Form of Tax Indemnity Agreement

EXHIBIT 10.1


TAX INDEMNIFICATION AGREEMENT


This TAX INDEMNIFICATION AGREEMENT (the "Agreement") dated as of _________, 2001 between Kinder Morgan, Inc., a Kansas corporation ("KMI") and Kinder Morgan Management, LLC, a Delaware limited liability company ("Management").


PREAMBLE


WHEREAS, Management was formed pursuant to the Limited Liability Company Agreement of Kinder Morgan Management, LLC, dated as of February 14, 2001 which was amended by the Amended and Restated Limited Liability Company Agreement of Kinder Morgan Management, LLC (the "Management LLC Agreement").


WHEREAS, as part of the capitalization of Management, Management issued two classes of limited liability company interests consisting of the "Listed Shares" and the "Voting Share," the rights and obligations of which are more specifically described in the Management LLC Agreement.


WHEREAS, Kinder Morgan Energy Partners, L.P., a Delaware limited partnership ("KMEP"), pursuant to the Third Amended and Restated Agreement of Limited Partnership of KMEP (the "Third KMEP Partnership Agreement"), authorized the issuance of the new class of partnership interest hereinafter referred to as the "I-Unit."


WHEREAS, Management issued the Voting Share to KMGP (as defined herein) in exchange for $100,000.


WHEREAS, Management issued the Listed Shares to the public in exchange for net proceeds of $______ million.


WHEREAS, Management acquired I-Units from KMEP in exchange for $_______ million. In addition, Management purchased the Exchange Right (as defined herein), the Purchase Right (as defined herein) and its rights under this Agreement from KMI for $________ million.


WHEREAS, KMI has agreed to indemnify Management for certain tax consequences attributable to the Indemnifiable Events described below.


ACCORDINGLY, in consideration of the mutual covenants herein contained and other good and valuable consideration, the parties hereto do hereby agree as follows:


AGREEMENT


1. Definitions. For purposes of this Agreement, the following terms shall have the following meanings. Any reference to any person shall include such person and its permitted successors and assigns. Except where expressly stated otherwise, any agreement referred to in this Agreement shall mean such agreement as amended, supplemented or modified from time to


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time in accordance with the applicable provisions thereof. Capitalized terms not otherwise defined herein have the meaning assigned them in the Management LLC Agreement.


"After-Tax Basis" means in respect of any amount received or accrued by any Person (or in the case of a payee which is a pass-through or disregarded entity for the relevant Tax purposes, the Persons who are required to take into account any items of income, gain, loss or deduction with respect to such entity) (the "base amount"), the base amount supplemented by a further payment, if necessary, to such Person such that, after reduction for all Taxes actually imposed on such Person as a result of the receipt or accrual of the base amount and such further payment (after giving effect to all deductions and credits, if any, actually utilized by such Person arising from the event or circumstance giving rise to the base amount), the net amount received by such Person shall be equal to the base amount.


"Business Day" means Monday through Friday of each week, except that a legal holiday recognized as such by the government of the United States or the states of New York or Texas shall not be regarded as a Business Day.


"Change in Law" means the occurrence after the date hereof of (i) the enactment of, or amendment to, any provision of the Code, Treasury Regulations thereunder or any administrative pronouncement, (ii) the enactment of, or amendment to, any provision of the Tax law of any state (or political subdivision thereof) in which Management is subject to Tax, or (iii) the issuance of a Final Determination of the United States Supreme Court or the United States Court of Appeals for the federal judicial circuit to which appeal would lie from a case concerning Indemnifiable Events relating to Management; provided, that (x) a change in the rate of any Tax shall not be treated as a Change in Law, and (y) an administrative pronouncement shall be treated as a Change in Law only if Management provides KMI a written opinion of independent, nationally-recognized tax counsel selected by Management (such counsel and form of opinion to be reasonably satisfactory to KMI) to the effect that such counsel is unable to conclude that a Reasonable Basis exists to take a position contrary to such administrative pronouncement.


"Code" means the Internal Revenue Code of 1986, as amended and in effect from time to time. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of successor law.


"Common Unit" has the meaning set forth in the Third KMEP Partnership Agreement.


"Exchange Right" means the various rights of holders of the Listed Shares to exchange Listed Shares for Common Units of KMEP owned by KMI or cash, the terms and provisions of which are more specifically set forth in Annex B of the Management LLC Agreement.


"Final Determination," in a proceeding involving KMI, KMEP or Management means: (i) in respect of judicial decisions, a decision, judgment, decree or other order by any court of competent jurisdiction, which decision, judgment, decree or other order has become final after all appeals allowable by law as of right and hereunder by either party to the action have been exhausted or the time for filing such appeals has expired; (ii) a closing agreement entered into under section 7121 of the Code or any other settlement agreement entered into with the


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applicable taxing authority in connection with an administrative or judicial proceeding (including a state or local proceeding); (iii) the expiration of the time for instituting a suit with respect to a claimed deficiency; or (iv) the expiration of the time for instituting a claim for refund, or if such a claim were filed, the expiration of the time for instituting a suit with respect thereto.


"I-Unit" is defined in the preamble to this Agreement. The terms and provisions of the I-Units are more specifically set forth in the Third KMEP Partnership Agreement.


"Indemnifiable Event" means an increase, as a result of a Change in Law, an audit by the applicable taxing authority or any action taken by KMI or KMGP that is inconsistent with the Tax Assumptions, in the sum of Taxes imposed on, payable by, or withheld from payments to Management, over the sum of Taxes, if any, Management would have paid or incurred in such year or shorter tax period with respect thereto based on the Tax Assumptions, computed in each case as provided in Section 5.


"Indemnity Amount" has the meaning set forth in Section 3(a)(1).


"Interest Rate" means the applicable federal rate (within the meaning of section 1274(d) of the Code).


"IRS" means the United States Internal Revenue Service.


"KMGP" means Kinder Morgan G.P., Inc., a Delaware corporation, the sole general partner of KMEP and the owner of the Voting Share.


"KMI" is defined in the introduction to this Agreement.


"Listed Shares" means the ownership interests in Management issued to the public for cash, the rights and obligations of which are more specifically described in the Management LLC Agreement.


"Management" is defined in the introduction to this Agreement.


"Management LLC Agreement" is defined in the preamble to this Agreement.


"Non-Taxable" means in respect of any transaction, event or circumstance, not causing or giving rise to the realization or recognition of any taxable income or other basis for the imposition of Tax.


"Purchase Rights" means the rights and obligations associated with the optional and mandatory purchase of Listed Shares by KMI, the terms and provisions of which are more specifically set forth in Annex A of the Management LLC Agreement.


"Reasonable Basis" for a position exists if tax counsel may properly advise reporting such position on a Tax return in accordance with Formal Opinion 85-352 of the American Bar Association or any successor thereto.


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"Revenue Agent's Report" means a report sent to a taxpayer under cover of a transmittal (30 day) letter relating to proposed adjustments in such taxpayer's United States federal income tax liability referred to in Treasury Regulation Section 601.105(c)(2)(i).


"Tax" or "Taxes" means any and all present or future taxes, duties, levies, imposts, deductions or withholdings (including, without limitation, income, franchise, gross receipts, sales, rental, use, turnover, value added, property (tangible and intangible), excise and stamp taxes) of any nature whatsoever, together with any and all assessments, penalties, fines, additions and interest relating thereto.


"Tax Assumptions" means the following assumptions with respect to the basis of taxation of Management and its capability to pay Taxes to which it may be subject relative to the cash which it has available to pay such Taxes:


(1) The formation and capitalization of Management and all
transactions related or incidental thereto, its issuance of
Listed Shares and the Voting Share and its acquisition of I-Units
in KMEP will be Non-Taxable to Management.


(2) Management's receipt of the Exchange Rights and Purchase Rights
from KMI will be Non-Taxable to Management.


(3) Management's transfer of the Exchange Rights and Purchase Rights
to the holders of Listed Shares will be Non-Taxable to
Management.


(4) Management is treated as a corporation for United States federal
income Tax purposes.


(5) Each Listed Share and Voting Share is treated as an ownership
interest in Management, and each owner of a Listed Share or a
Voting Share is treated as a shareholder of Management, for
United States federal income Tax purposes.


(6) KMEP is treated as a partnership for United States federal income
Tax purposes.


(7) Management, by virtue of its ownership of I-Units in KMEP, is
treated as a partner in KMEP for United States federal income tax
purposes.


(8) The allocation of KMEP Tax Items, as set forth in the Third KMEP
Partnership Agreement, is respected for United States federal
income tax purposes.


(9) Distributions of additional I-Units to Management by KMEP made
pursuant to the Third KMEP Partnership Agreement are Non-Taxable
to Management.


(10) Distributions of additional Listed Shares and Voting Shares by
Management to holders of Listed Shares and Voting Shares, made
pursuant to the Management LLC Agreement, are Non-Taxable to
Management.


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(11) To the extent that Management engages in the management and
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