KMR 2005 2nd Quarter Form 10-Q

Table of Contents


 



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q



x

  

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended June 30, 2005


o

  

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from _____________to_____________


Commission file number 1-16459


Kinder Morgan Management, LLC

(Exact name of registrant as specified in its charter)


Delaware

  

76-0669886

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification No.)

  

500 Dallas Street, Suite 1000, Houston, Texas 77002

(Address of principal executive offices, including zip code)

  

(713) 369-9000

(Registrant’s telephone number, including area code)


 

(Former name, former address and former fiscal year, if changed since last report)



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 o


Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x  No o


The number of shares outstanding for each of the registrant’s classes of common equity, as of July 22, 2005 was two voting shares and 56,077,070 listed shares.






KMR Form 10-Q



KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY

FORM 10-Q

QUARTER ENDED JUNE 30, 2005



Contents



  

 

Page

  

 

Number

PART I.

FINANCIAL INFORMATION

 

  

  

Item 1.

Financial Statements. (Unaudited)

 

  

  
 

   Consolidated Balance Sheets


3

 

   Consolidated Statements of Income


4

 

   Consolidated Statements of Cash Flows


5

 

   Notes to Consolidated Financial Statements


6-9

  

  

Item 2.

Management’s Discussion and Analysis of Financial Condition and

 
 

    Results of Operations.


10-15

  

  

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.


16

  

  

Item 4.

Controls and Procedures.


16

  

  

PART II.

OTHER INFORMATION

 

  

  

Item 1.

Legal Proceedings.


17

  

  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.


17

  

  

Item 3.

Defaults Upon Senior Securities.


17

  

  

Item 4.

Submission of Matters to a Vote of Security Holders.


17

  

  

Item 5.

Other Information.


17

  

  

Item 6.

Exhibits.


18

  

  

SIGNATURE


19




2




KMR Form 10-Q


PART I - FINANCIAL INFORMATION


Item 1.  Financial Statements.



CONSOLIDATED BALANCE SHEETS (Unaudited)

Kinder Morgan Management, LLC and Subsidiary


 

June 30,

2005

 

December 31,

2004

 

(In thousands except shares)

ASSETS

     

  

     

Current Assets:

     

Accounts Receivable, Related Party


$   14,250

  

$   24,857

 

Prepayments and Other


     1,529

  

       884

 
 

    15,779

  

    25,741

 

  

     

Investment in Kinder Morgan Energy Partners, L.P.


 1,511,379

  

 1,613,607

 

  

     

Total Assets


$1,527,158

  

$1,639,348

 

  

     

LIABILITIES AND SHAREHOLDERS’ EQUITY

     

  

     

Current Liabilities:

     

Accounts Payable


$    1,324

  

$    1,252

 

Accrued Expenses and Other


    14,390

  

    24,413

 
 

    15,714

  

    25,665

 

  

     

Deferred Income Taxes


    45,466

  

    82,601

 

  

     

Shareholders’ Equity:

     

Voting Shares - Unlimited Authorized; 2 Voting Shares Issued and Outstanding


       100

  

       100

 

Listed Shares - Unlimited Authorized; 56,077,070 and 54,157,639 Listed

     

  Shares Issued and Outstanding, Respectively


 1,861,969

  

 1,778,090

 

Retained Deficit


  (218,196

)

 

  (172,127

)

Accumulated Other Comprehensive Loss


  (177,895

)

 

   (74,981

)

Total Shareholders’ Equity


 1,465,978

  

 1,531,082

 

  

     

Total Liabilities and Shareholders’ Equity


$1,527,158

  

$1,639,348

 


The accompanying notes are an integral part of these statements.



3




KMR Form 10-Q




CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

Kinder Morgan Management, LLC and Subsidiary


 

Three Months Ended

June 30,

 

Six Months Ended

June 30,

 

2005

 

2004

 

2005

 

2004

 

(In thousands except per share amounts)

Equity in Earnings of Kinder Morgan Energy Partners, L.P.


$  27,825

  

$  25,662

  

$  57,247

  

$  51,315

 

Provision for Income Taxes


   10,106

  

    9,752

  

   20,792

  

   19,500

 

  

           

Net Income


$  17,719

  

$  15,910

  

$  36,455

  

$  31,815

 

  

           

Earnings Per Share, Basic and Diluted


$    0.32

  

$    0.31

  

$    0.66

  

$    0.64

 

  

           

Number of Shares Used in Computing

           

  Basic and Diluted Earnings Per Share


   55,632

  

   50,596

  

   55,142

  

   50,015

 


The accompanying notes are an integral part of these statements.




4




KMR Form 10-Q


CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Kinder Morgan Management, LLC and Subsidiary

Increase (Decrease) in Cash and Cash Equivalents


 

Six Months Ended June 30,

 

2005

 

2004

 

(In thousands)

Cash Flows From Operating Activities:

      

Net Income


$   36,455

  

$   31,815

 

Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:

      

    Deferred Income Taxes


    20,792

  

    19,500

 

    Equity in Earnings of Kinder Morgan Energy Partners, L.P.


   (57,247

)

 

   (51,315

)

    Decrease (Increase) in Accounts Receivable


    10,596

  

      (839

)

    (Increase) Decrease in Other Assets


      (645

)

 

     1,058

 

    Increase (Decrease) in Accounts Payable


        72

  

    (2,107

)

    (Decrease) Increase in Other Current Liabilities


   (10,023

)

 

     1,888

 

Net Cash Flows Provided by Operating Activities


         -

  

         -

 

  

      

Cash Flows From Investing Activities:

      

Purchase of i-units of Kinder Morgan Energy Partners, L.P.


         -

  

   (14,925

)

Net Cash Flows Used In Investing Activities


         -

  

   (14,925

)

       

Cash Flows From Financing Activities:

      

Shares Issued


         -

  

    15,000

 

Share Issuance Costs


         -

  

       (75

)

Net Cash Flows Provided by Financing Activities


         -

  

    14,925

 

  

      

Net Increase in Cash and Cash Equivalents


         -

  

         -

 

Cash and Cash Equivalents at Beginning of Period


         -

  

         -

 

Cash and Cash Equivalents at End of Period


$        -

  

$        -

 


SUPPLEMENTAL CASH FLOW INFORMATION


We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. No cash payments for interest or income taxes were made during the periods presented. We issue our shares or fractions thereof in distributions to our shareholders, and receive distributions from Kinder Morgan Energy Partners, L.P. on the i-units we own in the form of additional i-units in noncash transactions discussed in Note 4.


The accompanying notes are an integral part of these statements.



5




KMR Form 10-Q


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


1.   General


Kinder Morgan Management, LLC is a publicly traded Delaware limited liability company that was formed on February 14, 2001. Kinder Morgan G.P., Inc., an indirect wholly owned subsidiary of Kinder Morgan, Inc., and the general partner of Kinder Morgan Energy Partners, L.P., owns all of our voting shares. Kinder Morgan G.P., Inc., pursuant to a delegation of control agreement among us, Kinder Morgan G.P., Inc. and Kinder Morgan Energy Partners, L.P., has delegated to us, to the fullest extent permitted under Delaware law and Kinder Morgan Energy Partners, L.P.’s limited partnership agreement, all of its rights and powers to manage and control the business and affairs of Kinder Morgan Energy Partners, L.P., subject to the general partner’s right to approve specified actions. We are a limited partner in Kinder Morgan Energy Partners, L.P. through our ownership of its i-units, and manage and control its business and affairs pursuant to the delegation of control agreement. Our success is dependent upon our operation and management of Kinder Morgan Energy Partners, L.P. and its resulting performance, see Note 6.


We have prepared the accompanying unaudited interim consolidated financial statements under the rules and regulations of the Securities and Exchange Commission. Under such rules and regulations, we have condensed or omitted certain information and notes normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America. We believe, however, that our disclosures are adequate to make the information presented not misleading. The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of our financial results for the interim periods presented. You should read these interim consolidated financial statements in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2004 (“2004 Form 10-K”) and Kinder Morgan Energy Partners, L.P.’s Annual Report on Form 10-K for the year ended December 31, 2004 and Quarterly Report on Form 10-Q for the three months ended June 30, 2005. Unless the context requires otherwise, references to “we,” “us,” “our,” or the “Company” are intended to mean Kinder Morgan Management, LLC and its consolidated subsidiary, Kinder Morgan Services LLC.


2.   Earnings Per Share


Both basic and diluted earnings per share are computed based on the weighted-average number of shares outstanding during each period. There are no securities outstanding that may be converted into or exercised for shares.


3.   Capitalization


In April 2005, Kinder Morgan Energy Partners, L.P. issued 957,656 common units as partial consideration for the acquisition of seven bulk terminal operations. This transaction changed our percentage ownership of Kinder Morgan Energy Partners, L.P. and had the associated effects of increasing our (i) investment in the net assets of Kinder Morgan Energy Partners, L.P. by $2.2 million, (ii) associated accumulated deferred income taxes by $0.8 million and (iii) paid-in capital by $1.4 million.


In February 2004, Kinder Morgan Energy Partners, L.P. issued 5.3 million common units in a public offering at a price of $46.80 per common unit, receiving total net proceeds (after underwriting discount) of $237.8 million. We did not acquire any of these common units. On March 25, 2004, we closed the issuance and sale of 360,664 listed shares in a limited registered offering. None of the shares from our



6




KMR Form 10-Q


offering were purchased by Kinder Morgan, Inc. We used the net proceeds of approximately $14.9 million from the offering to buy additional i-units from Kinder Morgan Energy Partners, L.P. These issuances, collectively, changed our percentage ownership of Kinder Morgan Energy Partners, L.P. and had the associated effects of increasing our (i) investment in the net assets of Kinder Morgan Energy Partners, L.P. by $10.8 million, (ii) associated accumulated deferred income taxes by $4.1 million and (iii) paid-in capital by $6.7 million.


4.   Share Distributions


On May 13, 2005, we paid a share distribution of 0.017482 shares per outstanding share (963,495 total shares) to shareholders of record as of April 29, 2005, based on the $0.76 per common unit distribution declared by Kinder Morgan Energy Partners, L.P. On August 12, 2005, we will pay a share distribution of .016210 shares per outstanding share (909,009 total shares) to shareholders of record as of July 29, 2005, based on the $0.78 per common unit distribution declared by Kinder Morgan Energy Partners, L.P. These distributions are paid in the form of additional shares or fractions thereof calculated by dividing Kinder Morgan Energy Partners, L.P.’s cash distribution per common unit by the average market price of a share determined for a ten-trading day period ending on the trading day immediately prior to the ex-dividend date for our shares. We have paid share distributions totaling 1,919,431 shares in the six months ended June 30, 2005.


5.   Business Activities and Related Party Transactions


We do not receive a fee for our services under the delegation of control agreement, nor do we receive any margin or profit when we are reimbursed for expenses incurred. We incurred, on behalf of Kinder Morgan Energy Partners, L.P., approximately $47.0 million and $40.0 million of expenses during the three months ended June 30, 2005 and 2004, respectively, and $89.6 million and $86.8 million of expenses during the six months ended June 30, 2005 and 2004, respectively. The expense reimbursements by Kinder Morgan Energy Partners, L.P. to us are accounted for as a reduction to the expense incurred by us. At June 30, 2005, $14.3 million, primarily a receivable from Kinder Morgan Energy Partners, L.P., is recorded in the caption “Accounts Receivable, Related Party” in the accompanying interim Consolidated Balance Sheet.


6.   Summarized Income Statement Information for Kinder Morgan Energy Partners, L.P.


At June 30, 2005, through our ownership of Kinder Morgan Energy Partners, L.P. i-units, we owned approximately 26.7% of all of Kinder Morgan Energy Partners, L.P.’s outstanding limited partner interests. We use the equity method of accounting for this investment and, therefore, record earnings equal to our share of Kinder Morgan Energy Partners, L.P.’s limited partners’ net income. Our percentage ownership changes over time upon distribution of additional i-units to us and/or upon issuance of additional common units or other equity securities by Kinder Morgan Energy Partners, L.P. Following is summarized income statement information for Kinder Morgan Energy Partners, L.P. Additional information on Kinder Morgan Energy Partners, L.P.’s results of operations and financial position is contained in its Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.



7




KMR Form 10-Q



 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2005

 

2004

 

2005

 

2004

 

(In thousands)

Operating Revenues


$ 2,126,355

 

$ 1,957,182

 

$ 4,098,287

 

$ 3,779,438

Operating Expenses


  1,851,226

 

  1,725,818

 

  3,554,181

 

  3,322,932

        

Operating Income


$   275,129

 

$   231,364

 

$   544,106

 

$   456,506

        

Net Income


$   221,826

 

$   195,218

 

$   445,447

 

$   386,972


7.    Comprehensive (Loss) Income


Our comprehensive (loss) income, which differs from our net income solely due to our equity in the other comprehensive loss of Kinder Morgan Energy Partners, L.P., for the three months and six months ended June 30, 2005 and 2004 is as follows:


 

Three Months Ended

June 30,

 

Six Months Ended

June 30,

 

2005

 

2004

 

2005

 

2004

 

(In Thousands)

Net Income:


$  17,719

  

$  15,910

  

$  36,455

  

$  31,815

 

Other Comprehensive Loss, Net of Tax:

             

  Equity in Other Comprehensive Loss of

             

    Equity Method Investees

 

  (21,227

)

 

  (13,613

)

 

 (102,914

)

 

  (25,672

)

Comprehensive (Loss) Income

 

$  (3,508

)

 

$   2,297

  

$ (66,459

)

 

$   6,143

 


8.  Recent Accounting Pronouncements


In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R (revised 2004), Share-Based Payment. This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, and requires companies to expense the value of employee stock options and similar awards.  Significant provisions of SFAS No. 123R include the following:

  

·

share-based payment awards result in a cost that will be measured at fair value on the awards’ grant date, based on the estimated number of awards that are expected to vest. Compensation cost for awards that vest would not be reversed if the awards expire without being exercised;


·

when measuring fair value, companies can choose an option-pricing model that appropriately reflects their specific circumstances and the economics of their transactions;


·

companies will recognize compensation cost for share-based payment awards as they vest, including the related tax effects. Upon settlement of share-based payment awards, the tax effects will be recognized in the income statement or additional paid-in capital; and


·

public companies are allowed to select from three alternative transition methods – each having different reporting implications.


In April 2005, the Securities and Exchange Commission extended the effective date for public companies to implement SFAS No. 123R (revised 2004). The new Statement is now effective for non-small business entities starting with the first interim or annual period of the company’s first fiscal year beginning on or after June 15, 2005 (January 1, 2006, for us). We currently have no share-based



8




KMR Form 10-Q


compensation plans.


In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. This Statement replaces Accounting Principles Board Opinion (“APB”) No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle.


SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. In contrast, APB No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle.


The provisions of this Statement will be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 (January 1, 2006 for us). Earlier application is permitted for accounting changes and corrections of errors made occurring in fiscal years beginning after June 1, 2005. The Statement does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of this Statement.  Adoption of this Statement will not have any immediate effect on our consolidated financial statements, and we will apply this guidance prospectively.


In June 2005, the Emerging Issues Task Force reached a consensus on Issue No. 04-5, or EITF 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights. EITF 04-5 provides guidance for purposes of assessing whether certain limited partners rights might preclude a general partner from controlling a limited partnership.


For general partners of all new limited partnerships formed, and for existing limited partnerships for which the partnership agreements are modified, the guidance in EITF 04-5 is effective after June 29, 2005. For general partners in all other limited partnerships, the guidance is effective no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005 (January 1, 2006, for us). We are currently reviewing the effects of this Issue.



9




KMR Form 10-Q


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.


General


We are a publicly traded Delaware limited liability company, formed on February 14, 2001, that has elected to be treated as a corporation for federal income tax purposes. Our voting shares are owned by Kinder Morgan G.P., Inc., an indirect wholly owned subsidiary of Kinder Morgan, Inc. that is the general partner of Kinder Morgan Energy Partners, L.P.


Business


Kinder Morgan G.P., Inc. has delegated to us, to the fullest extent permitted under Delaware law and Kinder Morgan Energy Partners, L.P.’s limited partnership agreement, all of its rights and powers to manage and control the business and affairs of Kinder Morgan Energy Partners, L.P., subject to the general partner’s right to approve specified actions.


Financial Condition


As indicated by the accompanying interim Consolidated Balance Sheets, the principal changes in our financial position since December 31, 2004, are a $102.2 million decrease in our investment in Kinder Morgan Energy Partners, L.P. and a $65.1 million decrease in shareholders’ equity. These decreases reflect, principally, the net effect of our equity in the other comprehensive loss of Kinder Morgan Energy Partners, L.P. (see Note 7), partially offset by our earnings, which consist of our equity in the earnings of Kinder Morgan Energy Partners, L.P. attributable to the i-units we own, net of income taxes. Additional information regarding Kinder Morgan Energy Partners, L.P. is available in its Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 and in its Annual Report on Form 10-K for the year ended December 31, 2004.


Results of Operations


Our results of operations consist of the offsetting expenses and receipts associated with our managing and controlling the business and affairs of Kinder Morgan Energy Partners, L.P. and our equity in the earnings of Kinder Morgan Energy Partners, L.P. attributable to the i-units we own. At June 30, 2005, through our ownership of i-units, we owned approximately 26.7% of Kinder Morgan Energy Partners, L.P.’s outstanding limited partner interests. We use the equity method of accounting for our investment in Kinder Morgan Energy Partners, L.P. and, therefore, we record earnings equal to our share of Kinder Morgan Energy Partners, L.P.’s limited partners’ net income. Our percentage ownership in Kinder Morgan Energy Partners, L.P. changes over time upon the distribution of additional i-units to us or upon issuances of additional common units or other equity securities by Kinder Morgan Energy Partners, L.P.


For the three months ended June 30, 2005 and 2004, Kinder Morgan Energy Partners, L.P. reported limited partners’ interest in net income of $104.6 million and $99.4 million, respectively. For the six months ended June 30, 2005 and 2004, Kinder Morgan Energy Partners, L.P. reported limited partners’ net income of $216.5 million and $199.4 million, respectively. The reported segment earnings contribution by business segment for Kinder Morgan Energy Partners, L.P. is set forth below. This information should be read in conjunction with Kinder Morgan Energy Partners, L.P.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 and with its Annual Report on Form 10-K for the year ended December 31, 2004 .




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KMR Form 10-Q


Kinder Morgan Energy Partners, L.P.


 

Three Months Ended

June 30,

 

Six Months Ended

June 30,

 

2005

 

2004

 

2005

 

2004

 

(In thousands)

Segment Earnings Contribution:

           

   Products Pipelines


$ 102,598

  

$ 101,091

  

$ 207,962

  

$ 197,108

 

   Natural Gas Pipelines


   99,159

  

   82,443

  

  208,019

  

  172,637

 

   CO2


   75,812

  

   46,358

  

  159,464

  

   96,569

 

   Terminals


   63,471

  

   55,261

  

  125,503

  

  108,149

 

Total Segment Earnings


  341,040

  

  285,153

   

  700,948

  

  574,463

 

Interest and Corporate Administrative Expenses1


 (119,214

)

 

  (89,935

)

 

 (255,501

)

 

 (187,491

)

Net Income


$ 221,826

  

$ 195,218

   

$ 445,447

  

$ 386,972

 


1

Includes interest and debt expense, general and administrative expenses, minority interest expense and other insignificant items.


Our earnings, as reported in the accompanying interim Consolidated Statements of Income, represent equity in earnings of Kinder Morgan Energy Partners, L.P. attributable to the i-units we own, reduced by a deferred income tax provision. The deferred income tax provision is calculated based on the book/tax basis difference created by our recognition, under accounting principles generally accepted in the United States of America, of our share of the earnings of Kinder Morgan Energy Partners, L.P. Our earnings per share (both basic and diluted) is our net income divided by our weighted-average number of outstanding shares during each period presented. There are no securities outstanding that may be converted into or exercised for our shares.


Income Taxes


We are a limited liability company that has elected to be treated as a corporation for federal income tax purposes. Deferred income tax assets and liabilities are recognized for temporary differences between the basis of our assets and liabilities for financial reporting and tax purposes. Changes in tax legislation are included in the relevant computations in the period in which such changes are effective. Currently, our only such temporary difference results from recognition of the increased investment associated with recording our equity in the earnings of Kinder Morgan Energy Partners, L.P. The effective tax rate used in computing our income tax provision was 36.3 percent and 38.0 percent for the six months ended June 30, 2005 and 2004, respectively. The change in tax rate is due to a reduction in the state effective tax rate.


We are a party to a tax indemnification agreement with Kinder Morgan, Inc. Pursuant to this tax indemnification agreement, Kinder Morgan, Inc. agreed to indemnify us for any tax liability attributable to our formation or our management and control of the business and affairs of Kinder Morgan Energy Partners, L.P., and for any taxes arising out of a transaction involving the i-units we own to the extent the transaction does not generate sufficient cash to pay our taxes with respect to such transaction.


Liquidity and Capital Resources


Our authorized capital structure consists of two classes of interests: (1) our listed shares and (2) our voting shares, collectively referred to in this document as our “shares.” Additional classes of interests may be approved by our board and holders of a majority of our shares, excluding shares held by Kinder Morgan, Inc. and its affiliates. The number of our shares outstanding will at all times equal the number of i-units of Kinder Morgan Energy Partners, L.P., all of which we own. Under the terms of our limited



11




KMR Form 10-Q


liability company agreement, except in connection with our liquidation, we do not pay distributions on our shares in cash but we make distributions on our shares in additional shares or fractions of shares. At the same time Kinder Morgan Energy Partners, L.P. makes a distribution on its common units and i-units, we distribute on each of our shares that fraction of a share determined by dividing the amount of the cash distribution to be made by Kinder Morgan Energy Partners, L.P. on each common unit by the average market price of a share determined for a ten-trading day period ending on the trading day immediately prior to the ex-dividend date for our shares.


On March 25, 2004, we closed the issuance and sale of 360,664 listed shares in a limited registered offering. None of the shares from our offering were purchased by Kinder Morgan, Inc. We used the net proceeds of approximately $14.9 million from the offering to buy additional i-units from Kinder Morgan Energy Partners, L.P.


On May 13, 2005, we paid a share distribution of 0.017482 shares per outstanding share (963,495 total shares) to shareholders of record as of April 29, 2005, based on the $0.76 per common unit distribution declared by Kinder Morgan Energy Partners, L.P. On August 12, 2005, we will pay a share distribution of .016210 shares per outstanding share (909,009 total shares) to shareholders of record as of July 29, 2005, based on the $0.78 per common unit distribution declared by Kinder Morgan Energy Partners, L.P. We have paid share distributions totaling 1,919,431 shares in the six months ended June 30, 2005.


Kinder Morgan Energy Partners, L.P.’s partnership agreement requires that it distribute 100% of available cash, as defined in the partnership agreement, to its partners within 45 days following the end of each calendar quarter in accordance with their respective percentage interests. Available cash consists generally of all of Kinder Morgan Energy Partners, L.P.’s cash receipts, including cash received by its operating partnerships, less cash disbursements and net additions to reserves (including any reserves required under debt instruments for future principal and interest payments) and amounts payable to the former general partner of SFPP, L.P. in respect of its remaining 0.5% interest in SFPP.


Kinder Morgan Energy Partners, L.P.’s general partner is granted discretion by the partnership agreement, which discretion has been delegated to us, subject to the approval of the general partner in certain cases, to establish, maintain and adjust reserves for future operating expenses, debt service, maintenance capital expenditures, rate refunds and distributions for up to the next four quarters. These reserves are not restricted by magnitude, but only by type of future cash requirements with which they can be associated. When we determine Kinder Morgan Energy Partners, L.P.’s quarterly distributions, we consider current and expected reserve needs along with current and expected cash flows to identify the appropriate sustainable distribution level.


Typically, the general partner and owners of Kinder Morgan Energy Partners, L.P.’s common units and Class B units receive distributions in cash, while we, the sole owner of Kinder Morgan Energy Partners, L.P.’s i-units, receive distributions in additional i-units. For each outstanding i-unit, a fraction of an
i-unit will be issued. The fraction is calculated by dividing the amount of cash being distributed per Kinder Morgan Energy Partners, L.P. common unit by the average closing price of our shares over the ten consecutive trading days preceding the date on which the shares begin to trade ex-dividend under the rules of the New York Stock Exchange. The cash equivalent of distributions of i-units will be treated as if it had actually been distributed for purposes of determining the distributions to the general partner, although Kinder Morgan Energy Partners, L.P. does not distribute cash to i-unit owners but retains the cash for use in its business.


Available cash is initially distributed 98% to the limited partners and 2% to the general partner. These distribution percentages are 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.



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KMR Form 10-Q



Kinder Morgan Energy Partners, L.P.’s available cash for each quarter is distributed:


·

first, 98% to the owners of all classes of units pro rata and 2% to the general partner until the owners of all classes of units have received a total of $0.15125 per unit in cash or equivalent
i-units for such quarter;


·

second, 85% of any available cash then remaining to the owners of all classes of units pro rata and 15% to the general partner until the owners of all classes of units have received a total of $0.17875 per unit in cash or equivalent i-units for such quarter;


·

third, 75% of any available cash then remaining to the owners of all classes of units pro rata and 25% to the general partner until the owners of all classes of units have received a total of $0.23375 per unit in cash or equivalent i-units for such quarter; and


·

fourth, 50% of any available cash then remaining to the owners of all classes of units pro rata, to owners of common units and Class B units in cash and to owners of i-units in the equivalent number of i-units, 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 value of cash and i-units being distributed. The general partner’s incentive distribution for the distribution that Kinder Morgan Energy Partners, L.P. declared for the second quarter of 2005 was $115.7 million. The general partner’s incentive distribution for the distribution that Kinder Morgan Energy Partners, L.P. declared for the second quarter of 2004 was $94.9 million. The general partner’s incentive distribution that Kinder Morgan Energy Partners, L.P. paid during the second quarter of 2005 to the general partner (for the first quarter of 2005) was $111.1 million. The general partner’s incentive distribution that Kinder Morgan Energy Partners, L.P. paid during the second quarter of 2004 to the general partner (for the first quarter of 2004) was $90.7 million. All partnership distributions Kinder Morgan Energy Partners, L.P. declares for the fourth quarter of each year are declared and paid in the first quarter of the following year.


We expect that our expenditures associated with managing and controlling the business and affairs of Kinder Morgan Energy Partners, L.P. and the reimbursement for these expenditures received by us from Kinder Morgan Energy Partners, L.P. will continue to be equal. As stated above, the distributions we expect to receive on the i-units we own will be in the form of additional i-units. Therefore, we expect neither to generate nor to require significant amounts of cash in ongoing operations. We currently have no debt and have no plans to incur any debt. Any cash received from the sale of additional shares will immediately be used to purchase additional i-units. Accordingly, we do not anticipate any other sources or needs for additional liquidity.


Information Regarding Forward-looking Statements


This filing includes forward-looking statements. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. They use words such as “anticipate,” “believe,” “intend,” “plan,” “projection,” “forecast,” “strategy,” “position,” “continue,” “estimate,” “expect,” “may,” or the negative of those terms or other variations of them or comparable terminology. In particular, statements, express or implied, concerning future actions, conditions or events, future operating results or the ability to generate sales, income or cash flow or to make distributions are forward-looking statements. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Future actions, conditions or events and future results of



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KMR Form 10-Q


our operations and those of Kinder Morgan Energy Partners, L.P. may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results are beyond our ability to control or predict. Specific factors that could cause actual results to differ from those in the forward-looking statements include:


·

price trends and overall demand for natural gas liquids, refined petroleum products, oil, carbon dioxide, natural gas, coal and other bulk materials and chemicals in the United States;

·

economic activity, weather, alternative energy sources, conservation and technological advances that may affect price trends and demand;

·

changes in Kinder Morgan Energy Partners, L.P.’s tariff rates implemented by the Federal Energy Regulatory Commission or the California Public Utilities Commission;

·

Kinder Morgan Energy Partners, L.P.’s ability to acquire new businesses and assets and integrate those operations into its existing operations, as well as its ability to make expansions to its facilities;

·

difficulties or delays experienced by railroads, barges, trucks, ships or pipelines in delivering products to or from Kinder Morgan Energy Partners, L.P.’s terminals or pipelines;

·

Kinder Morgan Energy Partners, L.P.’s ability to successfully identify and close acquisitions and make cost-saving changes in operations;

·

shut-downs or cutbacks at major refineries, petrochemical or chemical plants, ports, utilities, military bases or other businesses that use Kinder Morgan Energy Partners, L.P.’s services or provide services or products to Kinder Morgan Energy Partners, L.P.;

·

changes in laws or regulations, third-party relations and approvals, decisions of courts, regulators and governmental bodies that may adversely affect Kinder Morgan Energy Partners, L.P.’s business or its ability to compete;

·

our ability to offer and sell equity securities and Kinder Morgan Energy Partners, L.P.’s ability to offer and sell equity securities and debt securities or obtain debt financing in sufficient amounts to implement that portion of Kinder Morgan Energy Partners, L.P.’s business plan that contemplates growth through acquisitions of operating businesses and assets and expansions of its facilities;

·

Kinder Morgan Energy Partners, L.P.’s indebtedness could make it vulnerable to general adverse economic and industry conditions, limit its ability to borrow additional funds and/or place it at competitive disadvantages compared to its competitors that have less debt or have other adverse consequences;

·

interruptions of electric power supply to Kinder Morgan Energy Partners, L.P.’s facilities due to natural disasters, power shortages, strikes, riots, terrorism, war or other causes;

·

our and Kinder Morgan Energy Partners, L.P.’s ability to obtain insurance coverage without a significant level of self-retention of risk;

·

acts of nature, sabotage, terrorism or other similar acts causing damage greater than Kinder Morgan Energy Partners, L.P.’s insurance coverage limits;



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KMR Form 10-Q


·

capital markets conditions;

·

the political and economic stability of the oil producing nations of the world;

·

national, international, regional and local economic, competitive and regulatory conditions and developments;

·

the ability of Kinder Morgan Energy Partners, L.P. to achieve cost savings and revenue growth;

·

inflation;

·

interest rates;

·

the pace of deregulation of retail natural gas and electricity;

·

foreign exchange fluctuations;

·

the timing and extent of changes in commodity prices for oil, natural gas, electricity and certain agricultural products;

·

the extent of Kinder Morgan Energy Partners, L.P.’s success in discovering, developing and producing oil and gas reserves, including the risks inherent in exploration and development drilling, well completion and other development activities;

·

engineering and mechanical or technological difficulties that Kinder Morgan Energy Partners, L.P. may experience with operational equipment, in well completions and workovers, and in drilling new wells;

·

the uncertainty inherent in estimating future oil and natural gas production or reserves that Kinder Morgan Energy Partners, L.P. may experience;

·

the timing and success of Kinder Morgan Energy Partners, L.P.’s business development efforts; and

·

unfavorable results of litigation involving Kinder Morgan Energy Partners, L.P. and the fruition of contingencies referred to in Kinder Morgan Energy Partners, L.P.’s Quarterly Report on Form 10-Q for the three months ended June 30, 2005.

You should not put undue reliance on any forward-looking statements. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Factors of our Business” included in our annual report filed on Form 10-K for the year ended December 31, 2004, for a more detailed description of these and other factors that may affect the forward-looking statements. When considering forward-looking statements, one should keep in mind the risk factors described in our 2004 Form 10-K report and in Kinder Morgan Energy Partners, L.P.’s 2004 Form 10-K report. The risk factors could cause our actual results to differ materially from those contained in any forward-looking statement. We disclaim any obligation to update the above list or to announce publicly the result of any revisions to any of the forward-looking statements to reflect future events or developments.




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KMR Form 10-Q


Item 3.  Quantitative and Qualitative Disclosures About Market Risk.


The nature of our business and operations is such that no activities or transactions of the type requiring discussion under this item are conducted or entered into.


Item 4.  Controls and Procedures.


As of June 30, 2005, our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon and as of the date of the evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective in all material respects to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required, and is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure. There has been no change in our internal control over financial reporting during the quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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KMR Form 10-Q


PART II - OTHER INFORMATION


Item 1.  Legal Proceedings.


There are currently no legal proceedings involving us in progress or pending.


Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.


During the quarter ended June 30, 2005, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended, and we did not repurchase any of our equity securities.


Item 3.  Defaults Upon Senior Securities.


None.


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


None.


Item 5.  Other Information.


At its July 20, 2005 meeting, the compensation committee of the Kinder Morgan, Inc. board of directors approved a special contribution of an additional 1% of base pay into the Kinder Morgan Savings Plan (a defined contribution 401(k) plan) for each eligible employee. Each eligible employee will receive an additional 1% company contribution based on eligible base pay to his or her Savings Plan account each pay period beginning with the first pay period of August 2005 and continuing through the last pay period of July 2006.


The 1% contribution will be in the form of Kinder Morgan, Inc. common stock (the same as the current 4% contribution). The 1% contribution will be in addition to, and does not change or otherwise impact, the 4% contribution that eligible employees currently receive. It may be converted to any other Savings Plan investment fund at any time and it will vest on the second anniversary of the employee’s date of hire. Since this additional 1% company contribution is discretionary, compensation committee approval will be required annually for each special contribution.


On May 4, 2005, we announced that C. Park Shaper, formerly our Executive Vice President and Chief Financial Officer, had been promoted and named our President, remaining a member of the Office of the Chairman, and that Steve Kean, formerly our President – Texas Intrastate Pipelines, had been promoted and named our Executive Vice President, Operations, becoming a member of the Office of the Chairman. In addition, we announced that Kim Allen had been promoted and named our Chief Financial Officer, retaining her role in charge of investor relations, and that David Kinder, our Vice President, Corporate Development, would also assume the role of Treasurer, formerly held by Ms. Allen. We also announced that (i) Deb Macdonald, our President – Natural Gas Pipelines, would resign from that position effective October 2005; (ii) Scott Parker, President of Kinder Morgan, Inc.’s Natural Gas Pipeline Company of America (“NGPL”), would be promoted effective October 2005 to our President – Natural Gas Pipelines; (iii) David Devine would become President of NGPL effective October 2005; and (iv) Tom Martin had been promoted to President – Texas Intrastate Pipelines. Until Ms. Macdonald’s resignation in October 2005, each of Ms. Macdonald and Mr. Parker are serving as Co-Presidents – Natural Gas Pipelines.




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KMR Form 10-Q


Item 6.  Exhibits.


 

31.1


31.2


32.1


32.2

Section 13a – 14(a) / 15d – 14(a) Certification of Chief Executive Officer


Section 13a – 14(a) / 15d – 14(a) Certification of Chief Financial Officer


Section 1350 Certification of Chief Executive Officer


Section 1350 Certification of Chief Financial Officer




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KMR Form 10-Q



SIGNATURE



Pursuant to the requirements 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.



 

KINDER MORGAN MANAGEMENT, LLC

(Registrant)


August 1, 2005

/s/ Kimberly J. Allen

 

Kimberly J. Allen

Vice President and Chief Financial Officer




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