-----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, JnIN5Mn8hyDB72dx+pSRzxJ1ACyylxG8Tclb/4fItMRY3yY7g+Xik8LHBz6dymHK hIBpX+0ShsPn3uqUbJ7SCA== 0001014108-98-000028.txt : 19980402 0001014108-98-000028.hdr.sgml : 19980402 ACCESSION NUMBER: 0001014108-98-000028 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NYSE 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: 10-K405 SEC ACT: SEC FILE NUMBER: 001-11234 FILM NUMBER: 98584286 BUSINESS ADDRESS: STREET 1: 1301 MCKINNEY ST STREET 2: STE 3450 CITY: HOUSTON STATE: TX ZIP: 77010 BUSINESS PHONE: 7138449500 MAIL ADDRESS: STREET 1: C/O MORRISON & HECKER LLP STREET 2: 2600 GRAND AVENUE CITY: KANSAS CITY STATE: MO ZIP: 64108 FORMER COMPANY: FORMER CONFORMED NAME: ENRON LIQUIDS PIPELINE L P DATE OF NAME CHANGE: 19970304 10-K405 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 F O R M 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 Commission file number: 1-11234 KINDER MORGAN ENERGY PARTNERS, L.P. (Exact name of registrant as specified in its charter) DELAWARE 76-0380342 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1301 McKinney Street, Ste. 3450, Houston, Texas 77010 (Address of principal executive offices)(zip code) Registrant's telephone number, including area code: 713-844-9500 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Units New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Aggregate market value of the Common Units held by non-affiliates of the registrant, based on closing prices in the daily composite list for transactions on the New York Stock Exchange on March 25, 1998 was approximately $1,361,127,733. This figure assumes that only the General Partner of the Registrant and officers and directors of the General Partner of the Registrant were affiliates. As of March 25, 1998 the registrant had 40,727,126 Common Units outstanding. Information relating to the Common Units has been retroactively restated to give effect to a two-for-one Unit split approved by the Registrant on September 2, 1997. The issuance and mailing of split Units occurred on October 1, 1997 to unitholders of record on September 15, 1997. KINDER MORGAN ENERGY PARTNERS, L.P. TABLE OF CONTENTS Page No. P A R T I Items 1. and 2. Business and Properties 1 Item 3. Legal Proceedings 37 Item 4. Submission of Matters to a Vote of Security Holders 41 P A R T II Item 5. Market for the Registrant's Common Units and Related Security Holder Matters 42 Item 6. Selected Financial Data 43 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 44 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 50 Item 8. Financial Statements and Supplementary Data 50 Item 9. Changes in and Disagreements on Accounting and Financial Disclosure 50 P A R T III Item 10. Directors and Executive Officers of the Registrant 51 Item 11. Executive Compensation 53 Item 12. Security Ownership of Certain Beneficial Owners and Management 55 Item 13. Certain Relationships and Related Transactions 56 P A R T IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 57 Financial Statements F-1 P A R T I Items 1 and 2. Business and Properties Kinder Morgan Energy Partners, L.P. ("Registrant" or "Partnership"), a Delaware limited partnership, is a publicly traded master limited partnership ("MLP") formed in August 1992. Through its operating limited partnerships ("OLPs"), the Partnership manages a diversified portfolio of midstream energy assets. On February 14, 1997, Kinder Morgan, Inc., a Delaware corporation formerly known as KC Liquids Holding Corporation ("KMI"), acquired from Enron Liquids Holding Corporation, a Delaware corporation ("ELHC"), all of the issued and outstanding common stock of Enron Liquids Pipeline Company, the general partner of the Partnership and a Delaware corporation (the "General Partner"), for approximately $21.7 million. As a result of KMI's acquisition of the common stock of the General Partner, KMI indirectly acquired a general partner and limited partner interest in the Partnership. In connection with the transaction Kinder Morgan, Inc., changed the names of the following entities: Old Name New Name Function - ------------------------------------------------------------------------- Enron Liquids Pipeline Kinder Morgan G.P., Inc. General Partner Company Enron Liquids Pipeline, L.P. Kinder Morgan Energy MLP Partners, L.P. Enron Liquids Pipeline Kinder Morgan Operating OLP Operating, L.P. L.P. "A" Enron Transportation Kinder Morgan Operating OLP Services, L.P. L.P. "B" The following chart shows the organizational structure and ownership of entities. [Chart showing the following ownership structure: Kinder Morgan, Inc. owning 100% of Kinder Morgan G.P., Inc. Kinder Morgan G.P., Inc. owning a 1.0101% general partner interest in Kinder Morgan Operating L.P. "A", Kinder Morgan Operating L.P. "B", Kinder Morgan Operating L.P. "C" and Kinder Morgan Operating L.P. "D", and owning a 2.1% limited partner interest and 1% general partner interest in Kinder Morgan Energy Partners, L.P. The public owns 96.9% of Kinder Morgan Energy Partners, L.P. Kinder Morgan Energy Partners, L.P. owning a 98.9899% limited partner interest in Kinder Morgan Operating L.P. "A", Kinder Morgan Operating L.P. "B", Kinder Morgan Operating L.P. "C" and Kinder Morgan Operating L.P. "D". Kinder Morgan Operating L.P. "A" owning the North System Pipeline, the Cypress Pipeline, a 50% interest in Heartland Pipeline Company and a 100% interest in Kinder Morgan CO2 LLC, which owns a 20% interest in Shell CO2 Company, Ltd. Kinder Morgan Operating L.P. "A" also owning a 100% interest in Kinder Morgan Natural Gas Liquids, Inc., which owns a 50% interest in Mont Belvieu Associates, which owns a 50% interest in the Mont Belvieu fractionator. Kinder Morgan Operating L.P. "B" owning the Cora Coal Terminal, the Painter plant and Red Lightning. Kinder Morgan Operating L.P. "C" owning the Grand Rivers Coal Terminal. Kinder Morgan Operating L.P. "D" owning a 99.5% general partner interest in SFPP, L.P.] See Item 12 for information regarding the ownership of KMI. 1 The Partnership also changed its address to 1301 McKinney Street, Suite 3450, Houston, Texas 77010 and its telephone number to (713) 844-9500. Kinder Morgan Operating, L.P. "A" (OLP-A) is a Delaware limited partnership which owns: (i) the North System pipeline, which transports natural gas liquids ("NGLs") and petroleum products between South Central Kansas and the Chicago area and various intermediate points and which includes eight terminals ; (ii) the Cypress Pipeline, which transports NGLs from the Mont Belvieu, Texas hub to a major petrochemical producer in Lake Charles, Louisiana; (iii) an indirect 20% limited partner interest in Shell CO2 Company, Ltd. ("Shell CO2 Company"), formed in March, 1998 by the Partnership and affiliates of Shell Oil Company ("Shell"), which will transport, market, produce and explore for CO2 to be used in enhanced oil recovery projects throughout the continental United States; (iv) an indirect 25% interest in a 200,000 barrels per day Y-grade fractionation facility located near Mont Belvieu, Texas; and (v) a 50% interest in the Heartland Pipeline Company, a partnership with Conoco Inc. ("Conoco") which ships refined petroleum products. Kinder Morgan Operating L.P. "B" (OLP-B) is a Delaware limited partnership which owns: (i) the Cora coal terminal, a high-speed, rail-to-barge coal transfer and storage facility, located in Cora, Illinois on the Mississippi River; and (ii) the Painter Gas Processing Plant, a natural gas processing plant, fractionator, and NGL terminal with truck and rail loading facilities. Kinder Morgan Operating, L.P. "C" (OLP-C) is a Delaware limited partnership formed in September 1997 to acquire the Grand Rivers coal terminal, a high speed coal transfer and storage facility, located on the Tennessee River above the Kentucky Dam. The terminal has facilities for unloading trains, trucks and barges with loading facilities for trucks and barges. Kinder Morgan Operating L.P. "D" (OLP-D), a Delaware limited partnership, acquired on March 6, 1998, 99% of SFPP, L.P. ("SFPP"), the operating partnership of Santa Fe Pacific Pipeline Partners, L.P. ("Santa Fe"). The Partnership acquired the interest of Santa Fe's common unit holders in SFPP in exchange for 26.6 million Common Units (1.39 Common Units for each Santa Fe common unit). The Partnership paid $84.4 million to Santa Fe Pacific Pipelines, Inc. (the "SF General Partner") in exchange for the general partner interest in Santa Fe. Also on March 6, 1998, SFPP redeemed from the SF General Partner a .5% interest in SFPP for $5.8 million. The redemption was paid from SFPP's cash reserves. After the redemption, the SF General Partner continues to own a .5% special limited partner interest in SFPP and OLP-D owns a 99.5% general partner interest in SFPP. Since the acquisition occurred after December 31, 1997, unless the context indicates otherwise, the financial and operating data in this report does not include information for SFPP. Assets acquired in this transaction comprise the Partnership's Pacific Operations, which includes thirteen owned and operated terminals and four pipeline systems: (i) the South Line consists of two pipeline segments, the West Line transports products from the Los Angeles Basin to Phoenix and Tucson, Arizona, including intermediate points and the East Line transports products from El Paso, Texas to Tucson and Phoenix; (ii) the North Line consists of six pipeline segments originating in Richmond, Concord and Bakersfield, California serving the Partnership's terminals located in Brisbane, Bradshaw, Chico, Fresno and San Jose, California, and Sparks, Nevada; (iii) the Oregon Line from its Portland, Oregon origin extends south and serves the Partnership's terminal located in Eugene, Oregon; and 2 (iv) the San Diego Line extends south to serve the Partnership's terminals in the cities of Orange and San Diego. Business Strategy General. Management's objective is to operate as a growth-oriented, publicly traded MLP by reducing operating costs, better utilizing and expanding its asset base, and making selective, strategic acquisitions that are accretive to unitholder distributions. The partnership agreement provides strong financial incentives for the General Partner to increase unitholder distributions through successful management and growth in business. With the addition of the Pacific Operations, the Partnership has become the largest pipeline MLP and the second largest products pipeline system in the United States in terms of volumes delivered. Pacific Operations. The Partnership plans to extend its presence in the rapidly growing refined products market in the Western United States through incremental expansions and accretive acquisitions. In the near term, the Partnership expects to realize $15-$20 million per year in cost savings through elimination of redundant general and administrative and other expenses. The Partnership's management, which changed in connection with KMI's acquisition of the General Partner, successfully reduced 1997 general and administrative and operating expenses 15% from 1996 levels while increasing revenues. North System. Because the North System serves a relatively mature market, the Partnership's strategic development will focus on increasing incremental throughput by remaining a reliable, cost-effective provider of transportation services, by using creative incentive programs that ensure product supply availability, and by continuing to increase the range of products transported and services offered. Shell CO2 Company. Within the Permian Basin, the strategy of Shell CO2 Company is to offer customers "one-stop shopping" for CO2 supply, transportation and technical support service. Outside the Permian Basin, Shell CO2 Company will compete aggressively for the new supply and transportation projects which will arise as other U.S. oil producing basins mature and make the transition from primary production to enhanced recovery methods. Coal Terminals. Both of the Partnership's coal terminals are strategically positioned to benefit from the expected increased demand for low sulfur western coals in eastern U.S. markets due to increasing environmental compliance standards. Because many utilities' compliance strategies require a diverse blend of higher and lower sulfur coals, the Partnership's modern blending facilities and large storage capacities enable it to offer higher margin services to its customers. During 1997, the Partnership expanded throughput and storage capacity at the Cora Terminal and in 1998 began expansion of its Grand Rivers Terminal. The Partnership's operations are grouped into three reportable business segments: Liquids Pipelines; Coal Transfer, Storage and Services; and, Gas Processing and Fractionation. Liquids Pipelines The Partnership's liquids pipelines segment is conducted through two geographic divisions; Kinder Morgan Pacific Operations and Kinder Morgan Mid-Continent Operations. The segment includes both interstate common carrier pipelines regulated by the Federal Energy Regulatory Commission ("FERC") and intrastate pipeline systems. Products transported on these pipelines include refined petroleum products, NGLs and CO2. Refined petroleum products and related uses are: Product Use - ------------------------------------------------------------------------------ Gasoline Transportation Jet / Kerosene Commercial and military air transportation Distillate Transportation (auto, rail, marine), farm, industrial and commercial Residual Fuels Marine transportation, power generation - ------------------------------------------------------------------------------ Natural gas liquids are typically extracted from natural gas in liquid form under low temperature and high pressure conditions. NGL products and related uses are: 3 Product Use - ------------------------------------------------------------------------- Propane Residential heating and agricultural uses, petrochemical feedstock Isobutanes Further processing Natural Gasoline Further processing or gasoline blending into gasoline motor fuel Ethane Feedstock for petrochemical plants Normal Butane Feedstock for petrochemical plants - ------------------------------------------------------------------------- CO2 is used in enhanced oil recovery projects as a flooding medium for recovering crude oil from mature oil fields. The liquids pipelines are, in general, located on land owned by others and are operated under easements or rights-of-way granted by land owners. Where Partnership facilities are located on or cross public property, railways, rivers, roads or highways, or similar crossings, they are operating under permits or easements from public authorities, railways, or public utilities, some of which are revocable at the election of the grantor. Kinder Morgan Pacific Operations The Pacific Operations liquids pipeline systems which include the South Line, North Line, Oregon Line and San Diego Line serve six western states with approximately 3,300 miles of refined petroleum products pipeline and related terminal facilities. The Pacific Operations pipelines transport approximately one million barrels per day of refined petroleum products. The three main products transported are: gasoline (63%), diesel fuel (20%) and jet fuel (17%). The operations also include 13 truck loading terminals and provide pipeline service to approximately 44 customer-owned terminals, three commercial airports and 12 military bases. These pipeline assets provide refined petroleum products to some of the fastest growing populations in the United States. Significant population gains have occurred in the Los Angeles and Orange, California areas as well as the Las Vegas, Nevada and the Tuscon-Phoenix, Arizona regions. Pipeline transportation of gasoline and jet fuels has a direct correlation with demographic patterns. The positive demographic changes associated with the Pacific Operations' assets are expected to continue in the future. South Line. The South Line consists of two pipeline segments, the West Line and the East Line. The West Line consists of approximately 555 miles of primary pipeline and currently transports products for approximately 50 shippers from seven refineries and three pipeline terminals in the Los Angeles Basin to Phoenix and Tucson, Arizona and various intermediate commercial and military delivery points. Also, a significant portion of West Line volumes are transported to Colton, California for local distribution and for delivery to CalNev Pipeline, an unaffiliated common carrier of refined petroleum products to Las Vegas, Nevada and intermediate points. The West Line serves Partnership terminals located in Colton and Imperial, California as well as in Phoenix and Tucson. The East Line is comprised of two parallel lines originating in El Paso, Texas and continuing approximately 300 miles west to the Tucson terminal and one line continuing northwest approximately 130 miles from Tucson to Phoenix. All products received by the East Line at El Paso come from a refinery in El Paso or are delivered through connections with non-affiliated pipelines from refineries in Odessa and Dumas, Texas and Artesia, New Mexico. The East Line transports refined petroleum products for approximately 17 shippers. The East Line serves Partnership terminals located in Tucson and Phoenix. In late 1995, Diamond Shamrock, Inc. completed construction of a new 10-inch diameter products pipeline from its refinery near Dumas, Texas to El Paso. In late 1996, Diamond Shamrock connected this pipeline to the East Line and began shipping products to Tucson and Phoenix. Longhorn Partners Pipeline is a proposed joint venture project which would begin transporting refined products from refineries on the Gulf Coast to El Paso and other destinations in Texas. Increased product supply in the El Paso area could result in some shift of volumes transported into Arizona from the West Line to East Line. While increased movements into the Arizona market from El Paso would displace higher tariff volumes supplied from Los Angeles on the West Line, such shift of supply sourcing has not had, and is not expected to have, a material effect on operating results. 4 North Line. The North Line consists of approximately 1,075 miles of pipeline in six pipeline segments originating in Richmond, Concord and Bakersfield, California. This line serves the Partnership's terminals located in Brisbane, Bradshaw, Chico, Fresno and San Jose, California, and Sparks, Nevada. The products delivered through the North Line come from refineries in the San Francisco area. A small percentage of supply is received from various pipeline and marine terminals that deliver products from foreign and domestic ports. Substantially all of the products shipped through the Bakersfield-Fresno segment of the North Line are supplied by a refinery located in Bakersfield. Oregon Line. The Oregon Line is a 114-mile pipeline serving approximately ten shippers. The Oregon Line receives products from marine terminals in Portland and from Olympic Pipeline, a non-affiliated carrier, which transports products from the Puget Sound area to Portland. From its origination point in Portland, the Oregon Line extends south and serves the Partnership terminal located in Eugene, Oregon. San Diego Line. The San Diego Line is a 135-mile pipeline serving major population areas in Orange County (immediately south of Los Angeles) and San Diego. Approximately 20 shippers transport products on this line, supplied by the same refineries and terminals that supply the West Line, and extends south to serve Partnership terminals in the cities of Orange and San Diego. Truck Loading Terminals. The Pacific operations include 13 truck loading terminals with an aggregate usable tankage capacity of approximately 8.2 million barrels. Terminals are located at destination points on each of the lines as well as at certain intermediate points along each line where deliveries are made. These terminals furnish short-term product storage, truck loading and ancillary services, such as vapor recovery, additive injection, oxygenate blending and quality control. The simultaneous truck loading capacity of the terminals ranges from 2 to 12 trucks. The capacity of terminaling facilities varies throughout the pipelines systems and terminal facilities are not owned at all pipeline delivery locations. At certain locations, product deliveries are made to facilities owned by shippers or independent terminal operators. Truck loading and other terminal services are provided as an additional service, and a separate fee (in addition to transportation tariffs) is charged. Markets. Currently the Pacific Operations serve in excess of 100 shippers in the refined products market, with the largest customers consisting of major petroleum companies, independent refineries, the United States military and independent marketers and distributors of products. A substantial portion of product volume transported is gasoline, the demand for which is dependent on such factors as prevailing economic conditions and demographic changes in the markets served. The majority of the Pacific Operations' market is expected to maintain growth rates that exceed the national average for the foreseeable future. Currently, the California gasoline market is approximately 900,000 barrels per day, of which the Partnership transports in excess of 65%. The Arizona gasoline market is served primarily by the Partnership at a market demand of 135,000 barrels per day. Nevada's gasoline market is currently in excess of 50,000 barrels per day and Oregon's is approximately 98,000 barrels per day. The distillate market is approximately 377,000 barrels per day, 78,000 barrels per day, 72,000 barrels per day and 62,000 barrels per day in California, Arizona, Nevada and Oregon, respectively. The volume of products transported is directly affected by the level of end-user demand for such products in the geographic regions served. Certain product volumes can experience seasonal variations; however, overall volumes may be slightly lower during the first and fourth quarters of each year. Supply. The majority of the refined products consumed in the Pacific Operations markets are supplied by pipelines from the three major refining centers around Los Angeles, San Francisco and Puget Sound. Pacific Operations supply initiates from these three major refining centers and others, as well as waterborne terminals. The waterborne terminals supplying the Pacific Operations' pipelines have three central locations on the Pacific Coast: (1) GATX and Mobil terminals, among others, on the Washington/Oregon coast, (2) the Wickland Terminal on the Northern California Coast, and (3) GATX, Shell and ASTC terminals on the Southern California Coast. Competition. The most significant competitors of the Pacific Operations pipeline systems are proprietary pipelines owned and operated by major oil companies in the area where the pipeline system delivers products, refineries within the Partnership's market areas and related trucking arrangements. The Partnership believes that 5 high capital costs, tariff regulation and environmental permitting considerations make it unlikely that a competing pipeline system comparable in size and scope will be built in the foreseeable future, provided that the Partnership has available capacity to satisfy demand and its tariffs remain at reasonable levels. However, the possibility of pipelines being constructed to serve specific markets is a continuing competitive factor. Trucks may competitively deliver products in certain markets. Increased utilization of trucking by major oil companies has caused minor but notable reductions in product volumes delivered to certain shorter-haul destinations, primarily Orange and Colton, California. Management cannot predict with certainty whether this trend towards increased short-haul trucking will continue in the future. Kinder Morgan Mid-Continent Operations The Mid-Continent Operations include the North System, Cypress Pipeline, and the Partnership's interests in Shell CO2 Company and the Heartland Pipeline Company. North System General. The North System is an approximate 1,600 mile interstate common carrier NGL and refined petroleum products pipeline system that extends from South Central Kansas to the Chicago area. South Central Kansas is a major hub for producing, gathering, storing, fractionating and transporting NGLs. The North System's primary pipeline is composed of approximately 1,400 miles of 8" and 10" pipelines and includes (i) two parallel pipelines (except for a 50-mile segment in Nebraska) originating at Bushton and continuing to a major storage and terminal area in Des Moines, Iowa, (ii) a third pipeline, which extends from Bushton to the Kansas City, Missouri area, and (iii) a fourth pipeline that transports product to the Chicago area from Des Moines. Through interconnections with other major liquids pipelines, the pipeline system connects Mid-Continent producing areas to markets in the Midwest and eastern United States. The North System operated at approximately 62%, 66% and 59% of capacity during 1997, 1996, and 1995 respectively. The Partnership has defined sole carrier rights to utilize capacity on an extensive pipeline system owned by the Williams Company which interconnects with the North System. The Partnership negotiated an amendment to this capacity lease agreement in March, 1998 which extends the lease term to February, 2013, with a five year renewal option. A reduction in the minimum guaranteed payment and an increase in capacity provided for such payment under this agreement should result in expected annual cost savings to the Partnership of approximately $600,000. The following table sets forth volumes (MBbls) of NGLs transported on the North System for delivery to the various markets for the periods indicated:
Year Ended December 31, ---------------------------------------------------- 1997 1996 1995 1994 1993 ---- ----- ---- ---- ---- Volumes (MBbls) Petrochemicals 1,200 684 1,125 2,861 11,201 Refineries & line 10,600 9,536 9,765 10,478 9,676 Fuels 7,976 10,500 7,763 10,039 8,957 Other 7,399 8,126 7,114 6,551 6,879 ------ ------ ------ ------ ------ Total 27,175 28,846 25,767 29,929 36,713 ====== ====== ====== ====== ====== The 1994 volumes reflect the loss of the major petrochemical shipper as of February 28, 1994. The 1995 volumes reflect the shut down of a synthetic natural gas plant in 1995. NGL gathering systems and Chicago origination's other than long-haul volumes of refinery butanes.
The North System has approximately 7.3 million barrels of storage capacity which include caverns, steel tanks, pipeline line-fill and leased storage capacity. This storage capacity provides operating efficiencies and flexibility in meeting seasonal demand of shippers as well as propane storage for the truck loading terminals. Truck Loading Terminals. The North System has seven propane truck loading terminals and one multi-terminal complex at Morris, Illinois, in the Chicago area, which is capable of loading propane, normal butane, isobutane, and natural gasoline. 6 Markets. The North System currently serves approximately 50 shippers in the upper Midwest market, including both users and wholesale marketers of NGLs. These shippers include all four major refineries in the Chicago area. Wholesale marketers of NGLs primarily make direct large volume sales to major end-users, such as propane marketers, refineries, petrochemical plants, and industrial concerns. Market demand for NGLs varies in respect to the different end uses to which NGL products may be applied. Demand for transportation services is influenced not only by demand for NGLs, but also by the available supply of NGLs. Supply. NGLs extracted or fractionated at the Bushton gas processing plant operated by KN Processing, Inc. have historically accounted for a significant portion of the NGLs transported through the North System (approximately 40-50%). Other sources of NGLs transported in the North System include major independent oil companies, marketers, end-users and natural gas processors that use interconnecting pipelines to transport hydrocarbons. Competition. The Partnership's North System competes with other liquids pipelines and to a lesser extent rail carriers. In most cases, established pipelines are generally the lowest cost alternative for the transportation of NGLs and refined petroleum products. Therefore, the Partnership's primary competition is represented by pipelines owned and operated by others. In the Chicago area, the North System competes with other NGL pipelines that deliver into the area and with rail car deliveries primarily from Canada. Other Midwest pipelines and area refineries compete with the North System for propane terminal deliveries. The North System also competes with pipelines that deliver product to markets not served by the North System, such as the Gulf Coast market area. Shell CO2 Company General. On March 5, 1998, the Partnership and affiliates of Shell Oil Company ("Shell") agreed to combine their CO2 activities and assets into a partnership (Shell CO2 Company, Ltd.) to be operated by Shell. The Partnership acquired, through a newly created limited liability company, a 20% interest in Shell CO2 Company in exchange for contributing the Central Basin Pipeline and approximately $25 million in cash. Shell contributed its approximately 45% interest in the McElmo Dome CO2 reserves and its 11% interest in the Bravo Dome CO2 reserves, its indirect 50% interest in the Cortez pipeline and its indirect 13% interest in the Bravo pipeline and other related assets in exchange for an 80% interest in Shell CO2 Company. The Cortez and Bravo pipelines connect CO2 reserves in the McElmo and Bravo Domes principally to Denver City, Texas, where they interconnect with the Central Basin Pipeline, among others. Shell CO2 Company is the industry leader in the supply and transportation of CO2. The Partnership's approval will be required for certain key decisions, including (i) capital calls in excess of $5 million, (ii) changes in distribution policy and (iii) approval of the five-year budget. The combination of Partnership and Shell assets facilitates the marketing of CO2 by bringing a complete package of CO2 supply, transportation and technical expertise to the customer. By creating an area of mutual interest in the continental U.S., the Partnership will have the opportunity to participate with Shell in certain new CO2 projects in the region. Altura, Shell's joint venture with Amoco, is also a major user of CO2 in its West Texas fields. Under the terms of the Shell CO2 Company partnership agreement, the Partnership will receive a priority distribution of $14.5 million per year for the first four years. To the extent the amount paid to the Partnership over the first four years is in excess of 20% of Shell CO2 Company's distributable cash flow for such period (discounted at 10%), the amount of such overpayment will be deducted from the Partnership's distributions equally over years five and six. At any time after March 5, 2002, Shell has the right to purchase the Partnership's interest in Shell CO2 Company and the Partnership has the right to require Shell to purchase the Partnership's interest in Shell CO2 Company. The purchase price for the Partnership's interest in Shell CO2 Company will be at a discount from fair value in the event the Partnership exercises its put option, and at a premium over fair value in the event Shell exercises its call option. The amount of the discount or premium declines during the period from March 5, 2003 through March 5, 2006 and is thereafter fixed at a 5% discount/premium. If the parties are unable to agree to the fair value of the Partnership's interest in Shell CO2 Company, then the Partnership and Shell will use an agreed-upon appraisal methodology to determine fair value. 7 McElmo and Bravo Domes. Shell CO2 Company operates, and owns 45% of, the McElmo Dome which contains more than 10 trillion cubic feet ("TCF") of nearly pure CO2. The remaining interest in McElmo is owned by Mobil (approximately 40%), Chevron (approximately 4%) and others. This dome produces from the Leadville formation at 8,000 feet through wells that deliver gas at individual rates up to 50 million cubic feet per day ("MMCF/d"). Delivery capacity exceeds one billion cubic feet per day ("Bcf/d") to the Permian Basin and 60 MMcf/d to Utah, and additional expansions are under consideration. The Bravo Dome, of which Shell CO2 Company owns 11%, holds reserves of approximately eight TCF and covers an area of more than 1,400 square miles. It produces more than 400 MMcf/d from more than 350 wells in the Tubb Sandstone at 2,300 feet. The remaining interest in the Bravo Dome is owned by Amoco (approximately 74%), Amerada Hess (approximately 10%) and others. CO2 Pipelines. The 502-mile, 30-inch Cortez Pipeline, operated by a Shell affiliate, carries CO2 from the McElmo Dome source reservoir to the Denver City hub. The Cortez line currently transports about 800 MMcf/d, including approximately 90% of the CO2 transported on the Central Basin Pipeline (see below). The Cortez Pipeline is owned by Shell CO2 Company (50%), Mobil (37%) and Cortez Vickers Pipeline Company (13%). The 20-inch Bravo pipeline runs 218 miles to the Denver City hub and has a capacity of more than 350 MMcf/d. Major delivery points along the line include the Slaughter Field in Cochran and Hockley counties, Texas, and the Wasson field in Yoakum County, Texas. Tariffs on the Cortez and Bravo pipelines are not regulated. The Bravo Pipeline is owned by Amoco (81%), Shell CO2 Company (13%) and Markland (6%). Placed in service in 1985, the Central Basin Pipeline consists of approximately 143 miles of 16" to 20" main pipeline and 157 miles of 4" to 12" lateral supply lines located in the Permian Basin between Denver City, Texas and McCamey, Texas with a throughput capacity of 600 MMcf/d. At its origination point in Denver City, the Central Basin Pipeline interconnects with all three major CO2 supply pipelines from Colorado and New Mexico, namely the Cortez, Bravo and Sheep Mountain pipelines (operated by Shell, Amoco, and ARCO, respectively). The mainline terminates near McCamey where it interconnects with the Canyon Reef Carriers, Inc. pipeline. CO2 pipeline profitability is dependent upon the demand among oil producers for CO2 in connection with enhanced oil recovery programs. The level of enhanced oil recovery programs is sensitive to the level of oil prices. Although CO2 floods are initially capital-intensive, they have relatively low ongoing operational costs. Many existing floods remain economic at oil prices as low as $5 per barrel. While volumes have increased on all three of Shell CO2 Company's pipelines, significant capacity exists for additional CO2 movement. This system should benefit from increased utilization due to the increased use of enhanced recovery techniques by companies expanding or initiating recovery projects. The CO2 pipelines' tariffs are not regulated. Competion. Shell CO2 Company's primary competitors for the sale of CO2 include suppliers which have an ownership interest in McElmo Dome, Bravo Dome and Sheep Mountain Dome CO2 reserves. Shell CO2 Company's ownership interests in the Cortez and Bravo pipelines are in direct competition with Sheep Mountain pipeline, as well as competing with one another, for transportation of CO2 to the Denver City, Texas market area. Competitive position is influenced by providing a lower laid in price in Denver City. The laid in price is a combination of the commodity price from the source field and the transportation fee to move it to the market. Utilization of Shell CO2 Company's Central Basin pipeline, which runs from Denver City to the Permian Basin is generally dependent upon the relative distance between it and other competing pipelines to a CO2 flood project. There is no assurance that new CO2 source fields will not be discovered which could compete with Shell CO2 Company or that new methodologies for enhanced oil recovery could replace CO2 flooding. Cypress Pipeline General. The Cypress Pipeline, which began operations in April 1991, is an interstate common carrier pipeline system originating at storage facilities in Mont Belvieu, Texas and extending 104 miles east to the Lake Charles, Louisiana area. Mont Belvieu, located approximately 20 miles east of Houston, is the largest hub for NGL gathering, transportation, fractionation and storage in the United States and is located at the intersection of multiple long-haul 8 NGL pipelines as well as NGL pipelines for transportation to the Port of Houston, the area with the largest concentration of major petrochemical plants and refineries in the United States. Markets. The pipeline was built to service a major petrochemical producer in the Lake Charles, Louisiana area under a 20-year ship-or-pay agreement that expires in 2011. The producer is a private company engaged primarily in the olefins and vinyls businesses in North America with 20 operating sites producing in excess of 7 billion pounds per year of product. The contract requires a minimum volume of 30,000 barrels per day. In 1996, the Company entered into an agreement with the producer to expand the Cypress Pipeline's capacity by 25,000 barrels per day to 57,000 barrels per day. The expansion was completed on October 31, 1997. In addition, a new five-year ship-or-pay contract with the producer was signed for a minimum of 13,700 additional barrels per day and shipment of additional volumes began on December 1, 1997. Management continues to pursue projects that could increase throughput on the Cypress Pipeline. The producer has elected to be an "investor shipper" and as such has the right, at the end of any year during the contract term, to purchase up to a 50% joint venture interest in the Cypress Pipeline at a price established in accordance with a formula contained in the transportation agreement. The Partnership believes, based on the formula purchase price and current market conditions, that it would be uneconomical for the producer to exercise its buy-in option in the foreseeable future. Supply. The Cypress Pipeline originates in Mont Belvieu where it is able to receive ethane from local storage facilities. Mont Belvieu has facilities to fractionate NGLs received from several pipelines into ethane and other components. Additionally, ethane is supplied to Mont Belvieu through pipeline systems that transport specification NGLs from major producing areas in Texas, New Mexico, Louisiana, Oklahoma, and the Mid-Continent Region. Heartland Pipeline Company General. The Heartland Pipeline was completed in the fall of 1990 and is owned by Heartland Pipeline Company (Heartland), a partnership owned equally by the Partnership and Conoco. The core of Heartland's pipeline system is one of the North System's main line sections that originates in Bushton, Kansas. Heartland leases certain specified pipeline capacity to ship refined petroleum products on this line under a long-term lease agreement that will expire in 2010. Heartland's Des Moines terminal has five main tanks that allow storage of approximately 200,000 barrels of gasoline and fuel oils. Under Heartland's organizational structure and partnership agreement, the Partnership operates the pipeline, and Conoco operates Heartland's Des Moines terminal and serves as the managing partner. Markets. Heartland provides transportation of refined petroleum products from refineries in the Kansas and Oklahoma area to a Conoco terminal in Lincoln, Nebraska and Heartland's Des Moines terminal. The volume of refined petroleum products transported by Heartland is directly affected by the demand for, and supply of, refined petroleum products in the geographic regions served. The major portion of refined petroleum product volumes transported by Heartland is motor gasoline, the demand for which is dependent on price, prevailing economic conditions and demographic changes in the markets served. Heartland's business has experienced only minor seasonal fluctuations in demand. Supply. Refined petroleum products transported by Heartland on the North System are supplied primarily from the National Cooperative Refinery Association crude oil refinery in McPherson, Kansas and the Conoco crude oil refinery in Ponca City, Oklahoma. The Ponca City volumes move to the North System through interconnecting third-party pipelines, while the McPherson volumes are transported directly through the North System. Competition. Heartland competes with other refined product carriers in the geographic market served. Heartland's principal competitor is Williams Pipeline Company. Coal Transfer, Storage and Services Coal continues to dominate as the fuel for electric generation, holding more than 55% of U.S. capacity. Forecasts of overall coal usage and power plant usage for the next 20 years show an increase of about 1.5% per year. Current domestic supplies are predicted to last for more than 300 years. Most of the Partnership's coal terminals' volume is destined for use in coal-fired electric generation. 9 Environmental legislation is currently driving changes in specification of coal used for electric generation to low-sulfur products. When burned, the sulfur in coal converts to an air pollutant known as sulfur dioxide (SO2). Effective January 1, 1995, Phase I of the Clean Air Act Amendments required the 110 largest sulfur-emitting power plants to reduce SO2 emissions. Effective January 1, 2000, Phase II of the Act requires the plants to further decrease emissions. The Partnership believes that obligations to comply with the Clean Air Act Amendments of 1990 will drive shippers to increase the use of low-sulfur coal from the western United States. Approximately 80% of the coal loaded through the Cora and Grand Rivers terminals is low sulphur coal originating from mines located in the western United States, including the Hanna basin, Powder River basin, western Colorado and Utah. Cora Coal Terminal The Cora Terminal is a high-speed, rail-to-barge coal transfer and storage facility. The Terminal is located on approximately 480 acres of land along the upper Mississippi River near Cora, Illinois, about 80 miles south of St. Louis. It was built in 1980. The terminal's equipment includes 3.5 miles of railroad track, a rotary dumping station and train indexer, a multidirectional coal stacker/reclaimer, approximately 4,000 feet of conveyor belts and an anchored terminaling facility on the Mississippi River that takes advantage of approximately five miles of owned and leased available riverfront access with approximately 7,000 feet developed. The Cora Terminal is located on lands owned by the Partnership and on private lands under lease to the Partnership. The primary lease for Cora Terminal expires December 2015. The terminal has a throughput capacity of about 15 million tons per year which can be expanded to 20 million tons with certain capital additions. The facility's equipment permits it to continuously unload 115-car unit trains at a rate of 3,500 tons per hour. The terminal can transfer the coal to a storage yard or unload to barges at a rate up to 5,700 tons per hour. The railroad track can accommodate two 115-car trains simultaneously. The riverfront access permits simultaneous fleeting of up to 100 barges. The terminal also has automatic sampling, programmable controls, certified belt scales, computerized inventory control and the ability to blend different types of coal. The terminal currently is equipped to store up to 1.0 million tons of coal, which gives customers the flexibility to coordinate their supplies of coal with the demand at power plants. Management is focused on increasing the volumes of coal handled through the Cora Terminal. A $1.5 million capital expenditure, completed in 1997, increased throughput capacity by approximately 25% and doubled storage capacity. The terminal handled approximately 7.1 million tons , 6.0 million tons, and 6.5 million tons of coal in 1997, 1996, and 1995, respectively. Increased volume in 1997 resulted from higher volumes shipped under certain existing contracts plus volumes shipped under a new contract with the Tennessee Valley Authority and other new business. Management plans to continue to lower costs in order to remain competitive and will try to cultivate strategic partners such as rail and major barge carriers. Possible complementary acquisitions will also be examined. Cora terminal operations include transloading coal from railcars and trucks to river barges, blending coal and providing harbor services. Markets. Four major customers ship approximately 80% of all the coal loaded through the terminal. TECO Energy, Inc. ("TECO") is the parent of Tampa Electric of Tampa, Florida. TECO Transport, TECO's barge subsidiary, transports the coal by barge down the Mississippi River and intercoastal waterway and burns the coal in Tampa Electric's power plants. Through Ziegler Coal, TECO has two contracts with Cora which expire December 31, 2004. Carboex International Limited ("Carboex") is a Spanish state-owned coal purchasing company. Carboex purchases coal for the various Spanish state-owned utilities. Carboex transports the coal by barge to New Orleans and then by ship to Spain for use in the Puentes de Garcia Rodriguez Power Plant. Carboex's contract with Cora expires December 31, 2001. Indiana-Kentucky Electric Corp. ("IKEC") is a subsidiary of American Electric Power ("AEP") of Columbus, Ohio. AEP transports coal by barge to its various power plants on the Ohio River. The IKEC contract continues through December 31, 2004. The Partnership signed a coal transfer contract with the Tennessee Valley Authority on May 15, 1997 (effective January 1, 1997) continuing through December 31, 1999. Supply. Historically, the Cora Terminal has moved coal that originated in the mines of southern Illinois. Many shippers, however, particularly in the East, are now using western coal loaded at the Cora Terminal or a mixture of western coal and Illinois coal as a means of meeting environmental restrictions. The Partnership believes that Illinois coal producers and shippers will continue to be important customers, but anticipates that growth in volume through the terminal will be primarily due to western coal originating in Wyoming, Colorado and Utah. 10 The Cora Terminal sits on the mainline of the Union Pacific Railroad and is strategically well positioned to receive coal shipments from the West. Mines in southern Illinois and in Wyoming (Hanna and Powder River basins) are within the Union Pacific's service area and its connecting lines. With the recent merger of the Union Pacific and Southern Pacific Railroads, coal mined in the Colorado and Utah basins can now be shipped through the Cora Terminal. Union Pacific is one of only two major rail lines connected to the western mines that ship coal to the East and serves major coal companies that have substantial developed and undeveloped reserves. Grand Rivers Terminal On September 4, 1997, the Partnership acquired at a cost of approximately $20 million the assets of BRT Transfer Terminal, Inc. and other assets from Vulcan Materials Company The name of the terminal was subsequently changed to Grand Rivers. The Grand Rivers Terminal is operated on land under easements with an initial expiration of July 2014. Grand Rivers is a coal transloading and storage facility located on the Tennessee River, just above the Kentucky Dam. Grand Rivers is a modern, high-speed coal handling terminal featuring a direct dump train-to-barge facility, a bottom dump train-to-storage facility, barge unloading and a coal blending facility that can blend up to four different coals at one time. The terminal has four distinct and separate facilities, three of which are in close proximity. Three of the facilities receive coal by rail and the fourth by truck and barge. Coal blending can be done in two of the facilities. The terminal has an annual throughput capacity of approximately 25 million tons with a storage capacity of approximately 2 million tons. Coal can be unloaded and sent either to storage or directly dumped into barges at the rate of 5,000 tons per hour. Coal can be automatically blended and loaded into barges at the rate of 3,000 tons per hour. The fleeting of barges is currently handled by Vulcan pursuant to an operating agreement with the Partnership. Other features of the terminal include automatic sampling, programmable controls, computerized blending, belt scales, and computerized inventory control. The Grand Rivers Terminal is strategically important to the Partnership's coal business because: (i) it offers access to seven Class I railroads (Cora accesses only one, the Union Pacific); (ii) it is located on two major waterways (the Tennessee and Cumberland Rivers) and has access to the Ohio and Mississippi Rivers and the Gulf Coast via the Tombigbee System; (iii) it is a state-of-the-art blending facility; and (iv) it is isolated from flooding problems due to its location near the Kentucky Dam and can provide a back-up to the Cora terminal if coal cannot be accepted at Cora due to high water conditions. Supply. Grand Rivers has its main operations on the Tennessee River, near Grand Rivers, Kentucky. The terminal provides easy access to the Ohio-Mississippi River network, the Tennessee-Tombigbee System, major trucking routes on the interstate highway system and is served by the Paducah & Louisville Railroad, a short line railroad with connections to seven Class I rail lines including the Union Pacific, CSX, Illinois Central and Burlington Northern. Grand Rivers is situated between the Illinois and western low-sulphur coal fields. The major coal companies served by these railroads have substantial developed and undeveloped reserves. Markets. Grand Rivers' primary business has been to supply blends of western U.S., southern Illinois and western Kentucky coal to the power plants operated by TVA and other power plants located on the Ohio-Mississippi and Tennessee-Tombigbee Systems. Grand Rivers is strategically positioned to receive and store both local and western basin coals and can also blend large volumes of coal with speed and accuracy. The strategic position and blending capabilities will provide an advantage in meeting increased demand by power plants for blends of western and eastern coals necessary for continued compliance with the Clean Air Act Amendments of 1990. Grand Rivers is the only major terminal in the area that can both receive and load barge coal. Competition. Cora and Grand Rivers compete with several coal terminals located in the general geographic area, however, no significant new coal terminals have been constructed near the Cora or Grand Rivers terminals in the last ten years. There are significant barriers to entry for the construction of new coal terminals, including the requirement for significant capital expenditures and restrictive environmental permitting requirements. Management believes the Cora and Grand Rivers terminals can compete successfully with other terminals because of their favorable location, independent ownership, available capacity, modern equipment and large storage area. Some of the the major competing terminals include: 11 American Commercial Marines' Hall Street Terminal, owned by CSX, is located in St. Louis. This terminal is similar to Cora in design and operation, with annual volumes estimated at 6 million tons. Like Cora, this terminal experiences occasional interruptions of service due to high water conditions. Cook Terminal, owned by a consortium of power companies led by American Electric Power, is located north of GRT on the Ohio River. This terminal is connected to both the Union Pacific and Burlington Northern railroads. Annual volumes are estimated at 12 million tons. Kellogg Dock, owned by Consolidated Coal Company ("Consol"), is located 25 miles north of Cora Terminal. Kellogg is connected to the Union Pacific railroad and has annual volumes estimated at 3 million tons. There are numerous other terminals, many that are for proprietary use by the owners. Red Lightning Energy Services - Coal, LPG's, Refined Fuels, and Terminal Services Marketing In 1997, the Partnership began marketing energy related products and coal terminal services through its Red Lightning Energy Services unit ("Red Lightning"). Products marketed include coal and propane. The unit provides marketing of coal terminal services for both the Cora and the Grand Rivers Terminal. Markets. Coal is marketed and sold to utilities and industrial customers in the Midwest and Southeastern region of the United States on short term delivery or spot contracts. These customers use coal primarily for the generation of electricity. Propane is marketed and sold to industrial customers in the Midwest for use as fuel for a variety of industrial applications. Terminal services are marketed to utility and industrial customers on both short and long term contracts for storage and blending of coal. Supply. Red Lightning obtains coal primarily through producers in the Powder River and Illinois Basins on short term or spot sales contracts. Some coal is purchased through other coal marketers and brokers. Propane is purchased from propane marketers. Other services marketed by Red Lightning include storage and blending for a fee at the Partnership's two coal terminals. The Partnership plans to expand Red Lightning in 1998 by adding refined fuels and natural gas to the products it is currently marketing to utilities and municipal and industrial customers. The Partnership does not utilize derivatives or other similar instruments to hedge its risk with respect to commodity price fluctuations. Gas Processing and Fractionation The Partnership's gas processing and fractionating assets include its indirect interest in the Mont Belvieu Fractionator and the Painter gas processing plant. Mont Belvieu Fractionator General. The Partnership owns an indirect 25% interest in the Mont Belvieu Fractionator, located approximately 20 miles east of Houston in Mont Belvieu, Texas. The fractionator is a full-service fractionating facility that produces a range of specification products, including ethane, propane, normal butane, isobutane and natural gasoline from a raw stream of natural gas liquids (Y-grade). The facility, which was built in 1980, is operated by Enterprise Products Company and has access to virtually all major liquids pipelines and storage facilities located in the Mont Belvieu area. The Partnership's cash flow from its indirect interest in the Mont Belvieu Fractionator depends on the difference between fractionation revenues and fractionation costs (including the level of capital expenditures), as well as demand for fractionation services. The Mont Belvieu Fractionator has two major components: NGL fractionating and butane splitting. The NGL fractionating component consists of two trains: The West Texas train and the Seminole train. Each train consists of a de-ethanizer, a de-propanizer and a de-butanizer. Each major unit has an associated reboiler and related control equipment. The fractionation process uses heat recovery equipment and cogeneration. In December 1996, the total capacity of the fractionator was expanded by approximately 45,000 barrels per day to approximately 200,000 barrels per day. The Mont Belvieu Fractionator operated at approximately 98%, 100% and 96% of capacity, respectively, during 1997, 1996, and 1995. 12 The fractionator is owned 50% by Mont Belvieu Associates, which is owned 50% by each of the Partnership and Enterprise Products. The remaining 50% of the fractionator is owned equally by Enterprise, Texaco, Union Pacific Fuels and Burlington Resources. The owners of the fractionator, with the exception of the Partnership, account for approximately 75% of its revenues. Other customers include Enron, Exxon, ARCO, Marathon, Warren and Phillips. Markets. The fractionator is located in proximity to major end-users of its specification products, ensuring consistent access to the largest domestic market for NGL products. In addition, the Mont Belvieu hub has access to deep-water port loading facilities via the Port of Houston, allowing access to import and export markets. Supply. The Mont Belvieu Fractionator is fed by six major Y-grade pipelines (Attco, Chevron, Black Lake, Seminole, Chaparral and Panola). Through several pipeline interconnects and unloading facilities, the Mont Belvieu Fractionator also can access supply from a variety of other sources. Supply can either be brought directly into the facility or directed into underground salt dome storage. The Chaparral and Seminole pipelines gather Y-grade from a variety of natural gas processing plants in Texas, New Mexico, Oklahoma and the Mid-Continent area. The Chevron line transports NGLs from Chevron's East Texas and Central Texas facilities. Black Lake draws its supply from the Northern Louisiana region. The Attco pipeline draws its supply from South Texas and the Panola pipeline transports NGLs from East Texas. Additionally, import barrels can be brought to the Mont Belvieu Fractionator from locations on the Port of Houston. Competition. The Mont Belvieu Fractionator competes for volumes of Y-grade with three other fractionators located in the Mont Belvieu hub and surrounding areas. Competitive factors for customers include primarily the level of fractionation fees charged and the relative amount of available capacity. Painter Gas Processing Plant The Painter Plant is located near Evanston, Wyoming and consists of a natural gas processing plant, a nitrogen rejection unit, a fractionator, an NGL terminal and interconnecting pipelines with truck and rail loading facilities. The fractionation facility has a capacity of approximately 6,000 barrels per day, depending on the feedstock composition. After fractionation, the propane, mixed butanes and natural gasoline are delivered through three interconnecting NGL pipelines to the Partnership's Millis Terminal and Storage Facility, which is located approximately seven miles from the Painter Plant. Truck and rail loading of fractionated products is provided at Millis, where there is approximately 14,000 barrels of aboveground storage for all products. The Painter Plant is located on Bureau of Land Management land that is leased to the Partnership and Enron (50% each) until september 2009. Millis is located on private lands and is under lease to the Partnership until September 2009. On February 14, 1997, the Partnership executed an operating lease agreement with Amoco Oil Company for Amoco's use of the Painter Plant fractionator and the Millis facilities with the nearby Amoco Painter Complex gas plant. The lease will generate approximately $1.0 million of cash flow per year for the Partnership. The primary term of the lease expires February 14, 2007, with evergreen provisions at the end of the primary term. Amoco took an assignment of all commercial arrangements in place on February 14, 1997, and assumed all day to day operations, maintenance, repairs and replacements, and all expenses (other than minor easement fees), taxes and charges associated with the fractionator and the Millis facilities. After year seven, Amoco may elect to purchase the fractionator and Millis facilities under certain terms. Major Customers of the Partnership Although the Partnership's 1997 revenues were derived from a wide customer base, revenues from Amoco Corporation, including its subsidiaries, accounted for approximately 11.9% of consolidated revenues. In 1996, revenues from Mobil Corporation and Amoco Corporation, including their subsidiaries, accounted for approximately 12.4% and 10.4%, respectively, of revenues. For the year ended December 31, 1995, revenues from Chevron Corporation and Amoco Corporation, including their subsidiaries, each accounted for approximately 10.2% of revenues. For a more complete discussion of customers, see Note 11 of the Notes to the Consolidated Financial Statements. Employees The Partnership does not have any employees. The General Partner employs all persons necessary for the operation of the Partnership's business and the Partnership reimburses the General Partner for the services of such persons. As of 13 March 6, 1998, the General Partner had approximately 550 employees. Twenty hourly personnel at the Cora terminal are represented by the International Union of Operating Engineers under a collective bargaining agreement that expires in September 1998. No other employees of the General Partner are members of a union or have a collective bargaining agreement. The General Partner considers its relations with its employees to be good. Regulation Interstate Common Carrier Regulation The Partnership's pipelines are interstate common carrier pipelines, subject to regulation by the FERC under the Interstate Commerce Act ("ICA"). The ICA requires the Partnership to maintain tariffs on file with the FERC, which tariffs set forth the rates the Partnership charges for providing transportation services on the interstate common carrier pipelines as well as the rules and regulations governing these services. Petroleum pipelines are able to change their rates within prescribed ceiling levels that are tied to an inflation index. Rate increases made within the ceiling levels will be subject to protest, but such protests must show that the portion of the rate increase resulting from application of the index is substantially in excess of the pipeline's increase in costs. A pipeline must, as a general rule, utilize the indexing methodology to change its rates. The FERC, however, retained cost-of-service ratemaking, market-based rates and settlement as alternatives to the indexing approach, which alternatives may be used in certain specified circumstances. In 1997, 1996, and 1995, application of the indexing methodology did not significantly affect the Partnership's rates. The ICA requires, among other things, that such rates be "just and reasonable" and nondiscriminatory. The ICA permits interested persons to challenge proposed new or changed rates and authorizes the FERC to suspend the effectiveness of such rates for a period of up to seven months and to investigate such rates. If, upon completion of an investigation, the FERC finds that the new or changed rate is unlawful, it is authorized to require the carrier to refund the revenues in excess of the prior tariff collected during the pendency of the investigation. The FERC may also investigate, upon complaint or on its own motion, rates that are already in effect and may order a carrier to change its rates prospectively. Upon an appropriate showing, a shipper may obtain reparations for damages sustained for a period of up to two years prior to the filing of a complaint. On October 24, 1992, Congress passed the Energy Policy Act of 1992 ("Energy Policy Act"). The Energy Policy Act deemed petroleum pipeline rates that were in effect for the 365-day period ending on the date of enactment or that were in effect on the 365th day preceding enactment and had not been subject to complaint, protest or investigation during the 365-day period to be just and reasonable under the ICA (i.e., "grandfathered"). The Energy Policy Act also limited the circumstances under which a complaint can be made against such grandfathered rates. The rates the Partnership charges for transportation service on its North System and Cypress Pipeline were not suspended or subject to protest or complaint during the relevant 365-day period established by the Energy Policy Act. For this reason, the Partnership believes these rates should be grandfathered under the Energy Policy Act. State and Local Regulation The Partnership's activities are subject to various state and local laws and regulations, as well as orders of regulatory bodies pursuant thereto, governing a wide variety of matters, including marketing, production, pricing, pollution, protection of the environment, safety, and other matters. Safety Regulation The liquids pipelines and the pipelines connecting the Millis facilities to the Painter Plant are subject to regulation by the United States Department of Transportation ("D.O.T.") with respect to the design, installation, testing, construction, operation, replacement, and management of pipeline facilities. In addition, the partnership must permit access to and copying of records, and make certain reports and provide information as required by the Secretary of Transportation. Comparable regulation exists in some states in which the Partnership conducts pipeline operations. In addition, the Partnership's truck and rail loading facilities are subject to D.O.T. regulations dealing with the transportation of hazardous materials for motor vehicles and rail cars. The Partnership is also subject to the requirements of the Federal Occupational Safety and Health Act ("OSHA") and comparable state statutes. The Partnership believes that it is in substantial compliance with OSHA requirements, including general industry standards, recordkeeping requirements, and monitoring of occupational exposure to benzene and other regulated substances. 14 In general, the Partnership expects to increase expenditures in the future to comply with higher industry and regulatory safety standards. Such expenditures cannot be accurately estimated at this time, although the Partnership does not expect that such expenditures will have a material adverse impact on the Partnership, except to the extent additional hydrostatic testing requirements are imposed. Environmental Matters General. The operations of the Partnership are subject to federal, state and local laws and regulations relating to protection of the environment. The Partnership believes that its operations and facilities are in general compliance with applicable environmental regulations. The Partnership has an ongoing environmental audit and compliance program. Risks of accidental leaks or spills are, however, associated with fractionation of NGLs, transportation of NGLs and refined petroleum products, the handling and storage of coal, the processing of gas, as well as the truck and rail loading of fractionated products. There can be no assurance that significant costs and liabilities will not be incurred, including those relating to claims for damages to property and persons resulting from operation of the Partnership's businesses. Moreover, it is possible that other developments, such as increasingly strict environmental laws and regulations and enforcement policies thereunder, could result in increased costs and liabilities to the Partnership. Environmental laws and regulations have changed substantially and rapidly over the last 25 years, and the Partnership anticipates that there will be continuing changes. The clear trend in environmental regulation is to place more restrictions and limitations on activities that may impact the environment, such as emissions of pollutants, generation and disposal of wastes and use and handling of chemical substances. Increasingly strict environmental restrictions and limitations have resulted in increased operating costs for the Partnership and other similar businesses throughout the United States, and it is possible that the costs of compliance with environmental laws and regulations will continue to increase. The Partnership will attempt to anticipate future regulatory requirements that might be imposed and to plan accordingly in order to remain in compliance with changing environmental laws and regulations and to minimize the costs of such compliance. Solid Waste. The Partnership owns several properties that have been used for NGL transportation and storage and coal storage for many years. Solid waste disposal practices within the NGL industry and other oil and natural gas related industries have improved over the years with the passage and implementation of various environmental laws and regulations. A possibility exists that hydrocarbons and other solid wastes may have been disposed of on or under various properties owned by the Partnership during the operating history of these facilities. In such cases, hydrocarbons and other solid wastes could migrate from their original disposal areas and have an adverse effect on groundwater. The Partnership does not believe that there presently exists significant surface or subsurface contamination of its assets by hydrocarbons or other solid wastes. The Partnership will generate both hazardous and nonhazardous solid wastes that are subject to the requirements of the federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes. From time to time United States Environmental Protection Agency ("EPA") considers the adoption of stricter disposal standards for nonhazardous waste. Furthermore, it is possible that some wastes that are currently classified as nonhazardous, which could include wastes currently generated during pipeline operations, may in the future be designated as "hazardous wastes." Hazardous wastes are subject to more rigorous and costly disposal requirements. Such changes in the regulations may result in additional capital expenditures or operating expenses by the Partnership. Superfund. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons that contributed to the release of a "hazardous substance" into the environment. These persons include the owner or operator of a site and companies that disposed or arranged for the disposal of the hazardous substances found at the site. CERCLA also authorizes the EPA and, in some cases, third parties to take actions in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. Although "petroleum" is excluded from CERCLA's definition of a "hazardous substance," in the course of its ordinary operations the Partnership will generate wastes that may fall within the definition of a "hazardous substances". The Partnership may be responsible under CERCLA for all or part of the costs required to clean up sites at which such wastes have been disposed. EPA Gasoline Volatility Restrictions. In order to control air pollution in the United States, the EPA has adopted regulations that require the vapor pressure of motor gasoline sold in the United States to be reduced from May through mid-September of each year. These regulations mandated vapor pressure reductions beginning in 1989, with more stringent restrictions beginning in 1992. States may impose additional volatility restrictions. The regulations have had a substantial effect on the market price and demand for normal butane, and to some extent isobutane, in the United States. Butanes are used by gasoline manufacturers in the production of motor gasolines. 15 Since normal butane is highly volatile, it is now less desirable for use in blended gasolines sold during the summer months. Although the EPA regulations have reduced demand and may have resulted in a significant decrease in prices for normal butane, low normal butane prices have not impacted the liquids pipelines business in the same way they would impact a business with commodity price risk. The EPA regulations have presented the opportunity for additional transportation services on the North System. In the summer of 1991, the North System began long-haul transportation of refinery grade normal butane produced in the Chicago area to the Bushton, Kansas area for storage and subsequent transportation north from Bushton during the winter gasoline blending season. These additional transportation volumes produced at Chicago area refineries resulted from the more restrictive EPA vapor pressure limits on motor gasoline. Clean Air Act. The operations of the Partnership are subject to the Clean Air Act and comparable state statutes. The Partnership believes that the operations of the liquids pipelines, the Mont Belvieu Fractionator, the coal terminals and the Painter Plant are in substantial compliance with such statutes. Numerous amendments to the Clean Air Act were adopted in 1990. These amendments contain lengthy, complex provisions that may result in the imposition over the next several years of certain pollution control requirements with respect to air emissions from the operations of the liquids pipelines, the coal terminals, the Mont Belvieu Fractionator and the Painter Plant. The EPA is developing, over a period of many years, regulations to implement those requirements. Depending on the nature of those regulations, and upon requirements that may be imposed by state and local regulatory authorities, the Partnership may be required to incur certain capital expenditures over the next several years for air pollution control equipment in connection with maintaining or obtaining operating permits and approvals and addressing other air emission-related issues. Due to the broad scope and complexity of the issues involved and the resultant complexity and controversial nature of the regulations, full development and implementation of many of the regulations have been delayed. Until such time as the new Clean Air Act requirements are implemented, the Partnership is unable to estimate the effect on earnings or operations or the amount and timing of such required capital expenditures. At this time, however, the Partnership does not believe it will be materially adversely affected by any such requirements. Risk Factors FERC Proceedings; Possible Effect on Rates Various shippers have filed complaints before the Federal Energy Regulatory Commission ("FERC") challenging certain of the pipeline tariff rates of the South, North and East Lines, alleging that such rates are not entitled to "grandfathered" status under the Energy Policy Act of 1992 ("EPACT") due to the development of factors constituting "changed circumstances" within the meaning of EPACT. Certain of these complaints have alleged that the acquisition of SFPP and the contemplated cost savings from the combination of the businesses of SFPP and the Partnership provide additional factors constituting "changed circumstances." The Partnership has taken the position that such rates are "grandfathered" and that "changed circumstances" do not exist. However, these proceedings involve complex rules and regulations and numerous factual issues, all of which must be considered and analyzed with the benefit of a limited number of legal precedents. It is possible that the factors cited by the complaining parties in support of "changed circumstances," including consummation of the acquisition of SFPP and realization of cost savings contemplated thereby, could, when considered individually or cumulatively, be found to constitute "changed circumstances." Such a finding could result in very substantial rate refunds and prospective rate reductions, thereby offsetting or perhaps exceeding any cost savings that may be realized. A finding of "changed circumstances" could thus have a material adverse effect on SFPP's results of operations, financial condition, liquidity and funds available for distributions to holders of Common Units. See "--Risks Associated with Legal Proceedings Related to Operations of SFPP" and Item 3. "Legal Proceedings." Combination of Pipeline Operations; Realization of Synergies The management of the Partnership believes that the Partnership will be able to integrate the geographically and operationally diverse businesses of the Partnership and SFPP in a beneficial and profitable manner. However, the operations and management of the Partnership and SFPP are different, and the Partnership may incur costs or encounter other challenges not currently anticipated which may negatively affect its prospects. The integration of operations following the acquisition will require the dedication of management and other personnel which may temporarily distract their attention from the day-to-day business of the combined partnership, the development or acquisition of new properties and the pursuit of other business acquisition opportunities. 16 Change in Management of SFPP Assets The assets of SFPP previously managed by the SF General Partner are now under the ultimate control and management of different persons. While many of the individuals responsible for the day-to-day management of the SFPP assets have continued with the Partnership following the acquisition, most members of senior management of SFPP did not remain with the Partnership. Risks Associated with Legal Proceedings Related to Operations of SFPP SFPP is currently a party to several legal proceedings, including, without limitation: (i) three proceedings before the FERC, which generally challenge certain of the existing tariff rates of SFPP and seek both reparations and prospective rate reductions, (ii) a proceeding before the California Public Utilities Commission ("CPUC"), which generally challenges rates charged by SFPP for intrastate transportation of refined petroleum products through its pipeline system in the State of California and requests prospective rate reductions, (iii) a judicial reference proceeding between SFPP and Southern Pacific Transportation Company ("SPTC") to determine the extent, if any, to which the rent payable by SFPP for the use of pipeline easements on rights-of-way held by SPTC should be adjusted pursuant to existing contractual arrangements and (iv) environmental proceedings related to ground water and soil contamination in Elmira, California. In addition, SFPP has liabilities under settlements related to ground water and soil contamination in the vicinity of SFPP's storage facilities and truck loading terminals at Sparks, Nevada and 18 other sites. Each of the actions pending before the FERC and the CPUC seeks to reduce SFPP's rates. The complainants in FERC Docket Nos. OR92-8-000 et al. are seeking reparations aggregating approximately $35 million for shipments between 1990 and 1994 as well as rate reductions of between 30% and 40% for shipments in 1995 and thereafter. If the complainants were to prevail on all claims, it is estimated that reparations resulting from such rate reductions for shipments in 1995, 1996, and 1997 would aggregate approximately an additional $80 million, resulting in total reparations for the period 1990-1997 of approximately $115 million, plus interest of approximately $30 million. The complainants in FERC Docket Nos. OR98-1-000 and OR98-2-000 also seek both prospective reductions in the rates charged by SFPP and reparations. In FERC Docket No. IS98-1-000, various parties have protested the tariff filed by SFPP in response to a decision of the FERC which required SFPP to file a tariff for use of its lines between Sepulveda junction and Watson Station in California. FERC has reserved decision in Docket Nos. OR98-2-000 et al. on reparations until it rules on the newly-filed rates. The complainants before the CPUC seek prospective rate reductions aggregating approximately $15 million per year. SFPP is vigorously contesting the complaints before the FERC and the CPUC. The initial decision rendered by the presiding Administrative Law Judge in Docket No. OR92-8-000, if implemented in its current form and also applied to the Sepulveda lines rate at issue in Docket No. IS98-1-000, would reduce prospective revenues by approximately $8 million to $10 million annually and require SFPP to pay reparations through year end 1997 in the approximate amount of $30 million. Under the rulings in the initial decision, reparations and interest would continue to accrue at approximately $8 million per annum until new prospective rates become effective. The Partnership is not able to predict with certainty the final outcome of these legal proceedings. However, the ultimate resolution of these proceedings could have a material adverse effect on the Partnership's results of operations, financial condition, liquidity and ability to maintain its annual cash distribution of $2.25 per Common Unit. See Item 3. "Legal Proceedings". No Assurance that Tariff Rates can be Maintained or Increased Revenues from interstate and California intrastate common carrier transportation on the liquids pipelines are determined in accordance with tariffs filed with FERC and the CPUC, respectively. As discussed above, the pipeline tariffs of SFPP are subject to challenge before the FERC and CPUC and thus such challenge could, if successful, result in rate refunds and/or lower prospective pipeline rates, which could have a material adverse effect on the Partnership's results of operations, financial condition, liquidity and funds available for distributions to holders of Common Units. Such rates could also be adversely affected in the future by increased competition. See "--Competition." 17 Possible Insufficiency of Cash Flow to Pay Announced Distributions The pro forma historical combined cash flow of the Partnership and SFPP would not be sufficient to pay the Partnership's current annual distribution of $2.25 per Common Unit. The ability of the Partnership to generate sufficient cash flow to pay such distribution will depend on the ability of the Partnership to realize anticipated cost savings resulting from the acquisition of Santa Fe and to increase revenues in certain sectors in accordance with the Partnership's 1998 business plan. Although the Partnership's management believes that such cost savings and revenue increases can be realized, there can be no assurance in this regard. In the short term the Partnership may fund distributions from borrowings, to the extent available. However, ultimately, the ability of the Partnership to sustain announced distributions will depend on the ability of the Partnership to increase distributable cash flow. In addition, there is no guaranteed minimum quarterly distribution under the Partnership Agreement. Cash Distributions will Fluctuate with Performance; No Minimum Distribution General. Although the General Partner will distribute 100% of the Available Cash, there can be no assurance regarding the amounts of Available Cash to be generated by the Partnership. See "--Risks Associated with Partnership Agreement and State Partnership Law--Cash Distribution Policy" and "Description of the Partnership Agreement--Cash Distribution Policy." The Partnership's profitability and its ability to make distributions to holders of Common Units will depend to a large extent upon volumes of NGLs and refined petroleum products that the liquids pipelines transport and to a lesser extent upon the volume of coal transloaded and stored by the Coal Terminals and volumes of NGLs for fractionation. Diminished volumes would decrease the Partnership's profits and, consequently, the amount of cash available for distribution to holders of Common Units. Because the demand for such products is subject to numerous factors outside the Partnership's control, no assurance can be given regarding future volumes. Factors Affecting Transportation Volumes. Transportation volumes for NGLs and refined petroleum products are affected primarily by the market demand for products in the geographic regions served by the liquids pipelines. Volumes for the Coal Terminals depend on the market demand for western and Illinois coal, economic and available rail transportation from sources of supply and economic barge transportation to delivery points. Market demand for NGLs, refined petroleum products and coal may be affected by future economic conditions, weather, fuel conservation measures, alternate fuel requirements, governmental and environmental regulation, demographic changes or technological advances in fuel economy and energy generation devices. The Partnership cannot predict the effect of such factors on the demand for the transportation of NGLs and refined petroleum products in the liquids pipelines and the handling and storage of coal. Profitability is Dependent on Certain Major Customers. Major end-users of NGLs and refined petroleum products transported by the liquids pipelines include wholesalers and retailers of refined petroleum products in the relevant service areas, refinery facilities in the Chicago area, a world-scale petrochemical plant near Lake Charles, Louisiana and United States military bases. Major suppliers of refined petroleum products transported on the liquids pipelines include refineries located in Los Angeles, San Francisco and Bakersfield, California; Chicago, Illinois; Houston and El Paso, Texas and Seattle, Washington. A disruption of operations at any of such facilities could adversely affect the Partnership's revenues by reducing the volumes of NGLs and refined petroleum products transported through the liquids pipelines. In addition, four major customers ship approximately 80% of all coal loaded through the Coal Terminals. The Partnership has business interruption insurance to protect itself against losses from reduced volumes of products transported as a result of disrupted operations of its assets or of a supplier or end-user because of physical loss or damage. However, there can be no assurance that business interruption insurance will be adequate to cover losses that might result from disruptions of operations. Should the Partnership lose any of its major customers, the Partnership's profitability could be adversely affected along with its ability to make distributions to holders of Common Units. Establishment of Reserves May Affect Distributions. The Partnership Agreement gives the General Partner broad latitude in establishing reserves that affect the amount of Available Cash because the General Partner may, in its reasonable discretion, determine amounts that can be set aside as reserves for the proper conduct of the business. Risks Associated with Leverage Impact on Ability to Make Cash Distributions. The Partnership has significant indebtedness. The debt service obligations associated with such indebtedness may reduce the Available Cash for distribution by the Partnership to holders of Common Units and to the General Partner. The ability of the Partnership to meet these debt service obligations will depend primarily upon its future performance, which will be subject to prevailing economic conditions 18 and to financial, business and other factors (including regulation), many of which are beyond its control. The Partnership may in the future incur additional indebtedness in order to finance acquisitions or for general business purposes. Assets Pledged to Secure Debt. The Partnership's primary credit facility is secured by a first priority lien on (i) the Partnership's limited partner interests in the operating partnerships; (ii) all of the assets of OLP-D (including its general partner interest in SFPP), (iii) the Partnership's ownership interests in the fractionator and Shell CO2 Company and (iv) intercompany notes executed by the operating partnerships in favor of the Partnership for loan proceeds lent to them by the Partnership. If the Partnership fails to maintain certain financial ratios, then each of the operating partnerships will be obligated to secure its intercompany note with its assets. SFPP has also granted liens on substantially all of its properties to secure its existing indebtedness and such liens remain in effect. If an event of default occurs, the lenders will have the right to foreclose upon such collateral. Foreclosure, in addition to causing an investment loss, could have significant adverse tax consequences for holders of Common Units, including the realization of taxable income by such holders without a corresponding distribution of cash. Similarly, holders of Common Units could have increased taxable income without a corresponding increased cash distribution if, while there is substantial indebtedness outstanding, the Partnership were to dispose of assets. Instruments Governing Indebtedness Contain Restrictive Covenants. The Partnership may be prevented by the instruments governing its indebtedness from engaging in certain transactions which might otherwise be considered beneficial to the Partnership, and such provisions may limit or prohibit distributions to holders of Common Units under certain circumstances. The agreements governing such indebtedness generally require the operating partnerships to comply with various affirmative and negative covenants, including without limitation, the maintenance of certain financial ratios and restrictions on (i) the incurrence of additional indebtedness; (ii) entering into mergers, consolidations and sales of assets; (iii) making investments; and (iv) granting liens. In addition, the agreements governing the Partnership's indebtedness generally prohibit the Partnership from making cash distributions to holders of Common Units more frequently than quarterly, from distributing amounts in excess of 100% of Available Cash for the immediately preceding calendar quarter and from making any distribution to holders of Common Units if an event of default exists or would exist upon making such distribution. The instruments governing SFPP's indebtedness contain similar restrictions. The instruments governing any additional indebtedness incurred to refinance the indebtedness may also contain similar restrictions. SFPP's First Mortgage Notes generally may not be prepaid at any time prior to December 15, 1999. After December 15, 1999 and prior to December 15, 2002, the Partnership may prepay the SFPP First Mortgage Notes with a make-whole prepayment premium. On or after December 15, 2002 and prior to December 15, 2003, the Partnership may prepay the SFPP First Mortgage Notes with a prepayment premium equal to .7133% of the principal amount so prepaid. After December 15, 2003, the Partnership may prepay the SFPP First Mortgage Notes in whole or in part without a prepayment premium. SFPP is restricted from taking certain actions with respect to $190 million of the SFPP First Mortgage Notes, including the prepayment of such amount. Such restrictions may limit the Partnership's flexibility in structuring or refinancing existing or future indebtedness. Potential Change of Control if Kinder Morgan, Inc. Defaults on Indebtedness A change of control of the Partnership could occur if Kinder Morgan, Inc. defaults on its secured indebtedness. Kinder Morgan, Inc. ("KMI") owns all of the outstanding capital stock of the General Partner. KMI has pledged this stock to secure certain of its indebtedness. At the present time, KMI's only source of income to pay such indebtedness is dividends that KMI receives from the General Partner. Risks Associated with Pipeline Easements A significant portion of the South, North and East Lines, owned and operated through SFPP, are located on railroad right-of-ways as to which SFPP was granted easements by SPTC for the construction and operation of such lines. SPTC, or its predecessors in interest, acquired some of such right-of-way pursuant to federal statutes enacted in 1871 and 1875. The right-of-way granted under the 1871 statute was thought to be an outright ownership interest, which would continue in perpetuity unless the right-of-way ceased to be used for railroad purposes, in which case the ownership interest would be extinguished. SPTC and its predecessors in interest have used the right-of-way for railroad purposes since the railroad was constructed. Except for one lawsuit which was dismissed, these lines have operated without challenge to the validity of the easements granted by SPTC on and beneath the land since construction of such lines in the 1950s. 19 Two United States Circuit Courts, however, have determined, in decisions rendered in 1979 and 1980, that railroad right-of-ways granted under laws similar to the 1871 statute provide only a surface easement for railroad purposes without any right to the subsurface. If a court were to determine that the 1871 statute also prohibits the use of the subsurface by the railroad or its assignees for the operation of a pipeline, SFPP may be required to obtain easements from subsurface landowners in order to continue to maintain the South, North and East lines beneath the right-of-way SPTC was granted under the 1871 statute. The General Partner believes that such easements could be obtained over time at a cost that would not have a material adverse effect on the Partnership, although no assurance in this regard can be given. With respect to the liquids pipelines, the Partnership has been advised by counsel that it has the power of eminent domain in the states in which it operates (except for Illinois) assuming it meets certain requirements that differ from state to state. While there can be no assurance, the Partnership believes that it meets such requirements. The Partnership does not believe that Shell CO2 Company has the power of eminent domain with repect to its CO2 pipelines. The inability of the Partnership to exercise the power of eminent domain could have a material adverse effect on the business of the Partnership in those instances where the Partnership will not have the right through leases, easements, rights-of-way, permits or licenses to use or occupy the property used for the operation of the liquids pipelines and where the Partnership is unable to obtain such rights. Risks Associated with Shell CO2 Company The limited partnership agreement forming the Shell CO2 Company provides that the Partnership will be entitled to a fixed, quarterly distribution of approximately $3.6 million ($14.5 million per year) during the four year period ended December 31, 2001. In 2002 and 2003, the Partnership's cash distributions will be increased or decreased so that the aggregate cash distributions received by the Partnership during the first six years of Shell CO2 Company's existence will be equal to the Partnership's percentage of the cumulative cash distributions of Shell CO2 Company during such period (which initially is expected to equal 20%) on a present value basis (discounted at 10%). Under certain scenarios, which management believes are unlikely, it is possible that the Partnership would not receive any distributions from Shell CO2 Company during 2002 and 2003 and could be required to return a portion of the distributions received during the first four years. After 2003, the Partnership will participate in distributions in accordance with its partnership percentage. Costs of Environmental Regulation The business and operations of the Partnership are subject to federal, state and local laws and regulations relating to environmental practices. In particular, the Partnership could incur significant costs and liabilities in the event of an accidental leak or spill in connection with liquid petroleum products transportation and storage. The costs and liabilities associated with leaks and spills of hazardous materials, either individually or in the aggregate, could negatively affect the level of cash available for distribution to holders of Common Units. Moreover, it is possible that other developments, such as increasingly strict environmental laws and regulations, could result in increased costs and liabilities to the Partnership. The Partnership cannot predict the ultimate impact on their business and operations of the Environmental Protection Agency standards or the impact of future environmental measures. The costs of environmental regulation are, however, already significant and there is a possibility that additional regulation could negatively affect the level of cash available for distribution to holders of Common Units. Competition Propane competes with electricity, fuel oil and natural gas in the residential and commercial heating market. In the engine fuel market, propane competes with gasoline and diesel fuel. Butanes and natural gasoline used in motor gasoline blending and isobutane used in alkylation compete with alternative products. NGLs used as feedstocks for refineries and petrochemical plants compete with alternative feedstocks. As a result, NGL demand is significantly affected by the availability and prices of alternative energy sources and feedstocks. Such competition could ultimately result in lower levels of the Partnership profits and lower cash distributions to holders of Common Units. The Partnership conducts its operations without the benefit of exclusive franchises from government entities. In addition, it provides common carrier transportation services through the liquids pipelines at posted tariffs, and, in virtually all cases, without long-term contracts for transportation service with its customers. Demand for transportation services for refined petroleum products is primarily a function of total and per capita fuel consumption, prevailing economic and demographic conditions, alternate modes of transportation, alternate product sources and price. 20 Because pipelines are generally the lowest cost method for intermediate and long-haul overland product movement, the liquids pipelines' most significant competitors are proprietary pipelines owned and operated by major oil companies in the areas where the liquids pipelines deliver products, refineries within the operating partnerships' market areas served by the liquids pipelines and trucks. The possibility exists that additional pipelines may in the future be constructed to serve specific markets served by the liquids pipelines. Trucks competitively deliver products in certain markets. Recently, the South, North and East Lines, owned and operated through SFPP, have experienced minor but notable reductions in product volumes delivered to certain shorter-haul destinations, primarily Orange and Colton, California, due to increased utilization of trucking by major oil companies. Management cannot predict with certainty whether this trend towards increased short-haul trucking will continue in the future. Utilization of and demand for terminaling services varies widely throughout the liquids pipelines. Certain of the major petroleum companies as well as independent terminal operators are presently in direct competition with the Partnership at several terminal locations. At those locations, market share is primarily a function of pricing, service capabilities and available tankage. Risks Associated with the Partnership Agreement and State Partnership Law Cash Distribution Policy. Under the terms of the Partnership Agreement, the General Partner is entitled to receive a specified percentage of the quarterly cash distributions to the partners of the Partnership. The percentage varies depending upon the amount of the quarterly distribution. See "Description of the Partnership Agreement--Cash Distribution Policy." After the holders of Common Units have received quarterly cash distributions of $.4675 per Common Unit, the General Partner is entitled to receive 50% (the highest marginal rate under the Partnership Agreement) of any additional cash distributed to the holders of Common Units during such quarter. Based on the Partnership's current annual distribution of $2.25 per Common Unit, the General Partner would receive approximately 20.8% of all such cash distributions and 50% of any distributions in excess of such amount. Limited Voting Rights, Management and Control. Holders of Common Units will have only limited voting rights on matters affecting the Partnership. The General Partner will manage and control the activities of the Partnership. See "Description of Partnership Agreement--Management." Holders of Common Units have no right to elect the General Partner on an annual or other ongoing basis. If the General Partner withdraws, however, its successor may be elected by the holders of a majority of the outstanding Common Units (excluding for purposes of such determination Common Units owned by the departing general partner and its affiliates). The General Partner may not be removed unless such removal is approved by the vote of the holders of not less than 662/3% of the outstanding Common Units, excluding Common Units owned by the General Partner and its affiliates, provided that certain other conditions are satisfied. Any such removal is subject to the limited partners approving the successor general partner by the same vote required for removing the General Partner and receipt of an opinion of counsel that such removal and the approval of a successor will not result in the loss of the limited liability of any limited partner or cause the Partnership to be treated as an association taxable as a corporation or otherwise taxed as an entity for federal income tax purposes. In addition, any Common Units held by a person (other than the General Partner and its affiliates) that owns 20% or more of the Common Units cannot be voted. These provisions mean that holders of Common Units only have a limited say in matters affecting the operation of the Partnership and, if such holders are in disagreement with the decisions of the General Partner, they may remove the General Partner only as provided in the Partnership Agreement. The General Partner's Liability to the Partnership and the Holders of Common Units May be Limited. Certain provisions of the Partnership Agreement contain exculpatory language purporting to limit the liability of the General Partner to the Partnership or the holders of Common Units. For example, the Partnership Agreement provides that: (i) borrowings by or the approval thereof by the General Partner will not constitute a breach of any duty of the General Partner to the Partnership or the holders of Common Units whether or not the purpose or effect thereof is to increase incentive distributions to the General Partner; (ii) any actions taken by the General Partner consistent with the standards of reasonable discretion set forth in the definitions of Available Cash and Cash from Operations contained in the Partnership Agreement will be deemed not to breach any duty of the General Partner to the Partnership or the holders of Common Units; and 21 (iii) in the absence of bad faith by the General Partner, the resolution of conflicts of interest by the General Partner will not constitute a breach of the Partnership Agreement or a breach of any standard of care or duty. Partnership Agreement Limits the Liability and Modifies the Fiduciary Duties of the General Partner Under Delaware Law. Provisions of the Partnership Agreement purport to limit the liability of the General Partner to the Partnership and the holders of Common Units. Such provisions also purport to modify the fiduciary duty standards to which the General Partner would otherwise be subject under Delaware law, under which a general partner owes its limited partners the highest duties of good faith, fairness and loyalty. Such duty of loyalty would generally prohibit a general partner of a Delaware limited partnership from taking any action or engaging in any transaction as to which it has a conflict of interest. The Partnership Agreement permits the General Partner to exercise the discretion and authority granted to it thereunder in the management of the Partnership and the conduct of its operations, so long as its actions are in, or not inconsistent with, the best interests of the Partnership. Such modifications of state law standards of fiduciary duty may significantly limit the ability of holders of Common Units to successfully challenge the actions of the General Partner as being a breach of what would otherwise have been a fiduciary duty. Potential Liability of the Holders of Common Units to Repay Distributions. Holders of Common Units will not be liable for assessments in addition to their initial capital investment in the Common Units. Under certain circumstances, however, holders of Common Units may be required to repay to the Partnership amounts wrongfully returned or distributed to them. Under the Delaware Act, a limited partnership may not make a distribution to a partner to the extent that at the time of the distribution, after giving effect to the distribution, all liabilities of the Partnership, other than liabilities to partners on account of their partnership interests and nonrecourse liabilities, exceed the fair value of the assets of the limited partnership. The Delaware Act provides that a limited partner who receives such a distribution and knew at the time of the distribution that the distribution was in violation of the Delaware Act will be liable to the limited partnership for the amount of the distribution for three years from the date of the distribution. Under the Delaware Act, an assignee who becomes a substituted limited partner of a limited partnership is liable for the obligations of the assignor to make contributions to the Partnership, except the assignee is not obligated for liabilities unknown to him at the time he or she became a limited partner and which could not be ascertained from the Partnership agreement. Potential Liability of Holders of Common Units if the Partnership has not Complied with a State Partnership Law. The Partnership conducts its business in 16 states, and in some of those states the limitations on the liability of limited partners for the obligations of a limited partnership have not been clearly established. If (i) a court or governmental agency determined that the Partnership was conducting business in any such state and had not complied with the applicable limited partnership statute, or (ii) the right of holders of Common Units as a group to remove or replace the General Partner or to take other action pursuant to the Partnership Agreement, and the exercise of such right or the taking of such action constituted "control" of the Partnership's business, then holders of Common Units might be held liable for the Partnership's obligations to the same extent as a general partner. The Partnership May Exercise its Limited Call Right. In the event that at any time not more than 20% of the issued and outstanding limited partners' interests of any class of the Partnership are held by persons other than the General Partner and its affiliates, the General Partner will have the right, assignable to any of its affiliates or to the Partnership, to purchase all, but not less than all, of the limited partner interests of the Partnership held by such unaffiliated persons for a price equal to the most recent 20-day average trading price, or the highest purchase price paid by the General Partner or its affiliates to acquire limited partner interests of such class of the Partnership during the prior 90 days, whichever is higher. As a consequence, a holder of such limited partner interests may have such holder's interest purchased even though the holder may not desire to sell it, or the price paid may be less than the amount the holder would desire to receive. The Partnership May Sell Additional Limited Partner Interests, Diluting Existing Interests of Holders of Common Units. The Partnership Agreement authorizes the General Partner to cause the Partnership to issue additional limited partner interests and other equity securities of the Partnership for such consideration and on such terms and conditions as shall be established by the General Partner. Any issuance of additional Common Units or other equity securities of the Partnership would result in a corresponding decrease in the proportionate ownership interest in the Partnership represented by Common Units then outstanding, and such issuance could therefore adversely affect the amount of cash distributed with respect to, and the market price of, Common Units outstanding prior to such issuance. Such additional issuance's will also diminish the relative voting strength of the previously outstanding Common Units. Effects of Anti-takeover Provisions. The Partnership Agreement provides that any person or group (other than the General Partner and its affiliates) that acquires beneficial ownership of 20% or more of the Common Units will lose its 22 voting rights with respect to all of its Common Units. This provision is intended to discourage a person or group from attempting to remove the General Partner or otherwise change management of the Partnership and may diminish the price at which the Common Units will trade under certain circumstances. For example, the provision may make it unlikely that a third party, in an effort to remove the General Partner and take over the management of the Partnership, would make a tender offer for the Common Units at a price above their trading market price without first removing the General Partner and substituting an affiliate. Pre-emptive Rights of General Partner. To maintain its then current partnership interest in the Partnership, the General Partner, acting as general partner of the Partnership, has the right to purchase additional limited partnership interests issued by the Partnership whenever, and on the same terms that, the Partnership issues such securities to any person other than the General Partner and its affiliates. No other holder of Common Units has a similar right. Therefore, only the General Partner may protect itself against the dilutive effect of an issuance of additional equity securities of the Partnership. The General Partner waived its pre-emptive right in connection with the Transaction, but not with respect to any other or further transaction. Potential Conflicts of Interest Related to Operation of the Partnership Certain conflicts of interest could arise among the General Partner, Kinder Morgan Inc., the parent company of the General Partner ("KMI") and the Partnership. Such conflicts may include, among others, the following situations: (i) The Partnership does not have any employees and relies solely on employees of the General Partner and its affiliates, including KMI. (ii) Under the terms of the Partnership Agreement, the Partnership reimburses the General Partner for costs incurred in managing and operating the Partnership. (iii) The amount of cash expenditures, borrowings and reserves in any quarter may affect whether or the extent to which there is sufficient Available Cash constituting Cash from Operations to pay quarterly distributions on the Common Units in such quarter or subsequent quarters. The ability of the Partnership to continue to make distributions at its current annual level of $2.25 per Common Unit depends upon the operations of the Partnership and various factors which cannot be guaranteed. See "--Cash Distributions will Fluctuate with Performance; No Minimum Distribution." (iv) Whenever possible, the General Partner intends to limit the liability under contractual arrangements of the Partnership to all or particular assets of the Partnership, with the other party to the contract having no recourse against the General Partner or its assets. The Partnership Agreement provides that any action by the General Partner in so limiting its liability or that of the Partnership will not be deemed to be a breach of its fiduciary duty, even if the Partnership could have obtained more favorable terms without such limitation on liability. (v) Under the terms of the Partnership Agreement, the General Partner is not restricted from paying its affiliates for any services rendered on terms fair and reasonable to the Partnership or entering into additional contractual arrangements with any of the affiliates of the General Partner on behalf of the Partnership. Neither the Partnership Agreement nor any of the other agreements, contracts and arrangements between the Partnership, on the one hand, and the General Partner and its affiliates, on the other hand, are or will be the result of arm's-length negotiations. (vi) The Partnership Agreement provides that it will not constitute a breach of the General Partner's fiduciary duty if the General Partner exercises its right to call for and purchase limited partner interests as provided in the Partnership Agreement or assigns this right to one of its affiliates or to the Partnership. Tax Treatment Of Publicly Traded Partnership Under The Internal Revenue Code The Internal Revenue Code of 1986, as amended (the "Code"), imposes certain limitations on the current deductibility of losses attributable to investments in publicly traded partnerships and treats certain publicly traded partnerships as corporations for federal income tax purposes. The following discussion briefly describes certain aspects of the Code that apply to individuals who are citizens or residents of the United States without commenting on all of the federal income tax matters affecting the Partnership or the Unitholders, and is qualified in its entirety by reference to the Code. UNITHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISOR ABOUT THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PARTNERSHIP. 23 Tax Characterization of the Partnership. The availability to a holder of Common Units of the federal income tax benefits of an investment in the Partnership depends, in large part, on the classification of the Partnership as a partnership for federal income tax purposes. The Code generally treats a publicly traded partnership formed after 1987 as a corporation unless, for each taxable year of its existence, 90% or more of its gross income consists of qualifying income. If the Partnership were to fail to meet the 90% "qualified income" test (the "Natural Resources Exception") for any year prior to or subsequent to the acquisition of Santa Fe, the Partnership would be treated as a corporation unless it met the inadvertent failure exception. Qualifying income includes interest, dividends, real property rents, gains from the sale or disposition of real property, income and gains derived from the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil or products thereof), or the marketing of any mineral or natural resource (including fertilizer, geothermal energy and timber), and gain from the sale or disposition of capital assets that produced such income. The General Partner believes that more than 90% of the Partnership's gross income is, and has been, qualifying income because the Partnership is engaged primarily in the transportation of NGLs, refined petroleum products and CO2 through the pipelines. If the Partnership were classified as an association taxable as a corporation for federal income tax purposes, the Partnership would be required to pay tax on its income at corporate rates, distributions would generally be taxed to the holders of Common Units as corporate distributions, and no income, gain, loss, deduction or credit would flow through to the holders of Common Units. Because tax would be imposed upon the Partnership as an entity, the cash available for distribution to the holders of Common Units would be substantially reduced. Treatment of the Partnership as an association taxable as a corporation or otherwise as a taxable entity would result in a material reduction in the anticipated cash flow and after-tax return to the holders of Common Units. There can be no assurance that the law will not be changed so as to cause the Partnership to be treated as an association taxable as a corporation for federal income tax purposes or otherwise to be subject to entity-level taxation. The Partnership Agreement provides that, if a law is enacted that subjects the Partnership to taxation as a corporation or otherwise subjects the Partnership to entity-level taxation for federal income tax purposes, certain provisions of the Partnership Agreement relating to the General Partner's incentive distributions will be subject to change, including a decrease in the amount of the Target Distribution levels to reflect the impact of entity level taxation on the Partnership. Passive Activity Loss Limitations. Under the passive loss limitations, losses generated by the Partnership, if any, will only be available to offset future income generated by the Partnership and cannot be used to offset income which an individual estate, trust or personal service corporation realizes from other activities, including passive activities or investments. Income which may not be offset by passive activity "losses" includes not only salary and active business income, but also portfolio income such as interest, dividends or royalties or gain from the sale of property that produces portfolio income. Credits from passive activities are also limited to the tax attributable to any income from passive activities. The passive activity loss rules are applied after other applicable limitations on deductions, such as the at-risk rules and the basis limitation. Certain closely held corporations are subject to slightly different rules, which can also limit their ability to offset passive losses against certain types of income. A Common Unitholder's proportionate share of unused losses may be deducted when the holder of Common Units disposes of all of such holder's Common Units in a fully taxable transaction with an unrelated party. Net passive income from the Partnership may be offset by a Common Unit holder's unused Partnership losses carried over from prior years, but not by losses from other passive activities, including losses from other publicly traded partnerships. In addition, a Unitholder's proportionate share of the Partnership's portfolio income, including portfolio income arising from the investment of the Partnership's working capital, is not treated as income from a passive activity and many not be offset by such Unitholder's share of net losses of the Partnership. Section 754 Election. Each of the Partnership and its operating partnerships has made, will make, as necessary, and maintain the election provided for by Section 754 of the Code, which will generally permit a holder of Common Units to calculate cost recovery and depreciation deductions by reference to the portion of the Common Unit holder's purchase price attributable to each asset of the Partnership. A constructive termination of the Partnership could result in penalties and a loss of basis adjustments under Section 754, if the Partnership were unable to determine that a termination had occurred and, therefore, did not make a Section 754 election for the new Partnership. No Amortization of Book-Up Attributable to Intangibles. The acquisition of Santa Fe resulted in a restatement of the capital accounts of both the former Santa Fe common unit holders and the pre-acquisition Common Unit holders to fair market value ("Book-Up") and an allocation of such increased capital account value among the Partnership's assets will 24 be based on the values indicated by an independent appraisal obtained by the General Partner. The General Partner has obtained an independent appraisal which indicates that all of such value is attributable to tangible assets. However, if such valuations were challenged by the IRS and such challenge were successful, a portion of this Book-Up could be allocated to intangible assets that will not be amortizable either for tax or capital account purposes, and therefore, will not support a curative allocation of income. This could result in a disproportionate allocation of taxable income to either a pre-acquisition Common Unit holder or a former Santa Fe common unit holder. Deductibility of Interest Expense. The Code generally provides that investment interest expense is deductible only to the extent of a non-corporate taxpayer's net investment income. In general, net investment income for purposes of this limitation includes gross income from property held for investment (except for net capital gains for which the taxpayer has elected to be taxed at a maximum rate of 28 percent) and portfolio income (determined pursuant to the passive loss rules) reduced by certain expense (other than interest) which are directly connected with the production of such income. Property subject to the passive loss rules is not treated as property held for investment. However, the IRS has issued a Notice which provides that net income from a publicly traded partnership (not otherwise treated as a corporation) may be included in net investment income for the purposes of the limitation on the deductibility of investment interest. A Unitholder's investment income attributable to its interest in the Partnership will include both its allocable share of the Partnership's portfolio income and trade or business income. A Unitholder's investment interest expense will include its allocable share of the Partnership's interest expense attributable to portfolio investments. Tax Liability Exceeding Cash Distributions or Proceeds from Dispositions of Common Units. A holder of Common Units will be required to pay federal income tax and, in certain cases, state and local income taxes on such holder's allocable share of the Partnership's income, whether or not such holder receives cash distributions from the Partnership. No assurance is given that holders of Common Units will receive cash distributions equal to their allocable share of taxable income from the Partnership. Further, a holder of Common Units may incur tax liability in excess of the amount of cash received. Tax Shelter Registration; Potential IRS Audit. The Partnership is registered with the IRS as a "tax shelter." No assurance can be given that the Partnership will not be audited by the IRS or that tax adjustments will not be made. The rights of a Common Unit holder owning less than a 1% profits interest in the Partnership to participate in the income tax audit process have been substantially reduced. Further, any adjustments in the Partnership's returns will lead to adjustments in the returns of holders of Common Units and may lead to audits of Common Unit holders' returns and adjustments of items unrelated to the Partnership's. Each holder of Common Units would bear the cost of any expenses incurred in connection with an examination of the personal tax return of such holder. Unrelated Business Taxable Income. Certain entities otherwise exempt from federal income taxes (such as individual retirement accounts, pension plans and charitable organizations) are nevertheless subject to federal income tax on net unrelated business taxable income and each such entity must file a tax return for each year in which it has more than $1,000 of gross income from unrelated business activities. The General Partner believes that substantially all of the Partnership's gross income will be treated as derived from an unrelated trade or business and taxable to such entities. The tax-exempt entity's share of the Partnership's deductions directly connected with carrying on such unrelated trade or business are allowed in computing the entity's taxable unrelated business income. ACCORDINGLY, INVESTMENT IN THE PARTNERSHIP BY TAX-EXEMPT ENTITIES SUCH AS INDIVIDUAL RETIREMENT ACCOUNTS, PENSION PLANS AND CHARITABLE TRUSTS MAY NOT BE ADVISABLE. State and Local Tax Treatment. Each holder of Common Units may be subject to income, estate or inheritance taxes in states and localities in which the Partnership owns property or does business, as well as in such holder's own state or locality. The Partnership conducts business in 15 states: Arizona, California, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Missouri, Nebraska, Nevada, New Mexico, Oregon, Texas and Wyoming. A unitholder will likely be required to file state income tax returns and to pay applicable state income taxes in many of these states and may be subject to penalties for failure to comply with such requirements. Some of the states have proposed that the Partnership withhold a percentage of income attributable to Partnership operations within the state for Unitholders who are non-residents of the state. In the event that amounts are required to be withheld (which may be greater or less than a particular Unitholder's income tax liability to the state), such withholding would generally not relieve the non-resident Unitholder from the obligation to file a state income tax return. 25 Description of the Partnership Agreeement The following paragraphs are a summary of certain provisions of the Partnership Agreement. A copy of the Partnership Agreement is filed as an exhibit to this report. Unless otherwise specifically described, references herein to the term "Partnership Agreement" constitute references to the partnership agreements of the Partnership and its operating partnerships collectively. The following discussion is qualified in its entirety by reference to the partnership agreements for the Partnership and its operating partnerships. With regard to allocations of taxable income and taxable loss, see "Tax Treatment of Publicly Traded Partnerships Under the Internal Revenue Code." Organization and Duration The Partnership, and each of the operating partnerships are Delaware limited partnerships. Unless liquidated or dissolved at an earlier time, under the terms of the Partnership Agreement, the Partnership and each of the operating partnerships will dissolve on December 31, 2082. Purpose The purpose of the Partnership under the Partnership Agreement is to serve as the limited partner in the operating partnerships and to conduct any other business that may be lawfully conducted by a limited partnership organized pursuant to the Delaware Act. Power of Attorney Each limited partner, and each person who acquires a Common Unit from a prior holder and executes and delivers a transfer application with respect to such Common Unit, grants to the General Partner and, if a liquidator has been appointed, the liquidator, a power of attorney to, among other things, (i) execute and file certain documents required in connection with the qualification, continuance or dissolution of the Partnership or the amendment of the Partnership Agreement in accordance with the terms of the Partnership Agreement and (ii) make consents and waivers contained in the Partnership Agreement. Restrictions on Authority of the General Partner The authority of the General Partner is limited in certain respects under the Partnership Agreement. The General Partner is prohibited, without the prior approval of holders of record of a majority of the outstanding Common Units from, among other things, selling or exchanging all or substantially all of the Partnership's assets in a single transaction or a series of related transactions (including by way of merger, consolidation or other combination) or approving on behalf of the Partnership the sale, exchange or other disposition of all or substantially all of the assets of the Partnership, provided that the Partnership may mortgage, pledge, hypothecate or grant a security interest in all or substantially all of the Partnership's assets without such approval. The Partnership may sell all or substantially all of its assets pursuant to a foreclosure or other realization upon the foregoing encumbrances without such approval. Except as provided in the Partnership Agreement and generally described under "--Amendment of Partnership Agreement and Other Agreements," any amendment to a provision of the Partnership Agreement generally will require the approval of the holders of at least 66 2/3% of the Common Units. The General Partner's ability to sell or otherwise dispose of the Partnership's assets are restricted by the terms of the Partnership's credit facility. In general, the General Partner may not take any action, or refuse to take any reasonable action, without the consent of the holders of at least a majority of each class of outstanding units of the Partnership, including the consent of at least a majority of the outstanding Common Units (other than Common Units owned by the General Partner and its affiliates), the effect of which would be to cause the Partnership to be treated as an association taxable as a corporation or otherwise taxed as an entity for federal income tax purposes. Withdrawal or Removal of the General Partner The General Partner has agreed not to voluntarily withdraw as general partner of the Partnership prior to January 1, 2003 (with limited exceptions described below) without the approval of at least a majority of the outstanding Common Units (excluding for purposes of such determination Common Units held by the General Partner and its affiliates) and furnishing an opinion of counsel that such withdrawal will not cause the Partnership to 26 be treated as an association taxable as a corporation or otherwise taxed as an entity for federal income tax purposes or result in the loss of the limited liability of any limited partner. On or after January 1, 2003, the General Partner may withdraw as general partner by giving 90 days' written notice (without first obtaining approval from the holders of Common Units), and such withdrawal will not constitute a breach of the Partnership Agreement. If an opinion of counsel cannot be obtained to the effect that (following the selection of a successor) the General Partner's withdrawal would not result in the loss of limited liability of the holders of Common Units or cause the Partnership to be treated as an association taxable as a corporation or otherwise taxed as an entity for federal income tax purposes, the Partnership will be dissolved after such withdrawal. Notwithstanding the foregoing, the General Partner may withdraw without approval of the holders of Common Units upon 90 days' notice to the limited partners if more than 50% of the outstanding Common Units (other than those held by the withdrawing General Partner and its affiliates) are held or controlled by one person and its affiliates. In addition, the Partnership Agreement does not restrict Kinder Morgan, Inc.'s ability to sell directly or indirectly, all or any portion of the capital stock of the General Partner to a third party without the approval of the holders of Common Units. The General Partner may not be removed unless such removal is approved by the vote of the holders of not less than 662/3% of the outstanding Common Units (excluding Common Units held by the General Partner and its affiliates) provided that certain other conditions are satisfied. Any such removal is subject to the approval of the successor general partner by the same vote and receipt of an opinion of counsel that such removal and the approval of a successor will not result in the loss of limited liability of any limited partner or cause the Partnership to be treated as an association taxable as a corporation or otherwise taxed as an entity for federal income tax purposes. In the event of withdrawal of the General Partner where such withdrawal violates the Partnership Agreement or removal of the General Partner by the limited partners under circumstances where cause exists, a successor general partner will have the option to acquire the general partner interest of the departing General Partner (the "Departing Partner") in the Partnership for a cash payment equal to the fair market value of such interest. Under all other circumstances where the General Partner withdraws or is removed by the limited partners, the Departing Partner will have the option to require the successor general partner to acquire such general partner interest of the Departing Partner for such amount. In each case such fair market value will be determined by agreement between the Departing Partner and the successor general partner, or if no agreement is reached, by an independent investment banking firm or other independent expert selected by the Departing Partner and the successor general partner (or if no expert can be agreed upon, by the expert chosen by agreement of the expert selected by each of them). In addition, the Partnership would also be required to reimburse the Departing Partner for all amounts due the Departing Partner, including without limitation all employee related liabilities, including severance liabilities, incurred in connection with the termination of the employees employed by the Departing Partner for the benefit of the Partnership. If the above-described option is not exercised by either the Departing Partner or the successor general partner, as applicable, the Departing Partner's general partner interest in the Partnership will be converted into Common Units equal to the fair market value of such interest as determined by an investment banking firm or other independent expert selected in the manner described in the preceding paragraph. The General Partner may transfer all, but not less than all, of its general partner interest in the Partnership without the approval of the limited partners to one of its affiliates or upon its merger or consolidation into another entity or the transfer of all or substantially all of its assets to another entity, provided in either case that such entity assumes the rights and duties of the General Partner, agrees to be bound by the provisions of the Partnership Agreement and furnishes an opinion of counsel that such transfer would not result in the loss of the limited liability of any limited partner or cause the Partnership to be treated as an association taxable as a corporation or otherwise cause the Partnership to be subject to entity level taxation for federal income tax purposes. In the case of any other transfer of the general partner interest in the Partnership, in addition to the foregoing requirements, the approval of at least a majority of the Common Units is required, excluding for such purposes those interests held by the General Partner and its affiliates. Upon the withdrawal or removal of the General Partner, the Partnership will be dissolved, wound up and liquidated, unless such withdrawal or removal takes place following the approval of a successor general partner or unless within 180 days after such withdrawal or removal a majority of the holders of Common Units agree in writing to continue the business of the Partnership and to the appointment of a successor general partner. See "-Termination and Dissolution." 27 Anti-takeover and Restricted Voting Right Provisions The Partnership Agreement contains certain provisions that are intended to discourage a person or group from attempting to remove the General Partner, as general partner, or otherwise change the management of the Partnership. If any person or group other than the General Partner and its affiliates acquires beneficial ownership of 20% or more of the Common Units, such person or group loses any and all voting rights with respect to all of the Common Units beneficially owned or held by such person. Transfer Agent and Registrar Duties. First Chicago Trust Company of New York is the registrar and transfer agent (the "Transfer Agent") for the Common Units and receives a fee from the Partnership for serving in such capacities. All fees charged by the Transfer Agent for transfers of Common Units are borne by the Partnership and not by the holders of Common Units, except that fees similar to those customarily paid by holders of securities for surety bond premiums to replace lost or stolen certificates, taxes or other governmental charges, special charges for services requested by a holder of a Common Unit and other similar fees or charges will be borne by the affected holder. There will be no charge to holders for disbursements of the Partnership cash distributions. The Partnership will indemnify the Transfer Agent, its agents and each of their respective shareholders, directors, officers and employees against all claims and losses that may arise out of acts performed or omitted in respect of its activities as such, except for any liability due to any negligence, gross negligence, bad faith or intentional misconduct of the indemnified person or entity. Resignation or Removal. The Transfer Agent may at any time resign, by notice to the Partnership, or be removed by the Partnership, such resignation or removal to become effective upon the appointment by the General Partner of a successor transfer agent and registrar and its acceptance of such appointment. If no successor has been appointed and accepted such appointment within 30 days after notice of such resignation or removal, the General Partner is authorized to act as the transfer agent and registrar until a successor is appointed. Transfer of Common Units; Status as Limited Partner or Assignee Until a Common Unit has been transferred on the books of the Partnership, the Partnership and the Transfer Agent, notwithstanding any notice to the contrary, may treat the record holder thereof as the absolute owner for all purposes, except as otherwise required by law or stock exchange regulation. Any transfers of a Common Unit will not be recorded by the Transfer Agent or recognized by the Partnership unless the transferee executes and delivers a Transfer Application (set forth on the reverse side of the certificate representing Common Units). By executing and delivering the Transfer Application, the transferee of Common Units (i) becomes the record holder of such Common Units and shall constitute an assignee until admitted to the Partnership as a substitute limited partner, (ii) automatically requests admission as a substituted limited partner in the Partnership, (iii) agrees to be bound by the terms and conditions of and is deemed to have executed the Partnership Agreement, (iv) represents that such transferee has capacity, power and authority to enter into the Partnership Agreement, (v) grants powers of attorney to the General Partner and any liquidator of the Partnership as specified in the Partnership Agreement and (vi) makes the consents and waivers contained in the Partnership Agreement. An assignee, pending its admission as a substituted limited partner in the Partnership, is entitled to an interest in the Partnership equivalent to that of a limited partner with respect to the right to share in allocations and distributions from the Partnership, including liquidating distributions. The General Partner will vote, and exercise other powers attributable to, Common Units owned by an assignee who has not become a substituted limited partner at the written direction of such Assignee. See "-Meetings; Voting." An assignee will become a substituted limited partner of the Partnership in respect of the transferred Common Units upon the consent of the General Partner and the recordation of the name of the assignee on the books and records of the Partnership. Such consent may be withheld in the sole discretion of the General Partner. Common Units are securities and are transferable according to the laws governing transfers of securities. In addition to other rights acquired upon transfer, the transferor gives the transferee the right to request admission as a substituted limited partner in the Partnership in respect of the transferred Common Units. A purchaser or transferee of Common Units who does not execute and deliver a Transfer Application obtains only (a) the right to transfer the Common Units to a purchaser or other transferee and (b) the right to transfer the right to seek admission as a substituted limited partner in the Partnership with respect to the transferred Common Units. Thus, a purchaser or transferee of 28 Common Units who does not execute and deliver a Transfer Application will not receive cash distributions unless the Common Units are held in a nominee or street name account and the nominee or broker has executed and delivered a Transfer Application with respect to such Common Units and may not receive certain federal income tax information or reports furnished to record holders of Common Units. The transferor of Common Units will have a duty to provide such transferee with all information that may be necessary to obtain registration of the transfer of the Common Units, but the transferee agrees, by acceptance of the certificate representing Common Units, that the transferor will not have a duty to see to the execution of the Transfer Application by the transferee and will have no liability or responsibility if such transferee neglects or chooses not to execute and forward the Transfer Application. Holders of Common Units may hold their Common Units in nominee accounts, provided that the broker (or other nominee) executes and delivers a Transfer Application. The Partnership will be entitled to treat the nominee holder of a Common Unit as the absolute owner thereof, and the beneficial owner's rights will be limited solely to those that it has against the nominee holder as a result of or by reason of any understanding or agreement between such beneficial owner and nominee holder. Non-citizen Assignees; Redemption If the Partnership is or becomes subject to federal, state or local laws or regulations that, in the reasonable determination of the General Partner, provides for the cancellation or forfeiture of any property in which the Partnership has an interest because of the nationality, citizenship or other related status of any limited partner or assignee, the Partnership may redeem the Common Units held by such limited partner or assignee at their Average Fair Market Price. In order to avoid any such cancellation or forfeiture, the General Partner may require each record holder or assignee to furnish information about the holder's nationality, citizenship, residency or related status. If the record holder fails to furnish such information within 30 days after a request for such information, or if the General Partner determines on the basis of the information furnished by such holder in response to the request that the cancellation or forfeiture of any property in which the Partnership has an interest may occur, the General Partner may be substituted as the limited partner for such record holder, who will then be treated as a non-citizen assignee ("Non-citizen Assignee"), and the General Partner will have the right to redeem the Common Units held by such record holder as described above. The Partnership Agreement sets forth the rights of such record holder or assignee upon redemption. Pending such redemption or in lieu thereof, the General Partner may change the status of any such limited partner or assignee to that of a Non-citizen Assignee. Further, a Non-citizen Assignee (unlike an assignee who is not a substitute limited partner) does not have the right to direct the vote regarding such Non-citizen Assignee's Common Units and may not receive distributions in kind upon liquidation of the Partnership. See "-Transfer of Common Units; Status as Limited Partner or Assignee." As used in this Report, (i) "Average Fair Market Price" of a limited partner interest as of any date means the average of the daily End of Day Price (as hereinafter defined) for the 20 consecutive Unit Transaction Days (as hereinafter defined) immediately prior to such date; (ii) "End of Day Price" for any day means the last sale price on such day, regular way, or in case no such sale takes place on such day, the average of the closing bid and asked prices on such day, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the principal national securities exchange on which the limited partner interests of such class are listed or admitted to trading or, if the limited partner interests of such class are not listed or admitted to trading on any national securities exchange, the last quoted sale price on such day, or, if not so quoted, the average of the high bid and low asked prices on such day in the over-the-counter market, as reported by the NASDAQ or such other system then in use, or if on any such day the limited partner interests of such class are not quoted by any such organization, the average of the closing bid and asked prices on such day as furnished by a professional market maker making a market in the limited partner interests of such class selected by the Board of Directors of the General Partner, or if on any such day no market maker is making a market in such limited partner interests, the fair value of such limited partner interests on such day as determined reasonably and in good faith by the Board of Directors of the General Partner; and (iii) "Unit Transaction Day" means a day on which the principal national securities exchange on which such limited partner interests are listed or admitted to trading is open for the transaction of business or, if the limited partner interests of such class are not listed or admitted to trading on any national securities exchange, a day on which banking institutions in New York City generally are open. 29 Issuance of Additional Securities The Partnership's Issuance of Securities. The Partnership Agreement does not restrict the ability of the General Partner to issue additional limited or general partner interests and authorizes the General Partner to cause the Partnership to issue additional securities of the Partnership for such consideration and on such terms and conditions as shall be established by the General Partner in its sole discretion without the approval of any limited partners. In accordance with Delaware law and the provisions of the Partnership Agreement, the General Partner may issue additional partnership interests which, in its sole discretion, may have special voting rights to which the Common Units are not entitled. Limited Pre-emptive Right of General Partner. The General Partner has the right, which it may from time to time assign in whole or in part to any of its affiliates, to purchase Common Units or other equity securities of the Partnership from the Partnership whenever, and on the same terms that, the Partnership issues such securities to persons other than the General Partner and its affiliates, to the extent necessary to maintain the percentage interest of the General Partner and its affiliates in the Partnership to that which existed immediately prior to each such issuance. Limited Call Right If at any time not more than 20% of the issued and outstanding limited partner interests of any class are held by persons other than the General Partner and its affiliates, the General Partner will have the right, which it may assign and transfer to any of its affiliates or to the Partnership, to purchase all, but not less than all, of the outstanding limited partner interests of such class held by such non-affiliated persons, as of a record date to be selected by the General Partner, on at least 10 but not more than 60 days' notice. The purchase price in the event of such purchase shall be the greater of (i) the Average Fair Market Price of limited partner interests of such class as of the date five days prior to the mailing of written notice of its election to purchase limited partner interests of such class and (ii) the highest cash price paid by the General Partner or any of its affiliates for any limited partner interests of such class purchased within the 90 days preceding the date the General Partner mails notice of its election to purchase such Common Units. Amendment of Partnership Agreement and Other Agreements Amendments to the Partnership Agreement may be proposed only by or with the consent of the General Partner. In order to adopt a proposed amendment, the General Partner is required to seek written approval of the holders of the number of Common Units required to approve such amendment or call a meeting of the limited partners to consider and vote upon the proposed amendment, except as described below. Proposed amendments (other than those described below) must be approved by holders of at least 662/3% of the outstanding Common Units, except that no amendment may be made which would (i) enlarge the obligations of any limited partner, without its consent, (ii) enlarge the obligations of the General Partner, without its consent, which may be given or withheld in its sole discretion, (iii) restrict in any way any action by or rights of the General Partner as set forth in the Partnership Agreement, (iv) modify the amounts distributable, reimbursable or otherwise payable by the Partnership to the General Partner, (v) change the term of the Partnership or (vi) give any person the right to dissolve the Partnership other than the General Partner's right to dissolve the Partnership with the approval of a majority of the outstanding Common Units or change such right of the General Partner in any way. The General Partner may make amendments to the Partnership Agreement without the approval of any limited partner or assignee of the Partnership to reflect (i) a change in the name of the Partnership, the location of the principal place of business of the Partnership, the registered agent or the registered office of the Partnership, (ii) admission, substitution, withdrawal or removal of partners in accordance with the Partnership Agreement, (iii) a change that, in the sole discretion of the General Partner, is reasonable and necessary or appropriate to qualify or continue the qualification of the Partnership as a partnership in which the limited partners have limited liability or that is necessary or advisable in the opinion of the General Partner to ensure that the Partnership will not be treated as an association taxable as a corporation or otherwise subject to taxation as an entity for federal income tax purposes, (iv) an amendment that is necessary, in the opinion of counsel to the Partnership, to prevent the Partnership or the General Partner or their respective directors or officers from in any manner being subjected to the provisions of the Investment Company Act of 1940, as amended, the Investment Advisors Act of 1940, as amended, or "plan asset" regulations adopted under the Employee Retirement Income Security Act of 1974, as amended, whether or not substantially similar to plan asset regulations currently applied or proposed by the United States Department of Labor, an amendment that in the sole discretion of the General Partner is necessary or desirable in 30 connection with the authorization of additional limited or general partner interests, (vi) any amendment expressly permitted in the Partnership Agreement to be made by the General Partner acting alone, (vii) an amendment effected, necessitated or contemplated by a merger agreement that has been approved pursuant to the terms of the Partnership Agreement and (viii) any other amendments substantially similar to the foregoing. In addition, the General Partner may make amendments to the Partnership Agreement without such consent if such amendments (i) do not adversely affect the limited partners in any material respect, (ii) are necessary or desirable to satisfy any requirements, conditions or guidelines contained in any opinion, directive, ruling or regulation of any federal or state agency or judicial authority or contained in any federal or state statute, (iii) are necessary or desirable to facilitate the trading of the Common Units or to comply with any rule, regulation, guideline or requirement of any securities exchange on which the Common Units are or will be listed for trading, compliance with any of which the General Partner deems to be in the best interests of the Partnership and the holders of Common Units or (iv) are required to effect the intent of, or as contemplated by, the Partnership Agreement. The General Partner will not be required to obtain an opinion of counsel as to the tax consequences or the possible effect on limited liability of amendments described in the two immediately preceding paragraphs. No other amendments to the Partnership Agreement will become effective without the approval of at least 95% of the Common Units unless the Partnership obtains an opinion of counsel to the effect that such amendment will not cause the Partnership to be treated as an association taxable as a corporation or otherwise cause the Partnership to be subject to entity level taxation for federal income tax purposes and will not affect the limited liability of any limited partner in the Partnership or the limited partner of the operating partnerships. Any amendment that materially and adversely affects the rights or preferences of any type or class of limited partner interests in relation to other types or classes of limited partner interests or the general partner interests will require the approval of at least 66 2/3% of the type or class of limited partner interests so affected. Management General. The General Partner will manage and operate the activities of the Partnership, and the General Partner's activities will be limited to such management and operation. Holders of Common Units will not direct or participate in the management or operations of the Partnership or any of the operating partnerships . See "--Limited Liability." The General Partner will owe a fiduciary duty to the holders of Common Units. Notwithstanding any limitation on obligations or duties, the General Partner will be liable, as the general partner of the Partnership, for all the debts of the Partnership (to the extent not paid by the Partnership), except to the extent that indebtedness incurred by the Partnership is made specifically non-recourse to the General Partner. The Partnership does not currently have any directors, officers or employees. As is commonly the case with publicly traded limited partnerships, the Partnership does not currently contemplate that it will directly employ any of the persons responsible for managing or operating the Partnership's business or for providing it with services, but will instead reimburse the General Partner or its affiliates for the services of such persons. See "-Reimbursement of Expenses." Reimbursement of Expenses. The General Partner will receive no management fee or similar compensation in conjunction with its management of the Partnership (other than cash distributions). See "--Cash Distribution Policy." However, the General Partner is entitled pursuant to Partnership Agreement to reimbursement on a monthly basis, or such other basis as the General Partner may determine in its sole discretion, for all direct and indirect expenses it incurs or payments it makes on behalf of the Partnership and all other necessary or appropriate expenses allocable to the Partnership or otherwise reasonably incurred by the General Partner in connection with operating the Partnership's business. The Partnership Agreement provides that the General Partner shall determine the fees and expenses that are allocable to the Partnership in any reasonable manner determined by the General Partner in its sole discretion. The reimbursement for such costs and expenses will be in addition to any reimbursement to the General Partner and its affiliates as a result of the indemnification provisions of the Partnership Agreement. See "-Indemnification." Indemnification. The Partnership Agreement provides that the Partnership will indemnify the General Partner, any Departing Partner and any person who is or was an officer or director of the General Partner or any Departing Partner, to the fullest extent permitted by law, and may indemnify, to the extent deemed advisable by the General Partner, to the fullest extent permitted by law, any person who is or was an affiliate of the General Partner or any 31 Departing Partner, any person who is or was an officer, director, employee, partner, agent or trustee of the General Partner, any Departing Partner or any such affiliate, or any person who is or was serving at the request of the General Partner or any affiliate of the General Partner or any Departing Partner as an officer, director, employee, partner, agent, or trustee of another person ("Indemnities") from and against any and all losses, claims, damages, liabilities (joint or several) expenses (including, without limitation, legal fees and expenses), judgments, fines, penalties, interest, settlement and other amounts arising from any and all claims, demands, actions, suits or proceedings, whether civil, criminal, administrative or investigative, in which any Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, by reason of its status as (i) the General Partner, a Departing Partner or affiliate of either, (ii) an officer, director, employee, partner, agent or trustee of the General Partner, any Departing Partner or affiliate of either or (iii) a person serving at the request of the Partnership in another entity in a similar capacity, provided that in each case the Indemnitee acted in good faith and in a manner which the Indemnitee believed to be in or not opposed to the best interests of the Partnership and, with respect to any criminal proceeding, had no reasonable cause to believe its conduct was unlawful. Any indemnification under the Partnership Agreement will only be paid out of the assets of the Partnership, and the General Partner will not be personally liable for, or have any obligation to contribute or loan funds or assets to the Partnership to enable it to effectuate, such indemnification. The Partnership is authorized to purchase (or to reimburse the General Partner or its affiliates for the cost of) insurance, purchased on behalf of the General Partner and such other persons as the General Partner determines, against liabilities asserted against and expenses incurred by such persons in connection with the Partnership's activities, whether or not the Partnership would have the power to indemnify such person against such liabilities under the provisions described above. Conflicts and Audit Committee. One or more directors who are neither officers nor employees of the General Partner or any of its affiliates will serve as a committee of the Board of Directors of the General Partner (the "Conflicts and Audit Committee") and will, at the request of the General Partner, review specific matters as to which the General Partner believes there may be a conflict of interest in order to determine if the resolution of such conflict proposed by the General Partner is fair and reasonable to the Partnership. The Conflicts and Audit Committee will only review matters at the request of the General Partner, which has sole discretion to determine which matters to submit to such Committee. Any matters approved by the Conflicts and Audit Committee will be conclusively deemed to be fair and reasonable to the Partnership, approved by all partners of the Partnership and not a breach by the General Partner of the Partnership Agreement or any duties it may owe to the Partnership. Additionally, it is possible that such procedure in itself may constitute a conflict of interest. Meetings; Voting Holders of Common Units or assignees who are record holders of Common Units on the record date set pursuant to the Partnership Agreement will be entitled to notice of, and to vote at, meetings of limited partners of the Partnership and to act with respect to matters as to which approvals may be solicited. With respect to voting rights attributable to Common Units that are owned by assignees who have not yet been admitted as limited partners, the General Partner will be deemed to be the limited partner with respect thereto and will, in exercising the voting rights in respect of such Common Units on any matter, vote such Common Units at the written direction of such record holder. If a proxy is not returned on behalf of the Common Unit record holder, such Common Units will not be voted (except that, in the case of Common Units held by the General Partner on behalf of Non-citizen Assignees, the General Partner will distribute the votes in respect of such Common Units in the same ratios as the votes of limited partners in respect of other Common Units are cast). When a proxy is returned properly executed, the Common Units represented thereby will be voted in accordance with the indicated instructions. If no instructions have been specified on the properly executed and returned proxy, the Common Units represented thereby will be voted "FOR" the approval of the matters to be presented. Common Units held by the General Partner on behalf of Non-citizen Assignees, as defined pursuant to the Partnership Agreement, shall be voted by the General Partner in the same ratios as the votes of the limited partners with respect to the matter presented to the holders of Common Units. Any action that is required or permitted to be taken by the limited partners may be taken either at a meeting of the limited partners or without a meeting if consents in writing setting forth the action so taken are signed by holders of such number of limited partner interests as would be necessary to authorize or take such action at a meeting of the limited partners. Meetings of the limited partners of the Partnership may be called by the General Partner or by limited partners owning at least 20% of the outstanding Common Units of the class for which a meeting is proposed. Limited partners may vote either in person or by proxy at meetings. Two-thirds (or a majority, if that is the vote required to take action at the meeting in question) of the outstanding limited partner interests of the class for which a meeting is to be held (excluding, if such are excluded from such vote, limited partner interests held by the General 32 Partner and its affiliates) represented in person or by proxy will constitute a quorum at a meeting of limited partners of the Partnership. Except for any proposal for removal of the General Partner or certain amendments to the Partnership Agreement described above, substantially all matters submitted for a vote are determined by the affirmative vote, in person or by proxy, of holders of a majority of the outstanding limited partner interests. Each record holder of a Common Unit has a vote according to such record holder's percentage interest in the Partnership, although additional limited partner interests having special voting rights could be issued by the General Partner. See "--Issuance of Additional Securities." However, Common Units owned beneficially by any person or group (other than the General Partner and its affiliates) that own beneficially 20% or more of all Common Units may not be voted on any matter and will not be considered to be outstanding when sending notices of a meeting of limited partners, calculating required votes, determining the presence of a quorum or for other similar partnership purposes. The Partnership Agreement provides that Common Units held in nominee or street name accounts will be voted by the broker (or other nominee) pursuant to the instruction of the beneficial owner, unless the arrangement between the beneficial owner and such holder's nominee provides otherwise. Any notice, demand, request, report or proxy materials required or permitted to be given or made to record holders of Common Units (whether or not such record holder has been admitted as a limited partner) under the terms of the Partnership Agreement will be delivered to the record holder by the Partnership or by the Transfer Agent at the request of the Partnership. Limited Liability Except as described below, Common Units are fully paid, and holders of Common Units will not be required to make additional contributions to the Partnership. Assuming that a limited partner does not participate in the control of the business of the Partnership, within the meaning of the Delaware Act, and that such partner otherwise acts in conformity with the provisions of the Partnership Agreement, such partner's liability under the Delaware Act will be limited, subject to certain possible exceptions, generally to the amount of capital such partner is obligated to contribute to the Partnership in respect of such holder's Common Units plus such holder's share of any undistributed profits and assets of the Partnership. However, if it were determined that the right or exercise of the right by the limited partners as a group to remove or replace the General Partner, to approve certain amendments to the Partnership Agreement or to take other action pursuant to the Partnership Agreement constituted "participation in the control" of the Partnership's business for the purposes of the Delaware Act, then the limited partners could be held personally liable for the Partnership's obligations under the laws of the State of Delaware to the same extent as the General Partner. Under the Delaware Act, a limited partnership may not make a distribution to a partner to the extent that at the time of the distribution, after giving effect to the distribution, all liabilities of the partnership, other than liabilities to partners on account of their partnership interests and nonrecourse liabilities, exceed the fair value of the assets of the limited partnership. For the purpose of determining the fair value of the assets of a limited partnership, the Delaware Act provides that the fair value of property subject to nonrecourse liability shall be included in the assets of the limited partnership only to the extent that the fair value of that property exceeds that nonrecourse liability. The Delaware Act provides that a limited partner who receives such a distribution and knew at the time of the distribution that the distribution was in violation of the Delaware Act shall be liable to the limited partnership for the amount of the distribution for three years from the date of the distribution. Under the Delaware Act, an assignee who becomes a substituted limited partner of a limited partnership is liable for the obligations of the assignor to make contributions to the partnership, except the assignee is not obligated for liabilities unknown to such assignee at the time the assignee became a limited partner and which could not be ascertained from the partnership agreement. The Partnership is organized under the laws of Delaware and currently conducts business in Arizona, California, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Missouri, Nebraska, New Mexico, Nevada, Oregon, Texas and Wyoming. Maintenance of limited liability will require compliance with legal requirements in such jurisdictions in which the Partnership conducts business, including qualifying the operating partnerships to do business therein. Limitations on the liability of limited partners for the obligations of a limited partnership have not been clearly established in many jurisdictions. If it were determined that the Partnership was, by virtue of its limited partner interest in the operating partnerships or otherwise, conducting business in any state without compliance with the applicable limited partnership statute, or that the right or exercise of the right by the limited partners as a group to remove or replace the General Partner, to approve certain amendments to the Partnership Agreement, or to take other action pursuant to the Partnership Agreement constituted "participation in the control" of the Partnership's 33 business for the purposes of the statues of any relevant jurisdiction, then the limited partners could be held personally liable for the Partnership's obligations under the law of such jurisdiction to the same extent as the General Partner. The Partnership will operate in such manner as the General Partner deems reasonable and necessary or appropriate to preserve the limited liability of holders of Common Units. Books and Reports The General Partner is required to keep appropriate books of the business at the principal offices of the Partnership. The books will be maintained for both tax and financial reporting purposes on an accrual basis. The fiscal year of the Partnership is the calendar year. As soon as practicable, but in no event later than 120 days after the close of each fiscal year, the General Partner will furnish each record holder of a Common Unit (as of a record date selected by the General Partner) with an annual report containing audited financial statements of the Partnership for the past fiscal year, prepared in accordance with generally accepted accounting principles. As soon as practicable, but in no event later than 90 days after the close of each calendar quarter (except the fourth quarter), the General Partner will furnish each record holder of Common Units upon request a report containing unaudited financial statements of the Partnership and such other information as may be required by law. The General Partner will use all reasonable efforts to furnish each record holder of a Common Unit information reasonably required for tax reporting purposes within 90 days after the close of each taxable year. Such information is expected to be furnished in a summary form so that certain complex calculations normally required of partners can be avoided. The General Partner's ability to furnish such summary information to holders of Common Units will depend on the cooperation of such holders of Common Units in supplying certain information to the General Partner. Every holder of a Common Unit (without regard to whether such holder supplies such information to the General Partner) will receive information to assist in determining such holder's federal and state tax liability and filing such holder's federal and state income tax returns. Right to Inspect Partnership Books and Records The Partnership Agreement provides that a limited partner can, for a purpose reasonably related to such limited partner's interest as a limited partner, upon reasonable demand and at such partner's own expense, have furnished to him (i) a current list of the name and last known address of each partner, (ii) a copy of the Partnership's tax returns, (iii) information as to the amount of cash, and a description and statement of the agreed value of any other property or services contributed or to be contributed by each partner and the date on which each became a partner, (iv) copies of the Partnership Agreement, the certificate of limited partnership of the Partnership, amendments thereto and powers of attorney pursuant to which the same have been executed, (v) information regarding the status of the Partnership's business and financial condition and (vi) such other information regarding the affairs of the Partnership as is just and reasonable. The General Partner may, and intends to, keep confidential from the limited partners trade secrets or other information the disclosure of which the General Partner believes in good faith is not in the best interests of the Partnership or which the Partnership is required by law or by agreements with third parties to keep confidential. Termination and Dissolution The Partnership will continue until December 31, 2082, unless sooner terminated pursuant to the Partnership Agreement. The Partnership will be dissolved upon (i) the election of the General Partner to dissolve the Partnership, if approved by a majority of the Common Units, (ii) the sale of all or substantially all of the assets and properties of the Partnership and its operating partnerships, (iii) the bankruptcy or dissolution of the General Partner or (iv) the withdrawal or removal of the General Partner or any other event that results in its ceasing to be the General Partner (other than by reason of a transfer in accordance with the Partnership Agreement or withdrawal or removal following approval of a successor), provided that the Partnership will not be dissolved upon an event described in clause (iv) if within 90 days after such event the partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of such event, of a successor general partner. Upon a dissolution pursuant to clause (iii) or (iv), at least a majority of the Common Units may also elect, within certain time limitations, to reconstitute the Partnership and continue its business on the same terms and conditions set forth in the Partnership Agreement by forming a new limited partnership on terms identical to those set forth in the Partnership Agreement and having as a general partner an entity approved by at least a majority of the Common 34 Units, subject to receipt by the Partnership of an opinion of counsel that the exercise of such right will not result in the loss of the limited liability of holders of Common Units or cause the Partnership or the reconstituted limited partnership to be treated as an association taxable as a corporation or otherwise subject to taxation as an entity for federal income tax purposes. Registration Rights Pursuant to the terms of the Partnership Agreement and subject to certain limitations described therein, the Partnership has agreed to register for resale under the Securities Act of 1933 and applicable state securities laws any Common Units (or other securities of the Partnership) proposed to be sold by the General Partner (or its affiliates) if an exemption from such registration requirements is not otherwise available for such proposed transaction. The Partnership is obligated to pay all expenses incidental to such registration, excluding underwriting discounts and commissions. Cash Distribution Policy General. A principal objective of the Partnership is to generate cash from the Partnership operations and to distribute Available Cash to its partners in the manner described herein. "Available Cash" generally means, with respect to any calendar quarter, the sum of all of the cash received by the Partnership from all sources, less all of its cash disbursements and net additions to reserves. For purposes of cash distributions to holders of Common Units, the term Available Cash excludes the amount paid in respect of the 0.5% special limited partner interest in SFPP owned by the former general partner of SFPP, which amount will equal 0.5% of the total cash distributions made each quarter by SFPP to its partners. The General Partner's decisions regarding amounts to be placed in or released from reserves may have a direct impact on the amount of Available Cash. This is because increases and decreases in reserves are taken into account in computing Available Cash. The General Partner may, in its reasonable discretion (subject to certain limits), determine the amounts to be placed in or released from reserves each quarter. Cash distributions will be characterized as either distributions of Cash from Operations or Cash from Interim Capital Transactions. This distinction affects the amounts distributed to holders of Common Units relative to the General Partner. See "--Quarterly Distributions of Available Cash-Distributions of Cash from Operations" and "-Quarterly Distributions of Available Cash-Distributions of Cash from Interim Capital Transactions." "Cash from Operations" generally refers to the cash balance of the Partnership on the date the Partnership commenced operations, plus all cash generated by the operations of the Partnership's business, after deducting related cash expenditures, reserves, debt service and certain other items. "Cash from Interim Capital Transactions" will generally be generated only by borrowings, sales of debt and equity securities and sales or other dispositions of assets for cash (other than inventory, accounts receivable and other current assets and assets disposed of in the ordinary course of business). To avoid the difficulty of trying to determine whether Available Cash distributed by the Partnership is Cash from Operations or Cash from Interim Capital Transactions, all Available Cash distributed by the Partnership from any source will be treated as Cash from Operations until the sum of all Available Cash distributed as Cash from Operations equals the cumulative amount of Cash from Operations actually generated from the date the Partnership commenced operations through the end of the calendar quarter prior to such distribution. Any excess Available Cash (irrespective of its source) will be deemed to be Cash from Interim Capital Transactions and distributed accordingly. If Cash from Interim Capital Transactions is distributed in respect of each Common Unit in an aggregate amount per Common Unit equal to $11.00 per Common Unit, (the initial public offering price of the Common Units adjusted to give effect to the 2-for-1 split of Common Units effective October 1, 1997) (the Initial Common Unit Price"), the distinction between Cash from Operations and Cash from Interim Capital Transactions will cease, and both types of Available Cash will be treated as Cash from Operations. The General Partner does not anticipate that there will be significant amounts of Cash from Interim Capital Transactions distributed. 35 The discussion below indicates the percentages of cash distributions required to be made to the General Partner and the holders of Common Units. In the following general discussion of how Available Cash is distributed, references to Available Cash, unless otherwise stated, mean Available Cash that constitutes Cash from Operations. Quarterly Distributions of Available Cash. The Partnership will make distributions to its partners with respect to each calendar quarter prior to liquidation in an amount equal to 100% of its Available Cash for such quarter. Distributions of Cash from Operations. Distributions by the Partnership of Available Cash constituting Cash from Operations with respect to any quarter will be made in the following manner: first, 98% to the holders of Common Units pro rata and 2% to the General Partner until the holders of Common Units have received a total of $0.3025 per Common Unit for such quarter in respect of each Common Unit (the "First Target Distribution"); and second, 85% of any such Available Cash then remaining to the holders of Common Units pro rata and 15% to the General Partner until the holders of Common Units have received a total of $0.3575 per Common Unit for such quarter in respect of each Common Unit (the "Second Target Distribution"); third, 75% of any such Available Cash then remaining to all holders of Common Units pro rata and 25% to the General Partner until the holders of Common Units have received a total of $0.4675 per Common Unit for such quarter in respect of each Common Unit (the "Third Target Distribution"); and fourth, 50% of any such Available Cash then remaining to all holders of Common Units pro rata and 50% to the General Partner. In addition, if the First, Second and Third Target Distribution levels are reduced to zero, as described below under "--Quarterly Distributions of Available Cash-Adjustment of Target Distribution Levels," all remaining Available Cash will be distributed as Cash from Operations, 50% to the holders of Common Units pro rata and 50% to the General Partner. These provisions are inapplicable upon the dissolution and liquidation of the Partnership. Distributions of Cash from Interim Capital Transactions. Distributions on any date by the Partnership of Available Cash that constitutes Cash from Interim Capital Transactions will be distributed 98% to all holders of Common Units pro rata and 2% to the General Partner until the Partnership shall have distributed in respect of each Common Unit Available Cash constituting Cash from Interim Capital Transactions in an aggregate amount per Common Unit equal to the Initial Common Unit Price. As Cash from Interim Capital Transaction is distributed, it is treated as if it were a repayment of the initial public offering price. To reflect such repayment, the First, Second and Third Target Distribution levels will be adjusted downward by multiplying each amount by a fraction, the numerator of which is the Unrecovered Initial Common Unit Price immediately after giving effect to such repayment and the denominator of which is the Unrecovered Initial Common Unit Price, immediately prior to giving effect to such repayment. "Unrecovered Initial Common Unit Price" includes the amount by which the Initial Common Unit Price exceeds the aggregate distribution of Cash from Interim Capital Transactions per Common Unit. When "Payback of Initial Common Unit Price" is achieved, i.e., when the Unrecovered Initial Common Unit Price is zero, then in effect the First, Second and Third Target Distribution levels each will have been reduced to zero. Thereafter all distributions of Available Cash from all sources will be treated as if they were Cash from Operations and Available Cash will be distributed 50% to all holders of Common Units pro rata and 50% to the General Partner. Adjustment of Target Distribution Levels. The First, Second and Third Target Distribution levels will be proportionately adjusted upward or downward, as appropriate, in the event of any combination or subdivision of Common Units (whether effected by a distribution payable in Common Units or otherwise) but not by reason of the issuance of additional Common Units for cash or property. For example, in connection with the Partnership's two-for-one split of the Common Units on October 1, 1997, the First, Second and third Target Distribution levels were each reduced to 50% of its initial level. See "--Quarterly Distributions of Available Cash-Distributions of Cash from Operations." 36 In addition, if a distribution is made of Available Cash constituting Cash from Interim Capital Transactions, the First, Second and Third Target Distribution levels will be adjusted downward proportionately, by multiplying each such amount, as the same may have been previously adjusted, by a fraction, the numerator of which is the Unrecovered Initial Common Unit Price immediately after giving effect to such distribution and the denominator of which is the Unrecovered Initial Common Unit Price immediately prior to such distribution. For example, assuming the Unrecovered Initial Common Unit Price is $11.00 per Common Unit and if Cash from Interim Capital Transactions of $5.50 per Common Unit is distributed to holders of Common Units (assuming no prior adjustments), then the amount of the First, Second and Third Target Distribution levels would each be reduced to 50% of its initial level. If and when the Unrecovered Initial Common Unit Price is zero, the First, Second and Third Target Distribution levels each will have been reduced to zero, and the General Partner's share of distributions of Available Cash will increase, in general, to 50% of all distributions of Available Cash. The First, Second and Third Target Distribution levels may also be adjusted if legislation is enacted which causes the Partnership to become taxable as a corporation or otherwise subjects the Partnership to taxation as an entity for federal income tax purposes. In such event, the First, Second, and Third Target Distribution levels for each quarter thereafter would be reduced to an amount equal to the product of (i) each of the First, Second and Third Target Distribution levels multiplied by (ii) one minus the sum of (x) the maximum marginal federal income tax rate to which the Partnership is subject as an entity plus (y) any increase that results from such legislation in the effective overall state and local income tax rate to which the Partnership is subject as an entity for the taxable year in which such quarter occurs (after taking into account the benefit of any deduction allowable for federal income tax purposes with respect to the payment of state and local income taxes). For example, assuming the Partnership was not previously subject to state and local income tax, if the Partnership were to become taxable as an entity for federal income tax purposes and the Partnership became subject to a maximum marginal federal, and effective state and local, income tax rate of 38%, then each of the Target Distribution levels, would be reduced to 62% of the amount thereof immediately prior to such adjustment. Liquidation and Distribution of Proceeds Upon dissolution of the Partnership, unless the Partnership is reconstituted and continued as a new limited partnership, the person authorized to wind up the affairs of the Partnership (the "Liquidator") will, acting with all of the powers of the General Partner that such Liquidator deems necessary or desirable in its good faith judgment in connection therewith, liquidate the Partnership's assets and apply the proceeds of the liquidation as follows: (i) first towards the payment of all creditors of the Partnership and the creation of a reserve for contingent liabilities and (ii) then to all partners in accordance with the positive balances in their respective capital accounts. Under certain circumstances and subject to certain limitations, the Liquidator may defer liquidation or distribution of the Partnership's assets for a reasonable period of time and/or distribute assets to partners in kind if it determines that a sale would be impractical or would cause undue loss to the partners. Generally, any gain will be allocated between the holders of Common Units and the General Partner in a manner that approximates their sharing ratios in the various Target Distribution levels. Holders of Common Units and the General Partner will share in the remainder of the Partnership's assets in proportion to their respective capital account balances in the Partnership. Any loss or unrealized loss will be allocated to the General Partner and the holders of Common Units: first, in proportion to the positive balances in such partners' capital accounts until all such balances are reduced to zero; and thereafter, to the General Partner. Item 3. Legal Proceedings FERC Proceedings In September 1992, El Paso Refinery, L.P. ("El Paso") filed a protest/complaint with FERC challenging SFPP's East Line rates from El Paso, Texas to Tucson and Phoenix, Arizona, challenging SFPP's proration policy and seeking to block the reversal of the direction of flow of SFPP's six inch pipeline between Phoenix and Tucson. At various dates following El Paso's September 1992 filing, other shippers on SFPP's South System, including Chevron U.S.A. Products Company ("Chevron"), Navajo, ARCO Products Company ("ARCO"), Texaco Refining and Marketing Inc. ("Texaco"), Refinery Holding Company, L.P. (a partnership formed by El Paso's long-term secured creditors that purchased El Paso's refinery in May 1993), Mobil Oil Corporation and Tosco Corporation, have filed separate complaints, and/or 37 motions to intervene in the FERC proceeding, challenging SFPP's rates on its East and West Lines. Certain of these parties also claimed that a gathering enhancement charge at SFPP's Watson origin pump station in Carson, California is in violation of the Interstate Commerce Act. In subsequent procedural rulings, the FERC has consolidated these challenges (Docket Nos. OR92-8-000, et al.) and ruled that they must proceed as a complaint proceeding, with the burden of proof being placed on the complaining parties. Such parties must show that SFPP's rates and practices at issue violate the requirements of the Interstate Commerce Act. Hearings in the FERC proceeding commenced on April 9, 1996 and concluded on July 19, 1996. The parties completed the filing of their post-hearing briefs on December 9, 1996. An initial decision by the FERC Administrative Law Judge was issued on September 25, 1997 (the "Initial Decision"). The Initial Decision upheld SFPP's position that "changed circumstances" were not shown to exist on the West Line, thereby retaining the just and reasonable status of all West Line rates that were "grandfathered" under the Energy Policy Act of 1992. Accordingly, such rates are not subject to challenge, either for the past or prospectively, in that proceeding. The Administrative Law Judge's decision specifically excepted from that ruling SFPP's Tariff No. 18 for movement of jet fuel from Los Angeles to Tucson, which was initiated subsequent to the enactment of EPACT. The Initial Decision also included rulings that were generally adverse to SFPP on such cost of service issues as the capital structure to be used in computing SFPP's 1985 starting rate base under FERC Opinion 154-B, the level of income tax allowance, and the recoverability of civil and regulatory litigation expense and certain pipeline reconditioning costs. The Administrative Law Judge also ruled that a gathering enhancement service at SFPP's Watson origin pump station in Carson, California is subject to FERC jurisdiction and ordered that a tariff for that service and supporting cost of service documentation be filed no later than 60 days after a final FERC order on this matter. Briefs on exceptions were filed on November 25, 1997, and briefs opposing exceptions were filed on January 23, 1998. The matters at issue will then be submitted to the FERC commissioners for a final decision, which decision is not expected before late - 1998. Unless the FERC's final decision is substantially more favorable to SFPP's position on the above-described methodological issues than the Initial Decision, SFPP will be required to pay reparations and file reduced tariff rates, primarily on the East Line. The complainants in FERC Docket Nos. OR92-8-000 et al. are seeking reparations, aggregating approximately $35 million for shipments between 1990 and 1994 as well as rate reductions of between 30% and 40% for shipments in 1995 and thereafter. If the complainants were to prevail on all claims, it is estimated that reparations resulting from such rate reductions for shipments in 1995, 1996, and 1997 would aggregate approximately an additional $80 million, resulting in total reparations for the period 1990-1997 of approximately $115 million, plus interest of approximately $30 million. The complainants in FERC Docket NOs OR98-1-000 and OR98-2-000 also seek both prospective reductions in the rates charged by SFPP and reparations. If the Initial Decision were affirmed in current form by the FERC, SFPP management estimates that the total reparations and interest that would be payable as of December 31, 1997 would approximate the $30 million in reserves that had been recorded as of that date. SFPP management also estimates that the Initial Decision, in its current form, and if also applied to the Sepulveda Lines rate at issue in Docket No. IS98-1-000, would reduce prospective revenues in the range of $8 million to $10 million annually. Under the rulings in the Initial Decision, reparations and interest would continue to accrue at approximately $8 million per annum until new prospective rates become effective. If SFPP were to lose its "grandfathered" rates due to a finding of "changed circumstances", the losses to the Partnership could be substantially larger. As a result, the loss of SFPP's "grandfathered" rates could have a material adverse effect on the Partnership's ability to make distributions to Unitholders. The Partnership is aggressively defending its position before the FERC. Prior to issuance of the Initial Decision, SFPP announced that it had reached tentative agreements with two complainants in Docket Nos. OR92-8-000 et al., resolving those parties' claims in that proceeding. Management does not anticipate that those agreements will be finalized in accordance with their tentative terms. In December 1995, Texaco filed an additional FERC complaint, which involves the question of whether a tariff filing is required for movements on certain of SFPP's lines upstream of its Watson, California station origin point (the "Sepulveda Lines") and, if so, whether those rates may be set in that proceeding and what those rates should be. Texaco's initial complaint was followed by several other West Line shippers filing similar complaints and/or motions to intervene, all of which have been consolidated into Docket Nos. OR96-2-000 et al. Hearings before an Administrative Law Judge were held in December 1996 and the parities completed the filing of final post-hearing briefs on January 31, 1997. 38 On March 28, 1997, the Administrative Law Judge issued an initial decision holding that the movements on SFPP's Sepulveda Lines are not subject to FERC jurisdiction. On August 5, 1997, the FERC reversed that decision and found the Sepulveda Lines to be subject to the jurisdiction of the FERC. SFPP was ordered to make a tariff filing within 60 days to establish an initial rate for these facilities. The FERC reserved decision on reparations until it rules on the newly-filed rates. On October 6, 1997, SFPP filed a tariff establishing the initial interstate rate for movements on the Sepulveda Lines from Sepulveda Junction to Watson Station at the preexisting rate of five cents per barrel, along with supporting cost of service documentation. Subsequently, several shippers filed protests and motions to intervene at the FERC challenging that rate. On October 27, 1997, SFPP made a responsive filing at the FERC, requesting that these protests be held in abeyance until the FERC ruled on SFPP's request for rehearing of the August 5, 1997 order, and also indicating that SFPP intended to defend the new tariff both on the basis of its cost of service and as a market-based rate. On November 5, 1997, the FERC issued an order accepting the new rate effective November 6, 1997, subject to refund, and referred the proceeding to a settlement judge. On December 10, 1997, following a settlement conference held at the direction of the FERC, the settlement judge recommended that the settlement procedures be terminated. On December 24, 1997, FERC denied SFPP's request for rehearing of the August 5, decision. On December 31, 1997, SFPP filed an application for market power determination, which, if granted, will enable it to charge market-based rates for this service. On October 22, 1997, ARCO Products Company, Mobil Oil Corporation and Texaco Refining and Marketing, Inc. filed a new complaint at the FERC (Docket No. OR98-1-000) challenging the justness and reasonableness of all of SFPP's interstate rates. The new complaint again challenges SFPP's East and West Line rates and raises many of the same issues, including a renewed challenge to the grandfathered status of West Line rates, that have been at issue in Docket Nos. OR92-8-000, et al. The new complaint includes an assertion that the acquisition of SFPP and the cost savings anticipated to result from the acquisition constitute "changed circumstances" that provide a basis for terminating the "grandfathered" status of SFPP's otherwise protected rates. The complaint also seeks to establish that SFPP's grandfathered interstate rates from the San Francisco Bay area to Reno, Nevada and from Portland to Eugene, Oregon are also subject to "changed circumstances" and, therefore, can be challenged as unjust and unreasonable. On November 26, 1997, Ultramar Diamond Shamrock Corporation filed a similar complaint at the FERC (Docket No. OR98-2-000). Both reparations and prospective rate deductions are sought for movements on all of the lines. SFPP filed answers to both complaints with the FERC on November 21, 1997 and December 22, 1997, respectively, and intends to vigorously defend all of the challenged rates. On January 20, 1998, the FERC issued an order accepting the complaints and consolidating both complaints into one proceeding, but holding them in abeyance pending a Commission decision on review of the Initial Decision in Docket Nos. OR92-8-000 et al. The FERC stated that it would, at that time, afford the complainants the opportunity to amend their complaints in light of any findings of the FERC in Docket Nos. OR92-8-000 et al. The FERC also stated that the complainants should identify more specifically the specific services at issue and the rates and charges upon which they are basing their claims for relief. Management has reviewed the filings and it is their position that none of the matters raised in the new complaints should constitute "changed circumstances" within the meaning of EPACT. Applicable rules and regulations in this field are vague, relevant factual issues are complex and there is little precedent available regarding the factors to be considered or the method of analysis to be employed in making a determination of "changed circumstances", which is the showing necessary to make "grandfathered" rates subject to challenge. The Partnership believes, after consultation with FERC counsel, that the acquisition of SFPP, standing alone, should not be found to constitute "changed circumstances", however, the realization of the cost savings anticipated to arise from the acquisition may increase the risk of a finding of "changed circumstances". If "changed circumstances" are found, SFPP rates previously "grandfathered" under EPACT may lose their "grandfathered" status and, if such rates are found to be unjust and unreasonable, shippers may be entitled to a prospective rate reduction together with reparations for periods form the date of the complaint to the date of the implementation of the new rates. The Partnership is not able to predict with certainty whether settlement agreements will be completed with some or all of the complainants, the final terms of any such settlement agreements that may be consummated, or the final outcome of the FERC proceedings should they be carried through to their conclusion, and it is possible that current or future proceedings could be resolved in a manner adverse to the Partnership. An adverse resolution could have a material adverse effect on the Partnership. 39 California Public Utilities Commission Proceeding A complaint was filed with the California Public Utilities Commission on April 7, 1997 ARCO Products Company, Mobil Oil Corporation and Texaco Refining and Marketing Inc. vs. SFPP,L.P. The complaint challenges rates charged by SFPP for intrastate transportation of refined petroleum products through its pipeline system in the State of California and requests prospective rate adjustments. On October 1, 1997, the complainants filed testimony seeking prospective rate reductions aggregating approximately $15 million per year. On November 26, 1997, SFPP filed responsive testimony defending the justness and reasonableness of its rates. The rebuttal testimony was filed on December 12, 1997 and hearings before the Administrative Law Judge were completed on January 15, 1998. Briefing and oral argument were made in March 1998, with a Commission decision expected in the third quarter of 1998. Management believes that the Partnership has substantial defenses against the claims raised in the complaint and intends to vigorously defend its California rates. SPTC Easements SFPP and SPTC are engaged in a judicial reference proceeding to determine the extent, if any, to which the rent payable by SFPP for the use of pipeline easements on rights-of-way held by SPTC should be adjusted pursuant to existing contractual arrangements (Southern Pacific Transportation Company vs. Santa Fe Pacific Corporation, SFP Properties, Inc., Santa Fe Pacific Pipelines, Inc., SFPP,L.P., et al., Superior Court of the State of California for the County of San Francisco, filed August 31, 1994). This matter was tried in the latter part of 1996 and the court issued its Statement of Tentative Decision in January 1997. The Statement of Tentative Decision indicated that the court intended to establish a new base annual rental for the subject rights-of-way at a level, subject to inflation adjustments, that is adequately provided for by the amounts that had been accrued by SFPP through December 31, 1997. On May 7, 1997, the judge issued a Statement of Decision and Judgment that reaffirmed the conclusions set forth in his January 1997 Statement of Tentative Decision. This Statement of Decision and Judgment was filed on June 30, 1997 with the Superior Court for the County of San Francisco, under which court's jurisdiction it is subject to appeal by SPTC. On May 30, 1997, SPTC filed a motion for a new trial and the motion was denied on June 26, 1997. Motions of Appeal were filed by SPTC and SFPP in July and August, 1997, respectively. Environmental Matters The Partnership is subject to environmental cleanup and enforcement actions from time to time. In particular, the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA" or "Superfund" law) generally imposes joint and several liability for cleanup and enforcement costs, without regard to fault or the legality of the original conduct, on current or predecessor owners and operators of a site. See Items 1 and 2 "Business and Properties - Regulation". Since August 1991, SFPP, along with several other respondents, has been involved in one cleanup ordered by the United States Environmental Protection Agency ("EPA") related to ground water contamination in the vicinity of SFPP's storage facilities and truck loading terminal at Sparks, Nevada. The EPA approved the respondents' remediation plan in September 1992 and the remediation system began operation in 1995. In addition, SFPP is presently involved in 18 ground water hydrocarbon remediation efforts under administrative orders issued by the California Regional Water Quality Control Board and two other state agencies. The General Partner is a defendant in two proceedings (one by the State of Illinois and one by the Department of Transportation) relating to alleged environmental and safety violations for events relating to a fire that occurred at the Morris storage field in September, 1994. Although no assurance can be given, the Partnership believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position or results of operations. Unitholder Class Actions Related to Santa Fe Acquisition Four purported class actions were filed arising out of the proposed acquisition by the Partnership of substantially all of the assets of Santa Fe. The actions seek, among other things, rescission of the acquisition and an award of rescissory damages. In February 1998, the parties to the actions entered into a memorandum of understanding that would settle 40 the actions on terms favorable to the Partnership. However, there can be no assurance that the court will approve the memorandum of understanding. Other The Partnership, in the ordinary course of business, is a defendant in various lawsuits relating to the Partnership's assets. Although no assurance can be given, the Partnership believes, based on its experience to date, that the ultimate resolution of such items will not have a material adverse impact on the Partnership's financial position or results of operations. Additional information is included in this report in Note 8 of the Notes to the Consolidated Financial Statements of the Partnership included elsewhere in this report. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the fourth quarter of 1997. 41 P A R T II Item 5. Market for the Registrant's Common Units and Related Security Holder Matters The following table sets forth, for the periods indicated, the high and low sale prices per Common Unit, as reported on the New York Stock Exchange, the principal market in which the securities are traded, and the amount of cash distributions paid per Common Unit. All information has been adjusted to give effect to the two-for-one split of Common Units effective October 1, 1997. Price Range Cash High Low Distributions 1997 First Quarter $21.3750 $13.6875 $0.3150 Second Quarter 24.0625 19.2500 0.5000 Third Quarter 36.8750 23.9375 0.5000 Fourth Quarter 41.2500 32.0000 0.5625 1996 First Quarter $13.1875 $12.1875 $0.3150 Second Quarter 13.0000 12.4375 0.3150 Third Quarter 14.0625 12.6875 0.3150 Fourth Quarter 14.5625 12.8125 0.3150 The Partnership pays quarterly distributions at a current rate of $.5625 per quarter. The Partnership currently expects that it will continue to pay comparable cash distributions in the future. As of January 11, 1998, there were approximately 8,700 beneficial owners of the Partnership's Common Units and there were an estimated 13,500 beneficial owners of Santa Fe Common Units. 42
Item 6. Selected Financial Data (unaudited) (in thousands, except per common unit and operating data) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Income and Cash Flow Data: Revenues $73,932 $71,250 $64,304 $54,904 $51,180 Cost of product sold 7,154 7,874 8,020 940 685 Operating expense 17,982 22,347 15,928 13,644 12,932 Fuel and power 5,636 4,916 3,934 5,481 6,875 Depreciation 10,067 9,908 9,548 8,539 7,167 General and 8,862 9,132 8,739 8,196 7,073 administrative ------- -------- -------- -------- -------- Operating Income 24,231 17,073 18,135 18,104 16,448 Equity in earnings 5,724 5,675 5,755 5,867 1,835 of partnerships Interest (expense) (12,605) (12,634) (12,455) (11,989) (10,302) Other income (353) 3,129 1,311 509 510 (expense) Income tax 740 (1,343) (1,432) (1,389) 83 (provision) benefit ------- -------- -------- -------- -------- Net Income $17,737 $11,900 $11,314 $11,102 $8,574 ======= ======== ======== ======== ======== Net Income per $1.02 $.90 $.85 $.93 $.75 ======= ======== ======== ======== ======== Common Unit Per Common Unit cash distribution paid $1.63 $1.26 $1.26 $1.26 $1.26 ===== ===== ===== ===== ===== Additions to property, plant and equipment $6,884 $8,575 $7,826 $5,195 $4,688 Balance Sheet Data (at end of period): Net property, plant $244,967 $235,994 $236,854 $238,850 $228,859 and equipment Total assets 312,906 303,603 303,664 299,271 288,345 Long-term debt 135,814 160,211 156,938 150,219 138,485 Partners' capital 150,224 118,344 123,116 128,474 132,391 Operating Data (unaudited): Liquids Pipelines transportation vols (MBbls) 46,309 46,601 41,613 46,078 52,600 NGL fractionation volumes (MBbls) 71,686 59,912 59,546 57,703 53,053 Gas processing volumes (MMcf/d) - 14 34 34 - NGL revenue volumes (MBbls) 395 1,638 477 - - CO2 transportation volumes (Bcf) 76 63 44 32 33 Coal transport volumes (Mtons) 9,087 6,090 6,486 4,539 1,209 Represents net income per Common Unit adjusted for the two-for-one split of Common Units effective on October 1, 1997. Allocation of net income per Common Unit was computed by dividing the interest of the holders of Common Units in net income by the weighted average number of Common Units outstanding during the period. Additions to property, plant and equipment for 1993, 1994 and 1997 exclude the $25,291, $12,825 and $11,688 of assets acquired in the September 1993 Cora Terminal, June 1994 Painter Gas Processing Plant and September 1997 Grand Rivers Terminal acquisitions, respectively. Represents total volumes for the Mont Belvieu Fractionator and the Painter Plant. Represents the volumes of the gas processing portion of the Painter Plant, which has not been operated by the Partnership since June 1996. Represents the volumes of the Bushton facility (beginning in October, 1995). Represents the volumes of the Cora Terminal, excluding ship or pay volumes of 252 Mtons for 1996, and the Grand Rivers Terminal from September 1997.
43 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation Results of Operations of the Partnership Year Ended December 31, 1997 Compared With Year Ended December 31, 1996 Net income of the Partnership increased 49% to $17.7 million in 1997 from $11.9 million in 1996. The results for 1996 included a non-recurring gain of $2.5 million, attributable to the cash buyout received from Chevron, USA ("Chevron") for early termination of a gas processing contract at the Painter Plant. See Note 5 of the Notes to the Consolidated Financial Statements of the Partnership. A significant earnings increase was attributable to the coal transfer, storage, and services segment. This segment reported net income of $10.7 million for 1997, $6.3 million (143%) higher than last year. Earnings from the coal terminals increased 81%, primarily the result of increases in coal tons transferred and average transfer rates at the Cora Terminal, as well as the addition of the Grand Rivers Terminal in September 1997. Operating results from Red Lightning, the energy services business unit, also contributed positive earnings. The liquids pipelines segment's net income increased to $23.9 million (8%) in 1997 compared to $22.1 million in 1996. Earnings from the Central Basin Pipeline increased by 16%, as a result of higher throughput and a decrease in cost of products sold. Increased throughput on the Cypress Pipeline, due to a 25,000 barrel per day expansion which came on-line in late November 1997, led to an earnings increase of 9% over 1996. Earnings on the North System for 1997 increased 3% compared to last year, chiefly due to lower operating and maintenance expenses. Higher earnings from the segments cited above were offset by lower earnings in the gas processing and fractionation segment. Segment earnings decreased $3.1 million in 1997, primarily the result of the $2.5 million non-recurring gain recognized in 1996 (referred to above). Earnings from the Partnership's interest in the Mont Belvieu Fractionator increased by 13% from a year ago. The favorable Fractionator results included $.7 million of tax benefits associated with the partial liquidating distribution of Kinder Morgan Natural Gas Liquids Corporation ("KMNGL"), the corporate entity holding the Partnership's interest in the Fractionator, partially offset by a $0.6 million reserve established for a contested product loss. Lower overall segment earnings were due to the termination of the Painter Plant's gas processing agreement by Chevron, effective as of August 1, 1996. Revenues of the Partnership increased 4% to $73.9 million in 1997 compared to $71.3 million in 1996. Revenues from the coal transfer, storage, and services segment totaled $18.2 million, up $10.1 million from 1996. The large increase reflects the addition of the Red Lightning Energy Services unit and the Grand Rivers Terminal starting in April and September, respectively. Revenues from the Cora Terminal increased to $10.9 million (35%) in 1997. The increase resulted from a 17% increase in volumes transferred, accompanied by a 6% increase in average transfer rates. 1997 revenues reported by the liquids pipelines segment remained relatively flat compared to 1996. Revenues in 1997 were $53.5 million compared to $54.0 million last year. Revenues from the Cypress Pipeline increased 11% due to a 14% increase in throughput volumes. The North System's revenues decreased 3% due to a 5% decrease in barrels transported. Revenue from the Central Basin Pipeline was essentially unchanged. Revenues from the gas processing and fractionation segment declined in 1997 compared to the previous year. The decrease was the result of the termination of gas processing at the Painter Plant in August 1996 and the assignment of the Mobil gas processing agreement at the Bushton Plant ( the "Mobil Agreement") to KN Processing, Inc. on April 1, 1997. Cost of products sold decreased 9% to $7.2 million in 1997 compared to 1996. The decrease was due to fewer purchase/sale contracts on the liquids pipelines as well as the termination of purchase/sale contracts at the Painter Plant. The lower overall cost of sales was partially offset by costs incurred by the Red Lightning Energy Services unit. Fuel and power expense increased to $5.6 million in 1997 compared to $4.9 million in 1996. The 14% increase from the prior period was principally the result of higher fuel costs reported by the liquids pipelines, as well as increases in coal tons transferred by the coal terminals. 44 Operating and maintenance expenses, combined with general and administrative expenses, were $23.9 million in 1997. This amount represents a 15% decrease from the $28.0 million reported in 1996. A significant decrease in operating and administrative expense resulted from the gas processing and fractionation segment's assignment of the Mobil Agreement to KN Processing, Inc. and leasing of the Painter Facility to Amoco Oil Company. Operating, maintenance, and administrative expenses for the liquids pipelines in 1997 decreased by 10% versus 1996 as a result of increased operating efficiencies and cost savings realized by new management. Lower overall operating, maintenance, and general and administrative expenses were partially offset by higher expenses from the coal transfer, storage, and services segment. Higher operating expenses from this segment were due to increased business activity. Taxes other than income decreased $0.5 million (15%) in 1997 due to adjustments to the liquids pipelines' ad valorem tax valuations and prior year ad valorem tax provisions. Other income which includes interest income, other non-operating income and expense, and reserves, decreased $3.4 million in 1997. The decrease reflects the $2.5 million buyout payment received from Chevron in 1996 and a $0.6 million contested product loss at the Mont Belvieu Fractionator. A decrease in the cumulative difference between book and tax depreciation and the effect of a partial liquidating distribution resulted in a $2.1 million reduction in income tax expense for 1997 compared to 1996. Year Ended December 31, 1996 Compared With Year Ended December 31, 1995 Net income of the Partnership increased to $11.9 million in 1996 from $11.3 million in 1995. The 5% increase was primarily due to increased operating earnings from the liquids pipelines segment and a $2.5 million buyout payment received from Chevron for early termination of a gas processing contract at the Painter Plant. The liquids pipelines segment reported a 15% increase in net income for 1996, chiefly due to increased earnings from the Central Basin Pipeline and the Cypress Pipeline of 83% and 12%, respectively. Higher overall Partnership earnings were partially offset by lower operating earnings from the gas processing and fractionation segment and the coal transfer, storage, and services segment. Revenues of the Partnership increased 11% to $71.3 million in 1996 compared to $64.3 million in 1995. The liquids pipelines' revenues increased 15% in 1996, mainly due to a 55% increase in revenues reported by the Central Basin Pipeline. Central Basin's increase in revenues was due primarily to a 41% increase in transport volumes in 1996 as compared to 1995. Additionally, the North System's revenues increased 7% in 1996 over 1995 due to a 12% increase in transport volumes resulting from a favorable crop drying season and colder weather. The gas processing and fractionation segment also reported higher revenues in 1996. Overall, the segment's revenues increased 2% over the comparable period in 1995, mainly due to a full year of revenues earned at the Bushton facility in connection with the Mobil Agreement, which was assigned to the Partnership as of October 1, 1995. The overall increase was somewhat offset by lower revenues at the Painter Plant due to the Chevron gas processing contract termination and unscheduled downtime due to an equipment malfunction. Cost of products sold decreased $0.1 million (2%) in 1996 as compared to 1995 primarily due to reduced product sales on the North System. Operating expense, including operations and maintenance expense, fuel and power costs, and taxes other than income taxes, increased 37% to $27.3 million in 1996 compared to $19.9 million in 1995, due to expenses incurred in connection with the Mobil Agreement. Additionally, operating expense increased $0.9 million as a result of a new storage agreement with a Partnership affiliate on the North System that went into effect on January 1, 1996. The new storage agreement increased the North System's storage capacity at Bushton, Kansas from 1.5 million barrels to 5.0 million barrels. Depreciation expenses increased $0.4 million (4%) during 1996 as compared to 1995 primarily as a result of 1996 property additions. General and administrative expenses increased $0.4 million (4%) in 1996 as compared to 1995 primarily due to a 6% annual increase in reimbursements to Enron for services provided to the Partnership by Enron and its affiliates. 45 Interest expense increased $0.2 million (1%) in 1996 as compared to 1995 primarily as a result of increased borrowings under OLP-A's working capital facility due to borrowings for expansion capital expenditures. Interest income and Other, net income increased 128% to $3.3 million in 1996 as compared to $1.4 million in 1995 primarily due to the $2.5 million buyout payment received from Chevron in 1996. In addition, other income for 1995 included a $0.5 million business interruption insurance settlement related to a previous year event on the North System. Outlook The Partnership intends to actively pursue a strategy to increase the Partnership's operating income. A three-pronged strategy will be utilized to accomplish this goal. * Cost Reductions. The Partnership has substantially reduced its operating expenses and will continue to seek further reductions where appropriate. * Internal Growth. The Partnership intends to expand the operations of its current facilities. The Partnership has taken a number of steps that management believes will increase revenues from existing operations, including the following: * The Cypress Pipeline has expanded capacity by 25,000 barrels per day starting in November, 1997. * The coal terminals, Cora and Grand Rivers, are each expected to handle approximately 10 million tons during 1998 as a result of sales agreements and other new business. * Earnings and cash flow as historically related to the operations of the Central Basin Pipeline are expected to increase in 1998 as a result of the partnership formed with Shell. * Strategic Acquisitions. The acquisition of Santa Fe closed on March 6, 1998. The Partnership intends to seek opportunities to make additional strategic acquisitions to expand existing businesses or to enter into related businesses. The Partnership periodically considers potential acquisition opportunities as such opportunities are identified by the Partnership. No assurance can be given that the Partnership will be able to consummate any such acquisitions. Management anticipates that acquisitions will be financed temporarily by bank bridge loans and permanently by a combination of debt and equity funding from the issuance of new Common Units. Management increased the quarterly distribution from $0.3150 per Unit in the first quarter of 1997 to $0.5625 per Unit for the fourth quarter of 1997. The fourth quarter distribution was paid in February, 1998. Management intends to maintain the distribution at an annual level of at least $2.25 per Unit. Liquidity and Capital Resources General The Partnership's primary cash requirements, in addition to normal operating expenses, are debt service, sustaining capital expenditures, discretionary capital expenditures, and quarterly distributions to partners. In addition to utilizing cash generated from operations, the Partnership could meet its cash requirements through the utilization of credit facilities or by issuing additional limited partner interests in the Partnership. The Partnership expects to fund future cash distributions and sustaining capital expenditures with existing cash and cash flows from operating activities. Discretionary capital expenditures are expected to be funded through additional Partnership borrowings. Cash Provided by Operating Activities Net cash provided by operating activities was $32.0 million for the year ended December 31, 1997 versus $22.8 million for the comparable period of 1996. This $9.2 million period-to-period increase in cash flow from operations was primarily the result of a $5.8 million improvement in net earnings and a $2.8 million increase in distributions received from the Partnership's investment in Mont Belvieu Associates. The completion of an expansion project at the Mont Belvieu Fractionator in 1996 enabled Mont Belvieu Associates to increase its 1997 distributions. Total 46 capital expenditures of $6.9 million in 1997, discussed below, include sustain- ing capital expenditures of $3.1 million. Net changes in working capital items provided $1.1 million in 1997, as compared to $1.8 million used in 1996. This positive change in cash flow mainly resulted from favorable changes in current payables and liabilities. The benefit was partially offset by lower deferred tax expenses ($2.0 million) in 1997 versus 1996. A 1997 tax benefit, producing an adjustment to deferred taxes, resulted from the partial liquidation of KMNGL. Cash Used in Investing Activities Cash used in investing activities totaled $30.3 million in 1997 compared to $9.1 million in 1996. This $21.2 million increase was mainly due to the Partnership's purchase of $20.0 million of long-term assets relating to the September 1997 acquisition of the Grand Rivers Terminal. Excluding the effect of long-term assets purchased in the Grand Rivers acquisition, additions to property, plant, and equipment were $6.9 million, $8.6 million, and $7.8 million for 1997, 1996, and 1995, respectively. Property additions were highest in 1996 chiefly due to the construction of a new propane terminal on the North System and pipeline laterals on the Central Basin Pipeline. Contributions to partnership investments increased $3.0 million in 1997 over the prior year. The increase reflects the funding of the Partnership's share of loan repayments associated with the 1996 expansion project at the Mont Belvieu Fractionator. Cash Used in Financing Activities Net cash used in financing activities totaled $11.8 million in 1997 compared to $13.6 million in 1996. This decrease of $1.8 million from the comparable 1996 period was the result of $33.7 million in net proceeds received from the issuance of Common Units, partially offset by debt payments, distributions to partners, and an increase in restricted cash. The proceeds from the issuance of Common Units relate to the Partnership's issuance of 1,091,200 Common Units in the third quarter of 1997. These proceeds were partially utilized to reduce net debt by $15.1 million in 1997. Overall net debt financing used for capital expansion projects on the Central Basin Pipeline and the North System provided $3.3 million and $6.1 million in 1996, and 1995, respectively. Distributions to partners increased to $24.3 million in 1997 compared to $16.8 million for the same period last year. This increase reflects an increase in the number of Unitholders, an increase in paid distributions per Unit and an increase in incentive distributions to the General Partner as a result of the higher distributions to Common Unitholders. The Partnership paid distributions of $1.63 per Common Unit in 1997 compared to $1.26 per Common Unit in 1996. The Partnership believes that the increase in paid distributions resulted from favorable operating results in 1997. The Partnership believes that future operating results will continue to support similar levels of quarterly cash distributions, however, no assurance can be given that future distributions will continue at such levels. The Partnership's debt instruments generally require the Partnership to maintain a reserve for future debt service obligations. The purpose of the reserve is to lessen differences in the amount of Available Cash from quarter to quarter due to the timing of required principal and interest payments (which may only be required on a semi-annual or annual basis) and to provide a source of funds to make such payments. The Partnership's debt instruments generally require the Partnership to set aside each quarter as a portion of the principal and interest payments due in the next six to 12 months. Partnership Distributions The Partnership Agreement requires the Partnership to distribute 100% of "Available Cash" (as defined in the Partnership Agreement) to the Partners within 45 days following the end of each calendar quarter in accordance with their respective percentage interests. Available Cash consists generally of all cash receipts of the Partnership and its operating partnerships, less cash disbursements and net additions to reserves and amounts payable to the former Santa Fe general partner in respect of its .5% interest in SFPP. 47 Available Cash of the Partnership generally is distributed 98% to the Limited Partners (including the approximate 2% limited partner interest of the General Partner) and 2% to the General Partner. This general requirement is modified to provide for incentive distributions to be paid to the General Partner in the event that quarterly distributions to unitholders exceed certain specified targets. In general, Available Cash for each quarter is distributed, first, 98% to the Limited Partners and 2% to the General Partner until the Limited Partners have received a total of $0.3025 per Unit for such quarter, second, 85% to the Limited Partners and 15% to the General Partner until the Limited Partners have received a total of $0.3575 per Unit for such quarter, third, 75% to the Limited Partners and 25% to the General Partner until the Limited Partners have received a total of $0.4675 per Unit for such quarter, and fourth, thereafter 50% to the Limited Partners and 50% to the General Partner. Incentive distributions are generally defined as all cash distributions paid to the General Partner that are in excess of 2% of the aggregate amount of cash being distributed. The General Partner's incentive distributions declared by the Partnership for 1997 were $3,935,852. Credit Facilities On February 17, 1998, the Partnership entered into a $325 million revolving credit facility (the "Loan Facility") with Goldman Sachs Credit Partners L.P., as syndication agent, First Union National Bank, as administrative agent, issuing bank and swingline lender, and the other financial institutions that are lenders under the agreement. The Partnership and OLP-B are co-borrowers under the Loan Facility. Commencing in May 2000, the amount available under the Loan Facility reduces on a quarterly basis, with the final installment due in February 2005. The obligations of the Partnership under the Loan Facility are guaranteed by the Partnership's operating partnerships and each other Restricted Subsidiary (as defined in the Loan Facility) of the Partnership (other than SFPP). The Partnership has guaranteed the obligations of OLP-B under the Loan Facility. The Loan Facility is secured by, among other things, a first priority lien on (i) the Partnership's limited partner interests in the Partnership's operating partnerships; (ii) all of the assets of OLP-D (including its general partner interest in SFPP), (iii) the Partnership's ownership interests in the Mont Belvieu Fractionator and Shell Co2 Company, and (iv) intercompany notes executed by each of the Partnership's operating partnerships (other than SFPP) in favor of the Partnership for loan proceeds lent to them by the Partnership. If the Partnership fails to maintain certain financial ratios, then each of the Partnership's operating partnerships will secure its intercompany note with its assets. Interest on loans under the Loan Facility accrues at the Partnership's option at a floating rate equal to either First Union National Bank's base rate (but not less than the Federal Funds Rate plus .5% per annum) or LIBOR plus a margin that will vary from .75% to 1.5% per annum depending upon the ratio of the Partnership's Funded Indebtedness to Cash Flow. Interest on advances is generally payable quarterly. The Loan Facility includes restrictive covenants that are customary for this type of facility, including without limitation, the maintenance of certain financial ratios and restrictions on (i) the incurrence of additional indebtedness; (ii) entering into mergers, consolidations, and sales of assets; (iii) making investments; and (iv) granting liens. In addition, the Loan Facility generally prohibits the Partnership from making cash distributions to holders of Common Units more frequently than quarterly, from distributing amounts in excess of 100% of Available Cash for the immediately preceding calendar quarter, and from making any distribution to holders of Common Units if an event of default exists or would exist upon making such distribution. On February 18, 1998, the Partnership borrowed approximately $142 million to refinance the First Mortgage Notes, including a prepayment premium, and the bank credit facilities of OLP-A and OLP-B (the "Refinanced Indebtedness"). On March 5, 1998, the Partnership borrowed approximately $25 million to fund its cash investment in Shell CO2 Company. On March 6, 1998, the Partnership borrowed approximately $90 million to fund its acquisition of the general partner interest in Santa Fe and a portion of the transaction costs associated with the acquisition of Santa Fe. The remaining availability under the Loan Facility will be used to fund the payment at par of any VREDs not tendered in the exchange offer described below and for general working capital and other general partnership purposes. The Partnership First Mortgage Notes were incurred in connection with the original formation of the Partnership. The remainder of the Refinanced Indebtedness was incurred for working capital and general partnership purposes. The Partnership's First Mortgage Notes bore interest at a fixed rate of 8.79% per annum. The remaining Refinanced Indebtedness bore interest at varying rates (a weighted average rate of approximately 7.65% per annum as of 48 December 31, 1997). The Partnership's First Mortgage Notes were payable in 10 equal annual installments of $11 million commencing in June 1998. The remaining Refinanced Indebtedness was scheduled to mature in 1999. As of December 31, 1997, SFPP's long term debt aggregated $355 million and consisted of $276.5 million of First Mortgage Notes (the "SF Notes") and a $78.5 million borrowing under SFPP's $175 million bank credit facility. The SF Notes are payable in annual installments through December 15, 2004. The credit facility matures in August 2000. The Partnership intends to refinance some or all of the remaining SF Notes as they become payable. The credit facility permits SFPP to refinance the $64 million of SF Notes due on or before December 15, 1999 (plus a $31.5 million prepayment allowed on such date). The SFPP credit facility also provides for a working capital facility of up to $25 million. Capital Requirements for Recent Transactions Shell CO2 Company. On March 5, 1998, the Partnership transferred the Central Basin Pipeline and $25 million in cash to Shell CO2 Company in exchange for a 20% limited partner interest in Shell CO2 Company. The Partnership financed its cash investment in Shell CO2 Company through the Loan Facility. Santa Fe Pacific Pipeline Partners, L.P. On March 6, 1998, the Partnership acquired substantially all of the assets of Santa Fe for approximately 26.6 million Common Units and $84.4 million in cash. The Partnership financed the $84.4 million cash portion of the purchase price and a portion of the transaction expenses through the Loan Facility. In September 1990, SFP Pipeline Holdings, Inc., the parent corporation of the general partner of Santa Fe, ("SF Holdings"), issued $218,981,000 principal amount of Variable Rate Exchangeable Debentures ("VREDs"). Originally, the VRED Holders were entitled to received 37.2093 Santa Fe Common Units for each $1,000 principal amount of VREDs upon the happening of certain triggering events, such as a change of control, merger or sale of substantially all of the assets (each an "Exchange Event"). The acquisition of substantially all of the assets of Santa Fe constituted an Exchange Event. As a result of the acquisition, SF Holdings and the VRED trustee entered into a supplemental indenture dated as of March 6, 1998, pursuant to which each $1,000 principal amount of VREDs became exchangeable for 51.720927 Common Units (the 37.2093 Santa Fe Common Units for which such VREDs were previously exchangeable multiplied by 1.39, the exchange ratio for the Santa Fe transaction) or an aggregate of 11,325,900 Common Units. The VRED Indenture permits the Partnership at its option to exchange the VREDs for cash equal to the "value of the VREDs" in lieu of Common Units. The "value of the VREDs" will be equal to the average of the closing prices of the VREDs during 15 consecutive trading days chosen by the Partnership during the 20 consecutive trading days preceding the Exchange Notice. The Partnership currently does not have any intention to exchange the VREDs for cash in lieu of Common Units and has not obtained a commitment for financing such cash payment. However, depending on the comparative prices of VREDs to Common Units and the Partnership's ability to obtain financing, the Partnership may exercise this option to deliver cash in lieu of Common Units. The Partnership agreed as part of the acquisition that it would cause OLP-D to perform all of SF Holdings' obligations related to the VREDs. Prior to the acquisition of Santa Fe, the former general partner owned 8,148,148 Santa Fe Common Units, which was approximately equal to the total number of Santa Fe Common Units into which the VREDs were exchangeable. As a result of the acquisition, those Santa Fe Common Units were converted into 11,325,925 Common Units. The general partner has placed the certificate representing the 11,325,925 Common Units into escrow to satisfy SF Holdings' obligations under the Indenture and these Common Units will be delivered in exchange for any VREDs tendered. Any VREDs that are not validly tendered for exchange will become due and payable in full in cash at par, plus accrued and unpaid interest, on June 4, 1998 (the "Exchange Date") and the Common Units into which such VREDs were exchangeable will be canceled. The Loan Facility permits the Partnership to borrow up to $25 million to finance the payment of any VREDs not tendered for exchange. Since the value of the Common Units to be received in the exchange offer currently exceeds the face value of the VREDs, the Partnership does not anticipate that such amounts will exceed $25 million. 49 Year 2000 The Partnership is assessing its internal computer systems and software to ensure that its information technology infrastructure will be Year 2000 capable. The Partnership cannot reasonably estimate, at this time, the potential impact on its financial position and operations if key suppliers, customers and other third parties with whom the Partnership conducts business (including other pipelines with which it interconnects) do not become Year 2000 capable on a timely basis. Costs incurred to become Year 2000 capable are not expected to have a material adverse effect on the Partnership's financial position or results of operations. Information Regarding Forward Looking Statements This filing includes forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward looking statements are identified as any statement that does not relate strictly to historical or current facts. They use words such as plans, expects, anticipates, estimates, will and other words and phrases of similar meaning. Although the Partnership believes that its expectations are based on reasonable assumptions, it can give no assurance that its goals will be achieved. Such forward looking statements involve known and unknown risks and uncertainties. The Partnership's actual actions or results may differ materially from those discussed in the forward looking statements. Specific factors which could cause actual results to differ from those in the forward looking statements, include, among others: * price trends and overall demand for NGLs, refined petroleum products, CO2, and coal in the United States (which may be affected by general levels of economic activity, weather, alternative energy sources, conservation and technological advances); * changes in the Partnership's tariff rates set by FERC and the California Public Utilities Commission; * the Partnership's ability to integrate the operations of Santa Fe (and other future acquisitions) into its existing operations; * with respect to the Coal Terminals, the ability of railroads to deliver coal to the terminals on a timely basis; * the Partnership's ability to successfully identify and close strategic acquisitions and realize cost savings; * the discontinuation of operations at major end-users of the products transported by the Liquids Pipelines (such as refineries, petrochemical plants, or military bases); and * the condition of the capital markets and equity markets in the United States. See Items 1 and 2 "Business and Properties - Risk Factors" for a more detailed description of these and other factors that may affect the forward looking statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk None. Item 8. Financial Statements and Supplementary Data The information required hereunder is included in this report as set forth in the "Index to Financial Statements" on page F-1. Item 9. Changes in and Disagreements on Accounting and Financial Disclosure None. 50 Item 10. Directors and Executive Officers of the Registrant Directors and Executive Officers of the General Partner As is commonly the case with publicly-traded limited partnerships, the Partnership does not employ any of the persons responsible for managing or operating the Partnership, but instead reimburses the General Partner for their services. Set forth below is certain information concerning the directors and executive officers of the General Partner. All directors of the General Partner are elected annually by, and may be removed by, Kinder Morgan, Inc. as the sole shareholder of the General Partner. All officers serve at the discretion of the directors of the Board of Directors of the General Partner. Name Age Position with the General Partner -------- --- --------------------------------- Richard D. Kinder 53 Director, Chairman, and CEO William V. Morgan 54 Director and Vice Chairman Alan L. Atterbury 55 Director Edward O. Gaylord 66 Director Thomas B. King 36 Director, President, and Chief Operating Officer David G. Dehaemers, Jr. 37 Vice President, Treasurer, and Chief Financial Officer Clare H. Doyle 43 Vice President, Secretary, and Corporate Counsel James E. Higgins 41 Vice President, Pacific Business Development and Marketing Roger Knouse 47 Vice President, Houston Commercial Operations, Pipelines Mary F. Morgan 45 Vice President, Pacific Customer Service Michael C. Morgan 29 Vice President, Corporate Development and Investments Roger C. Mosby 50 Vice President, Coal Commercial and Terminal Operations William M. White 52 Vice President, Pipeline Field Operations Eashy Yang 56 Vice President, Technical Services Richard D. Kinder was elected Director, Chairman, and Chief Executive Officer of the General Partner in February 1997. From 1992 to 1994, Mr. Kinder served as Chairman of the General Partner. From October 1990 until December 1996, Mr. Kinder was President of Enron Corp. Mr. Kinder was employed by Enron and its affiliates and predecessors for over 16 years. William V. Morgan was elected as a director of the General Partner in June 1994 and Vice Chairman of the General Partner in February 1997. Mr. Morgan has been the President of Morgan Associates, Inc., an investment and pipeline management company, since February 1987, and Cortez Holdings Corporation, a related pipeline investment company, since October 1992. He has held legal and management positions in the energy industry since 1975, including the presidencies of three major interstate natural gas companies which are now a part of Enron: Florida Gas Transmission Company, Transwestern Pipeline Company and Northern Natural Gas Company. Prior to joining Florida Gas in 1975, Mr. Morgan was engaged in the private practice of law in Washington, D.C. Alan L. Atterbury was elected as a director of the General Partner in February 1997. Mr. Atterbury is a co-founder of Midland Loan Services, L.P., a real estate financial services company, and has served as its Chief Executive Officer and President since its inception in 1992. Mr. Atterbury has also been the President and a Director of Midland Data Systems, the general partner of Midland Loan Services, since its inception in 1990 and the President of Midland Properties, a property management and real estate development company, since 1980. Edward O. Gaylord was elected as a director of the General Partner in February 1997. Mr. Gaylord is the President of Gaylord & Company, a venture capital company located in Houston, Texas. Mr. Gaylord also serves as Chairman of the Board for EOTT Energy Corporation, an oil trading and transportation company also located in Houston, Texas. He is also President of Jacintoport Terminal Company. Thomas B. King was elected Director, President, and Chief Operating Officer of the General Partner in February, 1997. Prior to that, he held the position of Vice-President, Midwest Region for the General Partner from July 1995 until February 1997. Mr. King has held several positions since he joined Enron in 1989, including Vice President, Gathering Services of Transwestern Pipeline Company and Northern Natural Gas Company and as Regional Vice 51 President, Marketing of Northern Natural Gas Company. From December 1989 to August 1993, he served as Director, Business Development for Northern Border Pipeline Company in Omaha, Nebraska. David G. Dehaemers, Jr. was elected Vice President and Chief Financial Officer of the General Partner in August 1997. He was elected Secretary and Treasurer of the General Partner in February 1997. From October 1992 to January 1997, he was Chief Financial Officer of Morgan Associates, Inc., an energy investment and pipeline management company. Mr. Dehaemers was previously employed by the national CPA firms of Ernst & Whinney and Arthur Young. He is a CPA, and received his undergraduate Accounting degree from Creighton University in Omaha, Nebraska. Mr. Dehaemers received his law degree from the University of Missouri - -Kansas City and is a member of the Missouri Bar. Clare H. Doyle was elected Vice President, Corporate Counsel and Secretary of the General Partner in August 1997. Prior to that, she was employed as counsel for Enron Operations Corp. from September 1996 to March 1997. From April 1988 to June 1996, she was counsel for PanEnergy Corp.(now Duke Energy). James E. Higgins was elected Vice President, Pacific Business Development and Marketing of the General Partner in March 1998. Previously, Mr. Higgins was Director of Business Development for Santa Fe Pacific Pipelines, L.P. from 1993 until March 1998. Prior to that, he was Director of Business Development and Administration for Enron Oil Trading and Transportation in 1992 and Director of Business Development for GATX Terminals Corporation from 1989 until 1992. Mr. Higgins held manager positions in sales and operations for GATX from 1985 until 1989. He also held treasury and economic analyst positions with Powerline Oil Company from 1979 until 1983. Roger M. Knouse was elected Vice President, Houston Commercial Operations, Pipelines of the General Partner in March 1998. Prior to that, he served as Director of Business Development for the General Partner from February 1997 until March 1998. Mr. Knouse was Director of Pipeline Services for Enron Liquid Service Corp. from July 1995 until February 1997 and Director of Pipeline Transportation for Enron Liquids Pipeline Company from January 1987 until July 1995. He held various operations and commercial positions with Enron Liquids Pipeline Company from November 1973 until January 1987. Mary F. Morgan was elected Vice President, Pacific Customer Service of the General Partner in March 1998. Prior to that, she was Director, Customer Service Center for Santa Fe Pacific Pipelines, L.P. since 1997. Prior to this assignment, Ms. Morgan served as Director, Products Movement and District Manager, Western District for Santa Fe. Over the past twenty years, she also served in various engineering and operations assignments with Santa Fe, Exxon Pipeline Company, and Amoco Production Company. Michael C. Morgan was elected Vice President, Corporate Development and Investments of the General Partner in February 1997. From August 1995 until February 1997, Mr. Morgan was an associate with McKinsey & Company, an international management consulting firm. In 1995, Mr. Morgan received a Masters in Business Administration from the Harvard Business School. From March 1991 to June 1993, Mr. Morgan held various positions at PSI Energy, Inc., an electric utility, including Assistant to the Chairman. Mr. Morgan received a Bachelor of Arts in Economics and a Masters of Arts in Sociology from Stanford University in 1990. Mr. Morgan is the son of William V. Morgan. Roger C. Mosby was elected Vice President, Coal Commercial and Terminal Operations of the General Partner in February 1997. Prior to that, Mr. Mosby was Vice President for Enron Liquid Services Corp. from July 1994 until February 1997. He was Vice President of Enron Gas Processing Company from January 1990 until March 1994. William M. White was elected Vice President, Pipeline Field Operations of the General Partner in March 1998. Previously, Mr. White served as Vice President of Engineering for Santa Fe Pacific Pipelines, L.P. from 1993 until March 1998. Prior to that, he held various engineering and operation positions with Santa Fe since December 1974. Mr. White graduated from the University of Kentucky with a degree in Electrical Engineering and he completed graduate work in Business Administration at the University of Tulsa. Eashy Yang was elected Vice President, Technical Services of the General Partner in July 1997. Mr. Yang was Director of Engineering and Technical Services for Enron Operations Corp. from June 1993 until February 1997. Prior to that, he was Director of Technical Operations and held various engineering positions with Enron from September 1974 until June 1993. 52 Item 11. Executive Compensation The Partnership has no executive officers, but is obligated to reimburse the General Partner for compensation paid to the General Partner's executive officers in connection with their operation of the Partnership's business. The following table summarizes all compensation paid to the General Partner's chief executive officer and to each of the General Partner's four other most highly compensated executive officers for services rendered to the Partnership during 1997.
Summary Compensation Table For the Year Ended December 31, 1997 Annual Compensation ------------------------------------ All Other Name and Principal Position Salary Bonus Compensation - --------------------------------------------------------------------- Richard D. Kinder $175,664 $ $ 12,757 Director, Chairman, and CEO William V. Morgan 175,685 - 12,757 Director and Vice Chairman Thomas B. King 140,667 160,000 9,774 Director, President, and COO David G. Dehaemers, Jr. 101,910 130,000 7,598 Vice President, Treasurer, and CFO Michael C. Morgan 101,910 130,000 7,539 Vice President Amounts earned in year shown and paid the following year. Represents the General Partner's contributions to the Retirement Savings Plan (a 401(k) plan) and the imputed value of General Partner-paid group term life insurance exceeding $50,000. Note: Prior to the acquisition of the General Partner by KMI, Mr. William V. Allison served as President of the General Partner. For the period January 1, 1997 until February 14, 1997, Mr. Allison was paid approximately $22,917 for services rendered to the Partnership.
Retirement Savings Plan. Effective July 1, 1997, the General Partner established the Kinder Morgan Retirement Savings Plan, a defined contribution 401(k) plan, that permits all full-time employees of the General Partner to contribute 1% to 15% of base compensation, on a pre-tax or after-tax basis, into participant accounts. In addition to a mandatory contribution equal to 4% of base compensation per year for each plan participant, the General Partner may make discretionary contributions in years when specific performance objectives are met. Any discretionary contributions are made during the first quarter following the performance year. On February 15, 1998, an additional 2% discretionary contribution was made to individual accounts based on 1997 financial targets to unitholders. All contributions, together with earnings thereon, are immediately vested and not subject to forfeiture. Participants may direct the investment of their contributions into a variety of investments. Plan assets are held and distributed pursuant to a trust agreement. Because levels of future compensation, participant contributions, and investment yields cannot be reliably predicted over the span of time contemplated by a plan of this nature, it is impractical to estimate the annual benefits payable at retirement to the individuals listed in the Summary Compensation Table above. Executive Compensation Plan. Pursuant to the Partnership's Executive Compensation Plan (the "Plan"), executive officers of the General Partner are eligible for awards equal to a percentage of the "Incentive Compensation Value", which is defined as cash distributions to the General Partner during the four calendar quarters preceding the date of redemption times eight (less a participant adjustment factor, if any). Under the Plan, no eligible employee may receive a grant in excess of 2% and total awards under the Plan may not exceed 10%. In general, participants may redeem vested awards in whole or in part from time to time by written notice. The 53 Partnership may, at its option, pay the participant in Common Units (provided, however, the unitholders approve the plan prior to issuing such Units) or in cash. The Partnership may not issue more than 200,000 Common Units in the aggregate under the Plan. Common Units will not be issued to a participant unless such Common Units have been listed for trading on the principal securities exchange on which the Common Units are then listed. The Plan terminates January 1, 2007 and any unredeemed awards will be automatically redeemed. The Board of Directors of the General Partner may, however, terminate the Plan before such date, and upon such early termination, the Partnership will redeem all unpaid grants of compensation at an amount equal to the highest Incentive Compensation Value, using as the determination date any day within the previous twelve months, multiplied by 1.5. The following table sets forth certain information regarding estimated potential awards to named executive officers pursuant to the Plan.
Long-Term Incentive Plans - Awards in 1997 Performance or Estimated Future Payouts Percentage of Performance or Under Non-Stock Incentive Other Period Until Price Based Name Compensation Value Maturation or Payout Plans - ----------------------------------------------------------------------------------------- Thomas B. King 1% 1997 - 1999 $359,884 1% 1997 - 2001 359,884 David G. Dehaemers, 1% 1997 - 1999 359,884 Jr. 1% 1997 - 2001 359,884 Michael C. Morgan 1% 1997 - 1999 359,884 1% 1997 - 2001 359,884 Currently, there are two Long-Term Incentive Plan vesting cycles in effect. The Plan was established in July 1997 and on July 1, 1997, the Board of Directors of the General Partner granted awards totaling 6% of the Incentive Compensation Value. Fifty percent of such awards vest on January 1, 2000 and the remaining fifty percent vest on January 1, 2002. Estimated payouts are based on actual cash distributions to the General Partner for the preceding four quarters ended December 31, 1997.
Common Unit Option Plan. Pursuant to the Partnership's Common Unit Option Plan (the "Option Plan") key personnel of the Partnership and its affiliates are eligible to receive grants of options to acquire Common Units. The total number of Common Units available under the plan is 250,000. None of the options granted under the Option Plan may be "Incentive Stock Options" under Section 422 of the Internal Revenue Code. If an option expires without being exercised, the number of Common Units covered by such option will be available for a future award. The exercise price for an option may not be less than the fair market value of a Common Unit on the date of grant. Either the Board of Directors of the General Partner or a committee of the Board of Directors will administer the Option Plan. The Plan terminates on March 5, 2008. No individual employee may be granted options for more than 10,000 Common Units in any year. The Board of Directors or the committee will determine the duration and vesting of the options to employees at the time of grant. On March 6, 1998, options for 118,000 Common Units at an exercise price of $35.4375 per Common Unit were granted to 56 employees of the General Partner. Forty percent of such options will vest on the first anniversary of the date of grant and twenty percent on each anniversary, thereafter. The options expire seven years from the date of grant. The Option Plan also grants each non-employee director of the Partnership as of April 1, 1998, an option to acquire 5,000 Common Units at an exercise price equal to the fair market value of the Common Units on such date. In addition, each new non-employee director will receive options to acquire 5,000 Common Units on the first day of the month following his or her election. Forty percent of such options will vest on the first anniversary of the date of grant and twenty percent on each anniversary, thereafter. The non-employee director options will expire seven years from the date of grant. 54 Directors fees. During 1997, each member of the Partnership's Board of Directors who was not also an employee of the General Partner was paid an annual retainer of $16,000 in lieu of all attendance fees. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information as of March 15, 1998, regarding the beneficial ownership of (i) the Common Units and (ii) the common stock of KMI, the parent company of the General Partner, by all directors of the General Partner, each of the named executive officers, all directors and executive officers as a group and all persons known by the General Partner to own beneficially more than 5% of the Common Units.
Amount and Nature of Beneficial Ownership KMI Voting Stock KMI Non Voting Stock Common Units (Class "A" Stock) (Class "B" Stock) ---------------- ------------------- --------------------- Number Percent Number Percent Number Percent of Units of Class of Shares of Class of Shares(3) of Class -------- ----------- ------------ --------- ------------ -------- First Union Corporation 991,200 2.43% 105 1.30% 2,541 100% One First Union Center 5th Floor 301 South College Street Charlotte, NC 28288-0732 Kinder Morgan G.P., Inc. 862,000 2.12% -- -- -- -- 1301 McKinney Street Suite 3450 Houston, Texas 77010 Richard D. Kinder 35,000 * 5,717 71.05% -- -- William V. Morgan 2,000 * 2,225 27.65% -- -- Alan L. Atterbury 8,000 * -- -- -- -- Edward O. Gaylord 4,000 * -- -- -- -- David G. Dehaemers -- * -- -- -- -- Michael C. Morgan -- * -- -- -- -- Thomas B. King 1,000 * -- -- -- -- Directors and Officers 52,100 * 7,942 98.70% -- -- as a group (14 persons) - -------------- *Less than 1% All Common Units involve sole voting power and sole investment power. As of March 6, 1998, the Partnership had 40,727,126 Common Units issued and outstanding. As of December 31, 1997, Kinder Morgan, Inc. ("KMI") had a total of 8,047 shares of issued and outstanding voting stock and a total of 2,541 shares of issued and outstanding non voting stock. Represents Units held by Kinder Morgan G.P., Inc., which is wholly owned by KMI. By virtue of its ownership of Kinder Morgan G.P., Inc., KMI may be deemed to indirectly own the Common Units owned by Kinder Morgan G.P., Inc. Excludes 862,000 Common Units owned by Kinder Morgan G.P., Inc. KMI owns 100% of the outstanding capital stock of Kinder Morgan G.P., Inc. Mr. Kinder owns approximately 71% of the voting common stock of KMI. By virtue of his ownership of KMI., Mr. Kinder may be deemed to indirectly own the Common Units owned by Kinder Morgan G.P., Inc. Mr. Kinder disclaims beneficial ownership of such Common Units. These shares are held by Morgan Associates, Inc., a Kansas corporation, wholly owned by Mr. Morgan.
KMI has pledged all of the stock of the General Partner to secure its bank credit facilities. Commencing on February 15, 1999, Mr. Kinder and Mr. Morgan have an option to purchase certain KMI stock owned by First Union Corporation, and commencing on August 15, 2000, KMI has an option to purchase and First Union Corporation has the right to require KMI to purchase, all of the KMI stock owned by First Union Corporation. 55 Item 13. Certain Relationships and Related Transactions General and Administrative Expenses The General Partner provides the Partnership with general and administrative services and is entitled to reimbursement of all direct and indirect costs related to the business activities of the Partnership. During 1997, the Partnership paid the General Partner $6.9 million as reimbursement for such costs. Partnership Distributions See Item 7 for information regarding Partnership Distributions. Odessa Lateral During 1996, the Odessa lateral was constructed to connect the South Cowden Unit flood project to the Central Basin Pipeline. The lateral is owned by MAI, which is owned by William V. Morgan, and was constructed for MAI by the Partnership under the terms of a Construction Agreement at a cost of $1.35 million, which amount has been paid by MAI. In addition, MAI and the Partnership entered into an Operating & Maintenance Agreement which provides for operation and maintenance of the lateral by the Partnership, and a Transportation Agreement which allows the Partnership to ship specified quantities of CO2 on the lateral and requires the Partnership to ship certain minimum quantities of CO2 on the lateral. The agreements are coterminous and expire in 2016. During 1997, the Partnership charged MAI $75,000 under the Operating and Maintenance Agreement and MAI charged the Partnership $496,005 under the Transportation Agreement. The terms of such agreements are comparable to those which the Partnership would make available to unaffiliated third parties. Other The General Partner makes all decisions relating to the management of the Partnership. KMI owns all the common stock of the General Partner. Certain conflicts of interest could arise as a result of the relationships among the General Partner, KMI, and the Partnership. The directors and officers of KMI have fiduciary duties to manage KMI, including selection and management of its investments in its subsidiaries and affiliates, in a manner beneficial to the shareholders of KMI. In general, the General Partner has a fiduciary duty to manage the Partnership in a manner beneficial to the Unitholders. The Partnership Agreements contain provisions that allow the General Partner to take into account the interests of parties in addition to the Partnership in resolving conflicts of interest, thereby limiting its fiduciary duty to the Unitholders, as well as provisions that may restrict the remedies available to Unitholders for actions taken that might, without such limitations, constitute breaches of fiduciary duty. The duty of the directors and officers of KMI to the shareholders of KMI may, therefore, come into conflict with the duties of the General Partner to the Unitholders. The Conflicts and Audit Committee of the Board of Directors of the General Partner will, at the request of the General Partner, review (and is one of the means for resolving) conflicts of interest that may arise between KMI or its subsidiaries, on the one hand, and the Partnership, on the other hand. 56 P A R T IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) and (2) Financial Statements and Financial Statement Schedules See "Index to Financial Statements" set forth on page F-1. (a)(3) Exhibits *2.1 -Purchase Agreement dated October 18, 1997 between Kinder Morgan Energy Partners, L.P., Kinder Morgan G.P., Inc., Santa Fe Pacific Pipeline Partners, L.P., Santa Fe Pacific Pipelines, Inc. and SFP Pipeline Holdings, Inc. (Exhibit 2 to 1998 S-4) *2.2 Master Agreement dated as of January 1, 1998 among Shell Western E&P Inc., Shell Western Pipelines Inc., Shell Cortez Pipeline Company, Shell CO2 , LLC, Shell CO2 General LLC, Shell Land & Energy Company, Kinder Morgan Operating L.P. "A" and Kinder Morgan CO2 LLC (Exhibit 2.2 to the Partnership's Current Report on Form 8-K dated March 5, 1998 (the "March 5, 1998 Form 8-K") *2.3 First Amended and Restated Agreement of Limited Partnership dated as of March 5, 1998, by and between Shell CO2 General LLC, Kinder Morgan CO2, LLC and Shell CO2 LLC. (Exhibit 2.3 to the March 5, 1998 Form 8-K) *2.4 Assumption and Indemnification Agreement dated as of January 1, 1998 among Shell CO2 General LLC, Shell CO2 General LLC, Shell Western E&P Inc., Shell Western Pipelines Inc., Shell Cortez Pipeline Company, Shell Land & Energy Company, Kinder Morgan CO2 LLC, Kinder Morgan Operating L.P. "A" and Shell CO2 Company, Ltd. (Exhibit 2.4 to the March 5 1998 Form 8-K) *2.5 Guaranty and Indemnification Agreement dated as of January 1, 1998 between Shell Western E&P Inc. and Kinder Morgan Energy Partners, L.P. (Exhibit 2.5 to the March 5, 1998 Form 8-K) *3.1 -Second Amendment to Amended and Restated Agreement of Limited Partner- ship dated as of February 14, 1997 (Exhibit 3.1 to Amendment No. 1 to the Partnership's Registration Statement on Form S-4 (File No. 333- 44519) filed February 4, 1998 ("1998 S-4")) *4.1 -Specimen Certificate representing Common Units (Exhibit 4.1 to 1998 S-4) *4.2 -Credit Agreement dated as of February 14, 1997 among Kinder Morgan Operating L.P. "B" and First Union National Bank of North Carolina with form of Notes attached (Exhibit 10.31 to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1996 ("1996 10-K") 4.2.1-First Amendment to Credit Agreement, among Kinder Morgan Operating L.P. "B" and First Union National Bank dated as of September 1, 1997 4.2.2-Second Amendment to Credit Agreement, among Kinder Morgan Operating L.P. "B" and First Union National Bank dated as of December 31, 1997 *4.3 -Security Agreement dated as of February 14, 1997 between Kinder Morgan Energy Partners, L.P. and First Union National Bank of North Carolina (Exhibit 10.32 to 1996 10-K) *4.4 -Security Agreement dated as of February 14, 1997 between Kinder Morgan Operating L.P. "B" and First Union National Bank of North Carolina (Exhibit 10.33 to 1996 10-K) *4.5 -Guaranty Agreement dated as of February 14, 1997 from Kinder Morgan Energy Partners, L.P. in favor of First Union National Bank of North Carolina (Exhibit 10.34 to 1996 10-K) 4.5.1-First Amendment to Guaranty Agreement dated as of September 26, 1997 4.5.2-Second Amendment to Guaranty Agreement dated as of September 26, 1997 *4.6 -Credit Agreement dated as of February 14, 1997 among Kinder Morgan, Inc.and First Union National Bank of North Carolina (Exhibit 10.35 to 1996 10-K) 4.6.1-First Amendment to Credit Agreement among Kinder Morgan, Inc. and First Union National Bank dated as of September 1, 1997 4.6.2-Second Amendment to Credit Agreement among Kinder Morgan, Inc. and First Union National Bank dated as of December 31, 1997 57 *4.7 -First Amendment to Mortgage and Security Agreement with Assignment of Rents (Illinois) dated as of February 14, 1997 between Kinder Morgan Operating L.P. "B" and First Union National Bank of North Carolina (Exhibit 10.37 to 1996 10-K) *4.8 -First Amendment to Mortgage, Security Agreement and Financing Statement (Wyoming) dated as of February 14, 1997 between Kinder Morgan Operating L.P. "B" and First Union National Bank of North Carolina as Agent (Exhibit 10.39 to 1996 10-K) 4.9 -Credit Agreement dated February 17, 1998 among Kinder Morgan Energy Partners, L.P., Kinder Morgan Operating L.P. "B", the Subsidiary Guarantors, the Lenders, Goldman Sachs Credit Partners, L.P. and First Union National Bank 4.10 -Pledge Agreement dated February 17, 1998 among Kinder Morgan Energy Partners, L.P., the Lenders, Goldman Sachs Credit Partners, L.P. and First Union National Bank 4.11 -Pledge Agreement dated February 17, 1998 among Kinder Morgan Operating L.P. "A", the Lenders, Goldman Sachs Credit Partners, L.P. and First Union National Bank 4.12 -Pledge Agreement dated February 17, 1998 among Kinder Morgan Operating L.P. "D", the Lenders, Goldman Sachs Credit Partners, L.P. and First Union National Bank 4.13 -Pledge Agreement dated February 17, 1998 among Kinder Morgan Natural Gas Liquids Corporation, the Lenders, Goldman Sachs Credit Partners, L.P. and First Union National Bank *4.14 First Mortgage Note Agreement dated December 8, 1998 among Southern Pacific Pipe Lines Partnership, L.P. (now known as SFPP.L.P.) and the Purchasers listed on Schedule A (a conformed composite of 54 separate agreements, identical except for signatures)(Exhibit 4.2 to Form 10-K for Santa Fe Pacific Pipelines, L.P. for 1988 ("Santa Fe 1988 Form 10-K") 4.14.1 Consent and Amendment dated as of December 19, 1997 between the noteholders and SFPP, L.P. (a conformed composite of the separate agreements with each noteholder, identical except for signatures) *4.15 Deed of Trust, Security Agreement and Fixture Filing, dated December 8, 1988, between SFPP, L.P., its general partner, Chicago Title Insurance Company and Security Pacific National Bank (Exhibit 4.3 to Santa Fe 1988 Form 10-K) *4.16 Trust Agreement dated December 19, 1988, between SFPP, L.P., its general partner and Security Pacific National Bank (Exhibit 4.4 to Santa Fe 1988 Form 10-K) *4.17 Amended and Restated Credit Agreement dated as of August 11, 1997 among SFPP, L.P., Bank of America National Trust and Savings Association, as agent, Texas Commerce Bank National Association, as syndication agent, Bank of Montreal, as documentation agent, BancAmerica Securities, Inc., as arranger, and the lenders that are signatories thereto. As the maximum allowable borrowings under this facility do not exceed 10% of the Registrant's total assets, this instrument is not filed as an exhibit to this Report, however, the Registrant hereby agrees to furnish a copy of such instrument to the Securities and Exchange Commission upon request. *10.1 -Employment Agreement with William V. Morgan (Exhibit 10.1 to Partner- ship's Form 10-Q Report dated March 31, 1997) *10.2 -Employment Agreement with Thomas B. King (Exhibit 10.2 to Partnership's Form 10-Q Report dated March 31, 1997) *10.3 -Kinder Morgan Energy Partners, L.P. Executive Compensation Plan (Exhibit 10 to Partnership's 10-Q dated June 30, 1997) *10.4 -Agreement to Purchase Units dated August 7, 1997 between Kinder Morgan Energy Partners, L.P. and the Purchasers listed on Schedule A thereto (Exhibit 10.1 to Partnership's Form 8-K Report dated August 7, 1997) *10.5 -Amended and Restated Agreement to Purchase Units dated as of August 13, 1997 between Kinder Morgan Energy Partners, L.P. and First Union Investors, Inc. (Exhibit 10.2 to Partnership's Form 8-K Report dated August 7, 1997) 10.6 Kinder Morgan Energy Partners, L.P. Common Unit Option Plan 21 -List of subsidiaries 24.1 -Consent letter from Price Waterhouse LLP 24.2 -Consent letter from Arthur Andersen LLP 27 -Financial Data Schedule - --------------------- * Asterisk indicates exhibits incorporated by reference as indicated; all other exhibits are filed herewith. 58 (b) Reports on Form 8-K Report dated October 18, 1997, on Form 8-K was filed on October 21, 1997, pursuant to Items 5 and 7 of that form. An agreement to purchase the assets of Santa Fe Pacific Pipeline Partners, L.P. was disclosed according to Item 5, and exhibits of the purchase agreement and associated press release were filed pursuant to Item 7. 59 INDEX TO FINANCIAL STATEMENTS Page KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES Report of Independent Accountants F-2 Report of Independent Public Accountants F-3 Consolidated Statements of Income for the years ended December 31, 1997, 1996, and 1995 F-4 Consolidated Balance Sheets for the years ended December 31, 1997 and 1996 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995 F-6 Consolidated Statements of Partners' Capital for the years ended December 31, 1997, 1996, and 1995 F-7 Notes to Consolidated Financial Statements F-8 MONT BELVIEU ASSOCIATES Report of Independent Accountants F-20 Report of Independent Public Accountants F-21 Statements of Income for the years ended December 31, 1997, 1996, and 1995 F-22 Balance Sheets for the years ended December 31, 1997 and 1996 F-23 Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995 F-24 Statements of Partners' Capital for the years ended December 31, 1997, 1996, and 1995 F-25 Notes to Financial Statements F-26 F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Kinder Morgan Energy Partners, L.P. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of cash flows, and of partners' capital present fairly, in all material respects, the financial position of Kinder Morgan Energy Partners, L.P. (a Delaware Limited Partnership) and subsidiaries (the Partnership) at December 31, 1997, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP Price Waterhouse LLP Houston, Texas March 6, 1998 F-2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of Kinder Morgan Energy Partners, L.P. (Formerly Enron Liquids Pipeline, L.P.) We have audited the accompanying consolidated balance sheet of Kinder Morgan Energy Partners, L.P. (a Delaware limited partnership) and subsidiaries as of December 31, 1996 , and the related consolidated statements of income, cash flows and partners' capital for each of the two years in the period ended December 31, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kinder Morgan Energy Partners, L.P. as of December 31, 1996 , and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Houston, Texas February 21, 1997 F-3 KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (In thousands, except per unit amounts) Year Ended December 31. ------------------------------------ 1997 1996 1995 --------- ---------- ---------- Revenues Trade $ 73,932 $ 62,561 $ 57,379 Related Party - 8,689 6,925 --------- ---------- ---------- 73,932 71,250 64,304 --------- ---------- ---------- Costs and Expenses Cost of products sold 7,154 7,874 8,020 Operations and maintenance Related Party - 6,558 2,683 Other 15,039 12,322 9,956 Fuel and power 5,636 4,916 3,934 Depreciation and amortization 10,067 9,908 9,548 General and administrative 8,862 9,132 8,739 Taxes other than income taxes 2,943 3,467 3,289 --------- ---------- ---------- 49,701 54,177 46,169 --------- ---------- ---------- Operating Income 24,231 17,073 18,135 Other Income (Expense) Equity in earnings of partnerships 5,724 5,675 5,755 Interest expense (12,605) (12,634) (12,455) Interest income and Other, net (174) 3,250 1,426 Minority Interest (179) (121) (115) ---------- --------- ---------- Income Before Income Taxes 16,997 13,243 12,746 Income Tax Benefit (Expense) 740 (1,343) (1,432) --------- ---------- ---------- Net Income $ 17,737 $ 11,900 $ 11,314 --------- ---------- ---------- General Partner's interest in Net Income 4,074 218 212 Limited Partners' interest in Net Income 13,663 11,682 11,102 --------- ---------- ---------- Net Income $ 17,737 $ 11,900 $ 11,314 --------- ---------- ---------- Allocation of Net Income per Limited Partner Unit $ 1.02 $ 0.90 $ 0.85 ========= ========== ========== Number of Units used in Computation 13,411 13,020 13,020 ========= ========== ========== The accompanying notes are an integral part of these consolidated financial statements. F-4 KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In thousands) December 31, ------------------ 1997 1996 ------- ------- ASSETS Current Assets Cash and cash $ 9,612 $ 14,299 Accounts receivable Trade 8,569 7,970 Related parties - 4,390 Inventories Products 1,901 882 Materials and supplies 1,710 1,827 ------- ------- 21,792 29,368 ------- ------- Property, Plant and Equipment, at cost 290,620 272,178 Less accumulated depreciation 45,653 36,184 ------- ------- 244,967 235,994 ------- ------- Investments in Partnerships 31,711 32,043 ------- ------- Deferred Charges and Other Assets 14,436 6,198 ======= ======= TOTAL ASSETS $ 312,906 $303,603 ======= ======= LIABILITIES AND PARTNERS' CAPITAL Current Liabilities Accounts payable Trade $ 4,423 $ 5,512 Related parties 507 4,520 Current portion of long-term debt - 1,709 Accrued liabilities 3,585 811 Accrued taxes 2,861 2,304 Distribution payable - 4,210 ------- ------- 11,376 19,066 ------- ------- Long-Term Liabilities and Deferred Credits Long-term debt 146,824 160,211 Other 2,997 3,492 ------- ------- 149,821 163,703 ------- ------- Commitments and Contingencies (Note 13) Minority Interest 1,485 2,490 ------- ------- Partners' Capital Common unitholders 146,840 101,000 Deferred participation unitholders - 16,165 General Partner 3,384 1,179 ------- ------- 150,224 118,344 ------- ------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 312,906 $ 303,603 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. F-5 KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) Year Ended December 31, ----------------------------------- 1997 1996 1995 ---------- ---------- ---------- Cash Flows From Operating Activities Reconciliation of net income to net cash provided by operating activities Net income $ 17,737 $ 11,900 $ 11,314 Depreciation and amortization 10,067 9,908 9,548 Equity in earnings of partnerships (5,724) (5,675) (5,755) Distributions from investments in partnerships 9,588 6,791 6,061 Changes in components of working capital Accounts receivable 3,791 (2,264) (2,958) Inventories (902) 198 465 Accounts payable (5,102) 2,096 1,581 Accrued liabilities 2,774 (1,997) 1,535 Accrued taxes 557 149 (373) Other, net (834) 1,670 1,148 ---------- ---------- ---------- Net Cash Provided by Operating Activities 31,952 22,776 22,566 ---------- ---------- ---------- Cash Flows From Investing Activities Acquisitions of assets (20,038) - - Additions to property, plant and equipment (6,884) (8,575) (7,826) Sale of property, plant and equipment 162 - - Contributions to partnership investment (3,532) (546) (772) ---------- --------- ---------- Net Cash Used in Investing Activities (30,292) (9,121) (8,598) ---------- --------- ---------- Cash Flows From Financing Activities Payment of debt (58,496) (1,718) (1,940) Issuance of debt 43,400 5,000 8,000 Net proceeds from issuance of common units 33,678 - - Distributions to partners Common units (21,768) (16,404) (16,404) General partner (2,280) (268) (268) Minority interest (245) (168) (168) Other, net (636) - - ---------- -------- --------- Net Cash Used In Financing Activities (6,347) (13,558) (10,780) ---------- -------- --------- Increase (Decrease) in Cash and Cash Equivalents (4,687) 97 3,188 Cash and Cash Equivalents, Beginning of Period 14,299 14,202 11,014 ========= ========= ========= Cash and Cash Equivalents, End of Period $ 9,612 14,299 14,202 ========= ========= ========= Supplemental disclosures of cash flow information Cash paid during the year for Interest (net of capitalized interest) $ 12,611 $ 12,487 $ 11,870 Income Taxes 463 397 425 The accompanying notes are an integral part of these consolidated financial statements. F-6 KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (In thousands) Deferred Total Common Participation General Partners' Units Units Partner Capital ------- ------------- -------- --------- Partners' capital at December 31, 1994 $109,703 $17,486 $ 1,285 $128,474 Net income 9,633 1,469 212 11,314 Distributions (14,236) (2,168) (268) (16,672) -------- ------- ------- ------- Partners' capital at December 31, 1995 105,100 16,787 1,229 123,116 Net income 10,136 1,546 218 11,900 Distributions (14,236) (2,168) (268) (16,672) -------- ------- ------- ------- Partners' capital at December 31, 1996 101,000 16,165 1,179 118,344 Net income 13,440 223 4,074 17,737 Transfer of deferred participation units 16,388 (16,388) - - Net proceeds from issuance of common units 33,678 - - 33,678 Capital contributions - - 345 345 Distributions accrued- December 31, 1996 4,102 - 66 4,168 Distributions paid (21,768) - (2,280) (24,048) -------- ------- ------- ------- Partners' capital at December 31, 1997 $146,840 $ - $ 3,384 $150,224 ======= ======= ======== ======== The accompanying notes are an integral part of these consolidated financial statements. F-7 KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization Sale of the stock of the General Partner Kinder Morgan Energy Partners, L.P. (the "Partnership", formerly Enron Liquids Pipeline, L.P.), a Delaware limited partnership was formed in August 1992. Effective February 14, 1997, Kinder Morgan, Inc. ("KMI") acquired all of the issued and outstanding stock of Enron Liquids Pipeline Company, the general partner, from Enron Liquids Holding Corp. ("ELHC"). At the time of the acquisition, the general partner and the Partnership's subsidiaries were renamed as follows: Kinder Morgan G.P., Inc. (the "General Partner", formerly Enron Liquids Pipeline Company); Kinder Morgan Operating L.P. "A" ("OLP-A", formerly Enron Liquids Operating Limited Partnership); Kinder Morgan Operating L.P. "B" ("OLP-B", formerly Enron Transportation Services, L.P.); and Kinder Morgan Natural Gas Liquids Corporation ("KMNGL", formerly Enron Natural Gas Liquids Corporation). The Partnership operates through three operating limited partnerships, OLP-A, OLP-B, and Kinder Morgan Operating L.P. "C" ("OLP-C") (collectively, the "Operating Partnerships"). Kinder Morgan G.P., Inc. is a wholly owned subsidiary of KMI and serves as the sole general partner of the Partnership, OLP-A, OLP-B, and OLP-C. The Partnership and the Operating Partnerships are governed by Amended and Restated Agreements of Limited Partnership and certain other agreements (collectively, the "Partnership Agreements"). General The Partnership's assets include two interstate common carrier natural gas liquids ("NGL" or "NGLs") pipelines ("North System" and "Cypress Pipeline"), a carbon dioxide ("CO2") pipeline ("Central Basin Pipeline"), two modern high speed rail-to-barge coal transfer facilities ("Cora Terminal" and "Grand Rivers Terminal"), a gas processing plant ("Painter Plant"), and a 25% indirect interest in an NGL fractionator in Mont Belvieu, Texas by means of the ownership of the common stock of KMNGL. The North System transports, stores and delivers a full range of NGLs and refined products from South Central Kansas to markets in the Midwest and has interconnects, using third-party pipelines in the Midwest, to the eastern United States. The Cypress Pipeline transports ethane from Mont Belvieu, Texas, to the Lake Charles, Louisiana area. The Central Basin Pipeline transports CO2 in West Texas. The Cora Terminal transfers coal from rail to barge on the banks of the Mississippi River near Cora, Illinois. The Grand Rivers Terminal is a coal transfer, storage, and blending facility located in Southwest Kentucky on the Tennessee River. The Painter Plant assets are operated by Amoco Oil Company under an operating lease agreement. Two-for-one Common Unit Split On September 2, 1997, the Partnership's General Partner approved a two-for-one Unit split of the Partnership's outstanding Common Units representing limited partner interests in the Partnership. The Unit split entitled common unitholders to one additional Common Unit for each Common Unit held. The issuance and mailing of split Units occurred on October 1, 1997 to unitholders of record on September 15, 1997. All references to the number of Common Units and per Unit amounts in the consolidated financial statements and related notes have been restated to reflect the effect of the split for all periods presented. 2. Summary of Significant Accounting Policies Principles of Consolidation and Use of Estimates The consolidated financial statements include the assets, liabilities, and results of operations of the Partnership and its majority-owned subsidiaries. All significant intercompany items have been eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure F-8 KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents Cash equivalents are defined as all highly liquid short-term investments with original maturities of three months or less. Inventories Inventories of products consist of NGLs and coal which are valued at the lower of cost (weighted-average cost method) or market. Materials and supplies are stated at the lower of cost or market. Property, Plant and Equipment Property, plant and equipment is stated at its acquisition cost. Expenditures for maintenance and repairs are charged to operations in the period incurred. The cost of property, plant and equipment sold or retired and the related depreciation are removed from the accounts in the period of sale or disposition. The provision for depreciation is computed using the straight-line method based on estimated economic or Federal Energy Regulatory Commission ("FERC") - mandated lives. Generally, composite depreciation rates are applied to functional groups of property having similar economic characteristics and range from 2.5% to 12.5%, excluding certain short-lived assets such as vehicles. The original cost of property retired is charged to accumulated depreciation and amortization, net of salvage and cost of removal. No retirement gain or loss is included in income except in the case of extraordinary retirements or sales. Revenue Recognition Revenues for the pipeline operations are generally recognized based on delivery of actual volume transported. Coal transfer service revenues are recognized based on volumes loaded. Recognition of gas processing revenues is based on volumes processed or fractionated. Revenues from energy related product sales of the Red Lightning Energy Services unit are based on delivered quantities of product. Minority Interest Minority interest consists of the approximate 1% general partner interest in the Operating Partnerships. Income Taxes The Partnership is not a taxable entity for Federal income tax purposes. As such, no Federal income tax will be paid by the Partnership. Each partner will be required to report on its tax return its allocable share of the taxable income or loss of the Partnership. Taxable income or loss may vary substantially from the net income or net loss reported in the consolidated statement of income primarily because of accelerated tax depreciation. Certain operations of the partnership are conducted through a wholly-owned corporate subsidiary which is taxable. Income before income tax expense attributable to corporate operations was $2.5 million, $3.6 million and $3.7 million for the years ended December 31, 1997, 1996 and 1995, respectively. For the periods ended December 31, 1997, 1996, and 1995, respectively, the provision for income taxes consists of deferred income tax of $(1.1) million, $.9 million, and $.9 million, respectively, and current income tax of $.3 million, $.4 million and $.5 million, respectively. The net deferred tax liability of $2.1 million and $3.2 million at December 31, 1997 and 1996, respectively, consists of deferred tax liabilities of $4.6 million and $5.4 million, respectively, and deferred tax assets of $2.5 million and $2.2 million, respectively. The deferred tax liabilities consist primarily of tax depreciation in excess of book depreciation. The F-9 KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS deferred tax assets consist primarily of alternative minimum tax credits and net operating losses. Net operating losses total approximately $2.4 million and substantially expire in 2008. Reconciling items between income tax expense computed at the statutory rate and actual income tax expense for the year ended December 31, 1997 primarily include the effect of a change in estimate of prior years' provision, a partial liquidating distribution and state income taxes. The tax attributes of the Partnership's net assets flow directly to each individual partner. Individual partners will have different investment bases depending upon the timing and prices of acquisition of partnership units. Further, each partner's tax accounting, which is partially dependent upon the partner's individual tax position, may differ from the accounting followed in the financial statements. Accordingly, there could be significant differences between each individual partner's tax basis and the partner's proportionate share of the net assets reported in the financial statements. FAS 109 requires disclosure by a publicly held partnership of the aggregate difference in the basis of its net assets for financial and tax reporting purposes. However, the Partnership does not have access to information about each individual partner's tax attributes in the Partnership, and the aggregate tax bases cannot be readily deteremined. In any event, management does not believe that, in the Partnership's circumstances, the aggregate difference would be meaningful information. Net Income Per Unit Allocation of Net Income per Limited Partner Unit was computed by dividing Limited Partner's interest in Net Income by the weighted average number of Common Units outstanding during the period. 3. Property, Plant and Equipment Property, plant and equipment consists of the following (in thousands): December 31, ----------------- 1997 1996 ------- ------- Liquids pipelines $ 226,129 $ 223,337 Coal transfer, storage and services 36,865 24,197 Gas processing and fractionation 13,563 13,529 Land 3,111 2,936 Other 10,952 8,179 ------- ------- Total $ 290,620 $ 272,178 ======= ======= 4. Investments in Partnerships Investments in partnerships accounted for under the equity method consisted of the following (dollars in thousands): December 31, Ownership ----------------- Percentage 1997 1996 ---------- ------- ------- Mont Belvieu Associates 50% $27,157 $27,205 Heartland Pipeline Company 50% 4,554 4,838 ------- ------- Total $31,711 $32,043 ======= ======= F-10 KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Partnership's equity in earnings of investments in partnerships is as follows (in thousands): ------------------------------------- 1997 1996 1995 ---------- --------- ---------- Mont Belvieu Associates $ 5,009 $ 4,968 $ 5,208 Heartland Pipeline Company 715 707 547 ---------- --------- ---------- Total $ 5,724 $ 5,675 $ 5,755 ========== ========= ========== Summarized combined financial information of the partnerships is presented below (in thousands): December 31, ----------------------- 1997 1996 --------- ---------- Balance Sheet Current assets $ 7,353 $ 7,729 Non-current assets $ 53,842 $ 54,401 Current liabilities $ 4,855 $ 5,043 Non-current $ 11,790 15,022 Partners' equity $ 4,554 42,065 Year Ended December 31, ------------------------------------- 1997 1996 1995 ---------- --------- ---------- Income Statement Revenues $ 38,299 $ 31,534 $ 30,032 Expenses 26,040 19,563 18,074 ---------- --------- ---------- Net income $ 12,259 $ 11,971 $ 11,958 ========== ========= ========== The excess of the Partnership's cost over its 50% share of the underlying net assets of the partnerships is being amortized over the estimated remaining life of the property, plant and equipment of the partnerships. Such amortization is reflected as a reduction in equity earnings related to the Partnership's investments. The unamortized excess was approximately $8 million as of December 31, 1997. 5. Gas Processing and Fractionation Transactions Chevron Contract Buyout In 1996, the Partnership was notified by Chevron, the only gas processing customer of the Painter Plant, that it was terminating the gas processing agreement effective as of August 1, 1996. The gas processing agreement with Chevron allowed for early termination by Chevron, subject to an approximate $2.9 million one time termination payment. On June 14, 1996, a force majeure event occurred and the Painter Plant gas processing facilities were shut down. Chevron subsequently disputed its obligation to pay the early termination payment. The Partnership negotiated with Chevron to settle all claims between the two parties under the gas processing agreement for $2.5 million. Gas Processing and Terminal Lease to Amoco On February 14, 1997, the Partnership executed an operating lease agreement with Amoco Oil Company ("Amoco") for Amoco's use of the Painter Plant fractionator and the Partnership's Millis Terminal and Storage Facility ("Millis") with the nearby Amoco Painter Complex Gas Plant. The lease generated approximately $0.9 million of cash flow in 1997. F-11 KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. Long-Term Debt OLP-A As of December 31, 1997, OLP-A had outstanding $110 million of 8.79% First Mortgage Notes ("First Mortgage Notes") due 2007. Such notes are secured by substantially all of the liquids pipeline property, plant and equipment of OLP-A and the common stock of KMNGL and are with recourse to the General Partner. OLP-A has established a $15 million revolving credit facility with a bank to meet its working capital requirements. OLP-A's credit facility with the bank has a variable interest rate equal to the London Interbank Offered Rate ("LIBOR") plus 1.75% per annum, requires interest payable quarterly on outstanding borrowings, and upon its June 1, 1999 termination, requires the repayment of the entire outstanding principal amount. At December 31, 1997, the Partnership had outstanding borrowings of $11.8 million under this facility. During 1997, the weighted-average interest rate was 7.49% per annum. OLP-B OLP-B has outstanding $23.7 million principal amount of tax exempt bonds issued by the Jackson-Union Counties Regional Port District due 2024. Such bonds bear interest at a weekly floating market rate. During 1997, the weighted-average interest rate on these bonds was 3.71% per annum. OLP-B has entered into an interest rate swap which fixes the interest rate at approximately 3.65% per annum during the period from February 13, 1996 to December 31, 1998. Debt Maturities Subsequent to December 31, 1997, the Partnership refinanced its First Mortgage Notes and existing bank credit facilities with a $325 million secured revolving credit facility. Beginning in May, 2000 the amount available under the credit facility reduces on a quarterly basis. At that time quarterly principal payments are required, as necessary to reduce the outstanding amount to the available amount under the credit facility. The final principal payment is due February, 2005. Fair Value of Financial Instruments The estimated fair value of the long-term debt based upon prevailing interest rates available to the Partnership at December 31, 1997 and 1996 is disclosed below. Fair value as used in SFAS No. 107 -- "Disclosures About Fair Value of Financial Instruments" represents the amount at which the instrument could be exchanged in a current transaction between willing parties. December 31, 1997 December 31, 1996 ----------------------- ------------------------ Carrying Estimated Carrying Estimated Value Fair Value Fair Value Value ---------- ---------- ---------- ---------- (in thousands) Long-term debt $ 146,824 $ 158,343 $ 161,920 $ 152,631 Interest rate swap $ - $ - $ - $ 155 F-12 KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Partners' Capital At December 31, 1997, Partners' capital consisted of 13,249,200 Common Units held by third parties and 862,000 Common Units held by the General Partner. Together, these 14,111,200 Common Units represent the limited partners' interest and an effective 98% interest in the Partnership. At December 31, 1996 and 1995 there were 13,020,000 Units outstanding. The general partner interest represents an effective 2% interest in the Partnership. On February 14, 1997, the 1,720,000 deferred participation units held by the General Partner were converted to Common Units and 858,000 of these units were sold to a third party. Since the deferred participation units owned by the General Partner are now Common Units, they are no longer separately disclosed. During 1997, the Partnership issued an additional 1,091,200 Common Units. For purposes of maintaining partner capital accounts, the Partnership agreement specifies that items of income and loss, shall be allocated among the partners in accordance with their respective percentage interests. Normal allocations according to percentage interests are done only, however, after giving effect to any priority income allocations in an amount equal to incentive distributions allocated 100% to the General Partner. Incentive distributions allocated to the General Partner are determined by the amount quarterly distributions to unitholders exceed certain specified target levels. For each of the four quarters of 1996 and the first quarter of 1997, the Partnership's cash distribution of $0.315 per Unit required an incentive distribution of $25,143 to the General Partner. The Partnership's cash distribution of $0.50 per Unit for each of the second and third quarters of 1997 required incentive distributions to the General Partner of $964,600 and $1,045,442, respectively. The increased incentive distribution for the third quarter reflects the issuance of additional Common Units. On January 14, 1998, the Partnership declared a cash distribution for the quarterly period ended December 31, 1997, of $0.5625 per Unit. The distribution will be paid on February 17, 1998, to unitholders of record as of January 31, 1998, and will require an incentive distribution to the General Partner of $1,900,667. Since this distribution was declared after the end of the quarter, no amount is shown in the December 31, 1997, balance sheet as a Distribution Payable. For the year ended December 31, 1996, the fourth quarter distribution was declared prior to the end of the period. 8. Concentrations of Credit Risk A substantial portion of the Partnership's revenues is derived from transportation services to oil and gas refining and marketing companies in the Midwest. Although this concentration could affect the Partnership's overall exposure to credit risk inasmuch as these customers could be affected by similar economic or other conditions, management believes that the Partnership is exposed to minimal credit risk. The Partnership generally does not require collateral for its receivables. 9. Related Party Transactions Revenues and Expenses Revenues for the years ended December 31, 1996 and 1995 include transportation charges and product sales to an Enron subsidiary, Enron Gas Liquids, Inc., of $7.7 million and $5.9 million, respectively. Another Enron subsidiary, Enron Gas Processing Company ("EGP"), provided services in connection with a gas processing agreement with Mobil as well as storage and other services to the Partnership and charged $6.6 million and $2.7 million for the years ended December 31, 1996 and 1995, respectively. Management believes that these charges were reasonable. As a result of F-13 KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KMI's acquisition of all of the common stock of the General Partner, Enron and its affiliates are no longer affiliates of the Partnership. The Partnership leases approximately 17 MBbls/d of North System capacity to Heartland Pipeline Company ("Heartland") under a lease agreement which will expire in 2010. Revenues earned from Heartland for the lease rights were approximately $0.9 million for each of the years ended December 31, 1997, 1996 and 1995. General and Administrative Expenses Prior to the sale of the General Partner, Enron and its affiliates were reimbursed for certain corporate staff and support services rendered to the General Partner in managing and operating the Partnership pursuant to the terms of the Omnibus Agreement which was executed among Enron, the Partnership and the General Partner at the time of formation of the Partnership. For the years ended December 31, 1996 and 1995 the amounts reimbursed to Enron were $5.8 million and $5.5 million, respectively. Partnership Distributions Kinder Morgan G.P., Inc. (the "General Partner") serves as the sole general partner of the three operating partnerships as well as the sole general partner of the Partnership. Pursuant to the partnership agreements, the general partner interests represent a 1% ownership interest in the Partnership, and a direct 1.0101% ownership interest in the operating partnerships. Together then, the General Partner owns an effective 2% interest in the operating partnerships; the 1.0101% direct general partner ownership interest (accounted for as minority interest in the consolidated financial statements of the Partnership) and the 0.9899% ownership interest indirectly owned via its 1% ownership interest in the Partnership. At December 31, 1997, the General Partner owned 862,000 Common Units, representing approximately 6.1% of the Common Units. The partnership agreements governing the operation of the Partnership and the operating partnerships require the partnerships to distribute 100% of the "Available Cash" (as defined in the partnership agreements) to the Partners within 45 days following the end of each calendar quarter in accordance with their respective percentage interests. Available Cash consists generally of all cash receipts of the partnerships less all of their cash disbursements and net additions to reserves. In general, Available Cash for each quarter is distributed, first, 98% to the Limited Partners and 2% to the General Partner until the Limited Partners have received a total of $0.3025 per Unit for such quarter, second, 85% to the Limited Partners and 15% to the General Partner until the Limited Partners have received a total of $0.3575 per Unit for such quarter, third, 75% to the Limited Partners and 25% to the General Partner until the Limited Partners have received a total of $0.4675 per Unit for such quarter, and fourth, thereafter 50% to the Limited Partners and 50% to the General Partner. Incentive distributions are generally defined as all cash distributions paid or payable to the General Partner that are in excess of 2% of the aggregate amount of cash being distributed. The General Partner's incentive distributions for the years ended December 31, 1997, 1996, and 1995 were $3,935,852, $100,571, and $100,571, respectively. Odessa Lateral During 1996, the Odessa lateral was constructed to connect the South Cowden Unit flood project to the Central Basin Pipeline. The lateral is owned by Morgan Associates, Inc. ("MAI"), which is owned by William V. Morgan (Vice Chairman of the General Partner). The lateral was constructed at a cost of $1.35 million, which amount has been paid by MAI. MAI and the Partnership entered into an Operating & Maintenance Agreement which provides for operation and maintenance of the lateral by the Partnership and a Transportation Agreement which allows the Partnership to ship specified quantities of CO2 and requires the Partnership to ship certain minimum quantities of CO2 on the lateral. The agreements are coterminous and expire in 2016. For the years ended December 31, 1997 and 1996, F-14 KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the Partnership charged MAI $75,000 and $31,250, respectively, under the Operating & Maintenance Agreement and paid MAI $496,005 and $194,648, respectively, under the Transportation Agreement. 10. Commitments and Leases The primary shipper on the Cypress Pipeline has the right until 2011 to purchase up to a 50% joint venture interest in the pipeline at a price based on, among other things, the construction cost of the Cypress Pipeline, plus adjustments for expansions. If the customer exercises its rights under the option, management anticipates that no loss will accrue to the Partnership. Under a joint tariff agreement, the Partnership's North System is obligated to pay minimum tariff revenues of approximately $2.3 million per contract year to an unaffiliated pipeline company subject to certain adjustments. This agreement expires June 30, 2001, but provides for two five-year extensions at the option of the Partnership. Subsequent to December 31, 1997, the Partnership renegotiated this contract. F-15 KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Partnership has entered into certain operating leases. Including probable elections to exercise renewal options, the leases have remaining terms ranging from eight to forty-six years. Future commitments related to these leases at December 31, 1997 are as follows (in thousands): 1998 $ 516 1999 530 2000 545 2001 561 2002 575 Thereafter 10,928 ------- Total minimum payments $ 13,655 ======= Total lease expenses, including related variable charges, incurred for the years ended December 31, 1997, 1996, and 1995 were $1.3 million, $1.5 million and $1.4 million, respectively. 11. Reportable Segments The Partnership has three reportable business segments: liquids pipelines; coal transfer, storage, and services; and gas processing and fractionation. The liquids pipelines segment transports natural gas liquids ("NGLs"), refined petroleum products, and carbon dioxide ("CO2") and includes the operations of the North System, Cypress Pipeline, and Central Basin Pipeline. The coal transfer, storage, and services segment transports, stores, and markets coal by the use of two coal terminal facilities (Cora Terminal and Grand Rivers Terminal) and an energy services business unit (Red Lightning Energy Services). The gas processing and fractionation segment includes the Partnership's 25% indirect interest in a NGL fractionation facility and lease income realized from an operating lease agreement at the Partnership's Painter Plant facilities. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (See Note 2). The Partnership evaluates performance based on each segments' earnings, which excludes general and administrative expenses, third-party debt costs, non-affiliated interest income, and minority interest. The Partnership's reportable segments are strategic business units that offer different products and services. They are managed separately because each segment involves different products and marketing strategies.
Coal Transfer, Gas Processing Total 1997 Liquids Storage, and and Segments Pipelines Services Fractionation --------------------------------------------------------- Revenues $53,511 $18,155 $2,266 $73,932 --------------------------------------------------------- Operating income $23,244 $10,709 $(855) $33,098 Equity in earnings of partnerships 715 - 5,009 5,724 Other (75) (1) (1,296) (1,372) Income tax - - 740 740 benefit/(expense) --------------------------------------------------------- Segment earnings $23,884 $10,708 $3,598 $38,190 --------------------------------------------------------- Assets at December 31 $209,820 $54,157 $38,021 $301,998 Depreciation and $8,069 $1,058 $940 $10,067 amortization Capital expenditures $4,253 $22,612 $57 $26,922 --------------------------------------------------------- 1996 Revenues $54,036 $8,059 $9,155 $71,250 --------------------------------------------------------- F-16 KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Operating income $21,208 $4,401 $596 $26,205 Equity in earnings of partnerships 707 - 4,968 5,675 Other 156 21 2,449 2,626 Income tax - - (1,343) (1,343) benefit/(expense) --------------------------------------------------------- Segment earnings $22,071 $4,422 $6,670 $33,163 (1) --------------------------------------------------------- Assets at December 31 $216,986 $28,736 $42,276 $287,998 (2) Depreciation and amortization $7,558 $1,366 $984 $9,908 Capital expenditures $7,673 $606 $296 $8,575 --------------------------------------------------------- 1995 --------------------------------------------------------- Revenues $46,940 $8,398 $8,966 $64,304 --------------------------------------------------------- Operating income $18,147 $5,015 $3,715 $26,877 Equity in earnings of partnerships 547 - 5,208 5,755 Other 430 26 175 631 Income tax - - (1,432) (1,432) benefit/(expense) --------------------------------------------------------- Segment earnings $19,124 $5,041 $7,666 $31,831 (1) --------------------------------------------------------- Assets at December 31 $214,846 $29,202 $43,995 $288,043 (2) Depreciation and $7,267 $1,332 $949 $9,548 amortization Capital expenditures $7,342 $148 $336 $7,826 --------------------------------------------------------- The following reconciles segment earnings to net income. 1997 1996 1995 --------------------------- Segment earnings $38,190 $33,163 $31,831 Interest and corporate (20,453) (21,263) (20,517) administrative expenses (a) --------------------------- Net income $17,737 $11,900 $11,314 --------------------------- (a) Includes interest and debt expense, general and administrative expenses, minority interest expense, and other insignificant items. The following reconciles segment assets to consolidated assets. 1997 1996 1995 --------------------------- Segment assets $301,998 $287,998 $288,043 Corporate assets (a) 10,908 15,605 15,621 --------------------------- Total Assets $312,906 $303,603 $303,664 --------------------------- (a) Includes cash, cash equivalents, and other insignificant assets. Gas Processing and Fractionation segment includes a gain of $2.5 million from early termination of a gas processing contract.
Although the Partnership's 1997 revenues were derived from a wide customer base, revenues from one customer of the Partnership's liquids pipelines and gas processing and fractionation segments represents approximately $8.8 million (11.9%) of total revenues. For the year ended December 31, 1996, revenues from two customers of the Partnership's liquids pipelines and gas processing and fractionation segments represented approximately $8.9 million (12.4%) and $7.4 million (10.4%), respectively, of total revenues. For the year ended December 31, 1995, revenues from one F-17 KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS customer of the Partnership's gas processing and fractionation segment represented approximately $6.6 million (10.2%) of total revenues, and revenues from one customer of the liquids pipelines and gas processing and fractionation segments represented approximately $6.5 million (10.2%) of total revenues. 12. Subsequent Events Santa Fe Acquisition On March 6, 1998, the Partnership acquired substantially all of the assets and assumed certain liabilities of Santa Fe Pacific Pipeline Partners, L.P. ("Santa Fe") for approximately 26.6 million Common Units and $84.4 million in cash. At the time of the acquisition, Santa Fe was one of the largest independent refined petroleum products pipelines in the United States serving six Western states with approximately 3,300 miles of common carrier pipeline and thirteen truck loading terminals. The Partnership intends to conduct the acquired operations through SFPP, L.P., a subsidiary partnership which is owned 99.5% by a fourth operating partnership, Kinder Morgan Operating L.P. "D" ("OLP-D"). Shell CO2 Company On March 5, 1998, the Partnership and affiliates of Shell Oil Company formed Shell CO2 Company, Ltd. which will explore, produce, market, and transport CO2 for enhanced oil recovery throughout the continental United States. The Partnership received a 20% limited partner interest in Shell CO2 Company, Ltd. in exchange for contributing the Central Basin Pipeline and approximately $25 million in cash. 13. Litigation and Other Contingencies General The Partnership, in the ordinary course of business, is a defendant in various lawsuits relating to the Partnership's assets. Although no assurance can be given, the Partnership believes, based on its experience to date, that the ultimate resolution of such items will not have a material adverse impact on the Partnership's financial position or results of operations. The operations of the Partnership are subject to federal, state and local laws and regulations relating to protection of the environment. The Partnership believes that its operations and facilities are in general compliance with applicable environmental regulations. The Partnership has an ongoing environmental audit and compliance program. Risks of accidental leaks or spills are, however, associated with fractionation of NGLs, transportation of NGLs and refined petroleum products, the handling and storage of coal, the processing of gas, as well as the truck and rail loading of fractionated products. There can be no assurance that significant costs and liabilities will not be incurred, including those relating to claims for damages to property and persons resulting from operation of the Partnership's businesses. Moreover, it is possible that other developments, such as increasingly strict environmental laws and regulations and enforcement policies thereunder, could result in increased costs and liabilities to the Partnership. Morris Storage Facility The General Partner is a defendant in two proceedings (one by the State of Illinois and one by the Department of Transportation) relating to alleged environmental violations for events relating to a fire that occurred at the Morris storage field in September, 1994. Although no assurance can be given, the Partnership believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position or results of operations. F-18 KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Class Action Filings Four purported class actions have been filed in connection with the acquisition by the Partnership of substantially all of the assets of Santa Fe (See Note 12). In February 1998, the parties to the actions entered into a memorandum of understanding that would settle the actions. However, there can be no assurance that the court will approve the memorandum of understanding. The Partnership believes any settlement will not have a material adverse affect on the Partnership's financial position or results of operations. Regulatory Matters The tariffs charged for interstate common carrier pipeline transportation for the North System and the Cypress Pipeline are subject to rate regulation by the FERC under the Interstate Commerce Act ("ICA"). The ICA requires, among other things, that petroleum products (including NGLs) pipeline rates be just and reasonable and non-discriminatory. Pursuant to FERC Order No. 561, effective January 1, 1995, petroleum pipelines are able to change their rates within prescribed ceiling levels that are tied to an inflation index. FERC Order No. 561-A, affirming and clarifying Order No. 561, expands the circumstances under which petroleum pipelines may employ cost-of-service ratemaking in lieu of the indexing methodology, effective January 1, 1995. For each of the years ended December 31, 1997, 1996, and 1995, the application of the indexing methodology did not significantly affect the Partnership's rates. 14. Quarterly Financial Data (Unaudited) Operating Net Income Revenues Income Net Income per Unit (In thousands, except per unit amounts) 1997 First Quarter $19,132 $5,927 $3,428 $0.26 Second Quarter 16,036 4,800 2,866 0.15 Third Quarter 17,385 5,315 3,754 0.20 Fourth Quarter 21,379 8,189 7,689 0.41 1996 First Quarter $18,431 $5,124 $2,810 $0.21 Second Quarter 14,668 2,860 1,353 0.10 Third Quarter 14,422 1,948 2,346 0.18 Fourth Quarter 23,729 7,141 5,391 0.41 1995 First Quarter $15,708 $5,846 $3,996 $0.30 Second Quarter 12,322 2,852 1,615 0.12 Third Quarter 15,215 2,830 978 0.07 Fourth Quarter 21,059 6,607 4,725 0.36 F-19 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Mont Belvieu Associates In our opinion, the accompanying balance sheet and the related statements of income , of cash flows, and of partners' capital present fairly, in all material respects, the financial position of Mont Belvieu Associates, a Texas general partnership, (the Partnership) at December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP Price Waterhouse LLP Houston, Texas March 6, 1998 F-20 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of Mont Belvieu Associates: We have audited the accompanying balance sheet of Mont Belvieu Associates, a Texas general partnership, (the Partnership) as of December 31, 1996, and the related statements of income, cash flows and partners' capital for each of the two years in the period ended December 31, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mont Belvieu Associates as of December 31, 1996, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Houston, Texas February 21, 1997 F-21 MONT BELVIEU ASSOCIATES STATEMENT OF INCOME (In thousands) Year Ended December 31, 1997 1996 1995 Revenues $33,646 $26,954 $25,795 Costs and expenses Operations and maintenance 19,350 14,302 13,361 Depreciation 1,934 1,424 1,293 Taxes, other than income taxes 1,025 634 517 Other 9 - 4 ---------- ---------- --------- 22,318 16,360 15,175 Operating income 11,328 10,594 10,620 Other income (expense) Interest expense (891) (92) (125) Other 175 105 329 ---------- ---------- ---------- (716) 13 204 ---------- ---------- ---------- Net income $10,612 $10,607 $10,824 ======= ======= ======= The accompanying notes are an integral part of these financial statements. F-22 MONT BELVIEU ASSOCIATES BALANCE SHEET (In thousands) December 31, 1997 1996 ASSETS Current assets Cash and cash equivalents $338 $2 Accounts receivable Due from partners - 1,542 Trade 4,357 3,510 Advances to fractionator 1,430 1,448 ----- ----- 6,125 6,502 Property, plant and equipment, at cost 70,351 68,609 Less accumulated depreciation 24,577 22,643 45,774 45,966 Deferred charges and other assets 79 - --------- ----------- TOTAL ASSETS $51,978 $52,468 ======= ======= LIABILITIES AND PARTNERS' CAPITAL Current liabilities Accounts payable due to fractionator $ - $ 282 Current portion of long-term debt 3,232 2,996 Accrued taxes other than income 915 536 Deferred revenues 332 732 ------- ------- 4,479 4,546 Long-term debt (Note 3) 11,790 15,022 ------ ------ Partners' capital 35,709 32,900 ------ ------ TOTAL LIABILITIES AND PARTNERS' CAPITAL $51,978 $52,468 The accompanying notes are an integral part of these financial statements. F-23 MONT BELVIEU ASSOCIATES STATEMENT OF CASH FLOWS (In thousands) Year Ended December 31, 1997 1996 1995 Cash flows from operating activities Reconciliation of net income to net cash provided by operating activities Net income $10,612 $10,607 $10,824 Depreciation and amortization 1,934 1,424 1,297 Changes in components of working capital Advances to fractionator 18 (230) 92 Accounts receivable 695 1,804 (1,745) Accounts payable due to fractionator (282) (2,426) 1,161 Accrued taxes other than income 379 - (1) Other, net (479) 732 (1,423) ------- -------- ------- Net cash provided by operating activities 12,877 11,911 10,205 Cash flows from investing activities Additions to property, plant and equipment (1,742) (11,684) (2,089) Net cash used in investing activities (1,742) (11,684) (2,089) Cash flows from financing activities Contributions from partners 6,755 871 1,652 Issuance of long-term debt - 17,000 436 Repayment of long-term debt (2,996) (399) (166) Cash distributions (14,558) (14,308) (10,036) Distribution of Equity Loan to Enterprise - (3,400) - Net cash used in financing activities (10,799) (236) (8,114) Increase (decrease) in cash and cash equivalents 336 (9) 2 Cash and cash equivalents, beginning of period 2 11 9 -------- -------- -------- Cash and cash equivalents, end of period $338 $ 2 $11 ==== === === - ---------------------------------------------------------------------------- Supplemental disclosures of cash flow information Cash paid during the year for interest (including capitalized interest) $1,185 $333 $125 - ---------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. F-24 MONT BELVIEU ASSOCIATES STATEMENT OF PARTNERS' CAPITAL (In thousands) Total Enterprise Partners' KMNGL Products Co. Capital Partners' capital at December 31, 1994 $18,345 $18,345 $36,690 Contributions 826 826 1,652 Net income 5,412 5,412 10,824 Distributions (5,018) (5,018) (10,036) ------- ------- ------- Partners' capital at December 31, 1995 19,565 19,565 39,130 Contributions 435 436 871 Net income 5,304 5,303 10,607 Distributions (7,154) (7,154) (14,308) Distributions for equity loa -- (3,400) (3,400) ------- -------- -------- Partners' Capital at December 31, 1996 18,150 14,750 32,900 Contributions 3,107 3,648 6,755 Net income 5,306 5,306 10,612 Distributions (7,279) (7,279) (14,558) ------- ------- -------- Partners' Capital at December 31, 1997 $19,284 $16,425 $35,709 ======== ======= ======= The accompanying notes are an integral part of these financial statements. F-25 MONT BELVIEU ASSOCIATES NOTES TO FINANCIAL STATEMENTS 1. Organization and Formation Mont Belvieu Associates ("MBA"), a Texas general partnership formed on July 17, 1985, owns an undivided 50% interest in a natural gas liquids fractionation facility (the "Mont Belvieu Fractionator" or the "Fractionator") located in Chambers County, Texas. Enterprise Products Company ("Enterprise") owns a 50% interest in MBA and operates the Fractionator. Kinder Morgan Natural Gas Liquids Corporation ("KMNGL") owns the remaining 50% interest and serves as the managing general partner for MBA. 2. Summary of Significant Accounting Policies Basis of Presentation MBA accounts for its investment in the Fractionator using the proportionate consolidation method of accounting, whereby MBA's proportionate share of assets, liabilities, revenues and operating expenses are reflected in the accompanying financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents Cash equivalents are defined as all highly liquid short-term investments with original maturities of three months or less. Property, Plant and Equipment Property, plant and equipment is stated at cost. Depreciation is computed using the straight-line method over 30 years, which approximates the estimated economic and physical life of the assets. Revenue Recognition Revenues are recognized based on actual barrels fractionated. Income Taxes MBA is not a taxable entity for federal income tax purposes. As such, no federal income tax will be paid by MBA. Each partner will be required to report on its tax return its allocable share of the taxable income or loss of MBA. 3. Long-Term Debt At December 31, 1997, MBA has outstanding a $0.6 million note payable to Enterprise for expansion projects. The original principal balance of $1.6 million is due in 48 equal monthly payments with the final payment being made in September 1999. Interest on the note is equal to the Eurodollar rate plus 1.75%. During 1997, the weighted-average interest rate on this note was 7.31%. The note is secured by MBA's partnership interest in the Fractionator. F-26 MONT BELVIEU ASSOCIATES NOTES TO FINANCIAL STATEMENTS In addition, at December 31, 1997, MBA has outstanding a $14.4 million promissory note which bears interest equal to the London Interbank Offered Rate ("LIBOR") plus a margin of .75% per annum. The original principal balance of $17 million is payable in equal monthly installments, except for the final payment due December 31, 2001, based on a six year amortization schedule which commenced February 14, 1997. The loan is non-recourse to the partners and is secured by the borrower's rights under the Operating Agreement between the joint owners. Maturities of debt as of December 31, 1997 were as follows (in thousands): 1998 $3,232 1999 3,054 2000 2,833 2001 5,903 Thereafter - 4. Related Party Transactions and Concentration of Credit Risk Generally, each partner of the Fractionator has the right to deliver natural gas liquids up to its proportionate share of fractionator capacity. Approximately 77% of revenues were earned from the partners of the Fractionator in 1997. All billings are passed from the Fractionator to MBA for its applicable portion. In turn, MBA bills each of its partners. All of MBA's revenues are derived from fractionation services to customers in the Gulf Coast area. This concentration could impact MBA's exposure to credit risk inasmuch as these customers could be affected by similar economic or other conditions. However, management believes that MBA is exposed to minimal credit risk. MBA generally does not require collateral for its receivables. F-27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 31st day of March, 1998. KINDER MORGAN ENERGY PARTNERS, L.P. (A Delaware Limited Partnership) By: KINDER MORGAN G.P., INC. as General Partner By: /s/ Thomas B. King Thomas B. King, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated. Signature Title Date /s/ Richard D. Kinder Director, Chairman, and March 31, 1998 Richard D. Kinder Chief Executive Officer (Principal Executive Officer) /s/ William V. Morgan Director and Vice Chairman March 31, 1998 William V. Morgan /s/ Alan L. Atterbury Director March 31, 1998 Alan L. Atterbury /s/ Edward O. Gaylord Director March 31, 1998 Edward O. Gaylord /s/ Thomas B. King Director, President, and Thomas B. King Chief Operating Officer March 31, 1998 /s/ David G. Dehaemers, Jr. Vice President, Treasurer, and David G. Dehaemers, Jr. Chief Financial Officer March 31, 1998 (Principal Financial and Accounting Officer) S-1 EX-4.2.1 2 FIRST AMENDMENT TO CREDIT AGREEMENT FIRST AMENDMENT TO CREDIT AGREEMENT This FIRST AMENDMENT TO CREDIT AGREEMENT is made and entered into effective as of the 1st day of September, 1997 (this "Amendment") among KINDER MORGAN OPERATING L.P. "B" (formerly known as Enron Transportation Services, L.P.), a limited partnership formed under the laws of the State of Delaware (the "Borrower"); each of the lenders that is or becomes a party to the Credit Agreement (defined below) (individually, together with its successors and assigns, a "Lender" and, collectively, the "Lenders"); and FIRST UNION NATIONAL BANK (formerly known as First Union National Bank of North Carolina), a national banking association (in its individual capacity, "First Union"), as agent for the Lenders (in such capacity, together with its successors in such capacity, the "Agent"). R E C I T A L S A. The Borrower, the Agent and the Lenders previously entered into that certain Credit Agreement dated as of February 14, 1997 (the "Credit Agreement"), pursuant to which the Lenders agreed to make certain loans to and extensions of credit on behalf of the Borrower upon the terms and conditions as provided therein. B. The Borrower and the Lenders now desire to make certain amendments and supplements to the Credit Agreement. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration and the mutual benefits, covenants and agreements herein expressed, the parties hereto now agree as follows: 1. All capitalized terms used in this Amendment and not otherwise defined herein shall have the meanings ascribed to such terms in the Credit Agreement. 2. The definitions of "Agreement", "Aggregate Revolving Credit Commitments" and "Applicable Margin" in Section 1.02 of the Credit Agreement are hereby amended to read as follows: "Agreement" shall mean this Credit Agreement, as amended by the First Amendment and as the same may be further amended or supplemented from time to time. "Aggregate Revolving Credit Commitments" at any time shall equal $10,000,000, as the same may be reduced in accordance with Section 2.03 hereof. "Applicable Margin" shall mean for Base Rate Loans or LIBOR Loans the following rate per annum as applicable based on the Indebtedness Ratio in effect from time to time: ------------------------------ Indebtedness LIBOR Base Ratio Rate Rate ------------------------------ >4.00 2.000% 0.500% ------------------------------ >3.50 1.750% 0.250% ------------------------------ >3.00 1.500% 0.000% ------------------------------ >2.50 1.250% 0.000% ------------------------------ < -2.50 1.000% 0.000% ------------------------------ 3. Section 1.02 of the Credit Agreement is hereby supplemented, where alphabetically appropriate, with the addition of the following definitions: "First Amendment" shall mean that certain First Amendment to Credit Agreement dated effective as of September 1, 1997 among the Borrower, the Agent and the Lenders. "Funded Debt Ratio" shall have the meaning assigned to that term in Section 9.20. "Indebtedness Ratio" shall mean the ratio of (i) the aggregate of all Indebtedness and letters of credit (that are not included in Indebtedness) outstanding on the date of calculation to (ii) EBITDA for the four fiscal quarters ending on the last day of the preceding fiscal quarter of the Borrower. For purposes of the calculation of the Indebtedness Ratio, EBITDA will change four times a year based on the financial statements delivered by the Borrower in accordance with Sections 8.01(a) and (b): 60 days following the end of the first three fiscal quarters of the Borrower and 120 days following the end fourth fiscal quarter. The numerator of such ratio will vary from time to time based on the outstanding Indebtedness and letters of credit. 4. Section 2.03(a) of the Credit Agreement is hereby deleted, and the following is substituted therefor: "(a) The Aggregate Revolving Credit Commitments shall reduce automatically $1,200,000 on each Quarterly Date commencing with March 31, 1998 and may be further reduced pursuant to Section 2.03(b) hereof." 5. Section 2.04(a) of the Credit Agreement is hereby deleted, and the following is substituted therefor: "(i) a commitment fee on the daily average unused amount of the Aggregate Revolving Credit Commitment for the period from and including the 2 Closing Date to but excluding the Revolving Credit Termination Date at the following rate per annum based on the Indebtedness Ratio: ---------------------------- Indebtedness Commitment Ratio Fee ---------------------------- >3.50 0.375% ---------------------------- < -3.50 0.250% ---------------------------- Accrued commitment fees shall be payable quarterly in arrears on each Quarterly Date and on the earlier of the date the Aggregate Revolving Credit Commitments are terminated or the Revolving Credit Termination Date. (ii) a letter of credit fee, computed (on the basis of a year of 360 days and actual days elapsed) for each day from the Closing Date at the rate of 1.50% per annum of the LC Maximum Amount, payable quarterly in arrears on each Quarterly Date." 6. Section 2.04(b)(i) of the Credit Agreement is hereby deleted, and the following is substituted therefor: "(i) 1/8% per annum of the LC Maximum Amount as a fronting fee, payable quarterly in arrears on each Quarterly Date." 7. Section 6.01(l) of the Credit Agreement is hereby deleted in its entirety. 8. Section 9.01 of the Credit Agreement is hereby amended by adding the following new subsection (h): "(h) the Borrower may become and remain liable with respect to unsecured Indebtedness of the Borrower owing to the General Partner or any Subsidiary or any other Affiliate of the General Partner created and outstanding under a subordinated promissory note subordinated pursuant to a Subordination Agreement substantially in the form of Exhibit A to the First Amendment so long as the aggregate outstanding principal amount of such subordinated Indebtedness does not at any time exceed $25,000,000." 9. Section 9.03 of the Credit Agreement is hereby amended by deleting the existing subsection (g) and adding the following new subsections (g) and (h): "(g) in addition to the investments permitted by Section 9.03(h), other investments, loans or advances not to exceed $500,000 in the aggregate at any time; and 3 (h) loans or advances to the Guarantor; provided that immediately before and after each loan or advance no Default or Event of Default exists and is continuing." 10. Section 9.13 of the Credit Agreement is hereby amended by deleting the second sentence and substituting the following sentence therefor: "For purposes of this Section 9.13, "Debt Service Ratio" shall mean the ratio of (i) EBITDA for the four fiscal quarters ending on such date to (ii) cash payments made for scheduled principal payments, including without limitation, any prepayments required as a result of the reduction of the Aggregate Revolving Credit Commitment pursuant to Section 2.03(a) and interest on Debt of the Borrower and its Consolidated Subsidiaries other than as permitted under Section 9.01(f) for such four fiscal quarters of the Borrower and its Consolidated Subsidiaries." 11. Section 9.16 of the Credit Agreement is hereby amended to read as follows: "Section 9.16 Transactions with Affiliates. Neither the Borrower nor any Subsidiary will enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of Property or the rendering of any service, with any Affiliate unless such transactions are otherwise permitted under this Agreement, are in the ordinary course of its business and are upon fair and reasonable terms to it." 12. Article IX of the Credit Agreement is hereby supplemented by adding the following new Section 9.20: "Section 9.20 Funded Debt Ratio. Commencing on the fiscal quarter ending June 30, 1997, the Borrower will not permit its Funded Debt Ratio as of the end of any fiscal quarter of the Borrower (calculated quarterly at the end of each fiscal quarter) to be greater than 4.50 to 1.00. For purposes of this Section 9.20, "Funded Debt Ratio" shall mean the ratio of (i) the aggregate of all outstanding Debt for borrowed money (excluding Debt outstanding on the Bonds and Debt permitted by Section 9.01(h)) and letters of credit on such date to (ii) EBITDA for the four fiscal quarters ending on such date." 13. Section 10.01(b) of the Credit Agreement is hereby amended by replacing the name "Mont Belview Associates" with the name "Mont Belvieu Associates." 14. Annex 1 to the Credit Agreement is hereby deleted and replaced by Annex 1 attached to this Amendment. 15. This Amendment shall become binding when the Agent shall have received counterparts of this Amendment executed by the Borrower and the Lenders and such other documents as the Agent or its counsel may reasonably request. 4 16. The parties hereto hereby acknowledge and agree that, except as specifically supplemented and amended, changed or modified hereby, the Credit Agreement shall remain in full force and effect in accordance with its terms. 17. The Borrower hereby reaffirms that as of the date of this Amendment, the representations and warranties made by the Borrower in Article VII of the Credit Agreement as amended hereby are true and correct on the date hereof as though made on and as of the date of this Amendment. 18. This Amendment shall be governed by, and construed in accordance with, the laws of the State of Texas. 19. This Amendment may be executed in two or more counterparts, and it shall not be necessary that the signatures of all parties hereto be contained on any one counterpart hereof; each counterpart shall be deemed an original, but all of which together shall constitute one and the same instrument. Delivery of an executed signature page by facsimile transmission shall be as effective as delivery of a manually executed counterpart hereof. 20. THE CREDIT AGREEMENT, THIS AMENDMENT, THE NOTES AND THE SECURITY INSTRUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN OR ORAL AGREEMENTS BETWEEN THE PARTIES. [SIGNATURES BEGIN NEXT PAGE] 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed effective as of the date first above written. BORROWER: KINDER MORGAN OPERATING L.P. "B" (formerly known as Enron Transportation Services, L.P.) By: Kinder Morgan G.P., Inc., its General Partner By: /s/ William V. Morgan Name: William V. Morgan Title: Vice Chairman AGENT AND LENDER: FIRST UNION NATIONAL BANK By: /s/ David Roberts Name: David Roberts Title: Senior Vice President EX-4.2.2 3 SECOND AMENDMENT TO CREDIT AGREEMENT SECOND AMENDMENT TO CREDIT AGREEMENT This SECOND AMENDMENT TO CREDIT AGREEMENT is made and entered into effective as of the 31st day of December, 1997 (this "Amendment") among KINDER MORGAN OPERATING L.P. "B" (formerly known as Enron Transportation Services, L.P.), a limited partnership formed under the laws of the State of Delaware (the "Borrower"); each of the lenders that is or becomes a party to the Credit Agreement (defined below) (individually, together with its successors and assigns, a "Lender" and, collectively, the "Lenders"); and FIRST UNION NATIONAL BANK (formerly known as First Union National Bank of North Carolina), a national banking association (in its individual capacity, "First Union"), as agent for the Lenders (in such capacity, together with its successors in such capacity, the "Agent"). R E C I T A L S A. The Borrower, the Agent and the Lenders previously entered into that certain Credit Agreement dated as of February 14, 1997 as amended by First Amendment to Credit Agreement dated as of September 1, 1997 (as amended, the "Credit Agreement"), pursuant to which the Lenders agreed to make certain loans to and extensions of credit on behalf of the Borrower upon the terms and conditions as provided therein. B. The Borrower and the Lenders now desire to make certain amendments and supplements to the Credit Agreement. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration and the mutual benefits, covenants and agreements herein expressed, the parties hereto now agree as follows: 1. All capitalized terms used in this Amendment and not otherwise defined herein shall have the meanings ascribed to such terms in the Credit Agreement. 2. The definition of "Agreement" in Section 1.02 of the Credit Agreement is hereby amended to read as follows: "Agreement" shall mean this Credit Agreement, as amended by the First Amendment and the Second Amendment as the same may be further amended or supplemented from time to time. 3. Section 1.02 of the Credit Agreement is hereby supplemented, where alphabetically appropriate, with the addition of the following definition: "Second Amendment" shall mean that certain Second Amendment to Credit Agreement dated effective as of December 31, 1997 among the Borrower, the Agent and the Lenders. 4. Section 2.04(a) of the Credit Agreement is hereby deleted, and the following is substituted therefor: "(a) The Borrower shall pay to the Agent for the account of each Lender: (i) a commitment fee on the daily average unused amount of the Aggregate Revolving Credit Commitment for the period from and including the Closing Date to but excluding the Revolving Credit Termination Date at the following rate per annum based on the Indebtedness Ratio: ---------------------------- Indebtedness Commitment Ratio Fee ---------------------------- >3.50 0.375% ---------------------------- < -3.50 0.250% ---------------------------- Accrued commitment fees shall be payable quarterly in arrears on each Quarterly Date and on the earlier of the date the Aggregate Revolving Credit Commitments are terminated or the Revolving Credit Termination Date. (ii) a letter of credit fee, computed (on the basis of a year of 360 days and actual days elapsed) for each day from the Closing Date at the rate of 1.50% per annum of the LC Maximum Amount, payable quarterly in arrears on each Quarterly Date." 5. Section 9.16 of the Credit Agreement is hereby amended to read as follows: "Section 9.16 Transactions with Affiliates. Neither the Borrower nor any Subsidiary will enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of Property or the rendering of any service, with any Affiliate unless such transactions are otherwise permitted under this Agreement and are upon fair and reasonable terms to it." 6. Section 9.19 of the Credit Agreement is hereby amended to read as follows: "Section 9.19 Partnership Agreement. The Borrower will not amend or permit to be amended the Partnership Agreement in a manner materially adverse to the Lenders without the prior written consent of the Majority Lenders." 7. This Amendment shall become binding when the Agent shall have received counterparts of this Amendment executed by the Borrower and the Lenders and such other documents as the Agent or its counsel may reasonably request. 2 8. The parties hereto hereby acknowledge and agree that, except as specifically supplemented and amended, changed or modified hereby, the Credit Agreement shall remain in full force and effect in accordance with its terms. 9. The Borrower hereby reaffirms that as of the date of this Amendment, the representations and warranties made by the Borrower in Article VII of the Credit Agreement as amended hereby are true and correct on the date hereof as though made on and as of the date of this Amendment. 10. This Amendment shall be governed by, and construed in accordance with, the laws of the State of Texas. 11. This Amendment may be executed in two or more counterparts, and it shall not be necessary that the signatures of all parties hereto be contained on any one counterpart hereof; each counterpart shall be deemed an original, but all of which together shall constitute one and the same instrument. Delivery of an executed signature page by facsimile transmission shall be as effective as delivery of a manually executed counterpart hereof. 12. THE CREDIT AGREEMENT, THIS AMENDMENT, THE NOTES AND THE SECURITY INSTRUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN OR ORAL AGREEMENTS BETWEEN THE PARTIES. [SIGNATURES BEGIN NEXT PAGE] 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed effective as of the date first above written. BORROWER: KINDER MORGAN OPERATING L.P. "B" (formerly known as Enron Transportation Services, L.P.) By: Kinder Morgan G.P., Inc., its General Partner By: /s/ William V. Morgan Name: William V. Morgan Title: Vice Chairman AGENT AND LENDER: FIRST UNION NATIONAL BANK By: /s/ David Roberts Name: David Roberts Title: Senior Vice President S-1 EX-4.5.1 4 FIRST AMENDMENT TO GUARANTY AGREEMENT FIRST AMENDMENT TO GUARANTY AGREEMENT THIS FIRST AMENDMENT TO GUARANTY AGREEMENT is made and entered into effective as of the 1st day of September, 1997 (this "Amendment") between KINDER MORGAN ENERGY PARTNERS, L.P. (formerly known as Enron Liquids Pipeline, L.P.), a Delaware limited partnership (the "Guarantor") and FIRST UNION NATIONAL BANK (formerly known as First Union National Bank of North Carolina), as agent (the "Agent") for the lenders (the "Lenders") that are or become parties to the Credit Agreement defined below. W I T N E S S E T H: WHEREAS, KINDER MORGAN OPERATING L.P. "B" (formerly known as Enron Transportation Services, L.P.), a Delaware limited partnership (the "Borrower"), the Agent and the Lenders have entered into that certain Credit Agreement dated as of February 14, 1997 as amended by First Amendment to Credit Agreement dated of even date herewith (such Credit Agreement as amended and as the same may be further amended from time to time, herein called the "Credit Agreement"); and WHEREAS, Guarantor executed that certain Guaranty Agreement dated as of February 14, 1997 (the "Guaranty Agreement") pursuant to the terms and conditions stated in the Credit Agreement; WHEREAS, Guarantor has requested, and the Lenders have agreed, that certain changes be made to the Guaranty Agreement; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration and the mutual benefits, covenants and agreements herein expressed, the parties hereto now agree as follows: 1. All capitalized terms used in this Amendment and not otherwise defined herein shall have the meanings ascribed to such terms in the Guaranty Agreement. 2. Section 3.3(a) of the Guaranty Agreement is hereby amended by adding the following new clause (vi): "(vi) the Guarantor may become and remain liable with respect to unsecured Indebtedness of the Guarantor owing to any of its Affiliates created and outstanding under a subordinated promissory note subordinated pursuant to a Subordination Agreement substantially in the form of Exhibit A to the First Amendment to Guaranty Agreement." 3. Section 3.3(c) of the Guaranty Agreement is hereby amended by adding the following new clause (viii): "(viii) investments, loans or advances made by the Guarantor in or to its Subsidiaries; provided that immediately before and after each loan or advance no Default or Event of Default exists and is continuing." 4. Section 3.3(k) of the Guaranty Agreement is hereby amended to read as follows: "(k) Transactions with Affiliates. The Guarantor will not enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of Property or the rendering of any service, with any Affiliate unless such transactions are otherwise permitted under the Credit Agreement, are in the ordinary course of its business and are upon fair and reasonable terms to it." 5. The parties hereto hereby acknowledge and agree that, except as specifically supplemented and amended, changed or modified hereby, the Guaranty Agreement shall remain in full force and effect in accordance with its terms. 6. This Amendment shall be governed by, and construed in accordance with, the laws of the State of Texas. 7. This Amendment may be executed in two or more counterparts, and it shall not be necessary that the signatures of all parties hereto be contained on any one counterpart hereof; each counterpart shall be deemed an original, but all of which together shall constitute one and the same instrument. Delivery of an executed signature page by facsimile transmission shall be as effective as delivery of a manually executed counterpart hereof. [SIGNATURES BEGIN NEXT PAGE] 2 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed effective as of the date first above written. GUARANTOR: KINDER MORGAN ENERGY PARTNERS, L.P. By: Kinder Morgan G.P., Inc., its General Partner By: /s/ William V. Morgan Name: William V. Morgan Title: Vice Chairman AGENT: FIRST UNION NATIONAL BANK By: /s/ David Roberts Name: David Roberts Title: Senior Vice President EX-4.5.2 5 SECOND AMENDMENT TO GUARANTY AGREEMENT SECOND AMENDMENT TO GUARANTY AGREEMENT THIS SECOND AMENDMENT TO GUARANTY AGREEMENT is made and entered into effective as of the 31st day of December, 1997 (this "Amendment") between KINDER MORGAN ENERGY PARTNERS, L.P. (formerly known as Enron Liquids Pipeline, L.P.), a Delaware limited partnership (the "Guarantor") and FIRST UNION NATIONAL BANK (formerly known as First Union National Bank of North Carolina), as agent (the "Agent") for the lenders (the "Lenders") that are or become parties to the Credit Agreement defined below. W I T N E S S E T H: WHEREAS, KINDER MORGAN OPERATING L.P. "B" (formerly known as Enron Transportation Services, L.P.), a Delaware limited partnership (the "Borrower"), the Agent and the Lenders have entered into that certain Credit Agreement dated as of February 14, 1997 as amended by First Amendment to Credit Agreement dated as of September 1, 1997 and Second Amendment to Credit Agreement dated of even date herewith (such Credit Agreement as amended and as the same may be further amended from time to time, herein called the "Credit Agreement"); and WHEREAS, Guarantor executed that certain Guaranty Agreement dated as of February 14, 1997 as amended by First Amendment to Guaranty Agreement dated as of September 26, 1997 (as amended, the "Guaranty Agreement") pursuant to the terms and conditions stated in the Credit Agreement; WHEREAS, Guarantor has requested, and the Lenders have agreed, that certain changes be made to the Guaranty Agreement; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration and the mutual benefits, covenants and agreements herein expressed, the parties hereto now agree as follows: 1. All capitalized terms used in this Amendment and not otherwise defined herein shall have the meanings ascribed to such terms in the Guaranty Agreement. 2. Section 3.3(c)(viii) of the Guaranty Agreement is hereby amended to read as follows: "(viii) investments, loans or advances made by the Guarantor in or to its Subsidiaries; provided that immediately before and after each investment, loan or advance no Default or Event of Default exists and is continuing." 3. Section 3.3(k) of the Guaranty Agreement is hereby amended to read as follows: "(k) Transactions with Affiliates. The Guarantor will not enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of Property or the rendering of any service, with any Affiliate unless such transactions are otherwise permitted under the Credit Agreement, and are upon fair and reasonable terms to it." 4. Section 3.3(l) of the Guaranty Agreement is hereby amended to read as follows: "Section 9.18. Partnership Agreement. The Guarantor will not amend or permit to be amended its partnership agreement in a manner materially adverse to the Lenders without the prior written consent of the Majority Lenders." 5. The parties hereto hereby acknowledge and agree that, except as specifically supplemented and amended, changed or modified hereby, the Guaranty Agreement shall remain in full force and effect in accordance with its terms. 6. This Amendment shall be governed by, and construed in accordance with, the laws of the State of Texas. 7. This Amendment may be executed in two or more counterparts, and it shall not be necessary that the signatures of all parties hereto be contained on any one counterpart hereof; each counterpart shall be deemed an original, but all of which together shall constitute one and the same instrument. Delivery of an executed signature page by facsimile transmission shall be as effective as delivery of a manually executed counterpart hereof. [SIGNATURES BEGIN NEXT PAGE] 2 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed effective as of the date first above written. GUARANTOR: KINDER MORGAN ENERGY PARTNERS, L.P. By: Kinder Morgan G.P., Inc., its General Partner By: /s/ William V. Morgan Name: William V. Morgan Title: Vice Chairman AGENT: FIRST UNION NATIONAL BANK By: /s/ David Roberts Name: David Roberts Title: Senior Vice President S-1 EX-4.6.1 6 FIRST AMENDMENT TO CREDIT AGREEMENT FIRST AMENDMENT TO CREDIT AGREEMENT This FIRST AMENDMENT TO CREDIT AGREEMENT is made and entered into effective as of the 1st day of September, 1997 (this "Amendment") among KINDER MORGAN, INC., a corporation formed under the laws of the State of Delaware (the "Borrower"); each of the lenders that is or becomes a party to the Credit Agreement (defined below) (individually, together with its successors and assigns, a "Lender" and, collectively, the "Lenders"); and FIRST UNION NATIONAL BANK (formerly known as First Union National Bank of North Carolina), a national banking association (in its individual capacity, "First Union"), as agent for the Lenders (in such capacity, together with its successors in such capacity, the "Agent"). R E C I T A L S A. The Borrower, the Agent and the Lenders previously entered into that certain Credit Agreement dated as of February 14, 1997 (the "Credit Agreement"), pursuant to which the Lenders agreed to make certain loans to and extensions of credit on behalf of the Borrower upon the terms and conditions as provided therein. B. The Borrower and the Lenders now desire to make certain amendments and supplements to the Credit Agreement. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration and the mutual benefits, covenants and agreements herein expressed, the parties hereto now agree as follows: 1. All capitalized terms used in this Amendment and not otherwise defined herein shall have the meanings ascribed to such terms in the Credit Agreement. 2. The definition of "Agreement" in Section 1.02 of the Credit Agreement are hereby amended to read as follows: "Agreement" shall mean this Credit Agreement, as amended by the First Amendment and as the same may be further amended or supplemented from time to time. 3. Section 1.02 of the Credit Agreement is hereby supplemented, where alphabetically appropriate, with the addition of the following definitions: "First Amendment" shall mean that certain First Amendment to Credit Agreement dated effective as of September 1, 1997 among the Borrower, the Agent and the Lenders. 4. The last sentence of Section 2.04(j) of the Credit Agreement is hereby deleted, and the following is substituted therefor: "The commissions and fronting fees in Sections 2.04(b), (c), (d) and (e) are payable quarterly in arrears on each Quarterly Date." 5. Section 9.03 of the Credit Agreement is hereby amended by deleting the existing subsection (g) and adding the following new subsections (g) and (h): "(g) in addition to the investments permitted by Section 9.03(h), investments, loans or advances made by the Borrower or Kinder Morgan G.P. in or to its Subsidiaries, not to exceed at any one time outstanding $150,000 in the aggregate; and (h) Kinder Morgan G.P. may make capital contributions as required by the partnership agreements of Kinder Morgan Energy, Kinder Morgan A, Kinder Morgan B and Kinder Morgan Operating L.P. "C" and any other partnership of which it is a partner; provided that its ownership interest in each such partnership is not greater than 1.2%." 6. Section 9.17 of the Credit Agreement is hereby amended to read as follows: "Section 9.17 Transactions with Affiliates. Neither the Borrower nor any Subsidiary will enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of Property or the rendering of any service, with any Affiliate unless such transactions are otherwise permitted under this Agreement, are in the ordinary course of its business and are upon fair and reasonable terms to it." 7. Section 9.18 of the Credit Agreement is hereby amended to read as follows: "Section 9.18 Subsidiaries. The Borrower shall not, and shall not permit Kinder Morgan G.P. to, create any additional Subsidiaries except for Subsidiaries with the following characteristics: (i) the Subsidiaries are Subsidiaries of Kinder Morgan Energy, (ii) the Borrower is not a partner or member of such Subsidiary, and (iii) if Kinder Morgan G.P. is a partner or member of such Subsidiary its ownership interest is no greater than 1.2%. The Borrower shall not and shall not permit Kinder Morgan G.P. to sell or to issue any stock or ownership interest of a Subsidiary (excluding Kinder Morgan Energy and its Subsidiaries) except to the Borrower or Kinder Morgan G.P." 8. Section 9.19 of the Credit Agreement is hereby amended to read as follows: "Section 9.19 Negative Pledge Agreements. The Borrower shall not, and shall not permit Kinder Morgan G.P. to create, incur, assume or suffer to exist any contract, agreement or understanding (other than this Agreement and the Security Instruments) which in any way prohibits or restricts the granting, conveying, creation or imposition of any Lien on any of its Property or restricts any Subsidiary (excluding Kinder Morgan 2 Energy and its Subsidiaries) from paying dividends to the Borrower, or which requires the consent of or notice to other Persons in connection therewith. 9. This Amendment shall become binding when the Agent shall have received counterparts of this Amendment executed by the Borrower and the Lenders and such other documents as the Agent or its counsel may reasonably request. 10. The parties hereto hereby acknowledge and agree that, except as specifically supplemented and amended, changed or modified hereby, the Credit Agreement shall remain in full force and effect in accordance with its terms. 11. The Borrower hereby reaffirms that as of the date of this Amendment, the representations and warranties made by the Borrower in Article VII of the Credit Agreement as amended hereby are true and correct on the date hereof as though made on and as of the date of this Amendment. 12. This Amendment shall be governed by, and construed in accordance with, the laws of the State of Texas. 13. This Amendment may be executed in two or more counterparts, and it shall not be necessary that the signatures of all parties hereto be contained on any one counterpart hereof; each counterpart shall be deemed an original, but all of which together shall constitute one and the same instrument. Delivery of an executed signature page by facsimile transmission shall be as effective as delivery of a manually executed counterpart hereof. 14. THE CREDIT AGREEMENT, THIS AMENDMENT, THE NOTES AND THE SECURITY INSTRUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN OR ORAL AGREEMENTS BETWEEN THE PARTIES. [SIGNATURES BEGIN NEXT PAGE] 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed effective as of the date first above written. BORROWER: KINDER MORGAN, INC. By: /s/ William V. Morgan Name: William V. Morgan Title: Vice Chairman AGENT AND LENDER: FIRST UNION NATIONAL BANK By: /s/ David Roberts Name: David Roberts Title: Senior Vice President 4 EX-4.6.2 7 SECOND AMENDMENT TO CREDIT AGREEMENT SECOND AMENDMENT TO CREDIT AGREEMENT This SECOND AMENDMENT TO CREDIT AGREEMENT is made and entered into effective as of the 31st day of December, 1997 (this "Amendment") among KINDER MORGAN, INC., a corporation formed under the laws of the State of Delaware (the "Borrower"); each of the lenders that is or becomes a party to the Credit Agreement (defined below) (individually, together with its successors and assigns, a "Lender" and, collectively, the "Lenders"); and FIRST UNION NATIONAL BANK (formerly known as First Union National Bank of North Carolina), a national banking association (in its individual capacity, "First Union"), as agent for the Lenders (in such capacity, together with its successors in such capacity, the "Agent"). R E C I T A L S A. The Borrower, the Agent and the Lenders previously entered into that certain Credit Agreement dated as of February 14, 1997 as amended by First Amendment to Credit Agreement dated as of September 1, 1997 (as amended, the "Credit Agreement"), pursuant to which the Lenders agreed to make certain loans to and extensions of credit on behalf of the Borrower upon the terms and conditions as provided therein. B. The Borrower and the Lenders now desire to make certain amendments and supplements to the Credit Agreement. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration and the mutual benefits, covenants and agreements herein expressed, the parties hereto now agree as follows: 1. All capitalized terms used in this Amendment and not otherwise defined herein shall have the meanings ascribed to such terms in the Credit Agreement. 2. The definitions of "Agreement" and "Aggregate Facility A Commitments" in Section 1.02 of the Credit Agreement are hereby amended to read as follows: "Agreement" shall mean this Credit Agreement, as amended by the First Amendment and the Second Amendment and as the same may be further amended or supplemented from time to time. "Aggregate Facility A Commitments" at any time shall equal $15,000,000 as reduced or terminated as provided in accordance with Section 2.03 hereof. 3. Section 1.02 of the Credit Agreement is hereby supplemented, where alphabetically appropriate, with the addition of the following definitions: "Kinder Morgan Operating C" shall mean Kinder Morgan Operating L.P. "C", a Delaware limited partnership. "Operating Partnerships" shall mean Kinder Morgan Operating A, Kinder Morgan Operating B, Kinder Morgan Operating C and any other operating partnerships (or partnerships created or acquired to own interests in operating partnerships) hereafter established or acquired by Kinder Morgan Energy. "Second Amendment" shall mean that certain Second Amendment to Credit Agreement dated effective as of December 31, 1997 among the Borrower, the Agent and the Lenders. 4. Section 7.02 of the Credit Agreement is hereby amended by deleting the last sentence of the existing subsection (b) and adding the following new sentence: "Except as reflected in such balance sheets, as of the Closing Date, Kinder Morgan G.P. has no material Debt, contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments." 5. Section 7.10 of the Credit Agreement is hereby amended by deleting the existing subsection (a) and adding the following new subsection (a): "(a) Except as set out in Schedule 7.10, each of the Borrower and its Subsidiaries has good and defensible title to its material (individually or in the aggregate) Properties. Such Properties (other than the Properties of Kinder Morgan Energy and its Subsidiaries) are free and clear of all Liens except Liens permitted by Section 9.02." 6. Section 7.14 of the Credit Agreement is hereby amended and restated in its entirety as follows: "Section 7.14 Subsidiaries. Except (i) as set forth on Schedule 7.14 and (ii) for Kinder Morgan Energy and its Subsidiaries, the Borrower has no Subsidiaries." 7. Section 7.15 of the Credit Agreement is hereby amended by deleting the last sentence of the existing section and adding the following new sentence: "The principal place of business and chief executive office of each Subsidiary (other than Kinder Morgan Energy and its Subsidiaries) are located at the chief executive office of the Borrower." 8. Section 7.19 of the Credit Agreement is amended as follows: (a) The first sentence is hereby deleted and replaced with the following new sentence: "Schedule 7.19 attached hereto contains, as of the Closing Date, an accurate and complete description of all material policies of fire, liability, workmen's -2- compensation and other forms of insurance owned or held by the Borrower and each Subsidiary." (b) The fourth sentence is hereby deleted and replaced with the following new sentence: "Schedule 7.19 identifies, as of the Closing Date, all material risks, if any, which the Borrower and its Subsidiaries and their respective Board of Directors or officers have designated as being self insured." 9. Section 9.01 of the Credit Agreement is hereby amended by deleting the existing subsection (g) and adding the following new subsection (g): "(g) Debt of Kinder Morgan G.P. arising by operation of law as a result of Kinder Morgan G.P. being the general partner of Kinder Morgan Energy, any of the Operating Partnerships or any other partnership of which it is a partner; and " 10. Section 9.03 of the Credit Agreement is hereby amended by deleting the existing subsection (h) and adding the following new subsection (h): "(h) Kinder Morgan G.P. may make capital contributions as required by the partnership agreements of Kinder Morgan Energy, the Operating Partnerships and any other partnership of which it is a partner; provided that its direct ownership interest in each such partnership is not greater than 1.2%." 11. Section 9.17 of the Credit Agreement is hereby amended to read as follows: "Section 9.17 Transactions with Affiliates. Neither the Borrower nor any Subsidiary will enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of Property or the rendering of any service, with any Affiliate unless such transactions are otherwise permitted under this Agreement and are on fair and reasonable terms to it." 12. Section 9.18 of the Credit Agreement is hereby amended to read as follows: "Section 9.18 Subsidiaries. The Borrower shall not, and shall not permit Kinder Morgan G.P. to, create any additional Subsidiaries except for Subsidiaries with the following characteristics: (i) the Subsidiaries are Subsidiaries of Kinder Morgan Energy, (ii) the Borrower is not a partner or member of such Subsidiary, and (iii) if Kinder Morgan G.P. is a partner or member of such Subsidiary its direct ownership interest is no greater than 1.2%. The Borrower shall not and shall not permit Kinder Morgan G.P. to issue any stock or ownership interest of a Subsidiary (excluding Kinder Morgan Energy and its Subsidiaries) except to the Borrower or Kinder Morgan G.P." -3- 13. Section 10.01 of the Credit Agreement is hereby amended by deleting the existing subsection (h) and adding the following new subsection (h): "(h) a judgment or judgments for the payment of money in excess of $150,000 (or $2,500,000 in the case of Kinder Morgan Energy or its Subsidiaries or Operating Partnerships) in the aggregate not covered by insurance shall be rendered by a court against the Borrower or any Subsidiary and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within thirty (30) days from the date of entry thereof and the Borrower or such Subsidiary shall not, within said period of 30 days, or such longer period during which execution of the same shall have been stayed, appeal therefor and cause the execution thereof to be stayed during such appeal; or" 14. Annex I to the Credit Agreement is hereby replaced by Annex I attached to this Amendment. 15. On the date of this Amendment the Borrower shall prepay all of the outstanding principal on the Facility C Notes, together with accrued interest thereon and any compensation required by Section 5.05 of the Credit Agreement, and the Facility C Commitment shall be canceled. 16. On the date of this Amendment Facility B shall be cancelled. 17. This Amendment shall become binding on the Lenders when, and only when, the Agent shall have received each of the following in form and substance satisfactory to the Agent or its counsel: (a) counterparts of this Amendment executed by the Borrower, the Agent and the Lenders; (b) counterparts of amendments to the Security Instruments executed by the Borrower and Kinder Morgan G.P.; (c) a certificate of the Secretary or an Assistant Secretary of each of the Borrower and Kinder Morgan G.P. setting forth resolutions of its board of directors with respect to the authorization of the Borrower or Kinder Morgan G.P. to execute, deliver and perform this Amendment and the amendments to the Security Instruments to which it is a party; and (d) such other documents as it or its counsel may reasonably request. 18. The parties hereto hereby acknowledge and agree that, except as specifically supplemented and amended, changed or modified hereby, the Credit Agreement shall remain in full force and effect in accordance with its terms. -4- 19. The Borrower hereby reaffirms that as of the date of this Amendment, the representations and warranties made by the Borrower in Article VII of the Credit Agreement as amended hereby are true and correct on the date hereof as though made on and as of the date of this Amendment. 20. This Amendment shall be governed by, and construed in accordance with, the laws of the State of Texas. 21. This Amendment may be executed in two or more counterparts, and it shall not be necessary that the signatures of all parties hereto be contained on any one counterpart hereof; each counterpart shall be deemed an original, but all of which together shall constitute one and the same instrument. Delivery of an executed signature page by facsimile transmission shall be as effective as delivery of a manually executed counterpart hereof. 22. THE CREDIT AGREEMENT, THIS AMENDMENT, THE NOTES AND THE SECURITY INSTRUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN OR ORAL AGREEMENTS BETWEEN THE PARTIES. [SIGNATURES BEGIN NEXT PAGE] -5- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed effective as of the date first above written. BORROWER: KINDER MORGAN, INC. By: /s/ William V. Morgan Name: William V. Morgan Title: Vice Chairman AGENT AND LENDER: FIRST UNION NATIONAL BANK By: /s/ David Roberts Name: David Roberts Title: Senior Vice President -6- EX-4.9 8 CREDIT AGREEMENT EXECUTION COPY CREDIT AGREEMENT dated as of February 17, 1998 AMONG KINDER MORGAN ENERGY PARTNERS, L.P., as the Company KINDER MORGAN OPERATING L.P. "B", as the Subsidiary Borrower THE SUBSIDIARY GUARANTORS, THE LENDERS PARTY HERETO, GOLDMAN SACHS CREDIT PARTNERS L.P., as Lead Arranger and the Syndication Agent and FIRST UNION NATIONAL BANK, as Co-Arranger, the Administrative Agent, the Issuing Bank and the Swingline Lender TABLE OF CONTENTS Page PRELIMINARY STATEMENTS........................................... 1 ARTICLE I. Definitions SECTION 1.01 Defined Terms.......................................2 SECTION 1.02 Classification of Loans and Borrowings.............27 SECTION 1.03 Accounting Terms; Changes in GAAP..................27 SECTION 1.04 Interpretation.....................................27 ARTICLE II. The Credits SECTION 2.01 Commitments........................................28 SECTION 2.02 Loans and Borrowings...............................28 SECTION 2.03 Requests for Revolving Borrowings..................29 SECTION 2.04 Swingline Loans....................................30 SECTION 2.05 Telephonic Notices.................................31 SECTION 2.06 Letters of Credit..................................31 SECTION 2.07 Funding of Borrowings..............................36 SECTION 2.08 Interest Elections.................................36 SECTION 2.09 Termination and Reduction of Commitments...........37 SECTION 2.10 Repayment of Loans; Evidence of Debt...............38 SECTION 2.11 Prepayment of Loans................................40 SECTION 2.12 Fees...............................................41 SECTION 2.13 Interest...........................................42 SECTION 2.14 Alternate Rate of Interest.........................42 SECTION 2.15 Increased Costs....................................43 SECTION 2.16 Break Funding Payments.............................44 SECTION 2.17 Taxes..............................................45 SECTION 2.18 Payments Generally; Pro Rata Treatment; Sharing of Set-offs................................45 SECTION 2.19 Mitigation Obligations; Replacement of Lenders............................................47 SECTION 2.20 Extensions of Maturity Date and Reduction Dates; Removal of Lenders..........................48 ARTICLE III. Conditions Precedent SECTION 3.01 Conditions Precedent to the Initial Credit Event......................................50 SECTION 3.02 Conditions Precedent to All Credit Events..........52 SECTION 3.03 Conditions Precedent to the Initial Credit Event Made on or After any Increase in Availability......53 SECTION 3.04 Conditions Precedent to Conversions................53 SECTION 3.05 Delivery of Documents..............................53 -ii- ARTICLE IV. Representations and Warranties SECTION 4.01 Organization and Qualification.....................53 SECTION 4.02 Authorization, Validity, Etc.......................54 SECTION 4.03 Governmental Consents, Etc.........................54 SECTION 4.04 Conflicting or Adverse Agreements or Restrictions..54 SECTION 4.05 Properties........................................ 55 SECTION 4.06 Litigation and Environmental Matters...............55 SECTION 4.07 Financial Statements...............................56 SECTION 4.08 Disclosure.........................................56 SECTION 4.09 Investment Company Act.............................56 SECTION 4.10 Public Utility Holding Company Act.................56 SECTION 4.11 ERISA..............................................57 SECTION 4.12 Tax Returns and Payments...........................57 SECTION 4.13 Compliance with Laws and Agreements................57 SECTION 4.14 Purpose of Loans...................................57 SECTION 4.15 No Intent to Hinder, Delay or Defraud..............58 ARTICLE V. Affirmative Covenants SECTION 5.01 Financial Statements and Other Information.........58 SECTION 5.02 Litigation.........................................60 SECTION 5.03 Existence, Conduct of Business.....................61 SECTION 5.04 Payment of Obligations.............................61 SECTION 5.05 Maintenance of Properties; Insurance...............61 SECTION 5.06 Books and Records; Inspection Rights...............61 SECTION 5.07 Compliance with Laws...............................61 SECTION 5.08 Use of Proceeds and Letters of Credit..............61 SECTION 5.09 Further Assurances.................................62 SECTION 5.10 Performance of Obligations.........................62 SECTION 5.11 Lines of Business..................................62 SECTION 5.12 Intercompany Notes and Security for Intercompany Notes.................................62 SECTION 5.13 KMNGL Subsidiary Guarantors Security Agreement.....63 ARTICLE VI. Negative Covenants SECTION 6.01 Indebtedness.......................................64 SECTION 6.02 Liens..............................................65 SECTION 6.03 Fundamental Changes................................65 SECTION 6.04 Investments, Loans, Advances, Guarantees and Acquisitions; Hedging Agreements...............66 SECTION 6.05 Restricted Payments................................68 SECTION 6.06 Transactions with Affiliates.......................68 -iii- SECTION 6.07 Restrictive Agreements.............................68 SECTION 6.08 Sale of Assets.....................................68 SECTION 6.09 Financial Covenants................................69 SECTION 6.10 Amendments to Certain Agreements...................69 ARTICLE VII. Events of Default SECTION 7.01 Events of Default and Remedies.....................69 SECTION 7.02 Other Remedies.....................................72 SECTION 7.03 Application of Moneys During Continuation of Event of Default................................72 ARTICLE VIII. The Administrative Agent SECTION 8.01 Appointment, Powers and Immunities.................73 SECTION 8.02 Reliance by Administrative Agent...................74 SECTION 8.03 Defaults; Events of Default........................74 SECTION 8.04 Rights as a Lender.................................74 SECTION 8.05 INDEMNIFICATION....................................74 SECTION 8.06 Non-Reliance on Agents and other Lenders...........75 SECTION 8.07 Action by Administrative Agent.....................75 SECTION 8.08 Resignation or Removal of Administrative Agent.....76 SECTION 8.09 Consents under Security Documents..................76 SECTION 8.10 Duties of Syndication Agent........................76 ARTICLE IX. Company Guaranty SECTION 9.01 Company Guaranty...................................77 SECTION 9.02 Continuing Guaranty................................77 SECTION 9.03 Effect of Debtor Relief Laws.......................80 SECTION 9.04 Waiver.............................................80 SECTION 9.05 Full Force and Effect..............................81 ARTICLE X. Subsidiary Guarantors Guaranty SECTION 10.01 Subsidiary Guarantors Guaranty....................81 SECTION 10.02 Continuing Guaranty...............................82 SECTION 10.03 Effect of Debtor Relief Laws......................84 SECTION 10.04 General Limitation on Borrower Guaranteed Obligations.......................................85 SECTION 10.05 Rights of Contribution............................85 SECTION 10.06 Subrogation.......................................86 SECTION 10.07 Subordination.....................................86 SECTION 10.08 Waiver............................................87 SECTION 10.09 Full Force and Effect.............................87 -iv- ARTICLE XI. Miscellaneous SECTION 11.01 Notices, Etc......................................88 SECTION 11.02 Waivers; Amendments...............................89 SECTION 11.03 Payment of Expenses, Indemnities, etc.............90 SECTION 11.04 Successors and Assigns............................92 SECTION 11.05 Assignments and Participations....................93 SECTION 11.06 Survival; Reinstatement...........................95 SECTION 11.07 Counterparts; Integration; Effectiveness..........95 SECTION 11.08 Severability......................................96 SECTION 11.09 Right of Setoff...................................96 SECTION 11.10 Governing Law; Jurisdiction; Consent to Service of Process................................96 SECTION 11.11 WAIVER OF JURY TRIAL..............................97 SECTION 11.12 Confidentiality...................................98 SECTION 11.13 Interest Rate Limitation..........................98 SECTION 11.14 EXCULPATION PROVISIONS............................99 SCHEDULES: - ---------- Schedule 1.01A Existing Indebtedness Schedule 4.01 Existing Subsidiaries Schedule 4.06 Disclosed Matters Schedule 6.02 Existing Liens Schedule 6.07 Existing Restrictions EXHIBITS: - --------- Exhibit 1.01A -- Form of Administrative Questionnaire Exhibit 1.01B -- Form of Assignment and Acceptance Exhibit 1.01C -- Existing Letter of Credit Exhibit 2.03 -- Form of Borrowing Request Exhibit 2.06 -- Form of Letter of Credit Request Exhibit 2.07 -- Form of Notice of Account Designation Exhibit 2.08 -- Form of Interest Election Request Exhibit 2.10 -- Form of (Revolving/Swingline) Note Exhibit 2.11 -- Form of Notice of Prepayment Exhibit 5.01 -- Form of Compliance Certificate Exhibit 6.04 -- Form of Subsidiary Guarantor Counterpart -v- CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of February 17, 1998 (this "Agreement") is among: (a) Kinder Morgan Energy Partners, L.P., a Delaware limited partnership (the "Company"); (b) Kinder Morgan Operating L.P. "B", a Delaware limited partnership (the "Subsidiary Borrower"); (c) Kinder Morgan Operating L.P. "A", a Delaware limited partnership ("OLP `A'"); Kinder Morgan Operating L.P. "C", a Delaware limited partnership ("OLP `C'"); Kinder Morgan Operating L.P. "D", a Delaware limited partnership ("OLP `D'"); Kinder Morgan Natural Gas Liquids Corporation, a Delaware corporation ("KMNGL"); and Kinder Morgan CO2 LLC, a Delaware limited liability company ("KMCO2", and together with OLP "A", OLP "C", OLP "D", KMNGL, the Subsidiary Borrower in its capacity as a guarantor pursuant to Article X and each other Person that becomes a Subsidiary Guarantor pursuant to Section 6.03, collectively, the "Subsidiary Guarantors"); (d) The banks and other financial institutions listed on the signature pages hereof under the caption "Lenders" (together with each other Person that becomes a Lender pursuant to Section 11.05, collectively, the "Lenders"); (e) Goldman Sachs Credit Partners L.P., a Bermuda limited partnership, individually as a Lender and as Lead Arranger and syndication agent for the other Lenders (in such capacity, the "Syndication Agent"); and (f) First Union National Bank, a national banking association, individually as a Lender and as Co-Arranger and as administrative agent for the other Lenders (in such capacity together with any other Person that becomes Administrative Agent pursuant to Section 8.08, the "Administrative Agent"). PRELIMINARY STATEMENTS The Company and the Subsidiary Borrower have requested that a credit facility be extended to them pursuant to which (a) the Company will borrow from the Lenders and advance to OLP "A" funds sufficient to enable it to (i) repay in full the principal of and accrued interest and make-whole premium on $110,000,000 of its 8.79% First Mortgage Notes due June 30, 2007 and issued pursuant to a Note Agreement dated as of July 30, 1992 (the "OLP `A' First Mortgage Notes") and (ii) repay in full the principal of and accrued interest on all loans and other amounts outstanding under that certain Loan Agreement dated effective May 24, 1995 by and between OLP "A" and Bank One, Texas, NA, as amended to the date hereof ("OLP `A' Loan Agreement" and together with the OLP "A" First Mortgage Notes collectively, the "OLP `A' Refinancing"); (b) (i) the Company will borrow from the Lenders and advance to the Subsidiary Borrower funds sufficient to enable it to repay in full the principal of and accrued interest on all loans and other amounts outstanding under that certain Credit Agreement dated as of February 14, 1997 among the Subsidiary Borrower, the lenders party thereto and First Union National Bank, as agent for such lenders, as amended to the date hereof (the "Subsidiary Borrower Credit Agreement"), and (ii) the account party's reimbursement obligations in respect of that certain irrevocable letter of credit No. S113181 issued by First Union National Bank for the benefit of Bank One, Texas, NA, as trustee, for the account of the Subsidiary Borrower in the face amount of $24,128,548 and in the form of Exhibit 1.01C hereto (the "Existing Letter of Credit") will become and be an obligation of the Subsidiary Borrower, and the Existing Letter of Credit will be deemed to have been issued, under this Agreement (collectively the "OLP `B' Refinancing"); (c) the Company may borrow from the Lenders and advance to OLP "A" the sum of $25,000,000 to enable it to contribute such amount together with its carbon dioxide pipeline system located in West Texas (the "Central Basin Pipeline") to Shell CO2 Company, Ltd., a Texas limited partnership ("Shell CO2"), in exchange for a 20% limited partner interest in that partnership (the "Shell JV Investment"); (d) the Company may borrow from the Lenders and advance to OLP "D" the sum of approximately $90,000,000 to (i) enable OLP "D" to purchase the entire general partner interest in Santa Fe Pacific Pipeline Partners, L.P., a Delaware limited partnership ("SFMLP") (ii) complete the purchase from SFMLP of its limited partner interest in SFPP, and (iii) complete the transactions contemplated in Section 1.3(a) and (b) of the Purchase Agreement, including the contribution to OLP "D" of 100% of the Company's partnership interest in SFPP, L.P., a Delaware limited partnership ("SFPP") (which, after giving effect to such transactions, will consist of a 99.5% general partner interest in SFPP) (collectively, the "Santa Fe Acquisition"); and (e) the Company may obtain working capital to be used for its other partnership purposes. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I. Definitions SECTION 1.01. Defined Terms. As used in this Agreement, the following terms have the meanings specified below: "ABR", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate. "Administrative Agent" has the meaning specified in the introduction to this Agreement. "Administrative Questionnaire" means an Administrative Questionnaire in the form of Exhibit 1.01A. "Affiliate" of any Person shall mean (i) any Person directly or indirectly controlled by, controlling or under common control with such first Person, (ii) any director or officer of such first -2- Person or of any Person referred to in clause (i) above and (iii) if any Person in clause (i) above is an individual, any member of the immediate family (including parents, siblings, spouse and children) of such individual and any trust whose principal beneficiary is such individual or one or more members of such immediate family and any Person who is controlled by any such member or trust. For purposes of this definition, any Person which owns directly or indirectly 25% or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation or 25% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to "control" (including, with its correlative meanings, "controlled by" and "under common control with") such corporation or other Person. "Agreement" has the meaning specified in the introduction to this Agreement. "Alternate Base Rate" means, for any day, a rate per annum equal to the greater of (a) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1% and (b) the Prime Rate in effect for such day. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "Anniversary Date" means each of February 1, 1999 and February 1, 2000. "Applicable Margin" means, for any day, with respect to any Eurodollar Revolving Loan, or with respect to the commitment fees payable hereunder, as the case may be, the Applicable Margin per annum set forth below under the caption "Eurodollar Spread" or "Commitment Fee Rate", as the case may be: (a) during the period from the Execution Date to the Financial Statement Delivery Date for the fiscal quarter of the Company ending March 31, 1998, the Applicable Margin shall be as follows: (i) prior to the Santa Fe Acquisition, Eurodollar Spread Commitment Fee Rate ----------------- ------------------- 1.25% .375% (ii) on and after the Santa Fe Acquisition, Eurodollar Spread Commitment Fee Rate ----------------- ------------------- 1.0% .25% -3- (b) if the Applicable Margin is to be determined with respect to the financial statements delivered pursuant to Section 5.01(a) or Section 5.01(b) on any Financial Statement Delivery Date for any fiscal quarter of the Company ending on or after March 31, 1998, the Applicable Margin shall be as follows: (i) if at the end of such fiscal quarter, the ratio of the Indebted- ness of the Company to Company Cash Flow for the four full fiscal quarters then most recently ended is less than 2.0 to 1.0: Eurodollar Spread Commitment Fee Rate ----------------- ------------------- .75% .25% (ii) if at the end of such fiscal quarter, the ratio of the Indebted- ness of the Company to Company Cash Flow for the four full fiscal quarters then most recently ended is equal to or greater than 2.0 to 1.0 but less than 2.5 to 1.0: Eurodollar Spread Commitment Fee Rate ----------------- ------------------- .875% .25% (iii)if at the end of such fiscal quarter, the ratio of the Indebted- ness of the Company to Company Cash Flow for the four full fiscal quarters then most recently ended is equal to or greater than 2.5 to 1.0 but less than 3.0 to 1.0: Eurodollar Spread Commitment Fee Rate ----------------- ------------------- 1.0% .25% (iv) if at the end of such fiscal quarter, the ratio of the Indebted- ness of the Company to Company Cash Flow for the four full fiscal quarters then most recently ended is equal to or greater than 3.0 to 1.0 but less than 3.5 to 1.0: Eurodollar Spread Commitment Fee Rate ----------------- ------------------- 1.125% .375% (v) if at the end of such fiscal quarter, the ratio of the Indebted- ness of the Company to Company Cash Flow for the four full fiscal quarters then most recently ended is equal to or greater than 3.5 to 1.0 but less than 4.0 to 1.0: -4- Eurodollar Spread Commitment Fee Rate ----------------- ------------------- 1.25% .375% (vi) if at the end of such fiscal quarter, the ratio of the Indebted- ness of the Company to Company Cash Flow for the four full fiscal quarters then most recently ended is equal to or greater than 4.0 to 1.0 but less than 4.5 to 1.0: Eurodollar Spread Commitment Fee Rate ----------------- ------------------- 1.375% .375% (vii)if at the end of such fiscal quarter, the ratio of the Indebted- ness of the Company to Company Cash Flow for the four full fiscal quarters then most recently ended is equal to or greater than 4.5 to 1.0: Eurodollar Spread Commitment Fee Rate ----------------- ------------------- 1.5% .375% Notwithstanding the foregoing, if on or after the Financial Statement Delivery Date for the fiscal quarter of the Company ending on March 31, 1998 any of the financial statements required pursuant to Section 5.01(a) or Section 5.01(b), as the case may be, shall not have been timely delivered, the Applicable Margin shall be determined pursuant to clause(b)(vii) above until the date that is five Business Days after the date such statements are delivered. Each change in the Applicable Margin shall become effective five Business Days after the Administrative Agent receives notification of the financial information forming the basis of such change. "Applicable Percentage" means, with respect to any Lender, the percentage of the Total Commitment represented by such Lender's Commitment. If the Total Commitment has terminated or expired, the Applicable Percentages shall be determined based upon the Total Commitment most recently in effect, giving effect to any assignments. "Application" has the meaning specified in Section 2.06(c). "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 11.05), and accepted by the Administrative Agent, in the form of Exhibit 1.01B or any other form approved by the Administrative Agent. "Available Cash" means, with respect to any fiscal quarter of the Company (a "Test Quarter"), an amount equal to the algebraic sum of (a) the aggregate of all cash distributions actually -5- made to and received by the Company from theRestricted Subsidiaries in respect of their Capital Stock during such fiscal quarter minus (b) the aggregate amount of all cash disbursements, including disbursements for operating expenses, payments of principal of and interest on Indebtedness and taxes, and capital expenditures (net of any borrowings to fund such capital expenditures permitted pursuant to this Agreement), actually paid by the Company during such Test Quarter, plus, in the case of a decrease, or minus, in the case of an increase (c) the amount by which, as at the end of such Test Quarter, cash reserves necessary in the reasonable discretion of the Company's management for the proper conduct of the business of the Company and the Restricted Subsidiaries subsequent to such Test Quarter, decreased or increased from the amount of such reserves as at the end of the immediately preceding fiscal quarter; provided, that "Available Cash" for any Test Quarter shall always exclude, without duplication (i) a reserve equal to at least 50% of the aggregate amount of all semiannual or less frequent (or 100% of all more frequent) interest payments on Indebtedness of the Company and/or the Restricted Subsidiaries other than SFPP payable in the fiscal quarter next succeeding such Test Quarter (assuming for this purpose in respect of Indebtedness with a variable interest rate that the same bears interest at the highest rate per annum applicable to such Indebtedness during the Test Quarter), (ii) a reserve with respect to Indebtedness of the Company and/or the Restricted Subsidiaries other than SFPP requiring annual amortization of principal, equal to the product of (A) an amount equal to 25% of the installment of such principal maturing next after the end of such Test Quarter multiplied by (B) the number of full fiscal quarters which will, as of the end of such Test Quarter, have elapsed since the date of the next preceding such payment (but not more than 75% of the amount of such installment), and (iii) if such Test Quarter immediately precedes a fiscal quarter in which a principal payment is due in respect of Indebtedness of the Company and/or the Restricted Subsidiaries other than SFPP requiring semiannual or more frequent amortization of principal, a reserve equal to 50% (if amortization is semiannual) or 100% (if amortization is more frequent) of the installment of such principal maturing next after the end of such Test Quarter. "Availability" means, at all times on and after the Effective Date, $185,000,000, but, subject to Section 3.03, such amount shall be increased by (a) $115,000,000 contemporaneously with the consummation of the Santa Fe Acquisition and (b) $25,000,000 contemporaneously with the making of the Shell JV Investment, provided that, in the case of each such increase, the event giving rise thereto shall occur prior to the Initial Reduction Date. "Availability Period" means the period from and including the Effective Date, to but excluding the earlier of the Maturity Date and the date of termination of the Commitments. "Bankruptcy Code" has the meaning specified in Section 9.01(a). "Board" means the Board of Governors of the Federal Reserve System of the United States of America. "Board of Directors" means, with respect to any Person, the Board of Directors of such Person or any committee of the Board of Directors of such Person duly authorized to act on behalf of the Board of Directors of such Person. -6- "Board Resolution" means, with respect to any Person, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Person to have been duly adopted by the Board of Directors of such Person and to be in full force and effect on the date of such certification, and delivered to the Administrative Agent. "Bonds" means the Port Facility Refunding Revenue Bonds (Enron Transportation Services, L.P. Project) Series 1994 in the aggregate principal amount of $23,700,000, as issued by the Jackson-Union Counties Regional Port District. "Borrower Guaranteed Obligations" has the meaning specified in Section 10.01. "Borrowers" means, collectively, the Company and the Subsidiary Borrower and "Borrower" means either one of them. "Borrowing" means (a) Revolving Loans of the same Type, made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect, or (b) a Swingline Loan. "Borrowing Date" means the Business Day upon which any Letter of Credit is to be issued or any Loan is to be made available to the Company. "Borrowing Request" has the meaning specified in Section 2.03. "Business Day" means any day that is not a Saturday, Sunday or other day on which commercial banks in Houston, Texas, New York, New York, or Charlotte, North Carolina are authorized or required by law to remain closed; provided that, when used in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Capital Lease Obligations" of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. "Capital Stock" means, with respect to any Person, any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents (however designated) of such Person's equity, including all common stock and preferred stock, any limited or general partnership interest and any limited liability company membership. "Central Basin Pipeline" has the meaning specified in the Preliminary Statements. "Change in Control" means either (a) the failure of Richard D. Kinder or William Morgan or both such Persons to control, directly or indirectly, 51% of the Voting Stock and 51% of the economic interest in the General Partner, whether through the ability to exercise voting power by -7- control or otherwise, or b) the General Partner shall cease to be the sole general partner of the Company. "Change in Law" means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender or the Issuing Bank (or, for purposes of Section 2.15(b), by any lending office of such Lender or by such Lender's or the Issuing Bank's holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement. "Change of Control Event" means the execution of any definitive agreement which, when fully performed by the parties thereto, would result in a Change of Control. "Charges" has the meaning specified in Section 11.13. "Class", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans or Swingline Loans. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Collateral" means, collectively, all the properties and assets of the Loan Parties described in and subject to the Lien purported to be created by the Security Documents. "Commitment" means, with respect to each Lender, the commitment of such Lender to make Revolving Loans and to acquire participations in Letters of Credit and Swingline Loans hereunder, expressed as an amount representing the maximum aggregate amount of such Lender's Revolving Credit Exposure hereunder, as such commitment may be (a) reduced from time to time pursuant to Section 2.09 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 11.05. The initial amount of each Lender's Commitment is set forth on its signature page hereto, or in the Assignment and Acceptance pursuant to which such Lender shall have assumed its Commitment, as applicable. "Communications" has the meaning specified in Section 11.01. "Company" has the meaning specified in the introduction to this Agreement. "Company Interest Expense" means, for any period, all Interest Expense of the Company actually paid during such period. "Company Cash Flow" means (without duplication), for any period, the sum of (a) OLP "A" EBITDA for such period, (b) the EBITDA of the Subsidiary Borrower for such period, (c) the EBITDA of OLP "C" for such period, (d) cash distributions actually received by the Company from OLP "D" for such period in respect of its Capital Stock (but not in excess of an amount equal to the EBITDA of SFPP for the same period less the sum for such period of (i) all scheduled payments of principal in respect of Indebtedness of SFPP, including the principal component of any such -8- payments in respect of Capital Lease Obligations, (ii) Interest Expense of SFPP, and (iii) without duplication the amount of all Maintenance Capital Expenditures), (e) the EBITDA of any other Wholly-Owned Restricted Subsidiary that is a Subsidiary Guarantor whose Capital Stock secures the Obligations for such period, and (f) cash distributions actually received by the Company from any other Restricted Subsidiary (other than a Wholly-Owned Restricted Subsidiary) whose Capital Stock secures the Obligations for such period; provided, however, if during any period the Company acquires any Person or all or substantially all of the assets of any Person, the EBITDA attributable to such assets or an amount equal to the percentage ownership of the Company in such Person times the EBITDA of such Person, for such period determined on a pro forma basis (which determination, in each case, shall be subject to approval of the Required Lenders, not to be unreasonably withheld) may be included as Company Cash Flow for such period, if on the date of such acquisition no Indebtedness (other than Indebtedness permitted pursuant to Section 6.01) is incurred by reason of and giving effect to such acquisition and such Person or the entity acquiring such assets, as the case may be, is a Restricted Subsidiary. "Company Guaranty" means the guaranty of the Company contained in Article IX. "Company Security Agreement" means a Pledge Agreement dated as of the date hereof from the Company in favor of the Administrative Agent covering, inter alia, (a) all limited partner interests in OLP "A", the Subsidiary Borrower, OLP "C", and OLP "D" and (b) the Intercompany Notes. "Consenting Lenders" has the meaning specified in Section 2.20. "Credit Event" means the making of any Loan or the issuance or the exten- sion of any Letter of Credit. "Default" means any event or condition which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. "Disclosed Matters" means the actions, suits and proceedings and the environmental matters disclosed in Schedule 4.06. "Disqualified Stock" means any Capital Stock issued by the Company that, by its terms (or by the terms of any security into which it is convertible or for which it is exercisable, redeemable or exchangeable), or upon the happening of an event or with the passage of time, matures, or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part, in each case on, or prior to, the Maturity Date, or which is exchangeable or convertible into debt securities of the Company or any Restricted Subsidiary, except to the extent that such exchange or conversion rights cannot be exercised prior to the Maturity Date. "Distribution Date" has the meaning specified in Section 7.03 "Dollars" or "$" refers to lawful money of the United States of America. -9- "EBITDA" means (without duplication), with respect to any Person for any period, the Net Income of such Person for such period determined in accordance with GAAP, increased (to the extent deducted in determining such earnings for such period) by the sum of (a) all income taxes (including state franchise taxes based upon income) of such Person paid or accrued according to GAAP for such period; (b) Interest Expense of such Person for such period; and (c) depreciation and amortization of such Person for such period determined in accordance with GAAP. "Effective Date" means the date on which the conditions specified in Section 3.01 are satisfied (or waived in accordance with Section 11.02). "Eligible Assignee" means (a) any Lender; (b) any Affiliate of any Lender; (c) a commercial bank organized or licensed under the laws of the United States, or a state thereof, and having total assets in excess of $1,000,000,000; (d) a commercial bank organized under the laws of any other country which is a member of the OECD, or a political subdivision of any such country, and having total assets in excess of $1,000,000,000, provided that such bank is acting through a branch or agency located in the country in which it is organized or another country which is also a member of the OECD; (e) a finance company, insurance company or other financial institution or fund (whether a corporation, partnership, trust or other entity) that is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business and having a combined capital and surplus or total assets of at least $100,000,000; and (f) any other entity approved by the Administrative Agent and the Company. "Environmental Laws" means all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources, the management, release or threatened release of any Hazardous Material or to health and safety matters. "Environmental Liability" means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Company or any Subsidiary directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release of any Hazardous Materials into the environment, or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) that, together with the Company, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. -10- "ERISA Event" means (a) any "reportable event", as defined in Section 4043of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived);(b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Company or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by the Company or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by the Company or any ERISA Affiliate of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by the Company or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Company or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. "Eurodollar", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the LIBOR Rate. "Event of Default" has the meaning specified in Section 7.01. "Excess Funding Obligor" has the meaning specified in Section 10.05. "Excess Payment" has the meaning specified in Section 10.05. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Excluded Taxes" means, with respect to the Administrative Agent, any Lender, the Issuing Bank or any other recipient of any payment to be made by or on account of any Obligation, (a) income or franchise taxes imposed on (or measured by) its net income by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which either Borrower is located and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Company under Section 2.19(b)), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement or is attributable to such Foreign Lender's failure or inability to comply with Section 2.17(e), except to the extent that such Foreign Lender's assignor (if any) was entitled, at the time of assignment, to receive additional amounts from a Borrower with respect to such withholding tax pursuant to Section 2.17(a). "Execution Date" means the earliest date upon which all of the following shall have occurred: counterparts of this Agreement shall have been executed by the Loan Parties and each Lender listed on the signature pages hereof and the Administrative Agent shall have received -11- counterparts hereof which taken together, bear the signature of the Loan Parties and each Lender and the Administrative Agent. "Existing Letter of Credit" has the meaning specified in the Preliminary Statements. "Existing Maturity Date" has the meaning specified in Section 2.20. "Existing Reduction Date" has the meaning specified in Section 2.20. "Federal Funds Effective Rate" means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Fee Letter" has the meaning specified in Section 2.12(c). "Financial Statement Delivery Date" means the date on which the quarterly or annual financial statements of the Company are to be delivered pursuant to Section 5.01(a) or Section 5.01(b), as the case may be. "Fixed Charges" means, at the end of any fiscal quarter of the Company, the sum of (a) all payments of principal in respect of Indebtedness of the Company and the Restricted Subsidiaries (other than SFPP) (including the principal component of any payments in respect of Capital Lease Obligations) payable during the next four consecutive fiscal quarters after eliminating all offsetting debits and credits between the Company and such Restricted Subsidiaries and all other items required to be eliminated in the course of the preparation of consolidated financial statements of the Company and the Restricted Subsidiaries in accordance with GAAP and (b) Company Interest Expense for the four consecutive fiscal quarters then ended. "Foreign Lender" means any Lender that is organized under the laws of a jurisdiction other than that in which either Borrower is located. For purposes of this definition, the United States of America, each state thereof and the District of Columbia shall be deemed to constitute a single jurisdiction. "GAAP" means generally accepted accounting principles in the United States of America from time to time, including as set forth in the opinions, statements and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and the Financing Accounting Standards Board. "General Partner" means Kinder Morgan G.P., Inc., a Delaware corporation. -12- "Governmental Authority" means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "Guarantee" of or by any Person (the "guarantor") means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation; provided, that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. "Hazardous Materials" means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law. "Hedging Agreement" means any interest rate protection agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement. "Indebtedness" of any Person means, without duplication, (a) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (d) all obligations of such Person in respect of the deferred purchase price of property or services or any other similar obligation upon which interest charges are customarily paid (excluding trade accounts payable incurred in the ordinary course of business), (e) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (f) all Guarantees by such Person of Indebtedness of others, (g) all Capital Lease Obligations of such Person, (h) all obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit and letters of guaranty and (i) all obligations, contingent or otherwise, of such Person in respect of bankers' acceptances. The Indebtedness of any Person shall include the Indebtedness of any other Person (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person's ownership interest in or other relationship with such -13- entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor. "Indemnified Taxes" means Taxes other than Excluded Taxes. "Information Memorandum" means the Confidential Information Memorandum dated January 1998 (Kinder Morgan Energy Partners L.P. $300,000,000 Senior Secured Credit Facility). "Initial Reduction Date" has the meaning specified in Section 2.09(a). "Intercompany Notes" has the meaning specified in Section 5.12. "Intercompany Security Documents" has the meaning specified in Section 5.12. "Interest Election Request" has the meaning specified in Section 2.08. "Interest Expense" means (without duplication), for any Person for any period, the aggregate amount of interest, whether expensed or capitalized, paid, accrued or scheduled to be paid during such period in respect of the Indebtedness of such Person including (a) the interest portion of any deferred payment obligation; (b) the portion of any rental obligation in respect of Capital Lease Obligations allocable to interest expenses; and (c) any non-cash interest payments or accruals, all determined in accordance with GAAP. "Interest Payment Date" means (a) with respect to any ABR Loan (including a Swingline Loan), the last day of each January, April, July and October and (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months' duration, each day prior to the last day of such Interest Period that occurs at intervals of three months' duration after the first day of such Interest Period. "Interest Period" means with respect to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter, as the Company may elect; provided, that (a) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day and (b) any Interest Period that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and, in the case of a Revolving Borrowing, thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing. "Issuing Bank" means First Union National Bank, in its capacity as the issuer of Letters of Credit hereunder, and its successors in such capacity as provided in Section 2.06(j). -14- "KMNGL" has the meaning specified in the introduction to this Agreement. "KMCO2"has the meaning specified in the introduction to this Agreement. "LC Disbursement" means a payment made by the Issuing Bank pursuant to a Letter of Credit. "LC Exposure" means, at any time, the sum of (a) the aggregate undrawn amount of all outstanding Letters of Credit at such time plus (b) the aggregate amount of all LC Disbursements that have not yet been reimbursed by or on behalf of the applicable Borrower at such time. The LC Exposure of any Lender at any time shall be its Applicable Percentage of the total LC Exposure at such time. "Lender" has the meaning specified in the introduction to this Agreement. "Lenders" has the meaning specified in the introduction to this Agreement. Unless the context otherwise requires, the term "Lenders" includes the Swingline Lender. "Letter of Credit" means the Existing Letter of Credit or any letter of credit issued pursuant to this Agreement. "Letter of Credit Request" has the meaning specified in Section 2.06. "LIBOR" shall mean the rate of interest determined on the basis of the rate for deposits in dollars in an amount substantially equal to the amount of the applicable Loan for a period equal to the applicable Interest Period commencing on the first day of such Interest Period appearing on Dow Jones Market Service (formerly Telerate) Page 3750 as of 11:00 a.m. (London time) two Business Days prior to the first day of the applicable Interest Period. In the event that such rate does not appear on Telerate Page 3750, "LIBOR" shall be determined by the Administrative Agent to be the rate per annum at which deposits in dollars are offered by leading reference banks in the London interbank market to First Union at approximately 11:00 a.m. (London time) two Business Days prior to the first day of the applicable Interest Period for a period equal to such Interest Period and in an amount substantially equal to the amount of the applicable Loan. "LIBOR Rate" shall mean, with respect to any LIBOR Loan for any Interest Period for such Loan, a rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the Administrative Agent to be equal to the quotient of (i) LIBOR for such Loan for such Interest Period divided by (ii) 1 minus the Reserve Requirement for such Loan for such Interest Period. "Lien" means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset and (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset. -15- "Loan Documents" mean, collectively, this Agreement (including the Company Guaranty and the Subsidiary Guarantors Guaranty), the Notes, if any, the Security Documents, the Intercompany Notes, the Applications, the Fee Letter and all other instruments and documents (including the Intercompany Security Documents, if any) from time to time executed and delivered by any Loan Party in connection herewith and therewith; provided, however, for purposes of Article IX and Article X, Loan Documents shall not include the Intercompany Notes or the Intercompany Security Documents. "Loan Party" means the Company, the Subsidiary Borrower or any Subsidiary Guarantor and "Loan Parties" means the Company, the Subsidiary Borrower and the Subsidiary Guarantors. "Loans" means advances made by the Lenders to the Company pursuant to this Agreement. "Maintenance Capital Expenditures" means cash capital expenditures made to maintain, up to the level thereof that existed on the Execution Date, the throughput, deliverable capacity, terminaling capacity, or fractionation capacity (assuming normal operating conditions, including down-time and maintenance) of the assets of the Company and the Restricted Subsidiaries, taken as a whole, as such assets existed on the Execution 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 part used to maintain such capacity level and the part used for other purposes shall be conclusive. "Make-Whole Premium" means the make-whole premium paid by OLP "A" on its 8.79% First Mortgage Notes due June 30, 2007. "Material Adverse Effect" means, relative to any occurrence of whatever nature (including any adverse determination in any litigation, arbitration or governmental investigation or proceeding) and after taking into account actual insurance coverage and effective indemnification with respect to such occurrence, (a) a material adverse effect on the financial condition, business or operations of the Company and the Restricted Subsidiaries taken as a whole, (b) the impairment of (i) the ability of the Loan Parties to collectively perform the payment or other material obligations hereunder or under the other Loan Documents or (ii) the ability of the Administrative Agent or the Lenders to realize the material benefits intended to be provided by the Loan Parties under the Loan Documents or (c) the subjection of any of the Administrative Agent, the Issuing Bank or any Lender to any civil or criminal liability. "Maturity Date" means the earlier of (a) February 1, 2005, as such date may be extended pursuant to Section 2.20, and (b) the acceleration of the Obligations pursuant to Section 7.01. "Maximum Rate" has the meaning specified in Section 11.13. -16- "Mont Belvieu" means Mont Belvieu Associates, a Texas general partnership of which each of KMNGL and Enterprise Products Co. owns a 50% general partner interest. "Moody's" means Moody's Investors Service, Inc. "Multiemployer Plan" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Net Income" means for any Person for any period, the net income or (net loss) of such Person for such period (taken as a cumulative whole), as determined in accordance with GAAP, provided that there shall be excluded, without duplication, from such net income (to the extent otherwise included therein): (a) net extra ordinary gains and losses (other than, in the case of losses, losses resulting from charges against net income to establish or increase reserves for potential environmental liabilities and reserves for exposure of such Person under rate cases); (b) net gains or losses in respect of dispositions of assets other than in the ordinary course of business; and (c) any gains or losses attributable to write-ups or write-downs of assets; and (d) proceeds of any key man insurance, or any insurance on property, plant or equipment. "New Subsidiary" has the meaning specified in Section 6.04. "Nominee" has the meaning specified in Section 2.20. "Non-Consenting Lenders" has the meaning specified in Section 2.20. "Note" has the meaning specified in Section 2.10. "Notice of Account Designation" has the meaning specified in Section 2.07. "Notice of Default" has the meaning specified in Section 7.01. "Notice of Extension" has the meaning specified in Section 2.20. "Notice of Prepayment" has the meaning specified in Section 2.11. "Obligations" means collectively: (a) the payment of all indebtedness and liabilities by, and perform- ance of all other obligations of, the Company in respect of the Loans; -17- (b) all obligations of the Company and the Subsidiary Borrower under, with respect to, and relating to the Letters of Credit whether contingent or matured; (c) all obligations of the Company or any Restricted Subsidiary (other than SFPP) owing to any Lender under any Hedging Agreement; (d) the payment of all other indebtedness and liabilities by and performance of all other obligations of, the Company and the Subsidiary Borrower to the Administrative Agent, the Issuing Bank and the Lenders under, with respect to, and arising in connection with, the Loan Documents, and the payment of all indebtedness and liabilities of the Company and the Subsidiary Borrower to the Administrative Agent, the Issuing Bank and the Lenders for fees, costs, indemnification and expenses (including reasonable attorneys' fees and expenses) under the Loan Documents; (e) the reimbursement of all sums advanced and costs and expenses incurred by the Administrative Agent under any Loan Document (whether directly or indirectly) in connection with the Obligations or any part thereof or any renewal, extension or change of or substitution for the Obligations or, any part thereof, whether such advances, costs and expenses were made or incurred at the request of any Loan Party or the Administrative Agent; and (f) all renewals, extensions, amendments and changes of, or substitutions or replacements for, all or any part of the items described under clauses (a) through (e) above. "OECD" means the Organization for Economic Cooperation and Development (or any successor). "OLP `A'" has the meaning specified in the introduction to this Agreement. "OLP `A' EBITDA" means (without duplication), for any period, the sum of (a) the EBITDA of OLP " A" for such period (not including, however, the EBITDA of any Person in which OLP "A" owned Capital Stock at any time during such period), plus (b) the aggregate of all distributions actually received by OLP "A" in respect of such period from any Person in which OLP "A" owned Capital Stock during all or any portion of such period; provided however, that (y) the EBITDA of OLP "A" will be calculated for such period without regard to the Make-Whole Premium and (z) notwithstanding anything to the contrary contained in this definition, upon completion of the Shell JV Investment, the EBITDA of OLP "A" for each of the four quarters preceding the effective date of completion of such investment shall be computed on a pro forma basis which assumes that the EBITDA from ownership and operation of the Central Basin Pipeline for each such quarter was $3,625,000 (i.e., an amount equal to the quarterly priority distribution to be received by KMCO2 during the first 16 quarters following completion of the Shell JV Investment). "OLP `A' First Mortgage Notes" has the meaning specified in the Preliminary Statements. "OLP `A' Loan Agreement" has the meaning specified in the Preliminary Statements. "OLP `A' Refinancing" has the meaning specified in the Preliminary Statements. -18- "OLP `B' Refinancing" has the meaning specified in the Preliminary State- ments. "OLP `C'" has the meaning specified in the introduction to this Agreement. "OLP `D'" has the meaning specified in the introduction to this Agreement. "Other Taxes" means any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement. "Participant" has the meaning specified in Section 11.05(e). "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions. "Permitted Encumbrances" means: (a) Liens imposed by law for taxes that are not yet due or are being contested in compliance with Section 5.04; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than 30 days or are being contested in compliance with Section 5.04; (c) pledges and deposits made in the ordinary course of business in compliance with workers' compensation, unemployment insurance and other social security laws or regulations; (d) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business; (e) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Company or any Subsidiary; (f) judgment and attachment Liens not giving rise to an Event of Default or Liens created by or existing from any litigation or legal proceeding that are currently being contested in good faith by appropriate proceedings, promptly instituted and diligently conducted, and for which adequate reserves have been made to the extent required by GAAP; (g) any interest or title of a lessor in property subject to any Capitalized Lease Obligation or operating lease which, in each case, is permitted under this Agreement; and -19- (h) Liens in favor of collecting or payor banks having a right of setoff, revocation, refund or chargeback with respect to money or instruments of the Company or any Restricted Subsidiary on deposit with or in possession of such bank; provided that the term "Permitted Encumbrances" shall not include any Lien securing Indebtedness. "Permitted Investments" means: (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof; (b) investments in commercial paper issued by a Person that is not the Company or an Affiliate of the Company maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, an investment grade rating from S&P or from Moody's; (c) investments in certificates of deposit, banker's acceptances and time deposits maturing within 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank organized under the laws of the United States of America or any state thereof which has a combined capital and surplus and undivided profits of not less than $500,000,000; (d) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above and entered into with a financial institution satisfying the criteria described in clause (c) above; and (e) investments in demand deposit accounts with any Lender or with a financial institution satisfying the criteria described in clause (c) above. "Person" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity. "Plan" means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Company or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Pledged Bonds" has the meaning specified in Section 2.06. "Prime Rate" shall mean the rate of interest from time to time announced publicly by the Administrative Agent at the Principal Office as its prime commercial lending rate. Such rate is set by the Administrative Agent as a general reference rate of interest, taking into account such factors as the Administrative Agent may deem appropriate, it being understood that many of the Administrative Agent's commercial or other loans are priced in relation to such rate, that it is not necessarily the lowest or best rate actually charged to any customer and that the Administrative -20- Agent may make various commercial or other loans at rates of interest having no relationship to such rate. "Principal Office" shall mean the principal office of the Administrative Agent, presently located at 301 South College Street, TW-10, Charlotte, North Carolina 28288-0608 or such other location as designated by the Administrative Agent from time to time. "Pro Rata Share" has the meaning specified in Section 10.05. "Purchase Agreement" shall mean the Purchase Agreement dated as of the 18th day of October, 1997, by and among the Company, the General Partner, SFMLP, Santa Fe Pacific Pipelines, Inc., a Delaware corporation, and SFP Pipelines, Inc., a Delaware corporation, and SFP Pipeline Holdings, Inc., a Delaware corporation, as amended. "Qualified Stock" means any Capital Stock issued by the Company that is not Disqualified Stock. "Reduction Date" has the meaning specified in Section 2.09(a). "Refinancing Indebtedness" means any Indebtedness of the Company or any Restricted Subsidiary issued in exchange for, or the net proceeds of which are applied entirely to substantially concurrently repay, refinance, refund or replace, Indebtedness of the Company or any Restricted Subsidiary (a) existing on the Execution Date and listed on Schedule 1.01A or (b) which would exist on the Execution Date (assuming that all unfunded commitments to advance any such Indebtedness are fully funded) (the "Refinanced Indebtedness"), to the extent such Refinancing Indebtedness: (a) is issued in a principal amount (or if such Indebtedness is issued at an original issue discount, is issued at an original issue price) not exceeding the outstanding principal amount (or, if such Refinanced Indebtedness was issued at an original issue discount, not exceeding the outstanding accrued principal amount) of such Refinanced Indebtedness; and (b) if the Refinanced Indebtedness is Indebtedness of the Company and ranks by contract, by its terms or otherwise junior in right of payment to the Obligations, (A) does not have a final scheduled maturity and is not subject to any principal payments, including payments upon mandatory or optional redemption prior to the dates of analogous payments under the Refinanced Indebtedness, and (B) has subordination provisions effective to subordinate such Indebtedness to the Obligations at least to the extent that such Refinanced Indebtedness is subordinated to the Obligations; and (c) if the Refinanced Indebtedness is Indebtedness of the Company which is pari passu in right of payment with the Obligations, (A) is either pari passu or is subordinated in right of payment to the Obligations, (B) does not have a final scheduled maturity and is not subject to any principal payments, including payments upon mandatory or optional redemption, prior to the final scheduled maturity date of the Refinanced Indebtedness, and (C) is not secured by a Lien on any -21- property or assets of the Company or any Restricted Subsidiary in addition to Liens securing the Refinanced Indebtedness. "Register" has the meaning specified in Section 11.05. "Regulation A" means Regulation A of the Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Regulation D" means Regulation D of the Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Regulation G" means Regulation G of the Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Regulation T" means Regulation T of the Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Regulation U" means Regulation U of the Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Regulation X" means Regulation X of the Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Related Parties" means, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates. "Relevant Anniversary Date" has the meaning specified in Section 2.20. "Required Lenders" means, at any time, Lenders having Revolving Credit Exposures and unused Commitments representing 66 2/3% of the sum of the total Revolving Credit Exposures and unused Commitments at such time. "Requirement of Law" shall mean any law, statute, code, ordinance, order, determination, rule, regulation, judgment, decree, injunction, franchise, permit, certificate, license, authorization or other directive or requirement (whether or not having the force of law), including Environmental Laws, energy regulations and occupational, safety and health standards or controls, of any Governmental Authority. "Reserve Requirement" means, for any day as applied to a Eurodollar Loan, the aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including basic, supplemental, marginal and emergency reserves under any regulations of the Board or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D) maintained by a member bank of the Federal Reserve System. -22- Eurodollar Loans shall be deemed to constitute Eurocurrency Liabilities and to be subject to such reserve requirements without benefit of or credit for proration, exceptions or offsets which may be available from time to time to any Lender under Regulation D. "Responsible Officer" of any Loan Party means the Chairman, Vice Chairman, President, Chief Financial Officer or Chief Accounting Officer of (a) as to any Loan Party that is a limited partnership, the General Partner of such Person, (b) as to any Loan Party that is a limited liability company, the managing member of such Person, and (c) as to any Loan Party that is a corporation, such Person. "Restricted Payment" means any distribution (whether in cash, securities or other property) with respect to any partnership interest in the Company, or any payment (whether in cash, securities or other property), including any deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any such partnership interest or any option or other right to acquire any such partnership interest; provided, however, that distributions with respect to the partnership interests in the Company that do not exceed, with respect to any fiscal quarter of the Company, the amount of Available Cash for such quarter shall not constitute Restricted Payments so long as in each case, both before and after the making of such distribution, no Event of Default or Default shall have occurred and be continuing; and provided, further, that any partnership interest split, partnership interest reverse split, dividend of Company partnership interests or similar transaction will not constitute a Restricted Payment and the issuance of Company partner interests in connection with completion of the Santa Fe Acquisition or the purchase or exchange (for cash not exceeding $25,000,000 or Company partner interests) of the Variable Rate Exchangeable Debentures due 2010 issued by SFP Pipeline Holdings, Inc. will not constitute a Restricted Payment. "Restricted Subsidiary" means any Subsidiary of the Company other than an Unrestricted Subsidiary. The Board of Directors of the general partner of the Company, by a Board Resolution, may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided, that (a) before and after giving effect thereto no Default or Event of Default shall have occurred and be continuing, (b) the Company and the Restricted Subsidiaries shall be in compliance, on a pro forma basis, after giving effect to such designation, with the covenants contained in Article VI, recomputed as at the last day of the most recently ended fiscal quarter of the Company and the Restricted Subsidiaries as if such designation had occurred on the first day of each relevant period for testing such compliance and (c) the Company shall have delivered to the Administrative Agent and the Lenders a certificate of a Responsible Officer to such effect, together with all relevant financial information and calculations demonstrating such compliance. For purposes of this definition and of Article VI, a newly designated or acquired Restricted Subsidiary shall be deemed to have incurred or made on the date of its designation or acquisition, as the case may be, all such Indebtedness, Liens and investments then outstanding as would be reflected on its balance sheet, prepared in accordance with GAAP, as at such date. "Revolving Borrowing" means a Borrowing comprised of Revolving Loans. -23- "Revolving Credit Exposure" means, with respect to any Lender at any time, the sum of the outstanding principal amount of such Lender's Revolving Loans and its LC Exposure and Swingline Exposure at such time. "Revolving Loan" means a Loan made pursuant to Section 2.03. "S&P" means Standard & Poor's. "Santa Fe Acquisition" has the meaning specified in the Preliminary Statements. "Security Documents" means, collectively, the Company Security Agreement and the Subsidiary Guarantors Security Agreements. "SFMLP" has the meaning specified in the Preliminary Statements. "SFPP" has the meaning specified in the Preliminary Statements. "SFPP First Mortgage Notes" means those certain First Mortgage Notes issued by SFPP (under its prior name Southern Pacific Pipe Lines Partnership, L.P.) pursuant to a Note Agreement dated December 8, 1988 between SFPP and the purchasers named therein, which on the Execution Date are outstanding in the aggregate principal amount of $279,500,000. "SFPP Revolving Credit Facility" means that certain Amended and Restated Credit Agreement dated as of August 11, 1997 among SFPP, the lenders party thereto, Bank of America National Trust and Savings Association, as agent, Chase Bank of Texas, National Association (formerly Texas Commerce Bank National Association), as syndication agent, Bank of Montreal, as documentation agent and BancAmerica Securities, Inc., as arranger, providing for revolving loans to be made to SFPP in an aggregate principal amount not exceeding $175,000,000 at any time outstanding. "Shell" means Shell Western E & P Inc., Shell Cortez Pipeline Company, Shell Land & Energy Company and their Affiliates. "Shell CO2" has the meaning specified in the Preliminary Statements. "Shell JV Investment" has the meaning specified in the Preliminary State- ments. "Subsidiary" means, with respect to any Person (the "parent") at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent's consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (b) that is, as of such date, otherwise -24- controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. Unless the context otherwise clearly requires, references in this Agreement to a "Subsidiary" or the "Subsidiaries" refer to a Subsidiary or the Subsidiaries of the Company. "Subsidiary Borrower" has the meaning specified in the introduction to this Agreement. "Subsidiary Borrower Credit Agreement" has the meaning specified in the Preliminary Statements. "Subsidiary Borrower Guaranteed Obligations" has the meaning specified in Section 9.01. "Subsidiary Guarantor Counterpart" has the meaning specified in Section 6.04. "Subsidiary Guarantors Security Agreements" means, collectively, (a) a Pledge Agreement dated as of the date hereof from OLP "A" in favor of the Administrative Agent covering, inter alia, 100% of the issued and outstanding shares of stock of KMNGL and 100% of the issued and outstanding member interests in KMCO2, (b) a Pledge Agreement dated as of the date hereof from OLP "D" in favor of the Administrative Agent covering its general partner interest in SFPP, and (c) when the necessary consents have been obtained and such agreement has become effective in accordance with its terms, a Subsidiary Guarantors Pledge Agreement from KMNGL in favor of the Administrative Agent covering, inter alia, its 50% general partner interest in Mont Belvieu. "Subsidiary Guarantors" has the meaning specified in the introduction to this Agreement. "Subsidiary Guarantors Guaranty" means the guaranty contained in Article X. "Swingline Exposure" means, at any time, the aggregate principal amount of all Swingline Loans outstanding at such time. The Swingline Exposure of any Lender at any time shall be its Applicable Percentage of the total Swingline Exposure at such time. "Swingline Lender" means First Union National Bank, in its capacity as lender of Swingline Loans hereunder. "Swingline Loan" means a Loan made pursuant to Section 2.04. "Syndication Agent" has the meaning specified in the introduction to this Agreement. "Taxes" means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. "Total Commitment" means the sum of the Commitments of the Lenders. -25- "Transactions" means the execution, delivery and performance by the Loan Parties of this Agreement and the other Loan Documents, the borrowing of Loans, the use of the proceeds thereof and the Existing Letter of Credit and the issuance of the other Letters of Credit hereunder. "Triggering Event" means the earlier to occur of December 31, 1998 and the Santa Fe Acquisition. "Trustee" means Bank One, Texas, NA as the beneficiary of the Existing Letter of Credit and any successor beneficiary. "Type", when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the LIBOR Rate or the Alternate Base Rate. "United States" and "U.S."each means United States of America. "Unrestricted Subsidiary" means (a) any Subsidiary of an Unrestricted Subsidiary or (b) any Subsidiary of the Company or of a Restricted Subsidiary that is designated as an Unrestricted Subsidiary by a Board Resolution of the general partner of the Company in accordance with the requirements of the following sentence with the consent of the Required Lenders (which consent shall not be unreasonably withheld). The Company may hereafter designate any Subsidiary of the Company or of a Restricted Subsidiary (other than the Subsidiary Borrower, a Subsidiary Guarantor or, after it becomes a Subsidiary, SFPP) to be an Unrestricted Subsidiary by a Board Resolution of the general partner of the Company, as evidenced by written notice thereof delivered to the Administrative Agent, if at the time of and after giving effect to such designation, (i) no Default or Event of Default shall have occurred and be continuing, (ii) such Subsidiary does not own or hold any Capital Stock of, or any Lien on any property of, the Company or any Restricted Subsidiary and (iii) such Subsidiary does not own or hold any Indebtedness of the Company or any Restricted Subsidiary that would not be permitted pursuant to Section 6.01 as if incurred on the date of such designation. As of the date hereof, the Company has no Unrestricted Subsidiaries. "Voting Stock" means, with respect to any Person, securities of any class or classes of Capital Stock in such Person entitling holders thereof (whether at all times or only so long as no senior class of stock has voting power by reason of any contingency) to vote in the election of members of the Board of Directors or other governing body of such Person or its managing member or its general partner (or its managing general partner if there is more than one general partner). "Wholly-Owned Restricted Subsidiary" means a Restricted Subsidiary of which all issued and outstanding Capital Stock (excluding (a) in the case of a corporation, directors' qualifying shares, (b) in the case of a limited partnership, a 1.5% general partner interest and (c) in the case of a limited liability company, a 1.5% member interest) is directly or indirectly owned by the Company. "Withdrawal Liability" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. -26- SECTION 1.02 Classification of Loans and Borrowing. For purposes of this Agreement, Loans may be classified and referred to by Class (e.g., a "Revolving Loan") or by Type (e.g., a "Eurodollar Loan") or by Class and Type (e.g., a "Eurodollar Revolving Loan"). Borrowings also may be classified and referred to by Class (e.g., a "Revolving Borrowing") or by Type (e.g., a "Eurodollar Borrowing") or by Class and Type (e.g., a "Eurodollar Revolving Borrowing"). SECTION 1.03. Accounting Terms; Changes in GAAP. All accounting and financial terms used n GAAP herein and not otherwise defined herein and the compliance with each covenant contained herein which relates to financial matters shall be determined in accordance with GAAP applied by the Company on a consistent basis, except to the extent that a deviation therefrom is expressly stated. Should there be a change in GAAP from that in effect on the Execution Date, such that the defined terms set forth in Section 1.01 or the covenants set forth in Article VI would then be calculated in a different manner or with different components or would render the same not meaningful criteria for evaluating the matters contemplated to be evidenced by such covenants, (a) the Company and the Required Lenders agree, within the 60-day period following any such change, to negotiate in good faith and enter into an amendment to this Agreement in order to conform the defined terms set forth in Section 1.01 or the covenants set forth in Article VI, or both, in such respects as shall reasonably be deemed necessary by the Required Lenders so that the criteria for evaluating the matters contemplated to be evidenced by such covenants are substantially the same criteria as were effective prior to any such change in GAAP, and (b) the Company shall be deemed to be in compliance with such covenants during the 60-day period following any such change, or until the earlier date of execution of such amendment, if and to the extent that the Company would have been in compliance therewith under GAAP as in effect immediately prior to such change. SECTION 1.04. Interpretation. (a) In this Agreement, unless a clear contrary intention appears: (i) the singular number includes the plural number and vice versa; (ii) reference to any gender includes each other gender; (iii) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision; (iv) reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually; provided that nothing in this clause (iv) is intended to authorize any assignment not otherwise permitted by this Agreement; (v) except as expressly provided to the contrary herein, reference to any agreement, document or instrument (including this Agreement) means such agreement, document or instrument as amended, supplemented or modified and in effect from time to -27- time in accordance with the terms thereof and, if applicable, the terms hereof, and reference to any Note or other note includes any note issued pursuant hereto in extension or renewal thereof and in substitution or replacement therefor; (vi) unless the context indicates otherwise, reference to any Article, Section, Schedule or Exhibit means such Article or Section hereof or such Schedule or Exhibit hereto; (vii) the word "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term; (viii) with respect to the determination of any period of time, except as expressly provided to the contrary, the word "from" means "from and including" and the word "to" means "to but excluding"; (ix) reference to any law, rule or regulation means such as amended, modified, codified or reenacted, in whole or in part, and in effect from time to time; and (x) the words "asset" and "property" shall be construed to have the same meaning and effect and refer to any and all tangible and intangible assets and properties. ARTICLE II. The Credits SECTION 2.01 Commitments. Subject to the terms and conditions set forth herein, each Lender agrees to make Revolving Loans to the Company from time to time during the Availability Period in an aggregate principal amount that will not result in (a) such Lender's Revolving Credit Exposure exceeding such Lender's Commitment or (b) the sum of the total Revolving Credit Exposures exceeding the Availability. Within the foregoing limits and subject to the terms and conditions set forth herein, the Company may borrow, prepay and reborrow Revolving Loans. SECTION 2.02. Loans and Borrowings. (a) Each Revolving Loan shall be made as part of a Borrowing consisting of Revolving Loans made by the Lenders ratably in accordance with their respective Commitments. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder. (b) Subject to Section 2.14, each Revolving Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Company may request in accordance herewith. Each Swingline Loan shall be an ABR Loan. Each Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Company to repay such Loan in accordance with the terms of this Agreement. -28- (c) At the commencement of each Interest Period for any Eurodollar Revolving Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $3,000,000. At the time that each ABR Revolving Borrowing is made, such Borrowing shall be in an aggregate amount that is an integral multiple of $500,000 and not less than $1,000,000; provided that an ABR Revolving Borrowing may be in an aggregate amount that is equal to the entire unused balance of the Total Commitment or that is required to finance the reimbursement of an LC Disbursement as contemplated by Section 2.06(f). Each Swingline Loan shall be in an amount that is an integral multiple of $100,000 and not less than $500,000. Borrowings of more than one Type and Class may be outstanding at the same time; provided that there shall not at any time be more than a total of six Eurodollar Revolving Borrowings outstanding. (d) Notwithstanding any other provision of this Agreement, the Company shall not be entitled to request, or to elect to convert or continue, any Borrowing if the Interest Period requested with respect thereto would end after the Maturity Date. SECTION 2.03. Requests for Revolving Borrowings. To request a Revolving Borrowing, the Company shall notify the Administrative Agent of such request by telephone (a) in the case of a Eurodollar Borrowing, not later than 10:00 a.m., Charlotte, North Carolina time, three Business Days before the date of the proposed Borrowing (provided, however, no such request may be given prior to the third Business Day after the Effective Date) and (b) in the case of an ABR Borrowing, not later than 10:00 a.m., Charlotte, North Carolina time, on the date of the proposed Borrowing. Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Borrowing Request in a form of Exhibit 2.03 (a "Borrowing Request") and signed by the Company. Each such telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.02: (i) the aggregate amount of the requested Borrowing; (ii) the date of such Borrowing, which shall be a Business Day; (iii) whether such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; (iv) in the case of a Eurodollar Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period"; and (v) the location and number of the Company's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.07. If no election as to the Type of Revolving Borrowing is specified, then the requested Revolving Borrowing shall be an ABR Borrowing. If no Interest Period is specified with respect to any requested Eurodollar Revolving Borrowing, then the Company shall be deemed to have selected an Interest Period of one month's duration. Promptly following receipt of a Borrowing Request in -29- accordance with this Section 2.03, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender's Loan to be made as part of the requested Borrowing. SECTION 2.04. Swingline Loans. (a) Subject to the terms and conditions set forth herein, the Swingline Lender agrees to make Swingline Loans to the Company from time to time during the Availability Period, in an aggregate principal amount at any time outstanding that will not result in (i) the aggregate principal amount of outstanding Swingline Loans exceeding $5,000,000 or (ii) the sum of the total Revolving Credit Exposures exceeding the lesser of the Total Commitment and the Availability; provided that the Swingline Lender shall not be required to make a Swingline Loan to refinance an outstanding Swingline Loan. Within the foregoing limits and subject to the terms and conditions set forth herein, the Company may borrow, prepay and reborrow Swingline Loans. (b) To request a Swingline Loan, the Company shall notify the Administrative Agent of such request by telephone (confirmed by telecopy), not later than 12:00 noon, Charlotte, North Carolina time, on the day of a proposed Swingline Loan. Each such notice shall be irrevocable and shall specify the requested date (which shall be a Business Day) and amount of the requested Swingline Loan. The Administrative Agent (if not the Swingline Lender) will promptly advise the Swingline Lender of any such notice received from the Company. So long as the Swingline Lender and the Administrative Agent are First Union National Bank, the Swingline Lender shall make each Swingline Loan available to the Company by means of a credit to the deposit account of the Company with the Swingline Lender identified in the most recent Notice of Account Designation by 3:00 p.m., Charlotte, North Carolina time, on the requested date of such Swingline Loan. (c) The Swingline Lender may by written notice given to the Administrative Agent not later than 12:00 noon, Charlotte, North Carolina time, on any Business Day require the Lenders to acquire participations on such Business Day in all or a portion of the Swingline Loans outstanding. Such notice shall specify the aggregate amount of Swingline Loans in which Lenders will participate. Promptly upon receipt of such notice, the Administrative Agent will give notice thereof to each Lender, specifying in such notice such Lender's Applicable Percentage of such Swingline Loan or Loans. Each Lender hereby absolutely and unconditionally agrees, upon receipt of notice as provided above, to pay to the Administrative Agent, for the account of the Swingline Lender, such Lender's Applicable Percentage of such Swingline Loan or Loans. Each Lender acknowledges and agrees that its obligation to acquire participations in Swingline Loans pursuant to this paragraph is absolute and unconditional and shall not be affected by any circumstance whatsoever, including the occurrence and continuance of a Default or Event of Default or reduction or termination of the Total Commitment, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. Each Lender shall comply with its obligation under this paragraph by wire transfer of immediately available funds, in the same manner as provided in Section 2.07 with respect to Loans made by such Lender (and Section 2.07 shall apply, mutatis mutandis, to the payment obligations of the Lenders), and the Administrative Agent shall promptly pay to the Swingline Lender the amounts so received by it from the Lenders. The Administrative Agent shall notify the Company of any participations in any Swingline Loan acquired pursuant to this paragraph, and thereafter payments in respect of such Swingline Loan shall be made to the Administrative Agent and not to the Swingline Lender. Any amounts received by the -30- Swingline Lender from the Company (or other party on behalf of the Company) in respect of a Swingline Loan after receipt by the Swingline Lender of the proceeds of a sale of participations therein shall be promptly remitted to the Administrative Agent; any such amounts received by the Administrative Agent shall be promptly remitted by the Administrative Agent to the Lenders that shall have made their payments pursuant to this paragraph and to the Swingline Lender, as their interests may appear. The purchase of participations in a Swingline Loan pursuant to this paragraph shall not relieve the Company or any other Loan Party of any default in the payment thereof. SECTION 2.05. Telephonic Notices. Without in any way limiting the obligation of he Company or any other Loan Party to confirm in writing any telephonic notice it is entitled to give under this Agreement or any other Loan Document, the Administrative Agent may act without liability upon the basis of a telephonic notice believed in good faith by the Administrative Agent to be from the Company or such Loan Party prior to receipt of written confirmation. In each such case, each Loan Party hereby waives the right to dispute the Administrative Agent's record of the terms of such telephonic notice. SECTION 2.06 Letters of Credit. (a) Existing Letter of Credit. The parties hereto acknowledge that on and after the Effective Date the Existing Letter of Credit shall be a Letter of Credit issued by the Issuing Bank for the account of the Subsidiary Borrower pursuant to this Agreement. The Subsidiary Borrower hereby pledges, assigns, transfers and delivers to the Issuing Bank all its right, title and interest to all Bonds purchased with funds drawn under the Existing Letter of Credit (the "Pledged Bonds"), and hereby grants to the Issuing Bank a first lien on, and security interest in, its rights, title and interest in and to the Pledged Bonds, the interest thereon and all proceeds thereof or substitutions therefor, as collateral security for the prompt and complete payment when due of the amounts payable in respect of the Existing Letter of Credit. During such time as any Bonds are Pledged Bonds, the Issuing Bank shall be entitled to exercise all of the rights of a holder of Bonds with respect to voting, consenting and directing the Trustee as if the Issuing Bank were the owner of such Bonds, and the Subsidiary Borrower hereby grants and assigns to the Issuing Bank all such rights. (b) General. Subject to the terms and conditions set forth herein, the Company may request the issuance of Letters of Credit for its own account or for its own account and that of any Restricted Subsidiary, in a form reasonably acceptable to the Administrative Agent and the Issuing Bank, at any time and from time to time during the Availability Period. In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any Application (as defined in Section 2.06(c)) or other agreement submitted by the Company to, or entered into by the Company with, the Issuing Bank relating to any Letter of Credit, the terms and conditions of this Agreement shall control. (c) Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions. To request the issuance of a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of Credit), the Company shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by the Issuing Bank) to the Issuing Bank and the Administrative Agent (not less than five Business Days in advance of the requested date of issuance, amendment, renewal or extension) a notice (a "Letter of Credit Request") -31- requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, the date of issuance, amendment, renewal or extension, the date on which such Letter of Credit is to expire (which shall comply with this Section 2.06(c)), the amount of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare, amend, renew or extend such Letter of Credit. If requested by the Issuing Bank, the Company also shall submit a letter of credit application on the Issuing Bank's standard form (an "Application") in connection with any request for a Letter of Credit. A Letter of Credit shall be issued, amended, renewed or extended only if (and upon issuance, amendment, renewal or extension of each Letter of Credit the Company shall be deemed to represent and warrant that), after giving effect to such issuance, amendment, renewal or extension (i) the LC Exposure shall not exceed $75,000,000 and (ii) the sum of the total Revolving Credit Exposures shall not exceed the lesser of the Total Commitment and the Availability. (d) Expiration Date. Each Letter of Credit (other than the Existing Letter of Credit) shall expire at or prior to the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit (or, in the case of any renewal or extension thereof, one year after such renewal or extension) and (ii) the date that is five Business Days prior to the Maturity Date. (e) Participations. On the Effective Date with respect to the Existing Letter of Credit and by the issuance of each other Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Issuing Bank or the Lenders, the Issuing Bank hereby grants to each Lender, and each Lender hereby acquires from the Issuing Bank, a participation in such Letter of Credit equal to such Lender's Applicable Percentage of the aggregate amount available to be drawn under such Letter of Credit. In consideration and in furtherance of the foregoing, each Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for the account of the Issuing Bank, such Lender's Applicable Percentage of each LC Disbursement made by the Issuing Bank and not reimbursed by the Company on the date due as provided in Section 2.06(f), or of any reimbursement payment required to be refunded to the Company for any reason. Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit or the occurrence and continuance of a Default or an Event of Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. (f) Reimbursement. If the Issuing Bank shall make any LC Disbursement in respect of a Letter of Credit, the Borrower for whose account such Letter of Credit was issued shall reimburse such LC Disbursement by paying to the Administrative Agent an amount equal to such LC Disbursement not later than 12:00 noon, Charlotte, North Carolina time, on the date that such LC Disbursement is made, if such Borrower shall have received notice of such LC Disbursement prior to 10:00 a.m., Charlotte, North Carolina time, on such date, or, if such notice has not been received by such Borrower prior to such time on such date, then not later than 12:00 noon, Charlotte, North Carolina time, on (i) the Business Day that such Borrower receives such notice, if such notice is received prior to 10:00 a.m., Charlotte, North Carolina time, on the day of receipt, or (ii) the -32- Business Day immediately following the day that such Borrower receives such notice, if such notice is not received prior to such time on the day of receipt; provided that if such Borrower fails to make such payment when due, then, upon demand by the Issuing Bank sent to the Administrative Agent and each Lender before 10:00 a.m., Charlotte, North Carolina time, each Lender shall pursuant to Section 2.07 on the same day make available to the Administrative Agent for delivery to the Issuing Bank, immediately available funds in an amount equal to such Lender's Applicable Percentage of the amount of such payment by the Issuing Bank, and the funding of such amount shall be treated as the funding of an ABR Loan by such Lender to such Borrower. Notwithstanding anything herein or in any other Loan Document to the contrary, the funding obligations of the Lenders set forth in this Section 2.06(f) shall be binding regardless of whether or not a Default or an Event of Default shall exist or the other conditions precedent in Article III are satisfied at such time. If and to the extent any Lender fails to effect any payment due from it under this Section 2.06(f) to the Administrative Agent, then interest shall accrue on the obligation of such Lender to make such payment from the date such payment became due to the date such obligation is paid in full at a rate per annum equal to the Federal Funds Effective Rate. The failure of any Lender to pay its Applicable Percentage of any payment under any Letter of Credit shall not relieve any other Lender of its obligation hereunder to pay to the Administrative Agent its Applicable Percentage of any payment under any Letter of Credit on the date required, as specified above, but no Lender shall be responsible for the failure of any other Lender to pay to the Administrative Agent such other Lender's Applicable Percentage of any such payment. (g) Obligations Absolute. The Company's obligation to reimburse (or in the case of the Existing Letter of Credit, the Subsidiary Borrower's obligation to reimburse) LC Disbursements as provided in Section 2.06(f) shall, to the extent permitted by law, be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances whatsoever and irrespective of: (i) any lack of validity or enforceability of any Letter of Credit, this Agreement or any other Loan Document, or any term or provision herein or therein; (ii) any amendment or waiver of or any consent to departure from all or any of the provisions of any Letter of Credit, this Agreement or any other Loan Document; (iii) the existence of any claim, setoff, defense or other right that either Borrower, any other Loan Party or other Affiliate thereof or any other Person may at any time have against the beneficiary under any Letter of Credit, the Issuing Bank, the Administrative Agent or any Lender or any other Person, whether in connection with this Agreement or any other related or unrelated agreement or transaction; (iv) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect; (v) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit; and -33- (vi) any other act or omission to act or delay of any kind of the Issuing Bank, the Lenders, the Administrative Agent or any other Person or any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section 2.06, constitute a legal or equitable discharge of any Loan Party's obligations hereunder. Neither the Administrative Agent, the Lenders nor the Issuing Bank, nor any of their Related Parties, shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder, including any of the circumstances specified in clauses (i) through (vi) above, as well as any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of the Issuing Bank; provided that the foregoing shall not be construed to excuse the Issuing Bank from liability to the Borrower for whose account such Letter of Credit was issued to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by each Borrower to the extent permitted by applicable law) suffered by such Borrower that are caused by the Issuing Bank's failure to exercise the agreed standard of care (as set forth below) in determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree that the Issuing Bank shall have exercised the agreed standard of care in the absence of gross negligence, willful misconduct or unlawful conduct on the part of the Issuing Bank. Without limiting the generality of the foregoing, it is understood that the Issuing Bank may accept documents that appear on their face to be in substantial compliance with the terms of a Letter of Credit, without responsibility for further investigation, regardless of any notice or information to the contrary, and may make payment upon presentation of documents that appear on their face to be in substantial compliance with the terms of such Letter of Credit; provided that the Issuing Bank shall have the right, in its sole discretion, to decline to accept such documents and to make such payment if such documents are not in strict compliance with the terms of such Letter of Credit. (h) Disbursement Procedures. The Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Issuing Bank shall promptly notify the Administrative Agent and the Borrower for whose account such Letter of Credit was issued by telephone (confirmed by telecopy) of such demand for payment and whether the Issuing Bank has made or will make an LC Disbursement thereunder; provided that any failure to give or delay in giving such notice shall not relieve either Borrower of its obligation to reimburse the Issuing Bank and the Lenders with respect to any such LC Disbursement. (i) Interim Interest. If the Issuing Bank shall make any LC Disbursement, then, unless the Company (or, in the case of the Existing Letter of Credit, the Subsidiary Borrower) shall reimburse such LC Disbursement in full on the date specified in Section 2.06(f), the unpaid amount thereof shall bear interest, for each day from the date such LC Disbursement is made to the date that the Company (or, in the case of the Existing Letter of Credit, the Subsidiary Borrower) reimburses such LC Disbursement (or all Lenders make the payments to the Administrative Agent contemplated -34- by Section 2.06(f) and treated pursuant to said Section as constituting the funding of ABR Loans), at the rate per annum then applicable to ABR Revolving Loans. (j) Replacement of the Issuing Bank. The Issuing Bank may be replaced at any time by written agreement among the Borrowers, the Administrative Agent, the replaced Issuing Bank and the successor Issuing Bank. The Administrative Agent shall notify the Lenders of any such replacement of the Issuing Bank. At the time any such replacement shall become effective, the Borrowers shall pay all unpaid fees accrued for the account of the replaced Issuing Bank pursuant to Section 2.12(b). From and after the effective date of any such replacement, (i) the successor Issuing Bank shall have all the rights and obligations of the Issuing Bank under this Agreement with respect to Letters of Credit to be issued thereafter and (ii) references herein to the term "Issuing Bank" shall be deemed to refer to such successor or to any previous Issuing Bank, or to such successor and all previous Issuing Banks, as the context shall require. After the replacement of an Issuing Bank hereunder, the replaced Issuing Bank shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Bank under this Agreement with respect to Letters of Credit issued by it prior to such replacement, but shall not be required to issue additional Letters of Credit. (k) Cash Collateralization. If (i) any Event of Default shall occur and be continuing, on the Business Day that the Company receives notice from the Administrative Agent or the Required Lenders (or, if the maturity of the Loans has been accelerated, Lenders with LC Exposure representing greater than 66_% of the total LC Exposure) demanding the deposit of cash collateral pursuant to this paragraph or (ii) a Change in Control shall occur, the Company shall deposit in an account with the Administrative Agent, in the name of the Administrative Agent and for the benefit of the Lenders, an amount in cash equal to the LC Exposure as of such date plus any accrued and unpaid interest thereon; provided that the obligation to deposit such cash collateral shall become effective immediately, and such deposit shall become immediately due and payable, without demand or notice of any kind, upon the occurrence of any Event of Default with respect to any Loan Party described in clause (g) or (h) of Section 7.01. Such deposit shall be held by the Administrative Agent as collateral for the payment and performance of the obligations of the Loan Parties under this Agreement and the other Loan Documents. The Administrative Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Other than any interest earned on the investment of such deposits, which investments shall be made at the option and sole discretion of the Administrative Agent and at the Company's risk and expense, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall be applied by the Administrative Agent to reimburse the Issuing Bank for LC Disbursements for which it has not been reimbursed and, to the extent not so applied, shall be held for the satisfaction of the reimbursement obligations of the Borrowers for the LC Exposure at such time or, if the maturity of the Loans has been accelerated (but subject to the consent of Lenders with LC Exposure representing greater than 66_% of the total LC Exposure), be applied to satisfy other obligations of the Loan Parties under this Agreement and the other Loan Documents. If the Company is required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount (to the extent not applied as aforesaid) shall be returned to the Company within three Business Days after all Events of Default have been cured or waived. -35- SECTION 2.07. Funding of Borrowings. (a) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 2:00 p.m., Charlotte, North Carolina time, to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders; provided that Swingline Loans shall be made as provided in Section 2.04. Not later than 2:00 p.m. (Charlotte time) on the proposed borrowing date, each Lender will make available to the Administrative Agent, for the account of the Borrower, at the office of the Administrative Agent in funds immediately available to the Administrative Agent, such Lender's Commitment Percentage of the Loans to be made on such borrowing date. The Company hereby irrevocably authorizes the Administrative Agent to disburse the proceeds of each borrowing requested pursuant to this Section 2.07 in immediately available funds by crediting or wiring such proceeds to the deposit account of the Company identified in the most recent Notice of Account Designation substantially in the form of Exhibit 2.07 hereto (a "Notice of Account Designation") delivered by the Company to the Administrative Agent or may be otherwise agreed upon by the Borrower and the Administrative Agent from time to time; provided that ABR Revolving Loans made to finance the reimbursement of an LC Disbursement as provided in Sections 2.06(e) and (f) shall be remitted by the Administrative Agent to the Issuing Bank. (b) Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing (or prior to 12:00 noon, Charlotte, North Carolina time, on such date in the case of an ABR Borrowing) that such Lender will not make available to the Administrative Agent such Lender's share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with Section 2.07(a) and may, in reliance upon such assumption, make available to the Company a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Company severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from the date such amount is made available to the Company to the date of payment to the Administrative Agent, at (i) in the case of such Lender, the Federal Funds Effective Rate or (ii) in the case of the Company, the interest rate applicable to ABR Loans. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender's Loan included in such Borrowing. SECTION 2.08 Interest Elections. (a) Each Revolving Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a Eurodollar Revolving Borrowing, shall have an initial Interest Period as specified in such Borrowing Request. Thereafter, the Company may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurodollar Revolving Borrowing, may elect Interest Periods therefor, all as provided in this Section 2.08. The Company may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing. This Section 2.08 shall not apply to Swingline Borrowings, which may not be converted or continued. (b) To make an election pursuant to this Section 2.08, the Company shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would -36- be required under Section 2.03 if the Company were requesting a Revolving Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request in the form of Exhibit 2.08 (an "Interest Election Request"). (c) Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.02: (i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing); (ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day; (iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; and (iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term "Interest Period". If any such Interest Election Request requests a Eurodollar Borrowing but does not specify an Interest Period, then the Company shall be deemed to have selected an Interest Period of one month's duration. (d) Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender's portion of each resulting Borrowing. (e) If the Company fails to deliver a timely Interest Election Request with respect to a Eurodollar Revolving Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to an ABR Borrowing. Notwithstanding any contrary provision hereof, if and so long as an Event of Default is continuing (i) no outstanding Revolving Borrowing may be converted to or continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar Revolving Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto. SECTION 2.09 Termination and Reduction of Commitments. (a) Unless previously terminated, on May 1, 2000 (as such date may be extended pursuant to Section 2.20, the "Initial Reduction Date") and on each of the other dates (the Initial Reduction Date and each such other date, as such other date may be extended pursuant to Section 2.20, being a "Reduction Date") specified -37- below, the Total Commitment shall reduce by an amount equal to the Total Commitment in effect on the Initial Reduction Date multiplied by the percentage set forth opposite such dates below: Dates Percentage May 1 and August 1, 2000 4.00% November 1, 2000 and February 1, 2001 4.25% May 1 and August 1, 2001 4.50% November 1, 2001 and February 1, 2002 4.75% May 1 and August 1, 2002 5.00% November 1, 2002 and February 1, 2003 5.00% May 1 and August 1, 2003 5.25% November 1, 2003 and February 1, 2004 5.50% May 1 and August 1, 2004 5.75% November 1, 2004 and February 1, 2005 6.00% Notwithstanding the foregoing, unless previously terminated, the Total Commitment shall terminate on the Maturity Date. (b) The Company may at any time terminate, or from time to time reduce, the Total Commitment, in whole or in part; provided that (i) each partial reduction of the Total Commitment shall be in an amount that is an integral multiple of $1,000,000 and not less than $5,000,000 and (ii) the Company shall not terminate or reduce the Commitments if, after giving effect to any concurrent prepayment of the Loans in accordance with Section 2.11, the sum of the Revolving Credit Exposures would exceed the lesser of the Total Commitment and the Availability. Each reduction of the Total Commitment pursuant to this Section 2.09(b) made after the Initial Reduction Date shall reduce the amount that must be reduced on each subsequent Reduction Date in the order in which each such reduction is to occur. (c) The Company shall notify the Administrative Agent of any election to terminate or reduce the Total Commitment under Section 2.09(b) at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Company pursuant to this Section 2.09 shall be irrevocable; provided that a notice of termination of the Total Commitment delivered by the Company may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Company (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not satisfied. Any termination or reduction of the Total Commitment shall be permanent. Each reduction of the Total Commitment shall be made ratably among the Lenders in accordance with their respective Commitments. SECTION 2.10 Repayment of Loans; Evidence of Debt . (a) The Company hereby unconditionally promises to pay (i) to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Revolving Loan on the Maturity Date and (ii) to the Swingline Lender the then unpaid principal amount of each Swingline Loan on demand thereof or by the -38- Swingline Lender. In addition, if after giving effect to the reduction of the Total Commitment on each Reduction Date, the Revolving Credit Exposure exceeds the lesser of the Total Commitment and the Availability, the Company shall pay to the Administrative Agent for the account of each Lender an aggregate principal amount of Revolving Loans sufficient to cause the Revolving Credit Exposure not to exceed the lesser of the Total Commitment and the Availability; provided, however, if the repayment of the outstanding Revolving Loans does not cause the Revolving Credit Exposure to be equal to or less than the lesser of the Total Commitment and the Availability, the Company shall deposit in an account with the Administrative Agent in the name of the Administrative Agent and for the benefit of the Lender, an amount in cash equal to the excess of the Revolving Credit Exposure over the Total Commitment, which cash deposit shall be held by the Administrative Agent for the payment of the obligations of the Loan Parties under this Agreement and the other Loan Documents. The Administrative Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account other than any interest earned on the investment of such deposit, which investments shall be made at the option and sole discretion of the Administrative Agent and at the Company's risk and expense. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall be applied by the Administrative Agent to reimburse the Issuing Bank for LC Disbursements for which it has not been reimbursed and, to the extent not so applied, shall be held for the satisfaction of the reimbursement obligations of the Borrowers for the LC Exposure at such time, or if the maturity of the Loans has been accelerated (but subject to the consent of the Lenders with LC Exposure representing greater than 66_% of the total LC Exposure), be applied to satisfy other obligations of the Loan Parties under this Agreement and the other Loan Documents. At any time when the Revolving Credit Exposure does not exceed the lesser of the Total Commitment and the Availability and so long as no Default or Event of Default shall then exist, upon the request of the Company the amount of such deposit (to the extent not applied as aforesaid) shall be returned to the Company within three Business Days after receipt of such request. (b) On the date that a Change in Control occurs, the Company shall repay the outstanding principal amount of the Loans and all other amounts outstanding hereunder and under the other Loan Documents and shall comply with the provisions of Section 2.06(k); provided, however, if the Change in Control is a result of the death or disability of Richard D. Kinder or William V. Morgan or both, the Company shall make such repayment and comply with the provisions of Section 2.06(k) on the date that is 180 days after such Change in Control occurs, unless such date is not a Business Day in which event such repayment and compliance shall be due on the next Business Day occurring after such date. (c) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Company to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. (d) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Class and Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and -39- payable from the Company to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Lenders and each Lender's share thereof. (e) The entries made in the accounts maintained pursuant to Section 2.10(c) or (d) shall be prima facie evidence of the existence and amounts of the obligations recorded therein; provided that the failure of any Lender or the Administrative Agent to maintain such accounts or any error or conflict therein shall not in any manner affect the obligation of the Company to repay the Loans in accordance with the terms of this Agreement. (f) Any Lender may request that Loans made by it be evidenced by a promissory note. In such event, the Company shall prepare, execute and deliver to such Lender a promissory note payable to the order of such Lender and in the form attached as Exhibit 2.10 (each a "Note"). Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 11.05) be represented by one or more promissory notes in such form payable to the order of the payee named therein. SECTION 2.11 Prepayment of Loans. (a) The Company shall have the right at any time and from time to time to prepay any Borrowing in whole or in part, subject to prior notice in accordance with Section 2.11(b). (b) The Company shall notify the Administrative Agent (and, in the case of prepayment of a Swingline Loan, the Swingline Lender) by telephone (confirmed by telecopy in the form of Exhibit 2.11 (a "Notice of Prepayment")) of any prepayment hereunder (i) in the case of prepayment of a Eurodollar Revolving Borrowing, not later than 11:00 a.m., Charlotte, North Carolina time, three Business Days before the date of prepayment, (ii) in the case of prepayment of an ABR Revolving Borrowing, not later than 11:00 a.m., Charlotte, North Carolina time, one Business Day before the date of prepayment or (iii) in the case of prepayment of a Swingline Loan, not later than 11:00 a.m., Charlotte, North Carolina time, on the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date, Type and the principal amount of each Borrowing or portion thereof to be prepaid; provided that, if a notice of prepayment is given in connection with a conditional notice of termination of the Commitments as contemplated by Section 2.09, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.09. Each partial prepayment shall be in an aggregate amount not less than, and shall be an integral multiple of, the amounts shown below with respect to the applicable Type of Loan or Borrowing: Type of Integral Minimum Loan/Borrowing Multiple of Aggregate Amount Eurodollar Revolving $ 1,000,000 $ 3,000,000 Borrowing ABR Revolving Borrowing 500,000 1,000,000 Borrowing Swingline Loan 100,000 500,000 -4- Promptly following receipt of any such notice relating to a Revolving Borrowing, the Administrative Agent shall advise the Lenders of the contents thereof. If the Company fails to designate the Type of Borrowings to be prepaid, partial prepayments shall be applied first to the outstanding ABR Borrowings until all such outstanding principal of ABR Borrowings are repaid in full, and then to the outstanding principal amount of Eurodollar Borrowings. Each partial prepayment of any Revolving Borrowing shall be in an amount that would be permitted in the case of an advance of a Revolving Borrowing of the same Type as provided in Section 2.02. Each prepayment of a Revolving Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.13. SECTION 2.12 Fees. (a) The Company agrees to pay to the Administrative Agent for the account of each Lender a commitment fee, which shall accrue at the Applicable Margin on the daily amount of the unused Commitment of such Lender during the period from and including the date of this Agreement to but excluding the date on which such Commitment terminates. Accrued commitment fees shall be payable in arrears on the last day of January, April, July and October of each year and on the date on which the Commitments terminate, commencing on the first such date to occur after the date hereof. All commitment fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (b) The Company agrees to pay (i) to the Administrative Agent for the account of each Lender a participation fee with respect to its participations in Letters of Credit, which shall accrue at a rate per annum equal to the Applicable Margin applicable to interest on Eurodollar Revolving Loans on the average daily amount of such Lender's LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Effective Date to but excluding the later of the date on which such Lender's Commitment terminates and the date on which such Lender ceases to have any LC Exposure, and (ii) to the Issuing Bank a fronting fee, which shall accrue at the rate of .125% per annum on the average daily amount of the LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Effective Date to but excluding the later of the date of termination of the Commitments and the date on which there ceases to be any LC Exposure, as well as the Issuing Bank's standard fees with respect to the issuance, amendment, renewal or extension of any Letter of Credit or processing of drawings thereunder. Accrued participation fees shall be payable in arrears on the last day of January, April, July and October of each year, commencing on the first such date to occur after the Effective Date; provided that all such fees shall be payable on the date on which the Commitments terminate and any such fees accruing after the date on which the Commitments terminate shall be payable on demand. Any other fees payable to the Issuing Bank pursuant to this paragraph shall be payable within 10 days after demand. All participation fees and fronting fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (c) The Company agrees to pay to the Administrative Agent, for its own account, fees payable in the amounts and at the times specified in that letter agreement dated January 14, 1998 among the Company, the Subsidiary Guarantors, the Administrative Agent, Goldman Sachs Credit -41- Partners L.P. and First Union Capital Markets Corp.(as from time to time amended, the "Fee Letter"). (d) All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Administrative Agent (or to the Issuing Bank, in the case of fees payable to it) for distribution, in the case of commitment fees and participation fees, to the Lenders. Except as required by law, fees paid shall not be refundable under any circumstances. SECTION 2.13. Interest. (a) The Loans comprising each ABR Borrowing (including each Swingline Loan) shall bear interest at a rate per annum equal to the Alternate Base Rate. (b) The Loans comprising each Eurodollar Borrowing shall bear interest at a rate per annum equal to LIBOR Rate for the Interest Period in effect for such Borrowing plus the Applicable Margin. (c) Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or other amount payable by the Company hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2% plus the rate otherwise applicable to such Loan as provided above or (ii) in the case of any other amount, 2% plus the Alternate Base Rate. (d) Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan; provided that (i) interest accrued pursuant to Section 2.13(c) shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan (other than a prepayment of an ABR Revolving Loan prior to the end of the Availability Period), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment, (iii) in the event of any conversion of any Eurodollar Revolving Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion and (iv) all accrued interest shall be payable upon termination of the Total Commitment. (e) All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate or LIBOR Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. SECTION 2.14. Alternate Rate of Interest. If prior to the commencement of any Interest Period for a Eurodollar Borrowing: -42- (a) the Administrative Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the LIBOR Rate for such Interest Period; or (b) the Administrative Agent is advised by the Required Lenders that the LIBOR Rate for such Interest Period will not adequately and fairly reflect the cost to such Lenders of making or maintaining their Loans included in such Borrowing for such Interest Period; then the Administrative Agent shall give notice thereof to the Company and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies the Company and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Revolving Borrowing to, or continuation of any Revolving Borrowing as, a Eurodollar Borrowing shall be ineffective and (ii) if any Borrowing Request requests a Eurodollar Revolving Borrowing, such Borrowing shall be made as an ABR Borrowing. SECTION 2.15. Increased Costs. (a) If any Change in Law shall: (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender except any such reserve requirement reflected in the LIBOR Rate) or the Issuing Bank; or (ii) impose on any Lender or the Issuing Bank or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by such Lender or any Letter of Credit or participation therein; and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan (or of maintaining its obligation to make any such Loan) or to increase the cost to such Lender or the Issuing Bank of participating in, issuing or maintaining any Letter of Credit or to reduce the amount of any sum received or receivable by such Lender or the Issuing Bank hereunder (whether of principal, interest or otherwise), then the Company will pay to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank, as the case may be, for such additional costs incurred or reduction suffered. (b) If any Lender or the Issuing Bank determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender's or the Issuing Bank's capital or on the capital of such Lender's or the Issuing Bank's holding company, if any, as a consequence of this Agreement or the Loans made by, or participations in Letters of Credit held by, such Lender, or the Letters of Credit issued by the Issuing Bank, to a level below that which such Lender or the Issuing Bank or such Lender's or the Issuing Bank's holding company could have achieved but for such Change in Law (taking into consideration such Lender's or the Issuing Bank's policies and the policies of such Lender's or the Issuing Bank's holding company with respect to capital adequacy), then from time to time the Company will pay -43- to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank or such Lender's or the Issuing Bank's holding company for any such reduction suffered. (c) A certificate of a Lender or the Issuing Bank setting forth the amount or amounts necessary to compensate such Lender or the Issuing Bank or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section 2.15 shall be delivered to the Company and shall be conclusive absent manifest error. The Company shall pay such Lender or the Issuing Bank, as the case may be, the amount shown as due on any such certificate within 10 days after receipt thereof. (d) Failure or delay on the part of any Lender or the Issuing Bank to demand compensation pursuant to this Section 2.15 shall not constitute a waiver of such Lender's or the Issuing Bank's right to demand such compensation; provided that the Company shall not be required to compensate a Lender or the Issuing Bank pursuant to this Section 2.15 for any increased costs or reductions incurred more than six months prior to the date that such Lender or the Issuing Bank, as the case may be, notifies the Company of the Change in Law giving rise to such increased costs or reductions and of such Lender's or the Issuing Bank's intention to claim compensation therefor; provided further that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the six-month period referred to above shall be extended to include the period of retroactive effect thereof. SECTION 2.16. Break Funding Payments. In the event of (a) the payment of any principal of any Eurodollar Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto, (c) the failure to borrow, convert, continue or prepay any Eurodollar Loan, or the failure to convert an ABR Loan to a Eurodollar Loan, on the date specified in any notice delivered pursuant hereto (regardless of whether such notice is permitted to be revocable under Section 2.09 and is revoked in accordance herewith) or (d) the assignment of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto as a result of a request by the Company pursuant to Section 2.19, then, in any such event, the Company shall compensate each Lender for the loss, cost and expense attributable to such event. In the case of a Eurodollar Loan, the loss to any Lender attributable to any such event shall be deemed to include an amount determined by such Lender to be equal to the excess, if any, of (i) the amount of interest that such Lender would pay for a deposit equal to the principal amount of such Loan for the period from the date of such payment, conversion, failure or assignment to the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, convert or continue, the duration of the Interest Period that would have resulted from such borrowing, conversion or continuation) if the interest rate payable on such deposit were equal to the LIBOR Rate for such Interest Period, over (ii) the amount of interest that such Lender would earn on such principal amount for such period if such Lender were to invest such principal amount for such period at the interest rate that would be bid by such Lender (or an affiliate of such Lender) for dollar deposits from other banks in the Eurodollar market at the commencement of such period. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section 2.16 shall be -44- delivered to the Company and shall be conclusive absent manifest error. The Company shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof. SECTION 2.17. Taxes. (a) Any and all payments by or an account of any obligation of either Borrower hereunder shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if either Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.17) the Administrative Agent, Lender or Issuing Bank (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) such Borrower shall make such deductions and (iii) such Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, such Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) The Company shall indemnify the Administrative Agent, each Lender and the Issuing Bank, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section 2.17(c)) paid by the Administrative Agent, such Lender or the Issuing Bank, as the case may be, and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Company by a Lender or the Issuing Bank, or by the Administrative Agent on its own behalf or on behalf of a Lender or the Issuing Bank, shall be conclusive absent manifest error. (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Company to a Governmental Authority, the Company shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent. (e) Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrowers are located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Company (with a copy to the Administrative Agent), at the time or times prescribed by applicable law or reasonably requested by the Company, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate. SECTION 2.18 Payments Generally; Pro Rata Treatment; Sharing of Set-offs. (a) The Company shall make or, in the case of the Existing Letter of Credit, the Subsidiary Borrower shall make, each payment required to be made by such Borrower hereunder (whether of principal, -45- interest, fees or reimbursement of LC Disbursements, or under Section 2.15, 2.16 or 2.17, or otherwise) prior to 12:00 noon, Charlotte, North Carolina time, on the date when due, in immediately available funds, without set-off or counterclaim. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent at its Principal Office, except payments to be made directly to the Issuing Bank or Swingline Lender as expressly provided herein and except that payments pursuant to Sections 2.15, 2.16, 2.17 and 11.03 shall be made directly to the Persons entitled thereto. The Administrative Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments hereunder shall be made in dollars. (b) If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, unreimbursed LC Disbursements, interest and fees then due hereunder, such funds shall be applied (i) first, to pay interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, to pay principal and unreimbursed LC Disbursements then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal and unreimbursed LC Disbursements then due to such parties. (c) If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Revolving Loans or participations in LC Disbursements or Swingline Loans resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Revolving Loans and participations in LC Disbursements and Swingline Loans and accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Revolving Loans and participations in LC Disbursements and Swingline Loans of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Revolving Loans and participations in LC Disbursements and Swingline Loans; provided that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by any Loan Party pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or participations in LC Disbursements to any assignee or participant, other than to a Loan Party or any subsidiary or Affiliate thereof (as to which the provisions of this paragraph shall apply). Each Loan Party consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against such Loan Party rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Company in the amount of such participation. -46- (d) Unless the Administrative Agent shall have received notice from the Company prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders or the Issuing Bank hereunder that the Company will not make (or in the case of the Existing Letter of Credit, the Subsidiary Borrower will not make) such payment, the Administrative Agent may assume that the applicable Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders or the Issuing Bank, as the case may be, the amount due. In such event, if the applicable Borrower has not in fact made such payment, then each of the Lenders or the Issuing Bank, as the case may be, severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender or Issuing Bank with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the Federal Funds Effective Rate. (e) If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.04(c), 2.06(e), 2.07(b) or 2.18(d), then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for the account of such Lender to satisfy such Lender's obligations under such Sections until all such unsatisfied obligations are fully paid. SECTION 2.19 Mitigation Obligations; Replacement of Lenders. (a) If any Lender requests compensation under Section 2.15, or if either Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.17, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.15 or 2.17, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Company hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment. (b) If any Lender requests compensation under Section 2.15, or if either Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.17, or if any Lender defaults in its obligation to fund Loans hereunder, then the Company may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 11.05), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (i) the Company shall have received the prior written consent of the Administrative Agent (and, if a Commitment is being assigned, the Issuing Bank and Swingline Lender), which consent shall not unreasonably be withheld, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans and participations in LC Disbursements and Swingline Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Company (in the case of all other -47- amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.15 or payments required to be made pursuant to Section 2.17, such assignment will result in a reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Company to require such assignment and delegation cease to apply. SECTION 2.20 Extensions of Maturity Date and Reduction Dates; Removal of Lenders. (a) The Company may, by written notice to the Administrative Agent (a "Notice of Extension") given not less than 60 nor more than 90 days prior to each Anniversary Date, advise the Lenders that it requests an extension of the then effective Maturity Date (the "Existing Maturity Date") and each then effective Reduction Date (an "Existing Reduction Date") by 12 calendar months, effective on the relevant Anniversary Date (the "Relevant Anniversary Date"). The Administrative Agent will promptly, and in any event within five Business Days of the receipt of such Notice of Extension, notify the Lenders of the contents of each such Notice of Extension. (b) Each Notice of Extension shall (i) be irrevocable and (ii) constitute a representation by the Loan Parties that (A) neither any Event of Default nor any Default has occurred and is continuing and (B) the representations and warranties contained in Article IV are correct on and as of the Relevant Anniversary Date, as though made on and as of such date. (c) In the event a Notice of Extension is given to the Administrative Agent as provided in Section 2.20(a) and the Administrative Agent notifies a Lender of the contents thereof, such Lender shall on or before the 30th day next preceding the then Relevant Anniversary Date advise the Administrative Agent in writing whether or not such Lender consents to the extension requested thereby and if any Lender fails so to advise the Administrative Agent, such Lender shall be deemed to have not consented to such extension. If Lenders holding 80% or more of the Total Commitment so consent (the "Consenting Lenders") to such extension and any and all Lenders who have not consented (the "Non-Consenting Lenders") are replaced, the Maturity Date and each Reduction Date for the Notes held by, and the Commitments of, the Consenting Lenders and the Nominees (as defined below) shall be automatically extended 12 calendar months past the Existing Maturity Date and each corresponding Existing Reduction Date, effective on the Relevant Anniversary Date. The Administrative Agent shall promptly notify the Borrowers and all of the Lenders of each written notice of consent given pursuant to this Section 2.20(c). (d) In the event the Consenting Lenders hold less than 100% of the Total Commitment, the Consenting Lenders, or any of them, shall have the right (but not the obligation) to assume all or any portion of the Non-Consenting Lenders' Commitments by giving written notice to the Company and the Administrative Agent of their election to do so on or before the 20th day next preceding the Relevant Anniversary Date, which notice shall be irrevocable and shall constitute an undertaking to (i) assume, as of the close of business on the Relevant Anniversary Date, all or such portion of the Commitments of the Non-Consenting Lenders, as the case may be, as may be specified in such written notice, and (ii) purchase (without recourse) from the Non-Consenting Lenders, at the close of business on the Relevant Anniversary Date, the Revolving Credit Exposure outstanding on the Relevant Anniversary Date that corresponds to the portion of the Commitments to be so assumed at a price equal to the sum of (x) the unpaid principal amount of all Loans so -48- purchased, plus (y) the aggregate amount, if any, previously funded by the transferor or any participations so purchased, plus (z) all accrued and unpaid interest thereon. Such Commitments and Revolving Credit Exposure, or portion thereof, to be assumed and purchased by Consenting Lenders shall be allocated among those Consenting Lenders who have so elected to assume the same pro rata in accordance with the respective Commitments of such Consenting Lenders as of the Relevant Anniversary Date (provided, however, in no event shall a Consenting Lender be required to assume and purchase an amount or portion of the Commitments and Revolving Credit Exposure of the Non-Consenting Lenders in excess of the amount which such Consenting Lender agreed to assume and purchase pursuant to the immediately preceding sentence) or on such other basis as such Consenting Lender shall agree. The Administrative Agent shall promptly notify the Company and the other Consenting Lenders in the event it receives any notice from a Consenting Lender pursuant to this Section 2.20(d). (e) In the event that the Consenting Lenders shall not elect as provided in Section 2.20(d) to assume and purchase all of the Non-Consenting Lenders' Commitments and Revolving Credit Exposure, the Company may designate, by written notice to the Administrative Agent and the Consenting Lenders given on or before the tenth day next preceding the Relevant Anniversary Date, one or more Eligible Assignees not a party to this Agreement (individually, a "Nominee" and collectively, the "Nominees") to assume all or any portion of the Non-Consenting Lenders' Commitments not to be assumed by the Consenting Lenders and to purchase (without recourse) from the Non-Consenting Lenders all Revolving Credit Exposure outstanding at the close of business on the Relevant Anniversary Date that corresponds to the portion of the Commitments so to be assumed at the price specified in Section 2.20(d). Each assumption and purchase under this Section 2.20(e) shall be effective as of the close of business on the Relevant Anniversary Date when each of the following conditions has been satisfied in a manner satisfactory to the Administrative Agent: (i) each Nominee and the Non-Consenting Lenders have executed an Assignment and Acceptance pursuant to which such Nominee shall (A) assume in writing its share of the obligations of the Non-Consenting Lenders hereunder, including its share of the Commitments of the Non-Consenting Lenders and (B) agree to be bound as a Lender by the terms of this Agreement; and (ii) each Nominee shall have completed and delivered to the Administrative Agent an Administrative Questionnaire. (f) In the event that the Consenting Lenders shall not elect as provided in Section 2.20(d) to assume all of the Non-Consenting Lenders' Commitments and the Company shall not have effectively designated one or more Nominees to assume the Commitments of and purchase the Revolving Credit Exposure of the Non-Consenting Lenders as contemplated by Section 2.20(e), there shall be no extension of the Existing Maturity Date nor any Existing Reduction Date. -49- ARTICLE III. Conditions Precedent SECTION 3.01 Conditions Precedent to the Initial Credit Event. The obligation of each Lender to make its initial Loan or the Issuing Bank to issue the initial Letter of Credit is subject to the following conditions: (a) The Administrative Agent shall have received the following, each dated the initial Borrowing Date, except for the Loan Documents described in clauses (i) through (v) below which shall be dated the Execution Date: (i) this Agreement executed by each party hereto; (ii) if requested by any Lender, a Note executed by the Company and payable to the order of such Lender; (iii) the Company Security Agreement executed by the Company; (iv) the Subsidiary Guarantors Security Agreements executed by the respective Subsidiary Guarantors party thereto; (v) the Intercompany Notes executed by the respective Subsidiary Guarantors makers thereof; (vi) a certificate of an officer and of the secretary or an assistant secretary of each Loan Party or its general partner or managing member, as applicable, certifying, inter alia, (A) true and complete copies of each of the certificate or articles of incorporation, partnership agreement or articles of organization, as the case may be, as amended and in effect, of such Loan Party and of its general partner or managing member, if any, the bylaws, as amended and in effect, of such Loan Party and the resolutions adopted by the Board of Directors of such Loan Party or its general partner or managing member (1) authorizing the execution, delivery and performance by such Loan Party of this Agreement and the other Loan Documents to which it is or will be a party and, in the case of the Company, the Borrowings to be made and the Letters of Credit (other than the Existing Letter of Credit) to be issued hereunder, (2) approving the forms of the Loan Documents to which it is a party and which will be delivered at or prior to the initial Borrowing Date and (3) authorizing officers of such Loan Party or its general partner or managing member to execute and deliver the Loan Documents to which such Loan Party is or will be a party and any related documents, including any agreement contemplated by this Agreement, (B) the incumbency and specimen signatures of the officers of such Loan Party or its general partner or managing member executing any documents on its behalf, (C) (1) that the representations and warranties made by such Loan Party in each Loan Document to which such Loan Party is a party and which will be delivered at or prior to the initial Borrowing Date are true and correct in all material respects, (2) the absence of any proceedings for the dissolution or liquidation of such Person and (3) the absence of the occurrence and continuance of any Default or -50- Event of Default and (D) in the case of the Company, that the OLP "A" Refinancing has occurred and, in the case of the Company and the Subsidiary Borrower, that the OLP "B" Refinancing has occurred; (vii) satisfactory evidence that the OLP "A" Loan Agreement and the Subsidiary Borrower Credit Agreement have been terminated and that the OLP "A" First Mortgage Notes have been prepaid in full; (viii) letters from CT Corporation System, Inc. in form and substance satisfactory to the Administrative Agent evidencing the obligation of CT Corporation System, Inc. to accept service of process in the State of New York on behalf of each Loan Party that is not authorized to do business as a foreign corporation in the State of New York; (ix) a favorable, signed opinion addressed to the Administrative Agent and the Lenders from Morrison & Hecker L.L.P., counsel to the Loan Parties, given upon the express instruction of the Loan Parties; and (x) certificates of appropriate public officials as to the existence, good standing and qualification to do business as a foreign corporation, partnership or limited liability company, as applicable, of each Loan Party in each jurisdiction in which the ownership of its properties or the conduct of its business requires such qualification and where the failure so to qualify would, individually or collectively, have a Material Adverse Effect. (b) The Administrative Agent shall have received, in form and substance satisfactory to the Administrative Agent: (i) searches of Uniform Commercial Code filings in the jurisdiction in which each Loan party to a Security Document has its place of business (or if such Loan Party has more than one place of business, the jurisdiction of its chief executive office); and (ii) duly executed Uniform Commercial Code financing statements for each appropriate jurisdiction as is necessary to perfect the Lien of Administrative Agent in the Collateral. (c) The Administrative Agent shall have received (a) all of the certificates evidencing outstanding shares of stock of KMNGL described on Schedule I to the Subsidiary Guarantors Security Agreement executed by OLP "A" together with related stock powers executed in blank by OLP "A", (b) the Intercompany Notes, endorsed in blank by the Company, and (c) if certificated, all of the member interests of KMCO2 described in Schedule I to the Subsidiary Guarantors Security Agreement, executed by OLP "A" together with related stock powers executed in blank by OLP "A". (d) All Collateral in which the Administrative Agent shall, at such time, be entitled to have a Lien pursuant to the Security Documents shall have been physically delivered to the Administrative Agent to the extent possession by the Administrative Agent is necessary to perfect a Lien in such Collateral. -51- (e) The Administrative Agent shall have received a Notice of Account Designation. (f) The Administrative Agent shall be reasonably satisfied that all required consents and approvals of any applicable Governmental Authority and any other Person in connection with the transactions contemplated by this Section 3.01 shall have been obtained and remain in effect (except where the failure to obtain such approvals would not have a Material Adverse Effect), and all applicable waiting periods shall have expired (or been waived) without any action being taken by any Governmental Authority. (g) All agreements relating to, and the organizational structure of, the Loan Parties, and all organic documents of the Loan Parties, shall be reasonably satisfactory to the Administrative Agent and the Syndication Agent. (h) The Company shall have paid to First Union Capital Markets Corp., Goldman Sachs Credit Partners L.P. and First Union National Bank all fees and expenses pursuant to the Fee Letter agreed upon by such parties to be paid on or prior to the Execution Date. (i) The Company shall have paid to Andrews & Kurth L.L.P. pursuant to Section 11.03 all fees and disbursements invoiced to the Company on or prior to the Execution Date. SECTION 3.02 Conditions Precedent to All Credit Events. Except with respect to Revolving Credit Loans made by the Lenders pursuant to Section 2.06(f), the obligation of the Lenders to make any Loan or to issue or extend any Letter of Credit (including any Loan made or Letter of Credit issued on the initial Borrowing Date) is subject to the further conditions precedent that on the date of such Credit Event: (a) The conditions precedent set forth in Section 3.01 shall have theretofore been satisfied; (b) The representations and warranties set forth in Article IV and in the other Loan Documents shall be true and correct in all material respects as of, and as if such representations and warranties were made on, the date of the proposed Loan or Letter of Credit, as the case may be (unless such representation and warranty expressly relates to an earlier date), and the Loan Parties shall be deemed to have certified to the Administrative Agent and the Lenders that such representations and warranties are true and correct in all material respects by the Company's delivery of a Borrowing Request; (c) The Company shall have complied with the provisions of Section 2.03 or Section 2.04, as the case may be; (d) No Default or Event of Default shall have occurred and be continu- ing or would result from such Credit Event; and (e) The Administrative Agent and the Lenders shall have received such other approvals, opinions or documents as the Agent or the Required Lenders may reasonably request. -52- The acceptance of the benefits of each Credit Event shall constitute a representation and warranty by the Loan Parties to each of the Lenders that all of the conditions specified in this Section 3.02 above exist as of that time. SECTION 3.03 Conditions Precedent to the Initial Credit Event Made on or After any Increase in Availability. The obligation of the Lenders to make the initial Loan or the Issuing Bank to issue the initial Letter of Credit upon or after any increase in Availability is subject to the further conditions that the Administrative Agent shall have received a certificate of a Responsible Officer of the Company certifying (a) the amount of such increase in Availability and a description of the event resulting in such increase and (b) that the representations and warranties contained in Article IV (unless any such representation and warranty expressly relates to an earlier date) are true and correct in all material respects as of, and as if such representations and warranties were made on, the date of such initial Loan or such initial Letter of Credit, as the case may be, after giving effect on a pro forma basis to the event resulting in such increase and the use on such date of the proceeds of such Loan or of such Letter of Credit. SECTION 3.04 Conditions Precedent to Conversions. The obligation of the Lenders to convert or continue any existing Borrowing as or into a Eurodollar Borrowing is subject to the condition precedent that on the date of such conversion or continuation no Default or Event of Default shall have occurred and be continuing or would result from the making of such conversion. The acceptance of the benefits of each such conversion or continuation shall constitute a representation and warranty by the Loan Parties to each of the Lenders that no Default or Event of Default shall have occurred and be continuing or would result from the making of such conversion or continuation. SECTION 3.05 Delivery of Documents. All of the Loan Documents, certi- ficates, legal opinions and other documents and papers referred to in this Article III, unless otherwise specified, shall be delivered to the Administra- tive Agent for the account of each of the Lenders and, except for any Notes, in sufficient counterparts or copies for each of the Lenders and shall be satis- factory in form and substance to the Lenders. ARTICLE IV. Representations and Warranties In order to induce the Lenders to enter into this Agreement and to make the Loans provided for herein and to induce the Issuing Bank to issue Letters of Credit and the other Lenders to participate therein and in the Existing Letter of Credit, each Loan Party makes for itself, and the Company makes for itself and the other Loan Parties, on or as of the Effective Date and the occurrence of each Credit Event, the following representations and warranties to the Administrative Agent and the Lenders: SECTION 4.01. Organization an Qualification. The Company and each of the Restricted Subsidiaries (a) is a corporation, partnership or limited liability company duly organized or formed, validly existing and in good standing under the laws of the state of its incorporation, organization or formation, (b) has all requisite corporate, partnership, limited liability company or -53- other power to own its property and to carry on its business as now conducted and (c) is duly qualified to do business and is in good standing in every jurisdiction in which the failure to be so qualified would, individually or together with all such other failures of the Company and the Restricted Subsidiaries, have a Material Adverse Effect. As of the Execution Date, the Persons and other entities named in Schedule 4.01 are all of the Subsidiaries of the Company, and such Schedule 4.01 (x) accurately reflects (i) the direct owner of the Capital Stock of each such Subsidiary and (ii) the percentage of the issued and outstanding Capital Stock of each such Subsidiary owned by any Loan Party, (y) accurately identifies such Subsidiaries and (z) accurately sets forth the jurisdictions of their respective incorporation, organization or formation, as the case may be, and jurisdictions in which they are qualified as foreign corporations, foreign partnerships, foreign limited liability companies or other foreign entities to do business. SECTION 4.02 Authorization, Validity, Etc. Each Loan Party has all requisite corporate, partnership, limited liability company or other power and authority to execute, deliver and perform its obligations hereunder and under the other Loan Documents to which it is a party and, in the case of the Company, to make the Borrowings and in the case of each Borrower to obtain the issuance of Letters of Credit hereunder, and all such action has been duly authorized by all necessary corporate, partnership, limited liability company or other proceedings on its part. This Agreement and the Security Documents have been duly and validly executed and delivered by or on behalf of each Loan Party thereto and constitute valid and legally binding agreements of such Loan Party enforceable against such Loan Party in accordance with the respective terms thereof, and the Loan Documents to which such Loan Party is a party, when duly executed and delivered by such Loan Party, will constitute valid and legally binding obligations of such Loan Party enforceable in accordance with the respective terms thereof and of this Agreement, except, in each case, (a) as may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer, fraudulent conveyance or other similar laws relating to or affecting the enforcement of creditors' rights generally, and by general principles of equity (including principles of good faith, reasonableness, materiality and fair dealing) which may, among other things, limit the right to obtain equitable remedies (regardless of whether considered in a proceeding in equity or at law) and (b) as to the enforceability of provisions for indemnification for violation of applicable securities laws, limitations thereon arising as a matter of law or public policy and (c) as enforceability of certain remedial and procedural provisions of the Security Documents may be limited by laws and court decisions, but such laws and court decisions will not render the remedies and procedures afforded to the Administrative Agent and the Lenders by the Security Documents inadequate for the practical realization of the benefits purported to be afforded by the Security Documents (except for the economic consequences of any delay). SECTION 4.03. Governmental Consents, Etc. No authorization, consent, approval, license or exemption of or registration, declaration or filing with any Governmental Authority, is necessary for the valid execution, delivery or performance by any Loan Party of any Loan Document to which it is a party, except those that have been obtained and such matters relating to performance as would ordinarily be done in the ordinary course of business after the Execution Date. SECTION 4.04 Conflicting or Adverse Agreement. Neither the Company nor any of the Restricted Subsidiaries is a party to any contract or agreement or subject to -54- any restriction that would reasonably be expected to have a Material Adverse Effect. Neither the execution, delivery and performance by any Loan Party of the Loan Documents to which it is a party, nor compliance with the terms and provisions thereof, nor the extensions of credit contemplated by the Loan Documents, (a) will breach or violate any applicable Requirement of Law, (b) will result in any breach or violation of, any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of its property or assets (other than Liens created by the Loan Documents) pursuant to the terms of any indenture, mortgage, deed of trust, agreement or other instrument to which it or any of its Subsidiaries is party or by which any property or asset of it or any of its Subsidiaries is bound or to which it is subject, except for breaches, violations and defaults under clauses (a) and (b) that neither individually nor in the aggregate for all Loan Parties could reasonably be expected to result in a Material Adverse Effect or (c) will violate any provision of the organic documents of any Loan Party. SECTION 4.05. Properties. (a) Each of the Company and the Subsidiaries has good title to, or valid leasehold or other interests in, all its real and personal property material to its business, except for minor defects in title that do not materially interfere with its ability to conduct its business as currently conducted or to utilize such properties for their intended purposes. (b) Each of the Company and the Restricted Subsidiaries owns, or is licensed to use, all trademarks, trade names, copyrights, patents and other intellectual property material to its business, and the use thereof by the Company and the Restricted Subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, neither individually nor in the aggregate for the Company and such Subsidiaries, could reasonably be expected to result in a Material Adverse Effect. SECTION 4.06 Litigation and Environmental Matters . (a) There are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries (i) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate for the Company and such Subsidiaries, to result in a Material Adverse Effect (other than the Disclosed Matters) or (ii) that involve this Agreement or the Transactions. (b) Except for the Disclosed Matters and except with respect to any other matters that, individually or in the aggregate for the Company and the Subsidiaries, could not reasonably be expected to result in a Material Adverse Effect, neither the Company nor any of the Subsidiaries (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability. (c) Since the Execution Date, there has been no change in the status of the Disclosed Matters that, individually or in the aggregate, has resulted in, or materially increased the likelihood of, a Material Adverse Effect. -55- SECTION 4.07 Financial Statements. (a) The audited consolidated and consolidating balance sheets of the Company and its consolidated Subsidiaries as at December 31, 1996 and the related consolidated and consolidating statements of income, partners', shareholders' or members' equity and cash flow of the Company and its consolidated Subsidiaries for the fiscal year ended on said date, with the opinion thereon of Arthur Andersen L.L.P. heretofore furnished to the Lenders and the unaudited consolidated and consolidating balance sheets of the Company and its consolidated Subsidiaries as at September 30, 1997 and their related consolidated and consolidating statements of income, partners', shareholders' or members' equity and cash flow of the Company and its consolidated Subsidiaries for the nine-month period ended on such date heretofore furnished to the Lenders, are complete and correct and fairly present the consolidated financial condition of the Company and its consolidated Subsidiaries as at said dates and the results of their operations for the fiscal year and the nine-month period ended on said dates, all in accordance with GAAP, as applied on a consistent basis (subject, in the case of the interim financial statements, to the absence of footnotes and to normal year-end and audit adjustments). (b) Since December 31, 1996, there has been no material adverse change in the business, assets, operations or condition, financial or otherwise, of the Company and the Restricted Subsidiaries, taken as a whole. SECTION 4.08 Disclosure. The Company has disclosed to the Lenders all agreements, instruments and corporate or other restrictions to which it or any of the Restricted Subsidiaries is subject, and all other matters known to it, that, individually or in the aggregate for the Company and such Subsidiaries, could reasonably be expected to result in a Material Adverse Effect. None of the reports, financial statements, certificates or other information furnished by or on behalf of the Company to the Administrative Agent or any Lender in connection with the syndication or negotiation of this Agreement or delivered hereunder (as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that (i) with respect to projected financial information, the Company represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time and (ii) with respect to information respecting the Santa Fe Acquisition and the Shell JV Investment, such information was provided to the Company by SFMLP and Shell respectively and therefore the Company only represents that to its knowledge such information is correct and complete. SECTION 4.09 Investment Company Act. Neither the Company nor any of its Subsidiaries is, or is regulated as, an "investment company," as such term is defined in the Investment Company Act of 1940, as amended. SECTION 4.10 Public Utility Holding Company Act . Neither the Company nor any of its Subsidiaries is a non-exempt "holding company,"or subject to regulation as such, or an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company,"within the meaning of the Public Utility Holding Company Act of 1935, as amended. -56- SECTION 4.11 ERISA. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect. The present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $5,000,000 the fair market value of the assets of such Plan, and the present value of all accumulated benefit obligations of all underfunded Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $5,000,000 the fair market value of the assets of all such underfunded Plans. Section 4.12 Tax Returns and Payments. (a) The Company and its Subsidiaries have caused to be filed all federal income tax returns and other material tax returns, statements and reports (or obtained extensions with respect thereto) which are required to be filed and have paid or deposited or made adequate provision in accordance with GAAP for the payment of all taxes (including estimated taxes shown on such returns, statements and reports) which are shown to be due pursuant to such returns, except where the failure to pay such taxes (individually or in the aggregate for the Company and the Restricted Subsidiaries) would not have a Material Adverse Effect. No material income tax liability of the Company or the Restricted Subsidiaries has been asserted by the Internal Revenue Service of the United States or any other Governmental Authority for any taxes in excess of those already paid, except for taxes which are being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP have been created on the books of the Company and the Restricted Subsidiaries. (b) The federal income tax liabilities, if any, of the Company and its Subsidiaries (and of all Persons who are partners of the Company) have been finally determined by the Internal Revenue Service and satisfied for all taxable years through the fiscal year ending in 1994. SECTION 4.13 Compliance with Laws and Agreement. Each of the Company and the Restricted Subsidiaries is in compliance with all laws, regulations and orders of any Governmental Authority applicable to it or its property and all indentures, agreements and other instruments binding upon it or its property, except where the failure to do so, individually or in the aggregate for the Company and the Restricted Subsidiaries, could not reasonably be expected to result in a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. SECTION 4.14 Purpose of Loans. (a) All proceeds of the Loans will be used for the purposes set forth in Section 5.08. All Letters of Credit (other than the Existing Letter of Credit) will be issued in connection with the working capital requirements of the Company or a Restricted Subsidiary. (b) None of the proceeds of the loans under any portion of the OLP "A" Refinancing or the OLP "B" Refinancing or this Agreement were or will be used directly or indirectly for the purpose of buying or carrying any "margin stock" within the meaning of Regulation U (herein called "margin stock") or for the purpose of reducing or retiring any indebtedness -57- (including the indebtedness repaid with the proceeds of the loans made under the agreements constituting the OLP "A" Refinancing or the OLP "B" Refinancing) which was originally incurred to buy or carry a margin stock, or for any other purpose which might constitute this transaction a "purpose" credit within the meaning of Regulation G, T, U or X. Neither any Loan Party nor any agent acting on its behalf has taken or will take any action which might cause this Agreement or any other Loan Document to violate Regulation G, Regulation T, Regulation U, Regulation X, or any other regulation of the Board or to violate the Securities Exchange Act of 1934. Margin stock does not constitute more than 25% of the assets of the Company or any Loan Party and the Company does not intend or foresee that it will ever do so. SECTION 4.15 No Intent to Hinder, Delay or Defraud . Each Subsidiary Guarantor has entered into this Agreement, including the Subsidiary Guarantors Guaranty and the other Loan Documents, with no intent to hinder, delay or defraud any Person to whom such Subsidiary Guarantor was or becomes, on or after the Execution Date, indebted, within the meaning of Section 548 of the Bankruptcy Code or any similar provision of state law. ARTICLE V. Affirmative Covenants Until the Commitments have expired or been terminated and the principal of and interest on each Loan and all fees payable hereunder shall have been paid in full and all Letters of Credit shall have expired or terminated and all LC Disbursements shall have been reimbursed, the Company covenants and agrees with the Lenders that: SECTION 5.01 Financial Statements and Other Informati. The Company will furnish to the Administrative Agent, in each case with sufficient copies for each Lender: (a) As soon as available and in any event within 120 days after the end of each fiscal year of the Company: (i) the audited consolidated statements of income, partners' equity, changes in financial position and cash flow of the Company for such fiscal year, and the related consolidated balance sheet of the Company as at the end of such fiscal year, setting forth in each case in comparative form the figures for (or in the case of the balance sheet, as of the end of) the previous fiscal year, accompanied by the related opinion of independent public accountants of recognized national standing acceptable to the Administrative Agent, which opinion shall (x) state that said financial statements of the Company fairly present the consolidated financial condition and results of operations of the Company as at the end of, and for, such fiscal year and that such financial statements have been prepared in accordance with GAAP except for such changes in such principles with which the independent public accountants shall have concurred, and (y) not contain a "going concern" or other adverse qualification or exception unacceptable to the Required Lenders; and (ii) a certificate of such accountants stating that, in making the examination necessary for their opinion, they obtained no knowledge, except as specifically stated, of any Event of Default or Default, and stating whether any change in GAAP or in the application thereof has occurred since the date of the audited financial statements referred to in Section 4.07(b) and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate. -58- (b) (i)As soon as available and in any event within 60 days after the end of each of the first three fiscal quarterly periods of each fiscal year of the Company, unaudited consolidated statements of income, partners' equity, changes in financial position and cash flow of the Company for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related unaudited consolidated balance sheet as at the end of such period, setting forth in each case in comparative form the figures for (or in the case of balance sheets, as of the end of) the corresponding periods in the previous fiscal year, accompanied by the certificate of a Responsible Officer of the Company, which certificate shall state that said financial statements fairly present the consolidated financial condition and results of operations of the Company in accordance with GAAP, as at the end of, and for, such period (subject to the absence of footnotes and changes resulting from normal year-end audit adjustments). (ii) As soon as available and in any event within 60 days after the end of each of the first three fiscal quarterly periods of each fiscal year, and within 120 days after the end of each fiscal year of OLP "A", the Subsidiary Borrower, OLP "C", OLP "D" and each other Restricted Subsidiary the Capital Stock of which is owned directly by the Company, unaudited consolidated statements of income, partners', shareholders' or members' equity, as the case may be, changes in financial position and cash flow of such Person and its Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related unaudited consolidated balance sheet as at the end of such period, setting forth in each case in comparative form the figures for (or in the case of balance sheets, as of the end of) the corresponding periods in the previous fiscal year, accompanied by the certificate of a Responsible Officer of such Person, which certificate shall state that said financial statements fairly present the consolidated and consolidating financial condition and results of operations of such Person in accordance with GAAP, as at the end of, and for, such period (subject to the absence of footnotes and changes resulting from normal year-end audit adjustments). (c) Promptly upon receipt thereof, and in the form received, all audited and unaudited financial statements (whether quarterly or annual) received by any Loan Party from any Person (other than an individual) whose income is accounted for through any of the Persons referenced in Section 5.01(b)(ii) and whose EBITDA or distributions, as the case may be, exceed 15% of the Company Cash Flow. (d) Prompt written notice of the following: (i) the occurrence of any Default or Event of Default or Change of Control Event; (ii) the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, could reasonably be expected to result in liability of the Company and the Restricted Subsidiaries in an aggregate amount exceeding $5,000,000; and (iii) any other development that results in, or could reasonably be expected to result in, a Material Adverse Effect. -59- Each notice delivered under this Section 5.01 shall be accompanied by a statement of a Responsible Officer setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto. (e) Promptly upon receipt thereof, a copy of each other report or letter submitted to the Company by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company, and a copy of any response by the Company, or the Board of Directors of the general partner of the Company, to such letter or report. (f) Promptly upon its becoming available, each financial statement, report, notice or proxy statement sent by the Company to stockholders generally and each regular or periodic report and any registration statement or prospectus filed by the Company with any securities exchange or the Securities and Exchange Commission or any successor agency. (g) Promptly after the furnishing thereof, copies of any statement, report or notice furnished to any Person pursuant to the terms of any indenture, loan or credit or other similar agreement, other than this Agreement and not otherwise required to be furnished to the Administrative Agent pursuant to any other provision of this Section 5.01. (h) From time to time such other information regarding the business, affairs or financial condition of the Company or any Restricted Subsidiary (including any Plan or Multiemployer Plan and any reports or other information required to be filed under ERISA) as the Required Lenders or the Administrative Agent may reasonably request. The Company will furnish to the Administrative Agent, at the time it furnishes each set of financial statements pursuant to paragraph (a) or (b) above, a certificate substantially in the form of Exhibit 5.01 executed by a Responsible Officer of the Company (i) certifying as to the matters set forth therein and stating that no Event of Default or Default has occurred and is continuing (or, if any Event of Default or Default has occurred and is continuing, describing the same in reasonable detail), (ii) setting forth in reasonable detail the computations necessary to determine whether the Company is in compliance with Sections 6.09(a), (b) and (c) and the computations necessary to determine the ratio referred to in the definition of "Applicable Margin" as of the end of the respective fiscal quarter or fiscal year, and (iii) a statement, with respect to each Intercompany Note, of (A) the actual outstanding principal amount thereof, and the amount of any accrued and unpaid interest thereon, as at the end of the respective quarter or fiscal year, as the case may be, and (B) the highest and lowest principal amount thereof at any time outstanding during such quarter or fiscal year and the periods during such quarter or fiscal year during which the principal of such Intercompany Note was outstanding in each such amount. SECTION 5.02. Litigation. The Company shall promptly give to the Administrative Agent notice of all legal or arbitral proceedings, and of all proceedings before any Governmental Authority affecting the Company or any Restricted Subsidiary, except proceedings which, if adversely determined, would not have a Material Adverse Effect. The Company will, and will cause each of the Restricted Subsidiaries to, promptly notify the Administrative Agent of any claim, judgment, Lien or other encumbrance affecting any property or assets of the Company or any such -60- Subsidiary if the value of the claim, judgment, Lien, or other encumbrance affecting such property or assets shall exceed $5,000,000. SECTION 5.03. Existence, Conduct of Business. The Company will, and will cause each of the Restricted Subsidiaries to, do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and the rights, licenses, permits, privileges and franchises material to the conduct of its business; provided that the foregoing shall not prohibit any merger, consolidation, liquidation or dissolution permitted under Section 6.03. SECTION 5.04. Payment of Obligations. The Company will, and will cause each of the Subsidiaries to, pay its obligations, including tax liabilities, that, if not paid, could result in a Material Adverse Effect before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, (b) the Company or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP and (c) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect. SECTION 5.05 Maintenance of Properties; Insurance. The Company will, and will cause each of the Restricted Subsidiaries to, (a) keep and maintain all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted, and (b) maintain, with financially sound and reputable insurance companies, insurance in such amounts and against such risks as are customarily maintained by companies engaged in the same or similar businesses operating in the same or similar locations. SECTION 5.06 Books and Records; Inspection Rights . The Company will, and will cause each of the Restricted Subsidiaries to, keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities. The Company will, and will cause each of the Restricted Subsidiaries to, permit any representatives designated by the Administrative Agent or any Lender, upon reasonable prior notice, to visit and inspect its properties, to examine and make extracts from its books and records, and to discuss its affairs, finances and condition with its officers and independent accountants, all at such reasonable times and as often as reasonably requested. SECTION 5.07. Compliance with Laws. The Company will, and will cause each of the Subsidiaries to, comply with all Requirements of Law applicable to it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. SECTION 5.08 Use of Proceeds and Letters of Credit . The proceeds of the Loans will be used only (i) to the extent of not more than $185,000,000, to effect the OLP "A" Refinancing and (to the extent of not more than $24,128,548 of said $185,000,000) the OLP "B" Refinancing, (ii) to the extent of not more than $115,000,000, to effect the Santa Fe Acquisition, (iii) to the extent of not more than $25,000,000, to effect the Shell JV Investment and (iv) for working capital and other partnership purposes. No part of the proceeds of any Loan will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board, including -61- Regulations G, T, U and X. The Existing Letter of Credit will be deemed to be issued under this Agreement, to the extent of $24,128,548, in connection with the OLP "B" Refinancing, and Letters of Credit (including the Existing Letter of Credit) to be issued under this Agreement shall as provided in Section 2.06(c) be subject to an overall limit of $75,000,000. SECTION 5.09. Further Assurances. (a) The Company will cure promptly, or cause another Loan Party to cure promptly, any defects in the creation and issuance of any Notes and the execution and delivery of the Security Documents and this Agreement. The Company at its expense will promptly execute and deliver, or cause the appropriate other Loan Party to execute and deliver, to the Administrative Agent upon request all such other documents, agreements and instruments to comply with or accomplish the covenants and agreements of the Loan Parties in the Security Documents and this Agreement, or to further evidence and more fully describe the Collateral intended as security for the Obligations, or to correct any omissions in the Security Documents, or to state more fully the security obligations set out herein or in any of the Security Documents, or to perfect, protect or preserve any Liens created pursuant to any of the Security Documents, or to make any recordings, to file any notices or obtain any consents, all as may be necessary or appropriate in connection therewith. (b) The Company will not cause, suffer or permit amendment of the partnership agreement or the operating agreement of any Loan Party to provide that any interest in such Loan Party is a "security" governed by Article 8 of the Uniform Commercial Code of any jurisdiction. SECTION 5.10. Performance of Obligations. The Company will pay the Loans according to the reading, tenor and effect thereof; and the Company will do and perform or cause each other Loan Party to do and perform every act and discharge all of the Obligations to be performed and discharged by it hereunder and under the Security Documents to which it is a party and this Agreement, at the time or times and in the manner specified. SECTION 5.11. Lines of Business. The Company will, and will cause each Restricted Subsidiary to, be and remain engaged in only those lines of business in which the Company and such Subsidiaries are engaged on the date of this Agreement, any additional lines of business reasonably related thereto, and no others. SECTION 5.12 Intercompany Notes and Security for Intercompany Notes. (a) The Company will cause each Subsidiary Guarantor to execute a promissory note in favor of the Company in an original principal amount equal to the lesser of (i) the Commitment and (ii) the actual amount from time to time outstanding of Indebtedness of such Subsidiary to the Company (being the sum of the amounts specified pursuant to clause (i) of the next sentence), and dated the Execution Date in the case of the Subsidiary Guarantors party to this Agreement on such date and in the case of any other Subsidiary Guarantor, the date such Person becomes a Subsidiary Guarantor pursuant to Section 6.03 (collectively, the "Intercompany Notes"). The Company will concurrently with the execution and delivery thereof, pledge each Intercompany Note to the Administrative Agent pursuant to and as provided in the Company Security Agreement and will maintain accounts in which it shall record (i) the amount of the proceeds of each Loan, and each other amount, from time to time advanced to such Subsidiary Guarantor and the amount of each payment made by the Company to -62- reimburse the Issuing Bank for any drawing made under any Letter of Credit on which such Subsidiary Guarantor is an account party; (ii) the interest rate applicable to such advance or payment; and (iii) each payment of principal or interest made by such Subsidiary Guarantor. (b) If at the end of any fiscal quarter the ratio of the Indebtedness of the Company at the end of such fiscal quarter to Company Cash Flow for the four consecutive fiscal quarters then ending is greater than (i) 4.75 to 1.0 prior the date of the Triggering Event or (ii) 3.5 to 1.0 on or after such date, upon the request of the Required Lenders, the Company will cause each Subsidiary Guarantor to secure its Intercompany Note with Liens on all of its assets. In this connection the Company at its own cost and expense will cause (i)(A) all security agreements, deeds of trust, mortgages, assignments and pledge agreements (collectively, the "Intercompany Security Documents"), Uniform Commercial Code Financing Statements and all other documents to be executed and delivered by such Subsidiary Guarantor to the Administrative Agent and (B) all filings and recordings to be made as are necessary or appropriate in each case to create and perfect such Liens and (ii) delivery of such opinions of counsel to each Subsidiary Guarantor as the Administrative Agent may reasonably request (such counsel and the form, scope and substance of each such opinion to be satisfactory in each case to the Administrative Agent) as to the organization and good standing of such Subsidiary Guarantor, enforceability of the Intercompany Security Documents to which such Subsidiary Guarantor is a party, the creation and perfection of the Liens purported to be executed by such Intercompany Security Documents and such other matters as may be reasonably requested by the Administrative Agent or any Lender. SECTION 5.13 KMNGL Subsidiary Guarantors Security Agreement. The Company shall, and shall cause KMNGL to, immediately commence to use its reasonable efforts to obtain the consents of each Person whose consent (whether to the pledge thereunder of the Capital Stock of Mont Belvieu or otherwise) is required for the Subsidiary Guarantors Security Agreement executed by KMNGL to become and be fully effective, without causing a default by KMNGL under, or triggering a right of first refusal to acquire its interest in Mont Belvieu under, any agreement binding upon it, and upon obtaining such consent(s) to deliver to the Administrative Agent an original signed copy thereof, together with an opinion of counsel satisfactory to the Administrative Agent, in form and substance satisfactory to the Administrative Agent, as to the same matters, as to KMNGL, the Subsidiary Guarantors Security Agreement executed and delivered by KMNGL and the pledge of Capital Stock of Mount Belivieu thereunder, mutatis mutandis,as are covered in respect of the other Subsidiary Guarantors, the other Subsidiary Guarantors Security Agreements and the pledges and grants of collateral security thereunder by the opinion delivered pursuant to Section 3.01(a)(ix). ARTICLE VI. Negative Covenants Until the Commitments have expired or terminated and the principal of and interest on each Loan and all fees payable hereunder have been paid in full and all Letters of Credit have expired or terminated and all LC Disbursements shall have been reimbursed, the Company covenants and agrees with the Lenders that: -63- SECTION 6.01 Indebtedness. The Company will not, and will not permit any Restricted Subsidiary to, create, incur, assume or permit to exist any Indebtedness (including any obligation of the Company or a Restricted Subsidiary in respect of Indebtedness of an Unrestricted Subsidiary, whether by way of guaranty or other direct or indirect support or assurance against loss provided to the holder of such Indebtedness) except: (a) Indebtedness created hereunder; (b) Refinancing Indebtedness; (c) from and after the consummation of the Santa Fe Acquisition, the SFPP First Mortgage Notes and Indebtedness under the SFPP Revolving Credit Facility not in excess of $380,000,000 aggregate principal amount for all such Indebtedness at any one time outstanding; provided that neither the Company nor any other Restricted Subsidiary shall be liable for any such Indebtedness except for any Indebtedness for which OLP "D" may be liable solely as a result of its being the general partner of SFPP. (d) Indebtedness of the Company to any Restricted Subsidiary (other than SFPP) and of any Restricted Subsidiary to the Company or any other Restricted Subsidiary (other than SFPP), provided that (i) any such borrowing Restricted Subsidiary shall be a Subsidiary Guarantor, and (ii) any such lending Restricted Subsidiary shall subordinate, on terms (including terms as to maturity, required amortization, and limitations on voluntary prepayments) reasonably satisfactory to the Required Lenders, its right to repayment of the Indebtedness of the Company or the borrowing Restricted Subsidiary, as the case may be, owing to it and otherwise permitted by this Section 6.01(d) to the rights of the Lenders to repayment of all Obligations of the Company or such borrowing Restricted Subsidiary, as the case may be, from time to time outstanding and owing to them under this Agreement; (e) Indebtedness of the Company or a Restricted Subsidiary, not otherwise permitted by this Section 6.01 in an aggregate principal amount at any one time outstanding (i) until the consummation of the Santa Fe Acquisition, not in excess of $10,000,000, and (ii) thereafter, not in excess of $25,000,000; (f) Indebtedness permitted under Section 6.04(f); and (g) additional Indebtedness of the Company, provided that no required principal payment (whether at stated maturity, or by virtue of scheduled amortization, required prepayment or redemption) shall be due in respect thereof prior to the final maturity of the Indebtedness outstanding hereunder. Notwithstanding any other provision of this Agreement, KMCO2, the owner of the limited partner interests in Shell CO2, shall not at any time create, incur, assume or permit to exist any Indebtedness whatsoever. -64- SECTION 6.12. Liens. The Company will not, and will not permit any Restricted Subsidiary to, create, incur, assume or permit to exist any Lien on any property or asset now owned or hereafter acquired by it, or assign or sell any income or revenues (including accounts receivable) or rights in respect of any thereof, except: (a) Permitted Encumbrances; (b) any Lien on any property or asset of the Company or any Restricted Subsidiary existing on the date hereof and set forth in Schedule 6.02; provided that (i) such Lien shall not extend to any other property or asset of the Company or such Subsidiary and (ii) such Lien shall secure only those obligations which it secures on the date hereof; (c) from and after the consummation of the Santa Fe Acquisition, Liens on properties or assets of SFPP securing the SFPP First Mortgage Notes and the SFPP Revolving Credit Facility, and Liens on the same properties or assets that secure the SFPP First Mortgage Notes, or the SFPP Revolving Credit Facility, as the case may be (and that do not extend to any other assets), securing Indebtedness issued in exchange for, or the net proceeds of which are applied substantially concurrently to repay, refinance, refund or replace the SFPP First Mortgage Notes or the SFPP Revolving Credit Facility, which Indebtedness would, if the SFPP First Mortgage Notes or the SFPP Revolving Credit Facility, as the case may be, constituted "Refinanced Indebtedness" (as said term is defined in the definition of "Refinancing Indebtedness" in Section 1.01) constitute Refinancing Indebtedness in respect thereof. (d) any Lien existing on any property or asset prior to the acquisition thereof by the Company or any Restricted Subsidiary or existing on any property or asset of any Person that becomes a Restricted Subsidiary after the date hereof prior to the time such Person becomes a Restricted Subsidiary; provided that (i) such Lien is not created in contemplation of or in connection with such acquisition or such Person becoming a Restricted Subsidiary , as the case may be, (ii) such Lien shall not apply to any other property or assets of the Company or any Restricted Subsidiary, (iii) such Lien shall secure only those obligations which it secures on the date of such acquisition or the date such Person becomes a Restricted Subsidiary, as the case may be, and (iv) after giving effect to such acquisition or such Person becoming a Restricted Subsidiary, the Indebtedness secured by such Lien would be permitted by Section 6.01(e), and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof; and (e) Liens on fixed or capital assets acquired, constructed or improved by the Company or any Restricted Subsidiary; provided that (i) such security interests secure Indebtedness permitted by clause (e) of Section 6.01, (ii) such security interests and the Indebtedness secured thereby are incurred prior to or within 90 days after such acquisition or the completion of such construction or improvement, (iii) the Indebtedness secured thereby does not exceed 80% of the cost of acquiring, constructing or improving such fixed or capital assets and (iv) such security interests shall not apply to any other property or assets of the Company or any Restricted Subsidiary. SECTION 6.03. Fundamental Changes. The Company will not, and will not permit any Restricted Subsidiary to, merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one -65- transaction or in a series of transactions) all (or substantially all) of its assets, or all or substantially all of the stock of or other equity interest in any of its Restricted Subsidiaries (in each case, whether now owned or hereafter acquired), or liquidate or dissolve, except that, if at the time thereof and immediately after giving effect thereto no Event of Default or Default shall have occurred and be continuing (a) any Person may merge into the Company in a transaction in which the Company is the surviving entity, (b) any Person may merge into any Restricted Subsidiary in a transaction in which the surviving entity is a Wholly-Owned Restricted Subsidiary, (c) any Restricted Subsidiary may sell, transfer, lease or otherwise dispose of its assets to the Company or to a Wholly-Owned Restricted Subsidiary (other than SFPP), (d) KMNGL may dissolve and liquidate into OLP "A" and (e) any Restricted Subsidiary (other than a Subsidiary Guarantor) may liquidate or dissolve if the Company determines in good faith that such liquidation or dissolution is in the best interests of the Company and is not materially disadvantageous to the Lenders and such liquidation or dissolution complies with this Section 6.03. SECTION 6.04 Investments, Loans, Advances, Guarantees and Acquisitions; Hedging Agreements. The Company will not, and will not permit any of its Restricted Subsidiaries to, purchase, hold or acquire (including pursuant to any merger with any Person that was not a Wholly-Owned Restricted Subsidiary prior to such merger) any Capital Stock, evidences of indebtedness or other securities (including any option, warrant or other right to acquire any of the foregoing) of, make or permit to exist any loans or advances to, Guarantee any obligations of, or make or (in the case of investments in Shell CO2) commit to make, or permit to exist any investment or any other interest in, any other Person, or purchase or otherwise acquire (in one transaction or a series of transactions) any assets of any other Person constituting a business unit, except: (a) the Company Guaranty and the Subsidiary Guarantors Guaranty and Permitted Investments; (b) investments, existing on the Execution Date, by the Company and the Restricted Subsidiaries in the Capital Stock of their respective Subsidiaries; (c) investments in, loans to and Guarantees of Indebtedness or other obligations of any Person (other than SFPP) that is a Restricted Subsidiary both before and immediately after the making of such investment or loan, or the giving of such Guarantee; (d) investments in the Capital Stock of any other Person, if immediately after and giving effect to the making of such investment: (i) no Event of Default or Default shall have occurred and be continuing or would result therefrom; (ii) any acquired or newly-formed corporation, partnership, association or other business entity (a "New Subsidiary") shall be a Wholly-Owned Restricted Subsidiary whose Capital Stock is owned directly by the Company or one or more Wholly-Owned Restricted Subsidiaries (other than SFPP), and such New Subsidiary shall become a Restricted Subsidiary and be engaged primarily in one or more lines of business permitted by -66- Section 5.11, and shall have executed a Subsidiary Guarantor Counterpart in the form of Exhibit 6.03 (a "Subsidiary Guarantor Counterpart"); (iii) the Company and the Restricted Subsidiaries shall be in compliance, on a pro forma basis, after giving effect to such acquisition or formation, with the covenants contained in Article VI, recomputed as at the last day of the most recently ended fiscal quarter of the Company and the Restricted Subsidiaries as if such acquisition had occurred on the first day of each relevant period for testing such compliance, and, the Company shall have delivered to the Administrative Agent, the Issuing Bank and the Lenders a certificate of a Responsible Officer to such effect, together with all relevant financial information of such New Subsidiary or assets and calculations demonstrating such compliance; (iv) any New Subsidiary shall not be liable for any Indebtedness (except for Indebtedness permitted by Section 6.01); (v) the Required Lenders shall have given their prior written consent (which consent shall not be unreasonably withheld, taking into consideration the merits of the acquisition) in the case of any acquisition made, directly or indirectly, with the proceeds of Indebtedness incurred by the Company or one or more Restricted Subsidiaries in excess of (A) $35,000,000 at any time prior to the Santa Fe Acquisition or (B) $75,000,000 thereafter; and (vi) the Administrative Agent shall have received (A) such opinions of counsel to such New Subsidiary as the Administrative Agent, the Issuing Bank and the Lenders may reasonably request as to the organization, good standing and enforceability of this Agreement and the Subsidiary Guarantor Counterpart and such other matters as the Administrative Agent, the Issuing Bank and the Lenders may reasonably require and (B) such other agreements, certificates, financing statements, approvals, reports, consents, waivers, estoppels, subordination agreements, filings and other documentation as the Administrative Agent and the Required Lenders may reasonably request. Notwithstanding the foregoing, the Company will cause SFPP at such time as no default under any of its Indebtedness would result therefrom to execute a Subsidiary Guarantor Counterpart and comply with clause (vi) above; (e) the OLP "A" Refinancing, the Santa Fe Acquisition and the Shell JV Investment; and (f) investments, loans and Guarantees and mandatory contributions to Shell CO2 under the partnership agreement of Shell CO2, in addition to the Shell JV Investment, in an aggregate amount at any one time outstanding not exceeding (i) $15,000,000 prior to consummation of the Santa Fe Acquisition, or (ii) $50,000,000 thereafter, provided that investments, loans and Guarantees in respect of Unrestricted Subsidiaries and mandatory contributions to Shell CO2 permitted by this clause (ii) shall not exceed in the aggregate $25,000,000 at any one time outstanding. -67- Notwithstanding the foregoing provisions of this Section 6.04, the Company may at any time or from time to time make investments, loans and Guarantees in amounts that, in the aggregate, when made, do not exceed the net proceeds of a substantially concurrent sale of the Company's Qualified Stock, provided, however, after giving effect to such investment, loan or guarantee, the Company and the Restricted Subsidiaries shall be in compliance with the terms of this Agreement (other than the preceding provisions of this Section 6.04). SECTION 6.05. Restricted Payments. The Company will not, and will not permit any of the Restricted Subsidiaries to, declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment. SECTION 6.06. Transactions with Affiliates. The Company will not, and will not permit any of the Restricted Subsidiaries to, sell, lease or otherwise transfer any property or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except (a) in the ordinary course of business at prices and on terms and conditions not less favorable to the Company or such Subsidiary than could be obtained on an arm's-length basis from unrelated third parties, (b) transactions between or among the Company and Guarantors not involving any other Affiliate, (c) any Restricted Payment permitted by Section 6.05 and (d) loans and advances by the Company to the General Partner to enable the General Partner to pay general and administrative costs and expenses pursuant to the partnership agreement of the Company and in accordance with past practices. SECTION 6.07 Restrictive Agreements. The Company will not, and will not permit any of the Restricted Subsidiaries to, directly or indirectly, enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon the ability of any such Subsidiary to pay dividends or other distributions with respect to any shares of its Capital Stock or to make or repay loans or advances to the Company or any other such Subsidiary or to Guarantee Indebtedness of the Company or any other such Subsidiary or to grant Liens to secure the Obligations (except for any agreement or arrangement with respect to the assets subject to the Liens permitted by Section 6.02(d) and Section 6.02(e)); provided that the foregoing shall not apply to (i) restrictions and conditions imposed by law or by this Agreement, (ii) customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary pending such sale, provided such restrictions and conditions apply only to the Subsidiary that is to be sold and such sale is permitted hereunder, or (iii) restrictions and conditions existing on the date hereof identified on Schedule 6.07 (but shall apply to any extension or renewal of, or any amendment or modification expanding the scope of, any such restriction or condition) and (iv) from and after the date of the Santa Fe Acquisition restrictions and conditions contained in the agreement pursuant to which the Santa Fe First Mortgage Notes were issued and in the Santa Fe Revolving Credit Facility. SECTION 6.08. Sale of Assets. The Company will not, and will not permit any of the Restricted Subsidiaries to, sell, lease or otherwise dispose of any of its properties or assets (other than sales of product in the ordinary course of business) if, at the time of the proposed sale, lease or other disposition, and giving effect thereto, the aggregate fair market value (as determined in good faith by the Board of the Company's general partner) of all properties and assets of the Company -68- and its Restricted Subsidiaries so sold, leased or otherwise disposed of during the then current fiscal year would exceed $10,000,000. SECTION 6.09 Financial Covenants. The Company will observe each of the following requirements: (a) Ratio of Indebtedness to Cash Flow. The Company will not permit the ratio of outstanding Indebtedness of the Company to Company Cash Flow for the four full fiscal quarters then most recently ended to exceed (i) at any time prior to the date on which the Triggering Event shall occur, 4.75 to 1.0, or (ii) at any time on or after such date, 3.75 to 1.0. (b) Ratio of Cash Flow to Interest Expense. The Company will not permit the ratio of Company Cash Flow for the four full fiscal quarters then most recently ended to Company Interest Expense for such four full fiscal quarters to be less than (i) at any time prior to the date on which the Triggering Event shall occur, 2.75 to 1.0, or (ii) at any time on or after such date, 3.50 to 1.0. (c) Ratio of Cash Flow to Fixed Charges. The Company will not, at the end of any fiscal quarter, permit the ratio of Company Cash Flow for the four full fiscal quarters then most recently ended to Fixed Charges at the end of such fiscal quarter to be less than 1.25 to 1.0. SECTION 6.10. Amendments to Certain Agreements. The Company will not and will not permit any Restricted Subsidiary (including SFPP after the Santa Fe Acquisition) to amend its partnership agreement or operating agreement or in the case of SFPP, the SFPP Revolving Credit Facility, the SFPP First Mortgage Notes or the Note Agreement pursuant to which such First Mortgage Notes were issued, in each case, in any manner that could be adverse to the Lenders; provided, however, the partnership agreement of SFPP may be amended to conform it to the partnership agreement of the Company and to enable the Santa Fe Acquisition to be effected. ARTICLE VII. Events of Default SECTION 7.01. Events of Default and Remedies. If any of the following events ("Events of Default") shall occur and be continuing: (a) any installment of principal of any Loan or any reimbursement obligation in respect of any LC Disbursement shall not be paid when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise; (b) any interest on any Loan or any fee or any other amount (other than an amount referred to in clause (a) of this Article) payable under this Agreement or any other Loan Document shall not be paid, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of three days; -69- (c) any representation or warranty made or, for purposes of Article III, deemed made by or on behalf of any Loan Party herein, at the direction of any Loan Party or by any Loan Party in any other Loan Document or in any document, certificate or financial statement delivered in connection with this Agreement or any other Loan Document shall prove to have been incorrect in any material respect when made or deemed made or reaffirmed, as the case may be; (d) any Loan Party shall fail to observe or perform any covenant, condition or agreement contained in Section 5.01(d)(iii), 5.03 (with respect to such Loan Party's existence) or 5.08 or in Article VI; (e) any Loan Party shall fail to perform or observe any other term, covenant or agreement contained in this Agreement (other than those specified in Section 7.01(a), Section 7.01(b) or Section 7.01(d)) or any other Loan Document to which it is a party and, in any event, such failure shall remain unremedied for 30 calendar days after the earlier of (i) written notice of such failure shall have been given to the Company by the Administrative Agent or any Lender or, (ii) an officer of any Loan Party becomes aware of such failure; (f) other than as specified in Section 7.01(a) or (b), (i) the Company or any Restricted Subsidiary fails to make (whether as primary obligor or as guarantor or other surety) any payment of principal of, or interest or premium, if any, on any item or items of Indebtedness (other than as specified in Section 7.01(a), Section 7.01(b) or Article IX or Article X) beyond any period of grace provided with respect thereto (not to exceed 30 days); provided that the aggregate outstanding principal amount of all Indebtedness as to which such a payment default shall occur and be continuing is equal to or exceeds $2,000,000, or (ii) the Company or any Restricted Subsidiary fails to duly observe, perform or comply with any agreement with any Person or any term or condition of any instrument, if such failure, either individually or in the aggregate, shall have caused or shall have the ability to cause the acceleration of the payment of Indebtedness with an aggregate face amount which is equal to or exceeds $2,000,000; provided that this Section 7.01(f) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness; (g) an involuntary case shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of the Company or any Restricted Subsidiary or its debts, or of a substantial part of its assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any Restricted Subsidiary or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (h) the Company, or any Restricted Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, winding-up, reorganization or other relief under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in Section 7.01(g), (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any -70- Restricted Subsidiary or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any action for the purpose of effecting any of the foregoing; (i) the Company or any Restricted Subsidiary shall become unable, admit in writing or fail generally to pay its debts as they become due; (j) the General Partner fails to make (whether as primary obligator or as guarantor or other surety) any payment of principal of, or interest or premium, if any, on any item or items of Indebtedness beyond any period of grace provided with respect thereto (not to exceed 30 days); provided that the aggregate outstanding principal amount of all such Indebtedness as to which such a payment default shall occur and be continuing is equal to or exceeds $5,000,000; (k) one or more judgments for the payment of money in an aggregate amount in excess of $5,000,000 shall be rendered against the Company, any Restricted Subsidiary or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of the Company or any Restricted Subsidiary to enforce any such judgment; (l) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in liability of the Company and the Restricted Subsidiaries in an aggregate amount exceeding (i) $5,000,000 in any year or (ii) $10,000,000 for all periods; (m) any Security Document or any Intercompany Security Document after delivery thereof shall for any reason, except to the extent permitted by the terms thereof, cease to be in full force and effect and valid, binding and enforceable in accordance with its terms, or cease to create a valid and perfected Lien of the priority required thereby on any of the Collateral purported to be covered thereby, except to the extent permitted by the terms of this Agreement or such Security Document or Intercompany Security Document, as the case may be, or any Loan Party shall so assert; or (n) either Borrower or any other Person shall petition or apply for or obtain any order restricting payment by the Issuing Bank under any Letter of Credit or extending the Issuing Bank's liability under such Letter of Credit beyond the expiration date stated therein or otherwise agreed to by the Issuing Bank; then, and in any such event, and at any time thereafter, if any Event of Default shall then be continuing, the Administrative Agent, may, and upon the written request of the Required Lenders shall, by written notice (including notice sent by telecopy) to the Company (a "Notice of Default") take any or all of the following actions, without prejudice to the rights of the Administrative Agent, any Lender or other holder of any of the Obligations to enforce its claims against any Loan Party (provided that, if an Event of Default specified in Section 7.01(g) or Section 7.01(h) shall occur with respect to the Company or any Restricted Subsidiary, the result of which would occur upon the giving of a Notice of Default as specified in clauses (i), (ii) and (v) below, shall occur automatically -71- without the giving of any Notice of Default): (i) declare the Total Commitment terminated, whereupon the Commitments of the Lenders shall forthwith terminate immediately and any accrued commitment fees shall forthwith become due and payable without any other notice of any kind; (ii) declare the principal of and any accrued interest in respect of all Loans, and all the other Obligations owing hereunder and under the other Loan Documents, to be, whereupon the same shall become, forthwith due and payable without presentment, demand, notice of demand or of dishonor and nonpayment, protest, notice of protest, notice of intent to accelerate, declaration or notice of acceleration or any other notice of any kind, all of which are hereby waived by each Loan Party; (iii) exercise any rights or remedies under the Loan Documents; (iv) terminate any Letter of Credit which may be terminated in accordance with its terms (whether by the giving of written notice to the beneficiary or otherwise); and (v) direct the Company to comply, and the Company agrees that upon receipt of such notice (or upon the occurrence of an Event of Default specified in Section 7.01(g) or Section 7.01(h)) it will comply, with the provisions of Section 2.06(k). SECTION 7.02. Other Remedies. Upon the occurrence and during the continuance of any Event of Default, the Administrative Agent, acting at the request of the Required Lenders, may proceed to protect and enforce its rights, either by suit in equity or by action at law or both, whether for the specific performance of any covenant or agreement contained in this Agreement or in any other Loan Document or in aid of the exercise of any power granted in this Agreement or in any other Loan Document; or may proceed to enforce the payment of all amounts owing to the Administrative Agent and the Lenders under the Loan Documents and interest thereon in the manner set forth herein or therein; it being intended that no remedy conferred herein or in any of the other Loan Documents is to be exclusive of any other remedy, and each and every remedy contained herein or in any other Loan Document shall be cumulative and shall be in addition to every other remedy given hereunder and under the other Loan Documents now or hereafter existing at law or in equity or by statute or otherwise. SECTION 7.03 Application of Moneys During Continuation of Event of Default. (a) So long as an Event of Default of which the Administrative Agent shall have given notice to the Lenders shall continue, all moneys received by the Administrative Agent from any Loan Party under the Loan Documents shall, except as otherwise required by law, be distributed by the Administrative Agent on the dates selected by the Administrative Agent (individually, a "Distribution Date" and collectively, the "Distribution Dates") as follows: first, to payment of the unreimbursed expenses for which the Administrative Agent or any Lender is to be reimbursed pursuant to Section 11.03 and unpaid fees owing to the Administrative Agent pursuant to the Fee Letter; second, to the ratable payment of accrued but unpaid interest on the Obligations; third, to the ratable payment of unpaid principal of the Obligations; fourth, to the ratable payment of all other amounts payable by the Loan Parties hereunder; -72- fifth, to the ratable payment of all other Obligations, until all Obliga- tions shall have been paid in full; and finally, to payment to the Loan Parties, or their respective successors or assigns, or as a court of competent jurisdiction may direct, of any surplus then remaining from such proceeds. (b) The term "unpaid" as used in this Section 7.03 shall mean all Obligations outstanding as of a Distribution Date (including any amounts unpaid under clause (v) of the last sentence of Section 7.01) as to which prior distributions have not been made, after giving effect to any adjustments which are made pursuant to Section 11.09 of which the Administrative Agent shall have been notified. ARTICLE VIII. The Administrative Agent SECTION 8.01 Appointment, Powers and Immunities. Each Lender hereby irrevocably appoints and authorizes the Administrative Agent to act as its agent hereunder and under the Security Documents with such powers as are specifically delegated to the Administrative Agent by the terms of this Agreement and such other Loan Documents, together with such other powers as are reasonably incidental thereto. The Administrative Agent (which term as used in this sentence and in Section 8.05 and the first sentence of Section 8.06 shall include reference to its Affiliates and its Affiliates' officers, directors, employees, attorneys, accountants, experts and agents): (a) shall have no duties or responsibilities except those expressly set forth in the Loan Documents, and shall not by reason of the Loan Documents be a trustee or fiduciary for any Lender; (b) makes no representation or warranty to any Lender and shall not be responsible to the Lenders for any recitals, statements, representations or warranties contained in this Agreement, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement, or for the value, validity, effectiveness, genuineness, execution, legality, enforceability or sufficiency of this Agreement, other Loan Document or any other document referred to or provided for herein or therein or for any failure by any Loan Party or any other Person (other than the Administrative Agent) to perform any of its obligations hereunder or thereunder or for the existence or value of, or the perfection or priority of any Lien upon, any collateral security or the financial or other condition of the Company, the Subsidiaries or any other obligor or guarantor; (c) except pursuant to Section 8.07 shall not be required to initiate or conduct any litigation or collection proceedings hereunder; and (d) shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other document or instrument referred to or provided for herein or in connection herewith including its own ordinary negligence, except for its own gross negligence, willful misconduct or unlawful conduct. The Administrative Agent may employ agents, accountants, attorneys and experts and shall not be responsible for the negligence or misconduct of any such agents, accountants, attorneys or experts selected by it in good faith or any action taken or omitted to be taken in good faith by it in accordance with the advice of such agents, accountants, attorneys or experts. The Administrative Agent may deem and treat the payee named in any Note as the holder thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof permitted hereunder shall have -73- been filed with the Administrative Agent. The Administrative Agent is authorized to release any Collateral that is permitted to be sold or released pursuant to the terms of the Loan Documents. SECTION 8.02. Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telex, telecopier, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Administrative Agent in good faith. SECTION 8.03. Defaults; Events of Default. The Administrative Agent shall not be deemed to have knowledge of the occurrence of a Default or an Event of Default (other than the non-payment of principal of or interest on Loans or of fees or failure to reimburse LC Disbursements) unless the Administrative Agent has received notice from a Lender or a Borrower specifying such Default or Event of Default and stating that such notice is a "Notice of Default."In the event that the Administrative Agent receives such a notice of the occurrence of a Default or Event of Default, the Administrative Agent shall give prompt notice thereof to the Lenders. In the event of a payment Default or Event of Default, the Administrative Agent shall give each Lender prompt notice of each such payment Default or Event of Default. SECTION 8.04. Rights as a Lender. With respect to its Commitments and the Loans made by it and its issuance, or its participation in the issuance, of each Letter of Credit, First Union National Bank (and any successor acting as Administrative Agent) in its capacity as a Lender hereunder shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as the Administrative Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include the Administrative Agent in its individual capacity. First Union National Bank (and any successor acting as Administrative Agent) and its Affiliates may (without having to account therefor to any Lender) accept deposits from, lend money to and generally engage in any kind of banking, trust or other business with any Loan Party (and any of its Affiliates) as if it were not acting as the Administrative Agent. Goldman Sachs Credit Partners L.P., First Union National Bank and their respective Affiliates may accept fees and other consideration from the Company or any other Loan Party for services in connection with this Agreement or otherwise without having to account for the same to the Lenders. SECTION 8.05 INDEMNIFICATION. THE LENDERS AGREE TO INDEMNIFY THE ADMINISTRATIVE AGENT AND THE SYNDICATION AGENT RATABLY IN ACCORDANCE WITH THEIR APPLICABLE PERCENTAGES FOR THE INDEMNITY MATTERS AS DESCRIBED IN SECTION 11.03 TO THE EXTENT NOT INDEMNIFIED OR REIMBURSED BY THE COMPANY UNDER SECTION 11.03, BUT WITHOUT LIMITING THE OBLIGATIONS OF THE COMPANY UNDER SAID SECTION 11.03 AND FOR ANY AND ALL OTHER LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY KIND AND NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST THE ADMINISTRATIVE AGENT OR THE SYNDICATION AGENT IN ANY WAY RELATING TO OR ARISING -74- OUT OF: (A) THIS AGREEMENT, THE SECURITY DOCUMENTS OR ANY OTHER LOAN DOCUMENT CONTEMPLATED BY OR REFERRED TO HEREIN OR THE TRANSACTIONS CONTEMPLATED HEREBY, BUT EXCLUDING, UNLESS A DEFAULT OR AN EVENT OF DEFAULT HAS OCCURRED AND IS CONTINUING, NORMAL ADMINISTRATIVE COSTS AND EXPENSES INCIDENT TO THE PERFORMANCE OF ITS AGENCY DUTIES, IF ANY, HEREUNDER OR (B) THE ENFORCEMENT OF ANY OF THE TERMS OF THIS AGREEMENT, ANY SECURITY DOCUMENT OR OF ANY SUCH OTHER LOAN DOCUMENT; WHETHER OR NOT ANY OF THE FOREGOING SPECIFIED IN THIS SECTION 8.05 ARISES FROM THE SOLE OR CONCURRENT NEGLIGENCE OF THE ADMINISTRATIVE AGENT OR THE SYNDICATION AGENT, AS THE CASE MAY BE; PROVIDED THAT NO LENDER SHALL BE LIABLE FOR ANY OF THE FOREGOING TO THE EXTENT THEY ARISE FROM THE GROSS NEGLIGENCE, WILLFUL MISCONDUCT OR UNLAWFUL CONDUCT OF THE ADMINISTRATIVE AGENT. SECTION 8.06 Non-Reliance on Agents and other Lenders . Each Lender acknowledges and agrees that it has, independently and without reliance on the Administrative Agent, the Syndication Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Company and the Subsidiaries and its decision to enter into this Agreement, and that it will, independently and without reliance upon the Administrative Agent, the Syndication Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement. Neither the Administrative Agent nor the Syndication Agent shall be required to keep itself informed as to the performance or observance by any Loan Party of this Agreement, the other Loan Documents or any other document referred to or provided for herein or to inspect the properties or books of any Loan Party. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by the Administrative Agent hereunder, neither the Administrative Agent nor the Syndication Agent shall have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition or business of any Loan Party (or any of its Affiliates) which may come into the possession of the Administrative Agent, the Syndication Agent or any of its respective Affiliates. In this regard, each Lender acknowledges that Andrews & Kurth L.L.P. is acting in this transaction as special counsel to the Administrative Agent and the Syndication Agent only. Each Lender will consult with its own legal counsel to the extent that it deems necessary in connection with this Agreement and other Loan Documents and the matters contemplated herein and therein. SECTION 8.07. Action by Administriave Agent. Except for action or other matters expressly required of the Administrative Agent hereunder, the Administrative Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall (a) receive written instructions from the Required Lenders (or all of the Lenders as expressly required by Section 11.02) specifying the action to be taken, and (b) be indemnified to its satisfaction by the Lenders against any and all liability and expenses which may be incurred by it by reason of taking or continuing to take any such action. The instructions of the Required Lenders (or all of the Lenders as expressly required by Section 11.02) and any action taken or failure to act pursuant thereto by the -75- Administrative Agent shall be binding on all of the Lenders. If a Default or Event of Default has occurred and is continuing, the Administrative Agent shall take such action with respect to such Default or Event of Default as shall be directed by the Required Lenders (or all of the Lenders as required by Section 11.02) in the written instructions (with indemnities) described in this Section 8.07; provided that, unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. In no event, however, shall the Administrative Agent be required to take any action which exposes the Administrative Agent to personal liability or which is contrary to this Agreement or any Security Document or applicable law. SECTION 8.08 Resignation or Removal of Administrative Agent. Subject to the appointment and acceptance of a successor Administrative Agent as provided below, the Administrative Agent may resign at any time by giving notice thereof to the Lenders and the Company, and the Administrative Agent may be removed at any time with or without cause by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Required Lenders and shall have accepted such appointment within thirty (30) days after the retiring Administrative Agent's giving of notice of resignation or the Required Lenders' removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent. Upon the acceptance of such appointment hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Article VIII and Section 11.03 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Administrative Agent. SECTION 8.09. Consents under Security Documents. The Administrative Agent may, with the prior consent of the Required Lenders (but not otherwise), consent to any modification, supplement or waiver under any of the Security Documents; provided that, without the prior consent of all the Lenders, the Administrative Agent shall not release any Collateral (except as expressly permitted in the Loan Documents) or otherwise terminate any Lien under any Security Document providing for collateral security, or agree to additional obligations being secured by such collateral security. SECTION 8.10. Duties of Syndication Agent. Notwithstanding the indemnity of the Syndication Agent contained in Section 8.05 and in Section 11.03, the Syndication Agent shall not have any duty, responsibility or liability in such capacity with respect to the administration or enforcement of this Agreement or any other Loan Document. -76- ARTICLE IX. Company Guaranty SECTION 9.01. Company Guaranty. (a) In consideration of, and in order to induce the Administrative Agent and the Lenders to enter into this Agreement and to induce the Lenders to make the Loans and the Issuing Bank to maintain the Existing Letter of Credit and to issue new Letters of Credit hereunder, the Company hereby absolutely, unconditionally and irrevocably guarantees the punctual payment and performance when due, whether at stated maturity, by acceleration or otherwise, of the Obligations of the Subsidiary Borrower (as such), and all covenants of the Subsidiary Borrower (as such), now or hereafter existing under this Agreement and the other Loan Documents to which the Subsidiary Borrower is a party, whether for principal, interest (including interest accruing or becoming owing both prior to and subsequent to the commencement of any proceeding against or with respect to the Subsidiary Borrower under any chapter of Title 11 of the United States Code, as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code")), fees, commissions, expenses (including reasonable attorneys' fees and expenses) or otherwise (all such obligations being the "Subsidiary Borrower Guaranteed Obligations"), it being understood, for the avoidance of doubt, that such term shall not include any Obligations of the Person that is the Subsidiary Borrower in any other capacity, e.g., as a Subsidiary Guarantor. The Company agrees to pay any and all expenses incurred by each Lender and the Administrative Agent in enforcing this Company Guaranty against the Company. (b) This Company Guaranty is an absolute, unconditional, present and continuing guaranty of payment and not of collectibility and is in no way conditioned upon any attempt to collect from the Subsidiary Borrower or any other Loan Party or any other action, occurrence or circumstance whatsoever. SECTION 9.02. Continuing Guaranty. (a) The Company guarantees that the Subsidiary Borrower Guaranteed Obligations will be paid strictly in accordance with the terms of this Agreement and the other Loan Documents. The Company agrees that, to the maximum extent permitted by applicable law, the Subsidiary Borrower Guaranteed Obligations and Loan Documents to which the Subsidiary Borrower is a party may be extended or renewed, and indebtedness thereunder repaid and reborrowed in whole or in part, without notice to or assent by the Company, and that it will remain bound upon this Company Guaranty notwithstanding any extension, renewal or other alteration of any Subsidiary Borrower Guaranteed Obligations or such Loan Documents, or any repayment and reborrowing of Loans. To the maximum extent permitted by applicable law, except as otherwise expressly provided in this Agreement or any other Loan Document to which the Company is a party, the obligations of the Company under this Company Guaranty shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms hereof under any circumstances whatsoever, including: (i) any modification, amendment, supplement, renewal, extension for any period, increase, decrease, alteration or rearrangement of all or any part of the Subsidiary Borrower Guaranteed Obligations, or of this Agreement or any other Loan Document executed in connection herewith, or any contract or understanding among the Company, the Subsidiary -77- Borrower, any Subsidiary Guarantor, the Administrative Agent and/or the Lenders, or any other Person, pertaining to the Subsidiary Borrower Guaranteed Obligations; (ii) any adjustment, indulgence, forbearance or compromise that might be granted or given by the Lenders to the Company or any Subsidiary Guarantor or any other Person liable on the Subsidiary Borrower Guaranteed Obligations; (iii) the insolvency, bankruptcy, arrangement, adjustment, composition, liquidation, disability, dissolution or lack of power of the Company, the Subsidiary Borrower, any Subsidiary Guarantor or any other Person at any time liable for the payment of all or part of the Subsidiary Borrower Guaranteed Obligations; or any dissolution of the Company, the Subsidiary Borrower, or any Subsidiary Guarantor, or any sale, lease or transfer of any or all of the assets of the Company, the Subsidiary Borrower, or any Subsidiary Guarantor, or any changes in the shareholders of the Company, the Subsidiary Borrower, or any Subsidiary Guarantor; or any reorganization of the Company, the Subsidiary Borrower, or any Subsidiary Guarantor; (iv) the invalidity, illegality or unenforceability of all or any part of the Subsidiary Borrower Guaranteed Obligations, or any document or agreement executed in connection with the Subsidiary Borrower Guaranteed Obligations, for any reason whatsoever, including the fact that (A) the Subsidiary Borrower Guaranteed Obligations, or any part thereof, exceeds the amount permitted by law, (B) the act of creating the Subsidiary Borrower Guaranteed Obligations or any part thereof is ultra vires, (C) the officers or representatives executing the documents or otherwise creating the Subsidiary Borrower Guaranteed Obligations acted in excess of their authority, (D) the Subsidiary Borrower Guaranteed Obligations or any part thereof violate applicable usury laws, (E) the Company, the Subsidiary Borrower or any Subsidiary Guarantor has valid defenses, claims and offsets (whether at law or in equity, by agreement or by statute) which render the Subsidiary Borrower Guaranteed Obligations wholly or partially uncollectible from the Company, the Subsidiary Borrower or such Subsidiary Guarantor, (F) the creation, performance or repayment of the Subsidiary Borrower Guaranteed Obligations (or execution, delivery and performance of any document or instrument representing part of the Subsidiary Borrower Guaranteed Obligations or executed in connection with the Subsidiary Borrower Guaranteed Obligations, or given to secure the repayment of the Subsidiary Borrower Guaranteed Obligations) is illegal, uncollectible, legally impossible or unenforceable, or (G) this Agreement, any other Loan Document, or any other document or instrument pertaining to the Subsidiary Borrower Guaranteed Obligations has been forged or otherwise is irregular or not genuine or authentic; (v) any full or partial release of the liability of the Company, the Subsidiary Borrower or any Subsidiary Guarantor on the Subsidiary Borrower Guaranteed Obligations or any part thereof, or any other Person now or hereafter liable, whether directly or indirectly, jointly, severally, or jointly and severally, to pay, perform, guarantee or assure the payment of the Subsidiary Borrower Guaranteed Obligations or any part thereof; it being recognized, acknowledged and agreed by the Company that the Company may be required to pay the -78- Subsidiary Borrower Guaranteed Obligations in full without assistance or support of any other Person, and the Company has not been induced to enter into this Guaranty on the basis of a contemplation, belief, understanding or agreement that any other Person will be liable to perform the Subsidiary Borrower Guaranteed Obligations, or that the Administrative Agent or any Lender will look to any other Person to perform the Subsidiary Borrower Guaranteed Obligations; (vi) the taking or accepting of any other security, collateral or guaranty, or other assurance of payment, for all or any part of the Subsidiary Borrower Guaranteed Obligations; (vii) any release, surrender, exchange, subordination, deterioration, waste, loss or impairment of any collateral, property or security, at any time existing in connection with, or assuring or securing payment of, all or any part of the Subsidiary Borrower Guaranteed Obligations; (viii) the failure of the Administrative Agent, the Lenders or any other Person to exercise diligence or reasonable care in the preservation, protection, enforcement, sale or other handling or treatment of all or any part of such collateral, property or security; (ix) the fact that any collateral, security or Lien contemplated or intended to be given, created or granted as security for the repayment of the Subsidiary Borrower Guaranteed Obligations shall not be properly perfected or created, or shall prove to be unenforceable or subordinate to any other Lien; it being recognized and agreed by the Company that the Company is not entering into this Company Guaranty in reliance on, or in contemplation of the benefits of, the validity, enforceability, collectibility or value of any of the collateral for the Subsidiary Borrower Guaranteed Obligations; (x) any payment by the Subsidiary Borrower or the Company to the Administrative Agent or any Lender is held to constitute a preference under bankruptcy laws, or for any other reason either the Administrative Agent or any Lender is required to refund such payment or pay such amount to the Subsidiary Borrower or any other Person; or (xi) any other action taken or omitted to be taken with respect to this Agreement, any other Loan Document, the Subsidiary Borrower Guaranteed Obligations, or the security and collateral therefor, whether or not such action or omission prejudices the Company or increases the likelihood that the Company will be required to pay the Subsidiary Borrower Guaranteed Obligations pursuant to the terms hereof; it being the unambiguous and unequivocal intention of the Company that the Company shall be obligated to pay the Subsidiary Borrower Guaranteed Obligations when due, notwithstanding any occurrence, circumstance, event, action, or omission whatsoever, whether contemplated or uncontemplated, and whether or not otherwise or particularly described herein, except for the full and final payment and satisfaction of the Subsidiary Borrower Guaranteed Obligations after the termination of the Commitments of all Lenders and the expiration or termination of the Existing Letter of Credit. -79- (b) The Company further agrees that, to the fullest extent permitted by law, as between the Company, on the one hand, and the Lenders and the Administrative Agent, on the other hand, (i) the maturity of the Subsidiary Borrower Guaranteed Obligations may be accelerated as provided in Article VII for the purposes of this Company Guaranty, notwithstanding any stay, injunction or other prohibition preventing such acceleration of the Subsidiary Borrower Guaranteed Obligations, and (ii) in the event of any acceleration of the Subsidiary Borrower Guaranteed Obligations as provided in Article VII, the Subsidiary Borrower Guaranteed Obligations (whether or not due and payable) shall forthwith become due and payable by the Company for the purpose of this Company Guaranty. SECTION 9.03. Effect of Debtor Relief Laws. IF after receipt of any payment of, or ws proceeds of any security applied (or intended to be applied) to the payment of all or any part of the Subsidiary Borrower Guaranteed Obligations, the Administrative Agent, the Issuing Bank or any Lender is for any reason compelled to surrender or voluntarily surrenders, such payment or proceeds to any Person (a) because such payment or application of proceeds is or may be avoided, invalidated, declared fraudulent, set aside, determined to be void or voidable as a preference, fraudulent conveyance, fraudulent transfer, impermissible set-off or a diversion of trust funds or (b) for any other reason, including (i) any judgment, decree or order of any court or administrative body having jurisdiction over the Administrative Agent, the Issuing Bank, any Lender or any of their respective properties or (ii) any settlement or compromise of any such claim effected by the Administrative Agent, the Issuing Bank or any Lender with any such claimant (including the Subsidiary Borrower), then the Subsidiary Borrower Guaranteed Obligations or part thereof intended to be satisfied shall be reinstated and continue, and this Company Guaranty shall continue in full force as if such payment or proceeds have not been received, notwithstanding any revocation thereof or the cancellation of any instrument evidencing any of the Subsidiary Borrower Guaranteed Obligations or otherwise; and the Company shall be liable to pay the Administrative Agent, the Issuing Bank and the Lenders, and hereby do indemnify the Administrative Agent, the Issuing Bank and the Lenders and hold them harmless for the amount of such payment or proceeds so surrendered and all reasonable expenses (including reasonable attorneys' fees, court costs and expenses attributable thereto) incurred by the Administrative Agent, the Issuing Bank or any Lender in the defense of any claim made against it that any payment or proceeds received by the Administrative Agent, the Issuing Bank or any Lender in respect of all or part of the Subsidiary Borrower Guaranteed Obligations must be surrendered. The provisions of this paragraph shall survive the termination of this Company Guaranty, and any satisfaction and discharge of the Subsidiary Borrower by virtue of any payment, court order or any Federal or state law. SECTION 9.04. Waiver. The Company hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Subsidiary Borrower Guaranteed Obligations and this Company Guaranty and waives presentment, demand for payment, notice of intent to accelerate, notice of dishonor or nonpayment and any requirement that the Administrative Agent or any Lender institute suit, collection proceedings or take any other action to collect the Subsidiary Borrower Guaranteed Obligations, including any require- ment that the Administrative Agent or any Lender protect, secure, perfect or insure any Lien against any property subject thereto or exhaust any right or take any action against the Subsidiary Borrower or any other Person or any collateral (it being the intention of the Administrative Agent, the Lenders and the Company that this -80- Company Guaranty is to be a guaranty of payment and not of collection). It shall not be necessary for the Administrative Agent or any Lender, in order to enforce any payment by the Company hereunder, to institute suit or exhaust its rights and remedies against the Subsidiary Borrower, any Subsidiary Guarantor or any other Person, including others liable to pay any Subsidiary Borrower Guaranteed Obligations, or to enforce its rights against any security ever given to secure payment thereof. The Company hereby expressly waives to the maximum extent permitted by applicable law each and every right to which it may be entitled by virtue of the suretyship laws of the State of New York or any other state in which it may be located, including any and all rights it may have pursuant to Rule 31, Texas Rules of Civil Procedure, Section 17.001 of the Texas Civil Practice and Remedies Code and Chapter 34 of the Texas Business and Commerce Code. The Company hereby waives marshaling of assets and liabilities, notice by the Administrative Agent or any Lender of any indebtedness or liability to which such Lender applies or may apply any amounts received by such Lender, and of the creation, advancement, increase, existence, extension, renewal, rearrangement or modification of the Subsidiary Borrower Guaranteed Obligations. The Company expressly waives, to the extent permitted by applicable law, the benefit of any and all laws providing for exemption of property from execution or for valuation and appraisal upon foreclosure. SECTION 9.05. Full Force and Effect. This Company Guaranty is a continuing guaranty and shall remain in full force and effect until all of the Subsidiary Borrower Guaranteed Obligations under this Agreement and the other Loan Documents to which the Subsidiary Borrower is a party and all other amounts payable under this Company Guaranty have been paid in full (after the termination of the Commitments of the Lenders and the termination or expiration of the Existing Letter of Credit). All rights, remedies and powers provided in this Company Guaranty may be exercised, and all waivers contained in this Company Guaranty may be enforced, only to the extent that the exercise or enforcement thereof does not violate any provisions of applicable law which may not be waived. ARTICLE X. Subsidiary Guarantors Guaranty SECTION 10.01. Subsidiary Guarantors Guaranty. (a) In consideration of, and in order to induce the Administrative Agent and the Lenders to enter into this Agreement and to induce the Lenders to make the Loans and the Issuing Bank to maintain the Existing Letter of Credit and to issue new Letters of Credit hereunder, each Subsidiary Guarantor hereby absolutely, unconditionally and irrevocably, jointly and severally guarantees the punctual payment and performance when due, whether at stated maturity, by acceleration or otherwise, of the Obligations of the Borrowers (as such), and all other obligations and covenants of the Borrowers (as such), now or hereafter existing under this Agreement and the other Loan Documents to which either Borrower is a party, whether for principal, interest (including interest accruing or becoming owing both prior to and subsequent to the commencement of any proceeding against or with respect to such Borrower under the Bankruptcy Code, commitment fees, commissions, expenses (including reasonable attorneys' fees and expenses) or otherwise, subject however to the limitation set forth in Section 10.04 (all such obligations being the "Borrower Guaranteed Obligations", it being understood, for the avoidance of doubt, that such term shall not include any Obligations of either Borrower in any -81- capacity other than as a Borrower hereunder, e.g., as the maker of the Company Guaranty or this Subsidiary Borrower Guaranty). Moreover, the term "Borrower Guaranteed Obligations" shall not, as to the Person that is the Subsidiary Borrower, include its own obligations, either as such or as a Subsidiary Guarantor. Each Subsidiary Guarantor agrees to pay any and all expenses incurred by each Lender and the Administrative Agent in enforcing this Subsidiary Guarantors Guaranty against such Subsidiary Guarantor. (b) Each Subsidiary Guarantor agrees that the amount of the Borrower Guaranteed Obligations may at any time and from time to time exceed the amount of the maximum liability of such Subsidiary Guarantor in respect thereof under this Subsidiary Guarantors Guaranty (by reason of the limitations set forth in Section 10.04) without impairing this Subsidiary Guarantors Guaranty or affecting the rights and remedies of the Administrative Agent and the Lenders hereunder. (c) This Subsidiary Guarantors Guaranty is an absolute, unconditional, present and continuing guaranty of payment and not of collectibility and is in no way conditioned upon any attempt to collect from the Company, any other Loan Party or any other action, occurrence or circumstance whatsoever. SECTION 10.02. Continuing Guaranty. (a) Each Subsidiary Guarantor guarantees that the Borrower Guaranteed Obligations will be paid strictly in accordance with the terms of this Agreement and the other Loan Documents. Each Subsidiary Guarantor agrees that, to the maximum extent permitted by applicable law, the Borrower Guaranteed Obligations and the Loan Documents may be extended or renewed, and Loans repaid and reborrowed in whole or in part, without notice to or assent by such Subsidiary Guarantor, and that it will remain bound upon this Subsidiary Guarantors Guaranty notwithstanding any extension, renewal or other alteration of any of the Borrower Guaranteed Obligations or the Loan Documents, or any repayment and reborrowing of Loans. To the maximum extent permitted by applicable law, except as otherwise expressly provided in this Agreement or any other Loan Document to which such Subsidiary Guarantor is a party, the obligations of each Subsidiary Guarantor under this Subsidiary Guarantors Guaranty shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms hereof under any circumstances whatsoever, including: (i) any modification, amendment, supplement, renewal, extension for any period, increase, decrease, alteration or rearrangement of all or any part of the Borrower Guaranteed Obligations or this Agreement or any other Loan Document executed in connection herewith, or any contract or understanding among either Borrower, any Subsidiary Guarantor, the Administrative Agent and/or the Lenders, or any other Person, pertaining to the Borrower Guaranteed Obligations; (ii) any adjustment, indulgence, forbearance or compromise that might be granted or given by the Lenders to either Borrower or any Subsidiary Guarantor or any other Person liable on the Borrower Guaranteed Obligations; -82- (iii) the insolvency, bankruptcy, arrangement, adjustment, composition, liquidation, disability, dissolution or lack of power of either Borrower, any Subsidiary Guarantor or any other Person at any time liable for the payment of all or part of the Borrower Guaranteed Obligations; or any dissolution of either Borrower or any Subsidiary Guarantor, or any sale, lease or transfer of any or all of the assets of either Borrower or any Subsidiary Guarantor, or any changes in the holders of the equity in either Borrower or any Subsidiary Guarantor; or any reorganization of either Borrower or any Subsidiary Guarantor; (iv) the invalidity, illegality or unenforceability of all or any part of the Borrower Guaranteed Obligations, or any document or agreement executed in connection with the Borrower Guaranteed Obligations, for any reason whatsoever, including the fact that (A) the Borrower Guaranteed Obligations, or any part thereof, exceeds the amount permitted by law, (B) the act of creating the Borrower Guaranteed Obligations or any part thereof is ultra vires, (C) the officers or representatives executing the documents or otherwise creating the Borrower Guaranteed Obligations acted in excess of their authority, (D) the Borrower Guaranteed Obligations or any part thereof violate applicable usury laws, (E) either Borrower or any Subsidiary Guarantor has valid defenses, claims and offsets (whether at law or in equity, by agreement or by statute) which render the Borrower Guaranteed Obligations wholly or partially uncollectible from either Borrower or such Subsidiary Guarantor, (F) the creation, performance or repayment of the Borrower Guaranteed Obligations (or execution, delivery and performance of any document or instrument representing part of the Borrower Guaranteed Obligations or executed in connection with the Borrower Guaranteed Obligations, or given to secure the repayment of the Borrower Guaranteed Obligations) is illegal, uncollectible, legally impossible or unenforceable, or (G) this Agreement, any other Loan Document, or any other document or instrument pertaining to the Borrower Guaranteed Obligations has been forged or otherwise is irregular or not genuine or authentic; (v) any full or partial release of the liability of either Borrower or any Subsidiary Guarantor on the Borrower Guaranteed Obligations or any part thereof, or any other Person now or hereafter liable, whether directly or indirectly, jointly, severally, or jointly and severally, to pay, perform, guarantee or assure the payment of the Borrower Guaranteed Obligations or any part thereof; it being recognized, acknowledged and agreed by each Subsidiary Guarantor that such Subsidiary Guarantor may be required to pay the Borrower Guaranteed Obligations in full without assistance or support of any other Person, and such Subsidiary Guarantor has not been induced to enter into this Guaranty on the basis of a contemplation, belief, understanding or agreement that any other Person will be liable to perform the Borrower Guaranteed Obligations, or that the Administrative Agent or any Lender will look to any other Person to perform the Borrower Guaranteed Obligations; (vi) the taking or accepting of any other security, collateral or guaranty, or other assurance of payment, for all or any part of the Borrower Guaranteed Obligations; (vii) any release, surrender, exchange, subordination, deterioration, waste, loss or impairment of any collateral, property or security, at any time existing in connection with, or assuring or securing payment of, all or any part of the Borrower Guaranteed Obligations; -83- (viii) the failure of the Administrative Agent, the Lenders or any other Person to exercise diligence or reasonable care in the preservation, protection, enforcement, sale or other handling or treatment of all or any part of such collateral, property or security; (ix) the fact that any collateral, security or Lien contemplated or intended to be given, created or granted as security for the repayment of the Borrower Guaranteed Obligations shall not be properly perfected or created, or shall prove to be unenforceable or subordinate to any other Lien; it being recognized and agreed by each Subsidiary Guarantor that such Subsidiary Guarantor is not entering into this Subsidiary Guarantors Guaranty in reliance on, or in contemplation of the benefits of, the validity, enforceability, collectibility or value of any of the collateral for the Borrower Guaranteed Obligations; (x) any payment by the Company or any Subsidiary Guarantor to the Administrative Agent or any Lender is held to constitute a preference under bankruptcy laws, or for any reason either the Administrative Agent or any Lender is required to refund such payment or pay such amount to the Company or any other Person; or (xi) any other action taken or omitted to be taken with respect to this Agreement, any other Loan Document, the Borrower Guaranteed Obligations, or the security and collateral therefor, whether or not such action or omission prejudices any Subsidiary Guarantor or increases the likelihood that any Subsidiary Guarantor will be required to pay the Borrower Guaranteed Obligations pursuant to the terms hereof; it being the unambiguous and unequivocal intention of each Subsidiary Guarantor that such Subsidiary Guarantor shall be obligated to pay the Borrower Guaranteed Obligations when due, notwithstanding any occurrence, circumstance, event, action, or omission whatsoever, whether contemplated or uncontemplated, and whether or not otherwise or particularly described herein, except for the full and final payment and satisfaction of the Borrower Guaranteed Obligations after the termination of the Commitments of all Lenders and the expiration or termination of all Letters of Credit. (b) Each Subsidiary Guarantor further agrees that, as between such Subsidiary Guarantor, on the one hand, and the Lenders and the Administrative Agent, on the other hand, (i) the maturity of the Borrower Guaranteed Obligations may be accelerated as provided in Article VII for the purposes of this Subsidiary Guarantors Guaranty, notwithstanding any stay, injunction or other prohibition preventing such acceleration of the Borrower Guaranteed Obligations, and (ii) in the event of any acceleration of the Obligations as provided in Article VII, the Borrower Guaranteed Obligations (whether or not due and payable) shall forthwith become due and payable by each Subsidiary Guarantor for the purpose of this Subsidiary Guarantors Guaranty. SECTION 10.03. Effect of Debtor Relief Laws. If after receipt of any payment of, or ws proceeds of any security applied (or intended to be applied) to the payment of all or any part of the Borrower Guaranteed Obligations, the Administrative Agent, the Issuing Bank or any Lender is for any reason compelled to surrender or voluntarily surrenders, such payment or proceeds to any Person (a) because such payment or application of proceeds is or may be avoided, invalidated, declared fraudulent, set aside, determined to be void or voidable as a preference, fraudulent conveyance, -84- fraudulent transfer, impermissible set-off or a diversion of trust funds or (b) for any other reason, including (i) any judgment, decree or order of any court or administrative body having jurisdiction over the Administrative Agent, the Issuing Bank, any Lender or any of their respective properties or (ii) any settlement or compromise of any such claim effected by the Administrative Agent, the Issuing Bank or any Lender with any such claimant (including the Company), then the Borrower Guaranteed Obligations or part thereof intended to be satisfied shall be reinstated and continue, and this Subsidiary Guarantors Guaranty shall continue in full force as if such payment or proceeds have not been received, notwithstanding any revocation thereof or the cancellation of any Note or any other instrument evidencing any of the Borrower Guaranteed Obligations or otherwise; and the Subsidiary Guarantors, jointly and severally, shall be liable to pay the Administrative Agent, the Issuing Bank and the Lenders, and hereby do indemnify the Administrative Agent, the Issuing Bank and the Lenders and hold them harmless for the amount of such payment or proceeds so surrendered and all reasonable expenses (including reasonable attorneys' fees, court costs and expenses attributable thereto) incurred by the Administrative Agent, the Issuing Bank or any Lender in the defense of any claim made against it that any payment or proceeds received by the Administrative Agent, the Issuing Bank or any Lender in respect of all or part of the Borrower Guaranteed Obligations must be surrendered. The provisions of this paragraph shall survive the termination of this Subsidiary Guarantors Guaranty, and any satisfaction and discharge of the Company by virtue of any payment, court order or any Federal or state law. SECTION 10.04 General Limitation on Borrower Guaranteed Obligations. In any action or proceeding involving any state corporate law, or any state or Federal bankruptcy, insolvency, reorganization or other law affecting the rights of creditors generally, if the obligations of any Subsidiary Guarantor under Section 10.01 would otherwise, taking into account the provisions of Section 10.05, be held or determined to be void, invalid or unenforceable, or subordinated to the claims of any other creditors, on account of the amount of its liability under Section 10.01, then, notwithstanding any other provision hereof to the contrary, the amount of such liability shall, without any further action by such Subsidiary Guarantor, any Lender, the Administrative Agent or any other Person, be automatically limited and reduced to the highest amount that is valid and enforceable and not subordinated to the claims of other creditors as determined in such action or proceeding. SECTION 10.05. Rights of Contribution. The Subsidiary Guarantors hereby agree, as between themselves, that if any Subsidiary Guarantor shall become an Excess Funding Obligor (as defined below) by reason of the payment by such Subsidiary Guarantor of any of the Borrower Guaranteed Obligations, each other Subsidiary Guarantor shall, on demand of such Excess Funding Obligor (but subject to the next sentence), pay to such Excess Funding Obligor an amount equal to such Subsidiary Guarantor's Pro Rata Share (as defined below and determined, for this purpose, without reference to the properties, debts and liabilities of such Excess Funding Obligor) of the Excess Payment (as defined below) in respect of such Borrower Guaranteed Obligations. For purposes of this Section 10.05, (i) "Excess Funding Obligor" shall mean, in respect of any of the Borrower Guaranteed Obligations, a Subsidiary Guarantor that has paid an amount in excess of its Pro Rata Share of such Borrower Guaranteed Obligations, (ii) "Excess Payment" shall mean, in respect of any of the Borrower Guaranteed Obligations, the amount paid by an Excess Funding Obligor in excess of its Pro Rata Share of such Borrower Guaranteed -85- Obligations and (iii) "Pro Rata Share" shall mean, for any Subsidiary Guarantor, the ratio (expressed as a percentage) of (x) the amount by which the aggregate fair saleable value of all properties of such Subsidiary Guarantor on the date of this Agreement exceeds the amount of all the debts and liabilities of such Subsidiary Guarantor (including contingent, subordinated, unmatured and unliquidated liabilities, but excluding the obligations that have been guaranteed by such Subsidiary Guarantor in Section 10.01) to (y) the amount by which the aggregate fair saleable value of all assets of the Borrowers and all the Subsidiary Guarantors exceeds the amount of all the debts and liabilities (including contingent, subordinated, unmatured and unliquidated liabilities, but excluding the obligations of the Borrowers and the Subsidiary Guarantors hereunder) of the Borrowers and all the Subsidiary Guarantors, all as of the Execution Date. SECTION 10.06. Subrogation. Notwithstanding any payment or payments made by any Subsidiary Guarantor hereunder, or any set-off or application by the Administrative Agent or any Lender of any security or of any credits or claims, no Subsidiary Guarantor will assert or exercise any rights of the Administrative Agent or any Lender or of such Subsidiary Guarantor against either Borrower to recover the amount of any payment made by such Subsidiary Guarantor to the Administrative Agent or any Lender hereunder by way of any claim, remedy or subrogation, reimbursement, exoneration, contribution, indemnity, participation or otherwise arising by contract, by statute, under common law or otherwise, and such Subsidiary Guarantor shall not have any right of recourse to or any claim against assets or property of either Borrower, until all of the Borrower Guaranteed Obligations are paid in full after the termination of the Commitments of all Lenders and the expiration or termination of all Letters of Credit. If any amount shall nevertheless be paid to a Subsidiary Guarantor by either Borrower or another Subsidiary Guarantor prior to payment in full of the Borrower Guaranteed Obligations, such amount shall be held in trust for the benefit of the Administrative Agent and the Lenders and shall forthwith be paid to the Administrative Agent to be credited and applied to the Borrower Guaranteed Obligations, whether matured or unmatured. The provisions of this paragraph shall survive the termination of this Subsidiary Guarantors Guaranty, and any satisfaction and discharge of either Borrower by virtue of any payment, court order or any Federal or state law. SECTION 10.07. Subordination. If any Subsidiary Guarantor becomes the holder of any indebtedness payable by either Borrower or another Subsidiary Guarantor, each Subsidiary Guarantor hereby subordinates all indebtedness owing to it from such Borrower or such other Subsidiary Guarantor to all indebtedness of such Borrower or such other Subsidiary Guarantor to the Administrative Agent and the Lenders, and agrees that during the continuance of any Default or Event of Default it shall not accept any payment on the same until the first to occur of (a) the date such Default or Event of Default no longer exists and (b) payment in full of the Borrower Guaranteed Obligations of the Borrowers under this Agreement and the other Loan Documents after the termination of the Commitments of the Lenders and the termination or expiration of the Letters of Credit and all other Loan Documents, and, while any Default or Event of Default exists, shall in no circumstance whatsoever attempt to set-off or reduce any obligations hereunder because of such indebtedness. If any amount shall nevertheless be paid to a Subsidiary Guarantor by either Borrower or another Subsidiary Guarantor prior to payment in full of the Borrower Guaranteed Obligations and, while any Default or Event of Default exists, such amount shall be held in trust for the benefit -86- of the Administrative Agent and the Lenders and shall forthwith be paid to the Administrative Agent to be credited and applied to the Borrower Guaranteed Obligations, whether matured or unmatured. SECTION 10.08. Waiver. Each Subsidiary Guarantor hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Borrower Guaranteed Obligations and this Subsidiary Guarantors Guaranty and waives presentment, demand for payment, notice of intent to accelerate, notice of dishonor or nonpayment and any requirement that the Administrative Agent or any Lender institute suit, collection proceedings or take any other action to collect the Borrower Guaranteed Obligations, including any requirement that the Administrative Agent or any Lender protect, secure, perfect or insure any Lien against any property subject thereto or exhaust any right or take any action against the Company or any other Person or any collateral (it being the intention of the Administrative Agent, the Lenders and each Subsidiary Guarantor that this Subsidiary Guarantors Guaranty is to be a guaranty of payment and not of collection). It shall not be necessary for the Administrative Agent or any Lender, in order to enforce any payment by any Subsidiary Guarantor hereunder, to institute suit or exhaust its rights and remedies against either Borrower, any other Subsidiary Guarantor or any other Person, including others liable to pay any Borrower Guaranteed Obligations, or to enforce its rights against any security ever given to secure payment thereof. Each Subsidiary Guarantor hereby expressly waives to the maximum extent permitted by applicable law each and every right to which it may be entitled by virtue of the suretyship laws of the State of New York or any other state in which it may be located, including any and all rights it may have pursuant to Rule 31, Texas Rules of Civil Procedure, Section 17.001 of the Texas Civil Practice and Remedies Code and Chapter 34 of the Texas Business and Commerce Code. Each Subsidiary Guarantor hereby waives marshaling of assets and liabilities, notice by the Administrative Agent or any Lender of any indebtedness or liability to which such Lender applies or may apply any amounts received by such Lender, and of the creation, advancement, increase, existence, extension, renewal, rearrangement or modification of the Borrower Guaranteed Obligations. Each Subsidiary Guarantor expressly waives, to the extent permitted by applicable law, the benefit of any and all laws providing for exemption of property from execution or for valuation and appraisal upon foreclosure. SECTION 10.09. Full Force and Effect. This Subsidiary Guarantors Guaranty is a continuing guaranty and shall remain in full force and effect until all of the Borrower Guaranteed Obligations under this Agreement and the other Loan Documents and all other amounts payable under this Subsidiary Guarantors Guaranty have been paid in full (after the termination of the Commitments of the Lenders and the termination or expiration of the Letters of Credit). All rights, remedies and powers provided in this Subsidiary Guarantors Guaranty may be exercised, and all waivers contained in this Subsidiary Guarantors Guaranty may be enforced, only to the extent that the exercise or enforcement thereof does not violate any provisions of applicable law which may not be waived. -87- ARTICLE XI. Miscellaneous SECTION 11.01 Notices, Etc. The Administrative Agent, the Issuing Bank, any Lender or the holder of any of the Obligations, giving consent or notice or making any request of any Loan Party provided for hereunder, shall notify each Lender (in the case of the Administrative Agent and/or the Issuing Bank) and the Administrative Agent (in the case of a Lender) thereof. In the event that the holder of any Note or any of the Obligations (including any Lender) shall transfer such Note or Obligations, it shall promptly so advise the Administrative Agent which shall be entitled to assume conclusively that no transfer of any Note or any of the Obligations has been made by any holder (including any Lender) unless and until the Administrative Agent receives written notice to the contrary. Except with respect to notices and other communications expressly permitted to be given by telephone, all notices, consents, requests, approvals, demands and other communications (collectively "Communications") provided for herein shall be in writing (including facsimile Communications) and mailed, telecopied or delivered: (a) if to the Company, to it at 1301 McKinney Street, Suite 3450, Houston, Texas 77010, Attention of David G. Dehaemers, Jr. (Telecopy No. (713) 844-9570); (b) if to any other Loan Party, to it in care of the Company; (c) if to the Administrative Agent, to it at _ First Union Capital Markets Corp., 1001 Fannin Street, Suite 2255, Houston, Texas 77002, Attention of Paul Riddle (Telecopy No. 713-650-6354); (d) if to the Issuing Bank, to it at _ First Union Capital Markets Corp., 1001 Fannin Street, Suite 2255, Houston, Texas 77002, Attention of Paul Riddle (Telecopy No. 713-650-6354); (e) if to the Swingline Lender, to it at _ First Union Capital Markets Corp., 1001 Fannin Street, Suite 2255, Houston, Texas 77002, Attention of Paul Riddle (Telecopy No. 713-650-6354); and (f) If to any other Lender, as specified on the signature page for such Lender hereto or, in the case of any Person who becomes a Lender after the date hereof, as specified on the Assignment and Acceptance executed by such Person or in the Administrative Questionnaire delivered by such Person or, in the case of any party hereto, such other address or telecopy number as such party may hereafter specify for such purpose by notice to the other parties. All Communications shall, when mailed, telecopied or delivered, be effective when mailed by certified mail, return receipt requested to any party at its address specified above, on the signature page hereof or on the signature page of such Assignment and Acceptance (or other address designated by such party in a Communication to the other parties hereto), or telecopied to any party to the telecopy number set forth above, on the signature page hereof or on the signature page of such Assignment and Acceptance (or other telecopy number designated by such party in a Communication -88- to the other parties hereto), or delivered personally to any party at its address specified above, on the signature page hereof or on the signature page of such Assignment and Acceptance (or other address designated by such party in a Communication to the other parties hereto); provided, however, Communications to the Administrative Agent pursuant to Article II or Article VIII shall not be effective until received by the Administrative Agent and Communications to the Administrative Agent, the Issuing Bank or the Swingline Lender pursuant to Article II shall be at the Principal Office. SECTION 11.02 Waivers; Amendments. (a) No failure or delay by the Administrative Agent, the Issuing Bank or any Lender in exercising, and no course of dealing with respect to, any right or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. No notice to or demand on any Loan Party in any case shall entitle such Loan Party to any other or further notice or demand in similar or other circumstances. No waiver of any provision of this Agreement or consent to any departure therefrom shall in any event be effective unless the same shall be permitted by Section 11.02(b), and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan or issuance of a Letter of Credit shall not be construed as a waiver of any Default or Event of Default, regardless of whether the Administrative Agent, any Lender or the Issuing Bank may have had notice or knowledge of such Default at the time. (b) No provision of this Agreement or any other Loan Document provision may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Loan Parties and the Required Lenders or by the Loan Parties and the Administrative Agent with the consent of the Required Lenders; provided that no such agreement shall (i) increase the Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any Loan or LC Disbursement or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the scheduled date of payment of the principal amount of any Loan or LC Disbursement, or any interest thereon, or any fees payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration of any Commitment, without the written consent of each Lender affected thereby, (iv) change Section 2.18(b) or (c) in a manner that would alter the pro rata sharing of payments required thereby, without the written consent of each Lender, or (v) release the Company or any Subsidiary Guarantor from their respective guarantees contained in Article IX or Article X, release any Collateral or change any of the provisions of this Section 11.02(b), Section 11.05 or the definition of "Required Lenders" or any other provision hereof specifying the number or percentage of Lenders required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender (it being understood that, with the consent of Required Lenders, additional extensions of credit pursuant to this Agreement may be included in the determination of "Required Lenders" and provisions relating to the pro rata sharing of payments on substantially the same basis as the Revolving Loans and Commitments are included on the Execution Date); provided further that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent or the -89- Issuing Bank hereunder without the prior written consent of the Administrative Agent or the Issuing Bank, as the case may be. SECTION 11.03 Payment of Expenses, Indemnities, etc. The Company agrees: (a) whether or not the transactions hereby contemplated are consummated, pay all reasonable expenses of the Administrative Agent in the administration (both before and after the execution hereof and including advice of counsel as to the rights and duties of the Administrative Agent and the Lenders with respect thereto) of, and in connection with the negotiation, syndication, investigation, preparation, execution and delivery of, recording or filing of, preservation of rights under, enforcement of, and refinancing, renegotiation or restructuring of, the Loan Documents and any amendment, waiver or consent relating thereto (including, without limitation, travel, photocopy, mailing, courier, telephone and other similar expenses of the Administrative Agent, the cost of environmental audits, surveys and appraisals at reasonable intervals, the reasonable fees and disbursements of counsel and other outside consultants for the Administrative Agent and, in the case of enforcement of this Agreement and the other Loan Documents, the reasonable fees and disbursements of counsel, including the allocated costs of inside counsel, for each of the Administrative Agent and the Issuing Bank, and each Lender); and promptly reimburse the Administrative Agent for all amounts expended, advanced or incurred by the Administrative Agent or the Lenders to satisfy any obligation of any Loan Party under this Agreement or any Security Document, including without limitation, all costs and expenses of foreclosure. (b) TO INDEMNIFY THE ADMINISTRATIVE AGENT, THE SYNDICATION AGENT, THE ISSUING BANK AND EACH LENDER AND EACH OF THEIR AFFILIATES AND EACH OF THEIR OFFICERS, DIRECTORS, EMPLOYEES, REPRESENTATIVES, AGENTS, ATTORNEYS, ACCOUNTANTS AND EXPERTS ("INDEMNIFIED PARTIES") FROM, HOLD EACH OF THEM HARMLESS AGAINST AND PROMPTLY UPON DEMAND PAY OR REIMBURSE EACH OF THEM FOR, THE INDEMNITY MATTERS WHICH MAY BE INCURRED BY OR ASSERTED AGAINST OR INVOLVE ANY OF THEM (WHETHER OR NOT ANY OF THEM IS DESIGNATED A PARTY THERETO) AS A RESULT OF, ARISING OUT OF OR IN ANY WAY RELATED TO (I) ANY ACTUAL OR PROPOSED USE BY EITHER BORROWER OF THE PROCEEDS OF ANY OF THE LOANS OR THE LETTER OF CREDIT, (II) THE EXECUTION, DELIVERY AND PERFORMANCE OF THE LOAN DOCUMENTS, (III) THE OPERATIONS OF THE BUSINESS OF THE COMPANY AND THE RESTRICTED SUBSIDIARIES, (IV) THE FAILURE OF THE COMPANY OR ANY RESTRICTED SUBSIDIARY TO COMPLY WITH THE TERMS OF ANY SECURITY DOCUMENT OR THIS AGREEMENT, OR WITH ANY REQUIREMENT OF LAW, (V) ANY INACCURACY OF ANY REPRESENTATION OR ANY BREACH OF ANY WARRANTY OF ANY LOAN PARTY SET FORTH IN ANY OF THE LOAN DOCUMENTS, (VI) THE ISSUANCE, EXECUTION AND DELIVERY OR TRANSFER OF OR PAYMENT OR FAILURE TO PAY UNDER ANY LETTER OF CREDIT, (VII) THE PAYMENT OF A DRAWING UNDER ANY LETTER OF CREDIT NOTWITHSTANDING THE NON-COMPLIANCE, NON-DELIVERY OR OTHER IMPROPER PRESENTATION OF THE MANUALLY EXECUTED DRAFT(S) AND CERTIFICATION(S), (VIII) ANY ASSERTION THAT THE -90- LENDERS WERE NOT ENTITLED TO RECEIVE THE PROCEEDS RECEIVED PURSUANT TO THE SECURITY DOCUMENTS OR (IX) ANY OTHER ASPECT OF THE LOAN DOCUMENTS, INCLUDING THE REASONABLE FEES AND DISBURSEMENTS OF COUNSEL AND ALL OTHER EXPENSES INCURRED IN CONNECTION WITH INVESTIGATING, DEFENDING OR PREPARING TO DEFEND ANY SUCH ACTION, SUIT, PROCEEDING (INCLUDING ANY INVESTIGATIONS, LITIGATION OR INQUIRIES) OR CLAIM AND INCLUDING ALL INDEMNITY MATTERS ARISING BY REASON OF THE ORDINARY NEGLIGENCE OF ANY INDEMNIFIED PARTY, BUT EXCLUDING ALL INDEMNITY MATTERS ARISING SOLELY BY REASON OF CLAIMS BETWEEN THE LENDERS OR ANY LENDER AND THE ADMINISTRATIVE AGENT OR THE SYNDICATION AGENT OR A LENDER'S SHAREHOLDERS AGAINST THE ADMINISTRATIVE AGENT OR LENDER OR BY REASON OF THE GROSS NEGLIGENCE, WILLFUL MISCONDUCT OR UNLAWFUL CONDUCT ON THE PART OF THE INDEMNIFIED PARTY SEEKING INDEMNIFICATION. (c) TO INDEMNIFY AND HOLD HARMLESS FROM TIME TO TIME THE INDEMNIFIED PARTIES FROM AND AGAINST ANY AND ALL LOSSES, CLAIMS, COST RECOVERY ACTIONS, ADMINISTRATIVE ORDERS OR PROCEEDINGS, DAMAGES AND LIABILITIES TO WHICH ANY SUCH PERSON MAY BECOME SUBJECT (I) UNDER ANY ENVIRONMENTAL LAW APPLICABLE TO THE COMPANY OR ANY SUBSIDIARY OR ANY OF THEIR PROPERTIES OR ASSETS, INCLUDING THE TREATMENT OR DISPOSAL OF HAZARDOUS SUBSTANCES ON ANY OF THEIR PROPERTIES OR ASSETS, (II) AS A RESULT OF THE BREACH OR NON-COMPLIANCE BY THE COMPANY OR ANY SUBSIDIARY WITH ANY ENVIRONMENTAL LAW APPLICABLE TO THE COMPANY OR ANY SUBSIDIARY, (III) DUE TO PAST OWNERSHIP BY THE COMPANY OR ANY SUBSIDIARY OF ANY OF THEIR PROPERTIES OR ASSETS OR PAST ACTIVITY ON ANY OF THEIR PROPERTIES OR ASSETS WHICH, THOUGH LAWFUL AND FULLY PERMISSIBLE AT THE TIME, COULD RESULT IN PRESENT LIABILITY, (IV) THE PRESENCE, USE, RELEASE, STORAGE, TREATMENT OR DISPOSAL OF HAZARDOUS SUBSTANCES ON OR AT ANY OF THE PROPERTIES OWNED OR OPERATED BY THE BORROWER OR ANY SUBSIDIARY, OR (V) ANY OTHER ENVIRONMENTAL, HEALTH OR SAFETY CONDITION IN CONNECTION WITH THE LOAN DOCUMENTS, PROVIDED, HOWEVER, THAT NO INDEMNITY SHALL BE AFFORDED UNDER THIS SECTION 11.03(c) IN RESPECT OF ANY PROPERTY OR ASSET FOR ANY OCCURRENCE ARISING FROM THE ACTS OR OMISSIONS OF THE ADMINISTRATIVE AGENT OR ANY LENDER DURING THE PERIOD AFTER WHICH SUCH PERSON, ITS SUCCESSORS OR ASSIGNS SHALL HAVE OBTAINED POSSESSION OF SUCH PROPERTY OR ASSET (WHETHER BY FORECLOSURE OR DEED IN LIEU OF FORECLOSURE, AS MORTGAGEE-IN-POSSESSION OR OTHERWISE). (d) No Indemnified Party may settle any claim to be indemnified without the consent of the indemnitor, such consent not to be unreasonably withheld; provided, that the indemnitor may not reasonably withhold consent to any settlement that an Indemnified Party proposes, if the indemnitor does not have the financial ability to pay all its obligations outstanding -91- and asserted against the indemnitor at that time, including the maximum potential claims against the Indemnified Party to be indemnified pursuant to this Section 11.03. (e) In the case of any indemnification hereunder, the Administrative Agent or Lender, as appropriate shall give notice to the Company of any such claim or demand being made against the Indemnified Party and the Company shall have the non-exclusive right to join in the defense against any such claim or demand; provided that if the Company provides a defense, the Indemnified Party shall bear its own cost of defense unless there is a conflict between the Company and such Indemnified Party. (f) THE FOREGOING INDEMNITIES SHALL EXTEND TO THE INDEMNIFIED PARTIES NOTWITHSTANDING THE SOLE OR CONCURRENT NEGLIGENCE OF EVERY KIND OR CHARACTER WHATSOEVER, WHETHER ACTIVE OR PASSIVE, WHETHER AN AFFIRMATIVE ACT OR AN OMISSION, INCLUDING, ALL TYPES OF NEGLIGENT CONDUCT IDENTIFIED IN THE RESTATEMENT (SECOND) OF TORTS OF ONE OR MORE OF THE INDEMNIFIED PARTIES OR BY REASON OF STRICT LIABILITY IMPOSED WITHOUT FAULT ON ANY ONE OR MORE OF THE INDEMNIFIED PARTIES. TO THE EXTENT THAT AN INDEMNIFIED PARTY IS FOUND TO HAVE COMMITTED AN ACT OF GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OR ENGAGED IN UNLAWFUL CONDUCT, THIS CONTRACTUAL OBLIGATION OF INDEMNIFICATION SHALL CONTINUE BUT SHALL ONLY EXTEND TO THE PORTION OF THE CLAIM THAT IS DEEMED TO HAVE OCCURRED BY REASON OF EVENTS OTHER THAN THE GROSS NEGLIGENCE, WILLFUL MISCONDUCT OR UNLAWFUL CONDUCT OF THE INDEMNIFIED PARTY. (g) The Company's obligations under this Section 11.03 shall survive any termination of this Agreement, the payment of the Loans and the expiration of the Letters of Credit and shall continue thereafter in full force and effect, for a period of six years. (h) To the extent that the Company fails to pay any amount required to be paid by it to the Administrative Agent or the Issuing Bank under this Section 11.03, each Lender severally agrees to pay to the Administrative Agent or the Issuing Bank, as the case may be, such Lender's Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent or the Issuing Bank in its capacity as such. (i) The Company shall pay any amounts due under this Section 11.03 within thirty (30) days of the receipt by the Company of notice of the amount due. SECTION 11.04 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby. Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby and, to the extent expressly contemplated hereby, the Related Parties of each of the -92- Administrative Agent, the Issuing Bank and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement. SECTION 11.05 Assignments and Participations. Assignments and (a) No Loan Party may assign its rights or obligations hereunder or under the Notes or any Letter of Credit without the prior consent of all of the Lenders and the Administrative Agent. (b) Any Lender may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided that (i) except in the case of an assignment to a Lender or an Affiliate of a Lender, any other Eligible Assignee, each of the Company and the Administrative Agent (and, in the case of an assignment of all or a portion of a Commitment or any Lender's obligations in respect of its LC Exposure or Swingline Exposure, the Issuing Bank and the Swingline Lender) must give their prior written consent to such assignment (which consent shall not be unreasonably withheld), (ii) except in the case of an assignment to a Lender or an Affiliate of a Lender or an assignment of the entire remaining amount of the assigning Lender's Commitment, the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $10,000,000 unless each of the Company and the Administrative Agent otherwise consent, (iii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement, (iv) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,500 for each such assignment (provided that the processing and recordation fee for each assignment made by any Lender party to this Agreement on the Execution Date shall be $2,000), and (v) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire; provided further that any consent of the Company otherwise required under this Section 11.05(b) shall not be required if an Event of Default under Section 7.01(g) or Section 7.01(h) has occurred and is continuing. Upon acceptance and recording pursuant to Section 11.05(d), from and after the effective date specified in each Assignment and Acceptance, the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.15, 2.16, 2.17 and 11.03). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with Section 11.05(e). (c) The Administrative Agent, acting for this purpose as an agent of the Loan Parties, shall maintain at one of its offices in Charlotte, North Carolina a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the -93- Lenders, and the Commitment of, and principal amount of the Loans and LC Disbursements owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive, and each Loan Party, the Administrative Agent, the Issuing Bank and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by any Loan Party, the Issuing Bank and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, the assignee's completed Administrative Questionnaire (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in Section 11.05(b) and any written consent to such assignment required by Section 11.05(b), the Administrative Agent shall accept such Assignment and Acceptance and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph. (e) Any Lender may, without the consent of any Loan Party, the Administrative Agent or the Issuing Bank, sell participations to one or more banks or other entities (a "Participant") in all or a portion of such Lender's rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Company, the Administrative Agent, the Issuing Bank and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 11.02(b) that affects such Participant. Subject to Section 11.05(f), each Loan Party agrees that each Participant shall be entitled to the benefits of Sections 2.15, 2.16 and 2.17 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to Section 11.05(b), and be indemnified under Section 11.03 as if it were a Lender. In addition, each agreement creating any participation must include an agreement by the Participant to be bound by the provisions of Section 11.12. (f) A Participant shall not be entitled to receive any greater payment under Section 2.15 or 2.17 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Company's prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.17 unless the Company is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Company, to comply with Section 2.17(e) as though it were a Lender. -94- (g) The Lenders may furnish any information concerning the Borrower in the possession of the Lenders from time to time to assignees and Participants (including prospective assignees and participants); provided that, such Persons agree to be bound by the provisions of Section 11.12 hereof. (h) Notwithstanding anything in this Section 11.05 to the contrary, any Lender may assign and pledge its Notes to any Federal Reserve Bank or the United States Treasury as collateral security pursuant to Regulation A and any operating circular issued by such Federal Reserve System and/or such Federal Reserve Bank. No such assignment and/or pledge shall release the assigning and/or pledging Lender from its obligations hereunder. (i) Notwithstanding any other provisions of this Section 11.05, no transfer or assignment of the interests or obligations of any Lender or any grant of participations therein shall be permitted if such transfer, assignment or grant would require a Borrower to file a registration statement with the SEC or to qualify the Loans under the "Blue Sky" laws of any state. SECTION 11.06 Survival; Resintatement. (a) All covenants, agreements, tement representations and warranties made by the Company herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of this Agreement and the making of any Loans and issuance of any Letters of Credit, regardless of any investigation made by any such other party or on its behalf and notwith- standing that the Administrative Agent, the Issuing Bank or any Lender may have had notice or knowledge of any Default or Event of Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid or any Letter of Credit is outstanding and so long as the Commitments have not expired or terminated. The provisions of Sections 2.15, 2.16, 2.17 and 11.03 and Article VIII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Letters of Credit and the Commitments or the termination of this Agreement or any provision hereof. (b) To the extent that any payments on the Obligations or proceeds of any Collateral are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver or other Person under any bankruptcy law, common law or equitable cause, then to such extent, the Obligations so satisfied shall be revived and continue as if such payment or proceeds had not been received and the Administrative Agent's, the Issuing Bank's and the Lenders' Liens, security interests, rights, powers and remedies under this Agreement and each Security Document shall continue in full force and effect. In such event, each Security Document shall be automatically reinstated and each Loan Party thereto shall take such action as may be reasonably requested by the Administrative Agent, the Issuing Bank and the Lenders to effect such reinstatement. SECTION 11.07 Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which -95- shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement, the other Loan Documents and the Fee Letter constitute the entire contract among the parties hereto relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof (including the Information Memorandum). Except as provided in Section 3.01, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. SECTION 11.08 Severability. Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. SECTION 11.09 Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of any Loan Party against any of and all the Obligations now or hereafter existing under this Agreement and the other Loan Documents held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such Obligations may be unmatured. The rights of each Lender under this Section 11.09 are in addition to other rights and remedies (including other rights of setoff) which such Lender may have. SECTION 11.10 Governing Laws; Jurisdiction; Consent to Service of Process. (a) This Agreement and the other Loan Documents shall be construed in accordance with and governed by the law of the State of New York. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY AND ASSETS, UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS WITH RESPECT TO ANY SUCH ACTION OR PROCEEDING. EACH LOAN PARTY HEREBY IRREVOCABLY DESIGNATES, APPOINTS AND EMPOWERS CT CORPORATION SYSTEM, INC., WITH OFFICES ON THE DATE HEREOF AT 1633 BROADWAY, NEW YORK, NEW YORK 10019, AS ITS DESIGNEE, APPOINTEE AND -96- AGENT TO RECEIVE, ACCEPT AND ACKNOWLEDGE FOR AND ON ITS BEHALF, AND IN RESPECT OF ITS PROPERTY, SERVICE OF ANY AND ALL LEGAL PROCESS, SUMMONS, NOTICES AND DOCUMENTS WHICH MAY BE SERVED IN ANY SUCH ACTION OR PROCEEDING. IF FOR ANY REASON SUCH DESIGNEE, APPOINTEE AND AGENT SHALL CEASE TO BE AVAILABLE TO ACT AS SUCH, EACH SUCH LOAN PARTY AGREES TO DESIGNATE A NEW DESIGNEE, APPOINTEE AND AGENT IN NEW YORK, NEW YORK ON THE TERMS AND FOR THE PURPOSES OF THIS PROVISION SATISFACTORY TO THE ADMINISTRATIVE AGENT. EACH LOAN PARTY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO IT AT ITS ADDRESS PROVIDED IN SECTION 11.01, SUCH SERVICE TO BECOME EFFECTIVE THIRTY DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE ADMINISTRATIVE AGENT OR ANY LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST ANY LOAN PARTY IN ANY OTHER JURISDICTION. (c) EACH OF THE LOAN PARTIES HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (b) ABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. (d) EACH PARTY HERETO HEREBY (I) IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT PERMITTED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (II) CERTIFIES THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (III) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE SECURITY DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION 11.10. SECTION 11.11 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS -97- AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 11.11. SECTION 11.12 Confidentiality. Each of the Administrative Agent, the Issuing Bank and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its Affiliates, directors, officers and employees and to its agents, including accountants, legal counsel and other advisors who have been informed of the confidential nature of the information provided, (b) to the extent requested by any regulatory authority, including the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about a Lender's investment portfolio, (c) to the extent a Lender reasonably believes it is required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (f) subject to an understanding with such Person that such Person will comply with this Section 11.12, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, (g) with the consent of the Company or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section 11.12 or (ii) becomes available to the Administrative Agent, the Issuing Bank or any Lender from a source other than a Loan Party. For the purposes of this Section 11.12, "Information" means all information received from any Loan Party relating to any Loan Party or its business, other than any such information that is known to a Lender, publicly known or otherwise available to the Administrative Agent, the Issuing Bank or any Lender other than through disclosure (a) by a Loan Party, or (b) from a source actually known to a Lender to be bound by a confidentiality agreement or other legal or contractual obligation of confidentiality with respect to such information; provided that, in the case of information received from any Loan Party after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section 11.12 shall be considered to have complied with its obligation to do so if such Person maintains the confidentiality of such Information in accordance with procedures adopted in good faith to protect confidential information of third parties delivered to a lender. SECTION 11.13 Interest Rate Limitation. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts which are treated as interest on such Loan under applicable law (collectively the "Charges"), shall exceed the maximum lawful rate (the "Maximum Rate") which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all -98- Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section 11.13 shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender. SECTION 11.14. EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS; THAT IT HAS IN FACT READ THIS AGREEMENT AND IS FULLY INFORMED AND HAS FULL NOTICE AND KNOWLEDGE OF THE TERMS, CONDITIONS AND EFFECTS OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS; THAT IT HAS BEEN REPRESENTED BY INDEPENDENT LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE NEGOTIATIONS PRECEDING ITS EXECUTION OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS; AND HAS RECEIVED THE ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS; AND THAT IT RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS RESULT IN ONE PARTY ASSUMING THE LIABILITY INHERENT IN SOME ASPECTS OF THE TRANSACTION AND RELIEVING THE OTHER PARTY OF ITS RESPONSIBILITY FOR SUCH LIABILITY. EACH PARTY HERETO AGREES AND COVENANTS THAT IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY PROVISION OF THIS AGREEMENT AND THE SECURITY DOCUMENTS ON THE BASIS THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT "CONSPICUOUS." -99- The parties hereto have caused this Agreement to be duly executed as of the date and year first above written. KINDER MORGAN ENERGY PARTNERS, L.P., as the Company By: Kinder Morgan G.P., Inc. its General Partner By: /s/ William V. Morgan Name: William V. Morgan Title: Vice Chairman Address for Notices: 1301 McKinney Street Suite 3450 Houston, Texas 77010 Telecopier No.: (713) 844-9570 Telephone No.: (713) 844-9500 Attention: David G. Dehaemers, Jr. Chief Executive Office and Principal Place of Business: 1301 McKinney Street Suite 3450 Houston, Texas 77010 S-1 KINDER MORGAN OPERATING L.P. "B", as the Subsidiary Borrower and as a Subsidiary Guarantor By: Kinder Morgan G.P., Inc. its General Partner By: /s/ William V. Morgan Name: William V. Morgan Title: Vice Chairman Address for Notices: 1301 McKinney Street Suite 3450 Houston, Texas 77010 Telecopier No.: (713) 844-9570 Telephone No.: (713) 844-9500 Attention: David G. Dehaemers, Jr. Chief Executive Office and Principal Place of Business: 1301 McKinney Street Suite 3450 Houston, Texas 77010 S-2 KINDER MORGAN OPERATING L.P. "A", as a Subsidiary Guarantor By: Kinder Morgan G.P., Inc. its General Partner By: /s/ William V. Morgan Name: William V. Morgan Title: Vice Chairman Address for Notices: 1301 McKinney Street Suite 3450 Houston, Texas 77010 Telecopier No.: (713) 844-9570 Telephone No.: (713) 844-9500 Attention: David G. Dehaemers, Jr. Chief Executive Office and Principal Place of Business: 1301 McKinney Street Suite 3450 Houston, Texas 77010 S-3 KINDER MORGAN OPERATING L.P. "C", as a Subsidiary Guarantor By: Kinder Morgan G.P., Inc. its General Partner By: /s/ William V. Morgan Name: William V. Morgan Title: Vice Chairman Address for Notices: 1301 McKinney Street Suite 3450 Houston, Texas 77010 Telecopier No.: (713) 844-9570 Telephone No.: (713) 844-9500 Attention: David G. Dehaemers, Jr. Chief Executive Office and Principal Place of Business: 1301 McKinney Street Suite 3450 Houston, Texas 77010 S-4 KINDER MORGAN OPERATING L.P. "D", as a Subsidiary Guarantor By: Kinder Morgan G.P., Inc. its General Partner By: /s/ Wiliam V. Morgan Name: William V. Morgan Title: Vice Chairman Address for Notices: 1301 McKinney Street Suite 3450 Houston, Texas 77010 Telecopier No.: (713) 844-9570 Telephone No.: (713) 844-9500 Attention: David G. Dehaemers, Jr. Chief Executive Office and Principal Place of Business: 1301 McKinney Street Suite 3450 Houston, Texas 77010 S-5 KINDER MORGAN NATURAL GAS LIQUIDS CORPORATION, as a Subsidiary Guarantor By: /s/ William V. Morgan Name: William V. Morgan Title: Vice Chairman Address for Notices: 1301 McKinney Street Suite 3450 Houston, Texas 77010 Telecopier No.: (713) 844-9570 Telephone No.: (713) 844-9500 Attention: David G. Dehaemers, Jr. Chief Executive Office and Principal Place of Business: 1301 McKinney Street Suite 3450 Houston, Texas 77010 S-6 KINDER MORGAN CO2, LLC, as a Subsidiary Guarantor By: Kinder Morgan Operating L.P., "A", its Sole Member By: Kinder Morgan G.P., Inc. its General Partner By: /s/ William V. Morgan Name: William V. Morgan Title: Vice Chairman Address for Notices: 1301 McKinney Street Suite 3450 Houston, Texas 77010 Telecopier No.: (713) 844-9570 Telephone No.: (713) 844-9500 Attention: David G. Dehaemers, Jr. Chief Executive Office and Principal Place of Business: 1301 McKinney Street Suite 3450 Houston, Texas 77010 S-7 Revolving Loan Commitment FIRST UNION NATIONAL BANK, as the Administrative $32,500,000 the Issuing Bank, the Swingline Lender and as a Lender By: /s/ David Roberts Name: David Roberts Title: Senior Vice President First Union National Bank 301 South College Street, TW-10 Charlotte, North Carolina 28288-0608 Telecopier No.: (704) 383-0288 Telephone No.: (704) 383-0281 Attention: Syndication Agency Services With copy to: First Union Capital Markets Corp. 1001 Fannin, Suite 2255 Houston, Texas 77002 Telecopier No.: (713) 650-6354 Telephone No.: (713) 650-3716 Attention: Paul N. Riddle S-8 Revolving Loan Commitment GOLDMAN SACHS CREDIT PARTNERS L.P., as $32,500,000 the Syndication Agent and as a Lender By: /s/ Ed Forst Name: Ed Forst Title: Authorized Signatory Address for Notices: Goldman, Sachs & Co. 85 Broad Street, 27th Floor New York, NY 10004 Telecopier No.: (212) 357-8680 Telephone No.: (212) 902-8123 Attention: Stephen B. King S-9 Revolving Loan Commitment BANK OF AMERICA NATIONAL TRUST AND SAVINGS $10,000,000 ASSOCIATION By: /s/ Daryl G. Patterson Name: Daryl G. Patterson Title: Vice President Address for Notices: Bank of America NT&SA 1850 Gateway Blvd. Concord, California 94520 Telecopier No.: (510) 603-7243 Telephone No.: (510) 675-7148 Attention: Laurie Warner With copy to: Pamela K. Rodgers Bank of America NT&SA 333 Clay Street, Suite 4550 Houston, Texas 77002 Telecopier No.: (713) 651-4808 Telephone No.: (713) 651-4880 S-10 Revolving Loan Commitment BANK OF MONTREAL $12,500,000.00 By: /s/ B.R. Gallow Name: B.R. Gallow Title: Managing Director Address for Notices: Bank of Montreal 700 Louisiana Street, Suite 4400 Houston, Texas 77002 Telecopier No.: (713) 223-4007 Telephone No.: (713) 546-9750 Attention: Cahal B. Carmody, Director S-11 Revolving Loan Commitment BANK OF SCOTLAND $10,000,000 By: /s/ Annie Chin Tat Name: Annie Chin Tat Title: Vice President Address for Notices: Bank of Scotland 565 Fifth Avenue New York, New York 10017 Telecopier No.: (212) 557-9460 Telephone No.: (212) 450-0871 Attention: Annie Chin Tat With copy to: Bank of Scotland 1750 Two Allen Center 1200 Smith Street Houston, Texas 77002-4312 Telecopier No.: (713) 651-9714 Telephone No.: (713) 651-1870 Attention: Janna Blanter S-12 Revolving Loan Commitment BANK ONE, TEXAS, NA $12,500,000 By: /s/ John B. Lane Name: John B. Lane Title: Vice President Address for Notices: Bank One, Texas, NA 910 Travis, 6th Floor Houston, Texas 77002 Telecopier No.: (713) 751-3544 Telephone No.: (713) 751-6246 Attention: David Phillips S-13 Revolving Loan Commitment BANQUE PARIBAS $12,500,000 By: /s/ Marian Livingston Name: Marian Livingston Title: Vice President By: /s/ Michael H. Fiuzat Name: Michael H. Fiuzat Title: Vice President Address for Notices: Banque Paribas 1200 Smith Street, Suite 3100 Houston, Texas 77002 Telecopier No.: (713) 659-6915 Telephone No.: (713) 659-4811 Attention: Marian Livingston S-14 Revolving Loan Commitment BARCLAYS BANK PLC $22,000,000 By: /s/ J. Onischuk Name: J. Onischuk Title: Associate Director Address for Notices: Barclays Bank PLC 222 Broadway New York, New York 10038 Telecopier No.: (212) 412-7585 Telephone No.: (212) 412-7584 Attention: J. Onischuk S-15 Revolving Loan Commitment CIBC INC. $10,000,000 By: /s/ Aleksandra K. Dymanus Name: Aleksandra K. Dymanus Title: Authorized Signatory Address for Notices: CIBC, Inc. Two Paces West, Suite 1200 2727 Paces Ferry Road Atlanta, Georgia 30339 Telecopier No.: (770) 319-4950 Telephone No.: (770) 319-4821 Attention: Kathryn S. McGovern S-16 Revolving Loan Commitment COMMERZBANK AG, ATLANTA AGENCY $10,000,000 By: /s/ Harry P. Yergey Name: Harry P. Yergey Title: Senior Vice President and Manager By: /s/ Eric R. Kagerer Name: Eric R. Kagerer Title: Vice President Address for Notices: Commerzbank AG, Atlanta Agency Promenade Two, Suite 3500 1230 Peachtree Street, NE Atlanta, Georgia 30309 Telecopier No.: (404) 888-6539 Telephone No.: (404) 888-6524 Attention: David Suttles, Vice President With a copy to: Dempsey L. Gable, Senior Vice President Commerzbank AG, New York Branch 2 World Financial Center New York, New York 10281-1050 Telecopier No.: (212) 266-7530 Telephone No.: (212) 266-7560 S-17 Revolving Loan Commitment CREDIT LYONNAIS NEW YORK BRANCH $10,000,000.00 By: /s/ Phillippe Soustra Name: Phillippe Soustra Title: Senior Vice President Address for Notices: Credit Lyonnais Houston Representative Office 1000 Louisiana, Suite 5360 Houston, Texas 77002 Telecopier No.: (713) 751-0307 Telephone No.: (713) 753-8723 Attention: Bernadette Archie S-18 Revolving Loan Commitment DEN NORSKE BANK ASA $12,500,000 By: /s/ Charles E. Hall Name: Charles E. Hall Title: Senior Vice President By: /s/ J. Morten Kreutz Name: J. Morten Kreutz Title: Vice President 333 Clay Street, Suite 4890 Houston, Texas 77002 Telecopier No.: (713) 757-1167 Telephone No.: (713) 844-9255 Attention: Charles E. Hall, Senior Vice President With copy to: Den norske Bank ASA 200 Park Avenue, 31st Floor New York, New York 10066-0396 Attention: Cathleen Buckley, Credit Administration Telecopier No.: (212) 681-3900 Telephone No.: (212) 681-3824 S-19 Revolving Loan Commitment THE FIRST NATIONAL BANK OF CHICAGO $22,000,000 By: /s/ Gail F. Scannell Name: Gail F. Scannell Title: Vice President Address for Notices: The First National Bank of Chicago One First National Plaza Suite 0634, I-10 Chicago, Illinois 60670 Telecopier No.: (312) 732-4840 Telephone No.: (312) 732-3659 Attention: John Beirne S-20 Revolving Loan Commitment THE FUJI BANK, LIMITED (HOUSTON AGENCY) $10,000,000 By: /s/ David Kelley Name: David Kelley Title: Senior Vice President Address for Notices: The Fuji Bank, Limited (Houston Agency) 1221 McKinney Street, Suite 4100 Houston, Texas 77010 Telecopier No.: (713) 759-0048 Telephone No.: (713) 650-7829 Attention: Charles van Ravenswaay With copy to: Jinny Lin, Vice President and Manager Loan Administration 1221 McKinney, Suite 4100 Houston, Texas 77010 Telecopier No.: (713) 951-0590 Telephone No.: (713) 650-7821 S-21 Revolving Loan Commitment NATIONSBANK OF TEXAS, N.A. $22,000,000 By: /s/ John J. Roberts Name: John H. Roberts Title: Vice President Address for Notices: NationsBank of Texas, N.A. 700 Louisiana Houston, Texas 77002 Telecopier No.: (713) 247-6568 Telephone No.: (713) 247-6952 Attention: Paul A. Squires S-22 Revolving Loan Commitment THE PRUDENTIAL INSURANCE COMPANY OF AMERICA $22,000,000 By: /s/ Steven D. Arnold Name: Steven D. Arnold Title: Vice President Address for Notices: The Prudential Insurance Company of America c/o Prudential Capital Group Four Gateway Center 100 Mulberry Street Newark, New Jersey 07102-4869 Telecopier No.: (973) 802-9425 Telephone No.: Attention: Trade Management Manager With copy to: The Prudential Insurance Company of America c/o Prudential Capital Group 2200 Ross Avenue, Suite 4200 East Dallas, Texas 75201 Attention: Managing Director S-23 Revolving Loan Commitment ROYAL BANK OF CANADA $10,000,000 By: /s/ Andy Williamson Name: Andy Williamson Title: Senior Manager Address for Notices: Royal Bank of Canada 1 Financial Square, 23rd Floor New York, NY 10005-3531 Attn: Asst. Manager, Loan Processing Fax: (212) 428-2372 Phone: (212) 428-6321 With Copies to: Royal Bank of Canada 12450 Greenspoint Drive, Suite 1450 Houston, TX 77060 Telecopier No.: (281) 874-0081 Telephone No.: (281) 874-5662 Attention: Gil J. Bernard, Senior Manager S-24 Revolving Loan Commitment SOCIE'TE' GE'NE'RALE $22,000,000 By: /s/ Richard A. Gould Name: Richard A. Gould Title: Vice President Address for Notices: Socie'te' Ge'ne'rale 2001 Ross Avenue, Suite 4800 Dallas, Texas 75201 Telecopier No.: (214) 979-0171 Telephone No.: (214) 979-2769 Attention: Lia Guerra With copy to: Societe Generale 1111 Bagby, Suite 2020 Houston, Texas 77002 Telecopier No.: (713) 650-0824 Telephone No.: (713) 759-6324 Attention: Richard Gould S-25 Revolving Loan Commitment PNC BANK, NATIONAL ASSOCIATION $10,000,000 By: /s/ John R. Way Name: John R. Way Title: Assistant Vice President Address for Notices: 249 5th Avenue Pittsburgh, Pennsylvania 15222 Telecopier No.: (412) 762-2571 Telephone No.: (412) 762-5290 Attention: John R. Way S-26 Revolving Loan Commitment UNION BANK OF CALIFORNIA $10,000,000 By: /s/ Carl Stutzman Name: Carl Stutzman Title: Vice President & Deputy Manager Address for Notices: 500 North Akard, Suite 4200 Dallas, TX 75201 Telecopier No.: (214) 922-4209 Telephone No.: (214) 922-4200 Attention: Gary Shekerjian, Asst. Vice President S-27 Revolving Loan Commitment WELLS FARGO BANK (TEXAS), NA $10,000,000 By: /s/ J. Alan Alexander Name: J. Alan Alexander Title: Vice President Address for Notices: Wells Fargo Bank (Texas), N.A. Energy Department 1000 Louisiana, Third Floor Houston, Texas 77002 Telecopier No.: (713) 250-7912 Telephone No.: (713) 250-1651 Attention: J. Alan Alexander With copy to: Oscar Enriquez 201 Third Street, 8th Floor San Francisco, California 94103 Telecopier No.: (415) 979-0675 Telephone No.: (415) 477-5425 S-28 EX-4.10 9 PLEDGE AGREEMENT BY KMEP EXECUTION COPY PLEDGE AGREEMENT THIS PLEDGE AGREEMENT (as from time to time amended, modified or supplemented, this "Agreement") dated as of February 17, 1998, is made by KINDER MORGAN ENERGY PARTNERS, L.P., a Delaware limited partnership (the "Pledgor"), in favor of FIRST UNION NATIONAL BANK, as administrative agent (in such capacity, the "Administrative Agent") for the banks and other financial institutions (the "Lenders") parties to the Credit Agreement (as defined below). PRELIMINARY STATEMENTS (A) The Pledgor, Kinder Morgan Operating L.P. "B" (the "Subsidiary Borrower") certain other subsidiaries of the Pledgor (together with Subsidiary Borrower in its capacity as a Subsidiary Guarantor, collectively, the "Subsidiary Guarantors"), the Lenders, the Administrative Agent and Goldman Sachs Credit Partners L.P., as syndication agent (in such capacity, the "Syndication Agent"), are parties to a Credit Agreement dated as of the date hereof (as the same may be amended and in effect from time to time, the "Credit Agreement"), providing, subject to the terms and conditions thereof, for extensions of credit to be made by the Lenders to the Pledgor and the Subsidiary Borrower; (B) The Pledgor is the owner of a 98.9899% limited partner interest (collectively, the "Interests") of each of the Subsidiaries listed in Part I of Schedule I under the title "Issuer" (all such Subsidiaries collectively, the "Issuers"); (C) The Pledgor is the owner of 100% of the indebtedness evidenced by the promissory notes (the "Pledged Debt") and issued by the obligors named therein described in Part II of Schedule I; and (D) In order to induce the Lenders to enter into the Credit Agreement and to extend credit thereunder to the Pledgor and the Subsidiary Borrower, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Pledgor has agreed to pledge and grant a security interest in the Collateral (as defined below) as security for the Secured Obligations (as defined below). Accordingly, the parties hereto agree as follows: SECTION 1. Defined Terms: Interpretation. 1.01 Defined Terms. (a) The capitalized terms used herein which are defined in the Credit Agreement and not otherwise defined herein have, as used herein, the respective meanings provided for therein. (b) Unless otherwise defined herein or in the Credit Agreement, terms defined in Articles 8 and 9 of the UCC are used herein as therein defined. (c) As used in this Agreement, the following terms shall have the following meanings: "Administrative Agent" has the meaning specified in the Introduction hereof. "Agreement" has the meaning specified in the Introduction hereof. "Collateral" has the meaning specified in Section 3. "Credit Agreement" has the meaning specified in the Preliminary Statements. "Interests" has the meaning specified in the Preliminary Statements. "Issuers" has the meaning specified in the Preliminary Statements. "Lenders" has the meaning specified in the Introduction hereof. "Pledged Debt" has the meaning specified in the Preliminary Statements. "Pledged Interests" has the meaning specified in Section 3. "Pledgor" has the meaning specified in the Introduction hereof. "Proceeds" has the meaning specified in Section 9-306 of the UCC. "Secured Obligations" means collectively: (i) the payment of all indebtedness and liabilities by, and performance of all other obligations of, the Pledgor in respect of the Loans; -2- (ii) all obligations of the Pledgor and the Subsidiary Borrower under, with respect to, and relating to the Letters of Credit whether contingent or matured; (iii) all obligations of the Pledgor or any Restricted Subsidiary (other than SFPP) owing to any Lender under any Hedging Agreement; (iv) the payment of all other indebtedness and liabilities by and performance of all other obligations of, the Pledgor and the Subsidiary Borrower to the Administrative Agent, the Issuing Bank and the Lenders under, with respect to, and arising in connection with, the Loan Documents, and the payment of all indebtedness and liabilities of the Pledgor and the Subsidiary Borrower to the Administrative Agent, the Issuing Bank and the Lenders for fees, costs, indemnification and expenses (including reasonable attorneys' fees and expenses) under the Loan Documents; (v) the payment of all sums advanced and costs and expenses incurred by the Administrative Agent or any Lender under any Loan Document (whether directly or indirectly) in connection with the Obligations or any part thereof or any renewal, extension or change of or substitution for the Obligations or any part thereof, whether such advances, costs and expenses were made or incurred at the request of any Loan Party, the Administrative Agent, the Issuing Bank or any Lender; and (vi) all renewals, extensions, amendments and changes of, or substitutions or replacements for, all or any part of the items described under clauses (i) through (v) above. "Secured Parties" means (i) the Lenders, (ii) the Issuing Bank Agent and (iii) the Administrative Agent. "Security Interests" means the security interests granted pursuant to Section 3, as well as all other security interests created or assigned as additional Collateral for the Secured Obligations pursuant to the provisions of this Agreement. "Subsidiary Borrower" has the meaning specified in the Preliminary Statements. "Subsidiary Guarantors" has the meaning specified in the Preliminary Statements. "Syndication Agent" has the meaning specified in the Preliminary Statements. "UCC" means the Uniform Commercial Code in effect from time to time in the State of New York; provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the Security Interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, "UCC" means the -3- Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection. 1.02 Interpretation. (a) In this Agreement, unless a clear contrary intention appears: (i) the singular number includes the plural number and vice versa; (ii) reference to any gender includes each other gender; (iii) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Section or other subdivision; (iv) reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually, provided that nothing in this clause (iv) is intended to authorize any assignment not otherwise permitted by this Agreement; (v) reference to any agreement (including this Agreement), document or instrument means such agreement, document or instrument as amended, supplemented or modified and in effect from time to time in accordance with the terms thereof and, if applicable, the terms hereof, and references to any Note includes any note issued in renewal, rearrangement, reinstatement, enlargement, amendment, modification, extension, substitution or replacement therefor; (vi) unless the context indicates otherwise, reference to any Section, Schedule or Exhibit means such Section hereof or such Schedule or Exhibit hereto; (vii) the word "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term; (viii) with respect to the determination of any period of time, the word "from" means "from and including" and the word "to" means "to but excluding"; and (ix) reference to any law, ordinance, statute, code, rule, regulation, interpretation or judgment means such law, ordinance, statute, code, rule, regulation, interpretation or judgment as amended, modified, codified or reenacted, in whole or in part, and in effect from time to time. -4- (b) The Section headings herein are for convenience only and shall not affect the construction hereof. (c) No provision of this Agreement shall be interpreted or construed against any Person solely because that Person or its legal representative drafted such provision. SECTION 2. Representations and Warranties of the Pledgor. The Pledgor represents and warrants as follows: (a) The Pledgor is the sole beneficial owner of the Collateral listed on Schedule I and will be the sole beneficial owner of all of the other limited partner interests of each Issuer. No Lien exists or will exist upon the Pledged Interests or any of the other limited partner interests of any Issuer or the Pledged Debt at any time (and no right or option to acquire the same exists in favor of any other Person), except for the pledge and security interest in favor of the Administrative Agent for the benefit of the Secured Parties created or provided for herein, which pledge and security interest constitute a first priority perfected pledge and security interest in and to all of the Interests pledged hereunder. (b) The Pledged Interests listed on Schedule I are, and all other limited partner interests which any Issuer may hereafter issue will be, duly authorized, validly existing, fully paid and non-assessable and none of such Pledged Interests is and none of such limited partner interests will be subject to any contractual restriction, or any restriction pursuant to the partnership agreement of such Issuer, upon the transfer of such limited partner interests or other limited partner interests (except for any such restriction contained herein or in the Credit Agreement). (c) The Pledged Debt has been duly authorized, validly issued, executed and delivered and is the legal, valid and binding obligation of the issuers thereof, and is not in default. (d) No authorization, approval, or other action by, and no notice to or filing with, any Governmental Authority is required either (i) for the pledge by the Pledgor of the Collateral pursuant to this Agreement or for the execution, delivery or performance of this Agreement by the Pledgor or (ii) for the exercise by the Administrative Agent of the voting or other rights provided for in this Agreement or the remedies in respect of such Collateral pursuant to this Agreement (except as may be required in connection with such disposition by laws affecting the offering and sale of securities generally). -5- (e) The Interests described in Part I of Schedule I constitute 100% of the issued and outstanding limited partner interests of each of Issuers described therein. Schedule I correctly identifies, as at the date hereof, the respective Issuers of the Pledged Interests. The Pledged Debt constitutes all of the outstanding indebtedness for money borrowed or for the deferred purchase price of property owing by the respective obligors thereof to the Pledgor. (f) None of the partnership agreements creating any of the Issuers provide that the limited partner interests of such Issuer are securities governed by Article 8 of the UCC and none of the Pledged Interests is a "security" within the meaning of Section 8-102(a) of the UCC. (g) This Agreement creates a valid and perfected first priority security interest in the Collateral, securing the payment of the Secured Obligations. (h) Upon the filing of a financing statement in the office of the Secretary of State of the State of Texas, the Administrative Agent for the benefit of the other Secured Parties will have a perfected first priority security interest in the Pledged Interests. (i) The delivery of the Pledged Debt to the Administrative Agent pursuant to the Agreement creates a valid and perfected first priority security interest in the Pledged Debt, securing payment of the Secured Obligations. SECTION 3. The Security Interests. (a) In order to secure the full and punctual payment of the Secured Obligations in accordance with the terms thereof, the Pledgor hereby hypothecates, transfers and grants to the Administrative Agent for the ratable benefit of the Secured Parties a continuing security interest in and to all right, title and interest of the Pledgor in the following property, whether now owned or existing or hereafter acquired or arising and regardless of where located (all being collectively referred to as the "Collateral"): (i) the Interests identified in Part I of Schedule I and all other limited partner interests of the Issuers, now or hereafter owned by the Pledgor (the Interests and all such additional limited partner interests, collectively the "Pledged Interests"); (ii) all securities, moneys or other property representing or constituting the Pledged Interests or representing a distribution in respect of any of the Pledged Interests, or representing a return of capital upon or in respect of the Pledged Interests, or resulting from a split-up, revision, reclassification or other like change of the Pledged Interests or otherwise received in exchange therefor, and any subscriptions warrants, rights or options issued to the holders of, or otherwise in respect of, the Pledged Interests; -6- (iii) without affecting the obligations of the Pledgor under any provision prohibiting such action hereunder or under the Credit Agreement, in the event of any consolidation or merger in which an Issuer is not the surviving entity, all of the Capital Stock of the successor entity formed by or resulting from such consolidation or merger excluding (A) in the case of a corporation, directors' qualifying shares, (B) in the case of a limited partnership, a 1.5% general partner interest and (C) in the case of a limited liability company a 1.5% member interest, in which event only such Capital Stock shall be included as Collateral; (iv) the Pledged Debt and the instruments evidencing the Pledged Debt, and all interest, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Debt; (v) all additional indebtedness from time to time owed to the Pledgor by any obligor on the Pledged Debt and the instruments evidencing such indebtedness, and all interest, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; and (vi) all Proceeds of and to any of the property of the Pledgor described in the preceding clauses of this Section 3 (including all causes of action, claims and warranties now or hereafter held by the Pledgor in respect of any of the items listed above) and, to the extent related to any property described in said clauses or such Proceeds, all books, correspondence, credit files, records, invoices and other papers. All certificates or instruments representing or evidencing the Collateral shall be delivered to and held by or on behalf of the Administrative Agent pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Administrative Agent. The Administrative Agent shall have the right, at any time in its sole discretion and without notice to the Pledgor, to transfer to or to register in the name of the Administrative Agent or any of its nominees any or all of the Collateral, subject only to the revocable rights specified in Section 4.03(b) and (c) hereof. (b) The inclusion of Proceeds in this Agreement does not authorize the Pledgor to sell, dispose of or otherwise use the Collateral in any manner not specifically authorized hereby or by the Credit Agreement. -7- SECTION 4. Further Assurances; Remedies. In furtherance of the grant of the Security Interest, the Pledgor hereby agrees with each Lender and the Administrative Agent as follows: 4.01 Delivery and Other Perfection. The Pledgor shall: (a) deliver to the Administrative Agent prior to or concurrently with the execution and delivery of this Agreement all certificates, if any, representing the Interests identified in Schedule I, endorsed in blank accompanied by undated stock powers duly executed in blank. (b) if any of the securities, instruments, moneys or other property required to be pledged by the Pledgor under Section 3(a) are received by the Pledgor, forthwith either (x) transfer and deliver to the Administrative Agent such securities or instruments so received by the Pledgor duly endorsed in blank or accompanied by undated powers duly executed in blank), all of which thereafter shall be held by the Administrative Agent pursuant to the terms of this Agreement, as part of the Collateral or (y) take such other action as the Administrative Agent shall deem necessary or appropriate to duly record the Lien created hereunder in such securities, instruments, moneys or other property in said clauses (i), (ii) and (iii); and (c) give, execute, deliver, file and/or record any financing statement, notice, instrument, document, agreement or other papers that may be reasonably requested by the Administrative Agent in order to create, preserve, perfect or validate the security interest granted pursuant hereto or to enable the Administrative Agent to exercise and enforce its rights hereunder with respect to such pledge and security interest, including causing any or all of the Collateral to be transferred of record into the name of the Administrative Agent or its nominee (and the Administrative Agent agrees that if any Collateral is transferred into its name or the name of its nominee, the Administrative Agent will thereafter promptly give to the Pledgor copies of any notices and communications received by it with respect to the Collateral). The Pledgor hereby authorizes the Administrative Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of the Pledgor where permitted by law. A carbon, photographic or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. 4.02 Other Financing Statements and Liens; Additional Shares. (a) Without the prior written consent of the Administrative Agent (granted with the authorization of the Lenders as specified in Section 11.02 of the Credit Agreement), the Pledgor shall not file or suffer to be on file, -8- or authorize or permit to be filed or to be on file, in any jurisdiction, any financing statement or like instrument with respect to the Collateral in which the Administrative Agent is not named as the sole secured party for the benefit of the other Secured Parties. (b) The Pledgor agrees that it will (i) cause the Issuers not to issue any limited partner interests in addition to or in substitution for the Interests, except to the Pledgor and (ii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, the Pledgor will execute such documentation as requested by the Administrative Agent pledging, and evidencing the pledge hereunder of, such limited partner interests or other securities. (c) The Pledgor agrees that, from time to time upon the written request of the Administrative Agent, the Pledgor will execute and deliver such further documents and do such other acts and things as the Administrative Agent may reasonably request in order fully to effect the purposes of this Agreement. 4.03 Collateral. (a) The Pledgor will cause the Pledged Interests to constitute at all times 100% of the limited partner interest of each Issuer then outstanding. (b) Unless an Event of Default shall have occurred and be continuing and the Administrative Agent has notified the Pledgor to the contrary, the Pledgor shall have the right to exercise all voting, consensual and other powers of ownership pertaining to the Collateral for all purposes not inconsistent with the terms of this Agreement, the Credit Agreement, the other Loan Documents or any other instrument or agreement referred to herein or therein, provided that the Pledgor agrees that it will not vote the Collateral in any manner that is inconsistent with the terms of this Agreement, the Credit Agreement, the other Loan Documents or any such other instrument or agreement; and the Administrative Agent shall execute and deliver to the Pledgor or cause to be executed and delivered to the Pledgor all such proxies, powers of attorney, dividend and other orders, and all such instruments, without recourse, as the Pledgor may reasonably request for the purpose of enabling the Pledgor to exercise the rights and powers that it is entitled to exercise pursuant to this Section 4.03(b). (c) The Pledgor shall be entitled to receive and retain any and all distributions and interest paid in respect of the Collateral, provided, however, that any and all (A) distributions and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Collateral, (B) distributions paid or payable in cash in respect of any Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus, and (C) cash paid, payable or otherwise distributed in redemption of, or in exchange for any Collateral, shall be, and shall be forthwith delivered to the Administrative Agent to hold as, -9- Collateral and shall, if received by the Pledgor, be received in trust for the benefit of the Administrative Agent, be segregated from the other property or funds of the Pledgor, and be forthwith delivered to the Administrative Agent as Collateral in the same form as so received (with any necessary endorsement). (d) If any Event of Default shall have occurred, then so long as such Event of Default shall continue, and whether or not the Administrative Agent or any other Secured Party exercises any available right to declare any Secured Obligation due and payable or seeks or pursues any other relief or remedy available to it under applicable law or under this Agreement, the Credit Agreement, the other Loan Documents or any other agreement relating to such Secured Obligation, and the Administrative Agent so requires by notice to the Pledgor, all distributions and interest received by the Pledgor on the Collateral shall be paid directly by the Pledgor to the Administrative Agent and retained by it as part of the Collateral, subject to the terms of this Agreement, and, if the Administrative Agent shall so request in writing, the Pledgor agrees to execute and deliver to the Administrative Agent appropriate additional distribution and other orders and documents to that end, provided that if such Event of Default is cured, any such distribution or interest theretofore paid to the Administrative Agent shall, upon request of the Pledgor (except to the extent theretofore applied to the Secured Obligations), be returned by the Administrative Agent to the Pledgor. 4.04 Events of Default, Etc. During the period during which an Event of Default shall have occurred and be continuing: (a) the Administrative Agent shall have all of the rights and remedies with respect to the Collateral of a secured party under the UCC (to the extent permitted by law whether or not the UCC is in effect in the jurisdiction where the rights and remedies are asserted) and such additional rights and remedies to which a secured party is entitled under the laws in effect in any jurisdiction including if the Administrative Agent has notified the Pledgor that it intends to exercise such right, the right, to the maximum extent permitted by law, to exercise all voting, consensual and other powers of ownership pertaining to the Collateral as if the Administrative Agent were the sole and absolute owner thereof (and the Pledgor agrees to take all such action as may be appropriate to give effect to such right); (b) upon and during the continuance of an Event of Default, the Administrative Agent in its discretion may, in its name or in the name of the Pledgor or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for any of the Collateral, but shall be under no obligation to do so; and (c) the Administrative Agent may, upon not less than ten Business Days' prior written notice to the Pledgor of the time and place, with respect to the Collateral or any part thereof that shall then be or shall thereafter come into the possession, custody or control of the Administrative Agent, the other Secured Parties or any of their respective agents, sell, -10- assign or otherwise dispose of all or any part of such Collateral, at such place or places as the Administrative Agent deems best, and for cash or for credit or for future delivery (without thereby assuming any credit risk), at public or private sale, and the Administrative Agent or any Lender or anyone else may be the purchaser, lessee, assignee or recipient of any or all of the Collateral so disposed of at any public sale (or, to the extent permitted by law, at any private sale) and thereafter hold the same absolutely, free from any claim or right of whatsoever kind, including any right or equity of redemption (statutory or otherwise), of the Pledgor, any such demand, notice and right or equity being hereby expressly waived and released. The Pledgor agrees that such ten Business Days' notice constitutes "reasonable notification" within the meaning of Section 9-504 of the UCC. The Administrative Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the sale may be so adjourned. The proceeds of each collection, sale or other disposition under this Section 4.04 shall be applied in accordance with Section 4.08 hereof. The Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act of 1933, as amended, and applicable state securities laws, the Administrative Agent may be compelled, with respect to any sale of all or any part of the Collateral, to limit purchasers to those who will agree, among other things, to acquire the Collateral for their own account, for investment and not with a view to the distribution or resale thereof. The Pledgor acknowledges that any such private sales may be at prices lower than at a public sale without such restrictions, and notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that the Administrative Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any Collateral for the period of time necessary to permit the respective Issuer thereof to register it for public sale. 4.05 Deficiency. Without limiting the obligations of the Pledgor to pay the Secured Obligations, if the proceeds of sale, collection or other realization of or upon the Collateral pursuant to Section 4.04 hereof are insufficient to cover the costs and expenses of such realization and the payment in full of the Secured Obligations, the Pledgor shall remain liable for any deficiency. 4.06 Removals, Etc. Without at least 30 days' prior written notice to the Administrative Agent, the Pledgor shall not (a) maintain any of its books and records with respect to the Collateral at any office or maintain its principal place of business at any place other than at the address indicated for the Pledgor in the Credit Agreement or (b) change its name, or the name under which it does business, from the name shown on the signature pages hereto. 4.07 Private Sale. The Administrative Agent and the other Secured Parties shall incur no liability as a result of the sale of the Collateral, or any part thereof, at any private sale -11- pursuant to Section 4.04 hereof conducted in a commercially reasonable manner and in compliance with all applicable securities laws. The Pledgor hereby waives any claims against the Administrative Agent or any other Secured Party arising by reason of the fact that the price at which the Collateral may have been sold at such a private sale was less than the price that might have been obtained at a public sale or was less than the aggregate amount of the Secured Obligations. 4.08 Application of Proceeds. Except as otherwise herein expressly provided or as otherwise required by law, the proceeds of any collection, sale or other realization of all or any part of the Collateral pursuant hereto, and any other cash at the time held by the Administrative Agent under this Section 4, shall be applied by the Administrative Agent as provided in Section 7.03 of the Credit Agreement. The Administrative Agent may make distributions hereunder in cash or in kind or on a ratable basis or in any combination thereof. 4.09 Attorney-in-Fact. Without limiting any rights or powers granted by this Agreement to the Administrative Agent, while no Event of Default has occurred and is continuing, upon the occurrence and during the continuance of any Event of Default, the Administrative Agent is hereby appointed the attorney-in-fact of the Pledgor for the purpose of carrying out the provisions of this Section 4 and taking any action and executing any instruments that the Administrative Agent may deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, so long as the Administrative Agent shall be entitled under this Section 4 to make collections in respect of the Collateral, to the extent permitted by law, the Administrative Agent shall have the right and power to receive, endorse and collect all checks made payable to the order of the Pledgor representing any distribution or other payment in respect of the Collateral or any part thereof and to give full discharge for the same. SECTION 5. Administrative Agent. 5.01 Limitation on Duty of Administrative Agent in Respect of Collateral. The powers conferred on the Administrative Agent hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Administrative Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. The Administrative Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which the Administrative Agent accords its own property, it being understood that the Administrative Agent shall not have any responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, tenders or other matters relative to any Collateral, whether or not the Administrative Agent has or is deemed to have knowledge of such -12- matters, or (b) taking any necessary steps to preserve rights against any parties with respect to any Collateral. 5.02 Concerning the Administrative Agent. The provisions of Article VIII of the Credit Agreement shall inure to the benefit of the Administrative Agent in respect of this Agreement and shall be binding upon the parties to the Credit Agreement in such respect. In furtherance and not in derogation of the rights, privileges and immunities of the Administrative Agent therein set forth: (A) The Administrative Agent is authorized to take all such action as is provided to be taken by it as the Administrative Agent hereunder and all other action reasonably incidental thereto. As to any matters not expressly provided for herein (including the timing and methods of realization upon the Collateral) the Administrative Agent shall act or refrain from acting in accordance with written instructions from the Required Lenders or, in the absence of such instructions, in accordance with its discretion. (B) The Administrative Agent shall not be responsible for the existence, genuineness or value of any of the Collateral or for the validity, perfection, priority or enforceability of the Security Interests in any of the Collateral, whether impaired by operation of law or by reason of any action or omission to act on its part hereunder. The Administrative Agent shall have no duty to ascertain or inquire as to the performance or observance of any of the terms of this Agreement by the Pledgor. 5.03 Appointment of Agents and Attorneys-in-Fact. The Administrative Agent may employ agents and attorneys-in-fact in connection herewith and shall not be responsible for the negligence or misconduct (except for gross negligence, willful misconduct or unlawful conduct) of any such agents or attorneys-in-fact selected by it in good faith. Without limiting the foregoing, at any time or times, in order to comply with any legal requirement in any jurisdiction, the Administrative Agent may appoint another bank or trust company or one or more other Persons, either to act as co-agent or co-agents, jointly with the Administrative Agent, or to act as separate agent or agents on behalf of the Secured Parties with such power and authority as may be necessary for the effective operation of the provisions hereof and may be specified in the instrument of appointment (which may, in the discretion of the Administrative Agent, include provisions for the protection of such co-agent or separate agent similar to the provisions of the Credit Agreement referred to in Section 5.02). -13- SECTION 6. Miscellaneous. 6.01 No Waiver. No failure on the part of the Administrative Agent or any other Secured Party to exercise, and no course of dealing with respect to, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by the Administrative Agent or any other Secured Party of any right, power or remedy hereunder operate as a waiver thereof; nor shall any single or partial exercise by the Administrative Agent or any other Secured Party of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein are cumulative and are not exclusive of any remedies provided by law. 6.02.Notices. All notices, requests, consents and demands hereunder shall be in writing and telecopied or delivered to the intended recipient pursuant to Section 11.01 of the Credit Agreement and shall be deemed to have been given at the times specified in that Section 11.01. 6.03.Expenses. Without duplication of the obligations of Pledgor set forth in the Credit Agreement, the Pledgor agrees to reimburse the Administrative Agent and each other Secured Party for all reasonable costs and expenses of the Administrative Agent and each other Secured Party (including the reasonable fees and expenses of legal counsel) in connection with (a) any Event of Default and any enforcement or collection proceeding resulting therefrom, including, without limitation, all manner of participation in or other involvement with (i) performance by the Administrative Agent of any obligations of the Pledgor in respect of the Collateral that the Pledgor has failed or refused to perform, (ii) bankruptcy, insolvency, receivership, foreclosure, winding up or liquidation proceedings, or any actual or attempted sale, or any exchange, enforcement, collection, compromise or settlement in respect of any of the Collateral, and for the care of the Collateral and defending or asserting rights and claims of the Administrative Agent in respect thereof, by litigation or otherwise, (iii) judicial or regulatory proceedings and (iv) workout, restructuring or other negotiations or proceedings (whether or not the workout, restructuring or transaction contemplated thereby is consummated) and (b) the enforcement of this Section 6.03, and all such costs and expenses shall be Secured Obligations entitled to the benefits of the collateral security provided pursuant to Section 3 hereof. 6.04.Amendments, Etc. The terms of this Agreement may be waived, altered or amended only by an instrument in writing duly executed by the Pledgor and the Administrative Agent (with the consent of the Lenders as specified in Section 11.02 of the Credit Agreement). Any such amendment or waiver shall be binding upon the Administrative Agent, each Lender, each holder of any of the Secured Obligations and the Pledgor. 6.05 Certain Documents. If any agreement, certificate or other writing, or any action taken or to be taken, is by the terms of this Agreement required to be satisfactory to the -14- Administrative Agent or any other Secured Party, the determination of such satisfaction shall be made by the Administrative Agent or such Secured Party in their or its sole and exclusive judgment. 6.06 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of the Pledgor, the Administrative Agent, the other Secured Parties and each holder of any of the Secured Obligations (provided, however, that the Pledgor shall not assign or transfer its rights hereunder without the prior written consent of the Administrative Agent). In the event of an assignment of all or any of the Secured Obligations, the rights hereunder, to the extent applicable to the indebtedness so assigned, may be transferred with such indebtedness. This Agreement shall be binding on the Pledgor and its successors and assigns. 6.07 Marshaling of Assets. All rights to marshaling of assets of the Pledgor, including any such right with respect to the Collateral, are hereby waived by the Pledgor. 6.08 Termination. When all Secured Obligations shall have been paid in full and all of the Commitments of the Lenders shall have been terminated, this Agreement shall terminate, and the Administrative Agent shall forthwith cause to be assigned, transferred and delivered, against receipt but without any recourse, warranty or representation whatsoever, any remaining Collateral and money received in respect thereof, to or upon the order of the Pledgor. 6.09 Severability. If any provision hereof is invalid and unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (a) the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Administrative Agent and the other Secured Parties in order to carry out the intentions of the parties hereto as nearly as may be possible and (b) the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. 6.10 Waivers. The Pledgor hereby expressly waives, to the extent permitted by applicable law (a) notice of the acceptance by the Administrative Agent or any other Secured Party of this Agreement, (b) notice of the existence or creation or non-payment of all or any of the Secured Obligations, (c) presentment, demand, notice of dishonor, protest, intent to accelerate, acceleration and all other notices whatsoever, and (d) all diligence in collection or protection of or realization upon the Secured Obligations or any thereof, any obligation hereunder, or any security for or guaranty of any of the foregoing. 6.11 Rescission. The Pledgor agrees that, if at any time all or any part of any payment theretofore applied by the Administrative Agent or any other Secured Party to any of the Secured Obligations is or must be rescinded or returned by the Administrative Agent or such Secured Party for any reason whatsoever (including the insolvency, bankruptcy or reorganization of the Pledgor or any of its Affiliates), such Secured Obligations shall, for the purposes of this Agreement, -15- to the extent that such payment is or must be rescinded or returned, be deemed to have continued in existence, notwithstanding such application by the Administrative Agent, and the Security Interest granted hereunder shall continue to be effective or be reinstated, as the case may be, as to such Secured Obligations, all as though such application by the Administrative Agent or such Secured Party had not been made. 6.12 Limitation by Law. All rights, remedies and powers provided in this Agreement may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law, and all the provisions of this Agreement are intended to be subject to all applicable mandatory provisions of law which may be controlling and which may not be effectively waived by the Pledgor and to be limited to the extent necessary so that they will not render this Agreement invalid, unenforceable, in whole or in part, or not entitled to be recorded, registered or filed under the provisions of any applicable law. 6.13 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and either of the parties hereto may execute this Agreement by signing any such counterpart. 6.14 Governing Law. This Agreement shall be governed by, and construed in accordance with, the law of the State of New York except as required by mandatory provisions of law and except to the extent that the validity or perfection of the Security Interests, or remedies hereunder, in respect of any particular Collateral are governed by the laws of a jurisdiction other than the State of New York. IN WITNESS WHEREOF, the Pledgor has caused this Agreement to be duly executed by the authorized officer of its general partner as of the day and year first above written. KINDER MORGAN ENERGY PARTNERS, L.P. By: Kinder Morgan G.P., Inc., its General Partner By: /s/ William V. Morgan Name: William V. Morgan Title: Vice Chairman -16- Schedule I Part I Percentage Interest Issuer Type of Interest In Issuer Kinder Morgan Operating L.P. "A" Limited Partner 98.9899% Kinder Morgan Operating L.P. "B" Limited Partner 98.9899% Kinder Morgan Operating L.P. "C" Limited Partner 98.9899% Kinder Morgan Operating L.P. "D" Limited Partner 98.9899% Part II Obligor Note Amount Note Date Kinder Morgan Operating L.P. "A" $325,000,000 February 17, 1998 Kinder Morgan Operating L.P. "B" $325,000,000 February 17, 1998 Kinder Morgan Operating L.P. "C" $325,000,000 February 17, 1998 Kinder Morgan Operating L.P. "D" $325,000,000 February 17, 1998 Kinder Morgan Natural Gas Liquids $325,000,000 February 17, 1998 Corporation Kinder Morgan CO2, LLC $325,000,000 February 17, 1998 EX-4.11 10 PLEDGE AGREEMENT BY KMOLP "A" EXECUTION COPY PLEDGE AGREEMENT THIS PLEDGE AGREEMENT (as from time to time amended, modified or supplemented, this "Agreement") dated as of February 17, 1998, is made by KINDER MORGAN OPERATING L.P. "A", a Delaware limited partnership (the "Pledgor"), and FIRST UNION NATIONAL BANK, as administrative agent (in such capacity, the "Administrative Agent") for the banks and other financial institutions (the "Lenders") parties to the Credit Agreement (as defined below). PRELIMINARY STATEMENTS (A) Kinder Morgan Energy Partners, L.P. (the "Company"), Kinder Morgan Operating L.P. "B" (the "Subsidiary Borrower"), certain other subsidiaries of the Company, including the Pledgor (together with the Subsidiary Borrower in its capacity as a Subsidiary Guarantor, collectively, the "Subsidiary Guarantors"), the Lenders, the Administrative Agent and Goldman Sachs Credit Partners L.P., as syndication agent (in such capacity, the "Syndication Agent"), are parties to a Credit Agreement dated as of the date hereof (as the same may be amended and in effect from time to time, the "Credit Agreement"), providing, subject to the terms and conditions thereof, for extensions of credit to be made by the Lenders to the Company and the Subsidiary Borrower; (B) The Pledgor is the owner of a 100% of the issued and outstanding member interests (collectively, the "Interests") of each of the Subsidiaries listed in Part I of Schedule I under the title "Limited Liability Company Issuer" (all such Subsidiaries collectively, the "Limited Liability Company Issuers"); (C) The Pledgor is the owner of 100% of the issued and outstanding shares (collectively the "Shares") of each of the Subsidiaries listed in Part II of Schedule I under the title "Stock Issuer" (the "Stock Issuers" and together with the Limited Liability Company Issuers collectively, the "Issuers"); and (D) In order to induce the Lenders to enter into the Credit Agreement and to extend credit thereunder to the Company and the Subsidiary Borrower, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Pledgor has agreed to pledge and grant a security interest in the Collateral (as defined below) as security for the Secured Obligations (as defined below). Accordingly, the parties hereto agree as follows: SECTION 1. Defined Terms: Interpretation. 1.01 Defined Terms. (a) The capitalized terms used herein which are defined in the Credit Agreement and not otherwise defined herein have, as used herein, the respective meanings provided for therein. (b) Unless otherwise defined herein or in the Credit Agreement, terms defined in Articles 8 and 9 of the UCC are used herein as therein defined. (c) As used in this Agreement, the following terms shall have the following meanings: "Administrative Agent" has the meaning specified in the Introduction hereof. "Agreement" has the meaning specified in the Introduction hereof. "Collateral" has the meaning specified in Section 3. "Company" has the meaning specified in the Preliminary Statements. "Credit Agreement" has the meaning specified in the Preliminary Statements. "Interests" has the meaning specified in the Preliminary Statements. "Issuers" has the meaning specified in the Preliminary Statements. "Lenders" has the meaning specified in the Introduction hereof. "Limited Liability Company Issuers" has the meaning specified in the Preliminary Statements. "Pledged Interests" has the meaning specified in Section 3. "Pledged Shares" has the meaning specified in Section 3. "Pledgor" has the meaning specified in the Introduction hereof. "Proceeds" has the meaning specified in Section 9-306 of the UCC. -2- "Secured Obligations" means collectively: (i) the payment of all indebtedness and liabilities by, and performance of all other obligations of, the Company and the Subsidiary Borrower in respect of the Loans; (ii) all obligations of the Company and the Subsidiary Borrower under, with respect to, and relating to the Letters of Credit whether contingent or matured; (iii) all obligations of the Company or any Restricted Subsidiary (other than SFPP) owing to any Lender under any Hedging Agreement; (iv) the payment of all other indebtedness and liabilities by and performance of all other obligations of, the Company and the Subsidiary Borrower to the Administrative Agent, the Issuing Bank and the Lenders under, with respect to, and arising in connection with, the Loan Documents, and the payment of all indebtedness and liabilities of the Company and the Subsidiary Borrower to the Administrative Agent, the Issuing Bank and the Lenders for fees, costs, indemnification and expenses (including reasonable attorneys' fees and expenses) under the Loan Documents; (v) the payment of all sums advanced and costs and expenses incurred by the Administrative Agent or any Lender under any Loan Document (whether directly or indirectly) in connection with the Obligations or any part thereof or any renewal, extension or change of or substitution for the Obligations or any part thereof, whether such advances, costs and expenses were made or incurred at the request of any Loan Party, the Administrative Agent, the Issuing Bank or any Lender; and (vi) all renewals, extensions, amendments and changes of, or substitutions or replacements for, all or any part of the items described under clauses (i) through (v) above. "Secured Parties" means (i) the Lenders, (ii) the Issuing Bank and (iii) the Administrative Agent. "Security Interests" means the security interests granted pursuant to Section 3, as well as all other security interests created or assigned as additional Collateral for the Secured Obligations pursuant to the provisions of this Agreement. "Shares" has the meaning specified in the Preliminary Statements. "Stock Issuers" has the meaning specified in the Preliminary Statements. "Subsidiary Borrower" has the meaning specified in the Preliminary Statements. -3- "Subsidiary Guarantors" has the meaning specified in the Preliminary Statements. "Syndication Agent" has the meaning specified in the Preliminary Statements. "UCC" means the Uniform Commercial Code in effect from time to time in the State of New York; provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the Security Interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, "UCC" means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection. 1.02 Interpretation. (a) In this Agreement, unless a clear contrary intention appears: (i) the singular number includes the plural number and vice versa; (ii) reference to any gender includes each other gender; (iii) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Section or other subdivision; (iv) reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually, provided that nothing in this clause (iv) is intended to authorize any assignment not otherwise permitted by this Agreement; (v) reference to any agreement (including this Agreement), document or instrument means such agreement, document or instrument as amended, supplemented or modified and in effect from time to time in accordance with the terms thereof and, if applicable, the terms hereof, and references to any Note includes any note issued in renewal, rearrangement, reinstatement, enlargement, amendment, modification, extension, substitution or replacement therefor; (vi) unless the context indicates otherwise, reference to any Section, Schedule or Exhibit means such Section hereof or such Schedule or Exhibit hereto; (vii) the word "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term; -4- (viii) with respect to the determination of any period of time, the word "from" means "from and including" and the word "to" means "to but excluding"; and (ix) reference to any law, ordinance, statute, code, rule, regulation, interpretation or judgment means such law, ordinance, statute, code, rule, regulation, interpretation or judgment as amended, modified, codified or reenacted, in whole or in part, and in effect from time to time. (b) The Section headings herein are for convenience only and shall not affect the construction hereof. (c) No provision of this Agreement shall be interpreted or construed against any Person solely because that Person or its legal representative drafted such provision. SECTION 2. Representations and Warranties of the Pledgor. The Pledgor represents and warrants as follows: (a) The Pledgor is the sole beneficial owner of the Collateral listed on Schedule I and will be the sole beneficial owner of all of the other member interests of each Limited Liability Company Issuer. No Lien exists or will exist upon the Pledged Interests (and no right or option to acquire the same exists in favor of any other Person), except for the pledge and security interest in favor of the Administrative Agent for the benefit of the Secured Parties created or provided for herein, which pledge and security interest constitute a first priority perfected pledge and security interest in and to all of the Pledged Interests. (b) The Pledged Interests listed on in Part I of Schedule I are, and all other member interests which any Limited Liability Company Issuer may hereafter issue will be, duly authorized, validly existing, fully paid and non-assessable and none of such Pledged Interests is and none of such other member interests will be subject to any contractual restriction, or any restriction pursuant to the operating agreement of such Issuer, upon the transfer of such member interests or other member interests (except for any such restriction contained herein or in the Credit Agreement). (c) The Pledged Shares listed in Part II of Schedule I are, and all other shares of capital stock which any Stock Issuer may hereafter issue will be, duly authorized, validly existing, fully paid and non-assessable and none of such Pledged Shares is and none of such other shares of capital stock will be subject to any contractual restriction, or any restriction pursuant to the Articles or Certificate of Incorporation of such Issuer, upon the transfer of -5- such shares of capital stock or other shares of capital stock (except for any such restriction contained herein or in the Credit Agreement). (d) No authorization, approval, or other action by, and no notice to or filing with, any Governmental Authority is required either (i) for the pledge by the Pledgor of the Collateral pursuant to this Agreement or for the execution, delivery or performance of this Agreement by the Pledgor or (ii) for the exercise by the Administrative Agent of the voting or other rights provided for in this Agreement or the remedies in respect of such Collateral pursuant to this Agreement (except as may be required in connection with such disposition by laws affecting the offering and sale of securities generally). (e) The Interests described in Part I of Schedule I constitute 100% of the issued and outstanding member interests of each of the Limited Liability Company Issuers and the Shares described in Part II of Schedule I constitute 100% of the issued and outstanding capital stock of each of the Stock Issuers described therein. Schedule I correctly identifies, as at the date hereof, the respective Issuers of the Pledged Interests and the Pledged Shares. (f) None of the operating agreements for any Limited Liability Company Issuers provides that the member interests of such Issuer are securities governed by Article 8 of the UCC and none of the Pledged Interests is a "security" within the meaning of Section 8-102(a) of the UCC. (g) This Agreement creates a valid and perfected first priority security interest in the Collateral, securing the payment of the Secured Obligations. (h) Upon the filing of a financing statement in the office of the Secretary of State of the State of Texas, the Administrative Agent for the benefit of the other Secured Parties will have a perfected first priority security interest in the Limited Liability Company Interests, securing payment of the Secured Obligations. (i) The delivery of the Shares to the Administrative Agent pursuant to the Agreement creates a valid and perfected first priority security interest in the Shares, securing payment of the Secured Obligations. -6- SECTION 3. The Security Interests. (a) In order to secure the full and punctual payment of the Secured Obligations in accordance with the terms thereof, the Pledgor hereby hypothecates, transfers and grants to the Administrative Agent for the ratable benefit of the Secured Parties a continuing security interest in and to all right, title and interest of the Pledgor in the following property, whether now owned or existing or hereafter acquired or arising and regardless of where located (all being collectively referred to as the "Collateral"): (i) the Interests identified in Part I of Schedule I and all other member interests of the Limited Liability Company Issuers now or hereafter owned by the Pledgor (the Interests and all such additional member interests, collectively, the "Pledged Interests"); (ii) the Shares represented by the certificates identified in Part II of Schedule I and all other shares of Capital Stock of whatever class of the Stock Issuers, now or hereafter owned by the Pledger (the Shares and all such additional shares collectively, the "Pledged Shares"); (iii) all shares, securities, moneys or other property representing or constituting the Pledged Interests or Pledged Shares or representing a distribution or dividend in respect of any of the Pledged Interests or Pledged Shares, or representing a return of capital upon or in respect of the Pledged Interests or Pledged Shares, or resulting from a split-up, revision, reclassification or other like change of the Pledged Interests or otherwise received in exchange therefor, and any subscriptions warrants, rights or options issued to the holders of, or otherwise in respect of, the Pledged Interests or Pledged Shares; (iv) without affecting the obligations of the Pledgor under any provision prohibiting such action hereunder or under the Credit Agreement, in the event of any consolidation or merger in which an Issuer is not the surviving entity, all of the Capital Stock of the successor entity formed by or resulting from such consolidation or merger, in which event only such Capital Stock shall be included as Collateral excluding (A) in the case of a corporation, directors' qualifying shares, (B) in the case of a limited partnership, a 1.5% general partner interest and (C) in the case of a limited liability company, a 1.5% member interest; and (v) all Proceeds of and to any of the property of the Pledgor described in the preceding clauses of this Section 3 (including all causes of action, claims and warranties now or hereafter held by the Pledgor in respect of any of the items listed above) and, to the extent related to any property described in said clauses or such Proceeds, all books, correspondence, credit files, records, invoices and other papers. -7- All certificates or instruments representing or evidencing the Collateral shall be delivered to and held by or on behalf of the Administrative Agent pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Administrative Agent. The Administrative Agent shall have the right, at any time in its sole discretion and without notice to the Pledgor, to transfer to or to register in the name of the Administrative Agent or any of its nominees any or all of the Collateral, subject only to the revocable rights specified in Section 4.03(b) and (c) hereof. (b) The inclusion of Proceeds in this Agreement does not authorize the Pledgor to sell, dispose of or otherwise use the Collateral in any manner not specifically authorized hereby or by the Credit Agreement. SECTION 4. Further Assurances; Remedies. In furtherance of the grant of the Security Interest, the Pledgor hereby agrees with each Lender and the Administrative Agent as follows: 4.01 Delivery and Other Perfection. The Pledgor shall: (a) deliver to the Administrative Agent prior to or concurrently with the execution and delivery of this Agreement all certificates, if any, representing the Interests or the Shares identified in Schedule I, endorsed in blank accompanied by undated stock powers duly executed in blank. (b) if any of the shares, securities, instruments, moneys or other property required to be pledged by the Pledgor under Section 3(a) are received by the Pledgor, forthwith either (x) transfer and deliver to the Administrative Agent such securities or instruments so received by the Pledgor duly endorsed in blank or accompanied by undated powers duly executed in blank), all of which thereafter shall be held by the Administrative Agent pursuant to the terms of this Agreement, as part of the Collateral or (y) take such other action as the Administrative Agent shall deem necessary or appropriate to duly record the Lien created hereunder in such securities, instruments, moneys or other property in said clauses (i), (ii) and (iii); and (c) give, execute, deliver, file and/or record any financing statement, notice, instrument, document, agreement or other papers that may be reasonably requested by the Administrative Agent in order to create, preserve, perfect or validate the security interest granted pursuant hereto or to enable the Administrative Agent to exercise and enforce its rights hereunder with respect to such pledge and security interest, including causing any or -8- all of the Collateral to be transferred of record into the name of the Administrative Agent or its nominee (and the Administrative Agent agrees that if any Collateral is transferred into its name or the name of its nominee, the Administrative Agent will thereafter promptly give to the Pledgor copies of any notices and communications received by it with respect to the Collateral). The Pledgor hereby authorizes the Administrative Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of the Pledgor where permitted by law. A carbon, photographic or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. 4.02 Other Financing Statements and Liens; Additional Shares. (a) Without the prior written consent of the Administrative Agent (granted with the authorization of the Lenders as specified in Section 11.02 of the Credit Agreement), the Pledgor shall not file or suffer to be on file, or authorize or permit to be filed or to be on file, in any jurisdiction, any financing statement or like instrument with respect to the Collateral in which the Administrative Agent is not named as the sole secured party for the benefit of the other Secured Parties. (b) The Pledgor agrees that it will (i) cause the Issuers not to issue any Capital Stock in addition to or in substitution for the Interests or the Shares, as the case may be, except to the Pledgor and (ii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, the Pledgor will execute such documentation as requested by the Administrative Agent pledging, and evidencing the pledge hereunder of, such Interests or Shares or other securities. (c) The Pledgor agrees that, from time to time upon the written request of the Administrative Agent, the Pledgor will execute and deliver such further documents and do such other acts and things as the Administrative Agent may reasonably request in order fully to effect the purposes of this Agreement. 4.03 Collateral. (a) The Pledgor will cause the Pledged Limited Liability Company Interests or the Pledged Shares to constitute at all times 100% of the Capital Stock of each Issuer then outstanding. (b) Unless an Event of Default shall have occurred and be continuing and the Administrative Agent has notified the Pledgor to the contrary, the Pledgor shall have the right to exercise all voting, consensual and other powers of ownership pertaining to the Collateral for all purposes not inconsistent with the terms of this Agreement, the Credit Agreement, the other Loan Documents or any other instrument or agreement referred to herein or therein, provided that the Pledgor agrees that it will not vote the Collateral in any manner that is inconsistent with the terms -9- of this Agreement, the Credit Agreement, the other Loan Documents or any such other instrument or agreement; and the Administrative Agent shall execute and deliver to the Pledgor or cause to be executed and delivered to the Pledgor all such proxies, powers of attorney, dividend and other orders, and all such instruments, without recourse, as the Pledgor may reasonably request for the purpose of enabling the Pledgor to exercise the rights and powers that it is entitled to exercise pursuant to this Section 4.03(b). (c) The Pledgor shall be entitled to receive and retain any and all distributions and dividends paid in respect of the Collateral, provided, however, that any and all (A) distributions and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Collateral, (B) distributions or dividends paid or payable in cash in respect of any Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus (other than distributions or dividends paid by KMNGL to the Pledgor in connection with the dissolution and liquidation of KMNGL), and (C) cash paid, payable or otherwise distributed in redemption of, or in exchange for any Collateral, shall be, and shall be forthwith delivered to the Administrative Agent to hold as, Collateral and shall, if received by the Pledgor, be received in trust for the benefit of the Administrative Agent, be segregated from the other property or funds of the Pledgor, and be forthwith delivered to the Administrative Agent as Collateral in the same form as so received (with any necessary endorsement). (d) If any Event of Default shall have occurred, then so long as such Event of Default shall continue, and whether or not the Administrative Agent or any other Secured Party exercises any available right to declare any Secured Obligation due and payable or seeks or pursues any other relief or remedy available to it under applicable law or under this Agreement, the Credit Agreement, the other Loan Documents or any other agreement relating to such Secured Obligation, and the Administrative Agent so requires by notice to the Pledgor, all distributions and other dividends received by the Pledgor on the Collateral shall be paid directly by the Pledgor to the Administrative Agent and retained by it as part of the Collateral, subject to the terms of this Agreement, and, if the Administrative Agent shall so request in writing, the Pledgor agrees to execute and deliver to the Administrative Agent appropriate additional dividend, distribution and other orders and documents to that end, provided that if such Event of Default is cured, any such distribution or dividend theretofore paid to the Administrative Agent shall, upon request of the Pledgor (except to the extent theretofore applied to the Secured Obligations), be returned by the Administrative Agent to the Pledgor. 4.04 Events of Default, Etc. During the period during which an Event of Default shall have occurred and be continuing: (a) the Administrative Agent shall have all of the rights and remedies with respect to the Collateral of a secured party under the UCC (to the extent permitted by law -10- whether or not the UCC is in effect in the jurisdiction where the rights and remedies are asserted) and such additional rights and remedies to which a secured party is entitled under the laws in effect in any jurisdiction including if the Administrative Agent has notified the Pledgor that it intends to exercise such right, the right, to the maximum extent permitted by law, to exercise all voting, consensual and other powers of ownership pertaining to the Collateral as if the Administrative Agent were the sole and absolute owner thereof (and the Pledgor agrees to take all such action as may be appropriate to give effect to such right); (b) upon and during the continuance of an Event of Default, the Administrative Agent in its discretion may, in its name or in the name of the Pledgor or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for any of the Collateral, but shall be under no obligation to do so; and (c) the Administrative Agent may, upon not less than ten Business Days' prior written notice to the Pledgor of the time and place, with respect to the Collateral or any part thereof that shall then be or shall thereafter come into the possession, custody or control of the Administrative Agent, the other Secured Parties or any of their respective agents, sell, assign or otherwise dispose of all or any part of such Collateral, at such place or places as the Administrative Agent deems best, and for cash or for credit or for future delivery (without thereby assuming any credit risk), at public or private sale, and the Administrative Agent or any Lender or anyone else may be the purchaser, lessee, assignee or recipient of any or all of the Collateral so disposed of at any public sale (or, to the extent permitted by law, at any private sale) and thereafter hold the same absolutely, free from any claim or right of whatsoever kind, including any right or equity of redemption (statutory or otherwise), of the Pledgor, any such demand, notice and right or equity being hereby expressly waived and released. The Pledgor agrees that such ten Business Days' notice constitutes "reasonable notification" within the meaning of Section 9-504 of the UCC. The Administrative Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the sale may be so adjourned. The proceeds of each collection, sale or other disposition under this Section 4.04 shall be applied in accordance with Section 4.08 hereof. The Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act of 1933, as amended, and applicable state securities laws, the Administrative Agent may be compelled, with respect to any sale of all or any part of the Collateral, to limit purchasers to those who will agree, among other things, to acquire the Collateral for their own account, for investment and not with a view to the distribution or resale thereof. The Pledgor acknowledges that any such private sales may be at prices lower than at a public sale without such restrictions, and notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been -11- made in a commercially reasonable manner and that the Administrative Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any Collateral for the period of time necessary to permit the respective Issuer thereof to register it for public sale. 4.05 Deficiency. Without limiting the obligations of the Pledgor to pay the Secured Obligations, if the proceeds of sale, collection or other realization of or upon the Collateral pursuant to Section 4.04 hereof are insufficient to cover the costs and expenses of such realization and the payment in full of the Secured Obligations, the Pledgor shall remain liable for any deficiency. 4.06 Removals, Etc. Without at least 30 days' prior written notice to the Administrative Agent, the Pledgor shall not (a) maintain any of its books and records with respect to the Collateral at any office or maintain its principal place of business at any place other than at the address indicated for the Pledgor in the Credit Agreement or (b) change its name, or the name under which it does business, from the name shown on the signature pages hereto. 4.07 Private Sale. The Administrative Agent and the other Secured Parties shall incur no liability as a result of the sale of the Collateral, or any part thereof, at any private sale pursuant to Section 4.04 hereof conducted in a commercially reasonable manner and in compliance with all applicable securities laws. The Pledgor hereby waives any claims against the Administrative Agent or any other Secured Party arising by reason of the fact that the price at which the Collateral may have been sold at such a private sale was less than the price that might have been obtained at a public sale or was less than the aggregate amount of the Secured Obligations. 4.08 Application of Proceeds. Except as otherwise herein expressly provided or as otherwise required by law, the proceeds of any collection, sale or other realization of all or any part of the Collateral pursuant hereto, and any other cash at the time held by the Administrative Agent under this Section 4, shall be applied by the Administrative Agent as provided in Section 7.03 of the Credit Agreement. The Administrative Agent may make distributions hereunder in cash or in kind or on a ratable basis or in any combination thereof. 4.09 Attorney-in-Fact. Without limiting any rights or powers granted by this Agreement to the Administrative Agent, while no Event of Default has occurred and is continuing, upon the occurrence and during the continuance of any Event of Default, the Administrative Agent is hereby appointed the attorney-in-fact of the Pledgor for the purpose of carrying out the provisions of this Section 4 and taking any action and executing any instruments that the Administrative Agent may deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, so long as the Administrative Agent shall be entitled under this Section 4 to make collections in respect of the Collateral, to the extent permitted by law, the Administrative Agent shall have the right and power to receive, endorse and collect all checks made payable to the order of the Pledgor -12- representing any distribution or other payment in respect of the Collateral or any part thereof and to give full discharge for the same. SECTION 5. Administrative Agent. 5.01 Limitation on Duty of Administrative Agent in Respect of Collateral. The powers conferred on the Administrative Agent hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Administrative Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. The Administrative Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which the Administrative Agent accords its own property, it being understood that the Administrative Agent shall not have any responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, tenders or other matters relative to any Collateral, whether or not the Administrative Agent has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve rights against any parties with respect to any Collateral. 5.02 Concerning the Administrative Agent. The provisions of Article VIII of the Credit Agreement shall inure to the benefit of the Administrative Agent in respect of this Agreement and shall be binding upon the parties to the Credit Agreement in such respect. In furtherance and not in derogation of the rights, privileges and immunities of the Administrative Agent therein set forth: (A) The Administrative Agent is authorized to take all such action as is provided to be taken by it as the Administrative Agent hereunder and all other action reasonably incidental thereto. As to any matters not expressly provided for herein (including the timing and methods of realization upon the Collateral) the Administrative Agent shall act or refrain from acting in accordance with written instructions from the Required Lenders or, in the absence of such instructions, in accordance with its discretion. (B) The Administrative Agent shall not be responsible for the existence, genuineness or value of any of the Collateral or for the validity, perfection, priority or enforceability of the Security Interests in any of the Collateral, whether impaired by operation of law or by reason of any action or omission to act on its part hereunder. The Administrative Agent shall have no duty to ascertain or inquire as to the performance or observance of any of the terms of this Agreement by the Pledgor. -13- 5.03 Appointment of Agents and Attorneys-in-Fact. The Administrative Agent may employ agents and attorneys-in-fact in connection herewith and shall not be responsible for the negligence or misconduct (except for gross negligence, willful misconduct or unlawful conduct) of any such agents or attorneys-in-fact selected by it in good faith. Without limiting the foregoing, at any time or times, in order to comply with any legal requirement in any jurisdiction, the Administrative Agent may appoint another bank or trust company or one or more other Persons, either to act as co-agent or co-agents, jointly with the Administrative Agent, or to act as separate agent or agents on behalf of the Secured Parties with such power and authority as may be necessary for the effective operation of the provisions hereof and may be specified in the instrument of appointment (which may, in the discretion of the Administrative Agent, include provisions for the protection of such co-agent or separate agent similar to the provisions of the Credit Agreement referred to in Section 5.02). SECTION 6. Miscellaneous. 6.01 No Waiver. No failure on the part of the Administrative Agent or any other Secured Party to exercise, and no course of dealing with respect to, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by the Administrative Agent or any other Secured Party of any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by the Administrative Agent or any other Secured Party of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein are cumulative and are not exclusive of any remedies provided by law. 6.02.Notices. All notices, requests, consents and demands hereunder shall be in writing and telecopied or delivered to the intended recipient pursuant to Section 11.01 of the Credit Agreement and shall be deemed to have been given at the times specified in that Section 11.01. 6.03.Expenses. Without duplication of the obligations of Pledgor set forth in the Credit Agreement, the Pledgor agrees to reimburse the Administrative Agent and each other Secured Party for all reasonable costs and expenses of the Administrative Agent and each other Secured Party (including the reasonable fees and expenses of legal counsel) in connection with (a) any Event of Default and any enforcement or collection proceeding resulting therefrom, including, without limitation, all manner of participation in or other involvement with (i) performance by the Administrative Agent of any obligations of the Pledgor in respect of the Collateral that the Pledgor has failed or refused to perform, (ii) bankruptcy, insolvency, receivership, foreclosure, winding up or liquidation proceedings, or any actual or attempted sale, or any exchange, enforcement, collection, compromise or settlement in respect of any of the Collateral, and for the care of the Collateral and defending or asserting rights and claims of the Administrative Agent in respect thereof, by litigation -14- or otherwise, (iii) judicial or regulatory proceedings and (iv) workout, restructuring or other negotiations or proceedings (whether or not the workout, restructuring or transaction contemplated thereby is consummated) and (b) the enforcement of this Section 6.03, and all such costs and expenses shall be Secured Obligations entitled to the benefits of the collateral security provided pursuant to Section 3 hereof. 6.04.Amendments, Etc. The terms of this Agreement may be waived, altered or amended only by an instrument in writing duly executed by the Pledgor and the Administrative Agent (with the consent of the Lenders as specified in Section 11.02 of the Credit Agreement). Any such amendment or waiver shall be binding upon the Administrative Agent, each Lender, each holder of any of the Secured Obligations and the Pledgor. 6.05 Certain Documents. If any agreement, certificate or other writing, or any action taken or to be taken, is by the terms of this Agreement required to be satisfactory to the Administrative Agent or any other Secured Party, the determination of such satisfaction shall be made by the Administrative Agent or such Secured Party in their or its sole and exclusive judgment. 6.06 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of the Pledgor, the Administrative Agent, the other Secured Parties and each holder of any of the Secured Obligations (provided, however, that the Pledgor shall not assign or transfer its rights hereunder without the prior written consent of the Administrative Agent). In the event of an assignment of all or any of the Secured Obligations, the rights hereunder, to the extent applicable to the indebtedness so assigned, may be transferred with such indebtedness. This Agreement shall be binding on the Pledgor and its successors and assigns. 6.07 Marshaling of Assets. All rights to marshaling of assets of the Pledgor, including any such right with respect to the Collateral, are hereby waived by the Pledgor. 6.08 Termination. When all Secured Obligations shall have been paid in full and all of the Commitments of the Lenders shall have been terminated, this Agreement shall terminate, and the Administrative Agent shall forthwith cause to be assigned, transferred and delivered, against receipt but without any recourse, warranty or representation whatsoever, any remaining Collateral and money received in respect thereof, to or upon the order of the Pledgor. 6.09 Severability. If any provision hereof is invalid and unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (a) the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Administrative Agent and the other Secured Parties in order to carry out the intentions of the parties hereto as nearly as may be possible and (b) the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. -15- 6.10 Waivers. The Pledgor hereby expressly waives, to the extent permitted by applicable law (a) notice of the acceptance by the Administrative Agent or any other Secured Party of this Agreement, (b) notice of the existence or creation or non-payment of all or any of the Secured Obligations, (c) presentment, demand, notice of dishonor, protest, intent to accelerate, acceleration and all other notices whatsoever, and (d) all diligence in collection or protection of or realization upon the Secured Obligations or any thereof, any obligation hereunder, or any security for or guaranty of any of the foregoing. 6.11 Rescission. The Pledgor agrees that, if at any time all or any part of any payment theretofore applied by the Administrative Agent or any other Secured Party to any of the Secured Obligations is or must be rescinded or returned by the Administrative Agent or such Secured Party for any reason whatsoever (including the insolvency, bankruptcy or reorganization of the Pledgor or any of its Affiliates), such Secured Obligations shall, for the purposes of this Agreement, to the extent that such payment is or must be rescinded or returned, be deemed to have continued in existence, notwithstanding such application by the Administrative Agent, and the Security Interest granted hereunder shall continue to be effective or be reinstated, as the case may be, as to such Secured Obligations, all as though such application by the Administrative Agent or such Secured Party had not been made. 6.12 Limitation by Law. All rights, remedies and powers provided in this Agreement may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law, and all the provisions of this Agreement are intended to be subject to all applicable mandatory provisions of law which may be controlling and which may not be effectively waived by the Pledgor and to be limited to the extent necessary so that they will not render this Agreement invalid, unenforceable, in whole or in part, or not entitled to be recorded, registered or filed under the provisions of any applicable law. 6.13 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and either of the parties hereto may execute this Agreement by signing any such counterpart. 6.14 Governing Law. This Agreement shall be governed by, and construed in accordance with, the law of the State of New York except as required by mandatory provisions of law and except to the extent that the validity or perfection of the Security Interests, or remedies hereunder, in respect of any particular Collateral are governed by the laws of a jurisdiction other than the State of New York. -16- IN WITNESS WHEREOF, the Pledgor has caused this Agreement to be duly executed by the authorized officer of its general partner as of the day and year first above written. KINDER MORGAN OPERATING L.P. "A" By: Kinder Morgan G.P., Inc., its General Partner By: /s/ William V. Morgan Name: William V. Morgan Title: Vice Chairman -17- Schedule I Part I PERCENTAGE INTEREST LIMITED LIABILITY IN LIMITED LIABILITY COMPANY ISSUER TYPE OF INTEREST COMPANY ISSUER Kinder Morgan CO2, LLC Member Interest 100% Part II PERCENTAGE CERTIFICATE CERTIFICATE NO. OF INTEREST IN STOCK ISSUER NO. DATE SHARES STOCK ISSUER Kinder Morgan 4 August 6, 1992 200 100% Natural Gas Liquids Corporation (formerly Enron Natural Gas Liquids Corporation) EX-4.12 11 PLEDGE AGREEMENT BY KMOLP "D" EXECUTION COPY PLEDGE AGREEMENT THIS PLEDGE AGREEMENT (as from time to time amended, modified or supplemented, this "Agreement") dated as of February 17, 1998, is made by KINDER MORGAN OPERATING L.P. "D", a Delaware limited partnership (the "Pledgor"), in favor of FIRST UNION NATIONAL BANK, as administrative agent (in such capacity, the "Administrative Agent") for the banks and other financial institutions (the "Lenders") parties to the Credit Agreement (as defined below). PRELIMINARY STATEMENTS (A) Kinder Morgan Energy Partners, L.P. (the "Company"), Kinder Morgan Operating L.P. "B" (the "Subsidiary Borrower"), certain other subsidiaries of the Company (together with the Subsidiary Borrower in its capacity as a Subsidiary Guarantor, collectively, the "Subsidiary Guarantors"), the Lenders, the Administrative Agent and Goldman Sachs Credit Partners L.P., as syndication agent (in such capacity, the "Syndication Agent"), are parties to a Credit Agreement dated as of the date hereof (as the same may be amended and in effect from time to time, the "Credit Agreement"), providing, subject to the terms and conditions thereof, for extensions of credit to be made by the Lenders to the Company and the Subsidiary Borrower; (B) The Pledgor is the owner of a 99.5% general partner interest (the "Interest") in SFPP, L.P., a Delaware limited partnership (the "Issuer"); (C) In order to induce the Lenders to enter into the Credit Agreement and to extend credit thereunder to the Company and the Subsidiary Borrower, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Pledgor has agreed to pledge and grant a security interest in the Collateral (as defined below) as security for the Secured Obligations (as defined below). Accordingly, the parties hereto agree as follows: SECTION 1. Defined Terms: Interpretation. 1.01 Defined Terms. (a) The capitalized terms used herein which are defined in the Credit Agreement and not otherwise defined herein have, as used herein, the respective meanings provided for therein. (b) Unless otherwise defined herein or in the Credit Agreement, terms defined in Articles 8 and 9 of the UCC are used herein as therein defined. (c) As used in this Agreement, the following terms shall have the following meanings: "Administrative Agent" has the meaning specified in the Introduction hereof. "Agreement" has the meaning specified in the Introduction hereof. "Collateral" has the meaning specified in Section 3. "Company" has the meaning specified in the Preliminary Statements. "Credit Agreement" has the meaning specified in the Preliminary Statements. "Interest" has the meaning specified in the Preliminary Statements. "Issuer" has the meaning specified in the Preliminary Statements. "Lenders" has the meaning specified in the Introduction hereof. "Pledged Interests" has the meaning specified in Section 3. "Pledgor" has the meaning specified in the Introduction hereof. "Proceeds" has the meaning specified in Section 9-306 of the UCC. "Secured Obligations" means collectively: (i) the payment of all indebtedness and liabilities by, and performance of all other obligations of, the Company and the Subsidiary Borrower in respect of the Loans; (ii) all obligations of the Company and the Subsidiary Borrower under, with respect to, and relating to the Letters of Credit whether contingent or matured; (iii) all obligations of the Company or any Restricted Subsidiary (other than the Issuer) owing to any Lender under any Hedging Agreement; (iv) the payment of all other indebtedness and liabilities by and performance of all other obligations of, the Company and the Subsidiary Borrower to the Administrative Agent, the Issuing Bank and the Lenders under, with respect to, and arising in connection with, the Loan Documents, and the payment of all indebtedness and liabilities of the Company and the Subsidiary Borrower to the Administrative Agent, the Issuing Bank and -2- the Lenders for fees, costs and expenses (including reasonable attorneys' fees and expenses) under the Loan Documents; (v) the payment of all sums advanced and costs and expenses incurred by the Administrative Agent or any Lender under any Loan Document (whether directly or indirectly) in connection with the Obligations or any part thereof or any renewal, extension or change of or substitution for the Obligations or any part thereof, whether such advances, costs, indemnification and expenses were made or incurred at the request of any Loan Party, the Administrative Agent, the Issuing Bank or any Lender; and (vi) all renewals, extensions, amendments and changes of, or substitutions or replacements for, all or any part of the items described under clauses (i) through (v) above. "Secured Parties" means (i) the Lenders, (ii) the Issuing Bank and (iii) the Administrative Agent. "Security Interests" means the security interests granted pursuant to Section 3, as well as all other security interests created or assigned as additional Collateral for the Secured Obligations pursuant to the provisions of this Agreement. "Subsidiary Borrower" has the meaning specified in the Preliminary Statements. "Subsidiary Guarantors" has the meaning specified in the Preliminary Statements. "Syndication Agent" has the meaning specified in the Preliminary Statements. "UCC" means the Uniform Commercial Code in effect from time to time in the State of New York; provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the Security Interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, "UCC" means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection. 1.02 Interpretation. (a) In this Agreement, unless a clear contrary intention appears: (i) the singular number includes the plural number and vice versa; (ii) reference to any gender includes each other gender; -3- (iii)the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Section or other subdivision; (iv) reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually, provided that nothing in this clause (iv) is intended to authorize any assignment not otherwise permitted by this Agreement; (v) reference to any agreement (including this Agreement), document or instrument means such agreement, document or instrument as amended, supplemented or modified and in effect from time to time in accordance with the terms thereof and, if applicable, the terms hereof, and references to any Note includes any note issued in renewal, rearrangement, reinstatement, enlargement, amendment, modification, extension, substitution or replacement therefor; (vi) unless the context indicates otherwise, reference to any Section, Schedule or Exhibit means such Section hereof or such Schedule or Exhibit hereto; (vii)the word "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term; (viii) with respect to the determination of any period of time, the word "from" means "from and including" and the word "to" means "to but excluding"; and (ix) reference to any law, ordinance, statute, code, rule, regulation, interpretation or judgment means such law, ordinance, statute, code, rule, regulation, interpretation or judgment as amended, modified, codified or reenacted, in whole or in part, and in effect from time to time. (b) The Section headings herein are for convenience only and shall not affect the construction hereof. (c) No provision of this Agreement shall be interpreted or construed against any Person solely because that Person or its legal representative drafted such provision. -4- SECTION 2. Representations and Warranties of the Pledgor. The Pledgor represents and warrants as follows: (a) The Pledgor is the sole beneficial owner of the Collateral and is or will be the sole beneficial owner of all of the other general partner interests of the Issuer. No Lien exists or will exist upon the Pledged Interests at any time (and no right or option to acquire the same exists in favor of any other Person), except for the pledge and security interest in favor of the Administrative Agent for the benefit of the Secured Parties created or provided for herein, which pledge and security interest constitute a first priority perfected pledge and security interest in and to all of the Interests pledged hereunder. (b) The Pledged Interests are duly authorized, validly existing, fully paid and non-assessable and is not nor will be subject to any contractual restriction, or any restriction pursuant to the partnership agreement of the Issuer, upon the transfer of the Interests (except for any such restriction contained herein or in the Credit Agreement). (c) No authorization, approval, or other action by, and no notice to or filing with, any Governmental Authority is required either (i) for the pledge by the Pledgor of the Collateral pursuant to this Agreement or for the execution, delivery or performance of this Agreement by the Pledgor or (ii) for the exercise by the Administrative Agent of the voting or other rights provided for in this Agreement or the remedies in respect of such Collateral pursuant to this Agreement (except as may be required in connection with such disposition by laws affecting the offering and sale of securities generally). (d) The Interest constitutes 100% of the issued and outstanding general partner interests of the Issuer. (e) This Agreement creates a valid and perfected first priority security interest in the Collateral, securing the payment of the Secured Obligations. (f) Upon the filing of a financing statement in the office of the Secretary of State of the State of Texas, the Administrative Agent for the benefit of the other Secured Parties will have a perfected first priority security interest in the Pledged Interests. -5- SECTION 3. The Security Interests. (a) In order to secure the full and punctual payment of the Secured Obligations in accordance with the terms thereof, the Pledgor hereby hypothecates, transfers and grants to the Administrative Agent for the ratable benefit of the Secured Parties a continuing security interest in and to all right, title and interest of the Pledgor in the following property, whether now owned or existing or hereafter acquired or arising and regardless of where located (all being collectively referred to as the "Collateral"): (i) the Interest and all other general partner interests of the Issuer, now or hereafter owned by the Pledgor (the Interest and all such additional general partner interests, collectively the "Pledged Interests"); (ii) all securities, moneys or other property representing a distribution in respect of any of the Pledged Interests, or representing a return of capital upon or in respect of the Pledged Interests, or resulting from a split-up, revision, reclassification or other like change of the Pledged Interests or otherwise received in exchange therefor, and any subscriptions, warrants, rights or options issued to the holders of, or otherwise in respect of, the Pledged Interests; (iii)without affecting the obligations of the Pledgor under any provision prohibiting such action hereunder or under the Credit Agreement, in the event of any consolidation or merger in which the Issuer is not the surviving entity, 99.5% of the Capital Stock of the successor entity formed by or resulting from such consolidation or merger, in which event only such Capital Stock shall be included as Collateral; and (iv) all Proceeds of and to any of the property of the Pledgor described in the preceding clauses of this Section 3 (including all causes of action, claims and warranties now or hereafter held by the Pledgor in respect of any of the items listed above) and, to the extent related to any property described in said clauses or such Proceeds, all books, correspondence, credit files, records, invoices and other papers. The Administrative Agent shall have the right, at any time in its sole discretion and without notice to the Pledgor, to transfer to or to register in the name of the Administrative Agent or any of its nominees any or all of the Collateral, subject only to the revocable rights specified in Section 4.03(b) and (c) hereof. (b) The inclusion of Proceeds in this Agreement does not authorize the Pledgor to sell, dispose of or otherwise use the Collateral in any manner not specifically authorized hereby or by the Credit Agreement. -6- SECTION 4. Further Assurances; Remedies. In furtherance of the grant of the Security Interest, the Pledgor hereby agrees with each Lender and the Administrative Agent as follows: 4.01 Delivery and Other Perfection. The Pledgor shall: (a) if any of the securities, instruments, moneys or property required to be pledged by the Pledgor under Section 3(a) are received by the Pledgor, forthwith either (x) transfer and deliver to the Administrative Agent such securities or instruments so received by the Pledgor duly endorsed in blank or accompanied by undated powers duly executed in blank), all of which thereafter shall be held by the Administrative Agent pursuant to the terms of this Agreement as part of the Collateral or (y) take such other action as the Administrative Agent shall deem necessary or appropriate to duly record the Lien created hereunder in such securities, instruments, moneys or other property in said clauses (i), (ii) and (iii); and (b) give, execute, deliver, file and/or record any financing statement, notice, instrument, document, agreement or other papers that may be reasonably requested by the Administrative Agent in order to create, preserve, perfect or validate the security interest granted pursuant hereto or to enable the Administrative Agent to exercise and enforce its rights hereunder with respect to such pledge and security interest, including causing any or all of the Collateral to be transferred of record into the name of the Administrative Agent or its nominee (and the Administrative Agent agrees that if any Collateral is transferred into its name or the name of its nominee, the Administrative Agent will thereafter promptly give to the Pledgor copies of any notices and communications received by it with respect to the Collateral). The Pledgor hereby authorizes the Administrative Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of the Pledgor where permitted by law. A carbon, photographic or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. 4.02 Other Financing Statements and Liens. (a) Without the prior written consent of the Administrative Agent (granted with the authorization of the Lenders as specified in Section 11.02 of the Credit Agreement), the Pledgor shall not file or suffer to be on file, or authorize or permit to be filed or to be on file, in any jurisdiction, any financing statement or like instrument with respect to the Collateral in which the Administrative Agent is not named as the sole secured party for the benefit of the other Secured Parties. -7- (b) The Pledgor agrees that, from time to time upon the written request of the Administrative Agent, the Pledgor will execute and deliver such further documents and do such other acts and things as the Administrative Agent may reasonably request in order fully to effect the purposes of this Agreement. 4.03 Collateral. (a) The Pledgor will cause the Pledged Interests to constitute at all times 99.5% of the general partner interest of the Issuer then outstanding. (b) Unless an Event of Default shall have occurred and be continuing and the Administrative Agent has notified the Pledgor to the contrary, the Pledgor shall have the right to exercise all voting, consensual and other powers of ownership pertaining to the Collateral for all purposes not inconsistent with the terms of this Agreement, the Credit Agreement, the other Loan Documents or any other instrument or agreement referred to herein or therein, provided that the Pledgor agrees that it will not vote the Collateral in any manner that is inconsistent with the terms of this Agreement, the Credit Agreement, the other Loan Documents or any such other instrument or agreement; and the Administrative Agent shall execute and deliver to the Pledgor or cause to be executed and delivered to the Pledgor all such proxies, powers of attorney, dividend and other orders, and all such instruments, without recourse, as the Pledgor may reasonably request for the purpose of enabling the Pledgor to exercise the rights and powers that it is entitled to exercise pursuant to this Section 4.03(b). (c) The Pledgor shall be entitled to receive and retain any and all distributions paid in respect of the Collateral, provided, however, that any and all (A) distributions paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Collateral, (B) distributions paid or payable in cash in respect of any Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus, and (C) cash paid, payable or otherwise distributed in redemption of, or in exchange for any Collateral, shall be, and shall be forthwith delivered to the Administrative Agent to hold as, Collateral and shall, if received by the Pledgor, be received in trust for the benefit of the Administrative Agent, be segregated from the other property or funds of the Pledgor, and be forthwith delivered to the Administrative Agent as Collateral in the same form as so received (with any necessary endorsement). (d) If any Event of Default shall have occurred, then so long as such Event of Default shall continue, and whether or not the Administrative Agent or any other Secured Party exercises any available right to declare any Secured Obligation due and payable or seeks or pursues any other relief or remedy available to it under applicable law or under this Agreement, the Credit Agreement, the other Loan Documents or any other agreement relating to such Secured Obligation, and the Administrative Agent so requires by notice to the Pledgor, all distributions received by the -8- Pledgor on the Collateral shall be paid directly by the Pledgor to the Administrative Agent and retained by it as part of the Collateral, subject to the terms of this Agreement, and, if the Administrative Agent shall so request in writing, the Pledgor agrees to execute and deliver to the Administrative Agent appropriate additional distribution and other orders and documents to that end, provided that if such Event of Default is cured, any such distribution theretofore paid to the Administrative Agent shall, upon request of the Pledgor (except to the extent theretofore applied to the Secured Obligations), be returned by the Administrative Agent to the Pledgor. 4.04 Events of Default, Etc. During the period during which an Event of Default shall have occurred and be continuing: (a) the Administrative Agent shall have all of the rights and remedies with respect to the Collateral of a secured party under the UCC (to the extent permitted by law whether or not the UCC is in effect in the jurisdiction where the rights and remedies are asserted) and such additional rights and remedies to which a secured party is entitled under the laws in effect in any jurisdiction including if the Administrative Agent has notified the Pledgor that it intends to exercise such right, the right, to the maximum extent permitted by law, to exercise all voting, consensual and other powers of ownership pertaining to the Collateral as if the Administrative Agent were the sole and absolute owner thereof (and the Pledgor agrees to take all such action as may be appropriate to give effect to such right); (b) upon and during the continuance of an Event of Default, the Administrative Agent in its discretion may, in its name or in the name of the Pledgor or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for any of the Collateral, but shall be under no obligation to do so; and (c) the Administrative Agent may, upon not less than ten Business Days' prior written notice to the Pledgor of the time and place, with respect to the Collateral or any part thereof that shall then be or shall thereafter come into the possession, custody or control of the Administrative Agent, the other Secured Parties or any of their respective agents, sell, assign or otherwise dispose of all or any part of such Collateral, at such place or places as the Administrative Agent deems best, and for cash or for credit or for future delivery (without thereby assuming any credit risk), at public or private sale, and the Administrative Agent or any Lender or anyone else may be the purchaser, lessee, assignee or recipient of any or all of the Collateral so disposed of at any public sale (or, to the extent permitted by law, at any private sale) and thereafter hold the same absolutely, free from any claim or right of whatsoever kind, including any right or equity of redemption (statutory or otherwise), of the Pledgor, any such demand, notice and right or equity being hereby expressly waived and released. The Pledgor agrees that such ten Business Days' notice constitutes "reasonable notification" within the meaning of Section 9-504 of the UCC. The Administrative Agent may, without notice or publication, adjourn any public or private sale or cause the same to -9- be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the sale may be so adjourned. The proceeds of each collection, sale or other disposition under this Section 4.04 shall be applied in accordance with Section 4.08 hereof. The Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act of 1933, as amended, and applicable state securities laws, the Administrative Agent may be compelled, with respect to any sale of all or any part of the Collateral, to limit purchasers to those who will agree, among other things, to acquire the Collateral for their own account, for investment and not with a view to the distribution or resale thereof. The Pledgor acknowledges that any such private sales may be at prices lower than at a public sale without such restrictions, and notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that the Administrative Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any Collateral for the period of time necessary to permit the Issuer thereof to register it for public sale. 4.05 Deficiency. Without limiting the obligations of the Pledgor to pay the Secured Obligations, if the proceeds of sale, collection or other realization of or upon the Collateral pursuant to Section 4.04 hereof are insufficient to cover the costs and expenses of such realization and the payment in full of the Secured Obligations, the Pledgor shall remain liable for any deficiency. 4.06 Removals, Etc. Without at least 30 days' prior written notice to the Administrative Agent, the Pledgor shall not (a) maintain any of its books and records with respect to the Collateral at any office or maintain its principal place of business at any place other than at the address indicated for the Pledgor in the Credit Agreement or (b) change its name, or the name under which it does business, from the name shown on the signature pages hereto. 4.07 Private Sale. The Administrative Agent and the other Secured Parties shall incur no liability as a result of the sale of the Collateral, or any part thereof, at any private sale pursuant to Section 4.04 hereof conducted in a commercially reasonable manner and in compliance with all applicable securities laws. The Pledgor hereby waives any claims against the Administrative Agent or any other Secured Party arising by reason of the fact that the price at which the Collateral may have been sold at such a private sale was less than the price that might have been obtained at a public sale or was less than the aggregate amount of the Secured Obligations. 4.08 Application of Proceeds. Except as otherwise herein expressly provided or as otherwise required by law, the proceeds of any collection, sale or other realization of all or any part of the Collateral pursuant hereto, and any other cash at the time held by the Administrative Agent under this Section 4, shall be applied by the Administrative Agent as provided in Section 7.03 -10- of the Credit Agreement. The Administrative Agent may make distributions hereunder in cash or in kind or on a ratable basis or in any combination thereof. 4.09 Attorney-in-Fact. Without limiting any rights or powers granted by this Agreement to the Administrative Agent, while no Event of Default has occurred and is continuing, upon the occurrence and during the continuance of any Event of Default, the Administrative Agent is hereby appointed the attorney-in-fact of the Pledgor for the purpose of carrying out the provisions of this Section 4 and taking any action and executing any instruments that the Administrative Agent may deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, so long as the Administrative Agent shall be entitled under this Section 4 to make collections in respect of the Collateral, to the extent permitted by law, the Administrative Agent shall have the right and power to receive, endorse and collect all checks made payable to the order of the Pledgor representing any distribution or other payment in respect of the Collateral or any part thereof and to give full discharge for the same. SECTION 5. Administrative Agent. 5.01 Limitation on Duty of Administrative Agent in Respect of Collateral. The powers conferred on the Administrative Agent hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Administrative Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. The Administrative Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which the Administrative Agent accords its own property, it being understood that the Administrative Agent shall not have any responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, tenders or other matters relative to any Collateral, whether or not the Administrative Agent has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve rights against any parties with respect to any Collateral. 5.02 Concerning the Administrative Agent. The provisions of Article VIII of the Credit Agreement shall inure to the benefit of the Administrative Agent in respect of this Agreement and shall be binding upon the parties to the Credit Agreement in such respect. In furtherance and not in derogation of the rights, privileges and immunities of the Administrative Agent therein set forth: -11- (A) The Administrative Agent is authorized to take all such action as is provided to be taken by it as the Administrative Agent hereunder and all other action reasonably incidental thereto. As to any matters not expressly provided for herein (including the timing and methods of realization upon the Collateral) the Administrative Agent shall act or refrain from acting in accordance with written instructions from the Required Lenders or, in the absence of such instructions, in accordance with its discretion. (B) The Administrative Agent shall not be responsible for the existence, genuineness or value of any of the Collateral or for the validity, perfection, priority or enforceability of the Security Interests in any of the Collateral, whether impaired by operation of law or by reason of any action or omission to act on its part hereunder. The Administrative Agent shall have no duty to ascertain or inquire as to the performance or observance of any of the terms of this Agreement by the Pledgor. 5.03 Appointment of Agents and Attorneys-in-Fact. The Administrative Agent may employ agents and attorneys-in-fact in connection herewith and shall not be responsible for the negligence or misconduct (except for gross negligence, willful misconduct or unlawful conduct) of any such agents or attorneys-in-fact selected by it in good faith. Without limiting the foregoing, at any time or times, in order to comply with any legal requirement in any jurisdiction, the Administrative Agent may appoint another bank or trust company or one or more other Persons, either to act as co-agent or co-agents, jointly with the Administrative Agent, or to act as separate agent or agents on behalf of the Secured Parties with such power and authority as may be necessary for the effective operation of the provisions hereof and may be specified in the instrument of appointment (which may, in the discretion of the Administrative Agent, include provisions for the protection of such co-agent or separate agent similar to the provisions of the Credit Agreement referred to in Section 5.02). SECTION 6. Miscellaneous. 6.01 No Waiver. No failure on the part of the Administrative Agent or any other Secured Party to exercise, and no course of dealing with respect to, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by the Administrative Agent or any other Secured Party of any right, power or remedy hereunder operate as a waiver thereof; nor shall any single or partial exercise by the Administrative Agent or any other Secured Party of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein are cumulative and are not exclusive of any remedies provided by law. -12- 6.02.Notices. All notices, requests, consents and demands hereunder shall be in writing and telecopied or delivered to the intended recipient pursuant to Section 11.01 of the Credit Agreement and shall be deemed to have been given at the times specified in that Section 11.01. 6.03.Expenses. Without duplication of the obligations of Pledgor set forth in the Credit Agreement, the Pledgor agrees to reimburse the Administrative Agent and each other Secured Party for all reasonable costs and expenses of the Administrative Agent and each other Secured Party (including the reasonable fees and expenses of legal counsel) in connection with (a) any Event of Default and any enforcement or collection proceeding resulting therefrom, including, without limitation, all manner of participation in or other involvement with (i) performance by the Administrative Agent of any obligations of the Pledgor in respect of the Collateral that the Pledgor has failed or refused to perform, (ii) bankruptcy, insolvency, receivership, foreclosure, winding up or liquidation proceedings, or any actual or attempted sale, or any exchange, enforcement, collection, compromise or settlement in respect of any of the Collateral, and for the care of the Collateral and defending or asserting rights and claims of the Administrative Agent in respect thereof, by litigation or otherwise, (iii) judicial or regulatory proceedings and (iv) workout, restructuring or other negotiations or proceedings (whether or not the workout, restructuring or transaction contemplated thereby is consummated) and (b) the enforcement of this Section 6.03, and all such costs and expenses shall be Secured Obligations entitled to the benefits of the collateral security provided pursuant to Section 3 hereof. 6.04.Amendments, Etc. The terms of this Agreement may be waived, altered or amended only by an instrument in writing duly executed by the Pledgor and the Administrative Agent (with the consent of the Lenders as specified in Section 11.02 of the Credit Agreement). Any such amendment or waiver shall be binding upon the Administrative Agent, each Lender, each holder of any of the Secured Obligations and the Pledgor. 6.05 Certain Documents. If any agreement, certificate or other writing, or any action taken or to be taken, is by the terms of this Agreement required to be satisfactory to the Administrative Agent or any other Secured Party, the determination of such satisfaction shall be made by the Administrative Agent or such Secured Party in their or its sole and exclusive judgment. 6.06 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of the Pledgor, the Administrative Agent, the other Secured Parties and each holder of any of the Secured Obligations (provided, however, that the Pledgor shall not assign or transfer its rights hereunder without the prior written consent of the Administrative Agent). In the event of an assignment of all or any of the Secured Obligations, the rights hereunder, to the extent applicable to the indebtedness so assigned, may be transferred with such indebtedness. This Agreement shall be binding on the Pledgor and its successors and assigns. -13- 6.07 Marshaling of Assets. All rights to marshaling of assets of the Pledgor, including any such right with respect to the Collateral, are hereby waived by the Pledgor. 6.08 Termination. When all Secured Obligations shall have been paid in full and all of the Commitments of the Lenders shall have been terminated, this Agreement shall terminate, and the Administrative Agent shall forthwith cause to be assigned, transferred and delivered, against receipt but without any recourse, warranty or representation whatsoever, any remaining Collateral and money received in respect thereof, to or upon the order of the Pledgor. 6.09 Severability. If any provision hereof is invalid and unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (a) the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Administrative Agent and the other Secured Parties in order to carry out the intentions of the parties hereto as nearly as may be possible and (b) the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. 6.10 Waivers. The Pledgor hereby expressly waives, to the extent permitted by applicable law (a) notice of the acceptance by the Administrative Agent or any other Secured Party of this Agreement, (b) notice of the existence or creation or non-payment of all or any of the Secured Obligations, (c) presentment, demand, notice of dishonor, protest, intent to accelerate, acceleration and all other notices whatsoever, and (d) all diligence in collection or protection of or realization upon the Secured Obligations or any thereof, any obligation hereunder, or any security for or guaranty of any of the foregoing. 6.11 Rescission. The Pledgor agrees that, if at any time all or any part of any payment theretofore applied by the Administrative Agent or any other Secured Party to any of the Secured Obligations is or must be rescinded or returned by the Administrative Agent or such Secured Party for any reason whatsoever (including the insolvency, bankruptcy or reorganization of the Pledgor or any of its Affiliates), such Secured Obligations shall, for the purposes of this Agreement, to the extent that such payment is or must be rescinded or returned, be deemed to have continued in existence, notwithstanding such application by the Administrative Agent, and the Security Interest granted hereunder shall continue to be effective or be reinstated, as the case may be, as to such Secured Obligations, all as though such application by the Administrative Agent or such Secured Party had not been made. 6.12 Limitation by Law. All rights, remedies and powers provided in this Agreement may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law, and all the provisions of this Agreement are intended to be subject to all applicable mandatory provisions of law which may be controlling and which may not be effectively waived by the Pledgor and to be limited to the extent necessary so that they will not -14- render this Agreement invalid, unenforceable, in whole or in part, or not entitled to be recorded, registered or filed under the provisions of any applicable law. 6.13 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and either of the parties hereto may execute this Agreement by signing any such counterpart. 6.14 Governing Law. This Agreement shall be governed by, and construed in accordance with, the law of the State of New York except as required by mandatory provisions of law and except to the extent that the validity or perfection of the Security Interests, or remedies hereunder, in respect of any particular Collateral are governed by the laws of a jurisdiction other than the State of New York. IN WITNESS WHEREOF, Pledgor has caused this Agreement to be duly executed by the authorized officer of its general partner as of the day and year first above written. KINDER MORGAN OPERATING L.P. "D" By: Kinder Morgan G.P., Inc., its General Partner By: /s/ William V. Morgan Name: William V. Morgan Title: Vice Chairman -15- EX-4.13 12 PLEDGE AGREEMENT BY KMNGL EXECUTION COPY PLEDGE AGREEMENT THIS PLEDGE AGREEMENT (as from time to time amended, modified or supplemented, this "Agreement") dated as of February 17, 1998, is made by KINDER MORGAN NATURAL GAS LIQUIDS CORPORATION, a Delaware corporation (the "Pledgor"), in favor of FIRST UNION NATIONAL BANK, as administrative agent (in such capacity, the "Administrative Agent") for the banks and other financial institutions (the "Lenders") parties to the Credit Agreement (as defined below). PRELIMINARY STATEMENTS (A) Kinder Morgan Energy Partners, L.P. (the "Company"), Kinder Morgan Operating L.P. "B" (the "Subsidiary Borrower"), certain other subsidiaries of the Company (together with the Subsidiary Borrower in its capacity as a Subsidiary Guarantor, collectively, the "Subsidiary Guarantors"), the Lenders, the Administrative Agent and Goldman Sachs Credit Partners L.P., as syndication agent (in such capacity, the "Syndication Agent"), are parties to a Credit Agreement dated as of the date hereof (as the same may be amended and in effect from time to time, the "Credit Agreement"), providing, subject to the terms and conditions thereof, for extensions of credit to be made by the Lenders to the Company and the Subsidiary Borrower; (B) The Pledgor is the owner of a 50% general partner interest (the "Interest") in Mont Belvieu Associates, a Texas general partnership (the "Issuer"); (C) In order to induce the Lenders to enter into the Credit Agreement and to extend credit thereunder to the Company and the Subsidiary Borrower, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Pledgor has agreed to pledge and grant a security interest in the Collateral (as defined below) as security for the Secured Obligations (as defined below). Accordingly, the parties hereto agree as follows: SECTION 1. Defined Terms: Interpretation. 1.01 Defined Terms. (a) The capitalized terms used herein which are defined in the Credit Agreement and not otherwise defined herein have, as used herein, the respective meanings provided for therein. (b) Unless otherwise defined herein or in the Credit Agreement, terms defined in Articles 8 and 9 of the UCC are used herein as therein defined. (c) As used in this Agreement, the following terms shall have the following meanings: "Administrative Agent" has the meaning specified in the Introduction hereof. "Agreement" has the meaning specified in the Introduction hereof. "Collateral" has the meaning specified in Section 3. "Company" has the meaning specified in the Preliminary Statements. "Credit Agreement" has the meaning specified in the Preliminary Statements. "Interest" has the meaning specified in the Preliminary Statements. "Issuer" has the meaning specified in the Preliminary Statements. "Lenders" has the meaning specified in the Introduction hereof. "Pledged Interests" has the meaning specified in Section 3. "Pledgor" has the meaning specified in the Introduction hereof. "Proceeds" has the meaning specified in Section 9-306 of the UCC. "Secured Obligations" means collectively: (i) the payment of all indebtedness and liabilities by, and performance of all other obligations of, the Company and the Subsidiary Borrower in respect of the Loans; (ii) all obligations of the Company and the Subsidiary Borrower under, with respect to, and relating to the Letters of Credit whether contingent or matured; (iii)all obligations of the Company or any Restricted Subsidiary (other than SFPP) owing to any Lender under any Hedging Agreement; (iv) the payment of all other indebtedness and liabilities by and performance of all other obligations of, the Company and the Subsidiary Borrower to the Administrative Agent, the Issuing Bank and the Lenders under, with respect to, and arising in connection with, the Loan Documents, and the payment of all indebtedness and liabilities of the Company and the Subsidiary Borrower to the Administrative Agent, the Issuing Bank and -2- the Lenders for fees, costs and expenses (including reasonable attorneys' fees and expenses) under the Loan Documents; (v) the payment of all sums advanced and costs and expenses incurred by the Administrative Agent or any Lender under any Loan Document (whether directly or indirectly) in connection with the Obligations or any part thereof or any renewal, extension or change of or substitution for the Obligations or any part thereof, whether such advances, costs, indemnification and expenses were made or incurred at the request of any Loan Party, the Administrative Agent, the Issuing Bank or any Lender; and (vi) all renewals, extensions, amendments and changes of, or substitutions or replacements for, all or any part of the items described under clauses (i) through (v) above. "Secured Parties" means (i) the Lenders, (ii) the Issuing Bank and (iii) the Administrative Agent. "Security Interests" means the security interests granted pursuant to Section 3, as well as all other security interests created or assigned as additional Collateral for the Secured Obligations pursuant to the provisions of this Agreement. "Subsidiary Borrower" has the meaning specified in the Preliminary Statements. "Subsidiary Guarantors" has the meaning specified in the Preliminary Statements. "Syndication Agent" has the meaning specified in the Preliminary Statements. "UCC" means the Uniform Commercial Code in effect from time to time in the State of New York; provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the Security Interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, "UCC" means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection. 1.02 Interpretation. (a) In this Agreement, unless a clear contrary intention appears: (i) the singular number includes the plural number and vice versa; (ii) reference to any gender includes each other gender; -3- (iii)the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Section or other subdivision; (iv) reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually, provided that nothing in this clause (iv) is intended to authorize any assignment not otherwise permitted by this Agreement; (v) reference to any agreement (including this Agreement), document or instrument means such agreement, document or instrument as amended, supplemented or modified and in effect from time to time in accordance with the terms thereof and, if applicable, the terms hereof, and references to any Note includes any note issued in renewal, rearrangement, reinstatement, enlargement, amendment, modification, extension, substitution or replacement therefor; (vi) unless the context indicates otherwise, reference to any Section, Schedule or Exhibit means such Section hereof or such Schedule or Exhibit hereto; (vii)the word "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term; (viii) with respect to the determination of any period of time, the word "from" means "from and including" and the word "to" means "to but excluding"; and (ix) reference to any law, ordinance, statute, code, rule, regulation, interpretation or judgment means such law, ordinance, statute, code, rule, regulation, interpretation or judgment as amended, modified, codified or reenacted, in whole or in part, and in effect from time to time. (b) The Section headings herein are for convenience only and shall not affect the construction hereof. (c) No provision of this Agreement shall be interpreted or construed against any Person solely because that Person or its legal representative drafted such provision. -4- SECTION 2. Representations and Warranties of the Pledgor. The Pledgor represents and warrants as follows: (a) The Pledgor is the sole beneficial owner of the Collateral listed on Schedule I. No Lien exists or will exist upon the Pledged Interests at any time (and no right or option to acquire the same exists in favor of any other Person), except for the pledge and security interest in favor of the Administrative Agent for the benefit of the Secured Parties created or provided for herein, which pledge and security interest constitute a first priority perfected pledge and security interest in and to all of the Interests pledged hereunder. (b) The Pledged Interests are duly authorized, validly existing, fully paid and non-assessable and is not nor will be subject to any contractual restriction, or any restriction pursuant to the partnership agreement of the Issuer, upon the transfer of the Interests (except for any such restriction contained herein or in the Credit Agreement). (c) No authorization, approval, or other action by, and no notice to or filing with, any Governmental Authority is required either (i) for the pledge by the Pledgor of the Collateral pursuant to this Agreement or for the execution, delivery or performance of this Agreement by the Pledgor or (ii) for the exercise by the Administrative Agent of the voting or other rights provided for in this Agreement or the remedies in respect of such Collateral pursuant to this Agreement (except as may be required in connection with such disposition by laws affecting the offering and sale of securities generally). (d) The Interest constitutes 50% of the issued and outstanding general partner interests of the Issuer. (e) This Agreement creates a valid and perfected first priority security interest in the Collateral, securing the payment of the Secured Obligations. (f) Upon the filing of a financing statement in the office of the Secretary of State of the State of Texas, the Administrative Agent for the benefit of the other Secured Parties will have a perfected first priority security interest in the Pledged Interests. -5- SECTION 3. The Security Interests. (a) In order to secure the full and punctual payment of the Secured Obligations in accordance with the terms thereof, the Pledgor hereby hypothecates, transfers and grants to the Administrative Agent for the ratable benefit of the Secured Parties a continuing security interest in and to all right, title and interest of the Pledgor in the following property, whether now owned or existing or hereafter acquired or arising and regardless of where located (all being collectively referred to as the "Collateral"): (i) the Interest and all other general partner interests of the Issuer, now or hereafter owned by the Pledgor (the Interest and all such additional general partner interests, collectively the "Pledged Interests"); (ii) all securities, moneys or property representing a distribution in respect of any of the Pledged Interests, or representing a return of capital upon or in respect of the Pledged Interests, or resulting from a split-up, revision, reclassification or other like change of the Pledged Interests or otherwise received in exchange therefor, and any subscriptions, warrants, rights or options issued to the holders of, or otherwise in respect of, the Pledged Interests; (iii)without affecting the obligations of the Pledgor under any provision prohibiting such action hereunder or under the Credit Agreement, in the event of any consolidation or merger in which the Issuer is not the surviving entity, 50% of the Capital Stock of the successor entity formed by or resulting from such consolidation or merger, in which event only such Capital Stock shall be included as Collateral; and (iv) all Proceeds of and to any of the property of the Pledgor described in the preceding clauses of this Section 3 (including all causes of action, claims and warranties now or hereafter held by the Pledgor in respect of any of the items listed above) and, to the extent related to any property described in said clauses or such Proceeds, all books, correspondence, credit files, records, invoices and other papers. The Administrative Agent shall have the right, at any time in its sole discretion and without notice to the Pledgor, to transfer to or to register in the name of the Administrative Agent or any of its nominees any or all of the Collateral, subject only to the revocable rights specified in Section 4.03(b) and (c) hereof. (b) The inclusion of Proceeds in this Agreement does not authorize the Pledgor to sell, dispose of or otherwise use the Collateral in any manner not specifically authorized hereby or by the Credit Agreement. -6- SECTION 4. Further Assurances; Remedies. In furtherance of the grant of the Security Interest, the Pledgor hereby agrees with each Lender and the Administrative Agent as follows: 4.01 Delivery and Other Perfection. The Pledgor shall: (a) if any of the securities, instruments, moneys or other property required to be pledged by the Pledgor under Section 3(a) are received by the Pledgor, forthwith either (x) transfer and deliver to the Administrative Agent such securities or instruments so received by the Pledgor duly endorsed in blank or accompanied by undated powers duly executed in blank), all of which thereafter shall be held by the Administrative Agent pursuant to the terms of this Agreement as part of the Collateral or (y) take such other action as the Administrative Agent shall deem necessary or appropriate to duly record the Lien created hereunder in such securities, instruments, moneys or other property in said clauses (i), (ii) and (iii); and (b) give, execute, deliver, file and/or record any financing statement, notice, instrument, document, agreement or other papers that may be reasonably requested by the Administrative Agent in order to create, preserve, perfect or validate the security interest granted pursuant hereto or to enable the Administrative Agent to exercise and enforce its rights hereunder with respect to such pledge and security interest, including causing any or all of the Collateral to be transferred of record into the name of the Administrative Agent or its nominee (and the Administrative Agent agrees that if any Collateral is transferred into its name or the name of its nominee, the Administrative Agent will thereafter promptly give to the Pledgor copies of any notices and communications received by it with respect to the Collateral). The Pledgor hereby authorizes the Administrative Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of the Pledgor where permitted by law. A carbon, photographic or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. 4.02 Other Financing Statements and Liens. (a) Without the prior written consent of the Administrative Agent (granted with the authorization of the Lenders as specified in Section 11.02 of the Credit Agreement), the Pledgor shall not file or suffer to be on file, or authorize or permit to be filed or to be on file, in any jurisdiction, any financing statement or like instrument with respect to the Collateral in which the Administrative Agent is not named as the sole secured party for the benefit of the other Secured Parties. -7- (b) The Pledgor agrees that, from time to time upon the written request of the Administrative Agent, the Pledgor will execute and deliver such further documents and do such other acts and things as the Administrative Agent may reasonably request in order fully to effect the purposes of this Agreement. 4.03 Collateral. (a) The Pledgor will cause the Pledged Interests to constitute at all times 50% of the general partner interest of the Issuer then outstanding. (b) Unless an Event of Default shall have occurred and be continuing and the Administrative Agent has notified the Pledgor to the contrary, the Pledgor shall have the right to exercise all voting, consensual and other powers of ownership pertaining to the Collateral for all purposes not inconsistent with the terms of this Agreement, the Credit Agreement, the other Loan Documents or any other instrument or agreement referred to herein or therein, provided that the Pledgor agrees that it will not vote the Collateral in any manner that is inconsistent with the terms of this Agreement, the Credit Agreement, the other Loan Documents or any such other instrument or agreement; and the Administrative Agent shall execute and deliver to the Pledgor or cause to be executed and delivered to the Pledgor all such proxies, powers of attorney, dividend and other orders, and all such instruments, without recourse, as the Pledgor may reasonably request for the purpose of enabling the Pledgor to exercise the rights and powers that it is entitled to exercise pursuant to this Section 4.03(b). (c) The Pledgor shall be entitled to receive and retain any and all distributions paid in respect of the Collateral, provided, however, that any and all (A) distributions paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Collateral, (B) distributions paid or payable in cash in respect of any Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus, and (C) cash paid, payable or otherwise distributed in redemption of, or in exchange for any Collateral, shall be, and shall be forthwith delivered to the Administrative Agent to hold as, Collateral and shall, if received by the Pledgor, be received in trust for the benefit of the Administrative Agent, be segregated from the other property or funds of the Pledgor, and be forthwith delivered to the Administrative Agent as Collateral in the same form as so received (with any necessary endorsement). (d) If any Event of Default shall have occurred, then so long as such Event of Default shall continue, and whether or not the Administrative Agent or any other Secured Party exercises any available right to declare any Secured Obligation due and payable or seeks or pursues any other relief or remedy available to it under applicable law or under this Agreement, the Credit Agreement, the other Loan Documents or any other agreement relating to such Secured Obligation, and the Administrative Agent so requires by notice to the Pledgor, all distributions received by the -8- Pledgor on the Collateral shall be paid directly by the Pledgor to the Administrative Agent and retained by it as part of the Collateral, subject to the terms of this Agreement, and, if the Administrative Agent shall so request in writing, the Pledgor agrees to execute and deliver to the Administrative Agent appropriate additional distribution and other orders and documents to that end, provided that if such Event of Default is cured, any such distribution theretofore paid to the Administrative Agent shall, upon request of the Pledgor (except to the extent theretofore applied to the Secured Obligations), be returned by the Administrative Agent to the Pledgor. 4.04 Events of Default, Etc. During the period during which an Event of Default shall have occurred and be continuing: (a) the Administrative Agent shall have all of the rights and remedies with respect to the Collateral of a secured party under the UCC (to the extent permitted by law whether or not the UCC is in effect in the jurisdiction where the rights and remedies are asserted) and such additional rights and remedies to which a secured party is entitled under the laws in effect in any jurisdiction including if the Administrative Agent has notified the Pledgor that it intends to exercise such right, the right, to the maximum extent permitted by law, to exercise all voting, consensual and other powers of ownership pertaining to the Collateral as if the Administrative Agent were the sole and absolute owner thereof (and the Pledgor agrees to take all such action as may be appropriate to give effect to such right); (b) upon and during the continuance of an Event of Default, the Administrative Agent in its discretion may, in its name or in the name of the Pledgor or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for any of the Collateral, but shall be under no obligation to do so; and (c) the Administrative Agent may, upon not less than ten Business Days' prior written notice to the Pledgor of the time and place, with respect to the Collateral or any part thereof that shall then be or shall thereafter come into the possession, custody or control of the Administrative Agent, the other Secured Parties or any of their respective agents, sell, assign or otherwise dispose of all or any part of such Collateral, at such place or places as the Administrative Agent deems best, and for cash or for credit or for future delivery (without thereby assuming any credit risk), at public or private sale, and the Administrative Agent or any Lender or anyone else may be the purchaser, lessee, assignee or recipient of any or all of the Collateral so disposed of at any public sale (or, to the extent permitted by law, at any private sale) and thereafter hold the same absolutely, free from any claim or right of whatsoever kind, including any right or equity of redemption (statutory or otherwise), of the Pledgor, any such demand, notice and right or equity being hereby expressly waived and released. The Pledgor agrees that such ten Business Days' notice constitutes "reasonable notification" within the meaning of Section 9-504 of the UCC. The Administrative Agent may, without notice or publication, adjourn any public or private sale or cause the same to -9- be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the sale may be so adjourned. The proceeds of each collection, sale or other disposition under this Section 4.04 shall be applied in accordance with Section 4.08 hereof. The Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act of 1933, as amended, and applicable state securities laws, the Administrative Agent may be compelled, with respect to any sale of all or any part of the Collateral, to limit purchasers to those who will agree, among other things, to acquire the Collateral for their own account, for investment and not with a view to the distribution or resale thereof. The Pledgor acknowledges that any such private sales may be at prices lower than at a public sale without such restrictions, and notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that the Administrative Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any Collateral for the period of time necessary to permit the Issuer thereof to register it for public sale. 4.05 Deficiency. Without limiting the obligations of the Pledgor to pay the Secured Obligations, if the proceeds of sale, collection or other realization of or upon the Collateral pursuant to Section 4.04 hereof are insufficient to cover the costs and expenses of such realization and the payment in full of the Secured Obligations, the Pledgor shall remain liable for any deficiency. 4.06 Removals, Etc. Without at least 30 days' prior written notice to the Administrative Agent, the Pledgor shall not (a) maintain any of its books and records with respect to the Collateral at any office or maintain its principal place of business at any place other than at the address indicated for the Pledgor in the Credit Agreement or (b) change its name, or the name under which it does business, from the name shown on the signature pages hereto. 4.07 Private Sale. The Administrative Agent and the other Secured Parties shall incur no liability as a result of the sale of the Collateral, or any part thereof, at any private sale pursuant to Section 4.04 hereof conducted in a commercially reasonable manner and in compliance with all applicable securities laws. The Pledgor hereby waives any claims against the Administrative Agent or any other Secured Party arising by reason of the fact that the price at which the Collateral may have been sold at such a private sale was less than the price that might have been obtained at a public sale or was less than the aggregate amount of the Secured Obligations. 4.08 Application of Proceeds. Except as otherwise herein expressly provided or as otherwise required by law, the proceeds of any collection, sale or other realization of all or any part of the Collateral pursuant hereto, and any other cash at the time held by the Administrative Agent under this Section 4, shall be applied by the Administrative Agent as provided in Section 7.03 -10- of the Credit Agreement. The Administrative Agent may make distributions hereunder in cash or in kind or on a ratable basis or in any combination thereof. 4.09 Attorney-in-Fact. Without limiting any rights or powers granted by this Agreement to the Administrative Agent, while no Event of Default has occurred and is continuing, upon the occurrence and during the continuance of any Event of Default, the Administrative Agent is hereby appointed the attorney-in-fact of the Pledgor for the purpose of carrying out the provisions of this Section 4 and taking any action and executing any instruments that the Administrative Agent may deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, so long as the Administrative Agent shall be entitled under this Section 4 to make collections in respect of the Collateral, to the extent permitted by law, the Administrative Agent shall have the right and power to receive, endorse and collect all checks made payable to the order of the Pledgor representing any distribution or other payment in respect of the Collateral or any part thereof and to give full discharge for the same. SECTION 5. Administrative Agent. 5.01 Limitation on Duty of Administrative Agent in Respect of Collateral. The powers conferred on the Administrative Agent hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Administrative Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. The Administrative Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which the Administrative Agent accords its own property, it being understood that the Administrative Agent shall not have any responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, tenders or other matters relative to any Collateral, whether or not the Administrative Agent has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve rights against any parties with respect to any Collateral. 5.02 Concerning the Administrative Agent. The provisions of Article VIII of the Credit Agreement shall inure to the benefit of the Administrative Agent in respect of this Agreement and shall be binding upon the parties to the Credit Agreement in such respect. In furtherance and not in derogation of the rights, privileges and immunities of the Administrative Agent therein set forth: -11- (A) The Administrative Agent is authorized to take all such action as is provided to be taken by it as the Administrative Agent hereunder and all other action reasonably incidental thereto. As to any matters not expressly provided for herein (including the timing and methods of realization upon the Collateral) the Administrative Agent shall act or refrain from acting in accordance with written instructions from the Required Lenders or, in the absence of such instructions, in accordance with its discretion. (B) The Administrative Agent shall not be responsible for the existence, genuineness or value of any of the Collateral or for the validity, perfection, priority or enforceability of the Security Interests in any of the Collateral, whether impaired by operation of law or by reason of any action or omission to act on its part hereunder. The Administrative Agent shall have no duty to ascertain or inquire as to the performance or observance of any of the terms of this Agreement by the Pledgor. 5.03 Appointment of Agents and Attorneys-in-Fact. The Administrative Agent may employ agents and attorneys-in-fact in connection herewith and shall not be responsible for the negligence or misconduct (except for gross negligence, willful misconduct or unlawful conduct) of any such agents or attorneys-in-fact selected by it in good faith. Without limiting the foregoing, at any time or times, in order to comply with any legal requirement in any jurisdiction, the Administrative Agent may appoint another bank or trust company or one or more other Persons, either to act as co-agent or co-agents, jointly with the Administrative Agent, or to act as separate agent or agents on behalf of the Secured Parties with such power and authority as may be necessary for the effective operation of the provisions hereof and may be specified in the instrument of appointment (which may, in the discretion of the Administrative Agent, include provisions for the protection of such co-agent or separate agent similar to the provisions of the Credit Agreement referred to in Section 5.02). SECTION 6. Miscellaneous. 6.01 No Waiver. No failure on the part of the Administrative Agent or any other Secured Party to exercise, and no course of dealing with respect to, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by the Administrative Agent or any other Secured Party of any right, power or remedy hereunder operate as a waiver thereof; nor shall any single or partial exercise by the Administrative Agent or any other Secured Party of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein are cumulative and are not exclusive of any remedies provided by law. -12- 6.02.Notices. All notices, requests, consents and demands hereunder shall be in writing and telecopied or delivered to the intended recipient pursuant to Section 11.01 of the Credit Agreement and shall be deemed to have been given at the times specified in that Section 11.01. 6.03.Expenses. Without duplication of the obligations of Pledgor set forth in the Credit Agreement, the Pledgor agrees to reimburse the Administrative Agent and each other Secured Party for all reasonable costs and expenses of the Administrative Agent and each other Secured Party (including the reasonable fees and expenses of legal counsel) in connection with (a) any Event of Default and any enforcement or collection proceeding resulting therefrom, including, without limitation, all manner of participation in or other involvement with (i) performance by the Administrative Agent of any obligations of the Pledgor in respect of the Collateral that the Pledgor has failed or refused to perform, (ii) bankruptcy, insolvency, receivership, foreclosure, winding up or liquidation proceedings, or any actual or attempted sale, or any exchange, enforcement, collection, compromise or settlement in respect of any of the Collateral, and for the care of the Collateral and defending or asserting rights and claims of the Administrative Agent in respect thereof, by litigation or otherwise, (iii) judicial or regulatory proceedings and (iv) workout, restructuring or other negotiations or proceedings (whether or not the workout, restructuring or transaction contemplated thereby is consummated) and (b) the enforcement of this Section 6.03, and all such costs and expenses shall be Secured Obligations entitled to the benefits of the collateral security provided pursuant to Section 3 hereof. 6.04.Amendments, Etc. The terms of this Agreement may be waived, altered or amended only by an instrument in writing duly executed by the Pledgor and the Administrative Agent (with the consent of the Lenders as specified in Section 11.02 of the Credit Agreement). Any such amendment or waiver shall be binding upon the Administrative Agent, each Lender, each holder of any of the Secured Obligations and the Pledgor. 6.05 Certain Documents. If any agreement, certificate or other writing, or any action taken or to be taken, is by the terms of this Agreement required to be satisfactory to the Administrative Agent or any other Secured Party, the determination of such satisfaction shall be made by the Administrative Agent or such Secured Party in their or its sole and exclusive judgment. 6.06 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of the Pledgor, the Administrative Agent, the other Secured Parties and each holder of any of the Secured Obligations (provided, however, that the Pledgor shall not assign or transfer its rights hereunder without the prior written consent of the Administrative Agent). In the event of an assignment of all or any of the Secured Obligations, the rights hereunder, to the extent applicable to the indebtedness so assigned, may be transferred with such indebtedness. This Agreement shall be binding on the Pledgor and its successors and assigns. -13- 6.07 Marshaling of Assets. All rights to marshaling of assets of the Pledgor, including any such right with respect to the Collateral, are hereby waived by the Pledgor. 6.08 Termination. When all Secured Obligations shall have been paid in full and all of the Commitments of the Lenders shall have been terminated, this Agreement shall terminate, and the Administrative Agent shall forthwith cause to be assigned, transferred and delivered, against receipt but without any recourse, warranty or representation whatsoever, any remaining Collateral and money received in respect thereof, to or upon the order of the Pledgor. 6.09 Severability. If any provision hereof is invalid and unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (a) the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Administrative Agent and the other Secured Parties in order to carry out the intentions of the parties hereto as nearly as may be possible and (b) the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. 6.10 Waivers. The Pledgor hereby expressly waives, to the extent permitted by applicable law (a) notice of the acceptance by the Administrative Agent or any other Secured Party of this Agreement, (b) notice of the existence or creation or non-payment of all or any of the Secured Obligations, (c) presentment, demand, notice of dishonor, protest, intent to accelerate, acceleration and all other notices whatsoever, and (d) all diligence in collection or protection of or realization upon the Secured Obligations or any thereof, any obligation hereunder, or any security for or guaranty of any of the foregoing. 6.11 Rescission. The Pledgor agrees that, if at any time all or any part of any payment theretofore applied by the Administrative Agent or any other Secured Party to any of the Secured Obligations is or must be rescinded or returned by the Administrative Agent or such Secured Party for any reason whatsoever (including the insolvency, bankruptcy or reorganization of the Pledgor or any of its Affiliates), such Secured Obligations shall, for the purposes of this Agreement, to the extent that such payment is or must be rescinded or returned, be deemed to have continued in existence, notwithstanding such application by the Administrative Agent, and the Security Interest granted hereunder shall continue to be effective or be reinstated, as the case may be, as to such Secured Obligations, all as though such application by the Administrative Agent or such Secured Party had not been made. 6.12 Limitation by Law. All rights, remedies and powers provided in this Agreement may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law, and all the provisions of this Agreement are intended to be subject to all applicable mandatory provisions of law which may be controlling and which may not be effectively waived by the Pledgor and to be limited to the extent necessary so that they will not -14 render this Agreement invalid, unenforceable, in whole or in part, or not entitled to be recorded, registered or filed under the provisions of any applicable law. 6.13 Effectiveness of this Agreement. This Agreement shall become effective (and shall become a Security Agreement and a Loan Document) when, and only when, the consent(s) referred to in Section 5.13 of the Credit Agreement is obtained. 6.14 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and either of the parties hereto may execute this Agreement by signing any such counterpart. 6.15 Governing Law. This Agreement shall be governed by, and construed in accordance with, the law of the State of New York except as required by mandatory provisions of law and except to the extent that the validity or perfection of the Security Interests, or remedies hereunder, in respect of any particular Collateral are governed by the laws of a jurisdiction other than the State of New York. IN WITNESS WHEREOF, the Pledgor has caused this Agreement to be duly executed by its authorized officer as of the day and year first above written. KINDER MORGAN NATURAL GAS LIQUIDS CORPORATION By: /s/ William V. Morgan Name: William V. Morgan Title: Vice Chairman EX-4.14.1 13 CONSENT AND AMENDMENT CONSENT AND AMENDMENT This Consent and Amendment dated to be effective as of December 19, 1997 ("Agreement"), is between the undersigned noteholder, (the "Noteholder") and SFPP, L.P., a Delaware limited partnership, formerly known as Southern Pacific Pipelines Partnership, L.P. (the "Company"). INTRODUCTION Reference is made to the Note Agreement dated as of December 8, 1988 (the "Note Agreement") between the Noteholder and the Company, the defined terms of which are used herein unless otherwise defined herein. In connection with the consummation of the transaction described below (the "Transaction"), the Company has requested (a) a consent to the replacement of the Company's Current General Partner (hereinafter defined) with the New General Partner (hereinafter defined), and (b) an amendment of the Note Agreement to permit certain Restricted Payments in connection therewith. The basis of the Transaction is the acquisition by Kinder Morgan Energy Partners, L.P. (the "Purchaser"), through its affiliate Kinder Morgan Operating L.P. "D," a Delaware limited partnership (the "New General Partner"), of a 99.5% general partnership interest in the Company. The Transaction will result in the exchange of the existing general partner interest of Santa Fe Pacific Pipelines, Inc., a Delaware corporation, formerly known as Southern Pacific Pipelines, Inc. (the "Current General Partner") for a 1.0101% special limited partner interest (the "SLP Interest"), which SLP Interest will be partially redeemed by the Company with a payment of $5,800,000 (the "Special Distribution"), reducing the Current General Partner's SLP Interest to 0.5%, and increasing the New General Partner's general partnership interest to 99.5%. Thereafter, the Current General Partner may require the Company to purchase the remaining SLP Interest, which payment (the "Put Right Payment") the Company may make in cash or common units of the Purchaser, at the Company's election, and the New General Partner may require the Current General Partner to sell to the Company the remaining SLP Interest, which payment (the "Call Right Payment") the Company may make in cash or common units of the Purchaser, at the New General Partner's election. The Transaction is described with greater detail in Exhibit B to the request for consent and the Purchase Agreement dated October 18, 1997, among the Purchaser, Kinder Morgan G.P., Inc., Santa Fe Pacific Pipeline Partners, L.P., SFP Pipeline Holdings, Inc., and the Current General Partner, which is attached as Exhibit C to the request for consent. Therefore, in connection with the foregoing and for other good and valuable consideration, the Noteholder and the Company agree as follows: Section 1. Consent. Section 11(1) of the Note Agreement requires the consent of the holders of a majority of the outstanding principal amount of the Notes to the replacement of the Current General Partner. The Noteholder hereby consents to the replacement of the Current General Partner with the New General Partner in connection with the Transaction. Section 2. Amendment. Section 18 of the Note Agreement requires the consent of the holders of 66-2/3% of the outstanding principal amount of the Notes to the amendment of the Note Agreement. Section 10.4 of the Note Agreement limits the Company's ability to make Restricted Payments. In order to exclude the Special Distribution and the Put Right Payment (but not the Call Right Payment) from such limitations, the definition of "Restricted Payments" is amended by adding the following provision to the end of such definition: Notwithstanding the foregoing, neither the Special Distribution in an amount not to exceed $5,800,000 nor any payment in connection with the Put Notice (in each case, as defined in the Purchase Agreement dated October 18, 1997, among Kinder Morgan Energy Partners, L.P., Kinder Morgan G.P., Inc., Santa Fe Pacific Pipeline Partners, L.P., SFP Pipeline Holdings, Inc., and Santa Fe Pacific Pipelines, Inc., as in effect on October 18, 1997 (the "Purchase Agreement"), the amount of which is calculated as set forth in Section 1.3 of such Purchase Agreement, shall constitute a "Restricted Payment" for purposes of this Agreement. Section 3. Representations and Warranties. The Company represents and warrants that (a) the execution, delivery and performance of this Agreement are within the power and authority of the Company and have been duly authorized by appropriate proceedings, (b) this Agreement constitutes legal, valid, and binding obligations of the Company enforceable in accordance with their terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the rights of creditors generally and general principles of equity, and (c) upon the effectiveness of this Agreement and the amendment of the Note Agreement as provided for herein, no Event of Default shall exist under the Note Agreement and there shall have occurred no event which with notice of lapse of time would become an Event of Default under the Note Agreement, as amended. Section 4. Effect on Note Agreement. Except as amended herein, the Note Agreement remains in full force and effect as originally executed. Nothing herein shall act as a waiver of the Noteholder's rights under the Note Agreement as amended, including the waiver of any default or event of default, however denominated. The Company must continue to comply with the terms of the Note Agreement, as amended. Any breach of the representations and warranties under this Agreement may be a default or Event of Default under the Note Agreement. Section 5. Miscellaneous. This Agreement shall be effective as of the date hereof when duly executed and delivered by the parties hereto. This Agreement may be executed in multiple counterparts. EXECUTED as of the date first above written. COMPANY: SFPP, L.P. By: Santa Fe Pacific Pipelines, Inc., its General Partner By: /s/ Barry R. Pearl Name: Barry R. Pearl Title: Senior Vice President and CFO NOTEHOLDER: Teachers Ins. & Annuity Assoc. By: /s/ Charles C. Thompson III Name: Charles C. Thompson III Title: Managing Director-Private Placements EXECUTED as of the date first above written. COMPANY: SFPP, L.P. By: Santa Fe Pacific Pipelines, Inc., its General Partner By:________________________________ Name:______________________________ Title:_____________________________ NOTEHOLDER: The Northwestern Mutual Life Insurance Company By: /s/ Richard A. Strait Name: Richard A. Strait Title: Vice President EXECUTED as of the date first above written. COMPANY: SFPP, L.P. By: Santa Fe Pacific Pipelines, Inc., its General Partner By:________________________________ Name:______________________________ Title:_____________________________ NOTEHOLDER: CIG & Co. By: /s/ James G. Schelling Name: James G. Schelling Title: Managing Director EXECUTED as of the date first above written. COMPANY: SFPP, L.P. By: Santa Fe Pacific Pipelines, Inc., its General Partner By:________________________________ Name:______________________________ Title:_____________________________ NOTEHOLDER: Pacific Life Ins. Co. (F.K.A. Pacific Mutual Life Ins. Co.) By: /s/ William R. Schmidt Name: William R. Schmidt Title: AVP EXECUTED as of the date first above written. COMPANY: SFPP, L.P. By: Santa Fe Pacific Pipelines, Inc., its General Partner By:________________________________ Name:______________________________ Title:_____________________________ NOTEHOLDER: Provident Life and Accident Insurance Company By: Provident Investment Management LLC By: /s/ David Fussell Name: David Fussell Title: Vice President EXECUTED as of the date first above written. COMPANY: SFPP, L.P. By: Santa Fe Pacific Pipelines, Inc., its General Partner By:________________________________ Name:______________________________ Title:_____________________________ NOTEHOLDER: The Paul Revere Life Insurance Company By: Provident Investment Management, LLC By: /s/ David Fussell Name: David Fussell Title: Vice President EXECUTED as of the date first above written. COMPANY: SFPP, L.P. By: Santa Fe Pacific Pipelines, Inc., its General Partner By:________________________________ Name:______________________________ Title:_____________________________ NOTEHOLDER: The Paul Revere Variable Annuity Insurance Company By: Provident Investment Management, LLC By: /s/ David Fussell Name: David Fussell Title: Vice President EXECUTED as of the date first above written. COMPANY: SFPP, L.P. By: Santa Fe Pacific Pipelines, Inc., its General Partner By:________________________________ Name:______________________________ Title:_____________________________ NOTEHOLDER: The Paul Revere Protective Life Insurance Company By: Provident Investment Management, LLC By: /s/ David Fussell Name: David Fussell Title: Vice President EXECUTED as of the date first above written. COMPANY: SFPP, L.P. By: Santa Fe Pacific Pipelines, Inc., its General Partner By:________________________________ Name:______________________________ Title:_____________________________ NOTEHOLDER: Sun Life Assurance Company of Canada (U.S.) By: /s/ John N. Whelihan Name: John N. Whelihan Title: Vice President, U.S. Private Placements - for President By: /s/ Jeffrey Skerry Name: Jeffrey Skerry Title: Senior Associate Counsel - for Secretary EXECUTED as of the date first above written. COMPANY: SFPP, L.P. By: Santa Fe Pacific Pipelines, Inc., its General Partner By:________________________________ Name:______________________________ Title:_____________________________ NOTEHOLDER: Sun Life Assurance Company of Canada By: /s/ John N. Whelihan Name: John N. Whelihan Title: Vice President, U.S. Private Placements - for President By: /s/ Jeffrey Skerry Name: Jeffrey Skerry Title: Senior Associate Counsel - for Secretary EXECUTED as of the date first above written. COMPANY: SFPP, L.P. By: Santa Fe Pacific Pipelines, Inc., its General Partner By:________________________________ Name:______________________________ Title:_____________________________ NOTEHOLDER: American General Life and Accident Insurance Company By: /s/ Julie S. Tucker Name: Julia S. Tucker Title: Investment Officer EXECUTED as of the date first above written. COMPANY: SFPP, L.P. By: Santa Fe Pacific Pipelines, Inc., its General Partner By:________________________________ Name:______________________________ Title:_____________________________ NOTEHOLDER: American United Life Insurance Company By: /s/ Christopher D. Pahlke Name: Christopher D. Pahlke Title: Vice President of Private Placements EXECUTED as of the date first above written. COMPANY: SFPP, L.P. By: Santa Fe Pacific Pipelines, Inc., its General Partner By:________________________________ Name:______________________________ Title:_____________________________ NOTEHOLDER: Massachusetts Mutual Life Ins. Co. By: /s/ Richard C. Morrison Name: Richard C. Morrison Title: Managing Director EXECUTED as of the date first above written. COMPANY: SFPP, L.P. By: Santa Fe Pacific Pipelines, Inc., its General Partner By:________________________________ Name:______________________________ Title:_____________________________ NOTEHOLDER: First Unum Life Insurance Company By: /s/ Richard R. Wolfe Name: Richard R. Wolfe Title: Director, Corporate Securities EXECUTED as of the date first above written. COMPANY: SFPP, L.P. By: Santa Fe Pacific Pipelines, Inc., its General Partner By:________________________________ Name:______________________________ Title:_____________________________ NOTEHOLDER: Unum Life Insurance Company of America By: /s/ Richard R. Wolfe Name: Richard R. Wolfe Title: Director, Corporate Securities EXECUTED as of the date first above written. COMPANY: SFPP, L.P. By: Santa Fe Pacific Pipelines, Inc., its General Partner By:________________________________ Name:______________________________ Title:_____________________________ NOTEHOLDER: Auer & Co. By: /s/ Rhonda Kellerborn Name: Rhonda Kellerborn Title: Reorg. Specialist EXECUTED as of the date first above written. COMPANY: SFPP, L.P. By: Santa Fe Pacific Pipelines, Inc., its General Partner By:________________________________ Name:______________________________ Title:_____________________________ NOTEHOLDER: Phoenix Home Life Mutual Insurance Company By: /s/ Donald Bertrand Name: Donald Bertrand Title: Vice President EXECUTED as of the date first above written. COMPANY: SFPP, L.P. By: Santa Fe Pacific Pipelines, Inc., its General Partner By:________________________________ Name:______________________________ Title:_____________________________ NOTEHOLDER: Pan America Life Insurance Co. By: /s/ F. Anderson Stone Name: F. Anderson Stone Title: Vice President, Corporate Securities EXECUTED as of the date first above written. COMPANY: SFPP, L.P. By: Santa Fe Pacific Pipelines, Inc., its General Partner By:________________________________ Name:______________________________ Title:_____________________________ NOTEHOLDER: Aid Association for Lutherans By: /s/ James Abitz Name: James Abitz Title: Vice President Investments By: /s/ R. Jerry Scheel Name: R. Jerry Scheel Title: Second Vice President - Securities EXECUTED as of the date first above written. COMPANY: SFPP, L.P. By: Santa Fe Pacific Pipelines, Inc., its General Partner By:________________________________ Name:______________________________ Title:_____________________________ NOTEHOLDER: Jefferson Pilot Life Insurance Company By: /s/ Robert E. Whalen, II Name: Robert E. Whalen, II Title: Second Vice President EXECUTED as of the date first above written. COMPANY: SFPP, L.P. By: Santa Fe Pacific Pipelines, Inc., its General Partner By:________________________________ Name:______________________________ Title:_____________________________ NOTEHOLDER: Salkeld & Co. By: /s/ Rhonda Kellenborn Name: Rhonda Kellenborn Title: Reorg. Specialist EXECUTED as of the date first above written. COMPANY: SFPP, L.P. By: Santa Fe Pacific Pipelines, Inc., its General Partner By:________________________________ Name:______________________________ Title:_____________________________ NOTEHOLDER: Massachusetts Casualty Insurance Company By: /s/ John N. Whelihan Name: John N. Whelihan Title: Assistant Treasurer
Int. Cumulative Maturity Principal Rate Total Current Noteholder CONSENT RECEIVED 45,000,000.00 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA 35,000,000.00 NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, THE 29,500,000.00 CIGNA PRIVATE PLACEMENTS (NOMINEE: CIG & CO.) 20,000,000.00 PACIFIC MUTUAL INSURANCE COMPANY (NOMINEE: ATWELL & CO.) 18,000,000.00 PAUL REVERE AND PROVIDENT LIFE GROUP 10,500,000.00 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) 10,000,000.00 AMERICAN GENERAL LIFE AND ACCIDENT INSURANCE CO. 8,000,000.00 AMERICAN UNITED LIFE INSURANCE COMPANY 8,000,000.00 MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY 8,000,000.00 FIRST UNUM AND UNUM LIFE GROUP 5,500,000.00 AUER & CO. (FBL INVESTMENT ADVISORY SERVICES) 4,000,000.00 PHOENIX MUTUAL LIFE INSURANCE COMPANY 3,000,000.00 PAN AMERICAN LIFE INSURANCE COMPANY 3,000,000.00 AID ASSOCIATION FOR LUTHERANS 3,000,000.00 JEFFERSON-PILOT LIFE INSURANCE COMPANY 2,000,000.00 SALKELD & CO. (AMERICAN MUTUAL LIFE INSURANCE COMPANY) 1,000,000.00 MASSACHUSETTS CASUALTY INSURANCE COMPANY 213,500,000.00 TOTAL 185,000,000.00 TOTAL REQUIRED
EX-10.6 14 COMMON UNIT OPTION PLAN Execution Copy KINDER MORGAN ENERGY PARTNERS, L.P. COMMON UNIT OPTION PLAN Section 1. Purposes of the Plan. The Partnership Agreement provides that the General Partner may adopt on behalf of Kinder Morgan Energy Partners, L.P. (the "Partnership") employee benefit plans (including, without limitation, plans involving the issuance of Units), for the benefit of employees of the General Partner. The Kinder Morgan Energy Partners, L.P. Common Unit Option Plan (the "Plan") is intended to encourage selected key personnel of the Partnership and its Affiliates to develop a proprietary interest in the growth and performance of the Partnership, to generate an increased incentive to contribute to the Partnership's future success and prosperity, and to link a part of the compensation for such key personnel to the ongoing success and performance of the Partnership. Section 2. Administration of the Plan. 2.1. The Plan shall be administered by the Board of Directors of the General Partner (the "Board") acting as an administrative committee of the whole or by another administrative committee comprised solely of not less than two (2) non-employee Directors of the Board (in each case the "Committee"). The Committee shall have all of the powers and duties specified for it under the Plan, including, without limitation, the selection of Participants and the determination of Awards to be granted to each Participant. The Committee may from time to time establish rules and procedures for the administration of the Plan which are not inconsistent with the provisions of the Plan, and any such rules and procedures shall be effective as if included in the Plan. 2.2. A majority of the members of the Committee shall constitute a quorum for the transaction of business. All action taken by the Committee at a meeting shall be by the vote of a majority of those present at such meeting, but any action may be taken by the Committee without a meeting upon written consent signed by all of the members of the Committee. Members of the Committee may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear or see the comments of one another. No member of the Committee shall vote on any matter directly affecting the amounts payable under the Plan to such member. 2.3. Subject to the terms of the Plan and applicable law, the Committee shall have sole power, authority and discretion to: (i) designate Participants; (ii) determine the types of Awards to be granted to a Participant under the Plan; (iii) determine the number of Common Units to be covered by or with respect to which payments, rights, or other matters are to be calculated in connection with Awards; (iv) determine the terms and conditions of any Award; (v) determine whether, to what extent, under what circumstances and how Awards may be settled or exercised in cash, Common Units, other securities, other Awards, or other property, or may be canceled, forfeited, or suspended; (vi) interpret, construe and administer the Plan and any instrument or agreement relating to an Award made under the Plan; (vii) establish, amend, suspend, or waive such 1 Execution Copy rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; (viii) make a determination as to the right of any person to receive payment of an Award or other benefit; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. 2.4. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time, and shall be final, conclusive, and binding upon all Persons. Section 3. Common Units Available For Awards 3.1. Common Units Available. (i) The aggregate number of Common Units available for granting Awards under the Plan shall be Two Hundred Fifty Thousand (250,000) Common Units, subject to adjustment as provided in Section 3.2. Further, if after the effective date of the Plan, any Common Units covered by an Award granted under the Plan, or to which an Award relates, are forfeited, or if an Award otherwise terminates without the delivery of Common Units or of other consideration, then the Common Units covered by such Award (or to which such Award relates, or the number of Common Units otherwise counted against the aggregate number of Common Units available under the Plan with respect to such Award, to the extent of any such forfeiture or termination) shall again be available for granting Awards under the Plan. (ii) For purposes of this Section 3, if an Award is denominated in Common Units, the number of Common Units covered by such Award, or to which such Award relates, shall be counted on the date of grant of such Award against the aggregate number of Common Units available for granting Awards under the Plan; provided, however, that Awards that operate in tandem with (whether granted simultaneously with or at a different time from) other Awards may be counted or not counted under procedures adopted by the Committee in order to avoid double counting. (iii) Any Common Units delivered pursuant to an Award may consist, in whole or in part, of Common Units owned or authorized to be issued by the Partnership. 3.2. Adjustments. (i) In the event that the Committee shall determine that any distribution (whether in the form of cash, Common Units, other securities or other property), recapitalization, unit split, reverse unit split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Common Units or other securities of the Partnership, issuance of warrants or other rights to purchase Common Units or other securities of the Partnership (or other similar transaction or event) affects the Common Units such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the 2 Execution Copy Committee may, subject to Section 3.2(ii), in such manner as it may deem equitable, adjust any or all of (a) the number and type of Common Units (or other securities or property) which thereafter may be made the subject of Awards, (b) the number and type of Common Units (or other securities or property) subject to outstanding Awards, and (c) the grant, purchase, or exercise price with respect to any Award, or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award; and provided further, that the number of Common Units subject to any Award denominated in Common Units shall always be a whole number. (ii) If, and whenever, prior to the expiration of a grant theretofore made, the Partnership shall effect a subdivision or consolidation of Common Units, the number of Common Units with respect to which such grant may thereafter be exercised (a) in the event of an increase in the number of outstanding Common Units shall be proportionately increased, for an outstanding Option Award the purchase price per Common Unit shall be proportionately reduced, and (b) in the event of a reduction in the number of outstanding Common Units shall be proportionately reduced, for an outstanding Option Award the purchase price per Common Unit shall be proportionately increased. Section 4. Eligibility Any Employee, including any officer of the Partnership or of any Affiliate, who is not a member of the Committee shall be eligible to be designated a Participant. Grants may be made to the same individual on more than one occasion. Grants shall also be made to non-employee directors pursuant to the provisions of Section 5.2. Section 5. Awards 5.1. Options. The Committee is hereby authorized to grant Options to Participants other than non-employee directors with the following terms and conditions and with such additional terms and conditions, which are not inconsistent with the provisions of the Plan, as the Committee shall determine: (i) Exercise Price. The per Common Unit purchase price of an Option shall not be less than the Fair Market Value of a Common Unit on the date of grant of such Option. (ii) Time and Method of Exercise. Subject to the provisions contained in the Plan and in a Participant's Award Agreement, exercisable Common Units under an Option may be exercised in whole or in part from time to time by request to the Partnership. Payment of the exercise price and any applicable tax withholding amounts must be made at the time of exercise, in whole or in part, by delivery of a cashier's check, Common Units, other property acceptable to and approved in advance by the Committee, or any combination thereof having a fair market value equal to such amount or part thereof provided that the fair market value of Common Units so delivered shall be equal to the closing price of the Common Units as reported by the New York Stock Exchange on the date of actual receipt by the Partnership of the notice exercising the Option or, if no closing prices are so reported 3 Execution Copy on such day, on the last preceding day on which such prices are so reported. An Option may be exercised through a broker financed exercise pursuant to the provisions of Regulation T of the Federal Reserve Board. If the Partnership receives payment of the purchase price for the exercise of the Option through a broker financed exercise before the end of the third business day following the broker's execution of the sale of Common Units for the financed exercise, the exercise shall be effective at the time of such sale. Otherwise, the exercise shall be effective when the Partnership receives payment of the purchase price. (iii) No Incentive Stock Options. No Option granted under the Plan shall be an Incentive Stock Option as defined under Section 422 of the Code, or any successor provision thereto, and any regulations promulgated thereunder. (iv) Award Agreement. Each grant of Options shall be evidenced by an Award Agreement which shall specify the term of the Option as well as provisions relating to exercise and termination. (v) Limit on Size of Option Grants. No individual shall be granted Options totaling more than Ten Thousand (10,000) Common Units in any single calendar year. (vi) Status as Unitholder. Unless and until a certificate or certificates representing such Common Units shall have been issued by the Partnership to the Participant, the Participant (or the person permitted to exercise an Option in the event of the Participant's death or incapacity) shall not be or have any of the rights or privileges of a unitholder of the Partnership with respect to the Common Units acquirable upon an exercise of an Option. 5.2. Grants to Non-Employee Directors. (i) Each Director of the General Partner who is not an employee of the General Partner, on the first day of the month following the effective date of the Plan, shall receive an Option to purchase five thousand (5,000) Common Units. Thereafter, each individual who becomes a non-employee Director of the General Partner, and who has not previously been granted an option pursuant to this Section 5.2, on the first day of the month following the date he or she becomes a Director, shall receive an Option to purchase five thousand (5,000) Common Units. (ii) The per Common Unit purchase price of such an Option shall be the Fair Market Value of a Common Unit on the date of grant of such Option. 4 Execution Copy (iii) An Option granted hereunder to a non-employee Director shall become exercisable determined by the number of full years as of and from the date of grant according to the following provisions: Percentage of Number of Common Units Full Years Exercisable -------------------- -------------- 0 (Date of Grant) 0% 1 40% 2 60% 3 80% 4 100% No less than four hundred (400) Common Units, or the total remaining exercisable Common Units if fewer, may be exercised at any one time. (iv) Each Option shall expire seven (7) years from the date of grant thereof, but shall be subject to earlier termination as follows. Options, to the extent exercisable as of the date a non-employee Director ceases to serve as a Director of the Company, must be exercised within three months of such date unless such event results from death, Disability or Retirement, in which case such Options may be exercised by the non-employee Director, his or her legal representative, heir or devisee, as the case may be, within one (1) year from the date of death, Disability or Retirement; provided, however, that no such event shall extend the normal expiration date of such Options. (v) Upon exercise of the Option, delivery of a certificate for fully paid Common Units shall be made at the corporate office of the General Partner in Houston, Texas to the non-employee Director exercising the Option either at such time during ordinary business hours not more than thirty (30) days from the date of receipt of the notice by the General Partner as shall be designated in such notice, or at such time, place and manner as may be agreed upon by the General Partner and the non-employee Director exercising the Option. (vi) To the extent they are not in conflict with the provisions of this Section 5.2, the provisions of Section 5.1 and 5.3 shall apply to each Option granted hereunder to a non-employee Director. 5.3. General. (i) No Cash Consideration for Awards. Except as otherwise provided in the Plan, Awards shall be granted for no cash consideration or for such minimal cash consideration as may be required by applicable law. (ii) Awards May Be Granted Separately or Together. Awards, in the discretion of the Committee, may be granted either alone or in addition to, or in tandem with any other 5 Execution Copy Award or any award granted under any other plan of the Partnership or any Affiliate. Awards granted in addition to or in tandem with other Awards, or in addition to or in tandem with awards granted under any other plan of the Partnership or any Affiliate, may be granted either at the same time as or at a different time from the grant of such other Awards or awards granted under any other plan of the Partnership or any Affiliate. (iii) Limits on Transfer of Awards. No Award and no right under any Award shall be assignable, alienable, saleable or transferable by a Participant other than: (a) by will or by the laws of descent and distribution; (b) pursuant to a "domestic relations order" as defined in Section 414(p) of the Code; (c) by transfer by an eligible Participant, subject to such rules as the Committee may adopt to preserve the purposes of the Plan (including limiting such transfer to Participants who are directors or senior executives), to: (I) a member of his or her Immediate Family, (II) a trust solely for the benefit of the Participant and his or her immediate Family, or (III) a partnership or limited liability company whose only partners or members are the Participant and his or her Immediate Family members, (d) by designation, in a manner established by the Committee, of a beneficiary or beneficiaries to exercise the rights of the Participant and to receive any property distributable with respect to any Award upon the death of the Participant. Each transferee described in (b) and (c) above is hereafter referred to as a "Permitted Transferee", provided that the Committee is notified in writing of the terms and conditions of any transfer intended to be described in (b) or (c) and the Committee determines that the transfer complies with the requirements of the Plan and the applicable Award Agreement. Any purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance that does not qualify under (a), (b), (c) or (d) shall be void and unenforceable against the Partnership. "Immediate Family" means, with respect to a particular Participant, the Participant's spouse, children or grandchildren (including adopted and stepchildren and grandchildren). The terms and provisions of an Award Agreement shall be binding upon the beneficiaries, executors and administrators of the Participant and on the Permitted Transferees of the Participant (including the beneficiaries, executors and administrators of the Permitted Transferees), except that Permitted Transferees shall not reassign any Award other than by will or by the laws of descent and distribution. An Award shall be exercised only by the Participant (or his or her attorney in fact or guardian) (including, in the case of a transferred 6 Execution Copy Award, by a Permitted Transferee), or, in the case of the Participant's death, by the Participant's executor or administrator (including, in the case of a transferred Award, by the executor or administrator of the Permitted Transferee), and all exercises of an Award shall be accompanied by sufficient payment, as determined by the Partnership, to meet its withholding tax obligation on such exercise or by other arrangements satisfactory to the Committee to provide for such payment. (iv) Term of Awards. The term of each Award shall be for such period as may be determined by the Committee; provided, however, that in no event shall the term of any Option exceed a period of ten (10) years from the date of its grant. (v) Rule 16b-3. It is intended that the Plan and any Award made to a Person subject to Section 16 of the Securities Exchange Act of 1934, as amended, meet all of the requirements of Rule 16b-3. If any provision of the Plan or any such Award would disqualify the Plan or such Award under, or would otherwise not comply with, Rule 16b-3, such provision or Award shall be construed or deemed amended to conform to Rule 16b-3. (vi) Status of Common Units. The Partnership intends to register for issue under the Securities Act of 1933, as amended ("The Act"), the Common Units acquirable pursuant to Awards under the Plan, and to keep such registration effective throughout the period any Awards are in effect. In the absence of such effective registration or an available exemption from registration under the Act, delivery of Common Units acquirable pursuant to Awards under the Plan shall be delayed until registration of such Common Units is effective or an exemption from registration under the Act is available. The Partnership intends to use reasonable efforts to avoid any such delay. In the event exemption from registration under the Act is available, a Participant (or a Participant's estate or personal representative in the event of the Participant's death or incapacity), if requested by the Partnership to do so, will execute and deliver to the Partnership in writing an agreement containing such provisions as the Partnership may require to assure compliance with applicable securities laws. No sale or disposition of Common Units acquired pursuant to an Award under the Plan by a Participant shall be made in the absence of an effective registration statement with respect to such Common Units under the Act unless an opinion of counsel satisfactory to the Partnership that such sale or disposition will not constitute a violation of the Act or any other applicable securities laws is first obtained. In the event that a Participant proposes to sell or otherwise dispose of Common Units in such a manner that an exception from the registration requirements of the Act is unavailable for such sale or disposition, and upon request to the Partnership by the Participant, the Partnership, at its sole cost and expense, shall cause a registration statement to be prepared and filed with respect to such sale or disposition by the Participant and shall use its reasonable efforts to have such registration statement declared effective, and, in connection therewith, shall execute and deliver such documents as shall be necessary, including without limitation, agreements providing for the indemnification of underwriters for any loss or damage incurred in connection with such sale or disposition. 6 Execution Copy (vii) Common Unit Certificates. All certificates for Common Units or other securities delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations and other requirements of the Securities and Exchange Commission, any trading exchange upon which such Common Units or other securities are then listed and any applicable Federal or state securities laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions, including, but not limited to, the provisions of Subsection 5.3(vi). Section 6. Amendment And Termination Except to the extent prohibited by applicable law and unless otherwise expressly provided in an Award Agreement or in the Plan: 6.1. Amendments to the Plan. The Board of Directors of the General Partner in its discretion may terminate the Plan at any time with respect to any Common Units for which a grant has not theretofore been made. The Board of Directors of the General Partner shall have the right to alter or amend the Plan or any part thereof from time to time; provided, that no change in any grant theretofore made may be made which would impair the rights of the recipient of a grant without the consent of such recipient. 6.2. Adjustments of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. A. Except as otherwise expressly provided herein, the issuance by the Partnership of securities, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of units or obligations of the Partnership convertible into such securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of Common Units subject to Options theretofore granted or the purchase price or grant price per Common Unit, if applicable. B. Any adjustment provided for in Section 3.2 or Section 6.2 shall be subject to any Partnership unitholder action or approval as may be required by law. 6.3. Correction of Defects, Omissions and Inconsistencies. The Committee may correct any defect, supply any omission, or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem desirable in the establishment or administration of the Plan. Section 7. General Provisions 7.1. No Rights to Awards. No Employee, Participant or other Person shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Employees, Participants, or holders or beneficiaries of Awards under the Plan. The terms and conditions of Awards need not be the same with respect to each Participant. 8 Execution Copy 7.2. Withholding. The Partnership or any Affiliate is authorized (i) to withhold from any Award granted, its exercise, or any payment due or any transfer made under any Award or under the Plan the amount (in cash, Common Units, other securities, other Awards, or other property) of withholding taxes due in respect of an Award, its exercise, or any payment or transfer under such Award or under the Plan, and (ii) to take such other action, including but not limited to, acceptance of already owned Common Units (including Common Units acquired from the exercise of an Option), as may be necessary to satisfy all obligations for the withholding of such taxes. Further, each Participant shall be solely responsible for the payment of all taxes relating to the Participant's Award and exercise thereof, in excess of the amount of any such taxes withheld. 7.3. No Limit on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Partnership or any Affiliate from adopting or continuing in effect other or additional compensation arrangements and such arrangements may be either generally applicable or applicable only in specific cases. 7.4. No Right To Employment. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Partnership or any Affiliate. Further, the Partnership or an Affiliate may at any time dismiss a Participant from employment, free from any liability or any claim under the Plan unless otherwise expressly provided in the Plan or in any Award Agreement. 7.5. Governing Law. The validity, construction and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with applicable Federal law, and to the extent not preempted thereby, with the laws of the State of Texas, excluding any conflict of law provisions. 7.6. Severability. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction, or as to any person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws. If it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or Award and the remainder of the Plan and any such Award shall remain in full force and effect. 7.7. No Trust or Fund Created. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Partnership or any Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Partnership or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Partnership or any Affiliate. 7.8. No Fractional Common Units. No fractional Common Units shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash, other securities, or other property shall be paid or transferred in lieu of any fractional Common Units, or whether such fractional Common Units or any rights thereto shall be canceled, terminated or 9 Execution Copy otherwise eliminated. In addition, no fractional Common Units shall be accepted by the Partnership in payment of the exercise price of an Option. 7.9. Headings. Headings are given to the Sections and Subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. 7.10. No Limitation. The existence of the Plan and the grants of Awards made hereunder shall not affect in any way the right or power of the General Partner or the unitholders of the Partnership (or any Affiliate, as applicable) to make or authorize any adjustment, recapitalization, reorganization or other change in the capital structure or business of the Partnership or any Affiliate, any merger or consolidation of the Partnership or any Affiliate, any issue of debt or equity securities ahead of or affecting Common Units or the rights thereof or pertaining thereto, the dissolution or liquidation of the Partnership or any Affiliate or any sale or transfer of all or any part of Partnership or any Affiliate's assets or business, or any other corporate act or proceeding. 7.11. No Right to Retention. Neither the Plan, nor any Award granted pursuant to the Plan, is a contract or agreement that the Partnership will continue the employment or retain the services of any Participant for any period of time. 7.12. Securities Laws. Each Award granted under the Plan shall be subject to the requirement that if at any time the Partnership or General Partner shall determine, in its discretion, that the listing, registration or qualification of the Common Units subject to such grant upon any securities exchange or under any state or federal law, or that the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, such grant or the issue or purchase of units thereunder, such grant shall be subject to the condition that such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Partnership or General Partner. Section 8. Effective Date Of The Plan The Plan shall be effective as of the date of its approval by the Board of Directors of the General Partner. Section 9. Term Of The Plan No Award shall be granted under the Plan after the earlier of (i) ten (10) years from the date of approval of the Plan by the Board of Directors of the General Partner pursuant to Section 8 or (ii) termination of the Plan pursuant to Section 6.1. However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award theretofore granted may extend beyond such date, and any authority of the Committee to amend, alter, suspend, discontinue or terminate any such Award, or to waive any conditions or rights under any such Award, and the authority of the Board of Directors of the General Partner to amend the Plan, shall extend beyond such date. 10 Execution Copy Section 10. Definitions As used in the Plan, the following terms shall have the meanings set forth below: (a) "Affiliate" shall mean (i) the General Partner and any entity that directly or through one or more intermediaries either controls or is controlled by the Partnership, (ii) any entity in which the Partnership has a significant equity interest as determined by the Committee, (iii) with respect to matters relating to Rule 16b-3, as the term "affiliate" is used in Rule 16b-3 and (iv) as used in Section 7.2 and in the term "Associate," as the term "affiliate" is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or any successor rule or regulation. (b) "Associate" is used to indicate a relationship with a specified person and shall mean (i) any corporation, partnership or other organization to which such specified person is an officer or partner or is, directly or indirectly, the Beneficial Owner of ten percent (10%) or more of any class of equity securities, (ii) any trust or other estate in which such specified person has a substantial beneficial interest or as to which such specified person serves as trustee or in a similar fiduciary capacity, (iii) any relative or spouse of such specified person, or any relative of such spouse, who has the same home as such specified person or who is a Director or officer of the Partnership or any of its parents or Affiliates, and (iv) any person who is a director or officer of such specified person or any of its parents or Affiliates (other than the Partnership or any wholly owned subsidiary of the Partnership). (c) "Award" shall mean any Option granted under the Plan. (d) "Award Agreement" shall mean any written agreement, contract or other instrument or document evidencing any Award granted under the Plan. (e) "Beneficial Owner" shall be defined by reference to Rule 13d-3 under the Securities Exchange Act of 1934, as amended, or any successor rule or regulation; provided, however, and without limitation, any individual, corporation, partnership, group, association or other person or entity which has the right to acquire any voting security at any time in the future, whether such right is contingent or absolute, pursuant to any agreement, arrangement or understanding or upon exercise of conversion rights, warrants or options, or otherwise, shall be the Beneficial Owner of such voting security. (f) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (g) "Committee" shall have the meaning set forth in Section 2.1. (h) "Common Unit" shall have the same meaning as "Unit" is defined in the Partnership Agreement. (i) "Disability" shall mean, with respect to a Participant in the Plan, an injury or illness to or of a Participant for which the Committee makes a determination that the Participant is 11 Execution Copy permanently and totally unable to perform his or her duties for the Partnership or an Affiliate as a result of any medically determinable physical or mental impairment as supported by a written medical opinion satisfactory to the Committee by a physician selected by the Committee, or if earlier, the date the Participant becomes entitled to receive long term disability benefits under the long term disability plan sponsored by the Partnership or an Affiliate for its employees generally. (j) "Employee" shall mean any person employed by the Partnership or any Affiliate. (k) "Fair Market Value" shall mean, with respect to any property (including, without limitation, any Common Units or other securities), the value of such property determined by such methods or procedures as shall be established from time to time by the Committee; provided, that so long as the closing price of Common Units is reported by the New York Stock Exchange, Fair Market Value with respect to Common Units on a particular date shall mean such closing price of Common Units as so reported for such date (or, if no prices are quoted for that date, as so quoted for the last preceding date for which such prices were so quoted). (l) "General Partner" shall mean Kinder Morgan G.P., Inc. (m) "Involuntary Termination" shall mean termination of a Participant's employment as an Employee with the Partnership or an Affiliate at the election of the Partnership or Affiliate, provided that such termination is not Termination for Cause. Involuntary Termination shall not include a transfer of assignment or location of a Participant where the Participant is employed by the Partnership or an Affiliate both before and after the transfer. (n) "Option" shall mean the opportunity to purchase Common Units of the Partnership pursuant to an Award granted under Section 5 of the Plan. (o) "Participant" shall mean an Employee or other individual described in Section 4 designated to be granted an Award under the Plan. (p) "Partnership Agreement" shall mean the Second Amended And Restated Agreement of Limited Partnership Of Kinder Morgan Energy Partners, L.P., dated as of January 14, 1998. (q) "Person" shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization or government or political subdivision thereof. (r) "Retirement" shall mean with respect to an Employee of the Partnership or an Affiliate, termination of employment, other than a Termination for Cause, after attainment of age 55 with at least 5 years of service. (s) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended from time to time. 12 Execution Copy (t) "Termination for Cause" shall mean termination of Participant by the Partnership or an Affiliate because of Participant's (i) conviction of a felony which in the reasonable, good faith opinion of the Committee would have an adverse impact on the reputation or business of the Partnership or an Affiliate; (ii) willful refusal without proper legal cause to perform Participant's duties and responsibilities; (iii) willfully engaging in conduct which Participant has reason to know is materially injurious to the Partnership or an Affiliate; or (iv) failure to meet clearly established and reasonable performance objectives or standards established by the Partnership or an Affiliate for Participant's job position. The Committee's determination of the reason for a Participant's termination of employment shall be conclusive and binding. (u) Any terms or provisions used herein which are defined in Sections 83, 421, 422 or 424 of the Code, or the regulations thereunder, or in Rule 16b-3 of the Securities Exchange Act of 1934, as amended, shall have the meanings as therein defined. Executed this 6th day of March, 1998 KINDER MORGAN ENERGY PARTNERS, L.P. By: KINDER MORGAN G.P., INC., its General Partner By: /s/ Michael C. Morgan Name: Michael C. Morgan Title: Vice President Attest: /s/ Clare H. Doyle Secretary 13 EX-21 15 LIST OF SUBSIDIARIES Exhibit 21-List of Subsidiaries Kinder Morgan Operating L.P. "A", a Delaware limited partnership Kinder Morgan Operating L.P. "B", a Delaware limited partnership Kinder Morgan Operating L.P. "C", a Delaware limited partnership Kinder Morgan Operating L.P. "D", a Delaware limited partnership Kinder Morgan Natural Gas Liquids Corporation, a Delaware corporation Kinder Morgan CO2, LLC, a Delaware limited liability company Mont Belvieu Associates, a Texas general partnership Heartland Partnership, a Texas general partnership SFPP L.P., a Delaware limited partnership EX-24.1 16 CONSENT LETTER FROM PRICE WATERHOUSE CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (Nos. 333-25995 and 333-25997) and on Form S-4 (No. 333-46709) of Kinder Morgan Energy Partners, L.P. of our report dated March 6, 1998 relating to the consolidated financial statements of Kinder Morgan Energy Partners, L.P. appearing on page F-2 and of our report dated March 6, 1998 relating to the financial statements of Mont Belvieu Associates appearing on page F-20 of this Form 10-K. PRICE WATERHOUSE LLP /s/ Price Waterhouse LLP Houston, Texas March 30, 1998 EX-24.2 17 CONSENT LETTER FROM ARTHUR ANDERSEN CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statement File Nos. 333-25997 (Kinder Morgan Energy Partners, L.P.), 333-25995 (First Union and Kinder Morgan G.P., Inc.), and 333-46709 (VRED Exchange). /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Houston, Texas March 30, 1998 EX-27 18 FINANCIAL DATA SCHEDULE
5 1,000 JAN-01-1997 12-MOS DEC-31-1997 DEC-31-1997 9,612 0 8,569 0 3,611 21,792 290,620 45,653 312,906 11,376 146,824 0 0 0 150,224 312,906 73,932 73,932 7,154 49,701 (5,371) 0 12,605 16,997 (740) 17,737 0 0 0 17,737 1.02 1.02 A 2-for-1 stock split occurred effective as of October 1, 1997. Prior Financial Data Schedules have not been restated to reflect this stock split.
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