purchase Price for any fractional Listed Share purchased pursuant to this Section 4 shall be the Optional Purchase Price for Common Units and Listed Shares times the fraction of the Listed Share to be purchased. In determining whether any fractional Listed Shares are outstanding, all certificates registered in the name of the same holder of Listed Shares shall be aggregated. 4.2 Optional Purchase Notice for Common Units and Listed Shares. The Purchaser may exercise its election to make an Optional Purchase of Common Units and Listed Shares by delivering copies of a notice (the "Optional Purchase Notice for Common Units and Listed Shares") to the Transfer Agent not less than ten days and not more than 60 days prior to the date the Purchaser selects for the Optional Purchase (the "Optional Purchase Date"). The Optional Purchase Notice for Common Units and Listed Shares shall not be effective, however, unless and until the later to occur of (i) delivery of the Optional Purchase Notice for Common Units and Listed Shares to the Transfer Agent and (ii) delivery to the transfer agent for the Common Units of a similar notice with respect to the purchase of all outstanding Common Units not owned by the Purchaser and its Affiliates (the "Partnership Notice") pursuant to the provisions of the Partnership Agreement. After both the Partnership Notice has been given to the transfer agent for the Common Units and the Optional Purchase Notice for Common Units and Listed Shares has been given to the Transfer Agent, the Transfer Agent shall, and the Company will use its reasonable efforts to cause the Transfer Agent to, mail the Optional Purchase Notice for Common Units and Listed Shares to the record holders of Listed Shares as of the most recent practicable date. Any such Optional Purchase Notice for Common Units and Listed Shares mailed to a record holder of Listed Shares at his address as reflected in the records of the Transfer Agent, or delivered by the Purchaser to the Transfer Agent for mailing to such holders, shall be conclusively presumed to have been given, whether or not such holder receives such notice. Failure to give such notice to any particular holder or holders shall not affect the validity of the purchase pursuant to these Purchase Provisions. So long as the Optional Purchase -11- 70 Condition for Common Units and Listed Shares exists on the date of the Optional Purchase Notice for Common Units and Listed Shares, the Purchaser may purchase such Listed Shares pursuant to these Optional Purchase provisions, whether or not the Optional Purchase Condition for Common Units and Listed Shares continues to exist on the Optional Purchase Date. The Optional Purchase Notice for Common Units and Listed Shares shall state: (a) that with respect to Listed Shares that on the Optional Purchase Date are not held by the Purchaser or its Affiliates, the Purchaser has elected to make the Optional Purchase for Common Units and Listed Shares pursuant to the terms of the LLC Agreement and these Purchase Provisions and that the General Partner or its assignee has elected to make the purchase of Common Units pursuant to the similar provisions of the Partnership Agreement; (b) the Optional Purchase Price for Common Units and Listed Shares; (c) the Optional Purchase Date; and (d) the instructions a holder of Listed Shares must follow, including any other documents such holder must deliver, in order to receive the Optional Purchase Price for Common Units and Listed Shares. 4.3 Deposit of Funds; Effect of Purchase. On or prior to the Optional Purchase Date, the Purchaser shall irrevocably deposit with the Transfer Agent funds sufficient to pay the Optional Purchase Price for Common Units and Listed Shares for all outstanding Listed Shares that on the date of such deposit are not held by the Purchaser or its Affiliates. After the date of such deposit and prior to the Optional Purchase Date, neither the Purchaser nor any of its Affiliates shall dispose of any Listed Shares held by them, other than to the Purchaser or any of its Affiliates. The Transfer Agent shall return to the Purchaser any funds not so required for such purchase. If the Purchaser so deposits funds with the Transfer Agent, and if the Purchaser has delivered the Optional Purchase Notice for Common Units and Listed Shares to the Transfer Agent for mailing to the record holders of the Listed Shares, then from and after the Optional Purchase Date, notwithstanding that any certificate representing Listed Shares shall not have been surrendered for purchase, all rights of the holders of such Listed Shares as such, including any other rights under the LLC Agreement and the right to receive any distributions on Listed Shares that have been declared (or a record date for which has been set) but that have not been paid or made, shall thereupon cease, except the right to receive the Optional Purchase Price for Common Units and Listed Shares, without interest, upon surrender to the Transfer Agent of the certificates representing such Listed Shares, with such other documents as may be required by the Optional Purchase Notice for Common Units and Listed Shares, in compliance with the instructions in the Optional Purchase Notice for Common Units and Listed Shares, and such Listed Shares shall from and after the Optional Purchase Date be deemed to be purchased by the Purchaser and shall be transferred to the Purchaser on the record books of the Transfer Agent, and the Purchaser shall be deemed to be the owner of such Listed Shares from and after the Optional Purchase Date and shall have all rights as the owner of such Listed Shares. As provided in the Exchange Provisions, the ability of a holder of Listed Shares to exchange such Listed Shares for Common Units shall terminate on the earlier of (i) the occurrence of a Mandatory Purchase Event, and (ii) the date on which the Purchaser has either mailed to the -12- 71 record holders of Listed Shares, or delivered to the Transfer Agent for mailing to the record holders of Listed Shares, a Purchase Notice. From and after the occurrence of the earlier of clause (i) or clause (ii) in the preceding sentence, any Listed Share surrendered for exchange shall not be exchanged, but shall be held for purchase pursuant to these Purchase Provisions, and shall be so purchased on the relevant Purchase Date. SECTION 5 Responsibility of Transfer Agent 5.1 Responsibility of Transfer Agent for Purchase Provisions. The Transfer Agent, in such capacity, shall not at any time be under any duty or responsibility to any holder of Listed Shares to determine whether any Mandatory Purchase Event has occurred, or with respect to the amount of the Purchase Price to be paid, or with respect to the method employed, or herein provided to be employed, in calculating the same. The Transfer Agent, in such capacity, shall not be responsible for any failure of the Purchaser to make or calculate any cash payment or for any failure of the Purchaser to comply with any of the Purchase Provisions. 5.2 Deliveries to Holders and Former Holders. Whenever the Purchaser or the Company may deliver to the Transfer Agent for mailing or delivery to the record holders or former record holders of Listed Shares any notice, communication, Purchase Price or other payment or other matter deliverable to record holders or former record holders of Listed Shares under these Purchase Provisions, the Transfer Agent shall promptly mail or deliver such notice, communication or payment or matter to the relevant record holder or former record holder, and the Company shall use its reasonable efforts to cause the Transfer Agent to do so. SECTION 6 Binding Effect on the Purchaser 6.1 Adoption of Purchase Provisions by Purchaser. KMI, as the initial Purchaser pursuant to these Purchase Provisions, has executed in the place provided below and delivered to the Company a copy of these Purchase Provisions, pursuant to which KMI has, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, adopted and agreed to be subject to and bound by these Purchase Provisions as the Purchaser hereunder. KMI further acknowledges and agrees that these Purchase Provisions and its obligations hereunder are for the benefit of and shall be enforceable by any record holder of Listed Shares. SECTION 7 Certain Covenants 7.1 Filings and Consents. The Purchaser and the Company will use their reasonable best efforts to make or cause to be made any registrations and filings with governmental authorities required of such party or any of its subsidiaries or Affiliates, and to obtain any consents, authorizations, approvals or failures to object of governmental authorities required with respect to such party or any of its subsidiaries or Affiliates, that are necessary for the consummation of a Mandatory Purchase or an Optional Purchase hereunder, (i) in the case of a -13- 72 Mandatory Purchase, prior to the occurrence of a Mandatory Purchase Event, and (ii) in the case of an Optional Purchase, prior to the Optional Purchase Date. SECTION 8 Amendments 8.1 Amendment. These Purchase Provisions may be amended by an agreement in writing signed by the Company and the Purchaser without the vote, approval or consent of the holders of any of the Listed Shares, unless such amendment would (a) reduce the time for any notice to which the holders of the Listed Shares would be entitled under these Purchase Provisions, or (b) have a material adverse effect on the powers, preferences or rights of the Listed Shares, as determined in the sole discretion of the Board of Directors of the Company, in which case such amendment must be approved by such vote or consent of the holders of Listed Shares, if any, as may be required by the LLC Agreement. 8.2 Certain Amendments Without Vote. Notwithstanding the foregoing provisions and the other provisions of the LLC Agreement with respect to amendments, the Board of Directors of the Company has reserved the right to make, with the written consent of the Purchaser, and may make, with the written consent of the Purchaser, changes in the Listed Shares and these Purchase Provisions to meet the requirements of applicable securities and other laws and regulations and stock exchange rules and to effect the intent of the LLC Agreement, and also may make other changes which the Board of Directors of the Company determines in its sole discretion will not have a material adverse effect on the rights and privileges of the Listed Shares, in each case without the vote, consent or approval of the holders of any Listed Shares. In addition, notwithstanding the foregoing provisions with respect to amendments, (a) in the case of (i) any merger of the Partnership, whether or not the Partnership is the survivor, that is the subject of a unitholder vote and does not constitute a Mandatory Purchase Event, and (ii) any recapitalization, reorganization or similar transaction of the Partnership, in each case that is the subject of a unitholder vote and does not constitute a Mandatory Purchase Event, or (b) if any Person becomes a Controlling Entity in a transaction complying with the requirements of clauses (b)(i) through (b)(iv) of the definition of "Mandatory Purchase Event" in these Purchase Provisions, such amendments as the Board of Directors of the Company deems appropriate in its good faith discretion and are agreed to by the Purchaser may be made in these Purchase Provisions to accommodate, in the case of clause (a), such merger, recapitalization, reorganization, or similar transaction, or, in the case of clause (b), the assumption by such Person of the obligations of the Purchaser under these Purchase Provisions, and any such amendment shall be deemed not to have such a material adverse effect or reduce the time for any notice, and therefore may be made without the vote, consent or approval of the Holders of any of the Listed Shares. -14- 73 ADOPTION BY KINDER MORGAN, INC. KMI, as the Purchaser pursuant to these Purchase Provisions, has executed in the place provided below and delivered to the Company a copy of these Purchase Provisions, pursuant to which KMI has, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, adopted and agreed to be subject to and bound by these Purchase Provisions as the Purchaser hereunder. KMI further acknowledges and agrees that these Purchase Provisions and its obligations hereunder are for the benefit of and shall be enforceable by any record holder of Listed Shares. Dated: , 2001 ---------------- KINDER MORGAN, INC. By: ----------------------------- Authorized Officer -15- EX-4.1 3 h84143a2ex4-1.txt FORM OF CERTIFICATE REPRESENTING SHARES 1 EXHIBIT 4.1 Certificate Evidencing Listed Shares Representing Limited Liability Company Interests in KINDER MORGAN MANAGEMENT, LLC No.______ ____________ Listed Shares KINDER MORGAN MANAGEMENT, LLC, a Delaware limited liability company (the "Company"), hereby certifies that _________________________________________ (the "Holder") is the registered owner of ___________________ Listed Shares representing limited liability company interests in the Company (the "Listed Shares") transferable on the books of the Company, in person or by duly authorized attorney, upon surrender of this Certificate properly endorsed. The designations, preferences and relative, participating, optional or other special rights, powers and duties relating to the Listed Shares are set forth in, and this Certificate and the Listed Shares represented hereby are issued and shall in all respects be subject to the terms and provisions of, the Amended and Restated Limited Liability Company Agreement of KINDER MORGAN MANAGEMENT, LLC, as amended, supplemented or restated from time to time (the "Agreement"). Copies of the Agreement are on file at, and will be furnished without charge on delivery of written request to the Company at, the principal office of the Company located at One Allen Center, Suite 1000, 500 Dallas Street, Houston, Texas 77002. Capitalized terms used herein but not defined shall have the meaning given to them in the Agreement. The Holder, by accepting this Certificate, is deemed to have (i) executed and agreed to comply with, and to become bound by, the Agreement, (ii) represented and warranted that the Holder has all right, power and authority and, if an individual, the capacity necessary to enter into the Agreement, (iii) appointed any Person duly authorized by the Board of Directors to act as the true and lawful representative and attorney-in-fact of the Holder, in the name, place and stead of the Holder, to make, execute, sign, deliver and file (a) any amendment of the Organizational Certificate, (b) any amendment to the Agreement, including any amendment to the Exchange Provisions and the Purchase Provisions, made in accordance with the terms of the Agreement, and (c) all such other instruments, documents and certificates that may from time to time be required by Law to effectuate, implement and continue the valid and subsisting existence of the Company or for any other purpose consistent with the Agreement and the transactions contemplated thereunder; (iv) given the powers of attorney provided for in the Agreement; and (v) made the waivers and given the consents and approvals contained in the Agreement. 2 This Certificate shall not be valid for any purpose unless it has been countersigned and registered by the Transfer Agent of the Listed Shares. Dated: ------------------------------ Countersigned and Registered by: KINDER MORGAN MANAGEMENT, LLC EQUISERVE TRUST COMPANY, N.A. as Transfer Agent and Registrar By: of the Listed Shares ------------------------------- Authorized Officer By: By: ---------------------------------- ------------------------------- Authorized Signature Authorized Officer [Reverse of Certificate] ABBREVIATIONS The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as follows according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - .................... TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right under Uniform Gifts of survivorship and not as to Act............. tenants in common (State) Additional abbreviations, though not in the above list, may also be used. STOCK POWER For Value Received, _________________________________________ hereby sells, assigns and transfers unto ____________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE, AND PLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFYING NUMBER OF ASSIGNEE) ___________________ Listed Shares representing the limited liability company interests represented by the Certificate, and does hereby irrevocably constitute and appoint _________________________ attorney-in-fact, to transfer the said Listed Shares stock on the books of the within named Company with full power of substitution in the premises. Dated: ------------------------------ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. 3 - ----------------------------------------- (SIGNATURE) - ----------------------------------------- (SIGNATURE) THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. SIGNATURE(S) GUARANTEED BY: ----------------------------------------- EX-4.6 4 h84143a2ex4-6.txt FORM OF REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 4.6 APRIL 26, 2001 REGISTRATION RIGHTS AGREEMENT This REGISTRATION RIGHTS AGREEMENT (this "Agreement") dated as of __________, 2001, is by and between Kinder Morgan Energy Partners, L.P., a Delaware limited partnership (the "Issuer"), and Kinder Morgan, Inc., a Kansas corporation (the "Holder"). WITNESSETH: WHEREAS, Kinder Morgan G.P., Inc., a Delaware corporation (the "General Partner"), has formed Kinder Morgan Management, LLC, a Delaware limited liability company ("Management"), as its wholly owned subsidiary, to be a limited partner in and, pursuant to a Delegation of Control Agreement of even date herewith, to manage and control the business and affairs of the Issuer; and WHEREAS, Management proposes to issue and sell in an underwritten public offering (the "Offering") pursuant to a registration statement on Form S-1 (Registration No. 333-55868) filed with the Securities and Exchange Commission (the "Commission") on February 20, 2001 (the "Management Registration Statement"), a number of its shares representing limited liability company interests identified in its Limited Liability Company Agreement as Listed Shares (the "Listed Shares"); and WHEREAS, the Exchange Provisions (the "Exchange Provisions") attached as Annex A to and made a part of Management's Amended and Restated Limited Liability Company Agreement (including the Exchange Provisions, the "LLC Agreement"), to be dated as of the date of the closing of the Offering (the "Closing"), provide that after the 45th day following the Closing the holders of the Listed Shares may exchange the Listed Shares with the Holder for common units of the Issuer (the "Common Units"), subject to the right of the Holder to settle the exchange in cash rather than in Common Units (such provisions of the LLC Agreement being collectively referred to as the "Exchange Feature"); and WHEREAS, the parties believe it appropriate for the exchange of the Common Units owned by the Holder (directly or indirectly through subsidiaries) for Listed Shares to be registered under the Securities Act of 1933, as amended (the "Securities Act"), and the Issuer is agreeable to preparing, filing and maintaining the effectiveness of such a registration statement or registration statements therefor as provided herein. NOW THEREFORE, in consideration of the premises and mutual covenants hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 2 Section 1 Definitions 1.1 Specific Definitions. The following terms shall have the meanings set forth below: "Affiliate" means, with respect to any Person, any other Person that directly or indirectly controls, is controlled by or is under common control with, the Person in question. As used herein, the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. "Agreement" has the meaning set forth in the preamble of this Agreement. "Closing" has the meaning set forth in the recitals of this Agreement. "Commission" has the meaning set forth in the recitals of this Agreement. "Common Units" has the meaning set forth in the recitals of this Agreement. "Confidential Information" means information that the Issuer determines, in good faith, is confidential, other than information which (i) is or becomes generally available to the public other than as a result of a disclosure by the Holder or an Inspector to which it was provided, (ii) was within the possession of the Holder or an Inspector prior to its being furnished to the Holder or an Inspector by or on behalf of the Issuer pursuant hereto, provided that the source of such information was not known by the Holder or such Inspector to be bound by a confidentiality agreement with or other contractual, legal or fiduciary obligation of confidentiality to the Issuer or any other party with respect to such information or (iii) becomes available to the Holder or an Inspector on a non-confidential basis from a source other than the Issuer, provided that such source is not bound by a confidentiality agreement with or other contractual, legal or fiduciary obligation of confidentiality to the Issuer or any other party with respect to such information. "Entity" means a corporation, limited liability company, venture, partnership, trust, unincorporated organization, association or other entity. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Feature" has the meaning set forth in the recitals of this Agreement. "Exchange Provisions" has the meaning set forth in the recitals of this Agreement. "Exchange Securities" means the Common Units owned by Holder (directly or indirectly through subsidiaries) or such other securities of the Issuer (including securities which may be deemed to be distributed by Rule 140 under the Securities Act) as Holder may be -2- 3 required, or have the election, to deliver or cause to be delivered in satisfaction of its obligations under the Exchange Feature. "General Partner" has the meaning as set forth in recitals of this Agreement. "Holder" has the meaning set forth in the preamble of this Agreement. "Initial Issuer Registration Statement" has the meaning set forth in Section 2.1. "Inspectors" has the meaning set forth in Section 2.3(j). "Issuer" has the meaning set forth in the preamble of this Agreement. "Issuer Registration Statement" has the meaning set forth in Section 2.3. "Listed Shares" has the meaning set forth in the recitals of this Agreement. "LLC Agreement" has the meaning set forth in the recitals of this Agreement. "Management" has the meaning set forth in the recitals of this Agreement. "Management Registration Statement" has the meaning set forth in the recitals of this Agreement. "Offering" has the meaning set forth in the recitals of this Agreement. "Partnership Agreement" means the Third Amended and Restated Agreement of Limited Partnership of the Issuer, dated as of _________, 2001. "Person" means a natural person or an Entity. "Records" has the meaning set forth in Section 2.3(j). "Section" means a section of this Agreement. "Securities Act" has the meaning set forth in the recitals of this Agreement. "Subsequent Issuer Registration Statement" has the meaning set forth in Section 2.2. 1.2 Rules of Construction. Unless the context otherwise clearly requires: (a) the terms defined in Section 1.1 have the meanings assigned to them in that Section; (b) terms defined include the plural as well as the singular and vice versa; -3- 4 (c) references to any document, agreement, instrument or provision thereof mean such document, agreement, instrument or provision thereof as the same may be duly amended, supplemented or restated from time to time; (d) "including" means including without limitation; (e) "or" is not exclusive; and (f) the words "herein," "hereof," "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Section or other subdivision. Section 2 Registration Rights 2.1 Initial Issuer Registration Statement. The Issuer has filed with the Commission a Registration Statement on Form S-3 (Registration No. 333-55866) (the "Initial Issuer Registration Statement") as a joint registration statement with the Management Registration Statement covering the resale of Exchange Securities owned by Holder (directly or indirectly through subsidiaries) pursuant to the Exchange Feature. The Initial Issuer Registration Statement was declared effective on _____________, 2001. The Issuer agrees to prepare and file with the Commission such amendments and supplements to the Initial Issuer Registration Statement and any prospectus used in connection therewith as may be necessary to keep such Initial Issuer Registration Statement effective until Holder has no further obligation to deliver Exchange Securities (or cash in lieu thereof) pursuant to the Exchange Feature, and to comply with the provisions of the Securities Act with respect to the disposition of such securities pursuant to the Exchange Feature. The agreements of the Issuer with respect to the Initial Issuer Registration Statement under this Section 2.1 shall terminate at such time as there has been filed and declared effective by the Commission a Subsequent Issuer Registration Statement pursuant to Section 2.2. 2.2 Subsequent Issuer Registration Statement. In lieu of maintaining the continued effectiveness of the Initial Issuer Registration Statement, the Issuer may prepare and file with the Commission a registration statement on any form for which the Issuer then qualifies and which counsel for the Issuer shall deem appropriate for the disposition of the Exchange Securities owned by Holder (directly or indirectly through subsidiaries) pursuant to the Exchange Feature (the "Subsequent Issuer Registration Statement"), and use its reasonable efforts to cause the Subsequent Issuer Registration Statement to become effective. After the Subsequent Issuer Registration Statement has been declared effective by the Commission, the Issuer agrees to prepare and file with the Commission such amendments and supplements to the Subsequent Issuer Registration Statement and any prospectus used in connection therewith as may be necessary to keep the Subsequent Issuer Registration Statement effective until Holder has no further obligation to deliver Exchange Securities (or cash in lieu thereof) pursuant to the Exchange Feature, and to comply with the provisions of the Securities Act with respect to the disposition of such securities pursuant to the Exchange Feature. -4- 5 2.3 Provisions Relating to All Issuer Registration Statements. The Issuer agrees, in connection with both the Initial Issuer Registration Statement and the Subsequent Issuer Registration Statement (each an "Issuer Registration Statement"), that it will: (a) Prepare and file with the Commission such amendments and supplements to any Issuer Registration Statement and any prospectus used in connection therewith as may be necessary to keep such Issuer Registration Statement effective as provided in Sections 2.1 and 2.2, and to comply with the provisions of the Securities Act with respect to the disposition of such securities pursuant to the Exchange Feature; (b) furnish to the Holder, (i) at least two business days prior to filing with the Commission, any Subsequent Issuer Registration Statement, any amendment or supplement to any Issuer Registration Statement, any prospectus used in connection therewith and any amendment or supplement to any such prospectus, which documents will be subject to the reasonable review of the Holder, and Issuer shall not file any such documents with the Commission to which the Holder shall reasonably object; and (ii) a copy of any and all transmittal letters or other correspondence with the Commission or any other governmental agency or self-regulatory body or other body having jurisdiction (including any domestic or foreign securities exchange) relating to the offering of Exchange Securities pursuant to the Exchange Feature; (c) furnish to the Holder such number of copies as the Holder may reasonably request of each Issuer Registration Statement, each amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated by reference therein) and the prospectus included in or used in connection with each Issuer Registration Statement (including each preliminary prospectus, final prospectus and prospectus supplement); (d) promptly notify the Holder of any stop order issued or, to the knowledge of the Issuer, threatened to be issued by the Commission with respect to any Issuer Registration Statement and promptly take all reasonable actions to prevent the entry of such stop order or to obtain its withdrawal if entered; (e) use its reasonable efforts to qualify the Exchange Securities for offer and sale under the securities, "blue sky" or similar laws of such jurisdictions (including any foreign country or any political subdivision thereof) as the Holder shall reasonably request and use its reasonable efforts to obtain all appropriate registrations, permits and consents required in connection therewith, except that the Issuer shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it is not so qualified, or subject itself to taxation or file a general consent to service of process in any such jurisdiction; (f) furnish upon exchange of the Listed Shares pursuant to the Exchange Feature unlegended certificates representing ownership of the Exchange Securities at a time and in a manner that would permit compliance by the Holder with the terms of the Exchange Feature relating to the delivery of such certificates to the Persons electing to exchange Listed Shares; -5- 6 (g) promptly inform the Holder (i) of the date on which any Issuer Registration Statement or any post-effective amendment thereto becomes effective and, if applicable, of the date of filing a Rule 430A prospectus (and, in the case of any offering abroad of Exchange Securities, of the date when any required filing under the securities and other laws of such foreign jurisdictions shall have been made and when the offering may be commenced in accordance with such laws) and (ii) of any request by the Commission, any securities exchange, government agency, self-regulatory body or other body having jurisdiction for any amendment of or supplement to any Issuer Registration Statement or preliminary prospectus or prospectus included therein or used in connection therewith or any other offering document relating to such offering; (h) until the Holder has no further obligations to deliver Exchange Securities (or cash in lieu thereof) pursuant to the Exchange Feature, keep effective and maintain any registration, qualification or approval obtained in connection with the offering of the Exchange Securities by the Holder pursuant to the Exchange Feature, and amend or supplement any Issuer Registration Statement or prospectus or other offering document used in connection therewith to the extent necessary in order to comply with applicable securities laws; (i) as promptly as practicable notify the Holder of the occurrence of an event requiring the preparation of a supplement or amendment to the prospectus related to any Issuer Registration Statement so that, as thereafter delivered to the recipients of the Exchange Securities pursuant to the Exchange Feature, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and as promptly as practicable make available to the Holder any such supplement or amendment; and (j) with reasonable promptness make available for inspection by the Holder, and any attorney, accountant or other agent retained by the Holder (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Issuer (collectively, the "Records") as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Issuer's or the General Partner's or Management's officers and employees to supply all information reasonably requested for such purpose by any such Inspector in connection with any Issuer Registration Statement; provided, however, that the selection of any Inspector other than an officer or employee of, or attorney or accountant for, the Holder shall be subject to the consent of the Issuer, which shall not be unreasonably withheld. Each Inspector that actually reviews Records supplied by the Issuer that include Confidential Information shall be required, prior to any such review, to execute an agreement with the Issuer in customary form reasonably satisfactory to the Issuer providing that such Inspector shall not publicly disclose any Confidential Information unless such disclosure is required by applicable law or legal process. The Holder agrees that Confidential Information obtained by it as a result of such inspections shall not be used by it as the basis for any transactions in securities of the Issuer unless and until such information is made generally available to the public. The Holder further agrees that it will, upon learning that disclosure of Confidential Information supplied to the Holder or an Inspector is sought in a court of competent jurisdiction from the Holder or an Inspector, give notice to the Issuer and allow the Issuer, at its -6- 7 expense, to undertake appropriate action to prevent disclosure of the Confidential Information. The Holder also agrees that the due diligence investigation made by the Inspectors shall be conducted in a manner that shall not unreasonably disrupt the operations of the Issuer or the work performed by the Issuer's or the General Partner's or Management's officers and employees. 2.4 Certain Notices by Issuer. (a) Upon notice to the Holder, the Issuer may require the Holder to suspend the use of the prospectus or any prospectus supplement related to an Issuer Registration Statement for a reasonable period of time, not to exceed 90 consecutive days or 120 days in any 12-month period, if the Issuer would be required to disclose information regarding the Issuer it was not otherwise then required by law to disclose publicly where such disclosure would reasonably be expected to adversely affect any material business transaction or negotiation in which the Issuer is then engaged. Any periods under this Section 2.4 shall be aggregated with periods under Section 2.4(b) in determining whether the periods of 90 consecutive days or 120 days in any 12-month period have been exceeded. (b) The Holder agrees that, upon receipt of any notice from the Issuer of the happening of any event of the kind described in Section 2.3(i), the Holder will forthwith discontinue disposition of Exchange Securities pursuant to the Exchange Feature pursuant to any Issuer Registration Statement until the Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 2.3(i), and, if so directed by the Issuer, the Holder will deliver to the Issuer (at the Issuer's expense) all copies, other than permanent file copies, then in the Holder's possession, of the prospectus covering such Exchange Securities current at the time of receipt of such notice. The Holder also agrees to notify the Issuer if any event relating to the Holder occurs that would require the preparation of a supplement or amendment to the prospectus so that such prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Section 3 Expenses 3.1 Registration Expenses. The Issuer agrees to bear and to pay or cause to be paid promptly upon request being made therefor all expenses incident to the Issuer's performance of or compliance with this Agreement, including (a) all Commission and any NASD registration and filing fees and expenses; (b) all fees and expenses in connection with the qualification of the Exchange Securities for offering and sale under the state or foreign securities and blue sky laws referred to in Section 2.3(e), including reasonable fees and disbursements of counsel, in connection with such qualifications; (c) all expenses relating to the preparation, printing, distribution and reproduction of any Issuer Registration Statement required to be filed hereunder, each prospectus included therein or prepared for distribution pursuant hereto, each amendment or supplement to the foregoing, the certificates representing the Exchange Securities and all other documents relating hereto; (d) fees and expenses of any paying agent, and of the registrar and transfer agent for the Exchange Securities to be issued upon exchange of the Listed Shares, as well as the reasonable fees and expenses of counsel therefor; (e) internal expenses (including all salaries and expenses of the Issuer's or General Partner's or Management's officers and -7- 8 employees performing legal or accounting duties); (f) fees, disbursements and expenses of counsel and independent certified public accountants of the Issuer (including the expenses of any opinions or "cold comfort" letters required by or incident to such performance and compliance); (g) fees and expenses of listing the Exchange Securities on all exchanges where Exchange Securities of the type then required to be delivered by the Holder pursuant to the Exchange Feature are listed; and (h) reasonable fees, disbursements and expenses of counsel for the Holder retained in connection with any Issuer Registration Statement and fees, expenses and disbursements of any other Persons, including special experts, retained by the Issuer in connection with such registration (collectively, the "Registration Expenses"). To the extent that any Registration Expenses are incurred, assumed or paid by the Holder, the Issuer shall reimburse the Holder for the full amount of the Registration Expenses so incurred, assumed or paid promptly after receipt of a documented request therefor. Notwithstanding the foregoing, the Holder shall pay all the fees and disbursements of any counsel or other advisors or experts retained by the Holder, other than the counsel and experts specifically referred to above. Section 4 Representations and Warranties 4.1 Representations and Warranties. The Issuer represents and warrants to, and agrees with, the Holder that: (a) Each Issuer Registration Statement and any further amendment or supplement to any Issuer Registration Statement, when it becomes effective or is filed with the Commission, as the case may be, will conform in all material respects to the applicable requirements of the Securities Act and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and at all times at and subsequent to the time when such Issuer Registration Statement has been declared effective under the Securities Act, other than from (i) such time as a notice has been given to the Holder pursuant to Section 2.3(i) until (ii) such time as the Issuer furnishes an amended or supplemented prospectus pursuant to Section 2.3(i) or such time as the Issuer provides notice that offers and sales pursuant to such Issuer Registration Statement may continue, each prospectus (including any preliminary or summary prospectus) contained in or prepared in connection with any Issuer Registration Statement, and each prospectus (including any summary prospectus) furnished pursuant to Section 2.3(c), as then amended or supplemented, will conform in all material respects to the applicable requirements of the Securities Act and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Issuer by or on behalf of the Holder expressly for use therein in any such Issuer Registration Statement or prospectus. (b) Any documents incorporated by reference in any prospectus referred to in this Agreement, when they become or became effective or are or were filed with the Commission, as the case may be, will conform or conformed in all material respects to the requirements of the Securities Act or the Exchange Act, as applicable, and none of such -8- 9 documents will contain or contained an untrue statement of a material fact or will omit or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Issuer by the Holder expressly for use therein. (c) The compliance by the Issuer with all of the provisions of this Agreement and the consummation of the transactions herein contemplated will not contravene any provision of applicable law or the Partnership Agreement, or any material indenture or instrument relating to indebtedness for money borrowed or agreement to which the Issuer or any of its subsidiaries is a party or any order, rule, regulation or decree of any court or governmental agency or authority located in the United States having jurisdiction over the Issuer or any of its subsidiaries or any property of the Issuer or any of its subsidiaries; and no consent, authorization or order of, or filing or registration with, any court or governmental agency or authority is required for the consummation by the Issuer of the transactions contemplated by this Agreement, except the registration under the Securities Act contemplated hereby, and such consents, approvals, authorizations, registrations or qualifications as may be required under state or foreign securities or blue sky laws. (d) This Agreement has been duly authorized, executed and delivered by the Issuer. Section 5 Indemnification and Contributions 5.1 (a) The Issuer will indemnify and hold harmless the Holder against any losses, claims, damages or liabilities, joint or several, to which the Holder may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, any Issuer Registration Statement or any prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Holder for any legal or other expenses reasonably incurred by the Holder in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that the Issuer shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any preliminary prospectus, any Issuer Registration Statement or any prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Issuer by the Holder expressly for use therein. (b) The Holder will indemnify and hold harmless the Issuer against any losses, claims, damages or liabilities to which the Issuer may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in -9- 10 respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, any Issuer Registration Statement or any prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any preliminary prospectus, any Issuer Registration Statement or any prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Issuer by the Holder expressly for use therein; and will reimburse the Issuer for any legal or other expenses reasonably incurred by the Issuer in connection with investigating or defending any such action or claim as such expenses are incurred. (c) Promptly after receipt by a party indemnified under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability that it may have to any indemnified party otherwise than under such subsection and shall not relieve the indemnifying party from any liability that it may have to any indemnified party under this Agreement unless such failure to give notice actually prejudices the indemnifying party's ability to defend the claim. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party. (d) If the indemnification provided for in this Section 5 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Issuer and the Holder from the transactions contemplated by this Agreement. If, however, the allocation -10- 11 provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (c) above and such failure actually prejudiced the indemnifying party's ability to defend the claim, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Issuer and the Holder in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Issuer and the Holder from the transactions contemplated by this Agreement shall be deemed to be in the same proportion as the total net proceeds (before deducting expenses) from the purchase of its I-Units by Management with the proceeds of the Offering received by the Issuer bear to the difference between the market value of the Listed Shares received by the Holder pursuant to the Exchange Feature and the market value of the Exchange Securities surrendered by or on behalf of the Holder in exchange for the Listed Shares received by the Holder pursuant to the Exchange Feature. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Issuer or the Holder and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Issuer and the Holder agree that it would not be just and equitable if contributions pursuant to this subsection (d) were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. (e) The obligations of the Issuer under this Section 5 shall be in addition to any liability that the Issuer may otherwise have and shall extend, upon the same terms and conditions, to each Person, if any, who controls the Holder or whom the Holder controls within the meaning of the Securities Act; and the obligations of the Holder under this Section 5 shall be in addition to any liability that the Holder may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Issuer (including any Person who, with his or her consent, is named in any Issuer Registration Statement as about to become a director of the Issuer) and to each Person, if any, who controls the Issuer within the meaning of the Act. Section 6 Benefits of Agreement 6.1 Benefits of Agreement. Pursuant to the Exchange Provisions, the Holder's obligations to deliver Exchange Securities may be performed by subsidiaries of the Holder. To the extent that such obligations are performed by subsidiaries of the Holder, the provisions of this Agreement shall also be binding on, for the benefit of and enforceable by such subsidiaries. -11- 12 Section 7 Miscellaneous 7.1 Provision of Information. The Holder shall, and shall cause its directors, officers, employees and agents to complete and execute all such questionnaires and other documents as the Issuer shall reasonably request in connection with any registration of Exchange Securities pursuant to this Agreement. 7.2 Injunctions. Irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specified terms or were otherwise breached. Therefore, the parties hereto shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically the terms of provisions hereof in any court having jurisdiction, such remedy being in addition to any other remedy to which they may be entitled at law or in equity. 7.3 Severability. If any term or provision of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms and provisions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term or provision. 7.4 Further Assurances. Subject to the specific terms of this Agreement, the Holder and the Issuer shall make, execute, acknowledge and deliver such other instruments and documents, and take all such other actions as may be reasonably required in order to effectuate the purposes of this Agreement and to consummate the transactions contemplated hereby. 7.5 Entire Agreement; Modification. This Agreement and the other related agreements entered into at or prior to the Closing contain the entire understanding of the parties with respect to the transactions contemplated hereby and supersede all agreements and understandings entered into with respect thereto prior to the execution hereof. 7.6 Amendment. (a) This Agreement may be amended by an agreement in writing signed by the Issuer and the Holder without the vote, approval or consent or the holders of any of the Listed Shares, unless such amendment would have a material adverse effect on the rights or preferences of the Listed Shares, as determined in the sole discretion of the Board of Directors of the Holder, in which case such amendment must be approved by such vote or consent of the holders of Listed Shares, if any, as may be required by the LLC Agreement. (b) Notwithstanding the foregoing provisions with respect to amendments, the Board of Directors of the Issuer has reserved the right to make, with the written consent of the Holder, and may make, with the written consent of the Holder, changes in this Agreement to meet the requirements of applicable securities and other laws and regulations and stock exchange rules and to effect the intent of the LLC Agreement, and also may make other changes which the Board of Directors of the Issuer determines in its sole discretion will not have a material adverse effect on the rights and privileges of the Listed Shares, in each case without the vote, consent or -12- 13 approval of the holders of any Listed Shares. In addition, notwithstanding the foregoing provisions with respect to amendments, (a) in the case of (i) any merger of the Issuer, whether or not the Issuer is the survivor, that is the subject of a unitholder vote and does not constitute a Mandatory Purchase Event (as defined in the Exchange Provisions), and (ii) any recapitalization, reorganization or similar transaction of the Issuer, in each case that is the subject of a unitholder vote and does not constitute a Mandatory Purchase Event, or (b) if any Person becomes a Controlling Entity (as defined in the Exchange Provisions) in a transaction complying with the requirements of clauses (b)(i) through (b)(iv) of the definition of "Mandatory Purchase Event" in the Exchange Provisions, such amendments as the Board of Directors of the Issuer deems appropriate in its good faith discretion and are agreed to by the Issuer may be made in this Agreement to accommodate, in the case of clause (a), such merger, recapitalization, reorganization, or similar transaction, or, in the case of clause (b), the assumption by such Person of the obligations of the Issuer under this Agreement, and any such amendment shall be deemed not to have such a material adverse effect, and therefore may be made without the vote, consent or approval of the holders of any of the Listed Shares. 7.7 Counterparts. For the convenience of the parties hereto, any number of counterparts of this Agreement may be executed by the parties hereto, but all such counterparts shall be deemed one and the same instrument. 7.8 Notices. All notices, consents, requests, demands and other communications hereunder shall be in writing and shall be given by hand or by mail (return receipt requested) or sent by overnight delivery service, cable, telegram or facsimile transmission to the parties at the following addresses or at such other address as shall be specified by the parties by like notice. (a) if to the Issuer, to: Kinder Morgan Energy Partners, L.P. 500 Dallas Street, Suite 1000 Houston, Texas 77002 Attention: General Counsel (b) if to the Holder, to: Kinder Morgan, Inc. 500 Dallas Street, Suite 1000 Houston, Texas 77002 Attention: General Counsel Notice so given shall, in the case of notice so given by mail, be deemed to be given and received on the third business day after posting, in the case of notice so given by overnight delivery service, on the day after notice is deposited with such service, and in the case of notice so given by cable, telegram, facsimile transmission or, as the case may be, personal delivery, on the date of actual delivery. -13- 14 7.9 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO ANY CHOICE OF LAW PRINCIPLES WHICH MIGHT REQUIRE OR PERMIT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION. 7.10 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of and be enforceable by and against the successors and assigns of the parties hereto. Except with the consent of the other party or as otherwise provided herein, the parties may not assign their rights under this Agreement and the Issuer may not delegate its obligations under this Agreement. Any attempted assignment or delegation prohibited hereby shall be void. 7.11 Parties in Interest. Except as otherwise specifically provided herein, nothing in this Agreement expressed or implied is in tended or shall be construed to confer any right or benefit upon any Person, firm or corporation other than the Holder and the Issuer and their respective successors and permitted assigns. -14- 15 IN WITNESS WHEREOF, each of the Holder and the Issuer have caused this Agreement to be duly executed as of the date first above written. Kinder Morgan Energy Partners, L.P. By: Kinder Morgan, G.P., Inc., as General Partner By: ---------------------------------- Authorized Officer Kinder Morgan, Inc. By: -------------------------------------- Authorized Officer -15- EX-4.7 5 h84143a2ex4-7.txt FORM OF THIRD AMENDED AGRMT OF LIMITED PARTNERSHIP 1 EXHIBIT 4.7 THIRD AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF KINDER MORGAN ENERGY PARTNERS, L.P. 2 TABLE OF CONTENTS ARTICLE I ORGANIZATIONAL MATTERS........................................................................2 1.1 Continuation..................................................................................2 1.2 Name..........................................................................................2 1.3 Registered Office; Principal Office...........................................................2 1.4 Power of Attorney.............................................................................2 1.5 Term..........................................................................................3 1.6 Possible Restrictions on Transfer.............................................................4 ARTICLE II DEFINITIONS...................................................................................4 Additional Limited Partner...............................................................................4 Adjusted Capital Account.................................................................................4 Adjusted Property........................................................................................4 Affiliate................................................................................................5 Agreed Allocation........................................................................................5 Agreed Value.............................................................................................5 Agreement ...............................................................................................5 API......................................................................................................5 Assignee.................................................................................................5 Available Cash...........................................................................................5 Average Market Price.....................................................................................6 Book-Tax Disparity.......................................................................................6 Business Day.............................................................................................6 Calculated Unit Amount...................................................................................7 Capital Account..........................................................................................7 Capital Additions and Improvements.......................................................................7 Capital Contribution.....................................................................................7 Carrying Value...........................................................................................7 Cash from Interim Capital Transactions...................................................................7 Cash from Operations.....................................................................................7 Cause....................................................................................................8 Central Basin Conveyances................................................................................8 Certificate..............................................................................................8 Certificate of Limited Partnership.......................................................................8 Citizenship Certification................................................................................9 Class B Unit.............................................................................................9 Closing Date.............................................................................................9 Closing Price............................................................................................9 Code.....................................................................................................9 Combined Interest........................................................................................9 Common Unit..............................................................................................9 Conflicts and Audit Committee............................................................................9 Contributed Property.....................................................................................9 Conveyance Agreement.....................................................................................9 Curative Allocation......................................................................................9 Current Market Price.....................................................................................9
-i- 3 Delaware Act............................................................................................10 Delegation of Control Agreement.........................................................................10 Departing Partner.......................................................................................10 Economic Risk of Loss...................................................................................10 Eligible Citizen........................................................................................10 Enron...................................................................................................10 Equivalent Non-Cash Amount..............................................................................10 Event of Withdrawal.....................................................................................10 Exchange Provisions.....................................................................................10 First Amended and Restated Agreement....................................................................10 First Liquidation Target Amount.........................................................................10 First Target Distribution...............................................................................10 General Partner.........................................................................................10 Group...................................................................................................10 Holder..................................................................................................10 I-Unit..................................................................................................10 Incentive Distribution..................................................................................11 Indemnified Persons.....................................................................................11 Indemnitee..............................................................................................11 Initial Offering........................................................................................11 Initial Unit Price......................................................................................11 Interim Capital Transactions............................................................................11 KMGP....................................................................................................11 KMI.....................................................................................................11 KMM.....................................................................................................11 KMNGL...................................................................................................11 Limited Partner.........................................................................................11 Liquidation Date........................................................................................11 Liquidator..............................................................................................12 Listed Shares...........................................................................................12 LLC Agreement...........................................................................................12 Maintenance Capital Expenditures........................................................................12 Mandatory Purchase Event................................................................................12 Maximum Permitted Delegation............................................................................12 Mandatory Redemption Notice.............................................................................12 Merger Agreement........................................................................................12 Minimum Quarterly Distribution..........................................................................12 National Securities Exchange............................................................................12 Net Agreed Value........................................................................................12 Net Income..............................................................................................12 Net Loss................................................................................................13 Net Termination Gain....................................................................................13 Net Termination Loss....................................................................................13 Non-citizen Assignees...................................................................................13 Nonrecourse Built-in Gain...............................................................................13 Nonrecourse Deductions..................................................................................14 Nonrecourse Liability...................................................................................14 Notice of Election to Purchase..........................................................................14
-ii- 4 Notice of Intent to Convert.............................................................................14 OLP-A...................................................................................................14 OLP-A Partnership Agreement.............................................................................14 Omnibus Agreement.......................................................................................14 Operating Partnership...................................................................................14 Operating Partnership Agreement.........................................................................14 Opinion of Counsel......................................................................................14 Optional Purchase Price.................................................................................14 Original Agreement......................................................................................14 Outstanding.............................................................................................14 Partners................................................................................................15 Partner Nonrecourse Debt................................................................................15 Partner Nonrecourse Debt Minimum Gain...................................................................15 Partner Nonrecourse Deductions..........................................................................15 Partnership.............................................................................................15 Partnership Interest....................................................................................15 Partnership Minimum Gain................................................................................15 Partnership Securities..................................................................................15 Percentage Interest.....................................................................................15 Person..................................................................................................15 Pipeline System and Other Assets........................................................................15 Pro Rata................................................................................................16 Purchase Date...........................................................................................16 Purchase Provisions.....................................................................................16 Recapture Income........................................................................................16 Record Date.............................................................................................16 Record Holder...........................................................................................16 Redeemable Units........................................................................................16 Registration Statement..................................................................................16 Required Allocations....................................................................................16 Residual Gain...........................................................................................16 Residual Loss...........................................................................................16 Second Amended and Restated Agreement...................................................................17 Second Liquidation Target Amount........................................................................17 Second Target Distribution..............................................................................17 Securities Act..........................................................................................17 Share Distribution......................................................................................17 Special Approval........................................................................................17 Substituted Limited Partner.............................................................................17 Surviving Business Entity...............................................................................17 Termination Capital Transactions........................................................................17 Third Target Distribution...............................................................................17 Trading Day.............................................................................................17 Transfer Agent..........................................................................................17 Transfer Application....................................................................................17 Underwriter.............................................................................................17 Underwriting Agreement..................................................................................17 Unit....................................................................................................17
-iii- 5 Unpaid MQD..............................................................................................18 Unrealized Gain.........................................................................................18 Unrealized Loss.........................................................................................18 Unrecovered Initial Unit Price..........................................................................18 ARTICLE III PURPOSE......................................................................................18 3.1 Purpose and Business.........................................................................18 3.2 Powers.......................................................................................18 ARTICLE IV CAPITAL CONTRIBUTIONS........................................................................18 4.1 Issuances of Units and Other Securities......................................................18 4.2 Limited Preemptive Rights....................................................................20 4.3 Capital Accounts.............................................................................20 4.4 Interest.....................................................................................22 4.5 No Withdrawal................................................................................23 4.6 Loans from Partners..........................................................................23 4.7 No Fractional Units..........................................................................23 4.8 Splits and Combinations......................................................................23 4.9 Class B Units................................................................................24 4.10 I-Units......................................................................................25 ARTICLE V ALLOCATIONS AND DISTRIBUTIONS................................................................25 5.1 Allocations for Capital Account Purposes.....................................................25 5.2 Allocations for Tax Purposes.................................................................31 5.3 Requirement and Characterization of Distributions............................................33 5.4 Distributions of Cash from Operations........................................................34 5.5 Distributions of Cash from Interim Capital Transactions......................................34 5.6 Adjustment of Minimum Quarterly Distribution and Target Distribution Levels..............................................................................35 5.7 Special Provisions Relating to Units.........................................................35 ARTICLE VI MANAGEMENT AND OPERATION OF BUSINESS.........................................................37 6.1 Management...................................................................................37 6.2 Certificate of Limited Partnership...........................................................38 6.3 Restrictions on General Partner's Authority..................................................38 6.4 Reimbursement of the General Partner.........................................................39 6.5 Outside Activities...........................................................................40 6.6 Loans to and from the General Partner; Contracts with Affiliates.............................41 6.7 Indemnification..............................................................................42 6.8 Liability of Indemnitees.....................................................................44 6.9 Resolution of Conflicts of Interest..........................................................44 6.10 Other Matters Concerning the General Partner.................................................46 6.11 Title to Partnership Assets..................................................................46 6.12 Purchase or Sale of Units....................................................................46 6.13 Registration Rights of KMGP and its Affiliates...............................................47 6.14 Reliance by Third Parties....................................................................49 6.15 Delegation to KMM............................................................................49
-iv- 6 ARTICLE VII RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS...................................................50 7.1 Limitation of Liability......................................................................50 7.2 Management of Business.......................................................................50 7.3 Outside Activities...........................................................................50 7.4 Return of Capital............................................................................50 7.5 Rights of Limited Partners Relating to the Partnership.......................................50 ARTICLE VIII BOOKS, RECORDS, ACCOUNTING AND REPORTS.......................................................51 8.1 Books, Records and Accounting................................................................51 8.2 Fiscal Year..................................................................................51 8.3 Reports......................................................................................51 ARTICLE IX TAX MATTERS..................................................................................52 9.1 Preparation of Tax Returns...................................................................52 9.2 Tax Elections................................................................................52 9.3 Tax Controversies............................................................................52 9.4 Organizational Expenses......................................................................53 9.5 Withholding..................................................................................53 9.6 Entity-Level Taxation........................................................................53 9.7 Entity-Level Arrearage Collections...........................................................53 9.8 Opinions of Counsel..........................................................................54 ARTICLE X CERTIFICATES.................................................................................54 10.1 Certificates.................................................................................54 10.2 Registration, Registration of Transfer and Exchange..........................................54 10.3 Mutilated, Destroyed, Lost or Stolen Certificates............................................55 10.4 Record Holder................................................................................55 ARTICLE XI TRANSFER OF INTERESTS........................................................................56 11.1 Transfer.....................................................................................56 11.2 Transfer of General Partner's Partnership Interest...........................................56 11.3 Transfer of Units............................................................................57 11.4 Restrictions on Transfers....................................................................57 11.5 Citizenship Certificates; Non-citizen Assignees..............................................57 11.6 Redemption of Interests......................................................................58 ARTICLE XII ADMISSION OF PARTNERS........................................................................59 12.1 Admission of Substituted Limited Partners....................................................59 12.2 Admission of Successor General Partner.......................................................60 12.3 Admission of Additional Limited Partners.....................................................60 12.4 Amendment of Agreement and Certificate of Limited Partnership................................60 ARTICLE XIII WITHDRAWAL OR REMOVAL OF PARTNERS............................................................61 13.1 Withdrawal of the General Partner............................................................61 13.2 Removal of the General Partner...............................................................62 13.3 Interest of Departing Partner and Successor General Partner..................................63 13.4 Withdrawal of Limited Partners...............................................................64
-v- 7 ARTICLE XIV DISSOLUTION AND LIQUIDATION..................................................................64 14.1 Dissolution..................................................................................64 14.2 Continuation of the Business of the Partnership after Dissolution............................65 14.3 Liquidation..................................................................................65 14.4 Distributions in Kind........................................................................66 14.5 Cancellation of Certificate of Limited Partnership...........................................67 14.6 Reasonable Time for Winding Up...............................................................67 14.7 Return of Capital............................................................................67 14.8 No Capital Account Restoration...............................................................67 14.9 Waiver of Partition..........................................................................67 ARTICLE XV AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE....................................67 15.1 Amendment to be Adopted Solely by General Partner............................................67 15.2 Amendment Procedures.........................................................................68 15.3 Amendment Requirements.......................................................................69 15.4 Meetings.....................................................................................69 15.5 Notice of Meeting............................................................................70 15.6 Record Date..................................................................................70 15.7 Adjournment..................................................................................70 15.8 Waiver of Notice; Approval of Meeting; Approval of Minutes...................................70 15.9 Quorum.......................................................................................71 15.10 Conduct of Meeting...........................................................................71 15.11 Action Without a Meeting.....................................................................71 15.12 Voting and Other Rights......................................................................72 ARTICLE XVI MERGER.......................................................................................72 16.1 Authority....................................................................................72 16.2 Procedure for Merger or Consolidation........................................................72 16.3 Approval by Limited Partners of Merger or Consolidation......................................73 16.4 Certificate of Merger........................................................................74 16.5 Effect of Merger.............................................................................74 ARTICLE XVII RIGHT TO ACQUIRE UNITS.......................................................................74 17.1 Right to Acquire Common Units and Listed Shares..............................................74 ARTICLE XVIII GENERAL PROVISIONS...........................................................................76 18.1 Addresses and Notices........................................................................76 18.2 References...................................................................................77 18.3 Pronouns and Plurals.........................................................................77 18.4 Further Action...............................................................................77 18.5 Binding Effect...............................................................................77 18.6 Integration..................................................................................77 18.7 Creditors....................................................................................77 18.8 Waiver.......................................................................................77 18.9 Counterparts.................................................................................77 18.10 Applicable Law...............................................................................78 18.11 Invalidity of Provisions.....................................................................78
-vi- 8 Exhibit A - Form of Certificate Evidencing Common Units Exhibit B - Form of Certificate Evidencing Class B Units Exhibit C - Form of Certificate Evidencing I-Units -vii- 9 THIRD AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF KINDER MORGAN ENERGY PARTNERS, L.P. THIS THIRD AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF KINDER MORGAN ENERGY PARTNERS, L.P., dated as of ___________, 2001, is entered into by and among Kinder Morgan G.P., Inc., a Delaware corporation, as the General Partner, and Persons who become Partners in the Partnership or parties hereto as provided herein. WHEREAS, the General Partner and the other parties thereto entered into that certain Agreement of Limited Partnership of the Partnership dated as of ___________, 1992 (the "Original Agreement"); and WHEREAS, the General Partner, acting pursuant to Section 15.1 of the Original Agreement, amended and restated the Original Agreement, as evidenced by that certain Amended and Restated Agreement of Limited Partnership of the Partnership dated as of August 6, 1992 (the "First Amended and Restated Agreement"); and WHEREAS, the General Partner, acting pursuant to Section 15.1 of the First Amended and Restated Agreement, amended and restated the First Amended and Restated Agreement, as evidenced by that certain Second Amended and Restated Agreement of Limited Partnership of the Partnership, entered into as of January 14, 1998, but effective as of February 14, 1997 (the "Second Amended and Restated Agreement"); and WHEREAS, the General Partner, acting pursuant to Section 15.1 of the Second Amended and Restated Agreement, amended the Second Amended and Restated Agreement, as evidenced by that certain Amendment No. 1 to Second Amended and Restated Agreement, dated as of January 20, 2000; and WHEREAS, the General Partner, acting pursuant to Article IV and Section 15.1 of the Second Amended and Restated Agreement, amended the Second Amended and Restated Agreement, as evidenced by that certain Amendment No. 2 to Second Amended and Restated Agreement, dated as of December 21, 2000; and WHEREAS, pursuant to the authority granted to the General Partner in the Second Amended and Restated Agreement, as amended, the General Partner desires (i) to amend the Second Amended and Restated Agreement to create a class of Units to be designated "I-Units," and to fix the preferences and relative, participating, optional and other special rights, powers and duties appertaining to the I-Units, and (ii) to restate the Second Amended and Restated Agreement as so amended; and WHEREAS, Article IV and Section 15.1 of the Second Amended and Restated Agreement permit the General Partner, without the approval of any Limited Partner or Assignee, to amend the Second Amended and Restated Agreement to effect the intent hereof; NOW, THEREFORE, the General Partner does hereby amend and restate the Second Amended and Restated Agreement, as amended, to provide, in its entirety, as follows: -1- 10 ARTICLE I ORGANIZATIONAL MATTERS 1.1 CONTINUATION. The General Partner and the Limited Partners hereby continue the Partnership as a limited partnership pursuant to the provisions of the Delaware Act. Except as expressly provided to the contrary in this Agreement, the rights and obligations of the Parties and the administration, dissolution and termination of the Partnership shall be governed by the Delaware Act. All Partnership Interests shall constitute personal property of the owner thereof for all purposes. 1.2 NAME. The name of the Partnership shall be "Kinder Morgan Energy Partners, L.P." The Partnership's business may be conducted under any other name or names deemed necessary or appropriate by the General Partner, including, without limitation, the name of the General Partner or any Affiliate thereof. The words "Limited Partnership," "L.P.," "Ltd." or similar words or letters shall be included in the Partnership's name where necessary for the purposes of complying with the laws of any jurisdiction that so requires. The General Partner in its sole discretion may change the name of the Partnership at any time and from time to time and shall notify the Limited Partners of such change in the next regular communication to Limited Partners. 1.3 REGISTERED OFFICE; PRINCIPAL OFFICE. Unless and until changed by the General Partner, the registered office of the Partnership in the State of Delaware shall be located at The Corporation Trust Center, 1209 Orange Street, New Castle County, Wilmington, Delaware 19801, and the registered agent for service of process on the Partnership in the State of Delaware at such registered office shall be The Corporation Trust Company. The principal office of the Partnership and the address of the General Partner shall be 500 Dallas Street, Suite 1000, Houston, Texas 77002, or such other place as the General Partner may from time to time designate by notice to the Limited Partners. The Partnership may maintain offices at such other place or places within or outside the State of Delaware as the General Partner deems necessary or appropriate. 1.4 POWER OF ATTORNEY. (a) Each Limited Partner and each Assignee hereby constitutes and appoints each of the General Partner and, if a Liquidator shall have been selected pursuant to Section 14.3, the Liquidator severally (and any successor to either thereof by merger, transfer, assignment, election or otherwise) and each of their authorized officers and attorneys-in-fact, with full power of substitution, as his true and lawful agent and attorney-in-fact, with full power and authority in his name, place and stead, to: (i) execute, swear to, acknowledge, deliver, file and record in the appropriate public offices (A) all certificates, documents and other instruments (including, without limitation, this Agreement and the Certificate of Limited Partnership and all amendments or restatements thereof) that the General Partner or the Liquidator deems necessary or appropriate to form, qualify or continue the existence or qualification of the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware and in all other jurisdictions in which the Partnership may conduct business or own property; (B) all certificates, documents and other instruments that the General Partner or the Liquidator deems necessary or appropriate to reflect, in accordance with its terms, any amendment, change, modification or restatement of this Agreement; (C) all certificates, documents and other instruments -2- 11 (including, without limitation, conveyances and a certificate of cancellation) that the General Partner or the Liquidator deems necessary or appropriate to reflect the dissolution and liquidation of the Partnership pursuant to the terms of this Agreement; (D) all certificates, documents and other instruments relating to the admission, withdrawal, removal or substitution of any Partner pursuant to, or other events described in, Article XI, XII, XIII or XIV or the Capital Contribution of any Partner; (E) all certificates, documents and other instruments relating to the determination of the rights, preferences and privileges of any class or series of Units or other Partnership Securities issued pursuant to Section 4.1; and (F) all certificates, documents and other instruments (including, without limitation, agreements and a certificate of merger) relating to a merger or consolidation of the Partnership pursuant to Article XVI; and (ii) execute, swear to, acknowledge, deliver, file and record all ballots, consents, approvals, waivers, certificates, documents and other instruments necessary or appropriate, in the sole discretion of the General Partner or the Liquidator, to make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action that is made or given by the Partners hereunder or is consistent with the terms of this Agreement or is necessary or appropriate, in the sole discretion of the General Partner or the Liquidator, to effectuate the terms or intent of this Agreement; provided, that when required by Section 15.3 or any other provision of this Agreement that establishes a percentage of the Limited Partners or of the Limited Partners of any class or series required to take any action, the General Partner or the Liquidator may exercise the power of attorney made in this Section 1.4(a)(ii) only after the necessary vote, consent or approval of the Limited Partners or of the Limited Partners of such class or series, as applicable. Nothing contained in this Section 1.4(a) shall be construed as authorizing the General Partner to amend this Agreement except in accordance with Article XV or as may be otherwise expressly provided for in this Agreement. (b) The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, and it shall survive and not be affected by the subsequent death, incompetency, disability, incapacity, dissolution, bankruptcy or termination of any Limited Partner or Assignee and the transfer of all or any portion of such Limited Partner's or Assignee's Partnership Interest and shall extend to such Limited Partner's or Assignee's heirs, successors, assigns and personal representatives. Each such Limited Partner or Assignee hereby agrees to be bound by any representation made by the General Partner or the Liquidator acting in good faith pursuant to such power of attorney; and each such Limited Partner or Assignee hereby waives any and all defenses that may be available to contest, negate or disaffirm the action of the General Partner or the Liquidator taken in good faith under such power of attorney. Each Limited Partner or Assignee shall execute and deliver to the General Partner or the Liquidator, within 15 days after receipt of the General Partner's or the Liquidator's request therefor, such further designation, powers of attorney and other instruments as the General Partner or the Liquidator deems necessary to effectuate this Agreement and the purposes of the Partnership. 1.5 TERM. The Partnership commenced upon the filing of the Certificate of Limited Partnership in accordance with the Delaware Act and shall continue in existence until the termination of the Partnership in accordance with the provisions of Article XIV. -3- 12 1.6 POSSIBLE RESTRICTIONS ON TRANSFER. Notwithstanding anything to the contrary contained in this Agreement, in the event of (a) the enactment (or imminent enactment) of any legislation, (b) the publication of any temporary or final regulation by the Treasury Department, (c) any ruling by the Internal Revenue Service or (d) any judicial decision, that, in any such case, in the Opinion of Counsel, would result in the taxation of the Partnership as an association taxable as a corporation or would otherwise result in the Partnership's being taxed as an entity for federal income tax purposes, then, the General Partner may impose such restrictions on the transfer of Units or Partnership Interests as may be required, in the Opinion of Counsel, to prevent the Partnership for federal income tax purposes from being taxed as an association taxable as a corporation or otherwise as an entity, including, without limitation, making any amendments to this Agreement as the General Partner in its sole discretion may determine to be necessary or appropriate to impose such restrictions, provided, that any such amendment to this Agreement that would result in the delisting or suspension of trading of any class of Units on any National Securities Exchange on which such class of Units is then traded must be approved by at least two-thirds of the Outstanding Units of such class (excluding the vote in respect of Units held by the General Partner and its Affiliates). ARTICLE II DEFINITIONS The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement. "ADDITIONAL LIMITED PARTNER" means a Person admitted to the Partnership as a Limited Partner pursuant to Section 12.3 and who is shown as such on the books and records of the Partnership. "ADJUSTED CAPITAL ACCOUNT" means the Capital Account maintained for each Partner as of the end of each fiscal year of the Partnership, (a) increased by any amounts that such Partner is obligated to restore under the standards set by Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to restore under Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5)) and (b) decreased by (i) the amount of all losses and deductions that, as of the end of such fiscal year, are reasonably expected to be allocated to such Partner in subsequent years under Sections 704(e)(2) and 706(d) of the Code and Treasury Regulation Section 1.751-1(b)(2)(ii), and (ii) the amount of all distributions that, as of the end of such fiscal year, are reasonably expected to be made to such Partner in subsequent years in accordance with the terms of this Agreement or otherwise to the extent they exceed offsetting increases to such Partner's Capital Account that are reasonably expected to occur during (or prior to) the year in which such distributions are reasonably expected to be made (other than increases as a result of a minimum gain chargeback pursuant to Section 5.1(d)(i) or 5.1(d)(ii)). The foregoing definition of Adjusted Capital Account is intended to comply with the provisions of Treasury Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. The "Adjusted Capital Account" of a Partner in respect of a Common Unit, a Class B Unit, an I-Unit or any other interest in the Partnership shall be the amount which such Adjusted Capital Account would be if such Common Unit, Class B Unit, I-Unit or other interest in the Partnership was the only interest in the Partnership held by a Partner. "ADJUSTED PROPERTY" means any property the Carrying Value of which has been adjusted pursuant to Section 4.3(d)(i) or 4.3(d)(ii). -4- 13 "AFFILIATE" means, with respect to any Person, any other Person that directly or indirectly controls, is controlled by or is under common control with, the Person in question. As used herein, the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. For purposes of this Agreement, KMM is an Affiliate of KMGP. "AGREED ALLOCATION" means any allocation, other than a Required Allocation, of an item of income, gain, loss or deduction pursuant to the provisions of Section 5.1, including, without limitation, a Curative Allocation (if appropriate to the context in which the term "Agreed Allocation" is used). "AGREED VALUE" of any Contributed Property means the fair market value of such property at the time of contribution as determined by the General Partner using such reasonable method of valuation as it may adopt; and the General Partner shall, in its sole discretion, use such method as it deems reasonable and appropriate to allocate the aggregate Agreed Value of Contributed Properties contributed to the Partnership in a single or integrated transaction among each separate property on a basis proportional to the fair market value of each Contributed Property. "AGREEMENT" means this Third Amended and Restated Agreement of Limited Partnership of Kinder Morgan Energy Partners, L.P., as it may be amended, supplemented or restated from time to time. "API" means a Partnership Interest that was issued pursuant to the First Amended and Restated Agreement and in accordance with the Omnibus Agreement, which Partnership Interest conferred upon the holder thereof only the rights and obligations specifically provided in the First Amended and Restated Agreement and the Omnibus Agreement with respect to APIs (and no other rights otherwise available to holders of a Partnership Interest). "ASSIGNEE" means a Non-citizen Assignee or a Person to whom one or more Units have been transferred in a manner permitted under this Agreement and who has executed and delivered a Transfer Application as required by this Agreement, but who has not become a Substituted Limited Partner. "AVAILABLE CASH" means, with respect to any calendar quarter: (a) the sum of: (i) all cash receipts of the Partnership during such quarter from all sources (including, without limitation, distributions of cash received from the Operating Partnerships and cash proceeds from Interim Capital Transactions, but excluding cash proceeds from Termination Capital Transactions); and (ii) any reduction in reserves with respect to such quarter from the level at the end of the prior quarter; (b) less the sum of: -5- 14 (i) all cash disbursements of the Partnership during such quarter, including, without limitation, disbursements for operating expenses, taxes, if any, debt service (including, without limitation, the payment of principal, premium and interest), capital expenditures and contributions, if any, to the Operating Partnerships (but excluding all cash distributions to Partners); and (ii) any reserves established with respect to such quarter, and any increase in reserves established with respect to prior quarters, in such amounts as the General Partner determines in its reasonable discretion to be necessary or appropriate (x) to provide for the proper conduct of the business of the Partnership or the Operating Partnerships (including, without limitation, reserves for future capital expenditures) or (y) to provide funds for distributions with respect to Units in respect of any one or more of the next four calendar quarters or (z) because the distribution of such amounts would be prohibited by applicable law or by any loan agreement, security agreement, mortgage, debt instrument or other agreement or obligation to which the Partnership or any of the Operating Partnerships is a party or by which any of them is bound or by which any of their assets are subject. Notwithstanding the foregoing, "Available Cash" with respect to any calendar quarter (A) shall not include any cash receipts or reductions in reserves or take into account any disbursements made or reserves established after the Liquidation Date and (B) shall include any distributions of cash (to the extent such distributions are attributable to transactions and operations during such quarter) received by the Partnership from the Operating Partnership after the end of such quarter but on or before the date on which the Partnership makes its distribution of Available Cash in respect of such quarter pursuant to Section 5.3. For purposes of determining "Available Cash," the Equivalent Non-Cash Amount for all I-Units with respect to any calendar quarter will be disregarded for purposes of determining "Available Cash" in future quarters. Taxes paid by the Partnership on behalf of, or amounts withheld with respect to, all or less than all of the Partners shall not be considered cash disbursements of the Partnership that reduce Available Cash, but the payment or withholding thereof shall be deemed to be a distribution of Available Cash to such Partners. Alternatively, in the discretion of the General Partner, such taxes (if pertaining to all Partners) may be considered to be cash disbursements of the Partnership which reduce Available Cash, but the payment or withholding thereof shall not be deemed to be a distribution of Available Cash to such Partners. "AVERAGE MARKET PRICE" has the meaning assigned to such term in Section 5.7(c). "BOOK-TAX DISPARITY" means with respect to any item of Contributed Property or Adjusted Property, as of the date of any determination, the difference between the Carrying Value of such Contributed Property or Adjusted Property and the adjusted basis thereof for federal income tax purposes as of such date. A Partner's share of the Partnership's Book-Tax Disparities in all of its Contributed Property and Adjusted Property will be reflected by the difference between such Partner's Capital Account balance as maintained pursuant to Section 4.3 and the hypothetical balance of such Partner's Capital Account computed as if it had been maintained strictly in accordance with federal income tax accounting principles. "BUSINESS DAY" means Monday through Friday of each week, except that a legal holiday recognized as such by the government of the United States or the states of New York or Texas shall not be regarded as a Business Day. -6- 15 "CALCULATED UNIT AMOUNT" has the meaning assigned to such term in Section 5.7(c). "CAPITAL ACCOUNT" means the capital account maintained for a Partner or Assignee pursuant to Section 4.3. "CAPITAL ADDITIONS AND IMPROVEMENTS" means additions or improvements (whether in the form of the acquisition or construction of additions or improvements) to the Pipeline System and Other Assets or the acquisition of an existing, or the construction of a new, pipeline system (including, without limitation, related tankage and terminaling facilities) or fractionation facilities that increase the throughput, deliverable capacity, terminaling capacity, fractionation capacity (assuming normal operating conditions, including, without limitation, down-time and maintenance) of the assets of the Operating Partnership from the throughput, deliverable capacity, terminaling capacity, fractionation capacity (assuming normal operating conditions, including, without limitation, down-time and maintenance) immediately prior to the making or acquisition of such additions or improvements, irrespective of whether such additions or improvements serve the same or different geographic markets than are served by the Pipeline System and Other Assets immediately prior to the making or acquisition of such additions or improvements. "CAPITAL CONTRIBUTION" means any cash, cash equivalents or the Net Agreed Value of Contributed Property that a Partner contributes to the Partnership pursuant to the Omnibus Agreement, the Conveyance Agreement or Sections 4.1 or 13.3(c). "CARRYING VALUE" means (a) with respect to a Contributed Property, the Agreed Value of such property reduced (but not below zero) by all depreciation, amortization and cost recovery deductions charged to the Partners' and Assignees' Capital Accounts in respect of such Contributed Property, and (b) with respect to any other Partnership property, the adjusted basis of such property for federal income tax purposes, all as of the time of determination. The Carrying Value of any property shall be adjusted from time to time in accordance with Section 4.3(d)(i) and 4.3(d)(ii) and to reflect changes, additions or other adjustments to the Carrying Value for dispositions and acquisitions of Partnership properties, as deemed appropriate by the General Partner. "CASH FROM INTERIM CAPITAL TRANSACTIONS" means, at any date, such amounts of Available Cash as are deemed to be Cash from Interim Capital Transactions pursuant to Section 5.3. "CASH FROM OPERATIONS" means, at the close of any calendar quarter but prior to the Liquidation Date, on a cumulative basis, all cash receipts of the Partnership and the Operating Partnership (including, without limitation, the cash balance of the Partnership as of the close of business on the Closing Date (and including in such cash balance proceeds from the Initial Offering that are next-day funds), cash proceeds from the sale of APIs and from the exercise of the Underwriters' over-allotment option granted pursuant to the Underwriting Agreement (but excluding any cash proceeds from any Interim Capital Transactions (except to the extent specified in Section 5.3) and Termination Capital Transactions) during the period since the Closing Date through such date, less the sum of (a) all cash operating expenditures of the Partnership and the Operating Partnership during such period, including, without limitation, taxes, if any, (b) all cash debt service payments of the Partnership and the Operating Partnership during such period (other than payments or prepayments of principal and premium required by -7- 16 reason of loan agreements (including, without limitation, covenants and default provisions therein) or by lenders, in each case in connection with sales or other dispositions of assets or made in connection with refinancings or refundings of indebtedness, provided, that any payment or prepayment of principal, whether or not then due, shall be deemed, at the election and in the discretion of the General Partner to be refunded or refinanced by any indebtedness incurred or to be incurred by the Partnership or the Operating Partnership simultaneously with or within 180 days prior to or after such payment or prepayment to the extent of the principal amount of such indebtedness so incurred), (c) all cash capital expenditures of the Partnership and the Operating Partnership during such period, including, without limitation, Maintenance Capital Expenditures, but excluding (i) cash capital expenditures made in respect of Capital Additions and Improvements and (ii) cash expenditures made in payment of transaction expenses relating to Interim Capital Transactions, (d) an amount equal to revenues collected as a result of transportation rate increases that are subject to possible refund, (e) any reserves outstanding as of such date that the General Partner deemed in its reasonable discretion to be necessary or appropriate to provide for the future cash payment of items of the type referred to in clauses (a) through (d) of this sentence and (f) any reserves that the General Partner deems in its reasonable discretion to be necessary or appropriate to provide funds for distributions with respect to Units in respect of any one or more of the next four calendar quarters, all as determined on a consolidated basis and after taking into account the General Partner's interest therein attributable to its general partner interest in the Operating Partnership. Where cash capital expenditures are made in part in respect of Capital Additions and Improvements and in part for other purposes, the General Partner's good faith allocation thereof between the portion made for Capital Additions and Improvements and the portion made for other purposes shall be conclusive. "CAUSE" means a court of competent jurisdiction has entered a final, non-appealable judgment finding the General Partner liable for actual fraud, gross negligence or willful or wanton misconduct in its capacity as general partner of the Partnership. "CENTRAL BASIN CONVEYANCES" means the instruments of conveyance or assignment pursuant to which Central Basin Funding, Inc., a Delaware corporation, and certain other entities, conveyed certain properties and assets relating to a carbon dioxide pipeline located in West Texas to the Operating Partnership on the Closing Date. "CERTIFICATE" means (a) a certificate, substantially in the form of Exhibit A to this Agreement or in such other forms as may be adopted by the General Partner in its sole discretion, issued by the Partnership evidencing ownership of one or more Common Units, (b) a certificate, substantially in the form of Exhibit B to this Agreement or in such other forms as may be adopted by the General Partner in its sole discretion, issued by the Partnership evidencing ownership of one or more Class B Units, (c) a certificate, substantially in the form of Exhibit C to this Agreement or in such other forms as may be adopted by the General Partner in its sole discretion, issued by the Partnership evidencing ownership of one or more I-Units, or (d) a certificate, in such form as may be adopted by the General Partner in its sole discretion, issued by the Partnership evidencing ownership of one or more other Units. "CERTIFICATE OF LIMITED PARTNERSHIP" means the Certificate of Limited Partnership filed with the Secretary of State of the State of Delaware as referenced in Section 6.2, as such Certificate of Limited Partnership may be amended, supplemented or restated from time to time. -8- 17 "CITIZENSHIP CERTIFICATION" means a properly completed certificate in such form as may be specified by the General Partner by which an Assignee or a Limited Partner certifies that he (and if he is a nominee holding for the account of another Person, that to the best of his knowledge such other Person) is an Eligible Citizen. "CLASS B UNIT" means a Unit representing an interest in the Partnership as a Limited Partner or Assignee, having the rights and obligations specified with respect to Class B Units in this Agreement. "CLOSING DATE" means the first date on which Common Units are sold by the Partnership to the Underwriters pursuant to the provisions of the Underwriting Agreement. "CLOSING PRICE" has the meaning assigned to such term in Section 17.1(a). "CODE" means the Internal Revenue Code of 1986, as amended and in effect from time to time, as interpreted by the applicable regulations thereunder. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provisions of future law. "COMBINED INTEREST" has the meaning assigned to such term in Section 13.3(a). "COMMON UNIT" means a Unit representing an interest in the Partnership as a Limited Partner or Assignee, having the rights and obligations specified with respect to Common Units in this Agreement. "CONFLICTS AND AUDIT COMMITTEE" means a committee of the Board of Directors of the General Partner composed entirely of one or more directors who are neither officers nor employees of the General Partner or any of its Affiliates. "CONTRIBUTED PROPERTY" means each property or other asset, in such form as may be permitted by the Delaware Act, but excluding cash, contributed to the Partnership. Once the Carrying Value of a Contributed Property is adjusted pursuant to Section 4.3(d), such property shall no longer constitute a Contributed Property, but shall be deemed an Adjusted Property. "CONVEYANCE AGREEMENT" means the Conveyance, Contribution and Assumption agreement, dated as of the Closing Date, among Enron, KMGP, Enron Pipeline Products, Inc., a Delaware corporation, Enron Gas Processing Company, a Delaware corporation, KMNGL, Enron Oil Trading & Transportation Company, a Delaware corporation, Enron Gas Liquids, Inc., a Delaware corporation, Enron Cogeneration Three Company, a Delaware corporation, the Partnership and OLP-A, together with the additional conveyance documents and instruments contemplated thereunder. "CURATIVE ALLOCATION" means any allocation of an item of income, gain, deduction, loss or credit pursuant to the provisions of Section 5.1(d)(x). "CURRENT MARKET PRICE" has the meaning assigned to such term in Section 17.1(a), except that if any Units involved are not listed or admitted to trading on any National Securities Exchange, such price shall be determined by an independent investment banking firm or other independent expert selected by the General Partner. -9- 18 "DELAWARE ACT" means the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. Section 17-101, et seq., as amended, supplemented or restated from time to time, and any successor to such statute. "DELEGATION OF CONTROL AGREEMENT" means the Delegation of Control Agreement dated as of ______, 2001 among KMGP, KMM, the Partnership and the Operating Partnerships, as amended, supplemented or restated from time to time. "DEPARTING PARTNER" means a former general partner, from and after the effective date of any withdrawal or removal of such former general partner pursuant to Section 13.1 or 13.2. "ECONOMIC RISK OF LOSS" has the meaning set forth in Treasury Regulation Section 1.752-2(a). "ELIGIBLE CITIZEN" means a Person qualified to own interests in real property in jurisdictions in which the Partnership or the Operating Partnership does business or proposes to do business from time to time, and whose status as a Limited Partner or Assignee does not or would not subject the Partnership or the Operating Partnership to a substantial risk of cancellation or forfeiture of any of its properties or any interest therein. "ENRON" means Enron Corp., a Delaware corporation. "EQUIVALENT NON-CASH AMOUNT" has the meaning assigned to such term in Section 5.7(c). "EVENT OF WITHDRAWAL" has the meaning assigned to such term in Section 13.1(a). "EXCHANGE PROVISIONS" means the exchange provisions that are attached to the LLC Agreement as Annex A. "FIRST AMENDED AND RESTATED AGREEMENT" has the meaning assigned to such term in the introduction to this Agreement. "FIRST LIQUIDATION TARGET AMOUNT" has the meaning assigned to such term in Section 5.1(c)(i)(D). "FIRST TARGET DISTRIBUTION" means $0.3025 per Unit, subject to adjustment in accordance with Sections 5.6 and 9.6. "GENERAL PARTNER" means KMGP and its successors as general partner of the Partnership, unless the context otherwise requires. "GROUP" means a "group" of Persons as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. "HOLDER" has the meaning assigned to such term in Section 6.13(a). "I-UNIT" means a Unit representing an interest in the Partnership as a Limited Partner or Assignee, having the rights and obligations specified with respect to I-Units in this Agreement. -10- 19 INCENTIVE DISTRIBUTION" means any amount of cash distributed to the General Partner, in its capacity as general partner of the Partnership, pursuant to Sections 5.4(c), 5.4(d) or 5.4(e) that exceeds that amount equal to 1% of the aggregate amount of cash then being distributed pursuant to such provisions. "INDEMNIFIED PERSONS" has the meaning assigned to such term in Section 6.13(c). "INDEMNITEE" means the General Partner, any Departing Partner, 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 or any Departing Partner or any such Affiliate, or any Person who is or was serving at the request of the General Partner or any Departing Partner or any such Affiliate as a director, officer, employee, partner, agent or trustee of another Person. "INITIAL OFFERING" means the initial offering of Common Units to the public, as described in the Registration Statement. "INITIAL UNIT PRICE" means $11.50 per Unit. "INTERIM CAPITAL TRANSACTIONS" means (a) borrowings, refinancings or refundings of indebtedness and sales of debt securities (other than for working capital purposes and other than for items purchased on open account in the ordinary course of business) by the Partnership or the Operating Partnership, (b) sales of equity interests by the Partnership or the Operating Partnership and (c) sales or other voluntary or involuntary dispositions of any assets of the Partnership or the Operating Partnership (other than (x) sales or other dispositions of inventory in the ordinary course of business, (y) sales or other dispositions of other current assets including, without limitation, receivables and accounts and (z) sales or other dispositions of assets as a part of normal retirements or replacements), in each case prior to the commencement of the dissolution and liquidation of the Partnership. "KMGP" means Kinder Morgan G.P., Inc., a Delaware corporation. "KMI" means Kinder Morgan, Inc., a Kansas corporation. "KMM" means Kinder Morgan Management, LLC, a Delaware limited liability company. "KMNGL" means Kinder Morgan Natural Gas Liquids Corp., a Delaware corporation. "LIMITED PARTNER" means, unless the context otherwise requires, each initial limited partner, each Substituted Limited Partner, each Additional Limited Partner and any Departing Partner upon the change of its status from General Partner to Limited Partner pursuant to Section 13.3. "LIQUIDATION DATE" means (a) in the case of an event giving rise to the dissolution of the Partnership of the type described in Sections 14.2(a) and (b), the date on which the applicable time period during which the holders of Outstanding Units have the right to elect to reconstitute the Partnership and continue its business has expired without such an election being made, and (b) in the case of any other event giving rise to the dissolution of the Partnership, the date on which such event occurs. -11- 20 "LIQUIDATOR" means the General Partner or other Person approved pursuant to Section 14.3 who performs the functions described therein. "LISTED SHARES" means the limited liability company interests in KMM designated in the LLC Agreement as "Listed Shares." "LLC AGREEMENT" means the Amended and Restated Limited Liability Company Agreement of KMM dated as of ____________, 2001, including exhibits and annexes thereto, as it may be amended, supplemented or restated from time to time. "MAINTENANCE CAPITAL EXPENDITURES" means cash capital expenditures made to maintain, up to the level thereof that existed on the Closing Date, the throughput, deliverable capacity, terminaling capacity, or fractionation capacity (assuming normal operating conditions, including, without limitation, down-time and maintenance) of the assets of the Partnership and the Operating Partnership, taken as a whole, as such assets existed on the Closing Date and shall, therefore, not include cash capital expenditures made in respect of Capital Additions and Improvements. Where cash capital expenditures are made in part to effectuate the capacity maintenance level referred to in the immediately preceding sentence and in part for other purposes, the General Partner's good faith allocation thereof between the portion used to maintain such capacity level and the portion used for other purposes shall be conclusive. "MANDATORY PURCHASE EVENT" has the meaning assigned to such term in the Purchase Provisions. "MAXIMUM PERMITTED DELEGATION" has the meaning assigned to such term in the Delegation of Control Agreement. "MANDATORY REDEMPTION NOTICE" has the meaning assigned to such term in Section 4.9(b). "MERGER AGREEMENT" has the meaning assigned to such term in Section 16.1. "MINIMUM QUARTERLY DISTRIBUTION" means $0.275 per Unit per calendar quarter, subject to adjustment in accordance with Sections 5.6 and 9.6. "NATIONAL SECURITIES EXCHANGE" means an exchange registered with the Securities and Exchange Commission under Section 6(a) of the Securities Exchange Act of 1934, as amended, supplemented or restated from time to time, and any successor to such statute. "NET AGREED VALUE" means, (a) in the case of any Contributed Property, the Agreed Value of such property reduced by any liabilities either assumed by the Partnership upon such contribution or to which such property is subject when contributed, and (b) in the case of any property distributed to a Partner or Assignee by the Partnership, the Partnership's Carrying Value of such property (as adjusted pursuant to Section 4.3(d)(ii)) at the time such property is distributed, reduced by any indebtedness either assumed by such Partner or Assignee upon such distribution or to which such property is subject at the time of the distribution, in either case, as determined under Section 752 of the Code. "NET INCOME" means, for any taxable period, the excess, if any, of the Partnership's items of income and gain (other than those items attributable to dispositions constituting -12- 21 Termination Capital Transactions) for such taxable period over the Partnership's items of loss and deduction (other than those items attributable to dispositions constituting Termination Capital Transactions) for such taxable period. The items included in the calculation of Net Income shall be determined in accordance with Section 4.3(b) and shall not include any items specially allocated under Section 5.1(d). Once an item of income, gain, loss or deduction that has been included in the initial computation of Net Income is subjected to a Required Allocation or a Curative Allocation, Net Income or Net Loss, whichever the case may be, shall be recomputed without regard to such item. "NET LOSS" means, for any taxable period, the excess, if any, of the Partnership's items of loss and deduction (other than those items attributable to dispositions constituting Termination Capital Transactions) for such taxable period over the Partnership's items of income and gain (other than those items attributable to dispositions constituting Termination Capital Transactions) for such taxable period. The items included in the calculation of Net Loss shall be determined in accordance with Section 4.3(b) and shall not include any items specially allocated under Section 5.1(d). Once an item of income, gain, loss or deduction that has been included in the initial computation of Net Loss is subjected to a Required Allocation or a Curative Allocation, Net Income, or Net Loss, whichever the case may be, shall be recomputed without regard to such item. "NET TERMINATION GAIN" means, for any taxable period, the sum, if positive, of all the items of income, gain, loss or deduction recognized by the Partnership (including, without limitation, such amounts recognized through the Operating Partnership) from Termination Capital Transactions occurring in such taxable period. The items included in the determination of Net Termination Gain shall be determined in accordance with Section 4.3(b) and shall not include any items of income, gain or loss specially allocated under Section 5.1(d). Once an item of income, gain or loss that has been included in the initial computation of Net Termination Gain is subjected to a Required Allocation or a Curative Allocation, Net Termination Gain or Net Termination Loss, whichever the case may be, shall be recomputed without regard to such item. "NET TERMINATION LOSS" means, for any taxable period, the sum, if negative, of all items of income, gain, loss or deduction recognized by the Partnership (including, without limitation, such amounts recognized through the Operating Partnership) from Termination Capital Transactions occurring in such taxable period. The items included in the determination of Net Termination Loss shall be determined in accordance with Section 4.3(b) and shall not include any items of income, gain or loss specially allocated under Section 5.1(d). Once an item of gain or loss that has been included in the initial computation of Net Termination Loss is subjected to a Required Allocation or a Curative Allocation, Net Termination Gain or Net Termination Loss, whichever the case may be, shall be recomputed without regard to such item. "NON-CITIZEN ASSIGNEES" means a Person who the General Partner has determined in its sole discretion does not constitute an Eligible Citizen and as to whose Partnership Interest the General Partner has become the Substituted Limited Partner, pursuant to Section 11.5. "NONRECOURSE BUILT-IN GAIN" means with respect to any Contributed Properties or Adjusted Properties that are subject to a mortgage or negative pledge securing a Nonrecourse Liability, the amount of any taxable gain that would be allocated to the Partners pursuant to Sections 5.2(b)(i)(A), 5.2(b)(ii)(A) or 5.2(b)(iv) if such properties were disposed of in a taxable transaction in full satisfaction of such liabilities and for no other consideration. -13- 22 "NONRECOURSE DEDUCTIONS" means any and all items of loss, deduction or expenditures (described in Section 705(a)(2)(B) of the Code) that, in accordance with the principles of Treasury Regulation Section 1.704-2(b), are attributable to a Nonrecourse Liability. "NONRECOURSE LIABILITY" has the meaning set forth in Treasury Regulation Section 1.752-1(a)(2). "NOTICE OF ELECTION TO PURCHASE" has the meaning assigned to such term in Section 17.1(b). "NOTICE OF INTENT TO CONVERT" has the meaning assigned to such term in Section 4.9(b). "OLP-A" means Kinder Morgan Operating L.P. "A", a Delaware limited partnership continued pursuant to the OLP-A Partnership Agreement. "OLP-A PARTNERSHIP AGREEMENT" means the Amended and Restated Agreement of Limited Partnership of OLP-A dated as of August 6, 1992, as it may be amended, supplemented or restated from time to time. "OMNIBUS AGREEMENT" means the Omnibus Agreement, dated as of the Closing Date, among Enron, the Partnership, OLP-A and KMGP. "OPERATING PARTNERSHIP" means OLP-A provided, however, that unless the context otherwise requires, any references herein to the term "Operating Partnership" or "Operating Partnerships" shall also be deemed to include, to the extent of the Partnership's ownership interest therein, any partnerships, joint ventures or other entities formed or acquired by the Partnership in connection with the conduct by the Partnership of activities permitted by the terms of Section 3.1. "OPERATING PARTNERSHIP AGREEMENT" means the OLP-A Partnership Agreement; provided, however, that unless the context otherwise requires, any references to the term "Operating Partnership Agreement" or "Operating Partnership Agreements" shall also be deemed to include the partnership or other governing charter agreement for any partnership, joint venture or other entity formed or acquired by the Partnership in connection with the conduct by the Partnership of activities permitted by the terms of Section 3.1. "OPINION OF COUNSEL" means a written opinion of counsel (who may be regular counsel to KMI, any Affiliate of KMI, the Partnership or the General Partner) acceptable to the General Partner. "OPTIONAL PURCHASE PRICE" has the meaning assigned to such term in Section 17.1. "ORIGINAL AGREEMENT" has the meaning assigned to such term in the introduction to this Agreement. "OUTSTANDING" means, with respect to the Units or other Partnership Securities, all Units or other Partnership Securities that are issued by the Partnership and reflected as outstanding on the Partnership's books and records as of the date of determination; provided that, if at any time any Person or Group (other than the General Partner and its Affiliates) owns beneficially 20% or more of the aggregate number of Listed Shares and Common Units on a combined basis, such -14- 23 Common Units so owned and the number of I-Units corresponding to the Listed Shares so owned shall not be voted on any matter and shall 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 purposes under this Agreement, except that such Common Units and I-Units shall be considered to be Outstanding for purposes of Section 13.1(b)(iv). "PARTNERS" means the General Partner; the Limited Partners; and solely for purposes of Articles IV, V and VI and Sections 14.3 and 14.4, the Assignees. "PARTNER NONRECOURSE DEBT" has the meaning set forth in Treasury Regulation Section 1.704-2(b)(4). "PARTNER NONRECOURSE DEBT MINIMUM GAIN" has the meaning set forth in Treasury Regulation Section 1.704-2(f)(2). "PARTNER NONRECOURSE DEDUCTIONS" means any and all items of loss, deduction or expenditure (including, without limitation, any expenditure described in Section 705(a)(2)(B) of the Code) that, in accordance with the principles of Treasury Regulation Section 1.704-2(i), are attributable to a Partner Nonrecourse Debt. "PARTNERSHIP" means the limited partnership heretofore formed and continued pursuant to this Agreement. "PARTNERSHIP INTEREST" means an interest in the Partnership, which shall include general partner interests, Units or other Partnership Securities, or a combination thereof or interest therein, as the case may be. "PARTNERSHIP MINIMUM GAIN" means that amount determined in accordance with the principles of Treasury Regulation Section 1.704-2(d). "PARTNERSHIP SECURITIES" has the meaning assigned to such term in Section 4.1(b). "PERCENTAGE INTEREST" means as of the date of such determination (a) as to the General Partner, 1%, (b) as to any Limited Partner or Assignee holding Units, the product of (i) 99% multiplied by (ii) the quotient of the number of Units held by such Limited Partner or Assignee divided by the total number of all Units then Outstanding, provided, however, that following any issuance of additional Partnership Securities by the Partnership in accordance with Sections 4.1, 5.4 or 5.5, proper adjustment shall be made to the Percentage Interest represented by each Unit to reflect such issuance, and (c) as to the holders of additional Partnership Securities issued by the Partnership in accordance with Sections 4.1, 5.4 or 5.5, the percentage established as a part of such issuance. "PERSON" means an individual or a corporation, partnership, trust, unincorporated organization, association or other entity. "PIPELINE SYSTEM AND OTHER ASSETS" means the natural gas liquid pipeline assets and related terminating facilities, the CO2 pipeline assets, the stock of KMNGL and other facilities and assets, all as more fully described in the Conveyance Agreement and the Central Basin -15- 24 Conveyances, that on the Closing Date are conveyed and contributed or sold to OLP-A or owned by KMNGL. "PRO RATA" means (a) when modifying Units or any class thereof, apportioned equally among all designated Units in accordance with their relative Percentage Interests and (b) when modifying Partners and Assignees, apportioned among all designated Partners and Assignees in accordance with their relative Percentage Interests. "PURCHASE DATE" means the date determined by the General Partner as the date for purchase of all Outstanding Units (other than Units owned by the General Partner and its Affiliates) pursuant to Article XVII. "PURCHASE PROVISIONS" means the purchase provisions that are attached to the LLC Agreement as Annex B. "RECAPTURE INCOME" means any gain recognized by the Partnership (computed without regard to any adjustment required by Sections 734 or 743 of the Code) upon the disposition of any property or asset of the Partnership, which gain is characterized as ordinary income because it represents the recapture of deductions previously taken with respect to such property or asset. "RECORD DATE" means the date established by the General Partner for determining (a) the identity of the Record Holder entitled to notice of, or to vote at, any meeting of Limited Partners or entitled to vote by ballot or give approval of Partnership action in writing without a meeting or entitled to exercise rights in respect of any lawful action of Limited Partners or (b) the identity of Record Holders entitled to receive any report or distribution. "RECORD HOLDER" means the Person in whose name a Unit is registered on the books of the Transfer Agent as of the opening of business on a particular Business Day. "REDEEMABLE UNITS means any Units for which a redemption notice has been given, and has not been withdrawn, under Section 11.6. "REGISTRATION STATEMENT" means the Registration Statement on Form S-1 (Registration No. 33-48142), as it may have been amended or supplemented from time to time, filed by the Partnership with the Securities and Exchange Commission under the Securities Act to register the offering and sale of the Common Units in the Initial Offering. "REQUIRED ALLOCATIONS" means any allocation (or limitation imposed on any allocation) of an item of income, gain, deduction or loss pursuant to (a) the proviso-clause of Section 5.1(b)(ii) or (b) Sections 5.1(d)(i), 5.1(d)(ii), 5.1(d)(iv), 5.1(d)(v), 5.1(d)(vi), 5.1(d)(vii) and 5.1(d)(ix), such allocations (or limitations thereon) being directly or indirectly required by the Treasury Regulations promulgated under Section 704(b) of the Code. "RESIDUAL GAIN" or "RESIDUAL LOSS" means any item of gain or loss, as the case may be, of the Partnership recognized for federal income tax purposes resulting from a sale, exchange or other disposition of a Contributed Property or Adjusted Property, to the extent such item of gain or loss is not allocated pursuant to Sections 5.2(b)(i)(A) or 5.2(b)(ii)(A), respectively, to eliminate Book-Tax Disparities. -16- 25 "SECOND AMENDED AND RESTATED AGREEMENT" has the meaning assigned to such term in the introduction to this Agreement. "SECOND LIQUIDATION TARGET AMOUNT" has the meaning assigned to such term in Section 5.1(c)(i)(E). "SECOND TARGET DISTRIBUTION" means $0.3575 per Unit, subject to adjustment in accordance with Sections 5.6 and 9.6. "SECURITIES ACT" means the Securities Act of 1933, as amended, and any successor to such statute. "SHARE DISTRIBUTION" has the meaning assigned to such term in the LLC Agreement. "SPECIAL APPROVAL" means approval by a majority of the members of the Conflicts and Audit Committee. "SUBSTITUTED LIMITED PARTNER" means a Person who is admitted as a Limited Partner to the Partnership pursuant to Section 12.1 in place of and with all the rights of a Limited Partner and who is shown as a Limited Partner on the books and records of the Partnership. "SURVIVING BUSINESS ENTITY" has the meaning assigned to such term in Section 16.2(b). "TERMINATION CAPITAL TRANSACTIONS" means any sale, transfer or other disposition of property of the Partnership or the Operating Partnership occurring upon or incident to the liquidation and winding up of the Partnership and the Operating Partnership pursuant to Article XIV. "THIRD TARGET DISTRIBUTION" means $0.4675 per Unit, subject to adjustment in accordance with Sections 5.6 and 9.6. "TRADING DAY" has the meaning assigned to such term in Section 17.1(a). "TRANSFER AGENT" means such bank, trust company or other Person (including, without limitation, the General Partner or one of its Affiliates) as shall be appointed from time to time by the Partnership to act as registrar and transfer agent for the Units. "TRANSFER APPLICATION" means an application and agreement for transfer of Units in the form set forth on the back of a Certificate or in a form substantially to the same effect in a separate instrument. "UNDERWRITER" means each Person named as an underwriter in Schedule I to the Underwriting Agreement who purchases Units pursuant thereto. "UNDERWRITING AGREEMENT" means the Underwriting Agreement dated July 30, 1992, among the Underwriters, the Partnership, the General Partner, OLP-A and Enron providing for the purchase of Common Units by such Underwriters. "UNIT" means a Partnership Interest of a Limited Partner or Assignee in the Partnership and shall include, without limitation, Common Units, Class B Units and I-Units. -17- 26 "UNPAID MQD" has the meaning assigned to such term in Section 5.1(c)(i)(C). "UNREALIZED GAIN" attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (a) the fair market value of such property as of such date (as determined under Section 4.3(d)) over (b) the Carrying Value of such property as of such date (prior to any adjustment to be made pursuant to Section 4.3(d) as of such date). "UNREALIZED LOSS" attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (a) the Carrying Value of such property as of such date (prior to any adjustment to be made pursuant to Section 4.3(d) as of such date) over (b) the fair market value of such property as of such date (as determined under Section 4.3(d)). "UNRECOVERED INITIAL UNIT PRICE" means, at any time, with respect to a Unit, the Initial Unit Price, less the sum of all distributions theretofore made in respect of a Common Unit issued in the Initial Offering constituting, and which for purposes of determining the priority of such distribution is treated as constituting, Cash from Interim Capital Transactions and of any distributions of cash (or the Net Agreed Value of any distributions in kind) in connection with the dissolution and liquidation of the Partnership theretofore made in respect of a Common Unit issued in the Initial Offering. ARTICLE III PURPOSE 3.1 PURPOSE AND BUSINESS. The purpose and nature of the business to be conducted by the Partnership shall be (a) to serve as a limited partner in OLP-A and, in connection therewith, to exercise all of the rights and powers conferred upon the Partnership as a limited partner in the OLP-A pursuant to the OLP-A Partnership Agreement or otherwise, (b) to engage directly in, or to enter into any partnership, joint venture or similar arrangement to engage in, any business activity or project that may lawfully be conducted or engaged in by a limited partnership organized pursuant to the Delaware Act and (c) to do anything necessary or appropriate to the foregoing, including, without limitation, the making of capital contributions or loans to the Operating Partnership or in connection with its involvement in the activities referred to in clause (b) of this sentence. Subject to the other provisions of this Agreement, the Partnership may engage in any business activity. The General Partner has no obligation or duty to the Partnership, the Limited Partners or the Assignees to propose or approve, and in its sole discretion may decline to propose or approve, the conduct by the Partnership of any business. 3.2 POWERS. The Partnership shall be empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business described in Section 3.1 and for the protection and benefit of the Partnership. ARTICLE IV CAPITAL CONTRIBUTIONS 4.1 ISSUANCES OF UNITS AND OTHER SECURITIES. (a) The initial Capital Contributions of the General Partner and the initial Limited Partners were made in accordance with Section 4.3 of the First Amended and Restated Agreement. -18- 27 (b) The General Partner is hereby authorized to cause the Partnership to issue, in addition to the Partnership Interests and Units issued heretofore by the Partnership, such additional Units, or classes or series thereof, or options, rights, warrants or appreciation rights relating thereto, or any other type of equity security that the Partnership may lawfully issue, or any unsecured or secured debt obligations of the Partnership convertible into any class or series of equity securities of the Partnership (collectively, "Partnership Securities"), for any Partnership purpose, at any time or from time to time, to the Partners or to other Persons for such consideration and on such terms and conditions as shall be established by the General Partner in its sole discretion, all without the approval of any Limited Partners. The General Partner shall have sole discretion, subject to the guidelines set forth in this Section 4.1 and the requirements of the Delaware Act, in determining the consideration and terms and conditions with respect to any future issuance of Partnership Securities. (c) Additional Partnership Securities to be issued by the Partnership pursuant to this Section 4.1 shall be issuable from time to time in one or more classes, or one or more series of any of such classes, with such designations, preferences and relative, participating, optional or other special rights, powers and duties, including, without limitation, rights, powers and duties senior to existing classes and series of Partnership Securities, all as shall be fixed by the General Partner in the exercise of its sole discretion, subject to Delaware law, including, without limitation, (i) the allocations of items of Partnership income, gain, loss, deduction and credit to each such class or series of Partnership Securities; (ii) the right of each such class or series of Partnership Securities to share in Partnership distributions; (iii) the rights of each such class or series of Partnership Securities upon dissolution and liquidation of the Partnership; (iv) whether such class or series of additional Partnership Securities is redeemable by the Partnership and, if so, the price at which, and the terms and conditions upon which, such class or series of additional Partnership Securities may be redeemed by the Partnership; (v) whether such class or series of additional Partnership Securities is issued with the privilege of conversion and, if so, the rate at which, and the terms and conditions upon which, such class or series of Partnership Securities may be converted into any other class or series of Partnership Securities or other property; (vi) the terms and conditions upon which each such class or series of Partnership Securities will be issued, evidenced by certificates and assigned or transferred; and (vii) the right, if any, of each such class or series of Partnership Securities to vote on Partnership matters, including, without limitation, matters relating to the relative rights, preferences and privileges of each such class or series. (d) Upon the issuance of any Partnership Interests by the Partnership (other than I-Units or fractions of I-Units pursuant to Section 5.4, 5.5, or 5.7(e)) or the making of any other Capital Contributions to the Partnership, the General Partner shall be required to make additional Capital Contributions to the Partnership such that the General Partner shall at all times have a balance in its Capital Account with respect to its general partner interest equal to 1% of the total positive Capital Account balances of all Partners. (e) The General Partner is hereby authorized and directed to take all actions that it deems necessary or appropriate in connection with each issuance of Units or other Partnership Securities pursuant to Section 4.1(b) and to amend this Agreement in any manner that it deems necessary or appropriate to provide for each such issuance, to admit Additional Limited Partners in connection therewith and to specify the relative rights, powers and duties of the holders of the Units or other Partnership Securities being so issued. -19- 28 (f) The General Partner is authorized to cause the issuance of Partnership Securities (other than I-Units) pursuant to any employee benefit plan for the benefit of employees responsible for the operations of the Partnership or the Operating Partnerships maintained or sponsored by the General Partner, the Partnership, the Operating Partnerships or any Affiliate of any of them. (g) The General Partner shall do all things necessary to comply with the Delaware Act and is authorized and directed to do all things it deems to be necessary or advisable in connection with any future issuance of Partnership Securities, including, without limitation, compliance with any statute, rule, regulation or guideline of any federal, state or other governmental agency or any National Securities Exchange on which the Units or other Partnership Securities are listed for trading. 4.2 LIMITED PREEMPTIVE RIGHTS. Except as provided in this Section 4.2, no Person shall have any preemptive, preferential or other similar right with respect to (a) additional Capital Contributions; (b) issuance or sale of any class or series of Units or other Partnership Securities, whether unissued, held in the treasury or hereafter created; (c) issuance of any obligations, evidences of indebtedness or other securities of the Partnership convertible into or exchangeable for, or carrying or accompanied by any rights to receive, purchase or subscribe to, any such Units or other Partnership Securities; (d) issuance of any right of subscription to or right to receive, or any warrant or option for the purchase of, any such Units or other Partnership Securities; or (e) issuance or sale of any other securities that may be issued or sold by the Partnership. The General Partner shall have 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 Partnership Securities from the Partnership whenever, and on the same terms that, the Partnership issues Units or other Partnership Securities to Persons other than the General Partner and its Affiliates, to the extent necessary to maintain the Percentage Interests of the General Partner and its Affiliates equal to that which existed immediately prior to the issuance of such Units or other Partnership Securities. 4.3 CAPITAL ACCOUNTS. (a) The Partnership shall maintain for each Partner (or a beneficial owner of Units held by a nominee in any case in which the nominee has furnished the identity of such owner to the Partnership in accordance with Section 6031(c) of the Code or any other method acceptable to the General Partner in its sole discretion) owning a Partnership Interest a separate Capital Account with respect to such Partnership Interest in accordance with the rules of Treasury Regulation Section 1.704-1(b)(2)(iv). Such Capital Account shall be increased by (i) the amount of all Capital Contributions made to the Partnership with respect to such Partnership Interest pursuant to this Agreement and (ii) all items of Partnership income and gain (including, without limitation, income and gain exempt from tax) computed in accordance with Section 4.3(b) and allocated with respect to such Partnership Interest pursuant to Section 5.1, and decreased by (x) the amount of cash or Net Agreed Value of all actual and deemed distributions of cash or property made with respect to such Partnership Interest pursuant to this Agreement and (y) all items of Partnership deduction and loss computed in accordance with Section 4.3(b) and allocated with respect to such Partnership Interest pursuant to Section 5.1. (b) For purposes of computing the amount of any item of income, gain, loss or deduction to be reflected in the Partners' Capital Accounts, the determination, recognition and classification of any such item shall be the same as its determination, recognition and -20- 29 classification for federal income tax purposes (including, without limitation, any method of depreciation, cost recovery or amortization used for that purpose), provided, that: (i) Solely for purposes of this Section 4.3, the Partnership shall be treated as owning directly its proportionate share (as determined by the General Partner based upon the provisions of the Operating Partnership Agreement) of all property owned by the Operating Partnership. (ii) All fees and other expenses incurred by the Partnership to promote the sale of (or to sell) a Partnership Interest that can neither be deducted nor amortized under Section 709 of the Code, if any, shall, for purposes of Capital Account maintenance, be treated as an item of deduction at the time such fees and other expenses are incurred and shall be allocated among the Partners pursuant to Section 5.1. (iii) Except as otherwise provided in Treasury Regulation Section 1.704-1(b)(2)(iv)(m), the computation of all items of income, gain, loss and deduction shall be made without regard to any election under Section 754 of the Code which may be made by the Partnership and, as to those items described in Section 705(a)(1)(B) or 705(a)(2)(B) of the Code, without regard to the fact that such items are not includable in gross income or are neither currently deductible nor capitalized for federal income tax purposes. (iv) Any income, gain or loss attributable to the taxable disposition of any Partnership property shall be determined as if the adjusted basis of such property as of such date of disposition were equal in amount to the Partnership's Carrying Value with respect to such property as of such date. (v) In accordance with the requirements of Section 704(b) of the Code, any deductions for depreciation, cost recovery or amortization attributable to any Contributed Property shall be determined as if the adjusted basis of such property on the date it was acquired by the Partnership were equal to the Agreed Value of such property. Upon an adjustment pursuant to Section 4.3(d) to the Carrying Value of any Partnership property subject to depreciation, cost recovery or amortization, any further deductions for such depreciation, cost recovery or amortization attributable to such property shall be determined (A) as if the adjusted basis of such property were equal to the Carrying Value of such property immediately following such adjustment and (B) using a rate of depreciation, cost recovery or amortization derived from the same method and useful life (or, if applicable, the remaining useful life) as is applied for federal income tax purposes; provided, however, that, if the asset has a zero adjusted basis for federal income tax purposes, depreciation, cost recovery or amortization deductions shall be determined using any reasonable method that the General Partner may adopt. (vi) If the Partnership's adjusted basis in a depreciable or cost recovery property is reduced for federal income tax purposes pursuant to Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction shall, solely for purposes hereof, be deemed to be an additional depreciation or cost recovery deduction in the year such property is placed in service and shall be allocated among the Partners pursuant to Section 5.1. Any restoration of such basis pursuant to Section 48(q)(2) of the Code shall, -21- 30 to the extent possible, be allocated in the same manner to the Partners to whom such deemed deduction was allocated. (c) A transferee of a Partnership Interest shall succeed to a pro rata portion of the Capital Account of the transferor relating to the Partnership Interest so transferred. (d) (i) Consistent with the provisions of Treasury Regulation Section 1.704-1(b)(2)(iv)(f), on an issuance of additional Units for cash or Contributed Property or the conversion of the General Partner's Partnership Interest to Common Units pursuant to Section 13.3(b), the Capital Account of all Partners (other than those holding I-Units) and the Carrying Value of each Partnership property immediately prior to such issuance shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as if such Unrealized Gain or Unrealized Loss had been recognized on an actual sale of each such property immediately prior to such issuance and had been allocated to the Partners at such time pursuant to Section 5.1. In determining such Unrealized Gain or Unrealized Loss, the aggregate cash amount and fair market value of all Partnership assets (including, without limitation, cash or cash equivalents) immediately prior to the issuance of additional Units shall be determined by the General Partner using such reasonable method of valuation as it may adopt. The General Partner shall allocate such aggregate value among the assets of the Partnership (in such manner as it determines in its sole discretion to be reasonable) to arrive at a fair market value for individual properties. (ii) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f), immediately prior to any actual or deemed distribution to a Partner of any Partnership property (other than a distribution of cash that is not in redemption or retirement of a Partnership Interest or a distribution of an additional I-Unit (or fraction thereof) pursuant to Section 5.4, 5.5 or 5.7(e)), the Capital Accounts of all Partners and the Carrying Value of such Partnership property shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as if such Unrealized Gain or Unrealized Loss had been recognized in a sale of such property immediately prior to such distribution for an amount equal to its fair market value, and had been allocated to the Partners, at such time, pursuant to Section 5.1. Any Unrealized Gain or Unrealized Loss attributable to such property shall be allocated in the same manner as Net Termination Gain or Net Termination Loss pursuant to Section 5.1(c); provided, however, that, in making any such allocation, Net Termination Gain or Net Termination Loss actually realized shall be allocated first. In determining such Unrealized Gain or Unrealized Loss, the aggregate cash amount and fair market value of all Partnership assets (including, without limitation, cash or cash equivalents) immediately prior to a distribution shall be determined and allocated by the Liquidator using such reasonable method of valuation as it may adopt. (iii) Upon the issuance of I-Units (or fractions thereof) pursuant to Section 5.4, 5.5 or 5.7(e), the Capital Accounts of all I-Units Outstanding prior to such issuance shall be divided equally among all I-Units Outstanding after such issuance (and any fractional I-Unit shall be allocated a fractional part of such Capital Accounts). 4.4 INTEREST. No interest shall be paid by the Partnership on Capital Contributions or on balances in Partners' Capital Accounts. -22- 31 4.5 NO WITHDRAWAL. No Partner shall be entitled to withdraw any part of its Capital Contributions or its Capital Account or to receive any distribution from the Partnership, except as provided in Articles V, XIII and XIV. 4.6 LOANS FROM PARTNERS. Loans by a Partner to the Partnership shall not constitute Capital Contributions. If any Partner shall advance funds to the Partnership in excess of the amounts required hereunder to be contributed by it to the capital of the Partnership, the making of such excess advances shall not result in any increase in the amount of the Capital Account of such Partner. The amount of any such excess advances shall be a debt obligation of the Partnership to such Partner and shall be payable or collectible only out of the Partnership assets in accordance with the terms and conditions upon which such advances are made. 4.7 NO FRACTIONAL UNITS. Except with respect to I-Units, no fractional Units shall be issued by the Partnership. 4.8 SPLITS AND COMBINATIONS. (a) Subject to Section 4.8(d), the General Partner may make a Pro Rata distribution of Units or other Partnership Securities to all Record Holders or may effect a subdivision or combination of Units or other Partnership Securities; provided, however, that after any such distribution, subdivision or combination, each Partner shall have the same Percentage Interest in the Partnership as before such distribution, subdivision or combination and the Capital Accounts of all such classes of distributed, subdivided or combined Units or other Partnership Securities Outstanding prior to such distribution, subdivision or combination shall be divided equally among all such Units or other Partnership Securities Outstanding after such distribution, subdivision or combination. (b) Whenever such a distribution, subdivision or combination of Units or other Partnership Securities is declared, the General Partner shall select a Record Date as of which the distribution, subdivision or combination shall be effective and shall send notice of the distribution, subdivision or combination at least 20 days prior to such Record Date to each Record Holder as of the date not less than 10 days prior to the date of such notice. The General Partner also may cause a firm of independent public accountants selected by it to calculate the number of Units to be held by each Record Holder after giving effect to such distribution, subdivision or combination. The General Partner shall be entitled to rely on any certificate provided by such firm as conclusive evidence of the accuracy of such calculation. (c) Promptly following any such distribution, subdivision or combination, the General Partner may cause Certificates to be issued to the Record Holders of Units as of the applicable Record Date representing the new number of Units held by such Record Holders, or the General Partner may adopt such other procedures as it may deem appropriate to reflect such distribution, subdivision or combination; provided, however, if any such distribution, subdivision or combination results in a smaller total number of Units Outstanding, the General Partner shall require, as a condition to the delivery to a Record Holder of such new Certificate, the surrender of any Certificate held by such Record Holder immediately prior to such Record Date. (d) Except with respect to I-Units, the Partnership shall not issue fractional Units upon any distribution, subdivision or combination of Units. If a distribution, subdivision or combination of Units would result in the issuance of fractional Units but for the provisions of Section 4.7 and this Section 4.8(d), each fractional Unit (other a fractional I-Unit) shall be rounded to the nearest whole Unit (and a 0.5 Unit shall be rounded to the next higher Unit). -23- 32 4.9 CLASS B UNITS. (a) Pursuant to Article IV and Section 15.1 of the Second Amended and Restated Agreement, as amended, the General Partner designated and created a special class of Units designated "Class B Units" and fixed the designations, preferences and relative, participating, optional or other special rights, powers and duties of the holders of the Class B Units as follows: (b) Each Class B Unit shall be convertible from time to time, in whole or in part, into one Common Unit from and after such date as the Partnership has been advised by the New York Stock Exchange that the Common Units issuable upon any such conversion are eligible for listing on the New York Stock Exchange. The General Partner shall promptly notify the holders of Class B Units upon receipt of such advice. Upon written notice to the General Partner from the holders of at least a majority of the Outstanding Class B Units (a "Notice of Intent to Convert") given not earlier than one year after the issuance of the Class B Units, the General Partner shall use its reasonable best efforts to cause the Partnership to meet any unfulfilled requirements of the New York Stock Exchange for such listing, including obtaining such approval of the holders of Common Units as may be required by the New York Stock Exchange for the issuance of additional Common Units to be listed thereon. If, 120 days after the date of the Notice of Intent to Convert, the Common Units issuable upon such conversion have not been approved for listing on the New York Stock Exchange, then the Partnership shall give written notice thereof to the holders of the Outstanding Class B Units, whereupon each holder of Outstanding Class B Units may, at such holder's election at any time thereafter, notify the General Partner in writing (a "Mandatory Redemption Notice") of such holder's election to cause the Partnership to redeem such holder's Outstanding Class B Units for cash. All such Outstanding Class B Units shall be redeemed as of the 60th day following the date of receipt of such Mandatory Redemption Notice unless, prior to such 60th day, the General Partner gives written notice to the holders of all Outstanding Class B Units that it has been advised by the New York Stock Exchange that the Common Units issuable upon a conversion of Class B Units have been approved for listing on the New York Stock Exchange, in which case the Mandatory Redemption Notice shall be deemed to have been withdrawn. (c) Before any holder of Class B Units shall be entitled to receive any redemption payment or to convert such holder's Class B Units into Common Units, as the case may be, it shall surrender the Class B Unit Certificates therefor, duly endorsed, at the office of the General Partner or of any transfer agent for the Class B Units. In the case of any such conversion, the Partnership shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Class B Units one or more Certificates, registered in the name of such holder, for the number of Common Units to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made as of the date of such surrender of the Class B Units to be converted, and the person entitled to receive the Common Units issuable upon such conversion shall be treated for all purposes as the record holder of such Common Units on said date. (d) Upon the request of KMI or any of its Affiliates to register all or any part of the Class B Units pursuant to Section 6.13, the Class B Units for which registration is so requested may be redeemed by the Partnership at its election. The Partnership, at its election, may exercise its option under this Section 4.9(d) by mailing written notice thereof to the holders of Class B Units for which registration is so requested. Such notice shall be given not later than 15 days after the receipt by the General Partner of such registration request and shall fix a date -24- 33 for redemption of such Class B Units not less than 30 nor more than 60 days after the date of such notice. (e) Any redemption under Section 4.9(b) or Section 4.9(d) shall be for a cash redemption price equal to the Current Market Price per Common Unit as of the date fixed for redemption multiplied by 0.955. (f) From and after a redemption date (unless default shall be made by the Partnership in providing money for the payment of the redemption price), the Class B Units redeemed shall no longer be deemed to be Outstanding, and all rights of the holders thereof as Partners in the Partnership (except the right to receive from the Partnership the redemption price) shall cease. Class B Units redeemed pursuant to Section 4.9(b) or Section 4.9(d) shall be restored to the status of authorized but unissued Units, without designation as to class. (g) Except as otherwise provided in this Agreement, each Class B Unit shall be identical to a Common Unit, and the holder of a Class B Unit shall have the rights of a holder of a Common Unit with respect to, without limitation, Partnership distributions, voting and allocations of income, gain, loss or deductions. Except as otherwise provided in this Agreement, all Units shall vote or consent together as a single class on all matters submitted for a vote or consent of the Outstanding Units. (h) The Certificates evidencing Class B Units shall be separately identified and shall not bear the same CUSIP number as the Certificates evidencing Common Units or I-Units. 4.10 I-UNITS. (a) Pursuant to Section 4.1, the General Partner hereby designates and creates a special class of Units designated "I-Units" and fixes the designations, preferences and relative, participating, optional or other special rights, powers and duties of the holders of the I-Units as follows: (b) Except as otherwise provided in Section 5.1(c) upon a Termination Capital Transaction, a holder of an I-Unit will receive no allocations of income, gain, loss or deductions. Except for distributions pursuant to Section 14.3(b), any distributions or payments shall be made to a holder of an I-Unit in additional I-Units (or fractions thereof) or a security that has in all material respects the same rights and privileges as the I-Units, in accordance with Section 5.7. (c) Except as otherwise provided in this Agreement, each I-Unit shall have the rights of a holder of a Common Unit with respect to voting. Except as otherwise provided in this Agreement, all Units shall vote or consent together as a single class on all matters submitted for a vote or consent of the Outstanding Units. (d) The Certificates evidencing I-Units shall be separately identified and shall not bear the same CUSIP number as the Certificates evidencing Common Units or Class B Units. ARTICLE V ALLOCATIONS AND DISTRIBUTIONS 5.1 ALLOCATIONS FOR CAPITAL ACCOUNT PURPOSES. For purposes of maintaining the Capital Accounts and in determining the rights of the Partners among themselves, the -25- 34 Partnership's items of income, gain, loss and deduction (computed in accordance with Section 4.3(b)) shall be allocated among the Partners in each taxable year (or portion thereof) as provided herein below. (a) NET INCOME. After giving effect to the special allocations set forth in Section 5.1(d), Net Income for each taxable period and all items of income, gain, loss and deduction taken into account in computing Net Income for such taxable period shall be allocated as follows: (i) First, 100% to the General Partner until the aggregate Net Income allocated to the General Partner pursuant to this Section 5.1(a)(i) for the current taxable year and all previous taxable years is equal to the aggregate Net Losses allocated to the General Partner pursuant to section 5.1(b)(iii) for all previous taxable years; (ii) Second, 99% to the Limited Partners holding Common Units and Class B Units, Pro Rata, and 1% to the General Partner until the aggregate Net Income allocated to such Partners pursuant to this Section 5.1(a)(ii) for the current taxable year and all previous taxable years is equal to the aggregate Net Losses allocated to such Partners pursuant to Section 5.1(b)(ii) for all previous taxable years; and (iii) Third, the balance, if any, 99% to the Limited Partners holding Common Units and Class B Units, Pro Rata, and 1% to the General Partner. (b) NET LOSSES. After giving effect to the special allocations set forth in Section 5.1(d), Net Losses for each taxable period and all items of income, gain, loss and deduction taken into account in computing Net Losses for such taxable period shall be allocated as follows: (i) First, 99% to the Limited Partners holding Common Units and Class B Units, Pro Rata, and 1% to the General Partner until the aggregate Net Losses allocated pursuant to this Section 5.1(b)(i) for the current taxable year and all previous taxable years is equal to the aggregate Net Income allocated to such Partners pursuant to Section 5.1(a)(iii) for all previous taxable years; (ii) Second, 99% to the Limited Partners holding Common Units and Class B Units, Pro Rata, and 1% to the General Partner; provided, that the Net Losses shall not be allocated pursuant to this Section 5.1(b)(ii) to the extent that such allocation would cause any Partner to have a deficit balance in its Adjusted Capital Account at the end of such taxable year (or increase any existing deficit balance in its Adjusted Capital Account); (iii) Third, the balance, if any, 100% to the General Partner. (c) NET TERMINATION GAINS AND LOSSES. After giving effect to the special allocations set forth in Section 5.1(d), all items of income, gain, loss and deduction taken into account in computing Net Termination Gain or Net Termination Loss for such taxable period shall be allocated in the same manner as such Net Termination Gain or Net Termination Loss is allocated hereunder. All allocations under this Section 5.1(c) shall be made after Capital Account balances have been adjusted by all other allocations provided under this Section 5.1 and -26- 35 after all distributions of Available Cash provided under Section 5.4 have been made with respect to the taxable period ending on the date of the Partnership's liquidation pursuant to Section 14.3. (i) If a Net Termination Gain is recognized (or deemed recognized pursuant to Section 4.3(d)) from Termination Capital Transactions, such Net Termination Gain shall be allocated between the General Partner and the Limited Partners in the following manner (and the Adjusted Capital Accounts of the Partners shall be increased by the amount so allocated in each of the following subclauses, in the order listed, before an allocation is made pursuant to the next succeeding subclause); (A) First, to each Partner having a deficit balance in its Adjusted Capital Account, in the proportion that such deficit balance bears to the total deficit balances in the Adjusted Capital Accounts of all Partners, until each such Partner has been allocated Net Termination Gain equal to any such deficit balance in its Adjusted Capital Account; (B) Second, if the Adjusted Capital Account of an I-Unit is less than the Adjusted Capital Account of a Common Unit, 99% to the Limited Partners holding I-Units and 1% to the General Partner until the Adjusted Capital Account of each I-Unit equals the Adjusted Capital Account of each Common Unit or, if the Adjusted Capital Account of an I-Unit is greater than the Adjusted Capital Account of a Common Unit, 99% to the Limited Partners holding Common Units and Class B Units and 1% to the General Partner until the Adjusted Capital Account of each Common Unit and Class B Unit equals the Adjusted Capital Account of each I-Unit; (C) Third, 99% to the Limited Partners holding I-Units, Common Units and Class B Units, Pro Rata, and 1% to the General Partner until the Adjusted Capital Account in respect of each Unit then Outstanding is equal to the sum of (1) the Unrecovered Initial Unit Price plus (2) the Minimum Quarterly Distribution for the quarter during which such Net Termination Gain is recognized, reduced by any distribution pursuant to Section 5.4(a) with respect to such Unit for such quarter (the amount determined pursuant to this clause (2) is hereinafter defined as the "Unpaid MQD"); (D) Fourth, 99% to the Limited Partners holding I-Units, Common Units and Class B Units, Pro Rata, and 1% to the General Partner until the Adjusted Capital Account in respect of each Unit then Outstanding is equal to the sum of (aa) the Unrecovered Initial Unit Price, plus (bb) the Unpaid MQD, plus (cc) the excess of (i) the First Target Distribution less the Minimum Quarterly Distribution for each quarter of the Partnership's existence over (ii) the amount of any distribution of Cash from Operations that was distributed pursuant to Section 5.4(b) (the sum of (aa) plus (bb) plus (cc) is hereinafter defined as the "First Liquidation Target Amount"); (E) Fifth, 85.8673% to the Limited Partners holding I-Units, Common Units and Class B Units, Pro Rata, and 14.1327% to the General Partner until the Adjusted Capital Account in respect of each Unit then Outstanding is equal to the sum of (aa) the First Liquidation Target Amount, plus (bb) the excess -27- 36 of (i) the Second Target Distribution less the First Target Distribution for each quarter of the Partnership's existence over (ii) the amount of any distributions of Cash from Operations that was distributed pursuant to Section 5.4(c) (the sum of (aa) plus (bb) is hereinafter defined as the "Second Liquidation Target Amount"); (F) Sixth, 75.7653% to the Limited Partners holding I-Units, Common Units and Class B Units, Pro Rata, and 24.2347% to the General Partner until the Adjusted Capital Account in respect of each Unit then Outstanding is equal to the sum of (aa) the Second Liquidation Target Amount, plus (bb) the excess of (i) the Third Target Distribution less the Second Target Distribution for each quarter of the Partnership's existence over (ii) the amount of any distributions of Cash from Operations that was distributed pursuant to Section 5.4(d); and (G) Finally, any remaining amount 50.5102% to the Limited Partners holding I-Units, Common Units and Class B Units, Pro Rata, and 49.4898% to the General Partner. (ii) If a Net Termination Loss is recognized (or deemed recognized pursuant to Section 4.3(d)) from Termination Capital Transactions, such Net Termination Loss shall be allocated to the Partners in the following manner: (A) First, if the Adjusted Capital Account of an I-Unit is less than the Adjusted Capital Account of a Common Unit, 99% to the Limited Partners holding Common Units and Class B Units and 1% to the General Partner until the Adjusted Capital Account of each Common Unit and Class B Unit equals the Adjusted Capital Account of each I-Unit or, if the Adjusted Capital Account of an I-Unit is greater than the Adjusted Capital Account of a Common Unit, 99% to the Limited Partners holding I-Units and 1% to the General Partner until the Adjusted Capital Account of each I-Unit equals the Adjusted Capital Account of each Common Unit; (B) Second, 100% to the General Partner and the Limited Partners holding I-Units, Common Units and Class B Units in proportion to, and to the extent of, the positive balances in their respective Adjusted Capital Accounts; (C) Finally, the balance, if any, 100% to the General Partner. (d) SPECIAL ALLOCATIONS. Notwithstanding any other provision of this Section 5.1, the following special allocations shall be made for such taxable period: (i) Partnership Minimum Gain Chargeback. Notwithstanding any other provision of this Section 5.1, if there is a net decrease in Partnership Minimum Gain during any Partnership taxable period, each Partner shall be allocated items of Partnership income and gain for such period (and, if necessary, subsequent periods) in the manner and amounts provided in Treasury Regulation Sections 1.704-2(f)(6), 1.704-2(g)(2) and 1.704-2(j)(2)(i), or any successor provision. For purposes of this Section 5.1(d), each Partner's Adjusted Capital Account balance shall be determined, and the -28- 37 allocation of income or gain required hereunder shall be effected, prior to the application of any other allocations pursuant to this Section 5.1(d) with respect to such taxable period (other than an allocation pursuant to Sections 5.1(d)(vi) and 5.1(d)(vii)). This Section 5.1(d)(i) is intended to comply with the Partnership Minimum Gain chargeback requirement in Treasury Regulation Section 1.704-2(f) and shall be interpreted consistently therewith. (ii) Chargeback of Partner Nonrecourse Debt Minimum Gain. Notwithstanding the other provisions of this Section 5.1 (other than Section 5.1(d)(i)), except as provided in Treasury Regulation Section 1.704-2(i)(4), if there is a net decrease in Partner Nonrecourse Debt Minimum Gain during any Partnership taxable period, any Partner with a share of Partner Nonrecourse Debt Minimum Gain at the beginning of such taxable period shall be allocated items of Partnership income and gain for such period (and, if necessary, subsequent periods) in the manner and amounts provided in Treasury Regulation Sections 1.704-2(i)(4) and 1.704-2(j)(2)(ii), or any successor provisions. For purposes of this Section 5.1(d), each Partner's Adjusted Capital Account balance shall be determined, and the allocation of income or gain required hereunder shall be effected, prior to the application of any other allocations pursuant to this Section 5.1(d), other than Section 5.1(d)(i) and other than an allocation pursuant to Sections 5.1(d)(vi) and 5.1(d)(vii), with respect to such taxable period. This Section 5.1(d)(ii) is intended to comply with the chargeback of items of income and gain requirement in Treasury Regulation Section 1.704-2(f)(4) and shall be interpreted consistently therewith. (iii) Priority Allocations. (A) If the amount of cash or the Net Agreed Value of any property distributed (except cash or property distributed pursuant to Section 14.3 or 14.4) to any Limited Partner holding Units with respect to a taxable year is greater (on a per Unit basis) than the amount of cash or the Net Agreed Value of property distributed to the other Limited Partners holding Units other than I-Units (on a per Unit basis), then (1) each Limited Partner holding Units receiving such greater cash or property distribution shall be allocated gross income in an amount equal to the product of (aa) the amount by which the distribution (on a per Unit basis) to such Limited Partners holding Units exceeds the distribution (on a per Unit basis) to the Limited Partner holding Units other than I-Units receiving the smallest distribution and (bb) the number of Units owned by the Limited Partners holding Units receiving the greater distribution; and (2) the General Partner shall be allocated gross income in an aggregate amount equal to 1/99 of the sum of the amounts allocated in clause (1) above. After the application of Section 5.1(d)(iii)(A), all or any portion of the remaining items of Partnership gross income or gain for the taxable period, if any, shall be allocated 100% to the General Partner, until the aggregate amount of such items allocated to the General Partner pursuant to this paragraph 5.1(d)(iii)(B) for the current taxable period and all previous taxable periods is equal to the cumulative amount of all Incentive Distributions made to the General Partner (or its assignee) from the Closing Date to a date 45 days after the end of the current taxable period. -29- 38 (iv) Qualified Income Offset. In the event any Partner unexpectedly receives any adjustments, allocations or distributions described in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Partnership income and gain shall be specifically allocated to such Partner in an amount and manner sufficient to eliminate, to the extent required by the Treasury regulations promulgated under Section 704(b) of the Code, the deficit balance, if any, in its Adjusted Capital Account created by such adjustments, allocations or distributions as quickly as possible unless such deficit balance is otherwise eliminated pursuant to Section 5.1(d)(i) or (ii). (v) Gross Income Allocations. In the event any Partner has a deficit balance in its Adjusted Capital Account at the end of any Partnership taxable period, such Partner shall be specially allocated items of Partnership gross income and gain in the amount of such excess as quickly as possible; provided, that an allocation pursuant to this Section 5.1(d)(v) shall be made only if and to the extent that such Partner would have a deficit balance in its Adjusted Capital Account after all other allocations provided for in this Section 5.1 have been tentatively made as if this Section 5.1(d)(v) were not in this Agreement. (vi) Nonrecourse Deductions. Nonrecourse Deductions for any taxable period shall be allocated to the Partners in accordance with their respective Percentage Interests. If the General Partner determines in its good faith discretion that the Partnership's Nonrecourse Deductions must be allocated in a different ratio to satisfy the safe harbor requirements of the Treasury regulations promulgated under Section 704(b) of the Code, the General Partner is authorized, upon notice to the Limited Partners, to revise the prescribed ratio to the numerically closest ratio that does satisfy such requirements. (vii) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions for any taxable period shall be allocated 100% to the Partner that bears the Economic Risk of Loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Treasury Regulation Section 1.704-2(i). If more than one Partner bears the Economic Risk of Loss with respect to a Partner Nonrecourse Debt, such Partner Nonrecourse Deductions attributable thereto shall be allocated between or among such Partners in accordance with the ratios in which they share such Economic Risk of Loss. (viii) Nonrecourse Liabilities. For purposes of Treasury Regulation Section 1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities of the Partnership in excess of the sum of (A) the amount of Partnership Minimum Gain and (B) the total amount of Nonrecourse Built-in Gain shall be allocated among the General Partner and the holders of Common Units and Class B Units in accordance with the allocation of Net Income set forth in Section 5.1(a)(iii). (ix) Code Section 754 Adjustments. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Section 734(b) or 743(b) of the Code is required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis -30- 39 of the asset) or loss (if the adjustment decreases such basis), and such item of gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Treasury regulations. (x) Curative Allocation. (A) Notwithstanding any other provision of this Section 5.1, other than the Required Allocations, the Required Allocations shall be taken into account in making the Agreed Allocations so that, to the extent possible, the net amount of items of income, gain, loss and deduction allocated to each Partner pursuant to the Required Allocations and the Agreed Allocations, together, shall be equal to the net amount of such items that would have been allocated to each such Partner under the Agreed Allocations had the Required Allocations and the related Curative Allocation not otherwise been provided in this Section 5.1. Notwithstanding the preceding sentence, Required Allocations relating to (1) Nonrecourse Deductions shall not be taken into account except to the extent that there has been a decrease in Partnership Minimum Gain and (2) Partner Nonrecourse Deductions shall not be taken into account except to the extent that there has been a decrease in Partner Nonrecourse Debt Minimum Gain. Allocations, pursuant to this Section 5.1(d)(x)(A) shall only be made with respect to Required Allocations to the extent the General Partner reasonably determines that such allocations will otherwise be inconsistent with the economic agreement among the Partners. Further, allocations pursuant to this Section 5.1(d)(x)(A) shall be deferred with respect to allocations pursuant to clauses (1) and (2) hereof to the extent the General Partner reasonably determines that such allocations are likely to be offset by subsequent Required Allocations. (B) The General Partner shall have reasonable discretion, with respect to each taxable period, to (1) apply the provisions of Section 5.1(d)(x)(A) in whatever order is most likely to minimize the economic distortions that might otherwise result from the Required Allocations, and (2) divide all allocations pursuant to Section 5.1(d)(x)(A) among the Partners in a manner that is likely to minimize such economic distortions. 5.2 ALLOCATIONS FOR TAX PURPOSES. (a) Except as otherwise provided herein, for federal income tax purposes, each item of income, gain, loss and deduction shall be allocated among the Partners in the same manner as its correlative item of "book" income, gain, loss or deduction is allocated pursuant to Section 5.1. (b) In an attempt to eliminate Book-Tax Disparities attributable to a Contributed Property or Adjusted Property, items of income, gain, loss, depreciation, amortization and cost recovery deductions shall be allocated for federal income tax purposes among the Partners as follows: (i) (A) In the case of a Contributed Property, such items attributable thereto shall be allocated among the Partners in the manner provided under Section 704(c) of the Code that takes into account the variation between the Agreed Value of such property and its adjusted basis at the time of contribution; and (B) except as -31- 40 otherwise provided in Section 5.2(b)(iv), any item of Residual Gain or Residual Loss attributable to a Contributed Property shall be allocated among the Partners in the same manner as its correlative item of "book" gain or loss is allocated pursuant to Section 5.1. (ii) (A) In the case of an Adjusted Property, such items shall (1) first, be allocated among the Partners in a manner consistent with the principles of Section 704(c) of the Code to take into account the Unrealized Gain or Unrealized Loss attributable to such property and the allocations thereof pursuant to Section 4.3(d)(i) or (ii), and (2) second, in the event such property was originally a Contributed Property, be allocated among the Partners in a manner consistent with Section 5.2(b)(i)(A); and (B) except as otherwise provided in Section 5.2(b)(iv), any item of Residual Gain or Residual Loss attributable to an Adjusted Property shall be allocated among the Partners in the same manner as its correlative item of "book" gain or loss is allocated pursuant to Section 5.1. (iii) Except as otherwise provided in Section 5.2(b)(iv), all other items of income, gain, loss and deduction shall be allocated among the Partners in the same manner as their correlative item of "book" gain or loss is allocated pursuant to Section 5.1. (iv) Any items of income, gain, loss or deduction otherwise allocable under Section 5.2(b)(i)(B), 5.2(b)(ii)(B) or 5.2(b)(iii) shall be subject to allocation by the General Partner in a manner designed to eliminate, to the maximum extent possible, Book-Tax Disparities in a Contributed Property or Adjusted Property otherwise resulting from the application of the "ceiling" limitation (under Section 704(c) of the Code or Section 704(c) principles) to the allocations provided under Section 5.2(b)(i)(A) or 5.2(b)(ii)(A). (c) For the proper administration of the Partnership and for the preservation of uniformity of the Units (or any class or classes thereof), the General Partner shall have sole discretion to (i) adopt such conventions as it deems appropriate in determining the amount of depreciation, amortization and cost recovery deductions; (ii) make special allocations for federal income tax purposes of income (including, without limitation, gross income) or deductions; and (iii) amend the provisions of this Agreement as appropriate (x) to reflect the proposal or promulgation of Treasury regulations under Section 704(b) or Section 704(c) of the Code or (y) otherwise to preserve or achieve uniformity of the Units (or any class or classes thereof). The General Partner may adopt such conventions, make such allocations and make such amendments to this Agreement as provided in this Section 5.2(c) only if such conventions, allocations or amendments would not have a material adverse effect on the Partners, the holders of any class or classes of Units issued and Outstanding or the Partnership, and if such allocations are consistent with the principles of Section 704 of the Code. (d) The General Partner in its sole discretion may determine to depreciate the portion of an adjustment under Section 743(b) of the Code attributable to unrealized appreciation in any Adjusted Property (to the extent of the unamortized Book-Tax Disparity) using a predetermined rate derived from the depreciation method and useful life applied to the Partnership's common basis of such property, despite the inconsistency of such approach with Treasury Regulation Section 1.167(c)-1(a)(6). If the General Partner determines that such reporting position cannot reasonably be taken, the General Partner may adopt a depreciation -32- 41 convention under which all purchasers acquiring Units in the same month would receive depreciation, based upon the same applicable rate as if they had purchased a direct interest in the Partnership's property. If the General Partner chooses not to utilize such aggregate method, the General Partner may use any other reasonable depreciation convention to preserve the uniformity of the intrinsic tax characteristics of any Units that would not have a material adverse effect on the Limited Partners or the Record Holders of any class or classes of Units. (e) Any gain allocated to the Partners upon the sale or other taxable disposition of any Partnership asset shall, to the extent possible, after taking into account other required allocations of gain pursuant to this Section 5.2, be characterized as Recapture Income in the same proportions and to the same extent as such Partners (or their predecessors in interest) have been allocated any deductions directly or indirectly giving rise to the treatment of such gains as Recapture Income. (f) All items of income, gain, loss, deduction and credit recognized by the Partnership for federal income tax purposes and allocated to the Partners in accordance with the provisions hereof shall be determined without regard to any election under Section 754 of the Code which may be made by the Partnership; provided, however, that such allocations, once made shall be adjusted as necessary or appropriate to take into account those adjustments permitted or required by Sections 734 and 743 of the Code. (g) Each item of Partnership income, gain, loss and deduction attributable to a transferred Partnership Interest of the General Partner or to transferred Units shall, for federal income tax purposes, be determined on an annual basis and prorated on a monthly basis and shall be allocated to the Partners as of the opening of the New York Stock Exchange on the first Business Day of each month; provided, however, that gain or loss on a sale or other disposition of any assets of the Partnership other than in the ordinary course of business shall be allocated to the Partners as of the opening of the New York Stock Exchange on the first Business Day of the month in which such gain or loss is recognized for federal income tax purposes. The General Partner may revise, alter or otherwise modify such methods of allocation as it determines necessary, to the extent permitted or required by Section 706 of the Code and the regulations or rulings promulgated thereunder. (h) Allocations that would otherwise be made to a Limited Partner under the provisions of this Article V shall instead be made to the beneficial owner of Units held by a nominee in any case in which the nominee has furnished the identify of such owner to the Partnership in accordance with Section 6031(c) of the Code or any other method acceptable to the General Partner in its sole discretion. 5.3 REQUIREMENT AND CHARACTERIZATION OF DISTRIBUTIONS. (a) Within 45 days following the end of each calendar quarter, an amount equal to 100% of Available Cash with respect to such quarter shall be distributed in accordance with this Article V by the Partnership to the Partners, as of the Record Date selected by the General Partner in its reasonable discretion. All amounts of Available Cash distributed by the Partnership on any date from any source shall be deemed to be Cash from Operations until the sum of all amounts of Available Cash theretofore distributed by the Partnership to Partners pursuant to Section 5.4 equals the aggregate amount of all Cash from Operations generated by the Partnership since the Closing Date through the close of the immediately preceding calendar quarter. Any remaining amounts of Available -33- 42 Cash distributed by the Partnership on such date shall, except as otherwise provided in Section 5.5, be deemed to be Cash from Interim Capital Transactions. (b) Notwithstanding the definitions of Available Cash and Cash from Operations contained herein, disbursements (including, without limitation, contributions to the Operating Partnerships or disbursements on behalf of the Operating Partnerships) made or reserves established after the end of any quarter shall be deemed to have been made or established, for purposes of determining Available Cash and Cash from Operations, within such quarter if the General Partner so determines. Notwithstanding the foregoing, in the event of the dissolution and liquidation of the Partnership, all proceeds of such liquidation shall be applied and distributed in accordance with, and subject to the terms and conditions of Sections 14.3 and 14.4. 5.4 DISTRIBUTIONS OF CASH FROM OPERATIONS. An amount equal to 100% of Available Cash with respect to any calendar quarter that is deemed to be Cash from Operations pursuant to the provisions of Section 5.3 or 5.5 shall be distributed in accordance with Section 5.7(a) as follows, except as otherwise required by Section 4.1(c) in respect of additional Partnership Securities issued pursuant thereto: (a) First, 99% to all Limited Partners, Pro Rata, and 1% to the General Partner until there has been distributed in respect of each Unit Outstanding as of the last day of such quarter an amount equal to the Minimum Quarterly Distribution; (b) Second, 99% to all Limited Partners, Pro Rata, and 1% to the General Partner until there has been distributed in respect of each Unit Outstanding as of the last day of such quarter an amount equal to the excess of the First Target Distribution over the Minimum Quarterly Distribution; (c) Third, 85.8673% to all Limited Partners, Pro Rata, and 14.1327% to the General Partner until there has been distributed in respect of each Unit Outstanding as of the last day of such quarter an amount equal to the excess of the Second Target Distribution over the First Target Distribution: (d) Fourth, 75.7653% to all Limited Partners, Pro Rata, and 24.2347% to the General Partner until there has been distributed in respect of each Unit Outstanding as of the last day of such quarter an amount equal to the excess of the Third Target Distribution over the Second Target Distribution; and (e) Thereafter, 50.5102% to all Limited Partners, Pro Rata, and 49.4898% to the General Partner; provided, however, if the Minimum Quarterly Distribution, the First Target Distribution, the Second Target Distribution and the Third Target Distribution have been reduced to zero pursuant to the second sentence of Section 5.6, the distributions of Available Cash that is deemed to be Cash from Operations with respect to any quarter will be made solely in accordance with Section 5.4(e). 5.5 DISTRIBUTIONS OF CASH FROM INTERIM CAPITAL TRANSACTIONS. An amount equal to 100% of Available Cash that constitutes Cash from Interim Capital Transactions shall be -34- 43 distributed in accordance with Section 5.7(a), unless the provisions of Section 5.3 require otherwise, 99% to all Limited Partners, Pro Rata, and 1% to the General Partner until a hypothetical holder of a Common Unit acquired on the Closing Date has received with respect to such Common Unit, during the period since the Closing Date through such date, distributions of Available Cash that are deemed to be Cash from Interim Capital Transactions in an aggregate amount equal to the Initial Unit Price. Thereafter, all Available Cash shall be distributed as if it were Cash from Operations and shall be distributed in accordance with Section 5.4. 5.6 ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS. (a) The Minimum Quarterly Distribution, First Target Distribution, Second Target Distribution and Third Target Distribution shall be proportionately adjusted in the event of any distribution, combination or subdivision (whether effected by a distribution payable in Units or otherwise) of Units or other Partnership Securities in accordance with Section 4.8; provided, however, that no such adjustment shall be made as a result of any distribution of I-Units or fractions of I-Units pursuant to Section 5.4 or 5.5. In the event of a distribution of Available Cash that is deemed to be Cash from Interim Capital Transactions, the Minimum Quarterly Distribution, First Target Distribution, Second Target Distribution and Third Target Distribution shall be adjusted proportionately downward to equal the product obtained by multiplying the otherwise applicable Minimum Quarterly Distribution, First Target Distribution, Second Target Distribution and Third Target Distribution, as the case may be, by a fraction of which the numerator is the Unrecovered Initial Unit Price of the Common Units immediately after giving effect to such distribution and of which the denominator is the Unrecovered Initial Unit Price of the Common Units immediately prior to giving effect to such distribution. (b) The Minimum Quarterly Distribution, First Target Distribution, Second Target Distribution and Third Target Distribution shall also be subject to adjustment pursuant to Section 9.6. 5.7 SPECIAL PROVISIONS RELATING TO UNITS. (a) Except for distributions pursuant to Section 14.3(b), distributions to holders of I-Units pursuant to Sections 5.4 and 5.5 will be made in additional I-Units or fractions of I-Units in accordance with Section 5.7(b). Distributions to holders of Common Units, Class B Units and the General Partner pursuant to Sections 5.4 and 5.5 will be made in cash. (b) A Holder of an I-Unit will receive distributions pursuant to Sections 5.4 and 5.5 in additional I-Units or fractions of I-Units equal to the Calculated Unit Amount. Each fractional I-Unit that is created as a result of distributions pursuant to Sections 5.4 and 5.5 shall be equal to and represented by a fraction that is calculated to six decimal places (without rounding), and any calculation that would result in a fractional interest in excess of one-millionth (1/1,000,000) of an I-Unit shall be disregarded without payment or other consideration and shall not be accumulated. (c) As used in this Agreement, (i) "Equivalent Non-Cash Amount" means, per each I-Unit, an amount equivalent to the cash distribution made on a Common Unit in accordance with Sections 5.4 and 5.5; (ii) "Calculated Unit Amount" means a fraction of an I-Unit calculated per I-Unit by dividing the Equivalent Non-Cash Amount by the Average Market Price; and (iii) "Average Market Price" means the average of the daily Closing Prices per Listed Share for the ten consecutive Trading Days prior to the date on which the Listed Shares begin to trade ex-dividend, but not including that date. For purposes of this Section 5.7(c), the "date on -35- 44 which the Listed Shares begin to trade ex-dividend" means the date on which "ex-dividend" trading commences for a Share Distribution on the principal National Securities Exchange on which the Listed Shares are listed or admitted to trading. (d) At any time during which there are any I-Units Outstanding, the Partnership will not: (i) make a distribution on a Common Unit other than in cash, Common Units or a security that has in all material respects the same rights and privileges as the Common Units; (ii) except pursuant to Section 14.3(b), make a distribution on an I-Unit other than in I-Units or a security that has in all material respects the same rights and privileges as the I-Units; (iii) allow a holder of Common Units to receive any consideration other than cash or Common Units or a security that has in all material respects the same rights and privileges as the Common Units or allow a holder of I-Units to receive any consideration other than I-Units or a security that has in all material respects the same rights and privileges as the I-Units in a (A) merger in which the Partnership is not the survivor, if the Limited Partners of the Partnership immediately prior to the transaction own more than 50% of the residual common equity securities of the survivor immediately after the transaction; (B) merger in which the Partnership is the survivor, if the Limited Partners of the Partnership immediately prior to the transaction own more than 50% of the Partnership Interests of the Limited Partners of the Partnership immediately after the transaction; or (C) recapitalization, reorganization or similar transaction; (iv) be a party to a merger in which it is not the survivor, sell substantially all of the Partnership's assets to another Person or enter into similar transactions if (A) the other person is to be an Affiliate of KMI after the transaction; and (B) the transaction will result in the occurrence of a Mandatory Purchase Event; (v) make a tender offer for Common Units unless the consideration (A) is exclusively cash; and (B) together with any cash payable in respect of any tender offer by the Partnership for Common Units concluded within the preceding 360 days and the aggregate amount of any cash distributions to all holders of Common Units made within the preceding 360 days, is less than 12% of the aggregate market value of all Outstanding Units determined on the Trading Day immediately preceding the commencement of the tender offer; or (vi) issue any I-Units to any Person other than KMM. (e) In the event of any (i) consolidation or merger of the Partnership with or into another Person in accordance with Section 16.1 (other than a consolidation or merger in which the Partnership is the Surviving Business Entity and which does not result in any reclassification, conversion, exchange or cancellation of Outstanding Common Units) or (ii) the sale or other disposition to another Person of all or substantially all of the assets of the Partnership (any of the foregoing, a "Transaction"), lawful provision shall be made such that if the holders of Common Units receive cash in the Transaction, except as provided in Section -36- 45 14.3(b), a distribution on each I-Unit will made in additional I-Units or fractions of I-Units equal to the cash received on a Common Unit as a result of the Transaction divided by the average of the daily Closing Prices per Listed Share for the 10 consecutive Trading Days immediately prior to the effective date of the Transaction. ARTICLE I MANAGEMENT AND OPERATION OF BUSINESS 6.1 MANAGEMENT. (a) Subject to Section 6.6(c), the General Partner shall conduct, direct and manage all activities of the Partnership. Except as otherwise expressly provided in this Agreement, all management powers over the business and affairs of the Partnership shall be exclusively vested in the General Partner, and no Limited Partner or Assignee shall have any management power over the business and affairs of the Partnership. In addition to the powers now or hereafter granted to a general partner of a limited partnership under applicable law or which are granted to the General Partner under any provision of this Agreement, the General Partner, subject to Section 6.3 shall have full power and authority to do all things and on such terms as it, in its sole discretion, may deem necessary or appropriate to conduct the business of the Partnership, to exercise all powers set forth in Section 3.2 and to effectuate the purposes set forth in Section 3.1, including, without limitation, (i) the making of any expenditures, the lending or borrowing of money, the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, the issuance of evidences of indebtedness and the incurring of any other obligations; (ii) the making of tax, regulatory and other filings, or rendering of periodic or other reports to government or other agencies having jurisdiction over the business or assets of the Partnership; (iii) the acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any or all of the assets of the Partnership or the merger or other combination of the Partnership with or into another Person (the matters described in this clause (iii) being subject, however, to any prior approval that may be required by Section 6.3); (iv) the use of the assets of the Partnership (including, without limitation, cash on hand) for any purpose consistent with the terms of this Agreement, including, without limitation, the financing of the conduct of the operations of the Partnership or the Operating Partnership, the lending of funds to other Persons (including, without limitation, the Operating Partnership) and the repayment of obligations of the Partnership and the Operating Partnership and the making of capital contributions to the Operating Partnership; (v) the negotiation, execution and performance of any contracts, conveyances or other instruments (including, without limitation, instruments that limit the liability of the Partnership under contractual arrangements to all or particular assets of the Partnership, with the other party to the contract to have no recourse against the General Partner or its assets other than its interest in the Partnership, even if same results in the terms of the transaction being less favorable to the Partnership than would otherwise be the case); (vi) the distribution of Partnership cash; (vii) the selection and dismissal of employees and agents (including, without limitation, employees having titles such as "president," "vice president," "secretary" and "treasurer") and agents, outside attorneys, accountants, consultants and contractors and the determination of their compensation and other terms of employment or hiring; (viii) the maintenance of such insurance for the benefit of the Partnership, the Operating Partnership and the Partners (including, without limitation, the assets of the Operating Partnership and the Partnership) as it deems necessary or appropriate; (ix) the formation of, or acquisition of an interest in, and the contribution of property to, any further limited or general partnerships, joint ventures, corporations or other relationships (including, without limitation, the acquisition of interests in, and the contributions of property to, the Operating Partnership from -37- 46 time to time); (x) the control of any matters affecting the rights and obligations of the Partnership, including, without limitation, the bringing and defending of actions at law or in equity and otherwise engaging in the conduct of litigation and the incurring of legal expense and the settlement of claims and litigation; (xi) the indemnification of any Person against liabilities and contingencies to the extent permitted by law; (xii) the entering into of listing agreements with the New York Stock Exchange and any other securities exchange and the delisting of some or all of the Units from, or requesting that trading be suspended on, any such exchange (subject to any prior approval that may be required under Section 1.6); (xiii) the purchase, sale or other acquisition or disposition of Units; and (xiv) the undertaking of any action in connection with the Partnership's participation in the Operating Partnership as the limited partner (including, without limitation, contributions or loans of funds by the Partnership to the Operating Partnership). (b) Notwithstanding any other provision of this Agreement, the Operating Partnership Agreement, the Delaware Act or any applicable law, rule or regulation, each of the Partners and the Assignees and each other Person who may acquire an interest in Units hereby agrees that none of the execution, delivery or performance by the General Partner, the Partnership, the Operating Partnership or any Affiliate of any of them of this Agreement or any agreement authorized or permitted under this Agreement (including, without limitation, the exercise by the General Partner or any Affiliate of the General Partner of the rights accorded pursuant to Article XVII) shall constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Limited Partners or the Assignees or any other Persons under this Agreement or of any duty stated or implied by law or equity. 6.2 CERTIFICATE OF LIMITED PARTNERSHIP. The General Partner has caused the Certificate of Limited Partnership to be filed with the Secretary of State of the State of Delaware as required by the Delaware Act and shall use all reasonable efforts to cause to be filed such other certificates or documents as may be determined by the General Partner in its sole discretion to be reasonable and necessary or appropriate for the formation, continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware or any other state in which the Partnership may elect to do business or own property. To the extent that such action is determined by the General Partner in its sole discretion to be reasonable and necessary or appropriate, the General Partner shall file amendments to and restatements of the Certificate of Limited Partnership and do all things to maintain the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) under the laws of the State of Delaware or of any other state in which the Partnership may elect to do business or own property. Subject to the terms of Section 7.5(a), the General Partner shall not be required, before or after filing, to deliver or mail a copy of the Certificate of Limited Partnership, any qualification document or any amendment thereto to any Limited Partner or Assignee. 6.3 RESTRICTIONS ON GENERAL PARTNER'S AUTHORITY. (a) The General Partner may not, without written approval of the specific act by all of the Outstanding Units or by other written instrument executed and delivered by all of the Outstanding Units subsequent to the date of this Agreement, take any action in contravention of this Agreement, including, without limitation, (i) any act that would make it impossible to carry on the ordinary business of the Partnership, except as otherwise provided in this Agreement; (ii) possess Partnership property, or assign any rights in specific Partnership property, for other than a Partnership purpose; (iii) admit a Person as a Partner, except as otherwise provided in this Agreement; (iv) amend this Agreement in any -38- 47 manner, except as otherwise provided in this Agreement; or (v) transfer its interest as general partner of the Partnership, except as otherwise provided in this Agreement. (b) Except as provided in Articles XIV and XVI, the General Partner may not sell, exchange or otherwise dispose of all or substantially all of the Partnership's assets in a single transaction or a series of related transactions or approve on behalf of the Partnership the sale, exchange or other disposition of all or substantially all of the assets of OLP-A, without the approval of at least a majority of the Outstanding Units; provided, however, that this provision shall not preclude or limit the General Partner's ability to mortgage, pledge, hypothecate or grant a security interest in all or substantially all of the Partnership's assets and shall not apply to any forced sale of any or all of the Partnership's assets pursuant to the foreclosure of, or other realization upon, any such encumbrance. Without the approval of at least two-thirds of the Outstanding Units, the General Partner shall not, on behalf of the Partnership, (i) consent to any amendment to the OLP-A Partnership Agreement or, except as expressly permitted by Section 6.9(d), take any action permitted to be taken by a partner of OLP-A, in either case, that would adversely affect the Partnership as a partner of OLP-A or (ii) except as permitted under Section 11.2 and 13.1, elect or cause the Partnership to elect a successor general partner of OLP-A. (c) Unless approved by the affirmative vote of at least a majority of each class of Outstanding Units, including a majority of Common Units (excluding for purposes of such determination Common Units owned by the General Partner and its Affiliates), the General Partner shall not take any action or refuse to take any reasonable action the effect of which, if taken or not taken, as the case may be, would be to cause the Partnership or the Operating Partnership to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for federal income tax purposes; provided that this Section 6.3(c) shall not be construed to apply to amendments to this Agreement (which are governed by Article XV) or mergers or consolidations of the Partnership with any Person (which are governed by Article XVI). (d) At all times while serving as the general partner of the Partnership, the General Partner shall not make any dividend or distribution on, or repurchase any shares of, its stock or take any other action within its control if the effect of such dividend, distribution, repurchase or other action would be to reduce its net worth below an amount necessary to receive an Opinion of Counsel that the Partnership will be treated as a partnership for federal income tax purposes. 6.4 REIMBURSEMENT OF THE GENERAL PARTNER. (a) Except as provided in this Section 6.4 and elsewhere in this Agreement or in the Operating Partnership Agreement, the General Partner shall not be compensated for its services as general partner of the Partnership or the Operating Partnership. (b) The General Partner shall be reimbursed on a monthly basis, or such other basis as the General Partner may determine in its sole discretion, for (i) all direct and indirect expenses it incurs or payments it makes on behalf of the Partnership (including, without limitation, amounts paid to any Person to perform services for the Partnership or for the General Partner in the discharge of its duties to the Partnership), and (ii) all other necessary or appropriate expenses allocable to the Partnership or otherwise reasonably incurred by the General Partner in connection with operating the Partnership's business (including, without limitation, expenses allocated to the General Partner by its Affiliates); provided, however, that the General Partner shall not perform or be reimbursed for the "Services" to be performed on -39- 48 behalf of the Partnership by Enron and its Affiliates pursuant to the Omnibus Agreement. 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. Reimbursements pursuant to this Section 6.4 shall be in addition to any reimbursement to the General Partner as a result of indemnification pursuant to Section 6.7. (c) The General Partner in its sole discretion and without the approval of the Limited Partners may propose and adopt on behalf of the Partnership employee benefit plans (including, without limitation, plans involving the issuance of Units), for the benefit of employees of the General Partner, the Partnership, the Operating Partnership or any Affiliate of any of them in respect of services performed, directly or indirectly, for the benefit of the Partnership or the Operating Partnership. 6.5 OUTSIDE ACTIVITIES. (a) After the Closing Date, the General Partner, for so long as it is the general partner of the Partnership, (i) agrees that its sole business will be to act as the general partner of the Partnership and the Operating Partnership and to undertake activities that are ancillary or related thereto, and (ii) shall not enter into or conduct any business or incur any debts or liabilities except in connection with or incidental to (A) its performance of the activities required or authorized by the Operating Partnership Agreement, this Agreement or the Omnibus Agreement or described in or contemplated by the Registration Statement and (B) the acquisition, ownership or disposition of partnership interests in the Partnership and the Operating Partnership. (b) Except as described in the Registration Statement, the Omnibus Agreement or Section 6.5(a), no Indemnitee shall be expressly or implicitly restricted or proscribed pursuant to this Agreement, the Operating Partnership Agreement or the partnership relationship established hereby or thereby from engaging in other activities for profit, whether in the businesses engaged in by the Partnership or the Operating Partnership or anticipated to be engaged in by the Partnership, the Operating Partnership or otherwise, including, without limitation, those businesses described in or contemplated by the Registration Statement. Without limitation of and subject to the foregoing (but subject to the limitations set forth in the Omnibus Agreement), each Indemnitee shall have the right to engage in the transportation of natural gas liquids and in other businesses of every type and description and to engage in and possess an interest in other business ventures of any and every type or description, independently or with others, including, without limitation, business interests and activities in direct competition with the Partnership or the Operating Partnership, and none of the same shall breach any duty to the Partnership, the Operating Partnership or any Partners. Neither the Partnership, the Operating Partnership, any Limited Partner nor any other Person shall have any rights by virtue of this Agreement, the Operating Partnership Agreement or the partnership relationship established hereby or thereby in any business ventures of any Indemnitee and, except as set forth in the Omnibus Agreement, such Indemnitees shall have no obligation to offer any interest in any such business ventures to the Partnership, the Operating Partnership, any Limited Partner or any other Person. The General Partner and any other Persons affiliated with the General Partner may acquire Units or other Partnership Securities, in addition to those acquired by any of such Persons on the Closing Date, and shall be entitled to exercise all rights of an Assignee or Limited Partner, as applicable, relating to such Units or Partnership Securities, as the case may be. -40- 49 (c) Without limitation of Section 6.5(a) and 6.5(b), and notwithstanding anything to the contrary in this Agreement, the competitive activities of certain Indemnitees and the restrictions on the Partnership's activities described in the Registration Statement and in the Omnibus Agreement are hereby approved by all Partners, and it shall not be deemed to be a breach of the General Partner's fiduciary duty for the General Partner to permit an Indemnitee to engage in a business opportunity in preference to or to the exclusion of the Partnership, if such activities are permitted by this Agreement, the Operating Partnership Agreement or the Omnibus Agreement. 6.6 LOANS TO AND FROM THE GENERAL PARTNER; CONTRACTS WITH AFFILIATES. (a) (i) The General Partner or any Affiliate thereof may lend to the Partnership or the Operating Partnership, and the Partnership and the Operating Partnership may borrow, funds needed or desired by the Partnership and the Operating Partnership for such periods of time as the General Partner may determine and (ii) the General Partner or any Affiliate thereof may borrow from the Partnership or the Operating Partnership, and the Partnership and the Operating Partnership may lend to the General Partner or such Affiliate, excess funds of the Partnership and the Operating Partnership for such periods of time and in such amounts as the General Partner may determine; provided, however, that in either such case the lending party may not charge the borrowing party interest at a rate greater than the rate that would be charged the borrowing party (without reference to the leading party's financial abilities or guarantees) by unrelated lenders on comparable loans. The borrowing party shall reimburse the lending party for any costs (other than any additional interest costs) incurred by the lending party in connection with the borrowing of such funds. For purposes of this Section 6.6(a) and Section 6.6(b), the term "Partnership" shall include any Affiliate of the Partnership that is controlled by the Partnership and the term "Operating Partnership" shall include any Affiliate of the Operating Partnership that is controlled by the Operating Partnership. (b) The Partnership may lend or contribute to the Operating Partnership, and the Operating Partnership may borrow, funds on terms and conditions established in the sole discretion of the General Partner; provided, however, that the Partnership may not charge the Operating Partnership interest at a rate greater than the rate that would be charged to the Operating Partnership (without reference to the General Partner's financial abilities or guarantees) by unrelated lenders on comparable loans. The foregoing authority shall be exercised by the General Partner in its sole discretion and shall not create any right or benefit in favor of the Operating Partnership or any other Persons. (c) The General Partner may itself, or may enter into an agreement, including the Delegation of Control Agreement, with any of its Affiliates to, render services to the Partnership or to the General Partner in the discharge of its duties as general partner of the Partnership. Any service rendered to the Partnership by the General Partner or any of its Affiliates shall be on terms that are fair and reasonable to the Partnership; provided, however, that the requirements of this Section 6.6(c) shall be deemed satisfied as to (i) any transaction approved by Special Approval, (ii) any transaction, the terms of which are no less favorable to the Partnership than those generally being provided to or available from unrelated third parties, or (iii) any transaction that, taking into account the totality of the relationships between the parties involved (including other transactions that may be particularly favorable or advantageous to the Partnership), is equitable to the Partnership. The provisions of Section 6.4 shall apply to the rendering of services described in this Section 6.6(c). -41- 50 (d) The Partnership may transfer assets to joint ventures, other partnerships, corporations or other business entities in which it is or thereby becomes a participant upon such terms and subject to such conditions as are consistent with this Agreement and applicable law. (e) Neither the General Partner nor any of its Affiliates shall sell, transfer or convey any property to, or purchase any property from, the Partnership, directly or indirectly, except pursuant to transactions that are fair and reasonable to the Partnership; provided, however, that the requirements of this Section 6.6(e) shall be deemed to be satisfied as to (i) any transaction approved by Special Approval, (ii) any transaction, the terms of which are no less favorable to the Partnership than those generally being provided to or available from unrelated third parties, or (iii) any transaction that, taking into account the totality of the relationships between the parties involved (including other transactions that may be particularly favorable or advantageous to the Partnership), is equitable to the Partnership. (f) The General Partner and its Affiliates will have no obligation to permit the Partnership or the Operating Partnership to use any facilities or assets of the General Partner and its Affiliates, except as may be provided in contracts entered into from time to time specifically dealing with such use, nor shall there be any obligation on the General Partner or its Affiliates to enter into such contracts. (g) Without limitation of Sections 6.6(a) through 6.6(f), and notwithstanding anything to the contrary in this Agreement, the existence of the conflicts of interest described in the Registration Statement and in the Omnibus Agreement are hereby approved by all Partners. 6.7 INDEMNIFICATION. (a) To the fullest extent permitted by law but subject to the limitations expressly provided in this Agreement, 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 shall be indemnified and held harmless by the Partnership, and all other Indemnitees may be indemnified and held harmless by the Partnership, to the extent deemed advisable by the General Partner, 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, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, whether civil, criminal, administrative or investigative, in which any Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, by reason of its status as (i) the General Partner, a Departing Partner or any of their Affiliates, (ii) an officer, director, employee, partner, agent or trustee of the General Partner, any Departing Partner or any of their Affiliates or (iii) a Person serving at the request of the Partnership in another entity in a similar capacity, provided, that in each case the Indemnitee acted in good faith and in the manner which such 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; provided, further, no indemnification pursuant to this Section 6.7 shall be available to the General Partner with respect to its obligations incurred pursuant to the Underwriting Agreement or the Conveyance Agreement (other than obligations incurred by the General Partner on behalf of the Partnership or the Operating Partnerships). The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that the Indemnitee acted in a manner contrary to that specified above. Any indemnification pursuant to this Section 6.7 shall be made only out of the assets of the Partnership, it being agreed that the General Partner shall -42- 51 not be personally liable for such indemnification and shall have no obligation to contribute or loan any monies or property to the Partnership to enable it to effectuate such indemnification. (b) To the fullest extent permitted by law, expenses (including, without limitation, legal fees and expenses) incurred by an Indemnitee who is indemnified pursuant to Section 6.7(a) in defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by the Partnership prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the Partnership of an undertaking by or on behalf of the Indemnitee to repay such amount if it shall be determined that the Indemnitee is not entitled to be indemnified as authorized in this Section 6.7. (c) The indemnification provided by this Section 6.7 shall be in addition to any other rights to which an Indemnitee may be entitled under any agreement, pursuant to any vote of the holders of Outstanding Units, as a matter of law or otherwise, both as to actions in the Indemnitee's capacity as (i) the General Partner, a Departing Partner or an Affiliate thereof, (ii) an officer, director, employee, partner, agent or trustee of the General Partner, any Departing Partner or an Affiliate thereof or (iii) a Person serving at the request of the Partnership in another entity in a similar capacity, and as to actions in any other capacity, and shall continue as to an Indemnitee who has ceased to serve in such capacity and shall inure to the benefit of the heirs, successors, assigns and administrators of the Indemnitee. (d) The Partnership may purchase and maintain (or reimburse the General Partner or its Affiliates for the cost of) insurance, on behalf of the General Partner and such other Persons as the General Partner shall determine, against any liability that may be asserted against or expense that may be incurred by such Person in connection with the Partnership's activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement. (e) For purposes of this Section 6.7, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by it of its duties to the Partnership also imposes duties on, or otherwise involves services by, it to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute "fines" within the meaning of Section 6.7(a); and action taken or omitted by it with respect to an employee benefit plan in the performance of its duties for a purpose reasonably believed by it to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is in, or not opposed to, the best interests of the Partnership. (f) In no event may an Indemnitee subject the Limited Partners to personal liability by reason of the indemnification provisions set forth in this Agreement. (g) An Indemnitee shall not be denied indemnification in whole or in part under this Section 6.7 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement or the Omnibus Agreement. (h) The provisions of this Section 6.7 are for the benefit of the Indemnities, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons. -43- 52 (i) No amendment, modification or repeal of this Section 6.7 or any provision hereof shall in any manner terminate, reduce or impair the right of any past, present or future Indemnitee to be indemnified by the Partnership, nor the obligation of the Partnership to indemnify any such Indemnitee under and in accordance with the provisions of this Section 6.7 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. 6.8 LIABILITY OF INDEMNITEES. (a) Notwithstanding anything to the contrary set forth in this Agreement, no Indemnitee shall be liable for monetary damages to the Partnership, the Limited Partners, the Assignees or any other Persons who have acquired interests in the Units, for losses sustained or liabilities incurred as a result of any act or omission if such Indemnitee acted in good faith. (b) Subject to its obligations and duties as General Partner set forth in Section 6.1(a), the General Partner may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its agents, and the General Partner shall not be responsible for any misconduct or negligence on the part of any such agent appointed by the General Partner in good faith. Notwithstanding the preceding sentence, the General Partner shall be responsible for any misconduct or negligence on the part of KMM in performing the Maximum Permitted Delegation. (c) Any amendment, modification or repeal of this Section 6.8 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the liability to the Partnership and the Limited Partners of the General Partner, its directors, officers and employees under this Section 6.8 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. 6.9 RESOLUTION OF CONFLICTS OF INTEREST. (a) Unless otherwise expressly provided in this Agreement, the Operating Partnership Agreement or the Omnibus Agreement, whenever a potential conflict of interest exists or arises between the General Partner or any of its Affiliates, on the one hand, and the Partnership, the Operating Partnership, and Partner or any Assignee, on the other hand, any resolution or course of action in respect of such conflict of interest shall be permitted and deemed approved by all Partners, and shall not constitute a breach of this Agreement, of the Operating Partnership Agreement, of any agreement contemplated herein or therein, or of any duty stated or implied by law or equity, if the resolution or course of action is or, by operation of this Agreement is deemed to be, fair and reasonable to the Partnership. The General Partner shall be authorized but not required in connection with its resolution of such conflict of interest to seek Special Approval of a resolution of such conflict or course of action. Any conflict of interest and any resolution of such conflict of interest shall be conclusively deemed fair and reasonable to the Partnership if such conflict of interest or resolution is (i) approved by Special Approval, (ii) on terms no less favorable to the Partnership than those generally being provided to or available from unrelated third parties or (iii) fair to the Partnership, taking into account the totality of the relationships between the parties involved (including other transactions that may be particularly favorable or advantageous to the Partnership). The General Partner may also adopt a resolution or course of action that has not received Special Approval. The General Partner (including the Conflicts and Audit Committee -44- 53 in connection with Special Approval) shall be authorized in connection with its determination of what is "fair and reasonable" to the Partnership and in connection with its resolution of any conflict of interest to consider (A) the relative interests of any party to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interest; (B) any customary or accepted industry practices and any customary or historical dealings with a particular Person; (C) any applicable generally accepted accounting or engineering practices or principles; and (D) such additional factors as the General Partner (including such Conflicts and Audit Committee) determines in its sole discretion to be relevant, reasonable or appropriate under the circumstances. Nothing contained in this Agreement, however, is intended to nor shall it be construed to require the General Partner (including such Conflicts and Audit Committee) to consider the interest of any Person other than the Partnership. In the absence of bad faith by the General Partner, the resolution, action or terms so made, taken or provided by the General Partner with respect to such matter shall not constitute a breach of this Agreement or any other agreement contemplated herein or a breach of any standard of care or duty imposed herein or therein or under the Delaware Act or any other law, rule or regulation. (b) Whenever this Agreement or any other agreement contemplated hereby provides that the General Partner or any of its Affiliates is permitted or required to make a decision (i) in its "sole discretion" or "discretion," that it deems "necessary or appropriate" or under a grant of similar authority or latitude, the General Partner or such Affiliate shall be entitled to consider only such interests and factors as it desires and shall have no duty or obligation to give any consideration to any interest of, or factors affecting, the Partnership, the Operating Partnership, any Limited Partner or any Assignee, (ii) it may make such decision in its sole discretion (regardless of whether there is a reference to "sole discretion" or "discretion") unless another express standard is provided for, or (iii) in "good faith" or under another express standard, the General Partner or such Affiliate shall act under such express standard and shall not be subject to any other or different standards imposed by this Agreement, the Operating Partnership Agreement, any other agreement contemplated hereby or under the Delaware Act or any other law, rule or regulation. In addition, any actions taken by the General Partner consistent with the standards of "reasonable discretion" set forth in the definitions of Available Cash or Cash from Operations shall not constitute a breach of any duty of the General Partner to the Partnership or the Limited Partners. The General Partner shall have no duty, express or implied, to sell or otherwise dispose of any asset of the Operating Partnership or of the Partnership, other than in the ordinary course of business. No borrowing by the Partnership or the Operating Partnership or the approval thereof by the General Partner shall be deemed to constitute a breach of any duty of the General Partner to the Partnership or the Limited Partners by reason of the fact that the purpose or effect of such borrowing is directly or indirectly to enable the General Partner to receive or increase the amount of Incentive Distributions. (c) Whenever a particular transaction, arrangement or resolution of a conflict of interest is required under this Agreement to be "fair and reasonable" to any Person, the fair and reasonable nature of such transaction, arrangement or resolution shall be considered in the context of all similar or related transactions. (d) The Limited Partners hereby authorize the General Partner, on behalf of the Partnership as a partner of the Operating Partnership, to approve of actions by the general partner of the Operating Partnership similar to those actions permitted to be taken by the General Partner pursuant to this Section 6.9. -45- 54 6.10 OTHER MATTERS CONCERNING THE GENERAL PARTNER. (a) The General Partner may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. (b) The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the opinion (including, without limitation, an Opinion of Counsel) of such Persons as to matters that such General Partner reasonably believes to be within such Person's professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion. (c) The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers and a duly appointed attorney or attorneys-in-fact. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform each and every act and duty that is permitted or required to be done by the General Partner hereunder. (d) Any standard of care any duty imposed by this Agreement or under the Delaware Act or any applicable law, rule or regulation shall be modified, waived or limited as required to permit the General Partner to act under this Agreement or any other agreement contemplated by this Agreement and to make any decision pursuant to the authority prescribed in this Agreement so long as such action is reasonably believed by the General Partner to be in, or not inconsistent with, the best interests of the Partnership. 6.11 TITLE TO PARTNERSHIP ASSETS. Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner or Assignee, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof. Title to any or all of the Partnership assets may be held in the name of the Partnership, the General Partner, one or more of its Affiliates or one or more nominees, as the General Partner may determine. The General Partner hereby declares and warrants that any Partnership assets for which record title is held in the name of the General Partner or one or more of its Affiliates or one or more nominees shall be held by the General Partner or such Affiliate or nominee for the use and benefit of the Partnership in accordance with the provisions of this Agreement; provided, however, that the General Partner shall use its reasonable efforts to cause record title to such assets (other than those assets in respect of which the General Partner determines that the expense and difficulty of conveyancing makes transfer of record title to the Partnership impracticable) to be vested in the Partnership as soon as reasonably practicable; provided that, prior to the withdrawal or removal of the General Partner or as soon thereafter as practicable, the General Partner shall use reasonable efforts to effect the transfer of record title to the Partnership and prior to any such transfer, will provide for the use of such assets in a manner satisfactory to the Partnership. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which record title to such Partnership assets is held. 6.12 PURCHASE OR SALE OF UNITS. The General Partner may cause the Partnership to purchase or otherwise acquire Units. As long as Units are held by the Partnership or the -46- 55 Operating Partnership, such Units shall not be considered Outstanding for any purpose, except as otherwise provided herein. The General Partner or any Affiliate of the General Partner may also purchase or otherwise acquire and sell or otherwise dispose of Units for its own account, subject to the provisions of Articles XI and XII. 6.13 REGISTRATION RIGHTS OF KMGP AND ITS AFFILIATES. (a) If (i) KMGP or any Affiliate (including, without limitation, for purposes of this Section 6.13, any Person that is an Affiliate at the date hereof notwithstanding that it may later cease to be an Affiliate) holds Units or other Partnership Securities that it desires to sell and (ii) Rule 144 of the Securities Act (or any successor rule or regulation to Rule 144) or another exemption from registration is not available to enable such holder of Units (the "Holder") to dispose of the number of Units or other securities it desires to sell at the time it desires to do so without registration under the Securities Act, then upon the request of KMGP or any of its Affiliates, the Partnership shall file with the Securities and Exchange Commission as promptly as practicable after receiving such request, and use all reasonable efforts to cause to become effective and remain effective for a period of not more than six months following its effective date, a registration statement under the Securities Act registering the offering and sale of the number of Units or other securities specified by the Holder; provided, however, that the Partnership shall not be required to effect more than three registrations pursuant to this Section 6.13(a); and provided further, that if the General Partner or, if at the time a request pursuant to this Section 6.13 is submitted to the Partnership, KMGP or its Affiliate requesting registration is an Affiliate of the General Partner, the Conflicts and Audit Committee in connection with Special Approval determines in good faith judgment that a postponement of the requested registration for up to six months would be in the best interest of the Partnership and its Partners due to a pending transaction, investigation or other event, the filing of such registration statement or the effectiveness thereof may be deferred for up to six months, but not thereafter. In connection with any registration pursuant to the immediately preceding sentence, the Partnership shall promptly prepare and file (x) such documents as may be necessary to register or qualify the securities subject to such registration under the securities laws of such states as the Holder shall reasonably request; provided, however, that no such qualification shall be required in any jurisdiction where, as a result thereof, the Partnership would become subject to general service of process or to taxation or qualification to do business as a foreign corporation or partnership doing business in such jurisdiction, and (y) such documents as may be necessary to apply for listing or to list the securities subject to such registration on such National Securities Exchange as the Holder shall reasonably request, and do any and all other acts and things that may reasonably be necessary or advisable to enable the Holder to consummate a public sale of such Units in such states. Except as set forth in Section 6.13(c), all costs and expenses of any such registration and offering (other than the underwriting discounts and commissions) shall be paid by the Partnership, without reimbursement by the Holder. (b) If the Partnership shall at any time propose to file a registration statement under the Securities Act for an offering of equity securities of the Partnership for cash (other than an offering relating solely to an employee benefit plan), the Partnership shall use all reasonable efforts to include such number or amount of securities held by the Holder in such registration statement as the Holder shall request. If the proposed offering pursuant to this Section 6.13(b) shall be an underwritten offering, then, in the event that the managing underwriter of such offering advises the Partnership and the Holder in writing that in its opinion the inclusion of all or some of the Holder's securities would adversely and materially affect the success of the -47- 56 offering, the Partnership shall include in such offering only that number or amount, if any, of securities held by the Holder which, in the opinion of the managing underwriter, will not so adversely and materially affect the offering. Except as set forth in Section 6.13(c), all costs and expenses of any such registration and offering (other than the underwriting discounts and commissions) shall be paid by the Partnership, without reimbursement by the Holder. (c) If underwriters are engaged in connection with any registration referred to in this Section 6.13, the Partnership shall provide indemnification, representations, covenants, opinions and other assurance to the underwriters in form and substance reasonably satisfactory to such underwriters. Further, in addition to and not in limitation of the Partnership's obligations under Section 6.7, the Partnership shall, to the fullest extent permitted by law, indemnify and hold harmless the Holder, its officers, directors and each Person who controls the Holder (within the meaning of the Securities Act) and any agent thereof (collectively, "Indemnified Persons") against any losses, claims, demands, actions, causes of action, assessments, damages, liabilities (joint or several), costs and expenses (including, without limitation, interest, penalties and reasonable attorneys' fees and disbursements), resulting to, imposed upon, or incurred by the Indemnified Persons, directly or indirectly, under the Securities Act or otherwise (hereinafter referred to in this Section 6.13(c) as a "claim" and in the plural as "claims"), based upon, arising out of, or resulting from any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which any Units were registered under the Securities Act or any state securities or Blue Sky laws, in any preliminary prospectus (if used prior to the effective date of such registration statement), or in any summary or final prospectus or in any amendment or supplement thereof (if used during the period the Partnership is required to keep the registration current), or arising out of, based upon or resulting from the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements made therein not misleading, provided, however, that the Partnership shall not be liable to any Indemnified Person to the extent that any such claim arises out of, is based upon or results from an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, such preliminary, summary or final prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Partnership by or on behalf of such Indemnified Person specifically for use in the preparation thereof. (d) The provisions of Sections 6.13(a) and 6.13(b) shall continue to be applicable with respect to KMGP (and any of KMGP's Affiliates) after it ceases to be a Partner of the Partnership, during a period of two years subsequent to the effective date of such cessation and for so long thereafter as is required for the Holder to sell all of the Units or other securities of the Partnership with respect to which it has requested during such two-year period that a registration statement be filed; provided, however, that the Partnership shall not be required to file successive registration statements covering the same securities for which registration was demanded during such two-year period. The provisions of Section 6.13(c) shall continue in effect thereafter. (e) Any request to register Partnership Securities pursuant to this Section 6.13 shall (i) specify the Partnership Securities intended to be offered and sold by the Person making the request, (ii) express such Person's present intent to offer such shares for distribution, (iii) describe the nature or method of the proposed offer and sale of Partnership Securities, and (iv) contain the undertaking of such Person to provide all such information and material and take all -48- 57 action as may be required in order to permit the Partnership to comply with all applicable requirements in connection with the registration of such Partnership Securities. 6.14 RELIANCE BY THIRD PARTIES. Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner has full power and authority to encumber, sell or otherwise use in any manner any and all assets of the Partnership and to enter into any contracts on behalf of the Partnership, and such Person shall be entitled to deal with the General Partner as if it were the Partnership's sole party in interest, both legally and beneficially. Each Limited Partner hereby waives any and all defenses or other remedies that may be available against such Person to contest, negate or disaffirm any action of the General Partner in connection with any such dealing. In no event shall any Person dealing with the General Partner or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the General Partner or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (a) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect, (b) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership and (c) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership. 6.15 DELEGATION TO KMM (a) Pursuant to Section 6.6(c) of this Agreement and in accordance with Section 17-403(c) of the Delaware Act, the General Partner shall delegate to KMM, to the fullest extent permitted under this Agreement and Delaware law, all of the General Partner's power and authority to manage and control the business and affairs of the Partnership under the terms and conditions of the Delegation of Control Agreement; provided, however, that such delegation shall not cause the General Partner to cease to be the sole general partner of the Partnership; and provided, further, that the General Partner shall not be relieved of any of its responsibilities or obligations to the Partnership or the Limited Partners as a result of such delegation. The General Partner shall retain all of its Partnership Interest, Percentage Interest, rights to Incentive Distributions, rights to allocations of Net Income and Net Losses, rights to allocations of Net Termination Gains and Net Termination Losses, and rights to distributions pursuant to Sections 5.3, 5.4, 5.5 and 14.3. The specific terms and conditions of the delegation to KMM are set forth in the Delegation of Control Agreement. (b) Notwithstanding anything to the contrary set forth in this Agreement, until such date as the Maximum Permitted Delegation is terminated in accordance with the Delegation of Control Agreement, the provisions of this Agreement that apply to the management and control of the Partnership, including Sections 6.4, 6.10 and 6.14, shall apply to KMM to the same extent as such provisions apply to the General Partner. (c) Notwithstanding anything to the contrary set forth in this Agreement, the provisions of Section 6.7 of this Agreement shall apply to KMM and any Person who is or was a manager, officer or director of KMM to the same extent as such provisions apply to the General Partner and any Person who is or was an officer or director of the General Partner. -49- 58 ARTICLE VII RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS 7.1 LIMITATION OF LIABILITY. The Limited Partners and the Assignees shall have no liability under this Agreement except as expressly provided in this Agreement or the Delaware Act. 7.2 MANAGEMENT OF BUSINESS. No Limited Partner or Assignee (other than the General Partner, any of its Affiliates or any officer, director, employee, partner, agent or trustee of the General Partner or any of its Affiliates, in its capacity as such, if such Person shall also be a Limited Partner or Assignee) shall participate in the operation, management or control (within the meaning of the Delaware Act) of the Partnership's business, transact any business in the Partnership's name or have the power to sign documents for or otherwise bind the Partnership. The transaction of any such business by the General Partner, any of its Affiliates or any officer, director, employee, partner, agent or trustee of the General Partner or any of its Affiliates, in its capacity as such, shall not affect, impair or eliminate the limitations on the liability of the Limited Partners or Assignees under this Agreement. 7.3 OUTSIDE ACTIVITIES. Subject to the provisions of Section 6.5, which shall continue to be applicable to the Persons referred to therein, regardless of whether such Persons shall also be Limited Partners or Assignees, any Limited Partner or Assignee shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including, without limitation, business interests and activities in direct competition with the Partnership or the Operating Partnership. Neither the Partnership nor any of the other Partners or Assignees shall have any rights by virtue of this Agreement in any business ventures of any Limited Partner or Assignee. 7.4 RETURN OF CAPITAL. No Limited Partner or Assignee shall be entitled to the withdrawal or return of his Capital Contribution, except to the extent, if any, that distributions made pursuant to this Agreement or upon termination of the Partnership may be considered as such by law and then only to the extent provided for in this Agreement. Except to the extent provided by Article V or as otherwise expressly provided in this Agreement or in the Omnibus Agreement, no Limited Partner or Assignee shall have priority over any other Limited Partner or Assignee either as to the return of Capital Contributions or as to profits, losses or distributions. Any such return shall be a compromise to which all Partners and Assignees agree within the meaning of Section 17-502(b) of the Delaware Act. 7.5 RIGHTS OF LIMITED PARTNERS RELATING TO THE PARTNERSHIP. (a) In addition to other rights provided by this Agreement or by applicable law, and except as limited by Section 7.5(b), each Limited Partner shall have the right, for a purpose reasonably related to such Limited Partner's interest as a limited partner in the Partnership, upon reasonable demand and at such Limited Partner's own expense: (i) to obtain true and full information regarding the status of the business and financial condition of the Partnership; (ii) promptly after becoming available, to obtain a copy of the Partnership's federal, state and local tax returns for each year; -50- 59 (iii) to have furnished to him, upon notification to the General Partner, a current list of the name and last known business, residence or mailing address of each Partner; (iv) to have furnished to him, upon notification to the General Partner, a copy of this Agreement, the Omnibus Agreement and the Certificate of Limited Partnership and all amendments thereto, together with a copy of the executed copies of all powers of attorney pursuant to which this Agreement, the Certificate of Limited Partnership and all amendments thereto have been executed; (v) to obtain true and full information regarding the amount of cash and description and statement of the Agreed Value of any other Capital Contribution by each Partner and which each Partner has agreed to contribute in the future, and the date on which each became a Partner; and (vi) to obtain such other information regarding the affairs of the Partnership as is just and reasonable. (b) Notwithstanding any other provision of this Agreement, the General Partner may keep confidential from the Limited Partners and Assignees, for such period of time as the General Partner deems reasonable, any information that the General Partner reasonably believes to be in the nature of trade secrets or other information the disclosure of which the General Partner in good faith believes is not in the best interests of the Partnership or the Operating Partnership or could damage the Partnership or the Operating Partnership or that the Partnership or the Operating Partnership is required by law or by agreements with third parties to keep confidential (other than agreements with Affiliates the primary purpose of which is to circumvent the obligations set forth in this Section 7.5). ARTICLE VIII BOOKS, RECORDS, ACCOUNTING AND REPORTS 8.1 BOOKS, RECORDS AND ACCOUNTING. The General Partner shall keep or cause to be kept at the principal office of the Partnership appropriate books and records with respect to the Partnership's business, including, without limitation, all books and records necessary to provide to the Limited Partners any information, lists and copies of documents required to be provided pursuant to Section 7.5(a). Any books and records maintained by or on behalf of the Partnership in the regular course of its business, including, without limitation, the record of the Record Holders and Assignees of Units or other Partnership Securities, books of account and records of Partnership proceedings, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, micrographics or any other information storage device, provided, that the books and records so maintained are convertible into clearly legible written form within a reasonable period of time. The books of the Partnership shall be maintained, for financial reporting purposes, on an accrual basis in accordance with generally accepted accounting principles. 8.2 FISCAL YEAR. The fiscal year of the Partnership shall be the calendar year. 8.3 REPORTS. (a) As soon as practicable, but in no event later than 120 days after the close of each fiscal year of the Partnership, the General Partner shall cause to be mailed to each Record Holder of a Unit as of a date selected by the General Partner in its sole discretion, an -51- 60 annual report containing financial statements of the Partnership for such fiscal year of the Partnership, presented in accordance with generally accepted accounting principles, including a balance sheet and statements of operations, Partners' equity and cash flows, such statements to be audited by a firm of independent public accountants selected by the General Partner. (b) As soon as practicable, but in no event later than 90 days after the close of each calendar quarter except the last calendar quarter of each year, the General Partner shall cause to be mailed to each Record Holder of a Unit, as of a date selected by the General Partner in its sole discretion, a report containing unaudited financial statements of the Partnership and such other information as may be required by applicable law, regulation or rule of any National Securities Exchange on which the Units are listed for trading, or as the General Partner determines to be necessary or appropriate. ARTICLE IX TAX MATTERS 9.1 PREPARATION OF TAX RETURNS. The General Partner shall arrange for the preparation and timely filing of all returns of Partnership income, gains, deductions, losses and other items required of the Partnership for federal and state income tax purposes and shall use all reasonable efforts to furnish, within 90 days of the close of each taxable year of the Partnership, the tax information reasonably required by holders of Outstanding Units for federal and state income tax reporting purposes. The classification, realization and recognition of income, gain, losses and deductions and other items shall be on the accrual method of accounting for federal income tax purposes. The taxable year of the Partnership shall be the calendar year. 9.2 TAX ELECTIONS. Except as otherwise provided herein, the General Partner shall, in its sole discretion, determine whether to make any available election pursuant to the Code; provided, however, that the General Partner shall make the election under Section 754 of the Code in accordance with applicable regulations thereunder. The General Partner shall have the right to seek to revoke any such election (including without limitation, the election under Section 754 of the Code) upon the General Partner's determination in its sole discretion that such revocation is in the best interests of the Limited Partners and Assignees. For purposes of computing the adjustments under Section 743(b) of the Code, the General Partner shall be authorized (but not required) to adopt a convention whereby the price paid by a transferee of Units will be deemed to be the lowest quoted trading price of the Units on any National Securities Exchange on which such Units are traded during the calendar month in which such transfer is deemed to occur pursuant to Section 5.2(g) without regard to the actual price paid by such transferee. 9.3 TAX CONTROVERSIES. Subject to the provisions hereof, the General Partner is designated the Tax Matters Partner (as defined in Section 6231 of the Code), and is authorized and required to represent the Partnership (at the Partnership's expense) in connection with all examinations of the Partnership's affairs by tax authorities, including, without limitation, resulting administrative and judicial proceedings, and to expend Partnership funds for professional services and costs associated therewith. Each Partner and Assignee agrees to cooperate with the General Partner and to do or refrain from doing any or all things reasonably required by the General Partner to conduct such proceedings. -52- 61 9.4 ORGANIZATIONAL EXPENSES. The Partnership shall elect to deduct expenses, if any, incurred by it in organizing the Partnership ratably over a 60-month period as provided in Section 709 of the Code. 9.5 WITHHOLDING. Notwithstanding any other provision of this Agreement, the General Partner is authorized to take any action that it determines in its sole discretion to be necessary or appropriate to cause the Partnership and the Operating Partnership to comply with any withholding requirements established under the Code or any other federal, state or local law including, without limitation, pursuant to Sections 1441, 1442, 1445 and 1446 of the Code. To the extent that the Partnership is required to withhold and pay over to any taxing authority any amount resulting from the allocation or distribution of income to any Partner or Assignee (including, without limitation, by reason of Section 1446 of the Code), the amount withheld shall be treated as a distribution of cash pursuant to Section 5.3 in the amount of such withholding from such Partner. 9.6 ENTITY-LEVEL TAXATION. If legislation is enacted that causes the Partnership to become treated as an association taxable as a corporation or otherwise subjects the Partnership to entity-level taxation for federal income tax purposes, the Minimum Quarterly Distribution, First Target Distribution, Second Target Distribution or Third Target Distribution, as the case may be, shall be equal to the product obtained by multiplying (a) the amount thereof by (b) 1 minus the sum of (i) the highest effective federal corporate (or other entity, as applicable) income tax rate for the fiscal year of the Partnership in which such quarter occurs (expressed as a percentage) plus (ii) the effective overall state and local income tax rate (expressed as a percentage) applicable to the Partnership for the calendar year next preceding the calendar 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), but only to the extent of the increase in such rates resulting from such legislation. Such effective overall state and local income tax rate shall be determined for the calendar year next preceding the first calendar year during which the Partnership is taxable for federal income tax purposes as an association taxable as a corporation or is otherwise subject to entity-level taxation by determining such rate as if the Partnership had been subject to such sate and local taxes during such preceding calendar year. 9.7 ENTITY-LEVEL ARREARAGE COLLECTIONS. If the Partnership or the Operating Partnership is required by applicable law to pay, or any revenue authority seizes any asset of the Partnership or the Operating Partnership with respect to, any federal, state or local income tax on behalf of, or withhold such amount with respect to, any Partner or Assignee or any former Partner or Assignee (a) the General Partner shall cause the Partnership to pay such tax on behalf of such Partner or Assignee or former Partner or Assignee from the funds of the Partnership; (b) any amount so paid or seized on behalf of, or withheld with respect to, any Partner or Assignee shall constitute a distribution out of Available Cash to such Partner or Assignee pursuant to Section 5.3; and (c) to the extent any such Partner or Assignee (but not a former Partner or Assignee) is not then entitled to such distribution under this Agreement, the General Partner shall be authorized, without the approval of any Partner or Assignee, to amend this Agreement insofar as is necessary to maintain the uniformity of intrinsic tax characteristics as to all Units and to make subsequent adjustments to distributions in a manner which, in the reasonable judgment of the General Partner, will make as little alteration as practicable in the priority and amount of distributions otherwise applicable under this Agreement, and will not otherwise alter the distributions to which Partners and Assignees are entitled under this Agreement. If the -53- 62 Partnership is permitted (but not required) by applicable law to pay any such tax on behalf of, or withhold such amount with respect to, any Partner or Assignee or former Partner or Assignee, the General Partner shall be authorized (but not required) to cause the Partnership to pay such tax from the funds of the Partnership and to take any action consistent with this Section 9.7. The General Partner shall be authorized (but not required) to take all necessary or appropriate actions to collect all or any portion of a deficiency in the payment of any such tax that relates to prior periods and that is attributable to Persons who were Limited Partners or Assignees when such deficiencies arose, from such Persons. 9.8 OPINIONS OF COUNSEL. Notwithstanding any other provision of this Agreement, if the Partnership is treated as an association taxable as a corporation at any time or is otherwise taxable for federal income tax purposes as an entity at any time and, pursuant to the provisions of this Agreement, an Opinion of Counsel would otherwise be required to the effect that an action will not cause the Partnership to become so treated as an association taxable as a corporation or otherwise taxable as an entity for federal income tax purposes, such requirement for an Opinion of Counsel shall be deemed automatically waived. ARTICLE X CERTIFICATES 10.1 CERTIFICATES. Upon the Partnership's issuance of Units to any Person, the Partnership shall issue one or more Certificates in the name of such Person evidencing the number of such Units being so issued. Certificates shall be executed on behalf of the Partnership by the General Partner. No Certificate shall be valid for any purpose until it has been countersigned by the Transfer Agent. 10.2 REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE. (a) The General Partner shall cause to be kept on behalf of the Partnership a register in which, subject to such reasonable regulations as it may prescribe and subject to the provisions of Section 10.2(b), the General Partner will provide for the registration and transfer of Units. The Transfer Agent is hereby appointed registrar and transfer agent for the purpose of registering Units and transfers of such Units as herein provided. The Partnership shall not recognize transfers of Certificates representing Units unless same are effected in the manner described in this Section 10.2. Upon surrender for registration of transfer of any Units evidenced by a Certificate, and subject to the provisions of Section 10.2(b), the General Partner on behalf of the Partnership shall execute, and the Transfer Agent shall countersign and deliver, in the name of the holder or the designated transferee or transferees, as required pursuant to the holder's instructions, one or more new Certificates evidencing the same aggregate number of Units as was evidenced by the Certificate so surrendered. (b) Except as otherwise provided in Section 11.5, the Partnership shall not recognize any transfer of Units until the Certificates evidencing such Units are surrendered for registration of transfer and such Certificates are accompanied by a Transfer Application duly executed by the transferee (or the transferee's attorney-in-fact duly authorized in writing). No charge shall be imposed by the Partnership for such transfer, provided, that, as a condition to the issuance of any new Certificate under this Section 10.2, the General Partner may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed with respect thereto. -54- 63 10.3 MUTILATED, DESTROYED, LOST OR STOLEN CERTIFICATES. (a) If any mutilated Certificate is surrendered to the Transfer Agent, the General Partner on behalf of the Partnership shall execute, and upon its request the Transfer Agent shall countersign and deliver in exchange therefor, a new Certificate evidencing the same number of Units as the Certificate so surrendered. (b) The General Partner on behalf of the Partnership shall execute, and upon its request the Transfer Agent shall countersign and deliver a new Certificate in place of any Certificate previously issued if the Record Holder of the Certificate: (i) makes proof by affidavit, in form and substance satisfactory to the General Partner, that a previously issued Certificate has been lost, destroyed or stolen; (ii) requests the issuance of a new Certificate before the Partnership has notice that the Certificate has been acquired by a purchaser for value in good faith and without notice of an adverse claim; (iii) if requested by the General Partner, delivers to the Partnership a bond, in form and substance satisfactory to the General Partner, with surety or sureties and with fixed or open penalty as the General Partner may reasonably direct, in its sole discretion, to indemnify the Partnership, the General Partner and the Transfer Agent against any claim that may be made on account of the alleged loss, destruction or theft of the Certificate; and (iv) satisfies any other reasonable requirements imposed by the General Partner. If a Limited Partner or Assignee fails to notify the Partnership within a reasonable time after he has notice of the loss, destruction or theft of a Certificate, and a transfer of the Units represented by the Certificate is registered before the Partnership, the General Partner or the Transfer Agent receives such notification, the Limited Partner or Assignee shall be precluded from making any claim against the Partnership, the General Partner or the Transfer Agent for such transfer or for a new Certificate. (c) As a condition to the issuance of any new Certificate under this Section 10.3, the General Partner may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including, without limitation, the fees and expenses of the Transfer Agent) reasonably connected therewith. 10.4 RECORD HOLDER. In accordance with Section 10.2(b), the Partnership shall be entitled to recognize the Record Holder as the Limited Partner or Assignee with respect to any Units and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Units on the part of any other Person, whether or not the Partnership shall have actual or other notice thereof, except as otherwise provided by law or any applicable rule, regulation, guideline or requirement of any National Securities Exchange on which the Units are listed for trading. Without limiting the foregoing, when a Person (such as a broker, dealer, bank, trust company or clearing corporation or an agent of any of the foregoing) is acting as nominee, agent or in some other representative capacity for another Person in acquiring and/or holding Units, as between the Partnership on the one hand and such other Person on the other hand, such -55- 64 representative Person (a) shall be the Limited Partner or Assignee (as the case may be) of record and beneficially, (b) must execute and deliver a Transfer Application and (c) shall be bound by this Agreement and shall have the rights and obligations of a Limited Partner or Assignee (as the case may be) hereunder and as provided for herein. ARTICLE XI TRANSFER OF INTERESTS 11.1 TRANSFER. (a) The term "transfer," when used in this Article XI with respect to a Partnership Interest, shall be deemed to refer to an appropriate transaction by which the General Partner assigns its Partnership Interest as General Partner to another Person or by which the holder of a Unit assigns such Unit to another Person who is or becomes an Assignee, and includes a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition by law or otherwise. (b) No Partnership Interest shall be transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article XI. Any transfer or purported transfer of a Partnership Interest not made in accordance with this Article XI shall be null and void. (c) Nothing contained in this Article XI shall be construed to prevent a disposition by the parent entity of the General Partner of all of the issued and outstanding capital stock of the General Partner. 11.2 TRANSFER OF GENERAL PARTNER'S PARTNERSHIP INTEREST. (a) The General Partner may transfer all, but not less than all, of its Partnership Interest as the General Partner to a single transferee if, but only if, (i) a majority of the Outstanding Units (excluding any Common Units and Class B Units owned by the General Partner and its Affiliates and excluding the number of I-Units corresponding to any Listed Shares owned by the General Partner and its Affiliates) and a majority of the Outstanding I-Units voting as a separate class (excluding the number of I-Units corresponding to any Listed Shares owned by the General Partner and its Affiliates) approve of such transfer and of the admission of such transferee as General Partner, (ii) the transferee agrees to assume and be bound by the provisions of this Agreement and Operating Partnership Agreement and (iii) the Partnership receives an Opinion of Counsel that such transfer would not result in the loss of limited liability of any Limited Partner or of any limited partner of the Operating Partnership or cause the Partnership or the Operating Partnership to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for federal income tax purposes. (b) Neither Section 11.2(a) nor any other provision of this Agreement shall be construed to prevent (and all Partners do hereby consent to) (i) the transfer by the General Partner of all of its Partnership Interest to an Affiliate or (ii) the transfer by the General Partner of all of its Partnership Interest upon its merger, consolidation or other combination into any other Person or the transfer by it of all or substantially all of its assets to another Person if, in the case of a transfer described in either clause (i) or (ii) of this sentence, the rights and duties of the General Partner with respect to the Partnership Interest so transferred are assumed by the transferee and the transferee agrees to be bound by the provisions of this Agreement and the Operating Partnership Agreement; provided, in either such case, that such transferee furnishes to the Partnership an Opinion of Counsel that such merger, consolidation, combination, transfer or -56- 65 assumption will not result in a loss of limited liability of any Limited Partner or of any limited partner of the Operating Partnership or cause the Partnership or the Operating Partnership to be treated as an association taxable as a corporation or otherwise be taxed as an entity for federal income tax purposes. In the case of a transfer pursuant to this Section 11.2(b), the transferee or successor (as the case may be) shall be admitted to the Partnership as the General Partner immediately prior to the transfer of the Partnership Interest, and the business of the Partnership shall continue without dissolution. 11.3 TRANSFER OF UNITS. (a) Units may be transferred only in the manner described in Section 10.2. The transfer of any Units and the admission of any new Partner shall not constitute an amendment to this Agreement. (b) Until admitted as a Substituted Limited Partner pursuant to Article XII, the Record Holder of a Unit shall be an Assignee in respect of such Unit. Limited Partners may include custodians, nominees, or any other individual or entity in its own or any representative capacity. (c) Each distribution in respect of Units shall be paid by the Partnership, directly or through the Transfer Agent or through any other Person or agent, only to the Record Holders thereof as of the Record Date set for the distribution. Such payment shall constitute full payment and satisfaction of the Partnership's liability in respect of such payment, regardless of any claim of any Person who may have an interest in such payment by reason of an assignment or otherwise. (d) A transferee who has completed and delivered a Transfer Application shall be deemed to have (i) requested admission as a Substituted Limited Partner, (ii) agreed to comply with and be bound by and to have executed this Agreement, (iii) represented and warranted that such transferee has the right, power and authority and, if an individual, the capacity to enter into this Agreement, (iv) made the powers of attorney set forth in this Agreement and (v) given the consents and approvals and made the waivers contained in this Agreement. 11.4 RESTRICTIONS ON TRANSFERS. Notwithstanding the other provisions of this Article XI, no transfer of any Unit or interest therein of any Limited Partner or Assignee shall be made if such transfer would (a) violate the then applicable federal or state securities laws or rules and regulations of the Securities and Exchange Commission, any state securities commission or any other governmental authorities with jurisdiction over such transfer, (b) result in the taxation of the Partnership as an association taxable as a corporation or otherwise subject the Partnership to entity-level taxation for federal income tax purposes or (c) affect the Partnership's existence or qualification as a limited partnership under the Delaware Act. 11.5 CITIZENSHIP CERTIFICATES; NON-CITIZEN ASSIGNEES. (a) If the Partnership or the Operating Partnership is or becomes subject to any federal, state or local law or regulation that, in the reasonable determination of the General Partner, provides for the cancellation or forfeiture of any property in which the Partnership or the Operating Partnership has an interest based on the nationality, citizenship or other related status of a Limited Partner or Assignee, the General Partner may request any Limited Partner or Assignee to furnish to the General Partner, within 30 days after receipt of such request, an executed Citizenship Certification or such other information concerning his nationality, citizenship or other related status (or, if the Limited Partner or -57- 66 Assignee is a nominee holding for the account of another Person, the nationality, citizenship or other related status of such Person) as the General Partner may request. If a Limited Partner or Assignee fails to furnish the General Partner within the aforementioned 30-day period such Citizenship Certification or other requested information or if upon receipt of such Citizenship Certification or other requested information the General Partner determines, with the advice of counsel, that a Limited Partner or Assignee is not an Eligible Citizen, the Units owned by such Limited Partner or Assignee shall be subject to redemption in accordance with the provisions of Section 11.6. In addition, the General Partner may require that the status of any such Limited Partner or Assignee be changed to that of a Non-citizen Assignee, and, thereupon, the General Partner shall be substituted for such Non-citizen Assignee as the Limited Partner in respect of his Units. (b) The General Partner shall, in exercising voting rights in respect of Units held by it on behalf of Non-citizen Assignees, distribute the votes in the same ratios as the votes of Limited Partners in respect of Units other than those of Non-citizen Assignees are cast, either for, against or abstaining as to the matter. (c) Upon dissolution of the Partnership, a Non-citizen Assignee shall have no right to receive a distribution in kind pursuant to Section 14.4 but shall be entitled to the cash equivalent thereof, and the General Partner shall provide cash in exchange for an assignment of the Non-citizen Assignee's share of the distribution in kind. Such payment and assignment shall be treated for Partnership purposes as a purchase by the General Partner from the Non-citizen Assignee of his Partnership Interest (representing his right to receive his share of such distribution in kind). (d) At any time after he can and does certify that he has become an Eligible Citizen, a Non-citizen Assignee may, upon application to the General Partner, request admission as a Substituted Limited Partner with respect to any Units of such Non-citizen Assignee not redeemed pursuant to Section 11.6, and upon his admission pursuant to Section 12.1 the General Partner shall cease to be deemed to be the Limited Partner in respect of the Non-citizen Assignee's Units. 11.6 REDEMPTION OF INTERESTS. (a) If at any time a Limited Partner or Assignee fails to furnish a Citizenship Certification or other information requested within the 30-day period specified in Section 11.5(a), or if upon receipt of such Citizenship Certification or other information the General Partner determines, with the advice of counsel, that a Limited Partner or Assignee is not an Eligible Citizen, the Partnership may, unless the Limited Partner or Assignee establishes to the satisfaction of the General Partner that such Limited Partner or Assignee is an Eligible Citizen or has transferred his Units to a person who furnishes a Citizenship Certification to the General Partner prior to the date fixed for redemption as provided below, redeem the Partnership Interest of such Limited Partner or Assignee as follows: (i) The General Partner shall not later than the 30th day before the date fixed for redemption, give notice of redemption to the Limited Partner or Assignee, at his last address designated on the records of the Partnership or the Transfer Agent, by registered or certified mail, postage prepaid. The notice shall be deemed to have been given when so mailed. The notice shall specify the Redeemable Units, the date fixed for redemption, the place of payment, that payment of the redemption price will be made upon surrender of the Certificate evidencing the Redeemable Units and that on and after -58- 67 the date fixed for redemption no further allocations or distributions to which the Limited Partner or Assignee would otherwise be entitled in respect of the Redeemable Units will accrue or be made. (ii) The aggregate redemption price for Redeemable Units shall be an amount equal to the Current Market Price (the date of determination of which shall be the date fixed for redemption) of Units of the class to be so redeemed multiplied by the number of Units of each such class included among the Redeemable Units. The redemption price shall be paid, in the sole discretion of the General Partner, in cash or by delivery of a promissory note of the Partnership in the principal amount of the redemption price, bearing interest at the rate of 10% annually and payable in three equal annual installments of principal together with accrued interest, commencing one year after the redemption date. (iii) Upon surrender by or on behalf of the Limited Partner or Assignee, at the place specified in the notice of redemption, of the Certificate evidencing the Redeemable Units, duly endorsed in blank or accompanied by an assignment duly executed in blank, the Limited Partner or Assignee or his duly authorized representative shall be entitled to receive the payment therefor. (iv) After the redemption date, Redeemable Units shall no longer constitute issued and Outstanding Units. (b) The provisions of this Section 11.6 shall also be applicable to Units held by a Limited Partner or Assignee as nominee of a Person determined to be other than an Eligible Citizen. (c) Nothing in this Section 11.6 shall prevent the recipient of a notice of redemption from transferring his Units before the redemption date if such transfer is otherwise permitted under this Agreement. Upon receipt of notice of such transfer, the General Partner shall withdraw the notice of redemption, provided, the transferee of such Units certifies in the Transfer Application that he is an Eligible Citizen. If the transferee fails to make such certification, such redemption shall be effected from the transferee on the original redemption date. ARTICLE XII ADMISSION OF PARTNERS 12.1 ADMISSION OF SUBSTITUTED LIMITED PARTNERS. By transfer of a Unit in accordance with Article XI, the transferor shall be deemed to have given the transferee the right to seek admission as a Substituted Limited Partner subject to the conditions of, and in the manner permitted under, this Agreement. A transferor of a Certificate shall, however, only have the authority to convey to a purchaser or other transferee who does not execute and deliver a Transfer Application (a) the right to negotiate such Certificate to a purchaser or other transferee and (b) the right to transfer the right to request admission as a Substituted Limited Partner to such purchaser or other transferee in respect of the transferred Units. Each transferee of a Unit (including, without limitation, any nominee holder or an agent acquiring such Unit for the account of another Person) who executes and delivers a Transfer Application shall, by virtue of such execution and delivery, be an Assignee and be deemed to have applied to become a -59- 68 Substituted Limited Partner with respect to the Units so transferred to such Person. Such Assignee shall become a Substituted Limited Partner (x) at such time as the General Partner consents thereto, which consent may be given or withheld in the General Partner's sole discretion, and (y) when any such admission is shown on the books and records of the Partnership. If such consent is withheld, such transferee shall be an Assignee. An Assignee shall have an interest in the Partnership equivalent to that of a Limited Partner with respect to allocations and distributions, including, without limitation, liquidating distributions, of the Partnership. With respect to voting rights attributable to Units that are held by Assignees, the General Partner shall be deemed to be the Limited Partner with respect thereto and shall, in exercising the voting rights in respect of such Units on any matter, vote such Units at the written direction of the Assignee who is the Record Holder of such Units. If no such written direction is received, such Units will not be voted. An Assignee shall have no other rights of a Limited Partner. 12.2 ADMISSION OF SUCCESSOR GENERAL PARTNER. A successor General Partner approved pursuant to Section 13.1 or 13.2 or the transferee of or successor to all of the General Partner's Partnership Interest pursuant to Section 11.2 who is proposed to be admitted as a successor General Partner shall be admitted to the Partnership as the General Partner, effective immediately prior to the withdrawal or removal of the General Partner pursuant to Section 13.1 or 13.2 or the transfer of the General Partner's Partnership Interest pursuant to Section 11.2; provided, however, that no such successor shall be admitted to the Partnership until compliance with the terms of Section 11.2 has occurred. Any such successor shall carry on the business of the Partnership and Operating Partnership without dissolution. In each case, the admission shall be subject to the successor General Partner executing and delivering to the Partnership an acceptance of all of the terms and conditions of this Agreement and such other documents or instruments as may be required to effect the admission. 12.3 ADMISSION OF ADDITIONAL LIMITED PARTNERS. (a) A Person (other than the General Partner or a Substituted Limited Partner) who makes a Capital Contribution to the Partnership in accordance with this Agreement shall be admitted to the Partnership as an Additional Limited Partner only upon furnishing to the General Partner (i) evidence of acceptance in form satisfactory to the General Partner of all of the terms and conditions of this Agreement, including, without limitation, the power of attorney granted in Section 1.4, and (ii) such other documents or instructions as may be required in the discretion of the General Partner to effect such Person's admission as an Additional Limited Partner. (b) Notwithstanding anything to the contrary in this Section 12.3, no Person shall be admitted as an Additional Limited Partner without the consent of the General Partner, which consent may be given or withheld in the General Partner's sole discretion. The admission of any Person as an Additional Limited Partner shall become effective on the date upon which the name of such Person is recorded on the books and records of the Partnership, following the consent of the General Partner to such admission. 12.4 AMENDMENT OF AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP. To effect the admission to the Partnership of any Partner, the General Partner shall take all steps necessary and appropriate under the Delaware Act to amend the records of the Partnership and, if necessary, to prepare as soon as practical an amendment of this Agreement and, if required by law, to prepare and file an amendment to the Certificate of Limited Partnership and may for this purpose, among others, exercise the power of attorney granted pursuant to Section 1.4. -60- 69 ARTICLE XIII WITHDRAWAL OR REMOVAL OF PARTNERS 13.1 WITHDRAWAL OF THE GENERAL PARTNER. (a) The General Partner shall be deemed to have withdrawn from the Partnership upon the occurrence of any one of the following events (each such event herein referred to as an "Event of Withdrawal"): (i) the General Partner voluntarily withdraws from the Partnership by giving written notice to the other Partners (and it shall be deemed that the General Partner has withdrawn pursuant to this Section 13.1(a)(i) if the General Partner voluntarily withdraws as general partner of OLP-A); (ii) the General Partner transfers all of its rights as General Partner pursuant to Section 11.2; (iii) the General Partner is removed pursuant to Section 13.2; (iv) the General Partner (A) makes a general assignment for the benefit of creditors; (B) files a voluntary bankruptcy petition; (C) files a petition or answer seeking for itself a reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any law; (D) files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the General Partner in a proceeding of the type described in clauses (A)-(C) of this Section 13.1(a)(iv); or (E) seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator of the General Partner or of all or any substantial part of its properties; (v) a final and non-appealable judgment is entered by a court with appropriate jurisdiction ruling that the General Partner is bankrupt or insolvent, or a final and non-appealable order for relief is entered by a court with appropriate jurisdiction against the General Partner, in each case under any federal or state bankruptcy or insolvency laws as now or hereafter in effect; or (vi) a certificate of dissolution or its equivalent is filed for the General Partner, or 90 days expire after the date of notice to the General Partner of revocation of its charter without a reinstatement of its charter, under the laws of its state of incorporation. In no event shall the Maximum Permitted Delegation pursuant to the terms and conditions of the Delegation of Control Agreement and this Agreement be deemed an Event of Withdrawal. If an Event of Withdrawal specified in Section 13.1(a)(iv), (v) or (vi) occurs, the withdrawing General Partner shall give notice to the Limited Partners within 30 days after such occurrence. The Partners hereby agree that only the Events of Withdrawal described in this Section 13.1 shall result in the withdrawal of the General Partner from the Partnership. (b) Withdrawal of the General Partner from the Partnership upon the occurrence of an Event of Withdrawal shall not constitute a breach of this Agreement under the -61- 70 following circumstances: (i) at any time during the period prior to January 1, 2003 the General Partner voluntarily withdraws by giving at least 90 days' advance notice of its intention to withdraw to the Limited Partners, provided, that prior to the effective date of such withdrawal the withdrawal is approved by Limited Partners holding at least a majority of the Outstanding Units (excluding for purposes of such determination Common Units and Class B Units owned by the General Partner and its Affiliates and excluding the number of I-Units corresponding to any Listed Shares owned by the General Partner and its Affiliates) and a majority of the Outstanding I-Units voting as a separate class (excluding for purposes of such determination the number of I-Units corresponding to any Listed Shares owned by the General Partner and its Affiliates) and the General Partner delivers to the Partnership an Opinion of Counsel ("Withdrawal Opinion of Counsel") that such withdrawal (following the selection of the successor General Partner) would not result in the loss of the limited liability of any Limited Partner or of the limited partner of the Operating Partnership or cause the Partnership or the Operating Partnership to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for federal income tax purposes; (ii) at any time on or after January 1, 2003, the General Partner voluntarily withdraws by giving at least 90 days' advance notice to the Limited Partners, such withdrawal to take effect on the date specified in such notice; (iii) at any time that the General Partner ceases to be a General Partner pursuant to Section 13.1(a)(ii) or is removed pursuant to Section 13.2; or (iv) notwithstanding clause (i) of this sentence, at any time that the General Partner voluntarily withdraws by giving at least 90 days' advance notice of its intention to withdraw to the Limited Partners, such withdrawal to take effect on the date specified in the notice, if at the time such notice is given one Person and its Affiliates (other than the General Partner and its Affiliates) own beneficially or of record or control at least 50% of the aggregate number of Outstanding Units (other than I-Units) and Listed Shares on a combined basis. The withdrawal of the General Partner from the Partnership upon the occurrence of an Event of Withdrawal shall also constitute the withdrawal of the General Partner as general partner of the Operating Partnership. If the General Partner gives a notice of withdrawal pursuant to Section 13.1(a)(i), holders of at least a majority of the Outstanding Units (excluding for purposes of such determination Units owned by the General Partner and its Affiliates) may, prior to the effective date of such withdrawal, elect a successor General Partner. The Person so elected as successor General Partner shall automatically become the successor general partner of the Operating Partnership, as provided in Operating Partnership Agreement. If, prior to the effective date of the General Partner's withdrawal, a successor is not selected by the Limited Partners as provided herein or the Partnership does not receive a Withdrawal Opinion of Counsel, the Partnership shall be dissolved in accordance with Section 14.1. Any such successor General Partner shall be subject to the provisions of Section 12.2. 13.2 REMOVAL OF THE GENERAL PARTNER. The General Partner may be removed if such removal is approved by Limited Partners holding at least two-thirds of the Outstanding Units (excluding for purposes of such determination Common Units and Class B Units owned by the General Partner and its Affiliates and excluding the number of I-Units corresponding to any Listed Shares owned by the General Partner and its Affiliates). Any such action by such Limited Partners for removal of the General Partner must also provide for the election and succession of a new General Partner. Such removal shall be effective immediately following the admission of the successor General Partner pursuant to Article XII. The removal of the General Partner shall also automatically constitute the removal of the General Partner as general partner of the Operating Partnership, as provided in the Operating Partnership Agreement. The Person so elected as successor General Partner shall automatically become the successor general partner of -62- 71 the Operating Partnership, as provided in the Operating Partnership Agreement. The right of the Limited Partners holding Outstanding Units to remove the General Partner shall not exist or be exercised unless the Partnership has received an opinion opining as to the matters covered by a Withdrawal Opinion of Counsel. Any such successor General Partner shall be subject to the provisions of Section 12.2. 13.3 INTEREST OF DEPARTING PARTNER AND SUCCESSOR GENERAL PARTNER. (a) In the event of (i) withdrawal of the General Partner under circumstances where such withdrawal does not violate this Agreement or (ii) removal of the General Partner by the Limited Partners under circumstances where Cause does not exist, the Departing Partner shall, at its option exercisable prior to the effective date of the departure of such Departing Partner, promptly receive from its successor in exchange for its Partnership Interest as General Partner an amount in cash equal to the fair market value of the Departing Partner's Partnership Interest as General Partner, such amount to be determined and payable as of the effective date of its departure. If the General Partner is removed by the Limited Partners under circumstances where Cause exists or if the General Partner withdraws under circumstances where such withdrawal violates this Agreement or the Operating Partnership Agreement, its successor shall have the option described in the immediately preceding sentence, and the Departing Partner shall not have such option. In either case, if the successor acquires the Departing Partner's Partnership Interest as the general partner, such successor General Partner must also acquire at such time the general partner interest of such Departing Partner as general partner of the Operating Partnership, for an amount in cash equal to the fair market value of such interest, determined as of the effective date of its departure. In either event, the Departing Partner shall be entitled to receive all reimbursements due such Departing Partner pursuant to Section 6.4, including, without limitation, any employee-related liabilities (including, without limitation, severance liabilities), incurred in connection with the termination of any employees employed by the General Partner for the benefit of the Partnership or the Operating Partnership. Subject to Section 13.3(b), the Departing Partner shall, as of the effective date of its departure, cease to share in any allocations or distributions with respect to its Partnership Interest as the General Partner and Partnership income, gain, loss, deduction and credit will be prorated and allocated as set forth in Section 5.2(g). For purposes of this Section 13.3(a), the fair market value of the Departing Partner's Partnership Interest as the general partner of the Partnership herein and the partnership interest of such Departing Partner as the general partner of the Operating Partnership (collectively, the "Combined Interest") shall be determined by agreement between the Departing Partner and its successor or, failing agreement within 30 days after the effective date of such Departing Partner's departure, by an independent investment banking firm or other independent expert selected by the Departing Partner and its successor, which, in turn, may rely on other experts and the determination of which shall be conclusive as to such matter. If such parties cannot agree upon one independent investment banking firm or other independent expert within 45 days after the effective date of such departure, then the Departing Partner shall designate an independent investment banking firm or other independent expert, the Departing Partner's successor shall designate an independent investment banking firm or other independent expert, and such firms or experts shall mutually select a third independent investment banking firm or independent expert, which shall determine the fair market value of the Combined Interest. In making its determination, such independent investment banking firm or other independent expert shall consider the then current trading price of Units on any National Securities Exchange on which -63- 72 Units are then listed, the value of the Partnership's assets, the rights and obligations of the General Partner and other factors it may deem relevant. (b) If the Combined Interest is not acquired in the manner set forth in Section 13.3(a), the Departing Partner shall become a Limited Partner and the Combined Interest shall be converted into Common Units pursuant to a valuation made by an investment banking firm or other independent expert selected pursuant to Section 13.3(a), without reduction in such Partnership Interest (but subject to proportionate dilution by reason of the admission of its successor). Any successor General Partner shall indemnify the Departing Partner as to all debts and liabilities of the Partnership arising on or after the date on which the Departing Partner becomes a Limited Partner. For purposes of this Agreement, conversion of the General Partner's Partnership Interest to Common Units shall be characterized as if the General Partner contributed its Partnership Interest to the Partnership in exchange for the newly-issued Common Units. (c) If the option described in Section 13.3(a) is not exercised by the party entitled to do so, the successor General Partner shall, at the effective date of its admission to the Partnership, contribute to the capital of the Partnership cash in an amount such that its Capital Account, after giving effect to such contribution and any adjustments made to the Capital Accounts of all Partners pursuant to Section 4.3(d)(i), shall be equal to that percentage of the Capital Accounts of all Partners that is equal to its Percentage Interest as the General Partner. In such event, each successor General Partner shall, subject to the following sentence, be entitled to such Percentage Interest of all Partnership allocations and distributions and any other allocations and distributions to which the Departing Partner was entitled. In addition, such successor General Partner shall cause this Agreement to be amended to reflect that, from and after the date of such successor General Partner's admission, the successor General Partner's interest in all Partnership distributions and allocations shall be 1%, and that of the holders of Outstanding Units shall be 99%. 13.4 WITHDRAWAL OF LIMITED PARTNERS. No Limited Partner shall have any right to withdraw from the Partnership; provided, however, that when a transferee of a Limited Partner's Units becomes a Record Holder, such transferring Limited Partner shall cease to be a Limited Partner with respect to the Units so transferred. ARTICLE XIV DISSOLUTION AND LIQUIDATION 14.1 DISSOLUTION. The Partnership shall not be dissolved by the admission of Substituted Limited Partners or Additional Limited Partners or by the admission of a successor General Partner in accordance with the terms of this Agreement. Upon the removal or withdrawal of the General Partner any successor General Partner shall continue the business of the Partnership. The Partnership shall dissolve, and (subject to Section 14.2) its affairs should be wound up, upon: (a) the expiration of its term as provided in Section 1.5; (b) an Event of Withdrawal of the General Partner as provided in Section 13.1(a) (other than Section 13.1(a)(ii)), unless a successor is elected and an Opinion of Counsel is received as provided in Section 13.1(b) or 13.2 and such successor is admitted to the Partnership pursuant to Section 12.2; -64- 73 (c) an election to dissolve the Partnership by the General Partner that is approved by at least a majority of the Outstanding Units (and all Limited Partners hereby expressly consent that such approval may be effected upon written consent of said applicable percentage of the Outstanding Units); (d) entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Delaware Act; or (e) the sale of all or substantially all of the assets and properties of the Partnership and the Operating Partnership. 14.2 CONTINUATION OF THE BUSINESS OF THE PARTNERSHIP AFTER DISSOLUTION. Upon (a) dissolution of the Partnership caused by the withdrawal or removal of the General Partner and following a failure of all Partners, within 90 days after the withdrawal or removal of the General Partner, to agree to continue the business of the Partnership and appoint a successor General Partner as provided in Section 13.1 or 13.2, then within an additional 90 days or (b) dissolution of the Partnership upon an event constituting an Event of Withdrawal as defined in Section 13.1(a)(iv), (v) or (vi), then within 180 days thereafter, a majority of the Outstanding Units may elect to reconstitute the Partnership and continue its business on the same terms and conditions set forth in this Agreement by forming a new limited partnership on terms identical to those set forth in this Agreement and having as a general partner a Person approved by a majority of the Outstanding Units. Upon any such election by a majority of the Outstanding Units, all Partners shall be bound thereby and shall be deemed to have approved same. Unless such an election is made within the applicable time period as set forth above, the Partnership shall conduct only activities necessary to wind up its affairs. If such an election is so made, then: (i) the reconstituted Partnership shall continue until the end of the term set forth in Section 1.5 unless earlier dissolved in accordance with this Article XIV; (ii) if the successor General Partner is not the former General Partner, then the interest of the former General Partner shall be treated thenceforth as the interest of a Limited Partner and converted into Common Units in the manner provided in Section 13.3(b); and (iii) all necessary steps shall be taken to cancel this Agreement and the Certificate of Limited Partnership and to enter into and, as necessary, to file a new partnership agreement and certificate of limited partnership, and the successor general partner may for this purpose exercise the powers of attorney granted the General Partner pursuant to Section 1.4; provided, that the right of a majority of Outstanding Units to approve a successor General Partner and to reconstitute and to continue the business of the Partnership shall not exist and may not be exercised unless the Partnership has received an Opinion of Counsel that (x) the exercise of the right would not result in the loss of limited liability of any Limited Partner and (y) neither the Partnership, the reconstituted limited partnership nor the Operating Partnership would be treated as an association taxable as a corporation or otherwise be taxable as an entity for federal income tax purposes upon the exercise of such right to continue. 14.3 LIQUIDATION. Upon dissolution of the Partnership, unless the Partnership is continued under an election to reconstitute and continue the Partnership pursuant to Section 14.2, -65- 74 the General Partner, or in the event the General Partner has been dissolved or removed, become bankrupt as set forth in Section 13.1 or withdrawn from the Partnership, a liquidator or liquidating committee approved by a majority of the Outstanding Units, shall be the Liquidator. The Liquidator (if other than the General Partner) shall be entitled to receive such compensation for its services as may be approved by a majority of the Outstanding Units. The Liquidator shall agree not to resign at any time without 15 days' prior notice and (if other than the General Partner) may be removed at any time, with or without cause, by notice of removal approved by a majority of the Outstanding Units. Upon dissolution, removal or resignation of the Liquidator, a successor and substitute Liquidator (who shall have and succeed to all rights, powers and duties of the original Liquidator) shall within 30 days thereafter be approved by a majority of the Outstanding Units. The right to approve a successor or substitute Liquidator in the manner provided herein shall be deemed to refer also to any such successor or substitute Liquidator approved in the manner herein provided. Except as expressly provided in this Article XIV, the Liquidator approved in the manner provided herein shall have and may exercise, without further authorization or consent of any of the parties hereto, all of the powers conferred upon the General Partner under the terms of this Agreement (but subject to all of the applicable limitations, contractual and otherwise, upon the exercise of such powers, other than the limitation on sale set forth in Section 6.3(b)) to the extent necessary or desirable in the good faith judgment of the Liquidator to carry out the duties and functions of the Liquidator hereunder for and during such period of time as shall be reasonably required in the good faith judgment of the Liquidator to complete the winding-up and liquidation of the Partnership as provided for herein. The Liquidator shall liquidate the assets of the Partnership, and apply and distribute the proceeds of such liquidation in the following order of priority, unless otherwise required by mandatory provisions of applicable law: (a) the payment to creditors of the Partnership, including, without limitation, Partners who are creditors, in the order of priority provided by law; and the creation of a reserve of cash or other assets of the Partnership for contingent liabilities in an amount, if any, determined by the Liquidator to be appropriate for such purposes; and (b) to all Partners in accordance with the positive balances in their respective Capital Accounts, as determined after taking into account all Capital Account adjustments (other than those made by reason of this clause) for the taxable year of the Partnership during which the liquidation of the Partnership occurs (with the date of such occurrence being determined pursuant to Treasury Regulation Section 1.704-1(b)(2)(ii)(g)); and such distribution shall be made by the end of such taxable year (or, if later, within 90 days after said date of such occurrence). 14.4 DISTRIBUTIONS IN KIND. Notwithstanding the provisions of Section 14.3, which require the liquidation of the assets of the Partnership, but subject to the order of priorities set forth therein, if prior to or upon dissolution of the Partnership, the Liquidator determines that an immediate sale of part or all of the Partnership's assets would be impractical or would cause undue loss to the Partners, the Liquidator may, in its absolute discretion, defer for a reasonable time the liquidation of any assets except those necessary to satisfy liabilities of the Partnership (including, without limitation, those to Partners as creditors) and/or distribute to the Partners or to specific classes of Partners, in lieu of cash, as tenants in common and in accordance with the provisions of Section 14.3, undivided interests in such Partnership assets as the Liquidator deems not suitable for liquidation. Any such distributions in kind shall be made only if, in the good faith judgment of the Liquidator, such distributions in kind are in the best interest of the Limited -66- 75 Partners, and shall be subject to such conditions relating to the disposition and management of such properties as the Liquidator deems reasonable and equitable and to any agreements governing the operation of such properties at such time. The Liquidator shall determine the fair market value of any property distributed in kind using such reasonable method of valuation as it may adopt. Notwithstanding the above, the Liquidator may not make distributions in kind unless all of the Listed Shares are owned by the General Partner and its Affiliates. 14.5 CANCELLATION OF CERTIFICATE OF LIMITED PARTNERSHIP. Upon the completion of the distribution of Partnership cash and property as provided in Sections 14.3 and 14.4, the Partnership shall be terminated and the Certificate of Limited Partnership and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the State of Delaware shall be cancelled and such other actions as may be necessary to terminate the Partnership shall be taken. 14.6 REASONABLE TIME FOR WINDING UP. A reasonable time shall be allowed for the orderly winding up of business and affairs of the Partnership and the liquidation of its assets pursuant to Section 14.3 in order to minimize any losses otherwise attendant upon such winding up, and the provisions of this Agreement shall remain in effect between the Partners during the period of liquidation. 14.7 RETURN OF CAPITAL. The General Partner shall not be personally liable for, and shall have no obligation to contribute or loan any monies or property to the Partnership to enable it to effectuate, the return of the Capital Contributions of the Limited Partners, or any portion thereof, it being expressly understood that any such return shall be made solely from Partnership assets. 14.8 NO CAPITAL ACCOUNT RESTORATION. No Partner shall have any obligation to restore any negative balance in its Capital Account upon liquidation of the Partnership. 14.9 WAIVER OF PARTITION. Each Partner hereby waives any right to partition of the Partnership property. ARTICLE XV AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE 15.1 AMENDMENT TO BE ADOPTED SOLELY BY GENERAL PARTNER. Each Limited Partner agrees that the General Partner (pursuant to its powers of attorney from the Limited Partners and Assignees), without the approval of any Limited Partner or Assignee, may amend any provision of this Agreement, and execute, swear to, acknowledge, deliver, file and record whatever documents may be required in connection therewith, to reflect: (a) a change in the name of the Partnership, the location of the principal place of business of the Partnership, the registered agent of the Partnership or the registered office of the Partnership; (b) admission, substitution, withdrawal or removal of Partners in accordance with this Agreement; -67- 76 (c) 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 limited partnership or a partnership in which the limited partners have limited liability under the laws of any state 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 taxed as an entity for federal income tax purposes; (d) a change (i) that, in the sole discretion of the General Partner, does not adversely affect the Limited Partners in any material respect, (ii) that is necessary or desirable to satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any federal or state agency or judicial authority or contained in any federal or state statute (including, without limitation, the Delaware Act) or that is necessary or desirable to facilitate the trading of the Units (including, without limitation, the division of Outstanding Units into different classes to facilitate uniformity of tax consequences within such classes of Units) or comply with any rule, regulation, guideline or requirement of any National Securities Exchange on which the Units are or will be listed for trading, compliance with any of which the General Partner determines in its sole discretion to be in the best interests of the Partnership and the Limited Partners or (iii) that is required to effect the intent of the provisions of this Agreement or is otherwise contemplated by this Agreement; (e) an amendment that is necessary, in the Opinion of Counsel, to prevent the Partnership or the General Partner or its directors or officers from in any manner being subjected to the provisions of the Investment Company Act of 1940, as amended, the Investment Advisers 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; (f) subject to the terms of Section 4.1, an amendment that the General Partner determines in its sole discretion to be necessary or appropriate in connection with the authorization for issuance of any class or series of Partnership Securities pursuant to Section 4.1; (g) any amendment expressly permitted in this Agreement to be made by the General Partner acting alone; (h) an amendment effected, necessitated or contemplated by a Merger Agreement approved in accordance with Section 16.3; or (i) any other amendments substantially similar to the foregoing. 15.2 AMENDMENT PROCEDURES. Except as provided in Sections 15.1 and 15.3, all amendments to this Agreement shall be made in accordance with the following requirements. Amendments to this Agreement may be proposed only by or with the consent of the General Partner. Each such proposal shall contain the text of the proposed amendment. If an amendment is proposed, the General Partner shall seek the written approval of the requisite percentage of Outstanding Units or call a meeting of the Limited Partners to consider and vote on such proposed amendment. A proposed amendment shall be effective upon its approval by at least two-thirds of the Outstanding Units unless a greater or different percentage is required under this Agreement; provided that if the effect of any amendment would have a material adverse effect on the rights or preferences of any class of Outstanding Units in relation to any other class of -68- 77 Outstanding Units, the affirmative vote of the holders of at least a two-thirds of the Outstanding Units of the class so affected shall be required to adopt such amendment (excluding for purposes of such determination, in the case of a vote of the holders of the I-Units, the number of I-Units corresponding to the Listed Shares owned by the General Partner and its Affiliates). The General Partner shall notify all Record Holders upon final adoption of any proposed amendment. 15.3 AMENDMENT REQUIREMENTS. (a) Notwithstanding the provisions of Sections 15.1 and 15.2, no provision of this Agreement that establishes a percentage of Outstanding Units required to take any action shall be amended, altered, changed, repealed or rescinded in any respect that would have the effect of reducing such voting requirement unless such amendment is approved by the written consent or the affirmative vote of holders of Outstanding Units whose aggregate Outstanding Units constitute not less than the voting requirement sought to be reduced. (b) Notwithstanding the provisions of Sections 15.1 and 15.2, no amendment to this Agreement may (i) enlarge the obligations of any Limited Partner without its consent, (ii) enlarge the obligations of the General Partner without its consent, which may be given or withheld in its sole discretion, (iii) modify the amounts distributable, reimbursable or otherwise payable to the General Partner by the Partnership or the Operating Partnership, (iv) change Section 14.1(a) or (c), (v) restrict in any way any action by or rights of the General Partner as set forth in this Agreement or (vi) change the term of the Partnership or, except as set forth in Section 14.1(c), give any Person the right to dissolve the Partnership. (c) Except as otherwise provided, and without limitation of the General Partner's authority to adopt amendments to this Agreement as contemplated in Section 15.1, the General Partner may amend the Partnership Agreement without the approval of holders of Outstanding Units, except that any amendment that would have a material adverse effect on the rights or preferences of any class of Outstanding Units in relation to other classes of Units must be approved by the holders of not less than two-thirds of the Outstanding Units of the class affected. (d) Notwithstanding any other provision of this Agreement, except for amendments pursuant to Section 6.3 or 15.1, no amendments shall become effective without the approval of at least 95% of the Outstanding Units unless the Partnership obtains an Opinion of Counsel to the effect that (a) such amendment will not cause the Partnership or the Operating Partnership to be treated as an association taxable as a corporation or otherwise taxable as an entity for federal income tax purposes and (b) such amendment will not affect the limited liability of any Limited Partner or any limited partner of the Operating Partnership under applicable law. (e) This Section 15.3 shall only be amended with the approval of not less than 95% of the Outstanding Units. 15.4 MEETINGS. All acts of Limited Partners to be taken hereunder shall be taken in the manner provided in this Article XV. Meetings of the Limited Partners may be called by the General Partner or by Limited Partners owning 20% or more of the Outstanding Units of the class for which a meeting is proposed. Limited Partners shall call a meeting by delivering to the General Partner one or more requests in writing stating that the signing Limited Partners wish to call a meeting and indicating the general or specific purposes for which the meeting is to be called. Within 60 days after receipt of such a call from Limited Partners or within such greater -69- 78 time as may be reasonably necessary for the Partnership to comply with any statutes, rules, regulations, listing agreements or similar requirements governing the holding of a meeting or the solicitation of proxies for use at such a meeting, the General Partner shall send a notice of the meeting to the Limited Partners either directly or indirectly through the Transfer Agent. A meeting shall be held at a time and place determined by the General Partner on a date not more than 60 days after the mailing of notice of the meeting. Limited Partners shall not vote on matters that would cause the Limited Partners to be deemed to be taking part in the management and control of the business and affairs of the Partnership so as to jeopardize the Limited Partners' limited liability under the Delaware Act or the law of any other state in which the Partnership is qualified to do business. 15.5 NOTICE OF MEETING. Notice of a meeting called pursuant to Section 15.4 shall be given to the Record Holders in writing by mail or other means of written communication in accordance with Section 17.1 The notice shall be deemed to have been given at the time when deposited in the mail or sent by other means of written communication. 15.6 RECORD DATE. For purposes of determining the Limited Partners entitled to notice of or to vote at a meeting of the Limited Partners or to give approvals without a meeting as provided in Section 15.11, the General Partner may set a Record Date, which shall not be less than 10 nor more than 60 days before (a) the date of the meeting (unless such requirement conflicts with any rule, regulation, guideline or requirement of any National Securities Exchange on which the Units are listed for trading, in which case the rule, regulation, guideline or requirement of such exchange shall govern) or (b) in the event that approvals are sought without a meeting, the date by which Limited Partners are requested in writing by the General Partner to give such approvals. 15.7 ADJOURNMENT. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting and a new Record Date need not be fixed, if the time and place thereof are announced at the meeting at which the adjournment is taken, unless such adjournment shall be for more than 45 days. At the adjourned meeting, the Partnership may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 45 days or if a new Record Date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given in accordance with this Article XV. 15.8 WAIVER OF NOTICE; APPROVAL OF MEETING; APPROVAL OF MINUTES. The transactions of any meeting of Limited Partners, however called and noticed, and whenever held, shall be as valid as if had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the Limited Partners entitled to vote, present in person or by proxy, signs a written waiver of notice or an approval of the holding of the meeting or an approval of the minutes thereof. All waivers and approvals shall be filed with the Partnership records or made a part of the minutes of the meeting. Attendance of a Limited Partner at a meeting shall constitute a waiver of notice of the meeting, except when the Limited Partner does not approve, at the beginning of the meeting, of the transaction of any business because the meeting is not lawfully called or convened; and except that attendance at a meeting is not a waiver of any right to disapprove the consideration of matters required to be included in the notice of the meeting, but not so included, if the disapproval is expressly made at the meeting. -70- 79 15.9 QUORUM. Two-thirds of the Outstanding Units of the class for which a meeting has been called represented in person or by proxy shall constitute a quorum at a meeting of Limited Partners of such class unless any such action by the Limited Partners requires approval by holders of a majority in interest of such Units, in which case the quorum shall be a majority (excluding, in either case, if such are to be excluded from the vote, Outstanding Units owned by the General Partner and its Affiliates). At any meeting of the Limited Partners duly called and held in accordance with this Agreement at which a quorum is present, the act of Limited Partners holding Outstanding Units that in the aggregate represent a majority of the Outstanding Units entitled to vote and be present in person or by proxy at such meeting shall be deemed to constitute the act of all Limited Partners, unless a greater or different percentage is required with respect to such action under the provisions of this Agreement, in which case the act of the Limited Partners holding Outstanding Units that in the aggregate represent at least such greater or different percentage shall be required. The Limited Partners present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough Limited Partners to leave less than a quorum, if any action taken (other than adjournment) is approved by the required percentage of Outstanding Units specified in this Agreement. In the absence of a quorum, any meeting of Limited Partners may be adjourned from time to time by the affirmative vote of a majority of the Outstanding Units represented either in person or by proxy, but no other business may be transacted, except as provided in Section 15.7. 15.10 CONDUCT OF MEETING. The General Partner shall have full power and authority concerning the manner of conducting any meeting of the Limited Partners or solicitation of approvals in writing, including, without limitation, the determination of Persons entitled to vote, the existence of a quorum, the satisfaction of the requirements of Section 15.4, the conduct of voting, the validity and effect of any proxies and the determination of any controversies, votes or challenges arising in connection with or during the meeting or voting. The General Partner shall designate a Person to serve as chairman of any meeting and shall further designate a Person to take the minutes of any meeting, in either case including, without limitation, a Partner or a director or officer of the General Partner. All minutes shall be kept with the records of the Partnership maintained by the General Partner. The General Partner may make such other regulations consistent with applicable law and this Agreement as it may deem advisable concerning the conduct of any meeting of the Limited Partners or solicitation of approvals in writing, including, without limitation, regulations in regard to the appointment of proxies, the appointment and duties of inspectors of votes and approvals, the submission and examination of proxies and other evidence of the right to vote, and the revocation of approvals in writing. 15.11 ACTION WITHOUT A MEETING. Any action that may be taken at a meeting of the Limited Partners may be taken without a meeting if an approval in writing setting forth the action so taken is signed by Limited Partners owning not less than the minimum percentage of the Outstanding Units that would be necessary to authorize or take such action at a meeting at which all the Limited Partners were present and voted. Prompt notice of the taking of action without a meeting shall be given to the Limited Partners who have not approved in writing. The General Partner may specify that any written ballot submitted to Limited Partners for the purpose of taking any action without a meeting shall be returned to the Partnership within the time period, which shall be not less than 20 days, specified by the General Partner. If a ballot returned to the Partnership does not vote all of the Units held by the Limited Partner, the Partnership shall be deemed to have failed to receive a ballot for the Units that were not voted. If approval of the -71- 80 taking of any action by the Limited Partners is solicited by any Person other than by or on behalf of the General Partner, the written approvals shall have no force and effect unless and until (a) they are deposited with the Partnership in care of the General Partner, (b) approvals sufficient to take the action proposed are dated as of a date not more than 90 days prior to the date sufficient approvals are deposited with the Partnership and (c) an Opinion of Counsel is delivered to the General Partner to the effect that the exercise of such right and the action proposed to be taken with respect to any particular matter (i) will not cause the Limited Partners to be deemed to be taking part in the management and control of the business and affairs of the Partnership so as to jeopardize the Limited Partners' limited liability, (ii) will not jeopardize the status of the Partnership as a partnership under applicable tax laws and regulations and (iii) is otherwise permissible under the state statutes then governing the rights, duties and liabilities of the Partnership and the Partners. 15.12 VOTING AND OTHER RIGHTS. (a) Only those Record Holders of Units on the Record Date set pursuant to Section 15.6 (and also subject to the limitations contained in the definition of "Outstanding") shall be entitled to notice of, and to vote at, a meeting of Limited Partners or to act with respect to matters as to which the holders of the Outstanding Units have the right to vote or to act. All references in this Agreement to votes of, or other acts that may be taken by, the Outstanding Units shall be deemed to be references to the votes or acts of the Record Holders of such Outstanding Units. (b) With respect to Units that are held for a Person's account by another Person (such as a broker, dealer, bank, trust company or clearing corporation, or an agent of any of the foregoing), in whose name such Units are registered, such broker, dealer or other agent shall, in exercising the voting rights in respect of such Units on any matter, and unless the arrangement between such Persons provides otherwise, vote such Units in favor of, and at the direction of, the Person who is the beneficial owner, and the Partnership shall be entitled to assume it is so acting without further inquiry. The provisions of this Section 15.12(b) (as well as all other provisions of this Agreement) are subject to the provisions of Section 10.4. ARTICLE XVI MERGER 16.1 AUTHORITY. The Partnership may merge or consolidate with one or more corporations, business trusts or associations, real estate investment trusts, common law trusts or unincorporated businesses, including, without limitation, a general partnership or limited partnership, formed under the laws of the State of Delaware or any other state of the United States of America, pursuant to a written agreement of merger or consolidation ("Merger Agreement") in accordance with this Article. 16.2 PROCEDURE FOR MERGER OR CONSOLIDATION. Merger or consolidation of the Partnership pursuant to this Article requires the prior approval of the General Partner. If the General Partner shall determine, in the exercise of its sole discretion, to consent to the merger or consolidation, the General Partner shall approve the Merger Agreement, which shall set forth: (a) The names and jurisdictions of formation or organization of each of the business entities proposing to merge or consolidate; -72- 81 (b) The name and jurisdictions of formation or organization of the business entity that is to survive the proposed merger or consolidation (the "Surviving Business Entity"); (c) The terms and conditions of the proposed merger or consolidation; (d) The manner and basis of exchanging or converting the equity securities of each constituent business entity for, or into, cash, property or general or limited partnership interests, rights, securities or obligations of the Surviving Business Entity; and (1) if any general or limited partnership interests, securities or rights of any constituent business entity are not to be exchanged or converted solely for, or into, cash, property or general or limited partnership interests, rights, securities or obligations of the Surviving Business Entity, the cash, property or general or limited partnership interests, rights, securities or obligations of any limited partnership, corporation, trust or other entity (other than the Surviving Business Entity) which the holders of such general or limited partnership interest are to receive in exchange for, or upon conversion of, their securities or rights, and (ii) in the case of securities represented by certificates, upon the surrender of such certificates, which cash, property or general or limited partnership interests, rights, securities or obligations of the Surviving Business Entity or any limited partnership, corporation, trust or other entity (other than the Surviving Business Entity), or evidences thereof, are to be delivered; (e) A statement of any changes in the constituent documents or the adoption of new constituent documents (the articles or certificate of incorporation, articles of trust, declaration of trust, certificate or agreement of limited partnership or other similar charter or governing document) of the Surviving Business Entity to be effected by such merger or consolidation; (f) The effective time of the merger, which may be the date of the filing of the certificate of merger pursuant to Section 16.4 or a later date specified in or determinable in accordance with the Merger Agreement (provided, that if the effective time of the merger is to be later than the date of the filing of the certificate of merger, it shall be fixed no later than the time of the filing of the certificate of merger and stated therein); and (g) Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or appropriate by the General Partner. 16.3 APPROVAL BY LIMITED PARTNERS OF MERGER OR CONSOLIDATION. (a) The General Partner of the Partnership, upon its approval of the Merger Agreement, shall direct that the Merger Agreement be submitted to a vote of Limited Partners whether at a meeting or by written consent, in either case in accordance with the requirements of Article XV. A copy or a summary of the Merger Agreement shall be included in or enclosed with the notice of a meeting or the written consent. (b) The Merger Agreement shall be approved upon receiving the affirmative vote or consent of at least a majority of the Outstanding Units unless the Merger Agreement contains any provision which, if contained in an amendment to this Agreement, the provisions of this Agreement or the Delaware Act would require the vote or consent of a greater percentage of the Outstanding Units or of any class of Limited Partners, in which case such greater percentage vote or consent shall be required for approval of the Merger Agreement. -73- 82 (c) After such approval by vote or consent of the Limited Partners, and at any time prior to the filing of the certificate of merger pursuant to Section 16.4, the merger or consolidation may be abandoned pursuant to provisions therefor, if any, set forth in the Merger Agreement. 16.4 CERTIFICATE OF MERGER. Upon the required approval by the General Partner and the Limited Partners of a Merger Agreement, a certificate of merger shall be executed and filed with the Secretary of State of the State of Delaware in conformity with the requirements of the Delaware Act. 16.5 EFFECT OF MERGER. (a) Upon the effective date of the certificate of merger: (i) all of the rights, privileges and powers of each of the business entities that has merged or consolidated, and all property, real, personal and mixed, and all debts due to any of those business entities and all other things and causes of action belonging to each of those business entities shall be vested in the Surviving Business Entity and after the merger or consolidation shall be the property of the Surviving Business Entity to the extent they were of each constituent business entity. (ii) the title to any real property vested by deed or otherwise in any of those constituent business entities shall not revert and is not in any way impaired because of the merger or consolidation; (iii) all rights of creditors and all liens on or security interest in property of any of those constituent business entities shall be preserved unimpaired; and (iv) all debts, liabilities and duties of those constituent business entities shall attach to the Surviving Business Entity, and may be enforced against it to the same extent as if the debts, liabilities and duties had been incurred or contracted by it. (b) A merger or consolidation effected pursuant to this Article shall not be deemed to result in a transfer or assignment of assets or liabilities from one entity to another having occurred. ARTICLE XVII RIGHT TO ACQUIRE UNITS 17.1 RIGHT TO ACQUIRE COMMON UNITS AND LISTED SHARES. (a) Notwithstanding any other provision of this Agreement, if at any time not more than 20% of the aggregate number of Listed Shares then outstanding plus the aggregate number of the Common Units then Outstanding are held by Persons other than the General Partner and its Affiliates, the General Partner shall then have the right, which right it may assign and transfer to the Partnership or any Affiliate of the General Partner, exercisable in its sole discretion, to purchase all, but not less than all, of the Common Units held by Persons other than the General Partner and its Affiliates, at the Optional Purchase Price, but only if KMI elects to purchase all, but not less than all, of the outstanding Listed Shares that are not held by KMI and its Affiliates pursuant to Section 4 of the Purchase Provisions. As used in this Agreement, "Optional Purchase Price" means a price that is equal to the greatest of (A) the Current Market Price for the Common Units as of the date five days prior to the date that the notice described in Section 17.1(b) is mailed, (B) the highest price -74- 83 paid by the General Partner or any of its Affiliates for a Common Unit purchased during the 90 calendar day period preceding the date that the notice described in Section 17.1(b) is mailed, (C) the Current Market Price for the Listed Shares as of the date five days prior to the date that the notice described in Section 17.1(b) is mailed, and (D) the highest price paid by the General Partner or any of its Affiliates for a Listed Share (other than pursuant to the Exchange Provisions) purchased during the 90 calendar day period preceding the date that the notice described in Section 17.1(b) is mailed. To the extent that the price paid for Listed Shares or Common Units in clauses (B) or (D) is paid in securities, the value of such securities shall be the Closing Price for such securities on the day the purchase of the Listed Shares or Common Units is effected. To the extent that the price paid for Listed Shares or Common Units in clauses (B) or (D) is paid other than in cash or securities, the value of such other consideration (and therefore the price paid for such Listed Shares or Common Units) shall be determined in good faith by the Board of Directors of the General Partner. As used in this Agreement, (i) "Current Market Price" as of any date of any class of Units or any other security means the average of the daily Closing Prices (as hereinafter defined) per Unit of such class or of such other security for the 20 consecutive Trading Days (as hereinafter defined) immediately prior to such date; (ii) "Closing Price" for a security on any day means (1) 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 composite transaction reporting system with respect to securities listed on the principal National Securities Exchange on which the Units of such class or such other securities are listed or admitted to trading, (2) or if the Units of such class or such other securities are not listed or admitted to trading on any National Securities Exchange on that day, the last quoted price on such day or, if no price is quoted, the average of the high bid and low asked prices on such day in the over-the-counter market, each as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or such other system then in use, or (3) if on any such day the Units of such class or such other securities 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 Units of such class or such other securities selected by the Board of Directors of the General Partner, or (4) if on any such day no market maker is making a market in the Units of such class or such other securities, the fair value of such Units or such other securities on such day as determined reasonably and in good faith by the Board of Directors of the General Partner; and (iii) "Trading Day" means a day on which the principal National Securities Exchange on which the Units of any class or such other securities are listed or admitted to trading is open for the transaction of business or, if Units of a class or such other securities 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. Notwithstanding anything herein to the contrary, the Current Market Price of each Class B Unit shall be deemed to be the same as the Current Market Price of one Common Unit. (b) If the General Partner, any Affiliate of the General Partner or the Partnership elects to exercise either the right to purchase Common Units granted pursuant to Section 17.1(a), the General Partner shall deliver to the Transfer Agent notice of such election to purchase (the "Notice of Election to Purchase") and shall cause the Transfer Agent to mail a copy of such Notice of Election to Purchase to the Record Holders of Units (as of a Record Date selected by the General Partner) at least 10, but not more than 60 days prior to the Purchase Date. Such Notice of Election to Purchase shall also be published in daily newspapers of general circulation printed in the English language and published in the Borough of Manhattan, New York. The Notice of Election to Purchase shall specify the Purchase Date and the price -75- 84 (determined in accordance with Section 17.1(a) at which Units will be purchased and state that the General Partner, its Affiliate or the Partnership, as the case may be, elects to purchase such Common Units, upon surrender of Certificates representing such Common Units in exchange for payment, at such office or offices of the Transfer Agent as the Transfer Agent may specify, or as may be required by any National Securities Exchange on which the Common Units are listed or admitted to trading. Any such Notice of Election to Purchase mailed to a Record Holder of Common Units at his address as reflected in the records of the Transfer Agent shall be conclusively presumed to have been given whether or not the owner receives such notice. On or prior to the Purchase Date, the General Partner, its Affiliate or the Partnership, as the case may be, shall deposit with the Transfer Agent cash in an amount sufficient to pay the aggregate purchase price of all the Common Units to be purchased in accordance with this Section 17.1. If the Notice of Election to Purchase shall have been duly given as aforesaid at least ten days prior to the Purchase Date, and if on or prior to the Purchase Date the deposit described in the preceding sentence has been made for the benefit of the holders of Common Units subject to purchase as provided herein, then from and after the Purchase Date, notwithstanding that any Certificate shall not have been surrendered for purchase, all rights of the holders of such Common Units (including, without limitation, any rights pursuant to Articles IV, V and XIV) shall thereupon cease, except the right to receive the purchase price (determined in accordance with Section 17.1(a)) for Common Units therefor, without interest, upon surrender to the Transfer Agent of the Certificates representing such Common Units, and such Common Units shall thereupon be deemed to be transferred to the General Partner, its Affiliate or the Partnership, as the case may be, on the record books of the Transfer Agent and the Partnership, and the General Partner or any Affiliate of the General Partner, or the Partnership, as the case may be, shall be deemed to be the owner of all such Units from and after the Purchase Date and shall have all rights as the owner of such Common Units (including, without limitation, all rights as owner of such Common Units pursuant to Articles IV, V and XIV). (c) At any time from and after the Purchase Date, a holder of an Outstanding Unit subject to purchase as provided in either this Section 17.1 may surrender his Certificate, as the case may be, evidencing such Unit to the Transfer Agent in exchange for payment of the amount described in Section 17.1(a), therefor, without interest thereon. ARTICLE XVIII GENERAL PROVISIONS 18.1 ADDRESSES AND NOTICES. Any notice, demand, request, report or proxy materials required or permitted to be given or made to a Partner or Assignee under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by first-class United States mail or by other means of written communication to the Partner or Assignee at the address described below. Any notice, payment or report to be given or made to a Partner or Assignee hereunder shall be deemed conclusively to have been given or made, and the obligation to give such notice or report or to make such payment shall be deemed conclusively to have been fully satisfied, upon sending of such notice, payment or report to the Record Holder of such Unit at his address as shown on the records of the Transfer Agent or as otherwise shown on the records of the Partnership, regardless of any claim of any Person who may have an interest in such Unit or the Partnership Interest of a General Partner by reason of any assignment or otherwise. An affidavit or certificate of making of any notice, payment or report in accordance with the provisions of this Section 18.1 executed by the General Partner, the Transfer Agent or the mailing organization shall be prima facie evidence of the giving or making of such notice, -76- 85 payment or report. If any notice, payment or report addressed to a Record Holder at the address of such Record Holder appearing on the books and records of the Transfer Agent or the Partnership is returned by the United States Post Office marked to indicate that the United States Postal Service is unable to deliver it, such notice, payment or report and any subsequent notices, payments and reports shall be deemed to have been duly given or made without further mailing (until such time as such Record Holder or another Person notifies the Transfer Agent or the Partnership of a change in his address) if they are available for the Partner or Assignee at the principal office of the Partnership for a period of one year from the date of the giving or making of such notice, payment or report to the other Partners and Assignees. Any notice to the Partnership shall be deemed given if received by the General Partner at the principal office of the Partnership designated pursuant to Section 1.3. The General Partner may rely and shall be protected in relying on any notice or other document from a Partner, Assignee or other Person if believed by it to be genuine. 18.2 REFERENCES. Except as specifically provided otherwise, references to "Articles" and "Sections" are to Articles and Sections of this Agreement. 18.3 PRONOUNS AND PLURALS. Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. 18.4 FURTHER ACTION. The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement. 18.5 BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns. 18.6 INTEGRATION. This Agreement constitutes the entire agreement among parties hereto pertaining to the subject matter hereof and supersedes all prior agreements and understandings pertaining thereto. 18.7 CREDITORS. None of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Partnership. 18.8 WAIVER. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition. 18.9 COUNTERPARTS. This Agreement may be executed in counterparts, all of which together shall constitute an agreement binding on all parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing its signature hereto or, in the case of a Person acquiring a Unit, upon accepting the certificate evidencing such Unit or executing and delivering a Transfer Application as herein described, independently of the signature of any other party. -77- 86 18.10 APPLICABLE LAW. This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of law. 18.11 INVALIDITY OF PROVISIONS. If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. -78- 87 IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be effective as of _____________, 2001. GENERAL PARTNER: KINDER MORGAN G.P., INC. By: ------------------------------- William V. Morgan Vice Chairman LIMITED PARTNERS: All Limited Partners now and hereafter admitted as limited partners of the Partnership, pursuant to Powers of Attorney now and hereafter executed in favor of, and granted and delivered to, the General Partner. By: Kinder Morgan G.P., Inc., General Partner, as attorney-in-fact for all Limited Partners pursuant to the Power of Attorney granted pursuant to Section 1.4. By: ------------------------------ William V. Morgan Vice Chairman -79- 88 EXHIBIT A TO THE THIRD AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF KINDER MORGAN ENERGY PARTNERS, L.P. CERTIFICATE EVIDENCING COMMON UNITS REPRESENTING LIMITED PARTNER INTERESTS IN KINDER MORGAN ENERGY PARTNERS, L.P. No.______ ________ Common Units KINDER MORGAN G.P., INC., a Delaware corporation, as the General Partner of KINDER MORGAN ENERGY PARTNERS, L.P., a Delaware limited partnership (the "Partnership"), hereby certifies that __________________________ (the "Holder") is the registered owner of _____ Common Units representing limited partner interests in the Partnership (the "Common Units") transferable on the books of the Partnership, in person or by duly authorized attorney, upon surrender of this Certificate properly endorsed and accompanied by a properly executed application for transfer of the Common Units represented by this Certificate. The rights, preferences and limitations of the Common Units are set forth in, and this Certificate and the Common Units represented hereby are issued and shall in all respects be subject to the terms and provisions of, the Third Amended and Restated Agreement of Limited Partnership of KINDER MORGAN ENERGY PARTNERS, L.P., as amended, supplemented or restated from time to time (the "Partnership Agreement"). Copies of the Partnership Agreement are on file at, and will be furnished without charge on delivery of written request to the Partnership at, the principal office of the Partnership located at 500 Dallas Street, Suite 1000, Houston, Texas 77002. Capitalized terms used herein but not defined shall have the meaning given them in the Partnership Agreement. The Holder, by accepting this Certificate, is deemed to have (i) requested admission as, and agreed to become, a Limited Partner or a Substituted Limited Partner, as applicable, and to have agreed to comply with and be bound by and to have executed the Partnership Agreement, (ii) represented and warranted that the Holder has all right, power and authority and, if an individual, the capacity necessary to enter into the Partnership Agreement, (iii) appointed the General Partner and, if a Liquidator shall be appointed, the Liquidator of the Partnership as the Holder's attorney to execute, swear to, acknowledge and file any document, including, without limitation, the Partnership Agreement and any amendment thereto and the Certificate of Limited Partnership of the Partnership and any amendment thereto, necessary or appropriate for the Holder's admission as a Limited Partner or a Substituted Limited Partner, as applicable, in the Partnership and as a party to the Partnership Agreement, (iv) given the powers of attorney provided for in the Partnership Agreement and (v) made the waivers and given the consents and approvals contained in the Partnership Agreement. Exhibit A Page 1 89 This Certificate shall not be valid for any purpose unless it has been countersigned and registered by the Transfer Agent and Registrar. Dated: ------------------------- KINDER MORGAN G.P., INC., as General Partner By: ------------------------------ Countersigned and Registered by: President , By: - ---------------------------------- ------------------------------ as Transfer Agent and Registrar Secretary By: ------------------------------- Authorized Signature Exhibit A Page 2 90 [REVERSE OF CERTIFICATE] ABBREVIATIONS The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as follows according to applicable laws or regulations: TEN COM-- as tenants in common UNIF GIFT MIN ACT-- TEN ENT-- as tenants by the entireties (Cust) (Minor) JT TEN-- as joint tenants with right of under Uniform Gifts to survivorship and not as Act...................... tenants in common (State) Additional abbreviations, though not in the above list, may also be used. ASSIGNMENT OF COMMON UNITS IN KINDER MORGAN ENERGY PARTNERS, L.P. IMPORTANT NOTICE REGARDING INVESTOR RESPONSIBILITIES DUE TO TAX SHELTER STATUS OF KINDER MORGAN ENERGY PARTNERS, L.P. You have acquired an interest in Kinder Morgan Energy Partners, L.P., 500 Dallas Street, Suite 1000, Houston, Texas 77002, whose taxpayer identification number is 76-0380342. The Internal Revenue Service has issued Kinder Morgan Energy Partners, L.P. the following tax shelter registration number: 9228900496. YOU MUST REPORT THIS REGISTRATION NUMBER TO THE INTERNAL REVENUE SERVICE IF YOU CLAIM ANY DEDUCTION, LOSS, CREDIT, OR OTHER TAX BENEFIT OR REPORT ANY INCOME BY REASON OF YOUR INVESTMENT IN KINDER MORGAN ENERGY PARTNERS, L.P. You must report the registration number as well as the name and taxpayer identification number of Kinder Morgan Energy Partners, L.P. on Form 8271. FORM 8271 MUST BE ATTACHED TO THE RETURN ON WHICH YOU CLAIM THE DEDUCTION, LOSS, CREDIT, OR OTHER TAX BENEFIT OR REPORT ANY INCOME BY REASON OF YOUR INVESTMENT IN KINDER MORGAN ENERGY PARTNERS, L.P. If you transfer your interest in Kinder Morgan Energy Partners, L.P. to another person, you are required by the Internal Revenue Service to keep a list containing (a) that person's name, address and taxpayer identification number, (b) the date on which you transferred the interest and (c) the name, address and tax shelter registration number of Kinder Morgan Energy Partners, L.P. If you do not want to keep such a list, you must (1) send the information specified above to the General Partner, who will keep the list for this tax shelter, and (2) give a copy of this notice to the person to whom you transfer your interest. Your failure to comply with any of the above-described responsibilities could result in the imposition of a penalty under Section 6707(b) or 6708(a) of the Internal Revenue Code of 1986, as amended, unless such failure is shown to be due to reasonable cause. ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS INVESTMENT OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED, OR APPROVED BY THE INTERNAL REVENUE SERVICE. Exhibit A Page 3 91 FOR VALUE RECEIVED,___________________________________ hereby assigns, conveys, sells and transfers unto ______________________________________________ - ---------------------------------- ------------------------------------- (Please print or typewrite name (Please insert Social Security or and address of Assignee) other identifying number of Assignee) _____________________________________________ Common Units representing limited partner interests evidenced by this Certificate, subject to the Partnership Agreement, and does hereby irrevocably constitute and appoint _______________________ as its attorney-in-fact with full power of substitution to transfer the same on the books of Kinder Morgan Energy Partners, L.P. Date: NOTE: The signature to any endorsement --------------------- hereon must correspond with the name as written upon the face of this Certificate in every particular, without alteration, enlargement or change. SIGNATURE(S) MUST BE GUARANTEED BY A MEMBER FIRM OF THE NATIONAL ------------------------------------------ ASSOCIATION OF SECURITIES DEALERS, (Signature) INC. OR BY A COMMERCIAL BANK OR TRUST COMPANY ------------------------------------------ (Signature) SIGNATURE(S) GUARANTEED No transfer of the Common Units evidenced hereby will be registered on the books of the Partnership, unless the Certificate evidencing the Common Units to be transferred is surrendered for registration or transfer and an Application for Transfer of Common Units has been executed by a transferee either (a) on the form set forth below or (b) on a separate application that the Partnership will furnish on request without charge. A transferor of the Common Units shall have no duty to the transferee with respect to execution of the transfer application in order for such transferee to obtain registration of the transfer of the Common Units. -------------------------------------------------------------- Exhibit A Page 4 92 APPLICATION FOR TRANSFER OF COMMON UNITS The undersigned ("Assignee") hereby applies for transfer to the name of the Assignee of the Common Units evidenced hereby. The Assignee (a) requests admission as a Substituted Limited Partner and agrees to comply with and be bound by, and hereby executes, the Third Amended and Restated Agreement of Limited Partnership of Kinder Morgan Energy Partners, L.P. (the "Partnership"), as amended, supplemented or restated to the date hereof (the "Partnership Agreement"), (b) represents and warrants that the Assignee has all right, power and authority and, if an individual, the capacity necessary to enter into the Partnership Agreement, (c) appoints the General Partner and, if a Liquidator shall be appointed, the Liquidator of the Partnership as the Assignee's attorney to execute, swear to, acknowledge and file any document, including, without limitation, the Partnership Agreement and any amendment thereto and the Certificate of Limited Partnership of the Partnership and any amendment thereto, necessary or appropriate for the Assignee's admission as a Substituted Limited Partner and as a party to the Partnership Agreement, (d) gives the powers of attorney provided for in the Partnership Agreement and (e) makes the waivers and gives the consents and approvals contained in the Partnership Agreement. Capitalized terms not defined herein have the meanings assigned to such terms in the Partnership Agreement. Date: ------------------------- ----------------------------------------------- Signature of Assignee - ------------------------------- ----------------------------------------------- Social Security or other Name and Address of Assignee identifying number of Assignee - ------------------------------- Purchase Price including commissions, if any Type of Entity (Check One): Individual Partnership Corporation --------------- -------------- -------------- Trust Other (specify) ---------------------- ------------------------- Nationality (Check One): U.S. Citizen, Resident or Domestic Entity - -------- Foreign Corporation, or Non-resident alien - -------- -------- If the U.S. Citizen, Resident or Domestic Entity box is checked, the following certification must be completed. Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the "Code"), the Partnership must withhold tax with respect to certain transfers of property if a holder of an interest in the Partnership is a foreign person. To inform the Partnership that no withholding is required with respect to the undersigned interest-holder's interest in it, the undersigned hereby certifies the following (or, if applicable, certifies the following on behalf of the interest-holder). Exhibit A Page 5 93 Complete either A or B: A. Individual Interest-Holder 1. I am not a non-resident alien for purposes of U.S. income taxation. 2. My U.S. taxpayer identifying number (Social Security Number) is _________________________________________. 3. My home address is _________________________________. B. Partnership, Corporate or Other Interest-Holder 1. ____________________________________ is not a foreign (Name of Interest-Holder) corporation, foreign partnership, foreign trust or foreign estate (as those terms are defined in the Code and Treasury Regulations). 2. The interest-holder's U.S. employer identification number is __________________________________________. 3. The interest-holder's office address and place of incorporation (if applicable) is ____________________________________________________. The interest-holder agrees to notify the Partnership within sixty (60) days of the date the interest-holder becomes a foreign person. The interest-holder understands that this certificate may be disclosed to the Internal Revenue Service by the Partnership and that any false statement contained herein could be punishable by fine, imprisonment or both. Under penalties of perjury, I declare that I have examined this certification and to the best of my knowledge and belief it is true, correct and complete and, if applicable, I further declare that I have authority to sign this document on behalf of - -------------------------------------------------------------------------------- (Name of Interest-Holder) - -------------------------------------------------------------------------------- Signature and Date - -------------------------------------------------------------------------------- Title (if applicable) Note: If the Assignee is a broker, dealer, bank, trust company, clearing corporation, other nominee holder or an agent of any of the foregoing, and is holding for the account of any other person, this application should be completed by an officer thereof or, in the case of a broker or dealer, by a registered representative who is a member of a registered national securities exchange or a member of the National Association of Securities Dealers Inc., or, in the case of any other nominee holder, a person performing a similar function. If the Assignee is a broker, dealer, bank, trust company, clearing corporation, other nominee owner or an agent of any of the foregoing, the above certification as to any Person for whom the Assignee will hold the Common Units shall be made to the best of the Assignee's knowledge. Exhibit A Page 6 94 EXHIBIT B TO THE THIRD AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF KINDER MORGAN ENERGY PARTNERS, L.P. CERTIFICATE EVIDENCING CLASS B UNITS REPRESENTING LIMITED PARTNER INTERESTS IN KINDER MORGAN ENERGY PARTNERS, L.P. No.______ ________ Class B Units KINDER MORGAN G.P., INC., a Delaware corporation, as the General Partner of KINDER MORGAN ENERGY PARTNERS, L.P., a Delaware limited partnership (the "Partnership"), hereby certifies that __________________________ (the "Holder") is the registered owner of _____ Class B Units representing limited partner interests in the Partnership (the "Class B Units") transferable on the books of the Partnership, in person or by duly authorized attorney, upon surrender of this Certificate properly endorsed and accompanied by a properly executed application for transfer of the Class B Units represented by this Certificate. The rights, preferences and limitations of the Class B Units are set forth in, and this Certificate and the Class B Units represented hereby are issued and shall in all respects be subject to the terms and provisions of, the Third Amended and Restated Agreement of Limited Partnership of KINDER MORGAN ENERGY PARTNERS, L.P., as amended, supplemented or restated from time to time (the "Partnership Agreement"). Copies of the Partnership Agreement are on file at, and will be furnished without charge on delivery of written request to the Partnership at, the principal office of the Partnership located at 500 Dallas Street, Suite 1000, Houston, Texas 77002. Capitalized terms used herein but not defined shall have the meaning given them in the Partnership Agreement. The Holder, by accepting this Certificate, is deemed to have (i) requested admission as, and agreed to become, a Limited Partner or a Substituted Limited Partner, as applicable, and to have agreed to comply with and be bound by and to have executed the Partnership Agreement, (ii) represented and warranted that the Holder has all right, power and authority and, if an individual, the capacity necessary to enter into the Partnership Agreement, (iii) appointed the General Partner and, if a Liquidator shall be appointed, the Liquidator of the Partnership as the Holder's attorney to execute, swear to, acknowledge and file any document, including, without limitation, the Partnership Agreement and any amendment thereto and the Certificate of Limited Partnership of the Partnership and any amendment thereto, necessary or appropriate for the Holder's admission as a Limited Partner or a Substituted Limited Partner, as applicable, in the Partnership and as a party to the Partnership Agreement, (iv) given the powers of attorney provided for in the Partnership Agreement and (v) made the waivers and given the consents and approvals contained in the Partnership Agreement. Exhibit B Page 1 95 This Certificate shall not be valid for any purpose unless it has been countersigned and registered by the Transfer Agent and Registrar. Dated: -------------------- KINDER MORGAN G.P., INC., as General Partner By: ----------------------------- Countersigned and Registered by: President , By: - ----------------------------------- ----------------------------- as Transfer Agent and Registrar Secretary By: -------------------------------- Authorized Signature Exhibit B Page 2 96 [REVERSE OF CERTIFICATE] ABBREVIATIONS The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as follows according to applicable laws or regulations: TEN COM-- as tenants in common UNIF GIFT MIN ACT-- TEN ENT-- as tenants by the entireties (Cust) (Minor) JT TEN-- as joint tenants with right of under Uniform Gifts to survivorship and not as Act...................... tenants in common (State) Additional abbreviations, though not in the above list, may also be used. ASSIGNMENT OF CLASS B UNITS IN KINDER MORGAN ENERGY PARTNERS, L.P. IMPORTANT NOTICE REGARDING INVESTOR RESPONSIBILITIES DUE TO TAX SHELTER STATUS OF KINDER MORGAN ENERGY PARTNERS, L.P. You have acquired an interest in Kinder Morgan Energy Partners, L.P., 500 Dallas Street, Suite 1000, Houston, Texas 77002, whose taxpayer identification number is 76-0380342. The Internal Revenue Service has issued Kinder Morgan Energy Partners, L.P. the following tax shelter registration number: 9228900496. YOU MUST REPORT THIS REGISTRATION NUMBER TO THE INTERNAL REVENUE SERVICE IF YOU CLAIM ANY DEDUCTION, LOSS, CREDIT, OR OTHER TAX BENEFIT OR REPORT ANY INCOME BY REASON OF YOUR INVESTMENT IN KINDER MORGAN ENERGY PARTNERS, L.P. You must report the registration number as well as the name and taxpayer identification number of Kinder Morgan Energy Partners, L.P. on Form 8271. FORM 8271 MUST BE ATTACHED TO THE RETURN ON WHICH YOU CLAIM THE DEDUCTION, LOSS, CREDIT, OR OTHER TAX BENEFIT OR REPORT ANY INCOME BY REASON OF YOUR INVESTMENT IN KINDER MORGAN ENERGY PARTNERS, L.P. If you transfer your interest in Kinder Morgan Energy Partners, L.P. to another person, you are required by the Internal Revenue Service to keep a list containing (a) that person's name, address and taxpayer identification number, (b) the date on which you transferred the interest and (c) the name, address and tax shelter registration number of Kinder Morgan Energy Partners, L.P. If you do not want to keep such a list, you must (1) send the information specified above to the General Partner, who will keep the list for this tax shelter, and (2) give a copy of this notice to the person to whom you transfer your interest. Your failure to comply with any of the above-described responsibilities could result in the imposition of a penalty under Section 6707(b) or 6708(a) of the Internal Revenue Code of 1986, as amended, unless such failure is shown to be due to reasonable cause. ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS INVESTMENT OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED, OR APPROVED BY THE INTERNAL REVENUE SERVICE. Exhibit B Page 3 97 FOR VALUE RECEIVED,_____________________________ hereby assigns, conveys, sells and transfers unto ______________________________________________ - ----------------------------------- ------------------------------------- (Please print or typewrite name (Please insert Social Security or and address of Assignee) other identifying number of Assignee) _____________________________________ Class B Units representing limited partner interests evidenced by this Certificate, subject to the Partnership Agreement, and does hereby irrevocably constitute and appoint _____________________ as its attorney-in-fact with full power of substitution to transfer the same on the books of Kinder Morgan Energy Partners, L.P. Date: NOTE: The signature to any endorsement --------------------- hereon must correspond with the name as written upon the face of this Certificate in every particular, without alteration, enlargement or change. SIGNATURE(S) MUST BE GUARANTEED BY A MEMBER FIRM OF THE NATIONAL ---------------------------------------- ASSOCIATION OF SECURITIES DEALERS, (Signature) INC. OR BY A COMMERCIAL BANK OR TRUST COMPANY ---------------------------------------- (Signature) SIGNATURE(S) GUARANTEED No transfer of the Class B Units evidenced hereby will be registered on the books of the Partnership, unless the Certificate evidencing the Class B Units to be transferred is surrendered for registration or transfer and an Application for Transfer of Class B Units has been executed by a transferee either (a) on the form set forth below or (b) on a separate application that the Partnership will furnish on request without charge. A transferor of the Class B Units shall have no duty to the transferee with respect to execution of the transfer application in order for such transferee to obtain registration of the transfer of the Class B Units. -------------------------------------------------------------- Exhibit B Page 4 98 APPLICATION FOR TRANSFER OF CLASS B UNITS The undersigned ("Assignee") hereby applies for transfer to the name of the Assignee of the Class B Units evidenced hereby. The Assignee (a) requests admission as a Substituted Limited Partner and agrees to comply with and be bound by, and hereby executes, the Third Amended and Restated Agreement of Limited Partnership of Kinder Morgan Energy Partners, L.P. (the "Partnership"), as amended, supplemented or restated to the date hereof (the "Partnership Agreement"), (b) represents and warrants that the Assignee has all right, power and authority and, if an individual, the capacity necessary to enter into the Partnership Agreement, (c) appoints the General Partner and, if a Liquidator shall be appointed, the Liquidator of the Partnership as the Assignee's attorney to execute, swear to, acknowledge and file any document, including, without limitation, the Partnership Agreement and any amendment thereto and the Certificate of Limited Partnership of the Partnership and any amendment thereto, necessary or appropriate for the Assignee's admission as a Substituted Limited Partner and as a party to the Partnership Agreement, (d) gives the powers of attorney provided for in the Partnership Agreement and (e) makes the waivers and gives the consents and approvals contained in the Partnership Agreement. Capitalized terms not defined herein have the meanings assigned to such terms in the Partnership Agreement. Date: ------------------------- ----------------------------------------------- Signature of Assignee - ------------------------------- ----------------------------------------------- Social Security or other Name and Address of Assignee identifying number of Assignee - ------------------------------- Purchase Price including commissions, if any Type of Entity (Check One): Individual Partnership Corporation --------------- -------------- -------------- Trust Other (specify) ---------------------- ------------------------- Nationality (Check One): U.S. Citizen, Resident or Domestic Entity - -------- Foreign Corporation, or Non-resident alien - -------- -------- If the U.S. Citizen, Resident or Domestic Entity box is checked, the following certification must be completed. Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the "Code"), the Partnership must withhold tax with respect to certain transfers of property if a holder of an interest in the Partnership is a foreign person. To inform the Partnership that no withholding is required with respect to the undersigned interest-holder's interest in it, the undersigned hereby certifies the following (or, if applicable, certifies the following on behalf of the interest-holder). Exhibit B Page 5 99 Complete either A or B: A. Individual Interest-Holder 1. I am not a non-resident alien for purposes of U.S. income taxation. 2. My U.S. taxpayer identifying number (Social Security Number) is _________________________________________. 3. My home address is _________________________________. B. Partnership, Corporate or Other Interest-Holder 1. ____________________________________ is not a foreign (Name of Interest-Holder) corporation, foreign partnership, foreign trust or foreign estate (as those terms are defined in the Code and Treasury Regulations). 2. The interest-holder's U.S. employer identification number is __________________________________________. 3. The interest-holder's office address and place of incorporation (if applicable) is ____________________________________________________. The interest-holder agrees to notify the Partnership within sixty (60) days of the date the interest-holder becomes a foreign person. The interest-holder understands that this certificate may be disclosed to the Internal Revenue Service by the Partnership and that any false statement contained herein could be punishable by fine, imprisonment or both. Under penalties of perjury, I declare that I have examined this certification and to the best of my knowledge and belief it is true, correct and complete and, if applicable, I further declare that I have authority to sign this document on behalf of - -------------------------------------------------------------------------------- (Name of Interest-Holder) - -------------------------------------------------------------------------------- Signature and Date - -------------------------------------------------------------------------------- Title (if applicable) Note: If the Assignee is a broker, dealer, bank, trust company, clearing corporation, other nominee holder or an agent of any of the foregoing, and is holding for the account of any other person, this application should be completed by an officer thereof or, in the case of a broker or dealer, by a registered representative who is a member of a registered national securities exchange or a member of the National Association of Securities Dealers Inc., or, in the case of any other nominee holder, a person performing a similar function. If the Assignee is a broker, dealer, bank, trust company, clearing corporation, other nominee owner or an agent of any of the foregoing, the above certification as to any Person for whom the Assignee will hold the Class B Units shall be made to the best of the Assignee's knowledge. Exhibit B Page 6 100 EXHIBIT C TO THE THIRD AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF KINDER MORGAN ENERGY PARTNERS, L.P. CERTIFICATE EVIDENCING I-UNITS REPRESENTING LIMITED PARTNER INTERESTS IN KINDER MORGAN ENERGY PARTNERS, L.P. No.______ ________ I-Units KINDER MORGAN G.P., INC., a Delaware corporation, as the General Partner of KINDER MORGAN ENERGY PARTNERS, L.P., a Delaware limited partnership (the "Partnership"), hereby certifies that __________________________ (the "Holder") is the registered owner of _____ I-Units representing limited partner interests in the Partnership (the "I-Units") transferable on the books of the Partnership, in person or by duly authorized attorney, upon surrender of this Certificate properly endorsed and accompanied by a properly executed application for transfer of the I-Units represented by this Certificate. The rights, preferences and limitations of the I-Units are set forth in, and this Certificate and the I-Units represented hereby are issued and shall in all respects be subject to the terms and provisions of, the Third Amended and Restated Agreement of Limited Partnership of KINDER MORGAN ENERGY PARTNERS, L.P., as amended, supplemented or restated from time to time (the "Partnership Agreement"). Copies of the Partnership Agreement are on file at, and will be furnished without charge on delivery of written request to the Partnership at, the principal office of the Partnership located at 500 Dallas Street, Suite 1000, Houston, Texas 77002. Capitalized terms used herein but not defined shall have the meaning given them in the Partnership Agreement. The Holder, by accepting this Certificate, is deemed to have (i) requested admission as, and agreed to become, a Limited Partner or a Substituted Limited Partner, as applicable, and to have agreed to comply with and be bound by and to have executed the Partnership Agreement, (ii) represented and warranted that the Holder has all right, power and authority and, if an individual, the capacity necessary to enter into the Partnership Agreement, (iii) appointed the General Partner and, if a Liquidator shall be appointed, the Liquidator of the Partnership as the Holder's attorney to execute, swear to, acknowledge and file any document, including, without limitation, the Partnership Agreement and any amendment thereto and the Certificate of Limited Partnership of the Partnership and any amendment thereto, necessary or appropriate for the Holder's admission as a Limited Partner or a Substituted Limited Partner, as applicable, in the Partnership and as a party to the Partnership Agreement, (iv) given the powers of attorney provided for in the Partnership Agreement and (v) made the waivers and given the consents and approvals contained in the Partnership Agreement. Exhibit C Page 1 101 This Certificate shall not be valid for any purpose unless it has been countersigned and registered by the Transfer Agent and Registrar. Dated: --------------------- KINDER MORGAN G.P., INC., as General Partner By: ----------------------------- Countersigned and Registered by: President , By: - ----------------------------------- ----------------------------- as Transfer Agent and Registrar Secretary By: -------------------------------- Authorized Signature Exhibit C Page 2 102 [REVERSE OF CERTIFICATE] ABBREVIATIONS The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as follows according to applicable laws or regulations: TEN COM-- as tenants in common UNIF GIFT MIN ACT-- TEN ENT-- as tenants by the entireties (Cust) (Minor) JT TEN-- as joint tenants with right of under Uniform Gifts to survivorship and not as Act...................... tenants in common (State) Additional abbreviations, though not in the above list, may also be used. ASSIGNMENT OF I-UNITS IN KINDER MORGAN ENERGY PARTNERS, L.P. IMPORTANT NOTICE REGARDING INVESTOR RESPONSIBILITIES DUE TO TAX SHELTER STATUS OF KINDER MORGAN ENERGY PARTNERS, L.P. You have acquired an interest in Kinder Morgan Energy Partners, L.P., 500 Dallas Street, Suite 1000, Houston, Texas 77002, whose taxpayer identification number is 76-0380342. The Internal Revenue Service has issued Kinder Morgan Energy Partners, L.P. the following tax shelter registration number: 9228900496. YOU MUST REPORT THIS REGISTRATION NUMBER TO THE INTERNAL REVENUE SERVICE IF YOU CLAIM ANY DEDUCTION, LOSS, CREDIT, OR OTHER TAX BENEFIT OR REPORT ANY INCOME BY REASON OF YOUR INVESTMENT IN KINDER MORGAN ENERGY PARTNERS, L.P. You must report the registration number as well as the name and taxpayer identification number of Kinder Morgan Energy Partners, L.P. on Form 8271. FORM 8271 MUST BE ATTACHED TO THE RETURN ON WHICH YOU CLAIM THE DEDUCTION, LOSS, CREDIT, OR OTHER TAX BENEFIT OR REPORT ANY INCOME BY REASON OF YOUR INVESTMENT IN KINDER MORGAN ENERGY PARTNERS, L.P. If you transfer your interest in Kinder Morgan Energy Partners, L.P. to another person, you are required by the Internal Revenue Service to keep a list containing (a) that person's name, address and taxpayer identification number, (b) the date on which you transferred the interest and (c) the name, address and tax shelter registration number of Kinder Morgan Energy Partners, L.P. If you do not want to keep such a list, you must (1) send the information specified above to the General Partner, who will keep the list for this tax shelter, and (2) give a copy of this notice to the person to whom you transfer your interest. Your failure to comply with any of the above-described responsibilities could result in the imposition of a penalty under Section 6707(b) or 6708(a) of the Internal Revenue Code of 1986, as amended, unless such failure is shown to be due to reasonable cause. ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS INVESTMENT OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED, OR APPROVED BY THE INTERNAL REVENUE SERVICE. Exhibit C Page 3 103 FOR VALUE RECEIVED,_____________________________ hereby assigns, conveys, sells and transfers unto ______________________________________________ - ---------------------------------- ------------------------------------- (Please print or typewrite name (Please insert Social Security or and address of Assignee) other identifying number of Assignee) _________________________________________ I-Units representing limited partner interests evidenced by this Certificate, subject to the Partnership Agreement, and does hereby irrevocably constitute and appoint _______________________ as its attorney-in-fact with full power of substitution to transfer the same on the books of Kinder Morgan Energy Partners, L.P. Date: NOTE: The signature to any endorsement --------------------- hereon must correspond with the name as written upon the face of this Certificate in every particular, without alteration, enlargement or change. SIGNATURE(S) MUST BE GUARANTEED BY A MEMBER FIRM OF THE NATIONAL ------------------------------------------- ASSOCIATION OF SECURITIES DEALERS, (Signature) INC. OR BY A COMMERCIAL BANK OR TRUST COMPANY ------------------------------------------- (Signature) SIGNATURE(S) GUARANTEED No transfer of the I-Units evidenced hereby will be registered on the books of the Partnership, unless the Certificate evidencing the I-Units to be transferred is surrendered for registration or transfer and an Application for Transfer of I-Units has been executed by a transferee either (a) on the form set forth below or (b) on a separate application that the Partnership will furnish on request without charge. A transferor of the I-Units shall have no duty to the transferee with respect to execution of the transfer application in order for such transferee to obtain registration of the transfer of the I-Units. -------------------------------------------------------------- Exhibit C Page 4 104 APPLICATION FOR TRANSFER OF I-UNITS The undersigned ("Assignee") hereby applies for transfer to the name of the Assignee of the I-Units evidenced hereby. The Assignee (a) requests admission as a Substituted Limited Partner and agrees to comply with and be bound by, and hereby executes, the Third Amended and Restated Agreement of Limited Partnership of Kinder Morgan Energy Partners, L.P. (the "Partnership"), as amended, supplemented or restated to the date hereof (the "Partnership Agreement"), (b) represents and warrants that the Assignee has all right, power and authority and, if an individual, the capacity necessary to enter into the Partnership Agreement, (c) appoints the General Partner and, if a Liquidator shall be appointed, the Liquidator of the Partnership as the Assignee's attorney to execute, swear to, acknowledge and file any document, including, without limitation, the Partnership Agreement and any amendment thereto and the Certificate of Limited Partnership of the Partnership and any amendment thereto, necessary or appropriate for the Assignee's admission as a Substituted Limited Partner and as a party to the Partnership Agreement, (d) gives the powers of attorney provided for in the Partnership Agreement and (e) makes the waivers and gives the consents and approvals contained in the Partnership Agreement. Capitalized terms not defined herein have the meanings assigned to such terms in the Partnership Agreement. Date: ------------------------- ----------------------------------------------- Signature of Assignee - ------------------------------- ----------------------------------------------- Social Security or other Name and Address of Assignee identifying number of Assignee - ------------------------------- Purchase Price including commissions, if any Type of Entity (Check One): Individual Partnership Corporation --------------- -------------- -------------- Trust Other (specify) ---------------------- ------------------------- Nationality (Check One): U.S. Citizen, Resident or Domestic Entity - -------- Foreign Corporation, or Non-resident alien - -------- -------- If the U.S. Citizen, Resident or Domestic Entity box is checked, the following certification must be completed. Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the "Code"), the Partnership must withhold tax with respect to certain transfers of property if a holder of an interest in the Partnership is a foreign person. To inform the Partnership that no withholding is required with respect to the undersigned interest-holder's interest in it, the undersigned hereby certifies the following (or, if applicable, certifies the following on behalf of the interest-holder). Exhibit C Page 5 105 Complete either A or B: A. Individual Interest-Holder 1. I am not a non-resident alien for purposes of U.S. income taxation. 2. My U.S. taxpayer identifying number (Social Security Number) is _________________________________________. 3. My home address is _________________________________. B. Partnership, Corporate or Other Interest-Holder 1. ____________________________________ is not a foreign (Name of Interest-Holder) corporation, foreign partnership, foreign trust or foreign estate (as those terms are defined in the Code and Treasury Regulations). 2. The interest-holder's U.S. employer identification number is __________________________________________. 3. The interest-holder's office address and place of incorporation (if applicable) is ____________________________________________________. The interest-holder agrees to notify the Partnership within sixty (60) days of the date the interest-holder becomes a foreign person. The interest-holder understands that this certificate may be disclosed to the Internal Revenue Service by the Partnership and that any false statement contained herein could be punishable by fine, imprisonment or both. Under penalties of perjury, I declare that I have examined this certification and to the best of my knowledge and belief it is true, correct and complete and, if applicable, I further declare that I have authority to sign this document on behalf of - -------------------------------------------------------------------------------- (Name of Interest-Holder) - -------------------------------------------------------------------------------- Signature and Date - -------------------------------------------------------------------------------- Title (if applicable) Note: If the Assignee is a broker, dealer, bank, trust company, clearing corporation, other nominee holder or an agent of any of the foregoing, and is holding for the account of any other person, this application should be completed by an officer thereof or, in the case of a broker or dealer, by a registered representative who is a member of a registered national securities exchange or a member of the National Association of Securities Dealers Inc., or, in the case of any other nominee holder, a person performing a similar function. If the Assignee is a broker, dealer, bank, trust company, clearing corporation, other nominee owner or an agent of any of the foregoing, the above certification as to any Person for whom the Assignee will hold the I-Units shall be made to the best of the Assignee's knowledge. Exhibit C Page 6 EX-5 6 h84143a2ex5.txt OPINION OF BRACEWELL & PATTERSON LLP 1 EXHIBIT 5 Bracewell & Patterson, L.L.P. 711 Louisiana, Suite 2900 Houston, Texas 77002 April 26, 2001 Kinder Morgan Management, LLC Kinder Morgan Energy Partners, L.P. Kinder Morgan, Inc. One Allen Center, Suite 1000 500 Dallas Street Houston, Texas 77002 Ladies and Gentlemen: We have acted as counsel to (i) Kinder Morgan Management, LLC, a Delaware limited liability company (the "Company"), in connection with the proposed offering by the Company of 9,000,000 shares (10,350,000 shares if the over-allotment option granted to the underwriters is exercised in full) of the Company representing limited liability company interests with limited voting rights (the "Shares," which term shall include such additional shares representing limited liability company interests with limited voting rights as may be offered pursuant to Rule 462 under the Securities Act of 1933, as amended), (ii) Kinder Morgan Energy Partners, L.P., a Delaware limited partnership (the "Partnership"), in connection with the proposed sale by the Partnership of limited partnership interests denominated as i-units (the "i-units," which term shall include such additional limited partnership interests denominated as i-units as may be offered pursuant to Rule 462 under the Securities Act of 1933, as amended) to the Company for a portion of the net proceeds of the offering of the Shares, and (iii) Kinder Morgan, Inc., a Kansas corporation ("KMI"), in connection with the proposed (a) obligation of KMI (the "Exchange Feature") to deliver common units of the Partnership (the "Common Units") in exchange for Shares as specified in the Exchange Provisions (the "Exchange Provisions") to be attached as Annex A to the Amended and Restated Limited Liability Company Agreement of the Company (the "Amended LLC Agreement") to be dated as of the date of the closing of the offering of the Shares (the "Closing"), and (b) obligation of KMI to purchase Shares (the "Purchase Obligation") in certain circumstances as specified in the Purchase Provisions (the "Purchase Provisions") to be attached as Annex B to the Amended LLC Agreement to be dated as of the Closing. A Registration Statement (as amended by Amendment No. 1 and Amendment No. 2 thereto, the "Registration Statement") has been filed with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended, (1) by the Company on Form S-1 (Registration No. 333-55868) relating to the Shares, (2) by the Partnership on Form S-3 2 Kinder Morgan Management, LLC Kinder Morgan Energy Partners, L.P. Kinder Morgan, Inc. April 26, 2001 Page 2 (Registration No. 333-55866) with respect to the i-units to be sold by the Partnership to the Company and the Common Units deliverable by KMI in exchange for the Shares pursuant to the Exchange Feature, and (3) by KMI on Form S-3 (Registration No. 333-55866) with respect to the Exchange Feature and the Purchase Obligation. We have examined, among other things, originals or copies of: o the Certificate of Formation of the Company; o the limited liability company agreement of the Company, as amended to date, and the proceedings taken to date by the Company with respect to the authorization, issuance and sale of the Shares; o the Certificate of Limited Partnership of the Partnership; o the Second Amended and Restated Agreement of the Partnership dated January 14, 1998, and Amendment No. 1 and Amendment No. 2 to the Second Amended and Restated Agreement of Limited Partnership of the Partnership, dated January 20, 2000 and December 21, 2000, respectively, and the corporate proceedings taken to date by the Board of Directors of Kinder Morgan G.P., Inc. ("KMGP"), the general partner of the Partnership, with respect to the authorization, issuance and sale of the Common Units and the i-units; o the restated Articles of Incorporation and Bylaws of KMI, each as amended to date, and the corporate proceedings taken to date by KMI with respect to the authorization of the Exchange Provisions and the Purchase Provisions; and o such other documents and records as we have deemed necessary and relevant for the purposes hereof. We have also examined the Registration Statement and the forms of the following documents attached as exhibits thereto, each of which is proposed to be executed and delivered at the Closing: o the Amended LLC Agreement; 3 Kinder Morgan Management, LLC Kinder Morgan Energy Partners, L.P. Kinder Morgan, Inc. April 26, 2001 Page 3 o the Exchange Provisions; o the Purchase Provisions; and o the Third Amended and Restated Agreement of Limited Partnership of the Partnership (the "Amended Partnership Agreement"). We have also examined the form of Underwriting Agreement attached as an exhibit to the Registration Statement (the "Underwriting Agreement"), to be executed among the Company, the Partnership, KMGP, KMI and the Underwriters to be named therein. In addition, we have relied on certificates of officers of the Company, KMGP and KMI and of public officials and others as to certain matters of fact relating to this opinion and have made such investigations of law as we have deemed necessary and relevant as a basis hereof. In such examination, we have assumed the genuineness of all signatures, the authenticity of all documents and records submitted to us as originals, the conformity to authentic original documents and records of all documents and records submitted to us as copies, the due execution and delivery of all documents by the parties thereto and the truthfulness of all statements of fact contained therein. We have also assumed that the Amended LLC Agreement, the Exchange Provisions, the Purchase Provisions, the Amended Partnership Agreement and the Underwriting Agreement will be executed and delivered in substantially the forms attached as exhibits to the Registration Statement, with only such changes therein as would not be material to the opinions expressed herein. Based on the foregoing, subject to the limitations, assumptions and qualifications set forth herein, and having due regard for such legal considerations as we deem relevant, we are of the opinion that: 1. The Company is a limited liability company, validly existing and in good standing under the laws of the State of Delaware. 2. The Partnership is a limited partnership, validly existing and in good standing under the laws of the State of Delaware. 3. KMI is a corporation, validly existing and in good standing under the laws of the State of Kansas. 4 Kinder Morgan Management, LLC Kinder Morgan Energy Partners, L.P. Kinder Morgan, Inc. April 26, 2001 Page 4 4. The issuance of the Shares to be issued by the Company pursuant to the offering has been duly authorized by the Company, and upon (i) issuance and delivery of the Shares in accordance with the terms of the Underwriting Agreement, (ii) receipt by the Company of the purchase price therefor, (iii) due execution and delivery of the Amended LLC Agreement by KMGP, and (iv) execution, adoption, and delivery of the Exchange Provisions and the Purchase Provisions by KMI, such Shares will be legally issued, fully paid and nonassessable except as such nonassessibility may be affected by Section 18-607 of the Delaware LLC Act (as defined below). Section 18-607 provides that an owner of a membership interest in a limited liability company (such as a Share) who receives a distribution of cash or property and knew, at the time of distribution of the cash or property, that it was made in violation of such Section shall be liable to the limited liability company for the amount of such distribution if an action to recover such distribution is commenced prior to the expiration of three years from the date of such distribution. 5. The issuance of the i-units to be issued by the Partnership to the Company in connection with the offering of the Shares has been duly authorized by KMGP on behalf of the Partnership, and upon (i) issuance and delivery of the i-units as set forth in the Registration Statement, (ii) receipt by the Partnership of the purchase price therefor, and (iii) due execution and delivery of the Amended Partnership Agreement, such i-units will be legally issued, fully paid and nonasssessable except as such nonassessibility may be affected by the matters below: (a) If a court were to determine that the right or exercise of the right under the Amended Partnership Agreement by the Company as the holder of all of the i-units of the Partnership, whether acting alone or with other classes of limited partnership units, (1) to remove or replace the general partner of the Partnership, or (2) to approve amendments to the Amended Partnership Agreement, or to take other actions under the Amended Partnership Agreement 5 Kinder Morgan Management, LLC Kinder Morgan Energy Partners, L.P. Kinder Morgan, Inc. April 26, 2001 Page 5 that constitutes "participation in the control" of the Partnership's business within the meaning of Section 17-303 of the Delaware Limited Partnership Act (as defined below), then the Company could be held personally liable for the Partnership's obligations to the same extent as the general partner, KMGP, with respect to persons who transact business with the Partnership reasonably believing, based on the conduct of the Company, that the Company is a general partner. (b) If a court were to determine that the Company's management and control of the Partnership pursuant to the Delegation of Control Agreement among the Company, the Partnership and KMGP constitutes "participation in the control" of the Partnership's business by a limited partner within the meaning of Section 17-303 of the Delaware Limited Partnership Act, then the Company could be held personally liable for the Partnership's obligations to the same extent as the general partner, KMGP, with respect to persons who transact business with the Partnership reasonably believing, based on the conduct of the Company, that the Company is a general partner. (c) Section 17-607 of the Delaware Limited Partnership Act provides that a limited partner who receives a distribution of cash or property and knew at the time of the distribution of cash or property that it was made in violation of such Section shall be liable to the limited partnership for three years for the amount of such distribution. 6. The Common Units outstanding on the date hereof that may be delivered in exchange for Shares pursuant to the Exchange Provisions have been duly authorized by the Partnership and are legally issued, fully paid and nonasssessable, except as such nonassessibility may be affected by the matters below: (a) If a court were to determine that the right or exercise of the right under the Amended Partnership Agreement by one or more holders of Common Units, Class B Units or i-units (collectively the "Limited Partners"), whether acting alone or as a member of a class, 6 Kinder Morgan Management, LLC Kinder Morgan Energy Partners, L.P. Kinder Morgan, Inc. April 26, 2001 Page 6 (1) to remove or replace the general partner; or (2) to approve amendments to the Amended Partnership Agreement, or to take other actions under the Amended Partnership Agreement that constitutes "participation in the control" of the Partnership's business by a limited partner within the meaning of Section 17-303 of the Delaware Limited Partnership Act, then such Limited Partner(s) could be held personally liable for the Partnership's obligations to the same extent as the general partner, KMGP, with respect to persons who transact business with the Partnership reasonably believing, based on the conduct of such Limited Partner(s), that such Limited Partner(s) is (are) a general partner(s). (b) Section 17-607 of the Delaware Limited Partnership Act provides that a limited partner who receives a distribution of cash or property and knew, at the time of the distribution of cash or property, that it was made in violation of such Section shall be liable to the limited partnership for three years for the amount of such distribution. 7. The Exchange Provisions have been duly authorized by KMI, and when the Exchange Provisions and the Amended LLC Agreement are duly executed, adopted and delivered as provided therein, the owners of Shares will be entitled to the benefits thereof. 8. The Purchase Provisions have been duly authorized by KMI, and when the Purchase Provisions and the Amended LLC Agreement are duly executed, adopted and delivered as provided therein, the owners of Shares will be entitled to the benefits thereof. The foregoing opinion is based on and limited to the General Corporation Code of the State of Kansas, the General Corporation Law of the State of Delaware, the Delaware Limited Liability Company Act (the "Delaware LLC Act"), the Delaware Revised Uniform Limited Partnership Act (the "Delaware Limited Partnership Act") and the relevant law of the United States of America, and we render no opinion with respect to the law of any other jurisdiction. 7 Kinder Morgan Management, LLC Kinder Morgan Energy Partners, L.P. Kinder Morgan, Inc. April 26, 2001 Page 7 We hereby consent to the filing of this opinion with the Commission as Exhibit 5 to the Registration Statement and to the references to our firm under the heading "Legal Matters" in the Prospectus included in the Registration Statement. By giving such consent, we do not admit that we are experts with respect to any part of the Registration Statement, including this Exhibit, within the meaning of the term "expert" as used in the Securities Act of 1933, as amended, or the rules and regulations thereunder. Very truly yours, /s/ Bracewell & Patterson, L.L.P. Bracewell & Patterson, L.L.P. EX-8 7 h84143a2ex8.txt OPINION OF BRACEWELL & PATTERSON LLP 1 EXHIBIT 8 BRACEWELL & PATTERSON, L.L.P. 711 LOUISIANA STREET, SUITE 2900 HOUSTON, TEXAS 77002-2781 April __, 2001 Kinder Morgan Management, LLC Kinder Morgan Energy Partners, L.P. Kinder Morgan, Inc. One Allen Center, Suite 1000 500 Dallas Street Houston, Texas 77002 Ladies and Gentlemen: We have acted as counsel to (i) Kinder Morgan Management, LLC, a Delaware limited liability company (the "Company"), in connection with the proposed offering by the Company of 9,000,000 shares (10,350,000 shares if the over-allotment option granted to the underwriters is exercised in full) of the Company representing limited liability company interests with limited voting rights (the "Shares"), (ii) Kinder Morgan Energy Partners, L.P., a Delaware limited partnership (the "Partnership"), in connection with the proposed sale by the Partnership of limited partnership interests denominated as i-units (the "i-units") to the Company for a portion of the net proceeds of the offering of the Shares, and (iii) Kinder Morgan, Inc., a Kansas corporation ("KMI"), in connection with the proposed (a) obligation of KMI (the "Exchange Feature") to deliver common units of the Partnership (the "Common Units") in exchange for Shares as specified in the Exchange Provisions to be attached as Annex A to the Amended and Restated Limited Liability Company Agreement of the Company (the "Amended LLC Agreement") to be dated as of the date of the closing of the offering of the Shares (the "Closing"), and (b) the obligation of KMI to purchase Shares (the "Purchase Obligation") in certain circumstances as specified in the Purchase Provisions to be attached as Annex B to the Amended LLC Agreement to be dated as of the Closing. A Registration Statement (as amended by Amendment No. 1 and Amendment No. 2 thereto, the "Registration Statement") has been filed with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended, (1) by the Company on Form S-1 (Registration No. 333-55868) relating to the Shares, (2) by the Partnership on Form S-3 (Registration No. 333-55866) with respect to the i-units to be sold by the Partnership to the Company and the Common Units deliverable by KMI in exchange for the Shares pursuant to the Exchange Feature, and (3) by KMI on Form S-3 (Registration No. 333-55866) with respect to the Exchange Feature and the Purchase Obligation. We have examined originals or copies of the Registration Statement and such other documents and 2 Kinder Morgan Management, LLC Kinder Morgan Energy Partners, L.P. Kinder Morgan, Inc. April __, 2001 Page 2 records as we have deemed necessary and relevant for the purposes hereof. In addition, we have relied on certificates of officers of Kinder Morgan G.P., Inc., the general partner of the Partnership, and of public officials and others as to certain matters of fact relating to this opinion and have made such investigations of law as we have deemed necessary and relevant as a basis hereof. In such examination, we have assumed the genuineness of all signatures, the authenticity of all documents and records submitted to us as copies, the conformity to authentic original documents and records of all documents and records submitted to us as copies, and the truthfulness of all statements of fact contained therein. All statements of legal conclusions in the Registration Statement under the caption "Income Tax Considerations Relating to the Shares and the Common Units," unless otherwise noted, constitute our opinion with respect to the matters set forth therein as of the effective date of the Registration Statement. We hereby consent to the filing of this opinion with the Commission as Exhibit 8 to the Registration Statement and to the references to our firm under the heading "Income Tax Considerations Relating to the Shares and the Common Units" in the Prospectus included in the Registration Statement. By giving such consent, we do not admit that we are experts with respect to any part of the Registration Statement, including this Exhibit, within the meaning of the term "expert" as used in the Securities Act of 1933, as amended, or the rules and regulations thereunder. Very truly yours, /s/ Bracewell & Patterson, L.L.P. Bracewell & Patterson, L.L.P. EX-10.1 8 h84143a2ex10-1.txt FORM OF TAX INDEMNITY AGREEMENT 1 EXHIBIT 10.1 TAX INDEMNIFICATION AGREEMENT This TAX INDEMNIFICATION AGREEMENT (the "Agreement") dated as of _________, 2001 between Kinder Morgan, Inc., a Kansas corporation ("KMI") and Kinder Morgan Management, LLC, a Delaware limited liability company ("Management"). PREAMBLE WHEREAS, Management was formed pursuant to the Limited Liability Company Agreement of Kinder Morgan Management, LLC, dated as of February 14, 2001 which was amended by the Amended and Restated Limited Liability Company Agreement of Kinder Morgan Management, LLC (the "Management LLC Agreement"). WHEREAS, Management issued two classes of limited liability company interests consisting of the "Listed Shares" and the "Voting Shares," the rights and obligations of which are more specifically described in the Management LLC Agreement. WHEREAS, Kinder Morgan Energy Partners, L.P., a Delaware limited partnership ("KMEP"), pursuant to the Third Amended and Restated Agreement of Limited Partnership of KMEP (the "KMEP Partnership Agreement"), authorized the issuance of the new class of partnership interest hereinafter referred to as the "I-Unit." WHEREAS, Management issued the Voting Shares to KMGP (as defined herein) in exchange for $100,000. WHEREAS, Management issued and sold the Listed Shares to the public. WHEREAS, Management applied the net proceeds of issuance and sale of the Listed Shares to the public to acquire I-Units from KMEP in exchange for $_______ million. In addition, Management purchased the Exchange Rights (as defined herein), the Purchase Rights (as defined herein) and its rights under this Agreement from KMI for $________ million. WHEREAS, KMI has agreed to indemnify Management for certain tax consequences attributable to the Indemnifiable Events described below. ACCORDINGLY, in consideration of the mutual covenants herein contained and other good and valuable consideration, the parties hereto do hereby agree as follows: AGREEMENT 1. Definitions. For purposes of this Agreement, the following terms shall have the following meanings. Any reference to any person shall include such person and its permitted successors and assigns. Except where expressly stated otherwise, any agreement referred to in this Agreement shall mean such agreement as amended, supplemented or modified from time to time in accordance with the applicable provisions thereof. Capitalized terms not otherwise defined herein have the meaning assigned them in the Management LLC Agreement. 2 "After-Tax Basis" means in respect of any amount received or accrued by any Person (or in the case of a payee which is a pass-through or disregarded entity for the relevant Tax purposes, the Persons who are required to take into account any items of income, gain, loss or deduction with respect to such entity) (the "base amount"), the base amount supplemented by a further payment, if necessary, to such Person such that, after reduction for all Taxes actually imposed on such Person as a result of the receipt or accrual of the base amount and such further payment (after giving effect to all deductions and credits, if any, actually utilized by such Person arising from the event or circumstance giving rise to the base amount), the net amount received by such Person shall be equal to the base amount. "Business Day" means Monday through Friday of each week, except that a legal holiday recognized as such by the government of the United States or the states of New York or Texas shall not be regarded as a Business Day. "Change in Law" means the occurrence after the date hereof of (i) the enactment of, or amendment to, any provision of the Code, Treasury Regulations thereunder or any administrative pronouncement, (ii) the enactment of, or amendment to, any provision of the Tax law of any state (or political subdivision thereof) in which Management is subject to Tax, or (iii) the issuance of a Final Determination of the United States Supreme Court or the United States Court of Appeals for the federal judicial circuit to which appeal would lie from a case concerning Indemnifiable Events relating to Management; provided, that (x) a change in the rate of any Tax shall not be treated as a Change in Law, and (y) an administrative pronouncement shall be treated as a Change in Law only if Management provides KMI a written opinion of independent, nationally-recognized tax counsel selected by Management (such counsel and form of opinion to be reasonably satisfactory to KMI) to the effect that such counsel is unable to conclude that a Reasonable Basis exists to take a position contrary to such administrative pronouncement. "Code" means the Internal Revenue Code of 1986, as amended and in effect from time to time. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of successor law. "Common Unit" has the meaning set forth in the KMEP Partnership Agreement. "Exchange Rights" means the various rights of holders of the Listed Shares to exchange Listed Shares for Common Units of KMEP owned by KMI or cash, the terms and provisions of which are more specifically set forth in Annex A of the Management LLC Agreement. "Final Determination," in respect of KMI, KMEP or Management means: (i) any judicial decisions, a decision, judgment, decree or other order by any court of competent jurisdiction, which decision, judgment, decree or other order has become final after all appeals allowable by law as of right and hereunder by either party to the action have been exhausted or the time for filing such appeals has expired; (ii) a closing agreement entered into under section 7121 of the Code or any other settlement agreement entered into with the applicable taxing authority in connection with an administrative or judicial proceeding (including a state or local proceeding); (iii) the expiration of the time for instituting a suit with respect to a claimed deficiency; or (iv) -2- 3 the expiration of the time for instituting a claim for refund, or if such a claim were filed, the expiration of the time for instituting a suit with respect thereto. "I-Unit" is defined in the preamble to this Agreement. The terms and provisions of the I-Units are more specifically set forth in the KMEP Partnership Agreement. "Indemnifiable Event" means either (i) an increase, as a result of a Change in Law, an audit by the applicable taxing authority or any action taken by KMI or KMGP that is inconsistent with the Tax Assumptions, in the sum of Taxes imposed on, payable by, or withheld from payments to Management, over the sum of Taxes, if any, Management would have paid or incurred in such year or shorter tax period with respect thereto based on the Tax Assumptions, computed in each case as provided in Section 4, (ii) any insufficiency or inadequacy of cash to pay Taxes as contemplated by the definition of "Tax Assumptions" (which insufficiency or inadequacy shall be treated as additional Tax for purposes of Section 3(a)(1)), or (iii) any of the situations described in the last sentence of Section 3(a)(3). "Indemnity Amount" has the meaning set forth in Section 3(a)(1). "Interest Rate" means the applicable federal rate (within the meaning of section 1274(d) of the Code). "IRS" means the United States Internal Revenue Service. "KMGP" means Kinder Morgan G.P., Inc., a Delaware corporation, the sole general partner of KMEP and the owner of the Voting Shares. "KMI" is defined in the introduction to this Agreement. "Listed Shares" means the ownership interests in Management issued to the public for cash, the rights and obligations of which are more specifically described in the Management LLC Agreement. "Management" is defined in the introduction to this Agreement. "Management LLC Agreement" is defined in the preamble to this Agreement. "Non-Taxable" means in respect of any transaction, event or circumstance, not causing or giving rise to the realization or recognition of any taxable income or other basis for the imposition of Tax. "Purchase Rights" means the rights and obligations associated with the optional and mandatory purchase of Listed Shares by KMI, the terms and provisions of which are more specifically set forth in Annex B of the Management LLC Agreement. "Realized Tax Savings" shall have the meaning set forth in Section 3(a)(3). -3- 4 "Reasonable Basis" for a position exists if tax counsel may properly advise reporting such position on a Tax return in accordance with Formal Opinion 85-352 of the American Bar Association or any successor thereto. "Revenue Agent's Report" means a report sent to a taxpayer under cover of a transmittal (30 day) letter relating to proposed adjustments in such taxpayer's United States federal income tax liability referred to in Treasury Regulation Section 601.105(c)(2)(i). "Tax" or "Taxes" means any and all present or future taxes, duties, levies, imposts, deductions or withholdings (including, without limitation, income, franchise, gross receipts, sales, rental, use, turnover, value added, property (tangible and intangible), excise and stamp taxes) of any nature whatsoever, together with any and all assessments, penalties, fines, additions and interest relating thereto. "Tax Assumptions" means the following assumptions with respect to the basis of taxation of Management and its capability to pay Taxes to which it may be subject relative to the cash which it has available to pay such Taxes: (1) The formation and capitalization of Management and all transactions related or incidental thereto (including, without limitation, this Agreement), its issuance of Listed Shares and Voting Shares and its acquisition of I-Units in KMEP will be Non-Taxable to Management. (2) Management's receipt of the Exchange Rights and Purchase Rights from KMI will be Non-Taxable to Management. (3) Management's transfer of the Exchange Rights and Purchase Rights to the holders of Listed Shares will be Non-Taxable to Management. (4) Management is treated as a corporation for United States federal, state and local income Tax purposes. (5) Each Listed Share and Voting Share is treated as an ownership interest in Management, and each owner of a Listed Share or a Voting Share is treated as a shareholder of Management, for United States federal, state and local income Tax purposes. (6) KMEP is treated as a partnership for United States federal, state and local income Tax purposes. (7) Management, by virtue of its ownership of I-Units in KMEP, is treated as a partner in KMEP for United States federal, state and local income Tax purposes. (8) The allocation of KMEP Tax Items, as set forth in the KMEP Partnership Agreement, is respected for United States federal, state and local income Tax purposes. -4- 5 (9) Distributions of additional I-Units to Management by KMEP made pursuant to the KMEP Partnership Agreement are Non-Taxable to Management. (10) Distributions of additional Listed Shares and Voting Shares by Management to holders of Listed Shares and Voting Shares, made pursuant to the Management LLC Agreement, are Non-Taxable to Management. (11) To the extent that Management engages in the management and control of KMEP and receives reimbursement from KMEP or KMGP in respect of its services and other expenses incurred by Management, such reimbursement will, after the payment by Management of any fees or expenses incurred by Management in respect of the management and control of KMEP, be adequate to pay all Taxes, if any, payable by Management by virtue of either (i) its management and control of KMEP, or (ii) the receipt of such reimbursement from KMEP or KMGP. (12) The only assets owned by Management, other than cash, are I-Units in KMEP. (13) If there is a sale, exchange, redemption or other disposition of I-Units owned by Management or a complete or partial liquidation of KMEP resulting in distributions in respect of the I-Units held by Management, the cash received by Management will be sufficient to satisfy any Tax payable by Management as a result of such sale, exchange, redemption, liquidation or other disposition. "Tax Items" means items of income, gain, loss, deduction and credit for income Tax purposes. "KMEP Partnership Agreement" is defined in the preamble to this Agreement. "Treasury Regulations" means temporary or final United States Treasury regulations. "Voting Shares" means the ownership interest in Management held by KMGP, the rights and obligations of which are more specifically set forth in the Management LLC Agreement. 2. Tax Representations. Management represents, warrants and covenants to KMI, and KMI represents, warrants and covenants to Management that, for all United States federal, state and local income Tax purposes: (a) It will treat Management as a corporation. (b) It will treat the owners of Listed Shares and Voting Shares as shareholders of Management. (c) It will treat the distributions by Management of additional Listed Shares and Voting Shares to holders of Listed Shares and Voting Shares made pursuant to the Management LLC Agreement as Non-Taxable. -5- 6 (d) It will treat KMEP as a partnership and will treat Management as a partner of KMEP with respect to its ownership of I-Units. (e) It will respect the allocation of Tax Items made with respect to the I-Units owned by Management as provided in the KMEP Partnership Agreement. (f) It will prepare and file all Tax elections, Tax returns and information returns on a basis consistent with the treatment described in (a) through (e) and will not take any contrary position on any Tax return or information return or take any other action that is inconsistent with such treatment. Notwithstanding anything to the contrary herein, neither KMI nor Management shall be obligated to take a position subsequent to (i) a Final Determination to the contrary or (ii) the receipt of a written opinion of independent, nationally-recognized tax counsel selected by Management (such counsel and form of opinion to be reasonably satisfactory to KMI) to the effect that, due solely to a Change in Law, such counsel is unable to conclude that a Reasonable Basis exists to take such position. 3. Indemnification and Reimbursements. (a) Indemnity Obligation; Reimbursement for Realized Tax Savings. (1) In General. Upon the occurrence of an Indemnifiable Event, KMI shall become obligated, in accordance with the terms of this Agreement, to pay as an indemnity such amounts as, on an After-Tax Basis, shall be equal to the amount of the additional Taxes incurred by Management as a result of such Indemnifiable Event (the "Indemnity Amount"). In addition, the Indemnity Amount shall be increased, on an After-Tax Basis, by the amount of all reasonable out-of-pocket expenses incurred by Management that would not otherwise have been incurred by Management, and that have not otherwise been previously paid by KMI to Management as result of: (i) any Indemnifiable Event or (ii) any determination by Management of the existence or amount of any Realized Tax Savings. (2) Increase for Interest. The Indemnity Amount shall be increased by an amount equal to interest accrued at the Interest Rate on the amount of indemnified Taxes that have actually been paid to the IRS or other applicable taxing authority by Management from the assumed date of payment of such Taxes (as provided in Section 4(b)), provided that (x) a payment of Taxes in respect of which KMI has advanced funds to Management pursuant to Section 5(d) shall not accrue interest and (y) such interest shall cease to accrue if the payment date of the Indemnity Amount is delayed as a result of the failure of Management to provide notice and computations to KMI within a reasonable time pursuant to Section 3(b). (3) Reimbursement for Realized Tax Savings. To the extent that any Indemnity Amount is paid pursuant to this Section 3 in respect of an Indemnifiable Event, Management shall reimburse KMI for any Tax savings (i) which are realized and which Management would not have realized but for such Indemnifiable Event and (ii) which are actually received or recognized by Management in the form of cash or a cash savings at a time when such cash or cash savings is not otherwise required by Management to pay its legal -6- 7 obligations, including, without limitation, its Taxes, and excluding the obligation created by this Section 3(a)(3) ("Realized Tax Savings") Management shall pay any Realized Tax Savings within fifteen (15) days of the earlier of (i) Management determining that such Realized Tax Savings exist or (ii) any final determination, pursuant to Section 6, that any such Realized Tax Savings exist and are available for payment pursuant to this Section 3(a)(3). Notwithstanding the foregoing, Management shall not be required to make any payment pursuant to this Section 3(a)(3) to the extent that the amount of such payment would exceed (i) the amount of all prior payments by KMI to Management pursuant to Section 3(a)(1) with respect to the Indemnifiable Event which gave rise to the Realized Tax Savings, less (ii) the amount of all prior payments by Management pursuant to this Section 3(a)(3) with respect to such Indemnifiable Event. If for any reason any Realized Tax Savings paid to KMI pursuant to this Section 3(a)(3) or taken into account in computing the amount of any indemnity payable hereunder pursuant to Section 3(a)(1) shall, as a result of a Final Determination or otherwise, be unavailable, such unavailability shall be treated as an Indemnifiable Event subject to indemnification by KMI pursuant to Section 3(a)(1), above. (b) Date for Payment. The amount payable by KMI pursuant to Section 3(a) shall be paid upon the occurrence of the latest of: (1) subject to Section 6 and the next sentence, 15 Business Days after the receipt by KMI of a notice from Management accompanied by its computations in accordance with Section 6; (2) if any such indemnity payment relates to an Indemnifiable Event that is contested pursuant to Section 5, 15 Business Days after the date of a Final Determination with respect to such Indemnifiable Event; and (3) in the case of, and to the extent such amount payable by KMI pursuant to Section 3(a) relates to, the redemption or other disposition of the KMEP I-Units, and subject to Section 6 and the next sentence, 15 Business Days after the redemption or other disposition of the KMEP I-Unit. The date required for payment pursuant to the preceding sentence shall be delayed until 15 Business Days after delivery to KMI of any verification requested pursuant to Section 6. 4. Computational Assumptions. (a) In General. For purposes of (i) computing the amount of Taxes payable as a result of an Indemnifiable Event and (ii) the definition of "After-Tax Basis," Management shall be assumed to be subject to United States federal income Tax at the maximum effective statutory rate generally applicable to corporations for the relevant period or periods, and to the extent Management is subject to state and local income Taxes it shall be assumed to be subject to state and local income taxes at the composite rate equal to the highest generally applicable composite rate for corporations whose principal place of business is such state or local jurisdiction before taking into account the deductibility of such Taxes in computing taxable income for United States federal income Tax purposes. -7- 8 (b) Due Date for Taxes; Date of Realized Tax Savings. Taxes will be assumed to be payable on the later of (i) the due date, without extensions, of the Tax return on which such Taxes are reported or (ii) the date on which such Taxes are actually paid to the IRS or other applicable taxing authority. Realized Tax Savings pursuant to Section 3(a)(3) will be assumed to be realized on the date when the cash or cash savings from such Realized Tax Savings is realized by Management and is not otherwise required by Management to pay its legal obligations. 5. Contests; Records. (a) Notice of Claim. If Management receives written notice (including in the form of a proposed Revenue Agent's Report) of any action by the IRS or other taxing authority that, if successful, would result in an Indemnifiable Event for which KMI may be required to indemnify Management hereunder, Management hereby agrees promptly to notify KMI in writing of such claim (but a failure to do so will not diminish KMI's obligations under this Agreement); provided, however, that if KMGP receives any such notice as the tax matters partner of KMEP, KMI shall be deemed to have received notice under this Section 5(a). (b) Agreement to Contest. Except as set forth in Section 5(d) and provided the conditions set forth in Section 5(c) are satisfied, Management agrees to contest (or join in contesting) in good faith such claim or proposed action and agrees not to settle such claim without the written approval of KMI. The conduct of the contest shall be controlled by Management (or such other person as Management shall have designated, subject to KMI's right of involvement set forth in this Section 5). (c) Conditions to Indemnified Party's Obligation to Contest and Not Settle. (1) Prior to taking any action to contest the claim described in Section 5(a), and again prior to any appeal of an adverse judicial decision, KMI shall have delivered to Management a written opinion of independent, nationally-recognized tax counsel selected by KMI (such counsel and form of opinion to be reasonably satisfactory to Management) to the effect that there is a Reasonable Basis for contesting such action or proposed action by the IRS or other taxing authority; (2) KMI shall have agreed to pay, on an After-Tax Basis as verified under Section 6 hereof, and shall be currently paying for Management, all reasonable out-of-pocket expenses (including reasonable attorneys fees of legal counsel reasonably selected by Management) that Management shall incur in connection with contesting such action or proposed action; and (3) the amount of the indemnity that would be payable hereunder (which shall include prospective exposure in future tax years attributable to the position being challenged) shall exceed U.S. $5,000. (d) Refund Claims. If Management shall determine in its reasonable discretion to pay the Tax claimed and sue for a refund, KMI must either, at its option and to the extent necessary for the contest to proceed, (i) promptly advance to Management on an interest-free basis sufficient funds to pay the Tax payable with respect thereto or (ii) pay to Management the -8- 9 amount payable pursuant to Section 3 (but without regard to the time of payment in Section 3(b)) with respect to such claim. (e) Supreme Court Appeals. Notwithstanding any other provision of this Section 5, no appeal to the Supreme Court of the United States shall be required in contesting a Tax claim or proposed action hereunder. (f) Time at Which Obligations Operative. In any circumstance where judicial review shall be unavailable, KMI's right to cause a contest hereunder, and Management's obligation to contest hereunder, shall become operative at the earliest time such a contest may, pursuant to law, be initiated, provided that KMI has then satisfied all of the necessary preconditions to the exercise of its contest rights. (g) Deferral of Indemnification. If KMI shall have requested Management to contest such claim as above provided and shall have duly complied and remains in compliance with all the terms of this Section 5, KMI's liability for indemnification shall be deferred (as provided in Section 3) until a Final Determination of the liability of Management. At such time, KMI shall become obligated for the payment of any indemnification hereunder resulting from the outcome of such contest, and, to the extent funds were advanced by KMI pursuant to Section 5(d) hereof, Management shall become obligated to refund to KMI any amount received as a refund by Management or credited to Management and fairly attributable to advances by KMI, net of any Taxes attributable to the receipt of such refund or credit. Within 15 Business Days following such Final Determination, any amounts due hereunder shall be paid first by set off against each other and then either: (1) KMI shall pay to Management any excess of the full amount due hereunder over the amount of any advances previously made by KMI and applied against its indemnity obligation as aforesaid; or (2) Management shall repay to KMI any excess of such advances, net of any Taxes attributable to Management's receipt of such refund or credit, over such full amount due hereunder, together with any interest received from the IRS or other taxing authority by Management that is properly attributable to such advances during the period such advances were outstanding and that is in excess of the amount of any Taxes attributable to Management's receipt or accrual of such interest. (h) Records and Participation. (1) Indemnified Party. Management shall provide KMI with all documents and information related to the contest as may be reasonably requested by KMI, shall keep KMI fully informed, shall afford KMI the opportunity to attend and participate in any meetings or negotiations with the IRS or other taxing authority regarding such contest and will consult in good faith with (and consider in good faith suggestions by) KMI and its counsel regarding relevant aspects of the progress and nature of any such contest, provided that nothing in this Agreement shall require Management to provide KMI with its Tax returns or other -9- 10 proprietary information relating to the identity of Management's shareholders, owners, members or lenders. (2) KMI. Within a reasonable time under the circumstances after reasonable written request therefor from Management, KMI shall provide such information and copies of records as are within its control to enable Management to fulfill its Tax return filing, audit and litigation obligations in connection with the transactions contemplated by the Management LLC Agreement, provided that nothing in this Agreement shall require KMI to provide Management with its Tax returns. 6. Verification. The results of all computations to be made with respect to Management under this Agreement, together with a statement describing in reasonable detail the manner in which such computations were made, shall be delivered to KMI in writing. Preparation and delivery of such computations shall be pursued diligently, in a timely manner and in good faith, and notice of an Indemnifiable Event and delivery of such computations to KMI shall be made within a reasonable time under the circumstances. If KMI so requests within ten (10) Business Days after receipt of such computations, any determination shall be reviewed by the independent accounting firm who regularly audits Management, who shall be asked to verify, after consulting with KMI and Management, whether Management's computations are correct, and to report its conclusions (within 20 Business Days upon being requested to verify and determine the correct computation) to both KMI and Management. KMI also may request that such accounting firm review Management's Tax returns for any year to determine if Management is required to make any payment pursuant to Section 3(a)(3). Management and KMI hereby agree to provide such accountants with all information and materials as shall be reasonably necessary or desirable in connection herewith. Any information provided to such accountants by any person shall be and remain the exclusive property of such person and shall be deemed by the parties to be (and the accountants shall confirm in writing that they shall treat such information as) the private, proprietary and confidential property of such person, and no person other than such person and the accountants shall be entitled thereto, and all such materials shall be returned to such person. The reasonable fees and expenses of the accountants in verifying an amount pursuant to this Agreement shall be paid by KMI; provided, that Management and not KMI shall be required to pay such fees if the computations provided by Management were not prepared in good faith. The parties hereto agree that the sole responsibility of the accountants hereunder shall be to verify calculations hereunder and that all matters of interpretation of this Agreement shall not be within the scope of the accountant's responsibilities. 7. Late Payments. Except as otherwise provided in this Agreement, any amount payable to Management or KMI under this Agreement not paid when due shall bear interest from the date due to the date paid at the Interest Rate. 8. No Duplication of Payments. Nothing contained in this Agreement shall be construed to permit Management to receive payment with respect to an Indemnifiable Event hereunder more than once, to permit Management to receive payment with respect to an Indemnifiable Event in duplication of any payment with respect to such Indemnifiable Event previously received by any transferor of Management's interest, to permit any third-party beneficiary hereof -10- 11 to recover any amount hereunder or to require Management to pay any Realized Tax Savings arising out of any Indemnifiable Event more than once. 9. Notices. All notices and other communications shall be given in the manner, to the respective addresses, and shall become effective as provided in the Management LLC Agreement except to the extent otherwise expressly provided herein, except that notices or communications shall be directed to KMI at: Kinder Morgan, Inc. 500 Dallas Street, suite 1000 Houston, Texas 77002 Attn: Joseph Listengart 713/369-9000 10. Assignment. The obligations and liabilities of KMI and Management arising under this Agreement are expressly made for the benefit of, and shall be enforceable by, Management and KMI and their respective successors and permitted assigns. Any assignment by KMI of any of its obligations or liabilities hereunder will not relieve KMI of any such obligations or liabilities without the consent of Management. 11. Survival. The obligations, rights and liabilities of KMI and Management hereunder shall continue in full force and effect (notwithstanding the cancellation, sale, exchange, redemption or other disposition of Listed Shares, or the dissolution, liquidation or termination of Management, KMEP or KMI) until the 180th day following the expiration of the relevant statute of limitations for all relevant taxable years (taking into account all extensions thereof). 12. Method of Payment. All payments to be made to a party pursuant to this Agreement shall be made in United States Dollars by wire transfer to such bank account of such party as such party from time to time shall have directed in writing at least five (5) Business Days prior to the due date thereof. 13. Governing Law. THIS TAX INDEMNIFICATION AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF DELAWARE, APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE AND WITHOUT REGARD TO ANY CONFLICT OF LAW PROVISIONS. 14. Counterparts. This Agreement may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, and such counterparts together shall constitute and be one and the same instrument. 15. Miscellaneous. (a) Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render -11- 12 unenforceable such provision in any other jurisdiction, unless the provisions declared prohibited as unenforceable are essential to effectuate the intent of the parties with respect to the Agreement taken as a whole. To the extent permitted by applicable Law, each of the parties hereto hereby agrees that any provision hereof that renders any other term or provision hereof invalid or unenforceable in any respect shall be modified, but only to the extent necessary to avoid rendering such other term or provision invalid or unenforceable, and such modification shall be accomplished in a manner that most nearly preserves the benefit of the parties' bargains hereunder. (b) Amendments. Neither this Agreement nor any of the terms hereof may be terminated, amended, supplemented, waived or modified orally, but only by an instrument in writing signed by the party against which the enforcement of the termination, amendment, supplement, waiver or modification is sought. (c) Headings. The section and paragraph headings in this Agreement are for convenience of reference only and shall not modify, define, expand or limit any of the terms or provisions hereof. (d) No Intended Third Party Beneficiaries. There are no intended third party beneficiaries of this Agreement. [The remainder of this page has been left intentionally blank] -12- 13 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. KINDER MORGAN, INC. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- KINDER MORGAN MANAGEMENT, LLC By: Kinder Morgan G.P., Inc., its Voting Shares member By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- KINDER MORGAN ENERGY PARTNERS, L.P. By: Kinder Morgan G.P., Inc., its general partner By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- [SIGNATURE PAGE TO TAX INDEMNIFICATION AGREEMENT] -13- EX-10.2 9 h84143a2ex10-2.txt FORM OF DELEGATION OF CONTROL AGREEMENT 1 EXHIBIT 10.2 DELEGATION OF CONTROL AGREEMENT AMONG KINDER MORGAN G.P., INC. KINDER MORGAN MANAGEMENT, LLC 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" AND KINDER MORGAN CO2 COMPANY, L.P. This Delegation of Control Agreement (the "AGREEMENT") dated _____________________, 2001 (the "EFFECTIVE DATE"), is among Kinder Morgan G.P., Inc., a Delaware corporation (the "GENERAL PARTNER"), Kinder Morgan Management, LLC, a Delaware limited liability company ("MANAGEMENT"), Kinder Morgan Energy Partners, L.P., a Delaware limited partnership (the "MASTER PARTNERSHIP"), Kinder Morgan Operating L.P. "A", a Delaware limited partnership ("OLP "A""), Kinder Morgan Operating L.P. "B", a Delaware limited partnership ("OLP "B""), Kinder Morgan L.P. "C", a Delaware limited partnership ("OLP "C""), Kinder Morgan L.P. "D", a Delaware limited partnership ("OLP "D""), Kinder Morgan CO2 Company, L.P., a Texas limited partnership ("CO2" and together with OLP "A," OLP "B," OLP "C," and OLP "D," the "OPERATING PARTNERSHIPS," and, together with the Master Partnership, the "PARTNERSHIPS"). The General Partner is the sole general partner of the Partnerships. Capitalized terms used but not defined in this Agreement shall have the meanings given to them in the Master Partnership's Third Amended and Restated Agreement of Limited Partnership (the "MASTER PARTNERSHIP AGREEMENT"). References herein to the Master Partnership Agreement or any limited partnership agreement of an Operating Partnership (an "OPERATING PARTNERSHIP AGREEMENT") in a context that contemplates a future time shall mean the Master Partnership Agreement or an Operating Partnership Agreement (collectively, the "PARTNERSHIP AGREEMENTS") as amended or restated at the applicable time. Management is an "INDEMNITEE" and an "AFFILIATE" of the Partnerships and the General Partner, as each of those terms is defined in Article II of the Master Partnership Agreement and in each of the Operating Partnership Agreements. RECITALS: The Partnerships and the General Partner wish to delegate to Management all the General Partner's power and authority to manage and control the business and affairs of the Partnerships to the fullest extent permitted under the Partnership Agreements and Delaware law, subject to the terms and conditions of this Agreement, and Management wishes to accept such delegation. 2 Section 6.6(c) of the Master Partnership Agreement and Section __ of each of the Operating Partnership Agreements permit the General Partner to enter into an agreement with Management to render services to the Partnerships and the General Partner in the discharge of the General Partner's duties as general partner to the Partnerships. Concurrently with the execution of this Agreement, Management is issuing and selling in an initial public offering (the "OFFERING") its shares representing limited liability company interests in Management (the "LISTED SHARES"), and the Master Partnership is issuing to Management its i-units representing limited partner interests in the Master Partnership. Each of the Partnerships wishes to confirm hereby its agreement with the terms of this Agreement relating to the management and control of the Partnership's and the Operating Partnerships' business and affairs and certain other agreements for the benefit of the General Partner, Management, their Affiliates and certain Indemnitees and Indemnified Parties. NOW, THEREFORE, the parties hereto agree as follows: 1. Delegation and Related Matters. 1.1. Delegation by General Partner to Management. The General Partner hereby irrevocably delegates to Management, to the fullest extent permitted under the Partnership Agreements and Delaware law, all of the General Partner's power and authority to manage and control the business and affairs of the Partnerships (the "MAXIMUM PERMITTED DELEGATION"), subject to termination only in accordance with Section 9 hereof; and all provisions in this Agreement are qualified to the extent required in order for all such provisions to be consistent, now and in the future, with the Maximum Permitted Delegation. The power and authority of the General Partner are set forth in the Partnership Agreements (in particular, in Section 6.1 of each of the Partnership Agreements) and are provided by Delaware law. If the General Partner's power and authority as general partner of any Partnership(s) are modified pursuant to a subsequent amendment or restatement of any of the Partnership Agreements or changes in Delaware law, then the power and authority delegated to Management with respect to such Partnership(s) shall be modified on the same basis. Notwithstanding the foregoing, the General Partner is not hereby withdrawing from the Partnerships as a general partner or otherwise; and the General Partner is retaining all of its Partnership Interests, its Percentage Interests and its rights to profits, losses and distributions from the Partnerships, and none of these are hereby being assigned or transferred by the General Partner to Management. 1.2. Continued Responsibility of General Partner. Notwithstanding the General Partner's making the Maximum Permitted Delegation to Management, the General Partner shall remain responsible to the Partnerships for actions taken or omitted by Management within the scope of such delegation as if the General Partner had itself 2 3 taken or omitted to take any such actions. The General Partner's responsibility to each of the Partnerships is not expanded or limited by this Agreement and shall be in effect to the same extent and on the same terms and conditions as specified in the applicable Partnership Agreement or under Delaware law. Pursuant to Section 6.8(b) of each of the Partnership Agreements, in each case as amended as of the Effective Date, the General Partner is responsible for the misconduct or negligence of Management in performing the Maximum Permitted Delegation but is not responsible for any misconduct or negligence of other agents appointed by the General Partner in good faith. The General Partner shall be entitled to monitor Management's performance under this Agreement. The General Partner shall have the right and power to direct Management to take, or to cease from taking, any action that would constitute a breach of any Partnership Agreement. The General Partner shall have access to the books, records and documents of the Partnerships and Management and to their officers, directors and employees to monitor Management's performance under this Agreement. 1.3. Acceptance of Delegation by Management. Management hereby accepts the Maximum Permitted Delegation and agrees to perform the Maximum Permitted Delegation according to the standards specified in Section 2 hereto. 1.4. Approval by General Partner. Without expanding or limiting the definition of Maximum Permitted Delegation, the taking by Management of the actions specified in Schedule 1.4 hereto shall be subject to the approval of the General Partner. 1.5. Use of Affiliates by Management. The Partnerships and the General Partner agree that Management may perform the Maximum Permitted Delegation either directly or through one or more Affiliates. If Management performs through any Affiliate, (i) Management shall remain fully responsible for actions taken or omitted by the Affiliate and (ii) for purposes of Sections 1, 2, 3, 4, 5, 6, 7 and 8 hereof, Management and all such Affiliates shall be taken together and treated as Management. 2. Standards of Performance. In performing the Maximum Permitted Delegation, Management shall be responsible to the Partnerships and the General Partner to the same extent and according to the same standards as would have been applicable to the General Partner in favor of the Partnerships had the General Partner continued to exercise the delegated power and authority directly. Among other provisions of the Partnership Agreements that are applicable to the duties and standards of performance assumed by Management, but without limiting the generality of other provisions in this Agreement, the following Sections of each of the Partnership Agreements, in each case as amended, shall be applicable to Management's performance of the Maximum Permitted Delegation: Sections 6.8, 6.9 and 6.10. 3. Conflicts of Interest. All potential and actual conflicts of interest that exist or arise between the General Partner, Management and each of their Affiliates, on the one hand, and the Partnerships, any subsidiary of the Partnerships, any Partner or any Assignee, on the other hand, shall be subject to Section 6.9 of each of the Partnership Agreements, in each case as amended as of the Effective Date. Among other possible courses of action under these Sections that are available to resolve conflicts of interest, the General Partner and Management have 3 4 reserved the right granted under these Sections to seek Special Approval of the General Partner's Conflicts and Audit Committee with respect to any such conflict. 4. Reliance on Counsel, etc. Pursuant to Section 6.10 of each of the Partnership Agreements, in each case as amended, Management shall have the benefit of all of the provisions of these Sections to the same extent as the General Partner. 5. Reliance by Third Parties. Pursuant to Section 6.14 of the Master Partnership Agreement and Section 6.12 of each of the Operating Partnership Agreements, in each case as amended, third parties dealing with the Partnerships shall be entitled to assume that Management has the full power and authority of the General Partner in acting for the Partnerships. 6. Indemnity. Management and its officers and directors and all other persons covered within the definition of Indemnitee shall be entitled to mandatory indemnity and shall be entitled to be held harmless by the Partnerships to the extent and subject to the conditions provided in Section 6.7 of each of the Partnership Agreements, in each case as amended, with the General Partner hereby deeming it advisable that such indemnification and holding harmless shall (rather than may) be done and provided by the Partnerships to the fullest extent and subject to the conditions provided therein. The General Partner and the other parties specified in Section 6.7 of each of the Partnership Agreements, in each case as amended, shall continue to be entitled to the benefits of said Sections. 7. Damage Limitations. Since each of Management and certain other parties specified in the Partnership Agreements who are associated with Management are Indemnitees, the provisions of Section 6.8 in the Master Partnership Agreement and Section 6.4(b) of each of the Operating Partnership Agreements, in each case as amended, regarding the limitation on an Indemnitee's liability for monetary damages shall be applicable to all such Indemnitees. The General Partner and other Indemnitees shall continue to be entitled to the limitation on liability for monetary damages set forth in Section 6.8 of each of the Partnership Agreements, in each case as amended as of the Effective Date. 8. Reimbursement. Management shall be entitled to be reimbursed by the Partnerships for direct, indirect, necessary or appropriate expenses it incurs or payments it makes on behalf of the Partnerships, or which are allocable to or otherwise reasonably incurred by the General Partner or Management, to the fullest extent contemplated in both Section 6.4(b) and Section 6.6(c) of the Master Partnership Agreement and in both Section 6.4(b) and Section 6.6(b) of each of the Operating Partnership Agreements, in each case as amended. It is understood and agreed that Management shall be entitled to reimbursement under such Sections for all fees and expenses incurred in connection with the performance of its obligations under the Securities Act of 1933, as amended, the Securities Act of 1934, as amended, and any other federal and state laws applicable to Management, including, without limitation, fees and expenses of legal counsel, accountants and financial advisors. 4 5 The General Partner shall continue to be entitled to be reimbursed as provided in these Sections of the Partnership Agreements. 9. Termination of Delegation. The Maximum Permitted Delegation under this Agreement commences on the Effective Date and shall continue in effect until the occurrence of the earliest of any of the following, at which time the delegation of power and authority by the General Partner to Management shall cease and terminate as provided below: 9.1. All outstanding Listed Shares shall become owned by the General Partner or its Affiliates (including, without limitation, Kinder Morgan, Inc. ("KMI") or its Affiliates) and such termination of delegated power and authority shall have been approved by the General Partner and Management at which time the delegation shall cease as to all Partnerships; or 9.2. The General Partner shall withdraw or shall be removed as general partner of any of the Partnerships, at which time the delegation shall cease as to those Partnerships from which the General Partner shall have withdrawn or shall have been removed; or 9.3. Such termination of delegated power and authority shall have been approved by (i) the General Partner, (ii) Management and (iii) holders (other than the General Partner and its Affiliates, including KMI and its Affiliates) of a majority of the outstanding Listed Shares (excluding any Listed Shares owned by the General Partner and its Affiliates, including KMI). The General Partner hereby covenants and agrees that it shall not withdraw as general partner of any of the Partnerships so long as any of the Listed Shares are owned by any persons other than KMI or its Affiliates. 10. Miscellaneous. 10.1. References. Except as specifically provided otherwise, references to "Articles" and "Sections" are to Articles and Sections of this Agreement. 10.2. Pronouns and Plurals. Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. 10.3. Further Action. The parties shall execute and deliver all documents, provide all information and take or refrain from taking actions as may be necessary or appropriate to achieve the purposes of this Agreement. 10.4. Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their successors and permitted assigns. This Agreement may not be assigned, in whole or in part, by any party to this Agreement without the written consent of the other parties to this Agreement. 5 6 10.5. Integration. This Agreement and the other instruments and agreements specifically referenced herein constitute the entire agreement among parties hereto. 10.6. Creditors. None of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Partnerships, the General Partner or Management. 10.7. Waiver. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition. 10.8. Counterparts. This Agreement may be executed in counterparts, all of which together shall constitute an agreement binding on all parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. 10.9. Applicable Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of law. 10.10. Invalidity of Provisions. If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. 10.11. Amendments. This Agreement may be amended by an agreement in writing signed by Management, the General Partner and the Partnerships without the vote, approval or consent of the holders of Listed Shares (as such term is defined in the Amended and Restated Limited Liability Company Agreement of Management, as amended, restated or supplemented (the "LLC AGREEMENT")), unless such amendment would, as determined in the sole discretion of the board of directors of Management, materially adversely affect the rights or preferences of such holders of Listed Shares or would reduce the time for any notice to which such holders of Listed Shares may be entitled, in which case such amendment shall require the affirmative vote or consent of the holders of at least a majority of the Listed Shares then Outstanding (as that term is defined under the LLC Agreement). 6 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be effective as of the Effective Date. "General Partner" KINDER MORGAN G.P., INC. By: ----------------------------------- Name: Title: "Management" KINDER MORGAN MANAGEMENT, LLC By: ----------------------------------- Name: Title: "Master Partnership" KINDER MORGAN ENERGY PARTNERS, L.P. By: Kinder Morgan G.P., Inc. By: ----------------------------------- Name: Title: OLP "A" KINDER MORGAN OPERATING L.P. "A" By: Kinder Morgan G.P., Inc. By: ----------------------------------- Name: Title: 7 8 OLP "B" KINDER MORGAN OPERATING L.P. "B" By: Kinder Morgan G.P., Inc. By: ----------------------------------- Name: Title: OLP "C" KINDER MORGAN OPERATING L.P. "C" By: Kinder Morgan G.P., Inc. By: ----------------------------------- Name: Title: OLP "D" KINDER MORGAN OPERATING L.P. "D" By: Kinder Morgan G.P., Inc. By: ----------------------------------- Name: Title: CO2 KINDER MORGAN CO2 COMPANY, L.P. By: Kinder Morgan G.P., Inc. By: ----------------------------------- Name: Title: 8 9 SCHEDULE 1.4 Actions Subject to Approval by General Partner - amend or propose an amendment to the Master Partnership Agreement, or - change the amount of the distribution made on the Master Partnership common units, or - allow a merger or consolidation involving the Master Partnership, or - allow a sale or exchange of all or substantially all of the assets of the Master Partnership, or - dissolve or liquidate the Master Partnership, or - take any action requiring approval of any class of units of the Master Partnership, or - call any meetings of the common unitholders of the Master Partnership, or - take any action that, under the terms of the Master Partnership Agreement, must or should receive a special approval of the Conflicts and Audit Committee of the General Partner, or - take any action that, under the terms of the Master Partnership Agreement, cannot be taken by the General Partner without the approval of all outstanding units of the Master Partnership, or - settle or compromise any claim, dispute or litigation directly against or otherwise relating to indemnification of Management, the General Partner, Affiliates of the General Partner or Management, or any of their officers, directors, managers or members, or - settle or compromise any claim, dispute or litigation relating to the i-units, the Listed Shares or the Offering, or - settle or compromise any claim, dispute or litigation involving tax matters, or 9 10 - allow the Master Partnership to incur indebtedness exceeding 50% of the market value of all of the then outstanding units of the Master Partnership, or - allow the Master Partnership to issue units in one transaction, or in a series of related transactions, having a market value in excess of 20% of the market value of then outstanding units of the Master Partnership, or 10 EX-23.2 10 h84143a2ex23-2.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in Amendment No. 2 to this Registration Statement on Form S-1 of our report dated February 16, 2001 relating to the financial statement of Kinder Morgan Management, LLC, which appears in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP Houston, Texas April 27, 2001 EX-23.3 11 h84143a2ex23-3.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in Amendment No. 2 on this Registration Statement on Form S-3 of our report dated February 14, 2001 relating to the financial statements and financial statement schedule, which appears in Kinder Morgan, Inc.'s Amendment No. 2 on Form 10-K/A for the year ended December 31, 2000. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP Houston, Texas April 27, 2001 EX-23.4 12 h84143a2ex23-4.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.4 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in Amendment No. 2 to this Registration Statement on Form S-3 of our reports dated March 27, 2000 relating to the financial statements of Trailblazer Pipeline Company and Kinder Morgan Interstate Gas Transmission LLC, which appear in Kinder Morgan Energy Partners, L.P.'s Current Report on Form 8-K/A (Amendment No. 3) dated April 27, 2001. We also consent to the incorporation by reference of (1) our report dated February 14, 2001 relating to the financial statements and financial statement schedule, which appears in Kinder Morgan Energy Partners, L.P.'s Amendment No. 2 on Form 10-K/A for the year ended December 31, 2000 and (2) our report dated February 14, 2001 relating to the balance sheet of Kinder Morgan G.P., Inc., which appears in Kinder Morgan Energy Partners, L.P.'s Current Report on Form 8-K/A (Amendment No. 2) dated April 27, 2001. We also consent to the references to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP Houston, Texas April 27, 2001 EX-23.5 13 h84143a2ex23-5.txt CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.5 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Amendment No. 2 to Form S-3 registration statement of our report dated February 2, 1999 (except with respect to the matters discussed in Note 6 to the December 31, 2000 consolidated financial statements, as to which the dates are March 16, 2000 and February 14, 2001) on the December 31, 1998 consolidated financial statements of Kinder Morgan, Inc., included in Kinder Morgan, Inc.'s Amendment No. 1 on Form 10-K/A for the year ended December 31, 2000, incorporated by reference in this registration statement, and to all references to our Firm included in this registration statement. /s/ Arthur Andersen LLP Denver, Colorado April 27, 2001 EX-23.6 14 h84143a2ex23-6.txt CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Amendment No. 2 to Form S-3 registration statement of our report dated March 24, 2000 on the financial statements of Red Cedar Gathering Company included in the Current Report on Form 8-K/A of Kinder Morgan Energy Partners, L.P. dated March 28, 2000 and to all references to our Firm included in this registration statement. /s/ ARTHUR ANDERSEN LLP Denver, Colorado, April 27, 2001. EX-23.7 15 h84143a2ex23-7.txt CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.7 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated January 23, 2001, with respect to the combined financial statements of GATX Terminals Companies as of and for the year ended December 31, 2000, included in the Kinder Morgan Energy Partners, L.P. Current Report on Form 8-K/A Amendment No. 2 dated April 27, 2001, and incorporated by reference in this Registration Statement and related Prospectus. /s/ Ernst & Young LLP Chicago, Illinois April 27, 2001 -----END PRIVACY-ENHANCED MESSAGE-----