Kinder Morgan Management, LLC Form 10-K

Table of Contents

KMR Form 10-K


 





UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

  

þ

  

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2006
or
  

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)


Registrant’s telephone number, including area code (713) 369-9000

Securities registered pursuant to Section 12(b) of the Act:
  


Title of each class

  

Name of each exchange
on which registered

Shares Representing Limited Liability Company Interests

  

New York Stock Exchange


Securities registered pursuant to section 12(g) of the Act:
  

None

(Title of class)


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:

Yes þ  No o


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act:

Yes o  No þ


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 þ  No o


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.  þ


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):  Large accelerated filer þ  Accelerated filer o  Non-accelerated filer o


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o  No þ







KMR Form 10-K




The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $2,177,434,973 as of June 30, 2006.


The number of shares outstanding for each of the registrant’s classes of common equity, as of January 31, 2007 was approximately two voting shares and 62,301,674 listed shares.



2



KMR Form 10-K



KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY

CONTENTS



 

 

Page
Number

 

PART I

 

 

  

 

 

 

Items 1 and 2:

Business and Properties

4-5

 

Item 1A:

Risk Factors

6-8

 

Item 1B:

Unresolved Staff Comments

8

 

Item 3:

Legal Proceedings

8

 

Item 4:

Submission of Matters to a Vote of Security Holders

8

 

  

 

 

 

 

PART II

 

 

  

 

 

 

Item 5:

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases

 

 

 

of Equity Securities

9

 

Item 6:

Selected Financial Data

10

 

Item 7:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

10-14

 

Item 7A:

Quantitative and Qualitative Disclosures About Market Risk

14

 

Item 8:

Financial Statements and Supplementary Data

15-26

 

Item 9:

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

26

 

Item 9A:

Controls and Procedures

26

 

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

26

 

 

Management Report on Internal Control over Financial Reporting

26

 

 

Changes in Internal Control over Financial Reporting

27

 

Item 9B:

Other Information

27

 

  

 

 

 

 

PART III

 

 

  

 

 

 

Item 10:

Directors, Executive Officers and Corporate Governance

28-30

 

Item 11:

Executive Compensation

30-44

 

Item 12:

Security Ownership of Certain Beneficial Owners and Management

 

 

 

Related Stockholder Matters

45-47

 

Item 13:

Certain Relationships and Related Transactions, and Director Independence

47-51

 

Item 14:

Principal Accounting Fees and Services

51-52

 

  

 

 

 

 

PART IV

 

 

  

 

 

 

Item 15:

Exhibits and Financial Statement Schedules

53-54

 

  

 

 

 

Signatures

55

 

  

Kinder Morgan Energy Partners, L.P. Annual Report on Form 10-K for the year ended December 31, 2006

Annex A

  

 

 

Note:  Individual financial statements of the parent company are omitted pursuant to the provisions of Accounting Series Release No. 302.



3



KMR Form 10-K



PART I

Items 1 and 2.  Business and Properties.

In this report, 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. Our shares representing limited liability company interests are traded on the New York Stock Exchange under the symbol “KMR”. Our executive offices are located at 500 Dallas Street, Suite 1000, Houston, Texas 77002 and our telephone number is (713) 369-9000.

We are a publicly traded Delaware limited liability company that was formed on February 14, 2001. We are a limited partner in Kinder Morgan Energy Partners, L.P., and manage and control its business and affairs pursuant to a delegation of control agreement. Our success is dependent upon our operation and management of Kinder Morgan Energy Partners, L.P. and its resulting performance. Therefore, we have attached hereto as Annex A Kinder Morgan Energy Partners, L.P.’s 2006 Annual Report on Form 10-K. Pursuant to the delegation of control agreement among Kinder Morgan G.P., Inc., Kinder Morgan Energy Partners, L.P., Kinder Morgan Energy Partners, L.P.’s operating partnerships and us:

·

Kinder Morgan G.P., Inc., as general partner of Kinder Morgan Energy Partners, L.P., delegated to us, to the fullest extent permitted under Delaware law and the Kinder Morgan Energy Partners, L.P. partnership agreement, and we assumed, all of Kinder Morgan G.P., Inc.’s power and authority to manage and control the business and affairs of Kinder Morgan Energy Partners, L.P. and Kinder Morgan Energy Partners, L.P.’s operating partnerships; and

·

We have agreed that we will not take any of the following actions without the approval of Kinder Morgan G.P., Inc.:

amend or propose an amendment to the Kinder Morgan Energy Partners, L.P. partnership agreement,

change the amount of the distribution made on the Kinder Morgan Energy Partners, L.P. common units,

allow a merger or consolidation involving Kinder Morgan Energy Partners, L.P.,

allow a sale or exchange of all or substantially all of the assets of Kinder Morgan Energy Partners, L.P.,

dissolve or liquidate Kinder Morgan Energy Partners, L.P.,

take any action requiring unitholder approval,

call any meetings of the Kinder Morgan Energy Partners, L.P. common unitholders,

take any action that, under the terms of the partnership agreement of Kinder Morgan Energy Partners, L.P., must or should receive a special approval of the conflicts and audit committee of Kinder Morgan G.P., Inc.,

take any action that, under the terms of the partnership agreement of Kinder Morgan Energy Partners, L.P., cannot be taken by the general partner without the approval of all outstanding units,

settle or compromise any claim or action directly against or otherwise relating to indemnification of our or the general partner’s (and respective affiliates) officers, directors, managers or members or relating to our structure or securities,

settle or compromise any claim or action relating to the i-units, which are a separate class of Kinder Morgan Energy Partners, L.P.’s limited partnership interests, our shares or any offering of our shares,

settle or compromise any claim or action involving tax matters,

allow Kinder Morgan Energy Partners, L.P. to incur indebtedness if the aggregate amount of its indebtedness then exceeds 50% of the market value of the then outstanding units of Kinder Morgan Energy Partners, L.P., or

allow Kinder Morgan Energy Partners, L.P. to issue units in one transaction, or in a series of related transactions, having a market value in excess of 20% of the market value of then outstanding units of Kinder Morgan Energy Partners, L.P.

·

Kinder Morgan G.P., Inc.:

is not relieved of any responsibilities or obligations to Kinder Morgan Energy Partners, L.P. or its unitholders as a result of such delegation,

owns, or one of its affiliates owns, all of our voting shares, and



4



Items 1 and 2.  Business and Properties. (continued)

KMR Form 10-K



will not withdraw as general partner of Kinder Morgan Energy Partners, L.P. or transfer to a non-affiliate all of its interest as general partner, unless approved by both the holders of a majority of each of the i-units and the holders of a majority of all units voting as a single class, excluding common units and Class B units held by Kinder Morgan G.P., Inc. and its affiliates and excluding the number of i-units corresponding to the number of our shares owned by Kinder Morgan G.P., Inc. and its affiliates.

·

Kinder Morgan Energy Partners, L.P. has agreed to:

recognize the delegation of rights and powers to us,

indemnify and protect us and our officers and directors to the same extent as it does with respect to Kinder Morgan G.P., Inc. as general partner, and

reimburse our expenses to the same extent as it does with respect to Kinder Morgan G.P., Inc. as general partner.

The delegation of control agreement will continue in effect until either Kinder Morgan G.P., Inc. has withdrawn or been removed as the general partner of Kinder Morgan Energy Partners, L.P. or all of our shares are owned by Kinder Morgan, Inc. and its affiliates. The partnership agreement of Kinder Morgan Energy Partners, L.P. recognizes the delegation of control agreement. The delegation of control agreement also applies to the operating partnerships of Kinder Morgan Energy Partners, L.P. and their partnership agreements.

Kinder Morgan G.P., Inc. remains the sole general partner of Kinder Morgan Energy Partners, L.P. and all of its operating partnerships. Kinder Morgan G.P., Inc. retains all of its general partner interests and shares in the profits, losses and distributions from all of these partnerships.

The withdrawal or removal of Kinder Morgan G.P., Inc. as general partner of Kinder Morgan Energy Partners, L.P. will simultaneously result in the termination of our power and authority to manage and control the business and affairs of Kinder Morgan Energy Partners, L.P. Similarly, if Kinder Morgan G.P., Inc.’s power and authority as general partner are modified in the partnership agreement of Kinder Morgan Energy Partners, L.P., then the power and authority delegated to us will be modified on the same basis. The delegation of control agreement can be amended by all parties to the agreement, but on any amendment that would reduce the time for any notice to which owners of our shares are entitled or that would have a material adverse effect on our shares, as determined by our board of directors in its discretion, the approval of the owners of a majority of the shares, excluding shares owned by Kinder Morgan, Inc. and its affiliates, is required.

Through our ownership of i-units, we are a limited partner in Kinder Morgan Energy Partners, L.P. We do not expect to have any cash flow attributable to our ownership of the i-units, but we expect that we will receive quarterly distributions of additional i-units from Kinder Morgan Energy Partners, L.P. The number of additional i-units we receive will be based on the amount of cash to be distributed by Kinder Morgan Energy Partners, L.P. to an owner of one of its common units. The amount of cash distributed by Kinder Morgan Energy Partners, L.P. to its owners of common units is dependent on the operations of Kinder Morgan Energy Partners, L.P. and its operating limited partnerships and their subsidiaries and investees, and will be determined in accordance with its partnership agreement.

We have elected to be treated as a corporation for federal income tax purposes. Because we are treated as a corporation for federal income tax purposes, an owner of our shares will not report on its federal income tax return any of our items of income, gain, loss and deduction relating to an investment in us.

We are subject to federal income tax on our taxable income; however, the i-units owned by us generally are not entitled to allocations of income, gain, loss or deduction of Kinder Morgan Energy Partners, L.P. until such time as there is a liquidation of Kinder Morgan Energy Partners, L.P. Therefore, we do not anticipate that we will have material amounts of taxable income resulting from our ownership of the i-units unless we enter into a sale or exchange of the i-units or Kinder Morgan Energy Partners, L.P. is liquidated.

We have no properties. Our assets consist of a small amount of working capital and the i-units that we own.

We have no employees. For more information, see Note 4 of the accompanying Notes to Consolidated Financial Statements and Kinder Morgan Energy Partners, L.P.’s report on Form 10-K for the year ended December 31, 2006.

We make available free of charge on or through our Internet website, at http://www.kindermorgan.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.



5



Items 1 and 2.  Business and Properties. (continued)

KMR Form 10-K



Item 1A.

Risk Factors

You should carefully consider the risks described below, in addition to the other information contained in this document. Realization of any of the following risks could have a material adverse effect on our business, financial condition, cash flows and results of operations.

Because our only assets are the i-units issued by Kinder Morgan Energy Partners, L.P., our success is dependent solely upon our operation and management of Kinder Morgan Energy Partners, L.P. and its resulting performance. We are a limited partner in Kinder Morgan Energy Partners, L.P. In the event that Kinder Morgan Energy Partners, L.P. decreases its cash distributions to its common unitholders, distributions of i-units on the i-units that we own will decrease correspondingly, and distributions of additional shares to owners of our shares will decrease as well. The risk factors that affect Kinder Morgan Energy Partners, L.P. also affect us; see “Risk Factors” for Kinder Morgan Energy Partners, L.P. included in Exhibit 99.1.

The value of the quarterly distribution of an additional fractional share may be less than the cash distribution on a common unit of Kinder Morgan Energy Partners, L.P. The fraction of a Kinder Morgan Management, LLC share to be issued per share outstanding with each quarterly distribution is based on the average closing price of the shares for the ten consecutive trading days preceding the ex-dividend date for our shares. Because the market price of our shares may vary substantially over time, the market value of our shares on the date a shareholder receives a distribution of additional shares may vary substantially from the cash the shareholder would have received had the shareholder owned common units instead of our shares.

Kinder Morgan Energy Partners, L.P. could be treated as a corporation for United States federal income tax purposes. The treatment of Kinder Morgan Energy Partners, L.P. as a corporation would substantially reduce the cash distributions on the common units and the value of i-units that Kinder Morgan Energy Partners, L.P. will distribute quarterly to us and the value of our shares that we will distribute quarterly to our shareholders. The anticipated benefit of an investment in our shares depends largely on the treatment of Kinder Morgan Energy Partners, L.P. as a partnership for United States federal income tax purposes. Kinder Morgan Energy Partners, L.P. has not requested, and does not plan to request, a ruling from the Internal Revenue Service on this or any other matter affecting Kinder Morgan Energy Partners, L.P. Current law requires Kinder Morgan Energy Partners, L.P. to derive at least 90% of its annual gross income from specific activities to continue to be treated as a partnership for United States federal income tax purposes. Kinder Morgan Energy Partners, L.P. may not find it possible, regardless of its efforts, to meet this income requirement or may inadvertently fail to meet this income requirement. Current law may change so as to cause Kinder Morgan Energy Partners, L.P. to be treated as a corporation for United States federal income tax purposes without regard to its sources of income or otherwise subject Kinder Morgan Energy Partners, L.P. to entity-level taxation.

If Kinder Morgan Energy Partners, L.P. were to be treated as a corporation for United States federal income tax purposes, it would pay United States federal income tax on its income at the corporate tax rate, which is currently a maximum of 35%, and would pay state income taxes at varying rates. Distributions to us of additional i-units would generally be taxed as a corporate distribution. Because a tax would be imposed upon Kinder Morgan Energy Partners, L.P. as a corporation, the cash available for distribution to common unitholders would be substantially reduced, which would reduce the values of i-units distributed quarterly to us and our shares distributed quarterly to our shareholders. Treatment of Kinder Morgan Energy Partners, L.P. as a corporation would cause a substantial reduction in the value of our shares.

As an owner of i-units, we may not receive value equivalent to the common unit value for our i-unit interest in Kinder Morgan Energy Partners, L.P. if Kinder Morgan Energy Partners, L.P. is liquidated. As a result, a shareholder may receive less per share in our liquidation than is received by an owner of a common unit in a liquidation of Kinder Morgan Energy Partners, L.P. If Kinder Morgan Energy Partners, L.P. is liquidated and Kinder Morgan, Inc. does not satisfy its obligation to purchase your shares, which is triggered by a liquidation, then the value of your shares will depend on the after-tax amount of the liquidating distribution received by us as the owner of i-units. The terms of the i-units provide that no allocations of income, gain, loss or deduction will be made in respect of the i-units until such time as there is a liquidation of Kinder Morgan Energy Partners, L.P. If there is a liquidation of Kinder Morgan Energy Partners, L.P., it is intended that we will receive allocations of income and gain in an amount necessary for the capital account attributable to each i-unit to be equal to that of a common unit. As a result, we will likely realize taxable income upon the liquidation of Kinder Morgan Energy Partners, L.P. However, there may not be sufficient amounts of income and gain to cause the capital account attributable to each i-unit to be equal to that of a common unit. If they are not equal, we, and therefore our shareholders, will receive less value than would be received by an owner of common units.

Further, the tax indemnity provided to us by Kinder Morgan, Inc. only indemnifies us for our tax liabilities to the extent we have not received sufficient cash in the transaction generating the tax liability to pay the associated tax. Prior to any liquidation of Kinder Morgan Energy Partners, L.P., we do not expect to receive cash in a taxable transaction. If a liquidation of Kinder Morgan Energy Partners, L.P. occurs, however, we likely would receive cash which would need to be used at least



6



Items 1 and 2.  Business and Properties. (continued)

KMR Form 10-K



in part to pay taxes. As a result, our residual value and the value of our shares likely will be less than the value of the common units upon the liquidation of Kinder Morgan Energy Partners, L.P.

Our management and control of the business and affairs of Kinder Morgan Energy Partners, L.P. and its operating partnerships could result in our being liable for obligations to third parties who transact business with Kinder Morgan Energy Partners, L.P. and its operating partnerships and to whom we held ourselves out as a general partner. We could also be responsible for environmental costs and liabilities associated with Kinder Morgan Energy Partners, L.P.’s assets in the event that it is not able to perform all of its obligations under environmental laws. Kinder Morgan Energy Partners, L.P. may not be able to reimburse or indemnify us as a result of its insolvency or bankruptcy. The primary adverse impact of that insolvency or bankruptcy on us would be the decline in or elimination of the value of our i-units, which are our only significant assets. Assuming under these circumstances that we have some residual value in our i-units, a direct claim by creditors of Kinder Morgan Energy Partners, L.P. against us could further reduce our net asset value and cause us also to declare bankruptcy. Another risk with respect to third party claims will occur, however, under the circumstances when Kinder Morgan Energy Partners, L.P. is financially able to pay us, but for some other reason does not reimburse or indemnify us. For example, to the extent that Kinder Morgan Energy Partners, L.P. fails to satisfy any environmental liabilities for which it is responsible, we could be held liable under environmental laws. For additional information, see the following risk factor.

If we are not fully indemnified by Kinder Morgan Energy Partners, L.P. for all the liabilities we incur in performing our obligations under the delegation of control agreement, we could face material difficulties in paying those liabilities, and the net value of our assets could be adversely affected. Under the delegation of control agreement, we have been delegated management and control of the business and affairs of Kinder Morgan Energy Partners, L.P. and its operating partnerships. There are circumstances under which we may not be indemnified by Kinder Morgan Energy Partners, L.P. or Kinder Morgan G.P., Inc. for liabilities we incur in managing and controlling the business and affairs of Kinder Morgan Energy Partners, L.P. These circumstances include:

·

if we act in bad faith; and

·

if we breach laws like the federal securities laws, where indemnification may not be allowed.

If in the future we cease to manage and control the business and affairs of Kinder Morgan Energy Partners, L.P., we may be deemed to be an investment company for purposes of the Investment Company Act of 1940. In that event, we would either have to register as an investment company under the Investment Company Act, obtain exemptive relief from the Securities and Exchange Commission, or modify our organizational structure or our contract rights to fall outside the definition of an investment company. Registering as an investment company could, among other things, materially limit our ability to engage in transactions with our affiliates, including the purchase and sale of certain securities or other property to or from our affiliates, restrict our ability to borrow funds or engage in other transactions involving leverage, and require us to add directors who are independent of us or our affiliates.

The interests of Kinder Morgan, Inc. may differ from our interests, the interests of our shareholders and the interests of unitholders of Kinder Morgan Energy Partners, L.P. Kinder Morgan, Inc. owns all of the stock of the general partner of Kinder Morgan Energy Partners, L.P. and elects all of its directors. The general partner of Kinder Morgan Energy Partners, L.P. owns all of our voting shares and elects all of our directors. Furthermore, some of our directors and officers are also directors and officers of Kinder Morgan, Inc. and the general partner of Kinder Morgan Energy Partners, L.P. and have fiduciary duties to manage the businesses of Kinder Morgan, Inc. and Kinder Morgan Energy Partners, L.P. in a manner that may not be in the best interest of our shareholders. Kinder Morgan, Inc. has a number of interests that differ from the interests of our shareholders and the interests of the unitholders. As a result, there is a risk that important business decisions will not be made in the best interest of our shareholders.

Our limited liability company agreement restricts or eliminates a number of the fiduciary duties that would otherwise be owed by our board of directors to our shareholders, and the partnership agreement of Kinder Morgan Energy Partners, L.P. restricts or eliminates a number of the fiduciary duties that would otherwise be owed by the general partner to the unitholders. Modifications of state law standards of fiduciary duties may significantly limit the ability of our shareholders and the unitholders to successfully challenge the actions of our board of directors and the general partner, respectively, in the event of a breach of their fiduciary duties. These state law standards include the duties of care and loyalty. The duty of loyalty, in the absence of a provision in the limited liability company agreement or the limited partnership agreement to the contrary, would generally prohibit our board of directors or the general partner from taking any action or engaging in any transaction as to which it has a conflict of interest. Our limited liability company agreement and the limited partnership agreement of Kinder Morgan Energy Partners, L.P. contain provisions that prohibit our shareholders and the limited partners, respectively, from advancing claims that otherwise might raise issues as to compliance with fiduciary duties or applicable law. For example, the limited partnership agreement of Kinder Morgan Energy Partners, L.P. provides that the general partner may take into account the interests of parties other than Kinder Morgan Energy Partners, L.P. in resolving conflicts of interest. Further, it provides that in the absence of bad faith by the general partner, the resolution of a conflict by the general



7



Items 1 and 2.  Business and Properties. (continued)

KMR Form 10-K



partner will not be a breach of any duty. The provisions relating to the general partner apply equally to us as its delegate. Our limited liability company agreement provides that none of our directors or officers will be liable to us or any other person for any acts or omissions if they acted in good faith.

Item 1B.

Unresolved Staff Comments.

None.

Item 3.

Legal Proceedings.

We are not a party to any litigation.

Item 4.

Submission of Matters to a Vote of Security Holders.

There were no matters submitted to a vote of our shareholders during the fourth quarter of 2006.



8



KMR Form 10-K



PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our shares are listed for trading on the New York Stock Exchange under the symbol “KMR.” The per share high and low sale prices of our shares, as reported on the New York Stock Exchange, by quarter for the last two years are provided below.

 

Market Price Per Share

 

2006

 

2005

 

Low

 

High

 

Low

 

High

Quarter Ended:

 

 

 

 

 

 

 

March 31

$41.21

 

$47.25

 

$39.33

 

$43.93

June 30

$40.09

 

$45.06

 

$40.93

 

$46.47

September 30

$41.35

 

$43.60

 

$46.01

 

$50.05

December 31

$41.26

 

$47.05

 

$44.50

 

$50.06


There were approximately 29,000 holders of our listed shares as of February 1, 2007, which includes individual participants in security position listings.

Under the terms of our limited 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 the ten-trading day period ending on the trading day immediately prior to the ex-dividend date for our shares.

 

Share Distributions

 

Shares Distributed Per Outstanding Share

 

Equivalent Distribution Value Per Share1

 

Total Number of Additional Shares Distributed

Quarter Ended:

2006

 

2005

 

2006

 

2005

 

2006

 

2005

March 31

0.018566

 

0.017482

 

$

0.81

 

$

0.76

 

1,093,826

 

963,495

June 30

0.018860

 

0.016210

 

$

0.81

 

$

0.78

 

1,131,777

 

909,009

September 30

0.018981

 

0.016360

 

$

0.81

 

$

0.79

 

1,160,520

 

932,292

December 31

0.016919

 

0.017217

 

$

0.83

 

$

0.80

 

1,054,082

 

997,180

___________

1

This is the cash distribution paid or payable to each common unit of Kinder Morgan Energy Partners, L.P. for the quarter indicated and is used to calculate our distribution of shares as discussed above. Because of this calculation, the market value of the shares distributed on the date of distribution may be less or more than the cash distribution per common unit of Kinder Morgan Energy Partners, L.P.

There were no sales of unregistered equity securities during the periods covered by this report. We did not repurchase any shares during the fourth quarter of 2006.

For information regarding our equity compensation plans, please refer to Item 12, included elsewhere herein.



9



KMR Form 10-K



Item 6.

Selected Financial Data.

KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY

 

Year Ended December 31,

 

2006

 

2005

 

2004

 

2003

 

2002

 

(In thousands except per share amounts)

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

$

123,155

 

$

88,448

 

$

113,482

 

$

94,775

 

$

72,199

Provision for Income Taxes

 

44,165

 

 

32,124

 

 

38,360

 

 

36,014

 

 

26,865

Net Income

$

78,990

 

$

56,324

 

$

75,122

 

$

58,761

 

$

45,334

Earnings Per Share, Basic and Diluted

$

1.31

 

$

1.00

 

$

1.47

 

$

1.24

 

$

1.23

Number of Shares Used in Computing
Basic and Diluted Earnings Per Share

 

60,074

 

 

56,090

 

 

51,181

 

 

47,372

 

 

36,790

Equivalent Distribution Value Per Share1

$

3.260

 

$

3.130

 

$

2.870

 

$

2.630

 

$

2.435

Total Number of Additional Shares Distributed

 

4,440

 

 

3,802

 

 

3,678

 

 

3,262

 

 

2,944

Total Assets at End of Period

$

1,699,971

 

$

1,583,661

 

$

1,639,348

 

$

1,506,286

 

$

1,439,190


1

This is the amount of cash distributions payable to each common unit of Kinder Morgan Energy Partners, L.P. for each period shown. Under the terms of our limited 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. Because of this calculation, the market value of the shares distributed on the date of distribution may be less or more than the cash distribution per common unit of Kinder Morgan Energy Partners, L.P.

Item 7.

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. and the general partner of Kinder Morgan Energy Partners, L.P.

Kinder Morgan, Inc. is one of the largest energy transportation, storage and distribution companies in North America, operating, either for itself or on behalf of Kinder Morgan Energy Partners, L.P., or owning an interest in approximately 43,000 miles of pipelines that transport primarily natural gas, crude oil, petroleum products and carbon dioxide; more than 155 terminals that store, transfer and handle products like gasoline and coal; and providing natural gas distribution service to over 1.1 million customers. On August 28, 2006, Kinder Morgan, Inc. entered into a definitive merger agreement under which investors led by Richard D. Kinder, Kinder Morgan, Inc.’s Chairman and Chief Executive Officer, would acquire all of its outstanding common stock for $107.50 per share in cash. Kinder Morgan, Inc.’s board of directors, on the unanimous recommendation of a special committee composed entirely of independent directors, approved the agreement and recommended that Kinder Morgan, Inc.’s stockholders approve the merger. Kinder Morgan, Inc.’s stockholders voted to approve the proposed merger agreement at a special meeting on December 19, 2006. The transaction is expected to be completed in the first or second quarter of 2007, subject to receipt of regulatory approvals, as well as the satisfaction of other customary closing conditions.

Kinder Morgan Energy Partners, L.P. is one of the largest publicly traded pipeline limited partnerships in the United States in terms of market capitalization, and the owner and operator of the largest independent refined petroleum products pipeline system in the United States in terms of volumes delivered. Kinder Morgan Energy Partners, L.P. owns and/or operates approximately 26,000 miles of pipelines and approximately 150 terminals. Kinder Morgan Energy Partners, L.P.’s pipelines transport more than two million barrels per day of gasoline and other petroleum products and up to seven billion cubic feet per day of natural gas. Kinder Morgan Energy Partners, L.P.’s terminals handle over 80 million tons of coal and other dry-bulk materials annually and have a liquids storage capacity of almost 70 million barrels for petroleum products and chemicals. Kinder Morgan Energy Partners, L.P. is also the leading independent provider of carbon dioxide for enhanced oil recovery projects in the United States.

We are a limited partner in Kinder Morgan Energy Partners, L.P., and manage and control its business and affairs pursuant to a delegation of control agreement. Our success is dependent upon our operation and management of Kinder Morgan Energy



10



Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)

KMR Form 10-K



Partners, L.P. and its resulting performance. Therefore, we have attached hereto as Annex A Kinder Morgan Energy Partners, L.P.’s 2006 Annual Report on Form 10-K. The following discussion should be read in conjunction with the accompanying financial statements and related notes.

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 Kinder Morgan G.P., Inc.’s right to approve specified actions.

Results of Operations

Our results of operations consist of the offsetting expenses and revenues 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 December 31, 2006, through our ownership of i-units, we owned approximately 27.0% of all 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 approximately 27.0% of Kinder Morgan Energy Partners, L.P.’s limited partners’ net income. Our percentage ownership in Kinder Morgan Energy Partners, L.P. will change 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 years ended December 31, 2006, 2005 and 2004, Kinder Morgan Energy Partners, L.P. reported limited partners’ net income of $459.2 million, $334.9 million and $436.5 million, respectively. Our net income for the corresponding periods was $79.0 million, $56.3 million and $75.1 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 2006 Annual Report on Form 10-K, which is attached hereto as Annex A.

Kinder Morgan Energy Partners, L.P.

 

Year Ended December 31,

 

2006

 

2005

 

2004

 

(In thousands)

Segment Earnings Contribution:

 

 

 

 

 

 

 

 

 

 

 

Product Pipelines

$

404,900

 

 

$

287,503

 

 

$

370,321

 

Natural Gas Pipelines

 

509,140

 

 

 

438,386

 

 

 

364,872

 

CO2

 

295,231

 

 

 

318,980

 

 

 

234,258

 

Terminals

 

333,592

 

 

 

255,529

 

 

 

238,848

 

Total Segment Earnings

 

1,542,863

 

 

 

1,300,398

 

 

 

1,208,299

 

Interest and Corporate Administrative Expenses1

 

(570,720

)

 

 

(488,171

)

 

 

(376,721

)

Net Income

$

972,143

 

 

$

812,227

 

 

$

831,578

 


1

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

Our earnings, as reported in the accompanying Consolidated Statements of Income, represent equity in earnings of Kinder Morgan Energy Partners, L.P. attributable to the i-units that 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 the periods presented. There are no securities outstanding that may be converted into or exercised for 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 income tax provision increased from $32.1 million in 2005 to $44.2 million in 2006, an increase of $12.1 million (37.7%). The net increase of $12.1 million principally results from an increase in pre-tax income of $34.7 million.



11



Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)

KMR Form 10-K



The income tax provision decreased from $38.4 million in 2004 to $32.1 million in 2005, a decrease of $6.3 million (16.4%) due principally to (i) the fact that the tax provision for 2004 includes a reduction of $2.9 million due to the impact of applying a lower effective tax rate on previously recorded net deferred tax liabilities and (ii) a decrease of $9.2 million due to a decrease in pre-tax income of $25.0 million.

The effective tax rate used in computing our income tax provision was 35.9% for 2006, 36.3% for 2005 and 33.8% for 2004. The effective tax rate for 2004 was reduced by 2.5%, due to a reduction in the state tax rate on our cumulative deferred tax liability.

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.

See Note 2E of the accompanying Notes to Consolidated Financial Statements for additional information on income taxes.

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. Our only off-balance sheet arrangement is our equity investment in Kinder Morgan Energy Partners, L.P.

The number of our shares outstanding will at all times equal the number of i-units of Kinder Morgan Energy Partners, L.P. we own. Under the terms of our limited 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 February 14, 2007, we paid a share distribution of 0.016919 shares per outstanding share (1,054,082 total shares) to shareholders of record as of January 31, 2007, based on the $0.83 per common unit distribution declared by Kinder Morgan Energy Partners, L.P. This distribution is paid in the form of additional shares or fractions thereof based on 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 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.

Recent Accounting Pronouncements

Refer to Note 6 of the accompanying Consolidated Financial Statements for information regarding recent accounting pronouncements.

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 pay dividends or 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 our operations and those of Kinder Morgan Energy Partners, L.P. may differ materially from those expressed in these forward-looking statements. Please see “Information Regarding Forward-Looking Statements” for Kinder Morgan Energy Partners, L.P. included in Exhibit 99.1. 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:



12



Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)

KMR Form 10-K



·

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 North America;

·

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.;

·

crude oil and natural gas production from exploration and production areas that Kinder Morgan Energy Partners, L.P. serves, including, among others, the Permian Basin area of West Texas;

·

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;

·

changes in accounting pronouncements that impact the measurement of Kinder Morgan Energy Partners, L.P.’s or our results of operations, the timing of when such measurements are to be made and recorded, and the disclosures surrounding these activities;

·

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;

·

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;



13



Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)

KMR Form 10-K



·

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 ability of Kinder Morgan Energy Partners, L.P. to complete expansion projects on time and on budget;

·

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 Annual Report on Form 10-K for the year ended December 31, 2006.

There is no assurance that any of the actions, events or results of the forward-looking statements will occur, or if any of them do, what impact they will have on our results of operations or financial condition. Because of these uncertainties, you should not put undue reliance on any forward-looking statements. See Item 1A “Risk Factors” for a more detailed description of these and other factors that may affect the forward-looking statements. When considering forward-looking statements, one should keep in mind the risk factors described in “Risk Factors” above. The risk factors could cause our actual results to differ materially from those contained in any forward-looking statement. Other than as required by applicable law, 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.

Item 7A.

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.



14



KMR Form 10-K



Item 8.  Financial Statements and Supplementary Data.

INDEX

 

Page 

 

 

 

Report of Independent Registered Public Accounting Firm

16

 

Consolidated Statements of Income

17

 

Consolidated Statements of Comprehensive Income

17

 

Consolidated Balance Sheets

18

 

Consolidated Statements of Shareholders’ Equity

19

 

Consolidated Statements of Cash Flows

20

 

Notes to Consolidated Financial Statements

21-25

 

Selected Quarterly Financial Data (unaudited)

25

 

Supplemental Information on Oil and Gas Producing
Activities (unaudited)

25-26

 

 

 

 



15



Item 8.  Financial Statements and Supplementary Data. (continued)

KMR Form 10-K



Report of Independent Registered Public Accounting Firm


To the Board of Directors

and Stockholders of Kinder Morgan Management, LLC:


We have completed integrated audits of Kinder Morgan Management, LLC’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Our opinions, based on our audits, are presented below.


Consolidated financial statements


In our opinion, the accompanying consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Kinder Morgan Management, LLC and its subsidiary (the “Company”) at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.


Internal control over financial reporting


Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria.  Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the COSO.  The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.  Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit.  We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinions.


A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



PricewaterhouseCoopers LLP

Houston, Texas

February 28, 2007



16



Item 8.  Financial Statements and Supplementary Data. (continued)

KMR Form 10-K





CONSOLIDATED STATEMENTS OF INCOME
Kinder Morgan Management, LLC and Subsidiary

 

Year Ended December 31,

 

2006

 

2005

 

2004

 

(In thousands)

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

$

123,155

 

 

$

88,448

 

 

$

113,482

 

Provision for Income Taxes

 

44,165

 

 

 

32,124

 

 

 

38,360

 

  

 

 

 

 

 

 

 

 

 

 

 

Net Income

$

78,990

 

 

$

56,324

 

 

$

75,122

 

  

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share, Basic and Diluted

$

1.31

 

 

$

1.00

 

 

$

1.47

 

  

 

 

 

 

 

 

 

 

 

 

 

Number of Shares Used in Computing Basic and Diluted
Earnings Per Share

 

60,074

 

 

 

56,090

 

 

 

51,181

 


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

Year Ended December 31,

 

2006

 

2005

 

2004

 

(In thousands)

Net Income

$

78,990

 

 

$

56,324

 

 

$

75,122

 

Other Comprehensive Income (Loss), Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

Change in Fair Value of Derivatives Utilized for Hedging
Purposes (Net of Tax Benefit of $15,882, $99,046 and
$47,200, respectively)

 

(28,093

)

 

 

(173,660

)

 

 

(82,764

)

Reclassification of Change in Fair Value of Derivatives to
Net Income (Net of Tax of $36,260, $40,162 and
$18,366, respectively)

 

64,139

 

 

 

70,417

 

 

 

32,204

 

Change in Foreign Currency Translation Adjustment

 

108

 

 

 

(116

)

 

 

63

 

Total Other Comprehensive Income (Loss)

 

36,154

 

 

 

(103,359

)

 

 

(50,497

)

  

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income

$

115,144

 

 

$

(47,035

)

 

$

24,625

 


The accompanying notes are an integral part of these statements.



17



Item 8.  Financial Statements and Supplementary Data. (continued)

KMR Form 10-K





CONSOLIDATED BALANCE SHEETS
Kinder Morgan Management, LLC and Subsidiary

 

December 31,

 

2006

 

2005

 

(In thousands)

ASSETS

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Accounts Receivable – Related Party

$

14,674

 

 

$

22,230

 

Prepayments and Other

 

4,050

 

 

 

3,498

 

 

 

18,724

 

 

 

25,728

 

  

 

 

 

 

 

 

 

Investment in Kinder Morgan Energy Partners, L.P.

 

1,681,247

 

 

 

1,557,933

 

  

 

 

 

 

 

 

 

Total Assets

$

1,699,971

 

 

$

1,583,661

 

  

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts Payable

$

1,231

 

 

$

2,648

 

Accrued Expenses and Other

 

17,417

 

 

 

23,004

 

  

 

18,648

 

 

 

25,652

 

  

 

 

 

 

 

 

 

Deferred Income Taxes

 

106,629

 

 

 

62,395

 

  

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

 

 

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

 

100

 

 

 

100

 

Listed Shares - Unlimited Authorized; 62,301,674 and 57,918,371 Listed Shares
Issued and Outstanding, Respectively

 

2,109,381

 

 

 

1,958,445

 

Retained Deficit

 

(392,120

)

 

 

(284,591

)

Accumulated Other Comprehensive Loss

 

(142,667

)

 

 

(178,340

)

Total Shareholders’ Equity

 

1,574,694

 

 

 

1,495,614

 

 

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

$

1,699,971

 

 

$

1,583,661

 


The accompanying notes are an integral part of these statements.



18



Item 8.  Financial Statements and Supplementary Data. (continued)

KMR Form 10-K




CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Kinder Morgan Management, LLC and Subsidiary

The accompanying notes are an integral part of these statements.

 

Year Ended December 31, 

 

2006

 

2005

 

2004

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

(Dollars in thousands)

Voting Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

2

 

$

100

 

 

2

 

$

100

 

 

2

 

$

100

 

Ending Balance

2

 

 

100

 

 

2

 

 

100

 

 

2

 

 

100

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Listed Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

57,918,371

 

 

1,958,445

 

 

54,157,639

 

 

1,778,090

 

 

48,996,463

 

 

1,559,485

 

Listed Shares Issued

-

 

 

-

 

 

-

 

 

-

 

 

1,660,664

 

 

67,603

 

Share Dividends

4,383,303

 

 

186,519

 

 

3,760,732

 

 

168,788

 

 

3,500,512

 

 

137,733

 

Share Issuance Costs

-

 

 

(34

)

 

-

 

 

(40

)

 

-

 

 

(1,777

)

Revaluation of Kinder Morgan Energy
Partners, L.P. Investment

-

 

 

(35,549


)

 

-

 

 

11,607

 

 

-

 

 

15,046

 

Ending Balance

62,301,674

 

 

2,109,381

 

 

57,918,371

 

 

1,958,445

 

 

54,157,639

 

 

1,778,090

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained Deficit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

 

 

(284,591

)

 

 

 

 

(172,127

)

 

 

 

 

(109,516

)

Net Income

 

 

 

78,990

 

 

 

 

 

56,324

 

 

 

 

 

75,122

 

Share Dividends

 

 

 

(186,519

)

 

 

 

 

(168,788

)

 

 

 

 

(137,733

)

Ending Balance

 

 

 

(392,120

)

 

 

 

 

(284,591

)

 

 

 

 

(172,127

)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive Loss
(Net of Tax Benefits):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

 

 

(178,287

)

 

 

 

 

(75,044

)

 

 

 

 

(24,484

)

Unrealized Gain (Loss) on Derivatives
Utilized for Hedging Purposes

 

 

 

36,046

 

 

 

 

 

(103,243


)

 

 

 

 

(50,560


)

Ending Balance

 

 

 

(142,241

)

 

 

 

 

(178,287

)

 

 

 

 

(75,044

)

Foreign Currency Translation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

 

 

(53

)

 

 

 

 

63

 

 

 

 

 

-

 

Currency Translation Adjustment

 

 

 

108

 

 

 

 

 

(116

)

 

 

 

 

63

 

Ending Balance

 

 

 

55

 

 

 

 

 

(53

)

 

 

 

 

63

 

Adjustment to Initially Apply SFAS No. 158

 

 

 

(481

)

 

 

 

 

-

 

 

 

 

 

-

 

Ending Balance

 

 

 

(142,667

)

 

 

 

 

(178,340

)

 

 

 

 

(74,981

)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Shareholders’ Equity

62,301,676

 

$

1,574,694

 

 

57,918,373

 

$

1,495,614

 

 

54,157,641

 

$

1,531,082

 


The accompanying notes are an integral part of these statements.



19



Item 8.  Financial Statements and Supplementary Data. (continued)

KMR Form 10-K



CONSOLIDATED STATEMENTS OF CASH FLOWS
Kinder Morgan Management, LLC and Subsidiary

Increase (Decrease) in Cash and Cash Equivalents

 

Year Ended December 31,

 

2006

 

2005

 

2004

 

(In thousands)

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

 

 

 

 

Net Income

$

78,990

 

 

$

56,324

 

 

$

75,122

 

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

 

 

 

 

 

 

 

 

 

 

 

Deferred Income Taxes

 

44,165

 

 

 

32,124

 

 

 

38,360

 

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

 

(123,155

)

 

 

(88,448

)

 

 

(113,482

)

Decrease (Increase) in Accounts Receivable

 

7,556

 

 

 

2,627

 

 

 

(10,196

)

(Increase) Decrease in Other Current Assets

 

(552

)

 

 

(773

)

 

 

773

 

(Decrease) Increase in Accounts Payable

 

(1,417

)

 

 

1,396

 

 

 

(1,490

)

(Decrease) Increase in Other Current Liabilities

 

(5,587

)

 

 

(3,250

)

 

 

10,913

 

Net Cash Flows Provided by Operating Activities

 

-

 

 

 

-

 

 

 

-

 

  

 

 

 

 

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

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

 

-

 

 

 

-

 

 

 

(67,528

)

Net Cash Flows Used in Investing Activities

 

-

 

 

 

-

 

 

 

(67,528

)

  

 

 

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

Shares Issued

 

-

 

 

 

-

 

 

 

67,603

 

Share Issuance Costs

 

-

 

 

 

-

 

 

 

(75

)

Net Cash Flows Provided by Financing Activities

 

-

 

 

 

-

 

 

 

67,528

 

  

 

 

 

 

 

 

 

 

 

 

 

Net Increase in Cash and Cash Equivalents

 

-

 

 

 

-

 

 

 

-

 

Cash and Cash Equivalents at Beginning of Period

 

-

 

 

 

-

 

 

 

-

 

Cash and Cash Equivalents at End of Period

$

-

 

 

$

-

 

 

$

-

 


The accompanying notes are an integral part of these statements.



20



Item 8.  Financial Statements and Supplementary Data. (continued)

KMR Form 10-K



KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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., (a midstream energy company traded on the New York Stock Exchange under the symbol “KMI”), owns all of our voting shares. References to “we,” “our” or “the Company” are intended to mean Kinder Morgan Management, LLC and its consolidated subsidiary.

2.

Significant Accounting Policies

(A) Basis of Presentation

Our consolidated financial statements include the accounts of Kinder Morgan Management, LLC and its wholly owned subsidiary, Kinder Morgan Services LLC. All material intercompany transactions and balances have been eliminated.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from these estimates.

(B) Accounting for Investment in Kinder Morgan Energy Partners, L.P.

We use the equity method of accounting for our investment in Kinder Morgan Energy Partners, L.P., which investment is further described in Notes 3 and 4. Kinder Morgan Energy Partners, L.P. is a publicly traded limited partnership and is traded on the New York Stock Exchange under the symbol “KMP.” We record, in the period in which it is earned, our share of the earnings of Kinder Morgan Energy Partners, L.P. attributable to the i-units we own. We receive distributions from Kinder Morgan Energy Partners, L.P. in the form of additional i-units, which increase the number of i-units we own. We issue additional shares (or fractions thereof) of the Company to our existing shareholders in an amount equal to the additional i-units received from Kinder Morgan Energy Partners, L.P. At December 31, 2006, through our ownership of i-units, we owned approximately 27.0% of all of Kinder Morgan Energy Partners, L.P.’s outstanding limited partner interests.

(C) Accounting for Share Distributions

Our board of directors declares and we make additional share distributions at the same times that Kinder Morgan Energy Partners, L.P. declares and makes distributions on the i-units to us, so that the number of i-units we own and the number of our shares outstanding remain equal. We account for the share distributions we make by charging retained earnings and crediting outstanding shares with amounts that equal the number of shares distributed multiplied by the closing price of the shares on the date the distribution is payable. As a result, we expect that our retained earnings will always be in a deficit position because (i) distributions per unit for Kinder Morgan Energy Partners, L.P. (which serve to reduce our retained earnings) are based on ”Available Cash” as defined by its partnership agreement, which amount generally exceeds the earnings per unit (which serve to increase our retained earnings) and (ii) the impact on our retained earnings attributable to our equity in the earnings of Kinder Morgan Energy Partners, L.P. is recorded after a provision for income taxes.

(D) Earnings Per Share

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

(E) 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. We include changes in tax legislation in the relevant computations in the period in which such changes are effective.

Our long-term deferred income tax liability of $106.6 million and $62.4 million at December 31, 2006 and 2005, respectively, 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 utilized in computing our income tax provision was 35.9% for 2006, 36.3% for 2005 and 33.8% for 2004. The effective tax rate includes the 35% federal statutory rate, a provision for state income taxes and a reduction of 2.5% in 2004 due to a reduction in the state tax rate on our cumulative deferred tax liability.



21



Item 8.  Financial Statements and Supplementary Data. (continued)

KMR Form 10-K



We entered into 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.

(F) 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.

3.

Capitalization

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.” Prior to the May 2001 initial public offering of our shares, our issued capitalization consisted of $100,000 contributed by Kinder Morgan, G.P., Inc. for two voting shares. At December 31, 2006, Kinder Morgan, Inc. owned approximately 10.3 million, or approximately 16.5% of our outstanding shares.

On February 14, 2007, we paid a share distribution of 0.016919 shares per outstanding share (1,054,082 total shares) to shareholders of record as of January 31, 2007, based on the $0.83 per common unit distribution declared by Kinder Morgan Energy Partners, L.P. This distribution is paid in the form of additional shares or fractions thereof based on 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.

4.

Business Activities and Related Party Transactions

At no time after our formation and prior to our initial public offering did we have any operations or own any interest in Kinder Morgan Energy Partners, L.P. Upon the closing of our initial public offering in May 2001, we became a limited partner in Kinder Morgan Energy Partners, L.P. and, pursuant to a delegation of control agreement, we assumed the management and control of its business and affairs. Under the delegation of control agreement, Kinder Morgan G.P., Inc. delegated to us, to the fullest extent permitted under Delaware law and the Kinder Morgan Energy Partners, L.P. partnership agreement, all of Kinder Morgan G.P., Inc.’s power and authority to manage and control the business and affairs of Kinder Morgan Energy Partners, L.P., subject to Kinder Morgan G.P., Inc.’s right to approve certain transactions. Kinder Morgan Energy Partners, L.P. will either pay directly or reimburse us for all expenses we incur in performing under the delegation of control agreement and will be obligated to indemnify us against claims and liabilities provided that we have acted in good faith and in a manner we believed to be in, or not opposed to, the best interests of Kinder Morgan Energy Partners, L.P. and the indemnity is not prohibited by law. Kinder Morgan Energy Partners, L.P. consented to the terms of the delegation of control agreement including Kinder Morgan Energy Partners, L.P.’s indemnity and reimbursement obligations. We do not receive a fee for our service under the delegation of control agreement, nor do we receive any margin or profit on the expense reimbursement. We incurred approximately $215.5 million, $178.4 million and $167.4 million of expenses during the years ended December 31, 2006, 2005 and 2004, respectively, on behalf of Kinder Morgan Energy Partners, L.P. The expense reimbursements by Kinder Morgan Energy Partners, L.P. to us are accounted for as a reduction to the expense incurred by us. The net monthly balance payable or receivable from these activities is settled in cash in the following month. At December 31, 2006, $14.7 million, primarily a receivable from Kinder Morgan Energy Partners, L.P., is recorded in the caption “Accounts Receivable, Related Party” in the accompanying Consolidated Balance Sheet.

Kinder Morgan Services LLC is our wholly owned subsidiary and provides centralized payroll and employee benefits services to us, Kinder Morgan G.P., Inc., Kinder Morgan Energy Partners, L.P. and Kinder Morgan Energy Partners, L.P.’s operating partnerships and subsidiaries (collectively, the “Group”). Employees of KMGP Services Company, Inc., a subsidiary of Kinder Morgan G.P., Inc., are assigned to work for one or more members of the Group. When they do so, they remain under our ultimate management and control. The direct costs of all compensation, benefits expenses, employer taxes and other employer expenses for these employees are allocated and charged by Kinder Morgan Services LLC to the appropriate members of the Group, and the members of the Group reimburse Kinder Morgan Services LLC for their allocated shares of these direct costs. There is no profit or margin charged by Kinder Morgan Services LLC to the members of the Group. The administrative support necessary to implement these payroll and benefits services is provided by the human resource department of Kinder Morgan, Inc., and the related administrative costs are allocated to members of the Group in accordance with expense allocation procedures. The effect of these arrangements is that each member of the Group bears the direct compensation and employee benefits costs of its assigned or partially assigned employees, as the case may be, while also bearing its allocable share of administrative costs. Pursuant to its limited partnership agreement, Kinder Morgan Energy Partners, L.P. reimburses Kinder Morgan Services LLC for its share of these administrative costs, and such reimbursements are accounted for as described above. During the twelve months ended December 31, 2006, 2005 and 2004 the expenses totaled approximately $248.3, million, $215.3 million and $172.6 million, respectively.



22



Item 8.  Financial Statements and Supplementary Data. (continued)

KMR Form 10-K



5.

Summarized Financial Information for Kinder Morgan Energy Partners, L.P.

Following is summarized financial information for Kinder Morgan Energy Partners, L.P., a publicly traded limited partnership in which we own a significant interest. Additional information on Kinder Morgan Energy Partners, L.P.’s results of operations and financial position are contained in its 2006 Annual Report on Form 10-K, which is attached to this report as Exhibit 99.1.

Summarized Income Statement Information

 

Year Ended December 31,

 

2006

 

2005

 

2004

 

(In thousands)

Operating Revenues

$

8,954,583

 

$

9,787,128

 

$

7,932,861

Operating Expenses

 

7,698,449

 

 

8,773,606

 

 

6,958,865

Operating Income

$

1,256,134

 

$

1,013,522

 

$

973,996

  

 

 

 

 

 

 

 

 

Income Before Cumulative Effect of a
Change in Accounting Principle

$

972,143

 

$

812,227

 

$

831,578

  

 

 

 

 

 

 

 

 

Net Income

$

972,143

 

$

812,227

 

$

831,578

  

Summarized Balance Sheet Information

 

As of December 31,

 

2006

 

2005

 

(In thousands)

Current Assets

$

1,036,745

 

$

1,215,224

Noncurrent Assets

$

11,209,649

 

$

10,708,238

  

 

 

 

 

 

Current Liabilities

$

2,885,699

 

$

1,808,885

Noncurrent Liabilities

$

5,288,443

 

$

6,458,506

Minority Interest

$

50,599

 

$

42,331


6.

Recent Accounting Pronouncements

On September 15, 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements. This Statement defines fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. It addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles and, as a result, there is now a common definition of fair value to be used throughout generally accepted accounting principles.

This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements; however, for some entities the application of this Statement will change current practice. The changes to current practice resulting from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements.

This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 (January 1, 2008 for us), and interim periods within those fiscal years. This Statement is to be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, with certain exceptions. The disclosure requirements of this Statement are to be applied in the first interim period of the fiscal year in which this Statement is initially applied. We are currently reviewing the effects of this Statement.

On September 29, 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statement Nos. 87, 88, 106 and 132(R). This Statement requires an employer to:

·

recognize the overfunded or underfunded status of a defined benefit pension plan or postretirement benefit plan (other than a multiemployer plan) as an asset or liability in its statement of financial position;



23



Item 8.  Financial Statements and Supplementary Data. (continued)

KMR Form 10-K



·

measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions), and to disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition assets or obligations; and

·

recognize changes in the funded status of a plan in the year in which the changes occur through comprehensive income.

Past accounting standards only required an employer to disclose the complete funded status of its plans in the notes to the financial statements. Recognizing the funded status of a company’s benefit plans as a net liability or asset on its balance sheet will require an offsetting adjustment to “Accumulated other comprehensive income/loss” in shareholders’ equity. SFAS No. 158 does not change how pensions and other postretirement benefits are accounted for and reported in the income statement—companies will continue to follow the existing guidance in previous accounting standards. Accordingly, the amounts to be recognized in “Accumulated other comprehensive income/loss” representing unrecognized gains/losses, prior service costs/credits, and transition assets/obligations will continue to be amortized under the existing guidance. Those amortized amounts will continue to be reported as net periodic benefit cost in the income statement. Prior to SFAS No. 158, those unrecognized amounts were only disclosed in the notes to the financial statements.

According to the provisions of this Statement, an employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit pension plan or postretirement benefit plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006 (December 31, 2006 for us). In the year that the recognition provisions of this Statement are initially applied, an employer is required to disclose, in the notes to the annual financial statements, the incremental effect of applying this Statement on individual line items in the year-end statement of financial position. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008 (December 31, 2008 for us). In the year that the measurement date provisions of this Statement are initially applied, a business entity is required to disclose the separate adjustments of retained earnings and “Accumulated other comprehensive income/loss” from applying this Statement. We currently have no defined benefit pension and other postretirement benefit plans.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108. This Bulletin requires a “dual approach” for quantifications of errors using both a method that focuses on the income statement impact, including the cumulative effect of prior years’ misstatements, and a method that focuses on the period-end balance sheet. For us, SAB No. 108 was effective January 1, 2007. The adoption of this Bulletin did not have a material impact on our consolidated financial statements, and we will apply this guidance prospectively.

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. For us, this Interpretation was effective January 1, 2007, and the adoption of this Interpretation had no effect on our consolidated financial statements.

In June 2006, the FASB ratified the consensuses reached by the Emerging Issues Task Force on EITF 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation). According to the provisions of EITF 06-3:

·

taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer may include, but are not limited to, sales, use, value added, and some excise taxes; and

·

that the presentation of such taxes on either a gross (included in revenues and costs) or a net (excluded from revenues) basis is an accounting policy decision that should be disclosed pursuant to Accounting Principles Board Opinion No. 22 (as amended), Disclosure of Accounting Policies. In addition, for any such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant. The disclosure of those taxes can be done on an aggregate basis.

EITF 06-3 should be applied to financial reports for interim and annual reporting periods beginning after December 15, 2006 (January 1, 2007 for us). Because the provisions of EITF 06-3 require only the presentation of additional disclosures, we do not expect the adoption of EITF 06-3 to have an effect on our consolidated financial statements.

On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement provides companies with an option to report selected financial assets and liabilities at fair value.



24



Item 8.  Financial Statements and Supplementary Data. (continued)

KMR Form 10-K



The Statement’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. The Statement also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities.

SFAS No. 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The Statement does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS No. 157, discussed above, and SFAS No. 107 Disclosures about Fair Value of Financial Instruments.

This Statement is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007 (January 1, 2008 for us). Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS No. 157. We are currently reviewing the effects of this Statement.

KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly Operating Results for 2006 and 2005

 

2006-Three Months Ended

 

March 31

 

June 30

 

September 30

 

December 31

 

(In thousands except per share amounts)

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

$

31,174

 

$

31,353

 

$

24,064

 

$

36,564

 

Provision for Income Taxes

 

11,322

 

 

11,057

 

 

8,575

 

 

13,211

 

Net Income

$

19,852

 

$

20,296

 

$

15,489

 

$

23,353

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share, Basic and Diluted

$

0.34

 

$

0.34

 

$

0.26

 

$

0.38

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Number of Shares Used in Computing
Basic and Diluted Earnings Per Share

 

58,428

 

 

59,480

 

 

60,600

 

 

61,747

 


 

2005-Three Months Ended

 

March 31

 

June 30

 

September 30

 

December 31

 

(In thousands except per share amounts)

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

$

29,422

 

$

27,825

 

$

32,621

 

$

(1,420

)

Income Tax Provision (Benefit)

 

10,686

 

 

10,106

 

 

11,848

 

 

(516

)

Net Income (Loss)

$

18,736

 

$

17,719

 

$

20,773

 

$

(904

)

  

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (Loss) Per Share, Basic and Diluted

$

0.34

 

$

0.32

 

$

0.37

 

$

(0.02

)

  

 

 

 

 

 

 

 

 

 

 

 

 

Number of Shares Used in Computing
Basic and Diluted Earnings Per Share

 

54,646

 

 

55,632

 

 

56,571

 

 

57,472

 

  

Supplemental Information on Oil and Gas Producing Activities (Unaudited)

We do not directly have oil and gas producing activities, however, our equity method investee, Kinder Morgan Energy Partners, L.P., does have significant oil and gas producing activities. The Supplementary Information on Oil and Gas Producing Activities that follows is presented as required by SFAS No. 69, Disclosures about Oil and Gas Producing Activities, and represents our equity interest in the oil and gas producing activities of Kinder Morgan Energy Partners, L.P. Our proportionate share of Kinder Morgan Energy Partners, L.P.’s capitalized costs, costs incurred and results of operations from oil and gas producing activities consisted of the following:



25



Item 8.  Financial Statements and Supplementary Data. (continued)

KMR Form 10-K




 

December 31,

 

2006

 

2005

 

2004

 

(In thousands)

Net Capitalized Costs

$

330,324

 

$

287,433

 

$

245,006

 

Costs Incurred for the Year Ended

 

79,055

 

 

74,264

 

 

75,294

 

Results of Operations for the Year Ended

 

21,204

 

 

30,939

 

 

21,054

 


Estimates of proved reserves are subject to change, either positively or negatively, as additional information becomes available and contractual and economic conditions change. Proved oil and gas reserves are the estimated quantities of crude oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, that is, prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations or declines based upon future conditions. Proved developed reserves are the quantities of crude oil, natural gas liquids and natural gas expected to be recovered through existing investments in wells and field infrastructure under current operating conditions. Proved undeveloped reserves require additional investments in wells and related infrastructure in order to recover the production.

The standardized measure of discounted cash flows is based on assumptions including year-end market pricing, future development and production costs and projections of future abandonment costs.  A discount factor of 10% is applied annually to the future net cash flows.

The table below represents our proportionate share of Kinder Morgan Energy Partners, L.P.’s (i) estimate of proved crude oil, natural gas liquids and natural gas reserves and (ii) standardized measure of discounted cash flows.

 

December 31,

 

2006

 

2005

 

2004

 

2003

 

(Dollars in thousands)

Proved Reserves:

 

 

 

 

 

 

 

 

 

 

 

Crude Oil (MBbls)

 

32,850

 

 

36,584

 

 

31,723

 

 

29,619

Natural Gas Liquids (MBbls)

 

2,738

 

 

4,892

 

 

5,191

 

 

4,131

Natural Gas (MMcf)1

 

77

 

 

555

 

 

408

 

 

836

Standardized Measure of Discounted Cash Flows
for the Year Ended

$

584,994

 

$

792,497

 

$

524,304

 

$

357,589


1

Natural gas reserves are computed at 14.65 pounds per square inch absolute and 60 degrees Fahrenheit.

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.

Controls and Procedures.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

As of December 31, 2006, 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 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.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies



26



Item 9A.  Controls and Procedures. (continued)   KMR Form 10-K



or procedures may deteriorate. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2006.

Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their attestation report which is included elsewhere in this report.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the fourth quarter of 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.

Other Information.

None



27



KMR Form 10-K



PART III

Item 10.

Directors, Executive Officers and Corporate Governance.

Set forth below is certain information concerning our directors and executive officers. All directors are elected annually by, and may be removed by, Kinder Morgan G.P., Inc. as the sole holder of our voting shares. All officers serve at the discretion of our board of directors. In addition to the individuals named below, Kinder Morgan, Inc. was one of our directors until its resignation in January 2003.

Name

Age

Position

Richard D. Kinder

62

Director, Chairman and Chief Executive Officer

C. Park Shaper

38

Director and President

Steven J. Kean

45

Executive Vice President and Chief Operating Officer

Edward O. Gaylord

75

Director

Gary L. Hultquist

63

Director

Perry M. Waughtal

71

Director

Kimberly A. Dang

37

Vice President, Investor Relations and Chief Financial Officer

Jeffrey R. Armstrong

38

Vice President (President, Terminals)

Thomas A. Bannigan

53

Vice President (President, Products Pipelines)

Richard T. Bradley

51

Vice President (President, CO2)

David D. Kinder

32

Vice President, Corporate Development and Treasurer

Joseph Listengart

38

Vice President, General Counsel and Secretary

Scott E. Parker

46

Vice President (President, Natural Gas Pipelines)

James E. Street

50

Vice President, Human Resources and Administration


Richard D. Kinder is Director, Chairman and Chief Executive Officer of Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. Mr. Kinder has served as Director, Chairman and Chief Executive Officer of Kinder Morgan Management, LLC since its formation in February 2001. He was elected Director, Chairman and Chief Executive Officer of Kinder Morgan, Inc. in October 1999. He was elected Director, Chairman and Chief Executive Officer of Kinder Morgan G.P., Inc. in February 1997. Mr. Kinder was elected President of Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. in July 2004 and served as President until May 2005. Mr. Kinder is the uncle of David Kinder, Vice President, Corporate Development and Treasurer of Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. and Kinder Morgan, Inc.

C. Park Shaper is Director and President of Kinder Morgan Management, LLC and Kinder Morgan G.P., Inc. and President of Kinder Morgan, Inc. Mr. Shaper was elected President of Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. in May 2005. He served as Executive Vice President of Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. from July 2004 until May 2005. Mr. Shaper was elected Director of Kinder Morgan Management, LLC and Kinder Morgan G.P., Inc. in January 2003. He was elected Vice President, Treasurer and Chief Financial Officer of Kinder Morgan Management, LLC upon its formation in February 2001, and served as its Treasurer until January 2004, and its Chief Financial Officer until May 2005. He was elected Vice President, Treasurer and Chief Financial Officer of Kinder Morgan, Inc. in January 2000, and served as its Treasurer until January 2004, and its Chief Financial Officer until May 2005. Mr. Shaper was elected Vice President, Treasurer and Chief Financial Officer of Kinder Morgan G.P., Inc. in January 2000, and served as its Treasurer until January 2004, and its Chief Financial Officer until May 2005. He received a Masters of Business Administration degree from the J.L. Kellogg Graduate School of Management at Northwestern University. Mr. Shaper also has a Bachelor of Science degree in Industrial Engineering and a Bachelor of Arts degree in Quantitative Economics from Stanford University.

Steven J. Kean is Executive Vice President and Chief Operating Officer of Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. and Kinder Morgan Inc.  Mr. Kean was elected Executive Vice President and Chief Operating Officer of Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. and Kinder Morgan Inc. in January 2006. He served as Executive Vice President, Operations of Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. and Kinder Morgan Inc. from May 2005 to January 2006. He served as President, Texas Intrastate Pipeline Group from June 2002 until May 2005. He served as Vice President of Strategic Planning for the Kinder Morgan Gas Pipeline Group from January 2002 until June 2002.  Until December 2001, Mr. Kean was Executive Vice President and Chief of Staff of Enron Corp.  Mr. Kean received his Juris Doctor from the University of Iowa in May 1985 and received a Bachelor of Arts degree from Iowa State University in May 1982.

Edward O. Gaylord is a Director of Kinder Morgan Management, LLC and Kinder Morgan G.P., Inc. Mr. Gaylord was elected Director of Kinder Morgan Management, LLC upon its formation in February 2001. Mr. Gaylord was elected Director of Kinder Morgan G.P., Inc. in February 1997. Since 1989, Mr. Gaylord has been the Chairman of the Board of Directors of Jacintoport Terminal Company, a liquid bulk storage terminal on the Houston, Texas ship channel.



28



Item 10.  Directors and Executive Officers of the Registrant. (continued)

KMR Form 10-K



Gary L. Hultquist is a Director of Kinder Morgan Management, LLC and Kinder Morgan G.P., Inc. Mr. Hultquist was elected Director of Kinder Morgan Management, LLC upon its formation in February 2001. He was elected Director of Kinder Morgan G.P., Inc. in October 1999. Since 1995, Mr. Hultquist has been the Managing Director of Hultquist Capital, LLC, a San Francisco-based strategic and merger advisory firm.

Perry M. Waughtal is a Director of Kinder Morgan Management, LLC and Kinder Morgan G.P., Inc. Mr. Waughtal was elected Director of Kinder Morgan Management, LLC upon its formation in February 2001. Mr. Waughtal was elected Director of Kinder Morgan G.P., Inc. in April 2000. Since 1994, Mr. Waughtal has been the Chairman of Songy Partners Limited, an Atlanta, Georgia based real estate investment company. Mr. Waughtal is also a director of HealthTronics, Inc.

Kimberly A. Dang is Vice President, Investor Relations and Chief Financial Officer of Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. Mrs. Dang was elected Chief Financial Officer of Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. in May 2005. She served as Treasurer of Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. from January 2004 to May 2005. She was elected Vice President, Investor Relations of Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. in July 2002. From November 2001 to July 2002, she served as Director, Investor Relations. From May 2001 until November 2001, Mrs. Dang was an independent financial consultant. From September 2000 until May 2001, she served as an associate and later a principal at Murphee Venture Partners, a venture capital firm. Mrs. Dang has received a Masters in Business Administration degree from the J.L. Kellogg Graduate School of Management at Northwestern University and a Bachelor of Business Administration degree in accounting from Texas A&M University.

Jeffrey R. Armstrong is Vice President (President, Terminals) of Kinder Morgan Management, LLC and Kinder Morgan G.P., Inc. Mr. Armstrong became Vice President (President, Terminals) in July 2003. He served as President, Kinder Morgan Liquids Terminals LLC from March 1, 2001, when the company was formed via the acquisition of GATX Terminals, through July 2003. From 1994 to 2001, Mr. Armstrong worked for GATX Terminals, where he was General Manager of their East Coast operations. He received his bachelor’s degree from the United States Merchant Marine Academy and an MBA from the University of Notre Dame.

Thomas A. Bannigan is Vice President (President, Products Pipelines) of Kinder Morgan Management, LLC and Kinder Morgan G.P., Inc. and President and Chief Executive Officer of Plantation Pipe Line Company. Mr. Bannigan was elected Vice President (President, Products Pipelines) of Kinder Morgan Management, LLC upon its formation in February 2001. He was elected Vice President (President, Products Pipelines) of Kinder Morgan G.P., Inc. in October 1999. Mr. Bannigan has served as President and Chief Executive Officer of Plantation Pipe Line Company since May 1998. Mr. Bannigan received his Juris Doctor, cum laude, from Loyola University in 1980 and received a Bachelors degree from the State University of New York in Buffalo.

Richard T. Bradley is Vice President (President, CO2) of Kinder Morgan Management, LLC and of Kinder Morgan G.P., Inc. and President of Kinder Morgan CO2 Company, L.P. Mr. Bradley was elected Vice President (President, CO2) of Kinder Morgan Management, LLC upon its formation in February 2001 and Vice President (President, CO2) of Kinder Morgan G.P., Inc. in April 2000. Mr. Bradley has been President of Kinder Morgan CO2 Company, L.P. (formerly known as Shell CO2 Company, Ltd.) since March 1998. Mr. Bradley received a Bachelor of Science in Petroleum Engineering from the University of Missouri at Rolla.

David D. Kinder is Vice President, Corporate Development and Treasurer of Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. Mr. Kinder was elected Treasurer of Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. in May 2005. He was elected Vice President, Corporate Development of Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. in October 2002. He served as manager of corporate development for Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. from January 2000 to October 2002. Mr. Kinder graduated cum laude with a Bachelors degree in Finance from Texas Christian University in 1996. Mr. Kinder is the nephew of Richard D. Kinder.

Joseph Listengart is Vice President, General Counsel and Secretary of Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. Mr. Listengart was elected Vice President, General Counsel and Secretary of Kinder Morgan Management, LLC upon its formation in February 2001. He was elected Vice President and General Counsel of Kinder Morgan G.P., Inc. and Vice President, General Counsel and Secretary of Kinder Morgan, Inc. in October 1999. Mr. Listengart was elected Kinder Morgan G.P., Inc.’s Secretary in November 1998 and has been an employee of Kinder Morgan G.P., Inc. since March 1998. Mr. Listengart received his Masters in Business Administration from Boston University in January 1995, his Juris Doctor, magna cum laude, from Boston University in May 1994, and his Bachelor of Arts degree in Economics from Stanford University in June 1990.

Scott E. Parker is Vice President (President, Natural Gas Pipelines) of Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. He was elected Vice President (President, Natural Gas Pipelines) of Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. in May 2005.  Mr. Parker served as President of



29



Item 10.  Directors and Executive Officers of the Registrant. (continued)

KMR Form 10-K



Kinder Morgan, Inc.’s Natural Gas Pipeline Company of America, or NGPL, from March 2003 to May 2005. Mr. Parker served as Vice President, Business Development of NGPL from January 2001 to March 2003. He held various positions at NGPL from January 1984 to January 2001. Mr. Parker holds a Bachelor’s degree in accounting from Governors State University.

James E. Street is Vice President, Human Resources and Administration of Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. Mr. Street was elected Vice President, Human Resources and Administration of Kinder Morgan Management, LLC upon its formation in February 2001. He was elected Vice President, Human Resources and Administration of Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. in August 1999. Mr. Street received a Masters of Business Administration degree from the University of Nebraska at Omaha and a Bachelor of Science degree from the University of Nebraska at Kearney.

Corporate Governance

We have a separately designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934 comprised of Messrs. Gaylord, Hultquist and Waughtal. Mr. Gaylord is the chairman of the audit committee and has been determined by the board to be an “audit committee financial expert.” The board has determined that all of the members of the audit committee are independent as described under the relevant standards.

We have not, nor has Kinder Morgan Energy Partners, L.P. nor its general partner made, within the preceding three years, contributions to any tax-exempt organization in which any of our or Kinder Morgan Energy Partners, L.P.’s independent directors serves as an executive officer that in any single fiscal year exceeded the greater of $1 million or 2% of such tax-exempt organization’s consolidated gross revenues.

On April 11, 2006, our chief executive officer certified to the New York Stock Exchange, as required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual, that as of April 11, 2006, he was not aware of any violation by us of the New York Stock Exchange’s Corporate Governance listing standards. We have also filed as an exhibit to this report the Sarbanes-Oxley Act Section 302 certifications regarding the quality of our public disclosure.

We make available free of charge within the “Investors” information section of our internet website, at www.kindermorgan.com, and in print to any shareholder who requests, the governance guidelines, the charters of the audit committee, compensation committee and nominating and governance committee, and our code of business conduct and ethics (which applies to senior financial and accounting officers and the chief executive officer, among others). Requests for copies may be directed to Investor Relations, Kinder Morgan Management, LLC, 500 Dallas Street, Suite 1000, Houston, Texas 77002, or telephone (713) 369-9490. We intend to disclose any amendments to our code of business conduct and ethics that would otherwise be disclosed on Form 8-K and any waiver from a provision of that code granted to our executive officers or directors that would otherwise be disclosed on Form 8-K on our internet website within four business days following such amendment or waiver. The information contained on or connected to our internet website is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report that we file with or furnish to the Securities and Exchange Commission.

Interested parties may contact our lead director, the chairpersons of any of the board’s committees, the independent directors as a group or the full board by mail to Kinder Morgan Management, LLC, 500 Dallas Street, Suite 1000, Houston, Texas 77002, Attention: General Counsel, or by e-mail within the “Contact Us” section of our internet website, at www.kindermorgan.com. Any communication should specify the intended recipient.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16 of the Securities Exchange Act of 1934 requires our directors and officers, and persons who own more than 10% of a registered class of our equity securities, to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission. Such persons are required by Securities and Exchange Commission regulation to furnish us with copies of all Section 16(a) forms they file.

Based solely on our review of the copies of such forms furnished to us and written representations from our executive officers and directors, we believe that all Section 16(a) filing requirements were met during 2006.

Item 11.  Executive Compensation

All of our individual executive officers and directors serve in the same capacities for Kinder Morgan G.P., Inc. Certain of those executive officers also serve as executive officers of Kinder Morgan, Inc. All information in this report with respect to compensation of executive officers describes the total compensation received by those persons in all capacities for Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc., Kinder Morgan, Inc. and their respective affiliates; consequently, in



30



Item 11.  Executive Compensation. (continued)

KMR Form 10-K



this Item 11, “we,” “our” or “us” refers to Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. and, where appropriate, Kinder Morgan, Inc.

Compensation Discussion and Analysis

Program Objectives

We are a publicly traded Delaware limited liability company. We are a limited partner in Kinder Morgan Energy Partners, L.P., and manage and control its business and affairs pursuant to a delegation of control agreement. We seek to attract and retain executives who will help us achieve our primary business strategy objective of growing the value of Kinder Morgan Energy Partners, L.P.’s portfolio of businesses for the benefit of our shareholders and its unitholders. To help accomplish this goal, we have designed an executive compensation program that rewards individuals with competitive compensation that consists of a mix of cash, benefit plans and long-term compensation, with a majority of executive compensation tied to the “at risk” portions of the annual cash bonus and long-term equity compensation.

The key objectives of our executive compensation program are to attract, motivate and retain executives who will advance our overall business strategies and objectives to create and return value to our shareholders and Kinder Morgan Energy Partners, L.P.’s unitholders. We believe that an effective executive compensation program should link total compensation to financial performance and to the attainment of short and long term strategic, operational, and financial objectives. We also believe it should provide competitive total compensation opportunities at a reasonable cost. In designing our executive compensation program, we have recognized that our executives have a much greater portion of their overall compensation at-risk than do our other employees; consequently, we have tried to establish the at-risk portions of our executive total compensation at levels that recognize their much increased level of responsibility and their ability to influence business results.

Our executive compensation program is principally comprised of the following three elements:

·

base cash salary;

·

possible annual cash bonus (reflected in the Summary Compensation Table below as Non-Equity Incentive Plan Compensation); and

·

possible long-term equity awards, namely grants of restricted Kinder Morgan, Inc. stock and, in previous years, grants of options to acquire shares of Kinder Morgan, Inc. common stock.

It is our current philosophy to pay our executive officers a base salary not to exceed $200,000 per year, which is below base salaries for comparable positions in the marketplace. In addition, we believe that the compensation of our Chief Executive Officer, Chief Financial Officer and the executives named below, collectively referred to in this Item 11 as our named executive officers, should be directly and materially tied to the financial performance of Kinder Morgan, Inc. and Kinder Morgan Energy Partners, L.P., and should be aligned with the interests of Kinder Morgan, Inc. stockholders and Kinder Morgan Energy Partners, L.P. unitholders. Therefore, the majority of our named executive officers’ compensation is allocated to the “at risk” portions of our compensation program—the annual cash bonus and the long-term equity compensation. For 2006, our executive compensation was weighted toward the cash bonus, payable on the basis of achieving (i) an earnings per share target by Kinder Morgan, Inc.; and (ii) a cash distribution per common unit target by Kinder Morgan Energy Partners, L.P. Prior to 2003, we used both Kinder Morgan, Inc. stock options and restricted Kinder Morgan, Inc. stock as the principal components of long-term executive compensation, and beginning in 2003, we used grants of restricted stock exclusively as the principal component of long-term executive compensation.

Grants of restricted Kinder Morgan, Inc. stock are made to encourage our executive officers to manage from the perspective of owners with an equity stake and our approach to equity compensation is designed to balance the business objectives of fair and reasonable executive pay with the business objectives of equityholder interests. We are very sensitive to making large awards of Kinder Morgan, Inc. restricted stock or Kinder Morgan, Inc. stock options to our executive officers because such large awards dilute the ownership of Kinder Morgan, Inc.’s stockholders. Therefore, we seek to balance the dilutive effect of such stock awards to Kinder Morgan, Inc.’s existing stockholders with our need to attract and retain key employees.

Additionally, we periodically compare our executive compensation components with market information. The purpose of this comparison is to ensure that our total compensation package operates effectively, remains both reasonable and competitive with the energy industry, and is generally comparable to the compensation offered by companies of similar size and scope as us. We also keep abreast of current trends, developments, and emerging issues in executive compensation, and if appropriate, will obtain advice and assistance from outside legal, compensation or other advisors.

We have endeavored to design our executive compensation program and practices with appropriate consideration of all tax, accounting, legal and regulatory requirements. Section 162(m) of the Internal Revenue Code limits the deductibility of certain compensation for our executive officers to $1,000,000 of compensation per year; however, if specified conditions are



31



Item 11.  Executive Compensation. (continued)

KMR Form 10-K



met, certain compensation may be excluded from consideration of the $1,000,000 limit. Since the bonuses we pay to our executive officers are paid under Kinder Morgan, Inc.’s stockholder-approved 2005 Annual Incentive Plan as a result of reaching designated financial targets established by Kinder Morgan, Inc.’s compensation committee, we expect that all compensation paid to our executives will be deductible by Kinder Morgan, Inc.

Behaviors Designed to Reward

Our executive compensation program is designed to reward individuals for advancing our business strategies and the interests of our stakeholders, and we prohibit engaging in any detrimental activities, such as performing services for a competitor, disclosing confidential information or violating appropriate business conduct standards. Each executive is held accountable to uphold and comply with company guidelines, which require the individual to maintain a discrimination-free workplace, to comply with orders of regulatory bodies, and to maintain high standards of operating safety and environmental protection.

Unlike many companies, we have no executive perquisites and, with respect to our United States-based executives, we have no supplemental executive retirement, non-qualified supplemental defined benefit/contribution, deferred compensation or split dollar life insurance programs. We have no executive company cars or executive car allowances nor do we offer or pay for financial planning services. Additionally, we do not own any corporate aircraft and we do not pay for executives to fly first class. We are currently below competitive levels for comparable companies in this area of our compensation package, however, we have no current plans to change our policy of not offering such executive benefits or perquisite programs.

At his request, Mr. Kinder, our Chairman and Chief Executive Officer, receives $1 of base salary per year. Additionally, Mr. Kinder has requested that he receive no annual bonus, stock or unit grants, or other compensation. Mr. Kinder does not have any deferred compensation, supplemental retirement or any other special benefit, compensation or perquisite arrangement. He wishes to be rewarded strictly on the basis of stock performance which impacts the value of his holdings of Kinder Morgan, Inc. common stock, Kinder Morgan Energy Partners, L.P. common units and our shares. Each year Mr. Kinder reimburses us for his portion of health care premiums and parking expenses.

Elements of Compensation

As outlined above, our executive compensation program is principally comprised of the following three elements: a base cash salary; a possible annual cash bonus; and a possible long-term equity award. With regard to our executive officers other than our Chief Executive Officer, Kinder Morgan, Inc.’s and our compensation committees review and approve annually the financial goals and objectives of both Kinder Morgan, Inc. and Kinder Morgan Energy Partners, L.P. that are relevant to the compensation of our executive officers. Generally following the regularly scheduled fourth quarter board meetings in each year, the committees solicit information from other directors, the Chief Executive Officer and other relevant members of senior management regarding the performance of our executive officers other than our Chief Executive Officer during that year. Our Chief Executive Officer makes compensation recommendations to the committees with respect to our executive officers, other than himself. The committees obtain the information and the recommendations prior to the regularly scheduled first quarter board meetings.

Annually, at Kinder Morgan, Inc.’s and our regularly scheduled first quarter board meetings, the committees evaluate the performance of our executive officers other than our Chief Executive Officer and make determinations regarding the terms of their continued employment and compensation for that year. If the committees deem it advisable, they may, rather than determine the terms of continued employment and compensation for executive officers (other than the Chief Executive Officer), make a recommendation with respect thereto to the independent members of the board who make the determination at the first quarter board meetings. The committees also determine bonuses for the prior year based on the performance targets set therefore, and set performance targets for the present year for bonus and other relevant purposes.

If any of our executive officers is also an executive officer of Kinder Morgan, Inc. or Kinder Morgan G.P., Inc., the committees’ compensation determination or recommendation (i) may be with respect to the aggregate compensation to be received by such officer from Kinder Morgan, Inc., Kinder Morgan G.P., Inc. and us that is to be allocated among them in accordance with procedures approved by the committees, if such aggregate compensation set by the committee or the board of Kinder Morgan, Inc. and that set by the committee or our board are the same, or alternatively (ii) may be with respect to the compensation to be received by such executive officers from Kinder Morgan, Inc., Kinder Morgan G.P., Inc. or us, as the case may be, in which case such compensation will not be allocated among Kinder Morgan, Inc., on the one hand, and Kinder Morgan G.P., Inc, Kinder Morgan Energy Partners, L.P. and us, on the other. Further, if any of our executive officers is also an executive officer of Kinder Morgan, Inc., the committees may, to the extent they believe necessary or desirable, exchange information with respect to evaluation and compensation recommendations with each other. Thereafter, the committees or the Chief Executive Officer will discuss the committees’ evaluation and the determination as to compensation with the executive officers.

In addition, the compensation committees have the sole authority to retain (and terminate as necessary) and compensate any compensation consultants, counsel and other firms of experts to advise them as they determine necessary or appropriate. The committees have the sole authority to approve any such firm's fees and other retention terms, and Kinder Morgan Energy



32



Item 11.  Executive Compensation. (continued)

KMR Form 10-K



Partners and Kinder Morgan, Inc., as applicable, will make adequate provision for the payment of all fees and other compensation, approved by the committees, to any such firm employed by the committees. The committees also have sole authority to determine if any compensation consultant is to be used to assist in the evaluation of director, Chief Executive Officer or senior executive compensation and will have sole authority to retain and terminate any such compensation consultant and to approve the consultant's fees and other retention terms.

Base Salary

This includes base salary, which is paid in cash. All of our executive officers, with the exception of our Chairman and Chief Executive Officer who receives $1 of base salary per year as described above, earn a base salary not to exceed $200,000 per year. Generally, we believe that our executive officers’ base salaries are below base salaries for executives in similar positions and with similar responsibilities at comparable companies of corresponding size and scope.

Possible Annual Cash Bonus (Non-Equity Cash Incentive)

Our possible annual cash bonuses are provided for under Kinder Morgan, Inc.’s 2005 Annual Incentive Plan, which became effective January 18, 2005 and which is referred to in this report as the Kinder Morgan, Inc. Annual Incentive Plan. The overall purpose of the Kinder Morgan, Inc. Annual Incentive Plan is to increase our executive officers’ and our employees’ personal stake in the continued success of Kinder Morgan, Inc. and Kinder Morgan Energy Partners, L.P. by providing them additional incentives through the possible payment of annual cash bonuses. Under the plan, annual cash bonuses may be paid to our executive officers and other employees depending on a variety of factors, including their individual performance, Kinder Morgan, Inc.’s financial performance, the financial performance of Kinder Morgan, Inc.’s subsidiaries (including Kinder Morgan Energy Partners, L.P.), and safety and environmental goals.

The plan is administered by the compensation committee of Kinder Morgan, Inc.’s board of directors, which consists of three or more directors, each of whom qualifies as an “outside director” for purposes of the Internal Revenue Code. The compensation committee is authorized to grant awards under the plan, interpret the plan, adopt rules and regulations for carrying out the plan, and make all determinations necessary or advisable for the administration of the plan.

All of the employees of Kinder Morgan, Inc. and its subsidiaries, including KMGP Services Company, Inc., are eligible to participate in the plan, except employees who are included in a unit of employees covered by a collective bargaining agreement unless such agreement expressly provides for eligibility under the plan. However, only eligible employees who are selected by the Kinder Morgan, Inc. compensation committee will actually participate in the plan and receive bonuses.

The plan consists of two components: the executive plan component and the non-executive plan component. Our Chairman and Chief Executive Officer and all employees who report directly to the Chairman are eligible for the executive plan component; however, as stated elsewhere in this report, Mr. Richard D. Kinder, our Chairman and Chief Executive Officer, does not participate under the plan. As of January 31, 2007, excluding Mr. Richard D. Kinder, 13 of our current executive officers were eligible to participate in the executive plan component. All other U.S. eligible employees were eligible for the non-executive plan component.

The Kinder Morgan, Inc. compensation committee determines which of the eligible employees will be eligible to participate under the executive plan component of the Kinder Morgan, Inc. Annual Incentive Plan for any given year. At or before the start of each calendar year (or later, to the extent allowed under Internal Revenue Code regulations), performance objectives for that year are identified. The performance objectives are based on one or more of the criteria set forth in the plan. The Kinder Morgan, Inc. compensation committee establishes a bonus opportunity for each executive officer, which is the amount of the bonus the executive officer will earn if the performance objectives are fully satisfied. The compensation committee may specify a minimum acceptable level of achievement of each performance objective below which no bonus is payable with respect to that objective. The compensation committee may set additional levels above the minimum (which may also be above the targeted performance objective), with a formula to determine the percentage of the bonus opportunity to be earned at each level of achievement above the minimum. Performance at a level above the targeted performance objective may entitle the executive officer to earn a bonus in excess of 100% of the bonus opportunity. However, the maximum payout to any individual under the Kinder Morgan, Inc. Annual Incentive Plan for any year is $2.0 million, and the Kinder Morgan, Inc. compensation committee has the discretion to reduce the bonus amount in any performance period.

Performance objectives may be based on one or more of the following criteria:

·

Kinder Morgan, Inc.’s earnings per share;

·

Kinder Morgan, Inc. cash dividends to its stockholders;

·

Kinder Morgan, Inc.’s earnings before interest and taxes or earnings before interest, taxes and corporate charges, or the earnings before interest and taxes or earnings before interest, taxes and corporate charges of one of its subsidiaries or business units;



33



Item 11.  Executive Compensation. (continued)

KMR Form 10-K



·

·

Kinder Morgan, Inc.’s net income or the net income of one of its subsidiaries or business units;

·

Kinder Morgan, Inc.’s revenues or the revenues of one of its subsidiaries or business units;

·

Kinder Morgan, Inc.’s unit revenues minus unit variable costs or the unit revenues minus unit variable costs of one of its subsidiaries or business units;

·

Kinder Morgan, Inc.’s return on capital, return on equity, return on assets, or return on invested capital, or the return on capital, return on equity, return on assets, or return on invested capital of one of its subsidiaries or business units;

·

Kinder Morgan, Inc.’s cash flow return on assets or cash flows from operating activities, or the cash flow return on assets or cash flows from operating activities of one of its subsidiaries or business units;

·

Kinder Morgan, Inc.’s capital expenditures or the capital expenditures of one of its subsidiaries or business units;

·

Kinder Morgan, Inc.’s operations and maintenance expense or general and administrative expense, or the operations and maintenance expense or general and administrative expense of one of its subsidiaries or business units;

·

Kinder Morgan, Inc.’s debt-equity ratios and key profitability ratios, or the debt-equity ratios and key profitability ratios of one of its subsidiaries or business units; or

·

Kinder Morgan, Inc.’s stock price.

The Kinder Morgan, Inc. compensation committee set two performance objectives for 2006 under both the executive plan component and the non-executive plan component. The 2006 performance objectives were $3.28 in cash distributions per common unit at Kinder Morgan Energy Partners, L.P., and $5.00 in earnings per share at Kinder Morgan, Inc. These targets were the same as Kinder Morgan Energy Partners, L.P.’s and Kinder Morgan, Inc.’s previously disclosed 2006 budget expectations. At the end of 2006, the Kinder Morgan, Inc. compensation committee determined and certified in writing the extent to which the performance objectives had been attained and the extent to which the bonus opportunity had been earned under the formula previously established by the Kinder Morgan, Inc. compensation committee. Because payments under the plan for our executive officers are determined by comparing actual performance to the performance objectives established by the compensation committee each year for eligible executive officers chosen to participate for that year, it is not possible to accurately predict any amounts that will actually be paid under the executive plan portion of the plan over the life of the plan.

The below table sets forth the bonus opportunities that would have been payable to our executive officers if the performance objectives established by the Kinder Morgan, Inc. compensation committee for 2006 had been 100% achieved. The Kinder Morgan, Inc. compensation committee may, at its sole discretion, reduce the amount of the bonus actually paid to any executive officer under the plan from the amount of any bonus opportunity open to such executive officer.

Kinder Morgan, Inc. Annual Incentive Plan
Bonus Opportunities for 2006
1

Name and Principal Position

 

Dollar Value

 

 

 

 

 

Richard D. Kinder, Chairman and Chief Executive Officer

 

$

2

 

 

 

 

 

Kimberly A. Dang, Vice President and Chief Financial Officer

 

 

1,000,000

3

 

 

 

 

 

Jeffrey R. Armstrong, Vice President (President, Terminals)

 

 

1,000,000

3

 

 

 

 

 

David D. Kinder, Vice President Corporate Development and Treasurer

 

 

1,000,000

3

 

 

 

 

 

Steven J. Kean, Executive Vice President and Chief Operating Officer

 

 

1,500,000

4

 

 

 

 

 

Joseph Listengart, Vice President, General Counsel and Secretary

 

 

1,000,000

3

 

 

 

 

 

Scott E. Parker, Vice President (President, Natural Gas Pipelines)

 

 

1,000,000

3

 

 

 

 

 

C. Park Shaper, Director and President

 

 

1,500,000

4

__________


1

No stock, stock options, stock appreciation rights, restricted stock or similar awards are payable under the plan.

2

Declined to participate.


34



Item 11.  Executive Compensation. (continued)

KMR Form 10-K



3

Under the plan, for 2006, if neither of the targets was met, no bonus opportunities would have been provided; if one of the targets was met, $500,000 in bonus opportunities would have been open; if both of the targets had been exceeded by 10%, $1,500,000 in bonus opportunities would have been open. The Kinder Morgan, Inc. compensation committee may, in its sole discretion, reduce the award payable to any participant for any reason.

4

Under the plan, for 2006, if neither of the targets was met, no bonus opportunities would have been provided; if one of the targets was met, $750,000 in bonus opportunities would have been open; if both of the targets had been exceeded by 10%, $2,000,000 in bonus opportunities would have been open. The Kinder Morgan, Inc. compensation committee may, in its sole discretion, reduce the award payable to any participant for any reason.

In 2006, excluding the impairment charge resulting from our entering into a definitive agreement to sell our Terasen Gas business segment, Kinder Morgan, Inc. exceeded its established target, but Kinder Morgan Energy Partners, L.P. did not achieve its established target. Excluding Mr. Richard D. Kinder, who does not participate in the plan, our top three executive officers (Messrs. Shaper, Kean and Listengart) voluntarily elected to take zero bonuses for work done in 2006. The Kinder Morgan, Inc. compensation committee agreed to the executives’ request for zero bonuses, but wanted to make note that it was no reflection on any of the executives’ personal performance for the year. It was also noted and reflected that each of our other executive officers’ bonus was reduced in accordance with past practice and in light of the making of just one target. Mr. Parker’s bonus was paid $500,000 from the plan according to the plan terms, and $350,000 from outside the plan as a discretionary bonus.

The plan was established, in part, to enable the portion of an officer’s or other employee’s annual bonus based on objective performance criteria to qualify as “qualified performance–based compensation” under the Internal Revenue Code. “Qualified performance–based compensation” is deductible by Kinder Morgan Energy Partners, L.P. for tax purposes. The tax deduction available with respect to compensation paid to executive officers is limited, unless the compensation qualifies as performance-based under the Internal Revenue Code. The requirements for performance-based compensation include the following:

·

the compensation must be paid based solely on the attainment of objective performance measures established by a committee of outside directors, and

·

the plan providing for such compensation must be approved by Kinder Morgan, Inc. stockholders.

The Kinder Morgan, Inc. Annual Incentive Plan is a bonus plan that enables the portion of an officer or employee's annual bonus based on objective performance criteria to qualify as performance-based. Accordingly, that amount is deductible without regard to the deduction limit otherwise imposed by the Internal Revenue Code. If a bonus paid under the plan to an individual is in excess of the bonus opportunity set by the compensation committee, Section 162(m) of the Internal Revenue Code could limit the deductibility of the bonus paid. Consequently, the compensation committee set bonus opportunities under the plan for 2006 for the executive officers at dollar amounts in excess of that which were expected to actually be paid under the plan.

Kinder Morgan, Inc.’s Board of Directors may amend the plan from time to time without Kinder Morgan, Inc. stockholder approval except as required to satisfy the Internal Revenue Code or any applicable securities exchange rules. Awards may be granted under the plan for calendar years 2007 through 2009, unless the plan is terminated earlier by the Kinder Morgan, Inc. Board. However, the plan will remain in effect until payment has been completed with respect to all awards granted under the plan prior to its termination.

Restricted Kinder Morgan, Inc. Stock Awards

This includes grants of restricted Kinder Morgan, Inc. stock under Kinder Morgan, Inc.’s Amended and Restated 1999 Stock Plan, referred to in this report as the Kinder Morgan, Inc. stock plan. The Kinder Morgan, Inc. stock plan allows for grants of restricted Kinder Morgan, Inc. stock and non-qualified Kinder Morgan, Inc. stock options. We believe the plan permits us to keep pace with changing developments in compensation and benefit programs, making us competitive with those companies that offer incentives to attract and retain employees.

The purposes of the Kinder Morgan, Inc. stock plan are to:

·

enable the employees of Kinder Morgan, Inc. and the employees of its subsidiaries to develop a sense of proprietorship and personal involvement in Kinder Morgan, Inc.’s financial success and the financial success of its subsidiaries, including us; and

·

encourage those employees to remain with and devote their best efforts to Kinder Morgan, Inc.’s business and the business of its subsidiaries, including Kinder Morgan Energy Partners, L.P.

Officers and other employees of Kinder Morgan, Inc. and other entities in which they have a direct or indirect interest are eligible to participate in the plan. Kinder Morgan, Inc.’s compensation committee, which administers the plan, has the sole



35



Item 11.  Executive Compensation. (continued)

KMR Form 10-K



discretion to select participants from among eligible persons. Directors who are not employees are not eligible to participate in the plan. The aggregate number of shares of Kinder Morgan, Inc. common stock which may be issued under the plan with respect to options, restricted stock and restricted stock units may not exceed 10,500,000, subject to adjustment for certain transactions affecting the common stock. Lapsed, forfeited or canceled options, and shares subject to forfeited restricted stock units, will not count against this limit and can be regranted under the plan. Options with respect to more than 1,000,000 shares of Kinder Morgan, Inc. common stock, restricted stock with respect to more than 500,000 shares of Kinder Morgan, Inc. common stock and restricted stock units with respect to more than 100,000 shares of Kinder Morgan, Inc. common stock may not be granted to any one employee during any five year period. The shares issued under the plan may be issued from shares held in treasury or from authorized but unissued shares.

The Kinder Morgan, Inc. stock plan provides for the grant of:

·

nonqualified stock options;

·

stock appreciation rights in tandem with stock options;

·

restricted stock; and

·

restricted stock units.

Awards may be granted individually, in combination, or in tandem as determined by the compensation committee. Kinder Morgan, Inc.’s Board of Directors may amend the plan without Kinder Morgan, Inc. stockholder approval, unless that approval is required by applicable law, rules, regulations or stock exchange requirements; however, Kinder Morgan, Inc.’s Board of Directors may not amend the plan in such a way that would impair the rights of a participant under an award without the consent of such participant, or that would decrease any authority granted to the Kinder Morgan, Inc. compensation committee in contravention of Rule 16b-3 under the Securities Exchange Act of 1934, as amended. In addition, Kinder Morgan, Inc.’s Board of Directors may terminate the plan at any time.

The Kinder Morgan, Inc. compensation committee establishes the form and terms of each grant of restricted stock, and each grant is evidenced by a written agreement. Shares of restricted stock are subject to "forfeiture restrictions" that restrict the transferability of the shares and obligate the participant to forfeit and surrender the shares under certain circumstances, such as termination of employment. The Kinder Morgan, Inc. compensation committee may decide that forfeiture restrictions on restricted stock will lapse upon the restricted stock holder's continued employment for a specified period of time, the attainment of one or more performance targets established by the Kinder Morgan, Inc. compensation committee, the occurrence of any event or the satisfaction of any condition specified by the Kinder Morgan, Inc. compensation committee, or a combination of any of these. The performance targets may be based on:

·

the price of a share of Kinder Morgan, Inc. stock or of the equity of one of its subsidiaries or business units;

·

Kinder Morgan, Inc.’s earnings per share or the earnings per share of one of its subsidiaries or business units;

·

Kinder Morgan, Inc.’s total stockholder value or the total stockholder value of one of its subsidiaries or business units;

·

Kinder Morgan, Inc.’s dividends or distributions or the dividends or distributions of one of its subsidiaries or business units;

·

Kinder Morgan, Inc.’s revenues or the revenues of one of its subsidiaries or business units;

·

Kinder Morgan, Inc.’s debt/equity ratio, interest coverage ratio or indebtedness/earnings before or after interest, taxes, depreciation and amortization ratio, or such ratios with respect to one of its subsidiaries or business units;

·

Kinder Morgan, Inc.’s cash coverage ratio or the cash coverage ratio with respect to one of its subsidiaries or business units;

·

Kinder Morgan, Inc.’s net income (before or after taxes) or the net income (before or after taxes) of one of its subsidiaries or business units;

·

Kinder Morgan, Inc.’s cash flow or cash flow return on investments or the cash flow or cash flow return on investments of one of its subsidiaries or business units;

·

Kinder Morgan, Inc.’s earnings before or after interest, taxes, depreciation, and/or amortization or earnings before or after interest, taxes, depreciation, and/or amortization of one of its subsidiaries or business units;



36



Item 11.  Executive Compensation. (continued)

KMR Form 10-K



·

Kinder Morgan, Inc.’s economic value added or the economic value added of one of its subsidiaries or business units;

·

Kinder Morgan, Inc.’s return on stockholders' equity or the return on stockholders' equity of one of its subsidiaries or business units; or

·

the payment of a bonus under the Kinder Morgan, Inc. Annual Incentive Plan as a result of the attainment of performance goals based on one or more of the criteria set forth above.

Each grant of restricted stock may have different forfeiture restrictions, in the discretion of the Kinder Morgan, Inc. compensation committee. The Kinder Morgan, Inc. compensation committee may, in its sole discretion, prescribe additional terms, conditions or restrictions relating to restricted stock, including, but not limited to, rules pertaining to the termination of employment (by retirement, disability, death or otherwise) of a participant prior to the lapse of the forfeiture restrictions, and terms related to tax matters.

Unless otherwise provided for in a written agreement, a participant will have the right to receive dividends with respect to restricted stock, to vote the stock and to enjoy all other stockholder rights, except that:

·

the participant will not be entitled to delivery of the stock certificate unless and until the forfeiture restrictions have lapsed;

·

Kinder Morgan, Inc. will retain custody of the stock unless and until the forfeiture restrictions have lapsed;

·

the participant may not sell, transfer, pledge, exchange, hypothecate or otherwise dispose of the stock unless and until the forfeiture restrictions have lapsed; and

·

a breach by a participant of the terms and conditions established by the Kinder Morgan, Inc. compensation committee pursuant to the restricted stock agreement will cause a forfeiture of the restricted stock by the participant.

Unless otherwise provided for in a written agreement, dividends payable with respect to restricted stock will be paid to a participant in cash on the day on which the corresponding dividend on shares is paid to Kinder Morgan, Inc. stockholders, or as soon as administratively feasible thereafter, but no later than the fifteenth day of the third calendar month following the day on which the corresponding dividend is paid to Kinder Morgan, Inc. stockholders. The Kinder Morgan, Inc. compensation committee may, in its sole discretion, decide that a participant's right to receive dividends on restricted stock is subject to the attainment of one or more performance targets based on the criteria listed above.

The Kinder Morgan, Inc. compensation committee at any time may accelerate the time or conditions under which the forfeiture restrictions lapse. However, except in the event of a corporate change (as defined in the plan), the Kinder Morgan, Inc. compensation committee may not take any such action with respect to “covered employees” (within the meaning of Treasury Regulation § 1.162-27(c)(2)) if such restricted stock has been designed to meet the exception for performance-based compensation under Section 162(m) of the Internal Revenue Code unless the performance targets with respect to the restricted stock have been attained.

For the year ended December 31, 2006, no restricted stock or options to purchase shares of Kinder Morgan, Inc. were granted to any of our executive officers.

Other Compensation

Kinder Morgan Savings Plan. The Kinder Morgan Savings Plan is a defined contribution 401(k) plan. The plan permits all full-time employees of Kinder Morgan, Inc. and KMGP Services Company, Inc., including the named executive officers, to contribute between 1% and 50% of base compensation, on a pre-tax basis, into participant accounts. In addition to a mandatory contribution equal to 4% of base compensation per year for most plan participants, Kinder Morgan G.P., Inc. may make special discretionary contributions. Certain employees’ contributions are based on collective bargaining agreements. The mandatory contributions are made each pay period on behalf of each eligible employee. All employer contributions, including discretionary contributions, are in the form of Kinder Morgan, Inc. stock that is immediately convertible into other available investment vehicles at the employee’s discretion. Participants may direct the investment of their contributions into a variety of investments. Plan assets are held and distributed pursuant to a trust agreement.

For employees hired on or prior to December 31, 2004, all contributions, together with earnings thereon, are immediately vested and not subject to forfeiture. Employer contributions for employees hired on or after January 1, 2005 will vest on the second anniversary of the date of hire. Effective October 1, 2005, for new employees of Kinder Morgan Energy Partners, L.P.’s Terminals business segment, a tiered employer contribution schedule was implemented. This tiered schedule provides for employer contributions of 1% for service less than one year, 2% for service between one and two years, 3% for service



37



Item 11.  Executive Compensation. (continued)

KMR Form 10-K



between two and five years, and 4% for service of five years or more. All employer contributions for employees of our Terminals business segment hired after October 1, 2005 will vest on the fifth anniversary of the date of hire.

At its July 2006 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 Savings Plan for each eligible employee. Each eligible employee will receive an additional 1% company contribution based on eligible base pay each pay period beginning with the first pay period of August 2006 and continuing through the last pay period of July 2007. The additional 1% contribution is in the form of Kinder Morgan, Inc. common stock (the same as the current 4% contribution) and does not change or otherwise impact, the annual 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 according to the same vesting schedule described in the preceding paragraph. Since this additional 1% company contribution is discretionary, KMI compensation committee approval will be required annually for each additional contribution. During the first quarter of 2007, excluding the 1% additional contribution described above, we will not make any additional discretionary contributions to individual accounts for 2006.

Additionally, in 2006, an option to make after-tax “Roth” contributions (Roth 401(k) option) to a separate participant account was added to the Savings Plan as an additional benefit to all participants. Unlike traditional 401(k) plans, where participant contributions are made with pre-tax dollars, earnings grow tax-deferred, and the withdrawals are treated as taxable income, Roth 401(k) contributions are made with after-tax dollars, earnings are tax-free, and the withdrawals are tax-free if they occur after both (i) the fifth year of participation in the Roth 401(k) option, and (ii) attainment of age 59 ½, death or disability. The employer contribution will still be considered taxable income at the time of withdrawal.

Cash Balance Retirement Plan. Employees of KMGP Services Company, Inc. and Kinder Morgan, Inc., including the named executive officers, are also eligible to participate in a Cash Balance Retirement Plan. Certain employees continue to accrue benefits through a career-pay formula, “grandfathered” according to age and years of service on December 31, 2000, or collective bargaining arrangements. All other employees accrue benefits through a personal retirement account in the Cash Balance Retirement Plan. Under the plan, we make contributions on behalf of participating employees equal to 3% of eligible compensation every pay period. Interest is credited to the personal retirement accounts at the 30-year U.S. Treasury bond rate, or an approved substitute, in effect each year. Employees become fully vested in the plan after five years, and they may take a lump sum distribution upon termination of employment or retirement.

The following table sets forth the estimated actuarial present value of each named executive officer’s accumulated pension benefit as of December 31, 2006, under the provisions of the Kinder Morgan Cash Balance Retirement Plan. With respect to our executive officers, the benefits were computed using the same assumptions used for financial statement purposes, assuming current remuneration levels without any salary projection, and assuming participation until normal retirement at age sixty-five. These benefits are subject to federal and state income taxes, where applicable, but are not subject to deduction for social security or other offset amounts.

Pension Benefits

Name

 

Plan Name

 

Current Credited Yrs
of Service

 

Present Value of Accumulated Benefit1

 

Contributions

During 2006

Richard D. Kinder

 

Cash Balance

 

6

 

 

$

-

 

 

 

$

    -

 

Kimberly A. Dang

 

Cash Balance

 

5

 

 

 

24,114

 

 

 

 

6,968

 

Jeffrey R. Armstrong

 

Cash Balance

 

6

 

 

 

40,534

 

 

 

 

7,726

 

David D. Kinder

 

Cash Balance

 

6

 

 

 

32,114

 

 

 

 

7,337

 

Steven J. Kean

 

Cash Balance

 

5

 

 

 

33,957

 

 

 

 

7,422

 

Joseph Listengart

 

Cash Balance

 

6

 

 

 

42,885

 

 

 

 

7,835

 

Scott E. Parker

 

Cash Balance

 

8

 

 

 

62,385

 

 

 

 

8,735

 

C. Park Shaper

 

Cash Balance

 

6

 

 

 

42,885

 

 

 

 

7,835

 

__________


1

The present values in the Pension Benefits table are based on certain assumptions-including a 6% discount rate, RP 2000 mortality (post-retirement only), 5% cash balance interest crediting rate, and lump sums calculated using a 5% interest rate and IRS mortality. We assumed benefits would commence at normal retirement date or unreduced retirement date, if earlier.  No death or turnover was assumed prior to retirement date.

Other Potential Post-Employment Benefits. On October 7, 1999, Mr. Richard D. Kinder entered into an employment agreement with Kinder Morgan, Inc. pursuant to which he agreed to serve as its Chairman and Chief Executive Officer. His employment agreement provides for a term of three years and one year extensions on each anniversary of October 7th. Mr. Kinder, at his initiative, accepted an annual salary of $1 to demonstrate his belief in Kinder Morgan Energy Partners, L.P.’s and Kinder Morgan, Inc.’s long term viability. Mr. Kinder continues to accept an annual salary of $1, and he receives no other compensation. Mr. Kinder’s employment agreement is extended annually at the request of Kinder Morgan, Inc.’s Board of Directors.



38



Item 11.  Executive Compensation. (continued)

KMR Form 10-K



Kinder Morgan, Inc.’s Board of Directors believes that Mr. Kinder’s employment agreement contains provisions that are beneficial to Kinder Morgan, Inc., its subsidiaries and its stockholders. For example, with limited exceptions, Mr. Kinder is prevented from competing in any manner with Kinder Morgan, Inc. or any of its subsidiaries, while he is employed by Kinder Morgan, Inc. and for 12 months following the termination of his employment with Kinder Morgan, Inc. The agreement contains provisions that address termination with and without cause, termination as a result of change in duties or disability, and death. At his current compensation level, the maximum amount that would be paid to Mr. Kinder or his estate in the event of his termination is three times $750,000, or $2.25 million. This payment would be made if Mr. Kinder were terminated by Kinder Morgan, Inc. without cause or if Mr. Kinder terminated his employment with Kinder Morgan, Inc. as a result of change in duties (as defined in the employment agreement). There are no employment agreements or change-in-control arrangements with any of our other executive officers.

Common Unit Option Plan. Pursuant to Kinder Morgan Energy Partners, L.P. Common Unit Option Plan, key personnel are eligible to receive grants of options to acquire common units. The total number of common units authorized under the option plan is 500,000. 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. Our compensation committee administers the option plan, and the plan has a termination date of March 5, 2008. Our compensation committee will determine the duration and vesting of the options to employees at the time of grant, and no individual employee may be granted options for more than 20,000 common units in any year. The option plan also granted to each of our non-employee directors an option to purchase 10,000 common units at an exercise price equal to the fair market value of the common units at the end of the trading day on such date.

For the year ended December 31, 2006, no options to purchase common units were granted to or exercised by any of our executive officers, and as of December 31, 2006, none of our executive officers owned unexercised common unit options. For the year ended December 31, 2006, no options to purchase common units were granted to our non-employee directors; however, one non-employee director held and exercised 10,000 common unit options during 2006. As of December 31, 2006, no options to purchase common units were outstanding under the plan.

 

Summary Compensation Table

The following table shows compensation paid for services rendered to us during fiscal year 2006 by (i) our principal executive officer, (ii) our principal financial officer, (iii) the three most highly compensated executive officers serving at fiscal year end, (iv) our three other highest ranking executive officers (collectively referred to as the “named executive officers”):

 

 

 

 

(1)

(2)

(3)

(4)

(5)

 

Name and
Principal Position

Year

Salary

Bonus

Stock

Awards

Option

Awards

Non-Equity

Incentive Plan

Compensation

Change in

Pension Value

All Other

Compensation

Total

Richard D. Kinder

2006

$

1

$

-

$

-

$

-

 

$

-

 

$

-

 

$

-

$

1

Director, Chairman and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Kimberly A. Dang

2006

 

200,000

 

-

 

139,296

 

37,023

 

 

270,000

 

 

6,968

 

 

46,253

 

699,540

Vice President and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jeffrey R. Armstrong

2006

 

200,000

 

-

 

412,467

 

-

 

 

450,000

 

 

7,726

 

 

132,878

 

1,203,071

Vice President (President,
Terminals)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steven J. Kean

2006

 

200,000

 

-

 

1,591,192

 

147,943

 

 

-

 

 

7,422

 

 

284,919

 

2,231,476

Executive Vice President
and Chief Operating Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

David D. Kinder

2006

 

200,000

 

-

 

235,207

 

63,586

 

 

315,000

 

 

7,337

 

 

164,630

 

985,760

Vice President Corporate Development and Treasurer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Joseph Listengart

2006

 

200,000

 

-

 

721,817

 

-

 

 

-

 

 

7,835

 

 

224,753

 

1,154,405

Vice President, General Counsel and Secretary

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Scott E. Parker

2006

 

200,000

 

350,000

 

881,317

 

29,490

 

 

500,000

 

 

8,735

 

 

164,630

 

2,134,172

Vice President (President, Natural Gas Pipelines)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C. Park Shaper

2006

 

200,000

 

-

 

1,134,283

 

24,952

 

 

-

 

 

7,835

 

 

348,542

 

1,715,612

Director and President

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 




39



Item 11.  Executive Compensation. (continued)

KMR Form 10-K



1

None of the restricted Kinder Morgan, Inc. stock awards were granted in 2006. Table amounts only represent the calendar year 2006 expense attributable to Kinder Morgan, Inc. restricted stock awarded in 2003, 2004 and 2005, and these awards were reflected in compensation tables previously filed by us with the Securities and Exchange Commission. The restricted shares were awarded according to the provisions of the Kinder Morgan, Inc. Stock Plan, and the computed value earned equaled the SFAS No. 123R expense accumulated during the 2006 calendar year. For grants of restricted stock, we take the value of the award at time of grant and accrue the expense over the vesting period according to SFAS No. 123R. For grants made July 16, 2003—Kinder Morgan, Inc. closing price was $53.80, twenty-five percent of the shares in each grant vest on the third anniversary after the date of grant and the remaining seventy-five percent of the shares in each grant vest on the fifth anniversary after the date of grant. For grants made July 20, 2004—Kinder Morgan, Inc. closing price was $60.79, fifty percent of the shares vest on the third anniversary after the date of grant and the remaining fifty percent of the shares vest on the fifth anniversary after the date of grant. For grants made July 20, 2005—Kinder Morgan, Inc. closing price was $89.48, twenty-five percent of the shares in each grant vest on the third anniversary after the date of grant and the remaining seventy-five percent of the shares in each grant vest on the fifth anniversary after the date of grant.

2

None of the options to purchase Kinder Morgan, Inc. shares were granted in 2006. Table amounts only represent the calendar year 2006 expense attributable to options to purchase Kinder Morgan, Inc. shares granted in 2002 and 2003, and these awards were reflected in compensation tables previously filed by us with the Securities and Exchange Commission. The options were granted according to the provisions of the Kinder Morgan, Inc. Stock Plan, and the computed value earned equaled the SFAS No. 123R expense accumulated on unvested options during the 2006 calendar year. For options granted in 2002—volatility of 0.3912 using a 6 year term, 4.01% five year risk free interest rate return, and a 0.71% expected annual dividend rate. For options granted in 2003—volatility of 0.3853 using a 6.25 year term, 3.37% treasury strip quote at time of grant, and a 2.973% expected annual dividend rate.

3

Represents amounts paid according to the provisions of the Kinder Morgan, Inc. Annual Incentive Plan—except in the case of Mr. Parker, where $500,000 was paid under the plan and $350,000 was paid outside of the plan. Amounts were earned in 2006 but paid in 2007.

4

Represents the 2006 change in the actuarial present value of accumulated defined pension benefit (including unvested benefits) according to the provisions of Kinder Morgan, Inc.’s Cash Balance Retirement Plan.

5

Amounts represent value of contributions to the Kinder Morgan Savings Plan (a 401(k) plan), value of group-term life insurance exceeding $50,000, taxable parking subsidy and dividends paid on unvested restricted stock awards. For each individual excluding Mr. Richard D. Kinder, amounts include $10,000 representing the value of contributions to the Kinder Morgan Savings Plan. Amounts representing the value of dividends paid on unvested restricted stock awards are as follows: for Ms. Dang $35,875; for Mr. Armstrong $122,500; for Mr. Kean $273,000; for Mr. David D. Kinder $69,563; for Mr. Listengart $214,375; for Mr. Parker $154,000; and for Mr. Shaper $336,875.

The following supplemental compensation table shows compensation details on the value of all non-guaranteed and non-discretionary incentive awards granted during 2006 to our named executive officers. The table includes grant awards made during 2006 and discloses estimated future payouts for both equity and non-equity incentive plans.

Grants of Plan-Based Awards

 

 

Estimated Future Payouts Under

Non-Equity Incentive Plan Awards1

Name

 

Threshold

 

Target

 

Maximum

Richard D. Kinder

 

$

-

 

$

-

 

$

-

Kimberly A. Dang

 

 

500,000

 

 

1,000,000

 

 

1,500,000

Jeffrey R. Armstrong

 

 

500,000

 

 

1,000,000

 

 

1,500,000

Steven J. Kean

 

 

750,000

 

 

1,500,000

 

 

2,000,000

David D. Kinder

 

 

500,000

 

 

1,000,000

 

 

1,500,000

Joseph Listengart

 

 

500,000

 

 

1,000,000

 

 

1,500,000

Scott E. Parker

 

 

500,000

 

 

1,000,000

 

 

1,500,000

C. Park Shaper

 

 

750,000

 

 

1,500,000

 

 

2,000,000

__________


1

Represents grants under the Kinder Morgan, Inc. Annual Incentive Plan for 2006. See “Elements of Compensation—Possible Annual Cash Bonus (Non-Equity Cash Incentive)” for a discussion of these awards.

The following tables set forth certain information at December 31, 2006 with respect to all outstanding Kinder Morgan, Inc. equity awards granted to our named executive officers.



40



Item 11.  Executive Compensation. (continued)

KMR Form 10-K



Outstanding Kinder Morgan, Inc. Equity Awards at 2006 Year-End

 

 

Option Awards

 

Stock Awards

 

 

No. of Shares Underlying Unexercised Options

 

Option

Exercise

 

Option Expiration

 

No. of Shares that Have Not

 

Market Value

of Shares that

Name

 

Exercisable

 

Unexercisable

 

Price

 

Date

 

Vested1

 

Have Not Vested2

Richard D. Kinder

 

 

-

 

 

 

-

 

 

 

$

-

 

 

-

 

 

-

 

 

 

$

-

 

Kimberly A. Dang

 

 

10,250

 

 

 

-

 

 

 

 

56.99

 

 

Jan. 16, 2012

 

 

8,000

 

 

 

 

846,000

 

 

 

 

10,000

 

 

 

-

 

 

 

 

39.12

 

 

July 17, 2012

 

 

-

 

 

 

 

-

 

 

 

 

4,500

 

 

 

-

 

 

 

 

53.80

 

 

July 16, 2010

 

 

-

 

 

 

 

-

 

Jeffrey R. Armstrong

 

 

22,000

 

 

 

-

 

 

 

 

53.20

 

Mar. 30, 2011

 

30,000

 

 

 

 

3,172,500

 

Steven J. Kean

 

 

12,500

 

 

 

-

 

 

 

 

56.99

 

 

Jan. 16, 2012

 

 

78,000

 

 

 

 

8,248,500

 

 

 

 

13,500

 

 

 

-

 

 

 

 

39.12

 

 

July 12, 2012

 

 

-

 

 

 

 

-

 

 

 

 

10,000

 

 

 

-

 

 

 

 

53.80

 

 

July 16, 2010

 

 

-

 

 

 

 

-

 

David D. Kinder

 

 

12,500

 

 

 

-

 

 

 

 

49.875

 

 

Jan. 17, 2011

 

 

15,750

 

 

 

 

1,665,563

 

 

 

 

100

 

 

 

-

 

 

 

 

49.875

 

 

Jan. 17, 2011

 

 

-

 

 

 

 

-

 

 

 

 

8,000

 

 

 

-

 

 

 

 

39.12

 

 

July 12, 2012

 

 

-

 

 

 

 

-

 

Joseph Listengart

 

 

50,000

 

 

 

-

 

 

 

 

23.8125

 

 

Oct. 8, 2009

 

 

52,500

 

 

 

 

5,551,875

 

 

 

 

6,300

 

 

 

-

 

 

 

 

49.875

 

 

Jan. 17, 2011

 

 

-

 

 

 

 

-

 

Scott E. Parker

 

 

10,000

 

 

 

-

 

 

 

 

53.80

 

 

July 16, 2010

 

 

44,000

 

 

 

 

4,653,000

 

C. Park Shaper

 

 

95,000

 

 

 

-

 

 

 

 

24.75

 

 

Jan. 20, 2010

 

 

82,500

 

 

 

 

8,724,375

 

 

 

 

25,000

 

 

 

-

 

 

 

 

49.875

 

 

Jan. 17, 2011

 

 

-

 

 

 

 

-

 

 

 

 

100,000

 

 

 

-

 

 

 

 

56.99

 

 

Jan. 16, 2012

 

 

-

 

 

 

 

-

 

__________


1

For Ms. Dang, 2,000 shares vest July 20, 2007, 1,500 shares vest July 20, 2009, and 4,500 shares vest July 20, 2010; for Mr. Armstrong 30,000 shares vest July 16, 2008; for Mr. Kean 4,000 shares vest July 20, 2007, 17,500 shares vest July 20, 2008, 4,000 shares vest July 20, 2009, and 52,500 shares vest July 20, 2010; for Mr. David D. Kinder 11,250 shares vest July 16, 2008, and 4,500 shares vest July 20, 2010; for Mr. Listengart 52,500 shares vest July 16, 2008; for Mr. Parker 4,000 shares vest July 20, 2007, 9,000 shares vest July 20, 2008, 4,000 shares vest July 20, 2009, and 27,000 shares vest July 20, 2010; and for Mr. Shaper 82,500 shares vest July 16, 2008. Upon closing of the proposed merger agreement providing for the acquisition of KMI by investors, including Mr. Richard D. Kinder and other senior members of KMI management, all restricted stock vesting dates would be accelerated.

2

Calculated on the basis of the fair market value of the underlying shares at December 31, 2006 ($105.75).

The following tables set forth certain information for the fiscal year ended December 31, 2006 with respect to all outstanding Kinder Morgan, Inc. equity awards vested to our named executive officers during 2006 and all exercises of Kinder Morgan, Inc. stock options during 2006.

Kinder Morgan, Inc. Option Exercises and Kinder Morgan, Inc. Stock Vested in 2006

 

 

Option Awards

 

Stock Awards

Name

 

Shares Acquired

on Exercise

 

Value Realized

on Exercise1

 

Shares Acquired

on Vesting

 

Value Realized

on Vesting2

Richard D. Kinder

 

 

-

 

 

 

$

-

 

 

 

-

 

 

$

-

Kimberly A. Dang

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

Jeffrey R. Armstrong

 

 

10,000

 

 

 

 

522,642

 

 

 

11,000

 

 

 

1,098,980

Steven J. Kean

 

 

11,500

 

 

 

 

757,165

 

 

 

5,000

 

 

 

483,850

David D. Kinder

 

 

-

 

 

 

 

-

 

 

 

4,000

 

 

 

399,193

Joseph Listengart

 

 

-

 

 

 

 

-

 

 

 

20,000

 

 

 

1,991,925

Scott E. Parker

 

 

-

 

 

 

 

-

 

 

 

625

 

 

 

60,481

C. Park Shaper

 

 

-

 

 

 

 

-

 

 

 

30,000

 

 

 

2,991,925

__________


1

Calculated on the basis of the fair market value of the underlying shares at exercise date, minus the exercise price.

2

Calculated on the basis of the fair market value of underlying shares at the vesting date.

Director Compensation

Compensation Committee Interlocks and Insider Participation. Kinder Morgan Management, LLC’s compensation committee, comprised of Mr. Edward O. Gaylord, Mr. Gary L. Hultquist and Mr. Perry M. Waughtal, makes compensation



41



Item 11.  Executive Compensation. (continued)

KMR Form 10-K



 decisions regarding our and Kinder Morgan G.P., Inc.’s executive officers. Mr. Richard D. Kinder, Mr. James E. Street, and Messrs. Shaper and Kean, who are executive officers of Kinder Morgan Management, LLC, participate in the deliberations of our compensation committee concerning executive officer compensation. None of the members of our compensation committee is or has been one of our officers or employees, and none of our executive officers served during 2006 on a board of directors of another entity which has employed any of the members of our compensation committee.

Directors Fees. Beginning in 2005, Kinder Morgan Energy Partners, L.P.’s Common Unit Compensation Plan for Non-Employee Directors, as discussed following, served as compensation for each of our three non-employee directors. In addition, directors are reimbursed for reasonable expenses in connection with board meetings. Our directors who are also employees of Kinder Morgan, Inc. (Messrs. Richard D. Kinder and C. Park Shaper) do not receive compensation in their capacity as directors.

Kinder Morgan Energy Partners, L.P. Common Unit Compensation Plan for Non-Employee Directors. On January 18, 2005, our compensation committee established the Kinder Morgan Energy Partners, L.P. Common Unit Compensation Plan for Non-Employee Directors. The plan is administered by our compensation committee and our board has sole discretion to terminate the plan at any time. The primary purpose of this plan was to promote Kinder Morgan Energy Partners, L.P.’s interests and the interests of Kinder Morgan Energy Partners, L.P.’s unitholders by aligning the compensation of the non-employee members of our board of directors with unitholders’ interests. Further, since our success is dependent on its operation and management of Kinder Morgan Energy Partners, L.P.’s business and its resulting performance, the plan is expected to align the compensation of the non-employee members of the board with the interests of our shareholders.

The plan recognizes that the compensation to be paid to each non-employee director is fixed by our board, generally annually, and that the compensation is payable in cash. Pursuant to the plan, in lieu of receiving cash compensation, each non-employee director may elect to receive common units. Each election will be generally at or around the first board meeting in January of each calendar year and will be effective for the entire calendar year. The election for 2006 was made effective January 17, 2006, and the election for 2007 was made effective January 16, 2007. A non-employee director may make a new election each calendar year. The total number of common units authorized under this compensation plan is 100,000.

Each annual election will be evidenced by an agreement, the Common Unit Compensation Agreement, between Kinder Morgan Energy Partners, L.P. and each non-employee director, and this agreement will contain the terms and conditions of each award. Pursuant to this agreement, all common units issued under this plan are subject to forfeiture restrictions that expire six months from the date of issuance. Until the forfeiture restrictions lapse, common units issued under the plan may not be sold, assigned, transferred, exchanged, or pledged by a non-employee director. In the event the director’s service as a director of our board is terminated prior to the lapse of the forfeiture restriction either for cause, or voluntary resignation, each director will, for no consideration, forfeit to Kinder Morgan Energy Partners, L.P. all common units to the extent then subject to the forfeiture restrictions. Common units with respect to which forfeiture restrictions have lapsed will cease to be subject to any forfeiture restrictions, and Kinder Morgan Energy Partners, L.P. will provide each director a certificate representing the units as to which the forfeiture restrictions have lapsed. In addition, each non-employee director will have the right to receive distributions with respect to the common units awarded to him under the plan, to vote such common units and to enjoy all other unitholder rights, including during the period prior to the lapse of the forfeiture restrictions.

The number of common units to be issued to a non-employee director electing to receive the cash compensation in the form of common units will equal the amount of such cash compensation awarded, divided by the closing price of the common units on the New York Stock Exchange on the day the cash compensation is awarded (such price, the fair market value), rounded down to the nearest 50 common units. The common units will be issuable as specified in the Common Unit Compensation Agreement. A non-employee director electing to receive the cash compensation in the form of common units will receive cash equal to the difference between (i) the cash compensation awarded to such non-employee director and (ii) the number of common units to be issued to such non-employee director multiplied by the fair market value of a common unit. This cash payment will be payable in four equal installments generally around March 31, June 30, September 30 and December 31 of the calendar year in which such cash compensation is awarded.

On January 17, 2006, each of our three non-employee directors was awarded cash compensation of $160,000 for board service during 2006. Effective January 17, 2006, each non-employee director elected to receive cash compensation of $87,780 in the form of Kinder Morgan Energy Partners, L.P. common units and was issued 1,750 common units pursuant to the plan and its agreements (based on the $50.16 closing market price of Kinder Morgan Energy Partners, L.P. common units on January 17, 2006, as reported on the New York Stock Exchange). The remaining $72,220 cash compensation was paid to each of the non-employee directors as described above. No other compensation was paid to the non-employee directors during 2006.

On January 17, 2007, each of our three non-employee directors was awarded cash compensation of $160,000 for board service during 2007. Effective January 17, 2007, each non-employee director elected to receive certain amounts of cash compensation in the form of Kinder Morgan Energy Partners, L.P. common units and each was issued common units pursuant to the plan and its agreements (based on the $48.44 closing market price of Kinder Morgan Energy Partners, L.P.



42



Item 11.  Executive Compensation. (continued)

KMR Form 10-K



common units on January 17, 2007, as reported on the New York Stock Exchange). Mr. Gaylord elected to receive cash compensation of $95,911.20 in the form of Kinder Morgan Energy Partners, L.P. common units and was issued 1,980 common units; Mr. Waughtal elected to receive cash compensation of $159,852.00 in the form of Kinder Morgan Energy Partners, L.P. common units and was issued 3,300 common units; and Mr. Hultquist elected to receive cash compensation of $96,880.00 in the form of Kinder Morgan Energy Partners, L.P. common units and was issued 2,000 common units. All remaining cash compensation ($64,088.80 to Mr. Gaylord; $148.00 to Mr. Waughtal; and $63,120.00 to Mr. Hultquist) will be paid to each of the non-employee directors as described above, and no other compensation will be paid to the non-employee directors during 2007.

Directors’ Unit Appreciation Rights Plan. On April 1, 2003, our compensation committee established Kinder Morgan Energy Partners, L.P. Directors’ Unit Appreciation Rights Plan. Pursuant to this plan, each of our three non-employee directors was eligible to receive common unit appreciation rights. Upon the exercise of unit appreciation rights, Kinder Morgan Energy Partners, L.P. will pay, within thirty days of the exercise date, the participant an amount of cash equal to the excess, if any, of the aggregate fair market value of the unit appreciation rights exercised as of the exercise date over the aggregate award price of the rights exercised. The fair market value of one unit appreciation right as of the exercise date will be equal to the closing price of one common unit on the New York Stock Exchange on that date. The award price of one unit appreciation right will be equal to the closing price of one common unit on the New York Stock Exchange on the date of grant. Proceeds, if any, from the exercise of a unit appreciation right granted under the plan will be payable only in cash (that is, no exercise will result in the issuance of additional common units) and will be evidenced by a unit appreciation rights agreement.

All unit appreciation rights granted vest on the six-month anniversary of the date of grant. If a unit appreciation right is not exercised in the ten year period following the date of grant, the unit appreciation right will expire and not be exercisable after the end of such period. In addition, if a participant ceases to serve on the board for any reason prior to the vesting date of a unit appreciation right, such unit appreciation right will immediately expire on the date of cessation of service and may not be exercised.

On April 1, 2003, the date of adoption of the plan, each of our three non-employee directors was granted 7,500 unit appreciation rights. In addition, 10,000 unit appreciation rights were granted to each of our three non-employee directors on January 21, 2004, at the first meeting of the board in 2004. During the first board meeting of 2005, the plan was terminated and replaced by the Kinder Morgan Energy Partners, L.P. Common Unit Compensation Plan for Non-Employee Directors; however, all unexercised awards made under the plan remain outstanding. No unit appreciation rights were exercised during 2006, and as of December 31, 2006, 52,500 unit appreciation rights had been granted, vested and remained outstanding.

The following table discloses the compensation earned by each of our three non-employee directors for board service during 2006. In addition, directors are reimbursed for reasonable expenses in connection with board meetings. Our directors who are also employees of Kinder Morgan, Inc. do not receive compensation in their capacity as directors.

Non-Employee Director Compensation for Fiscal Year 2006

Name

 

Fees Earned or

Paid in Cash

 

Common Unit

Awards1

 

All Other

Compensation2

 

Total

Edward O. Gaylord

 

 

$

72,220

 

 

 

$

87,780

 

 

 

$

3,418

 

 

163,418

Gary L. Hultquist

 

 

 

72,220

 

 

 

 

87,780

 

 

 

 

3,418

 

 

163,418

Perry M. Waughtal

 

 

 

72,220

 

 

 

 

87,780

 

 

 

 

3,418

 

 

163,418

__________


1

Represents the value of cash compensation received in the form of Kinder Morgan Energy Partners, L.P. common units according to the provisions of Kinder Morgan Energy Partners, L.P. Common Unit Compensation Plan for Non-Employee Directors. Value computed as the number of common units elected to be received in lieu of cash (1,750 on January 17, 2006) times the closing price on date of election ($50.16 at January 17, 2006).

2

For each, represents the value of common unit appreciation rights earned during 2006 according to the provisions of Kinder Morgan Energy Partners, L.P. Directors’ Unit Appreciation Rights Plan for Non-Employee Directors. For grants of common unit appreciation rights, compensation cost is determined according to the provisions of  SFAS No.123R—for each common unit appreciation right, equal to the increase in value of each common unit over its grant-date fair value. Value of $600 computed as the number of common unit appreciation rights increasing in value during 2006 (7,500) times the increase in common unit closing price from December 31, 2005 to December 31, 2006 ($0.08; equal to $47.90 at December 31, 2006 less $47.82 at December 31, 2005). Also for each, includes $2,818 for distributions paid on unvested common units awarded according to the provisions of Kinder Morgan Energy Partners, L.P. Common Unit Compensation Plan for Non-Employee Directors.



43



Item 11.  Executive Compensation. (continued)

KMR Form 10-K



Compensation Committee Report

Throughout fiscal 2006, the compensation committee of our board of directors was comprised of three directors, each of which our board of directors has determined meets the criteria for independence under our governance guidelines and the New York Stock Exchange rules.

The compensation

committee

has discussed and reviewed the above Compensation Discussion and Analysis for fiscal year 2006 with management. Based on this review and discussion, the compensation committee recommended to our board of directors that this Compensation Discussion and Analysis be included in this annual report on Form 10-K for the fiscal year 2006.


Compensation Committee:
Edward O. Gaylord
Gary L. Hultquist
Perry M. Waughtal



44



 

KMR Form 10-K



Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table sets forth information as of January 31, 2007, regarding (a) the beneficial ownership of (i) Kinder Morgan Energy Partners, L.P.’s common and Class B units, (ii) our shares and (iii) the common stock of Kinder Morgan, Inc., the parent company of Kinder Morgan G.P., Inc., by all our directors and those of Kinder Morgan G.P., Inc., by each of the named executive officers and by all our directors and executive officers as a group and (b) the beneficial ownership of Kinder Morgan Energy Partners, L.P.’s common and Class B units or our shares by all persons known by us to own beneficially at least 5% of Kinder Morgan Energy Partners, L.P.’s common and Class B units and our shares. Unless otherwise noted, the address of each person below is c/o Kinder Morgan Energy Partners, L.P., 500 Dallas Street, Suite 1000, Houston, Texas 77002.

Amount and Nature of Beneficial Ownership1

 

Kinder Morgan Energy Partners, L.P.

Kinder Morgan

 

 

 

Management,

Kinder Morgan, Inc.

 

Common Units

Class B Units

LLC Shares

Voting Stock

 

Number
of Units2

Percent
of Class
 

Number
of Units3

Percent
of Class
 

Number
of Shares4

Percent
of Class
 

Number
of Shares5

Percent
of Class
 

 

______________________________________________

______________________________________

_________________________________________

______________________________________

____________________________________________________

______________________________________

_________________________________________________

______________________________________

Richard D. Kinder6

315,979

*

 

-

-

 

59,910

*

 

24,000,000

17.90

%

C. Park Shaper7

 4,000

*

 

-

-

 

2,913

*

 

352,070

*

 

Edward O. Gaylord8

38,480

*

 

-

-

 

-

-

 

2,000

*

 

Gary L. Hultquist9

16,500

*

 

-

-

 

-

-

 

500

-

 

Perry M. Waughtal10

44,100

*

 

-

-

 

43,243

*

 

70,030

*

 

Steven J. Kean11

-

-

 

-

-

 

-

-

 

124,754

*

 

Joseph Listengart12

 4,198

*

 

-

-

 

-

-

 

140,368

*

 

Scott E. Parker13

-

-

 

-

-

 

-

-

 

55,431

*

 

Kimberly A. Dang14

121

*

 

-

-

 

412

*

 

33,915

*

 

David D. Kinder15

2,186

*

 

-

-

 

1,408

*

 

42,307

*

 

Jeffrey R. Armstrong16

1,093

*

 

-

-

 

-

*

 

64,417

*

 

Directors and Executive

 

 

 

 

 

 

 

 

 

 

 

 

Officers as a  group (14

                       

  persons)17

436,657

*

 

-

-

 

111,174

*

 

25,101,200

18.61

%

Kinder Morgan, Inc.18

14,355,735

8.90

%

5,313,400

100.00

%

9,676,909

15.53

%

-

-

 

Kayne Anderson Capital

 

 

 

 

 

 

 

 

 

 

 

 

Advisors, L.P. 19

-

-

 

-

-

 

6,250,520

10.79

%

-

-

 

OppenheimerFunds, Inc.20

-

-

 

-

-

 

5,230,737

8.40

%

-

-

 

Tortoise Capital Advisors, L.L.C.21

 -

 -

 

 -

 -

 

 4,047,052

 6.50%

-

-

 

______________


*Less than 1%.


1

Except as noted otherwise, all units, our shares and Kinder Morgan, Inc. shares involve sole voting power and sole investment power. For Kinder Morgan Management, LLC, see note (4). On January 18, 2005, Kinder Morgan Management, LLC’s board of directors initiated a rule requiring each director to own a minimum of 10,000 common units, Kinder Morgan Management, LLC shares, or a combination thereof. If a director does not already own the minimum number of required securities, the director will have six years to acquire such securities.

2

As of January 31, 2007, Kinder Morgan Energy Partners, L.P. had 162,823,583 common units issued and outstanding.

3

As of January 31, 2007, Kinder Morgan Energy Partners, L.P. had 5,313,400 Class B units issued and outstanding.

4

Represent the limited liability company shares of Kinder Morgan Management, LLC. As of January 31, 2007, there were 62,301,674 issued and outstanding Kinder Morgan Management, LLC shares, including two voting shares owned by Kinder Morgan G.P., Inc. In all cases, Kinder Morgan Energy Partners, L.P.’s i-units will be voted in proportion to the affirmative and negative votes, abstentions and non-votes of owners of Kinder Morgan Management, LLC shares. Through the provisions in Kinder Morgan Energy Partners, L.P.’s partnership agreement and Kinder Morgan Management, LLC’s limited liability company agreement, the number of outstanding Kinder Morgan Management, LLC shares, including voting shares owned by Kinder Morgan G.P., Inc., and the number of Kinder Morgan Energy Partners, L.P.’s i-units will at all times be equal.

5

As of January 31, 2007, Kinder Morgan, Inc. had a total of 134,188,793 shares of issued and outstanding voting common stock, which excludes 15,023,351 shares held in treasury.

6

Includes (a) 7,879 common units owned by Mr. Kinder’s spouse, (b) 5,173 Kinder Morgan, Inc. shares held by Mr. Kinder’s spouse and (c) 250 Kinder Morgan, Inc. shares held by Mr. Kinder in a custodial account for his nephew. Mr. Kinder disclaims any and all beneficial or pecuniary interest in these units and shares.

7

Includes options to purchase 220,000 Kinder Morgan, Inc. shares exercisable within 60 days of January 31, 2007, and includes 82,500 shares of restricted Kinder Morgan, Inc. stock.



45



Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
(continued)

KMR Form 10-K



8

Includes 1,980 restricted common units.

9

Includes 2,000 restricted common units.

10

Includes 3,300 restricted common units.

11

Includes options to purchase 36,000 Kinder Morgan, Inc. shares exercisable within 60 days of January 31, 2007, and 78,000 shares of restricted Kinder Morgan, Inc. stock.

12

Includes options to purchase 56,300 Kinder Morgan, Inc. shares exercisable within 60 days of January 31, 2007, and includes 52,500 shares of restricted Kinder Morgan, Inc. stock.

13

Includes options to purchase 10,000 Kinder Morgan, Inc. shares exercisable within 60 days of January 31, 2007, and includes 44,000 shares of restricted Kinder Morgan, Inc. stock.

14

Includes options to purchase 24,750 Kinder Morgan, Inc. shares exercisable within 60 days of January 31, 2007, and includes 8,000 shares of restricted Kinder Morgan, Inc. stock.

15

Includes 1,211 Kinder Morgan Energy Partners, L.P. common units owned by Mr. Kinder’s spouse, 240 Kinder Morgan Management, LLC shares purchased in November 2004 for Mr. Kinder’s son (and nominal share distributions thereon), options to purchase 20,600 Kinder Morgan, Inc. shares exercisable within 60 days of January 31, 2007, and includes 15,750 shares of restricted Kinder Morgan, Inc. stock. Mr. Kinder’s son holds 250 shares of Kinder Morgan, Inc. stock, which shares are not included in the number of shares Mr. Kinder beneficially owns.  Mr. Kinder disclaims any and all beneficial ownership in the Kinder Morgan Energy Partners, L.P. common units owned by his wife, and the Kinder Morgan Management, LLC shares and the Kinder Morgan, Inc. stock owned by his sons.

16

Includes options to purchase 22,000 Kinder Morgan, Inc. shares exercisable within 60 days of January 31, 2007, and includes 30,000 shares of restricted Kinder Morgan, Inc. stock.

17

Includes options to purchase 458,050 Kinder Morgan, Inc. shares exercisable within 60 days of January 31, 2007, and includes 7,280 restricted Kinder Morgan Energy Partners, L.P. common units and 400,750 shares of restricted Kinder Morgan, Inc. stock.

18

Includes common units owned by Kinder Morgan, Inc. and its consolidated subsidiaries, including 1,724,000 common units owned by Kinder Morgan G.P., Inc.

19

As reported on the Schedule 13G/A filed February 5, 2007 by Kayne Anderson Capital Advisors, L.P. and Richard A. Kayne. Kayne Anderson Capital Advisors, L.P. reported that in regard to Kinder Morgan Management, LLC shares, it had sole voting power over 0 shares, shared voting power over 6,978,859 shares, sole disposition power over 0 shares and shared disposition power over 6,978,859 shares. Mr. Kayne reports that in regard to Kinder Morgan Management, LLC shares, he had sole voting power over 1,060 shares, shared voting power over 6,978,859 shares, sole disposition power over 1,060 shares and shared disposition power over 6,978,859 shares. Kayne Anderson Capital Advisors, L.P.’s and Richard A. Kayne’s address is 1800 Avenue of the Stars, Second Floor, Los Angeles, California 90067.

20

As reported on the Schedule 13G/A filed February 6, 2007 by OppenheimerFunds, Inc. and Oppenheimer Capital Income Fund. OppenheimerFunds, Inc. reported that in regard to Kinder Morgan Management, LLC shares, it had sole voting power over 0 shares, shared voting power over 5,230,737 shares, sole disposition power over 0 shares and shared disposition power over 5,230,737 shares. Of those 5,230,737 Kinder Morgan Management, LLC shares, Oppenheimer Capital Income Fund had sole voting power over 0 shares, shared voting power over 3,657,500 shares, sole disposition power over 0 shares and shared disposition power over 3,657,500 shares. OppenheimerFunds, Inc.’s address is Two World Financial Center, 225 Liberty Street, 11th Floor, New York, New York 10281, and Oppenheimer Capital Income Fund’s address is 6803 South Tucson Way, Centennial, Colorado 80112.

21

As reported on the Schedule 13G/A filed February 13, 2007 by Tortoise Capital Advisors, L.L.C. Tortoise Capital Advisors, L.L.C. reported that in regard to Kinder Morgan Management, LLC shares, it had sole voting power over 0 shares, shared voting power over 3,960,233 shares, sole disposition power over 0 shares and shared disposition power over 4,047,052 shares. Tortoise Capital Advisors, L.L.C.’s address is 10801 Mastin Blvd., Suite 222, Overland Park, Kansas 66210.



46



Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
(continued)

KMR Form 10-K



Equity Compensation Plan Information

The following table sets forth information regarding Kinder Morgan Energy Partners, L.P.’s equity compensation plans as of December 31, 2006. Specifically, the table provides information regarding Kinder Morgan Energy Partners, L.P.’s Common Unit Option Plan and Common Unit Compensation Plan for Non-Employee Directors, both described in Item 11., “Executive Compensation.”

 

 

Number of securities to be issued upon exercise
of outstanding options, warrants and rights

 

Weighted average exercise price
of outstanding options, warrants and rights

 

Number of securities
remaining available for
future issuance under equity
compensation plans

Plan category

 

(a)

 

(b)

 

(c)

Equity compensation plans
approved by security holders

 

 

-

 

 

 

-

 

 

 

-

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Equity compensation plans not
approved by security holders

 

 

-

 

 

 

-

 

 

 

149,100

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

-

 

 

 

-

 

 

 

149,100

 


Item 13.  Certain Relationships and Related Transactions, and Director Independence.

General and Administrative Expenses

KMGP Services Company, Inc., a subsidiary of Kinder Morgan G.P., Inc., provides employees and Kinder Morgan Services LLC, our wholly owned subsidiary, provides centralized payroll and employee benefits services to us, Kinder Morgan G.P., Inc., Kinder Morgan Energy Partners, L.P. and Kinder Morgan Energy Partners, L.P.’s operating partnerships and subsidiaries (collectively, the “Group”). Employees of KMGP Services Company, Inc. are assigned to work for one or more members of the Group. The direct costs of all compensation, benefits expenses, employer taxes and other employer expenses for these employees are allocated and charged by Kinder Morgan Services LLC to the appropriate members of the Group, and the members of the Group reimburse Kinder Morgan Services LLC for their allocated shares of these direct costs. There is no profit or margin charged by Kinder Morgan Services LLC to the members of the Group. The administrative support necessary to implement these payroll and benefits services is provided by the human resource department of Kinder Morgan, Inc., and the related administrative costs are allocated to members of the Group in accordance with existing expense allocation procedures. The effect of these arrangements is that each member of the Group bears the direct compensation and employee benefits costs of its assigned or partially assigned employees, as the case may be, while also bearing its allocable share of administrative costs. Pursuant to its limited partnership agreement, Kinder Morgan Energy Partners, L.P. provides reimbursement for its share of these administrative costs and such reimbursements will be accounted for as described above. Additionally, Kinder Morgan Energy Partners, L.P. reimburses us with respect to costs incurred or allocated to us in accordance with Kinder Morgan Energy Partners, L.P.’s limited partnership agreement, the delegation of control agreement among Kinder Morgan G.P., Inc., Kinder Morgan Energy Partners, L.P., us and others, and our limited liability company agreement.

Our named executive officers and other employees that provide management or services to both Kinder Morgan, Inc. and the Group are employed by Kinder Morgan, Inc. Additionally, other Kinder Morgan, Inc. employees assist in the operation of Kinder Morgan Energy Partners, L.P.’s Natural Gas Pipeline assets. These Kinder Morgan, Inc. employees’ expenses are allocated without a profit component between Kinder Morgan, Inc. and the appropriate members of the Group.

Kinder Morgan Energy Partners, L.P. Distributions

Kinder Morgan G.P., Inc.

Kinder Morgan G.P., Inc. serves as the sole general partner of Kinder Morgan Energy Partners, L.P. Pursuant to their partnership agreements, Kinder Morgan G.P., Inc.’s general partner interests represent a 1% ownership interest in Kinder Morgan Energy Partners, L.P., and a direct 1.0101% ownership interest in each of Kinder Morgan Energy Partners, L.P.’s five operating partnerships. Collectively, Kinder Morgan G.P., Inc. owns an effective 2% interest in the operating partnerships, excluding incentive distributions rights as follows:

·

its 1.0101% direct general partner ownership interest (accounted for as minority interest in the consolidated financial statements of Kinder Morgan Energy Partners, L.P.); and

·

its 0.9899% ownership interest indirectly owned via its 1% ownership interest in Kinder Morgan Energy Partners, L.P.



47



Item 13.

Certain Relationships and Related Transactions. (continued)

KMR Form 10-K



As of December 31, 2006, Kinder Morgan G.P., Inc. owned 1,724,000 common units, representing approximately 0.75% of Kinder Morgan Energy Partners, L.P.’s outstanding limited partner units.

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 and net reductions in reserves, less cash disbursements and net additions to reserves and amounts payable to the former general partner of SFPP, L.P. in respect of its remaining 0.5% interest in SFPP, L.P.

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

Kinder Morgan G.P., Inc. 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. Kinder Morgan Energy Partners, L.P. does not distribute cash to i-unit owners but retains the cash for use in its business. However, the cash equivalent of distributions of i-units is treated as if it had actually been distributed for purposes of determining the distributions to Kinder Morgan G.P., Inc. Each time Kinder Morgan Energy Partners, L.P. makes a distribution, the number of i-units owned by us and the percentage of Kinder Morgan Energy Partners, L.P.’s total units owned by us increase automatically under the provisions of Kinder Morgan Energy Partners, L.P.’s partnership agreement.

Kinder Morgan, Inc.

Kinder Morgan, Inc., through its subsidiary Kinder Morgan (Delaware), Inc., remains the sole stockholder of Kinder Morgan G.P., Inc. At December 31, 2006, Kinder Morgan, Inc. directly owned 8,838,095 common units, indirectly owned 5,313,400 Class B units and 5,517,640 common units owned by its consolidated affiliates, including Kinder Morgan G.P., Inc., and owned 10,305,553 of our shares, representing an indirect ownership interest of 10,305,553 Kinder Morgan Energy Partners, L.P.’s i-units. Together, these units represent approximately 13.0% of Kinder Morgan Energy Partners, L.P.’s outstanding limited partner units. Including both its general and limited partner interests in Kinder Morgan Energy Partners, L.P., at the 2006 distribution level, Kinder Morgan, Inc. received approximately 49% of all quarterly distributions from Kinder Morgan Energy Partners, L.P., of which approximately 42% is attributable to its general partner interest and 7% is attributable to its limited partner interest. The actual level of distributions Kinder Morgan, Inc. will receive in the future will vary with the level of distributions to the limited partners determined in accordance with Kinder Morgan Energy Partners, L.P.’s partnership agreement.

Kinder Morgan Management, LLC

We, as Kinder Morgan G.P., Inc.’s delegate, are the sole owner of Kinder Morgan Energy Partners, L.P.’s 62,301,676 i-units.

Operations

Kinder Morgan, Inc. or its subsidiaries operate and maintain for Kinder Morgan Energy Partners, L.P. the assets comprising Kinder Morgan Energy Partners, L.P.’s Natural Gas Pipelines business segment. Natural Gas Pipeline Company of America, a subsidiary of Kinder Morgan, Inc., operates Trailblazer Pipeline Company’s assets under a long-term contract pursuant to which Trailblazer Pipeline Company incurs the costs and expenses related to Natural Gas Pipeline Company of America’s operating and maintaining the assets. Trailblazer Pipeline Company provides the funds for capital expenditures. Natural Gas Pipeline Company of America does not profit from or suffer loss related to its operation of Trailblazer Pipeline Company’s assets.

The remaining assets comprising Kinder Morgan Energy Partners, L.P.’s Natural Gas Pipelines business segment as well as Kinder Morgan Energy Partners, L.P.’s North System and Cypress Pipeline, which are part of Kinder Morgan Energy Partners, L.P.’s Products Pipelines business segment, are operated under agreements between Kinder Morgan, Inc. and Kinder Morgan Energy Partners, L.P. Pursuant to the applicable underlying agreements, Kinder Morgan Energy Partners, L.P. pays Kinder Morgan, Inc. either a fixed amount or actual costs incurred as reimbursement for the corporate general and administrative expenses incurred in connection with the operation of these assets. The amounts paid to Kinder Morgan, Inc. for corporate general and administrative costs, including amounts related to Trailblazer Pipeline Company, were $1.0 million of fixed costs and $37.9 million of actual costs incurred for 2006, $5.5 million of fixed costs and $24.2 million of actual costs incurred for 2005, and $8.8 million of fixed costs and $13.1 million of actual costs incurred for 2004.



48



Item 13.

Certain Relationships and Related Transactions. (continued)

KMR Form 10-K



Kinder Morgan Energy Partners, L.P. believes the amounts paid to Kinder Morgan, Inc. for the services they provided each year fairly reflect the value of the services performed. However, due to the nature of the allocations, these reimbursements may not exactly match the actual time and overhead spent. Kinder Morgan Energy Partners, L.P. believes the fixed amounts that were agreed upon at the time the contracts were entered into were reasonable estimates of the corporate general and administrative expenses to be incurred by Kinder Morgan, Inc. and its subsidiaries in performing such services. Kinder Morgan Energy Partners, L.P. also reimburses Kinder Morgan, Inc. and its subsidiaries for operating and maintenance costs and capital expenditures incurred with respect to these assets.

Kinder Morgan, Inc. or its subsidiaries operate and maintain for Kinder Morgan Energy Partners, L.P. the power plant Kinder Morgan Energy Partners, L.P. constructed at the SACROC oil field unit, located in the Permian Basin area of West Texas. Kinder Morgan Production Company, a subsidiary of one of Kinder Morgan Energy Partners, L.P.’s operating limited partnerships, completed construction of the power plant in June 2005 at an approximate cost of $76 million. The power plant provides approximately half of SACROC’s current electricity needs.

Kinder Morgan Power Company, a subsidiary of Kinder Morgan, Inc., operates and maintains the power plant under a five-year contract expiring in June 2010. Pursuant to the contract, Kinder Morgan, Inc. incurs the costs and expenses related to operating and maintaining the power plant for the production of electrical energy at the SACROC field. Such costs include supervisory personnel and qualified operating and maintenance personnel in sufficient numbers to accomplish the services provided in accordance with good engineering, operating and maintenance practices. Kinder Morgan Production Company fully reimburses Kinder Morgan, Inc.’s expenses, including all agreed-upon labor costs, and also pays to Kinder Morgan, Inc. an operating fee of $20,000 per month.

In addition, Kinder Morgan Production Company is responsible for processing and directly paying invoices for fuels utilized by the plant. Other materials, including but not limited to lubrication oil, hydraulic oils, chemicals, ammonia and any catalyst are purchased by Kinder Morgan, Inc. and invoiced monthly as provided by the contract, if not paid directly by Kinder Morgan Production Company. The amount paid to Kinder Morgan, Inc. in 2006 and 2005 for operating and maintaining the power plant was $2.9 million and $0.8 million, respectively. Kinder Morgan Energy Partners, L.P. estimates the total reimbursement to be paid to Kinder Morgan, Inc. for operating and maintaining the plant for 2007 will be approximately $3.3 million. Furthermore, Kinder Morgan Energy Partners, L.P. believes the amounts paid to Kinder Morgan, Inc. for the services they provide each year fairly reflect the value of the services performed.

KM Insurance, Ltd., referred to as KMIL, is a Bermuda insurance company and wholly-owned subsidiary of Kinder Morgan, Inc. KMIL was formed during the second quarter of 2005 as a Class 2 Bermuda insurance company, the sole business of which is to issue policies for Kinder Morgan, Inc. and Kinder Morgan Energy Partners, L.P. to secure the deductible portion of Kinder Morgan Energy Partners, L.P.’s workers compensation, automobile liability, and general liability policies placed in the commercial insurance market. Kinder Morgan Energy Partners, L.P. accrues for the cost of insurance, which is included in the related party general and administrative expenses and which totaled approximately $5.8 million in 2006.

From time to time in the ordinary course of business, Kinder Morgan Energy Partners, L.P. buys and sells pipeline and related services from Kinder Morgan, Inc. and its subsidiaries. Such transactions are conducted in accordance with all applicable laws and regulations and on an arms’ length basis consistent with Kinder Morgan Energy Partners, L.P.’s policies governing such transactions.

Certain of Kinder Morgan Energy Partners, L.P.’s business activities expose Kinder Morgan Energy Partners, L.P. to risks associated with changes in the market price of natural gas, natural gas liquids and crude oil. Kinder Morgan Energy Partners, L.P. also has exposure to interest rate risk as a result of the issuance of its fixed rate debt obligations. Pursuant to Kinder Morgan Energy Partners, L.P.’s management’s approved risk management policy, Kinder Morgan Energy Partners, L.P. uses derivative contracts to hedge or reduce our exposure to these risks and protect its profit margins.

Kinder Morgan Energy Partners, L.P.’s risk management policies prohibit it from engaging in speculative trading. Kinder Morgan Energy Partners, L.P.’s commodity-related risk management activities are monitored by its risk management committee, which is a separately designated standing committee whose job responsibilities involve operations exposed to commodity market risk and other external risks in the ordinary course of business. Kinder Morgan Energy Partners, L.P.’s risk management committee is charged with the review and enforcement of its management’s risk management policy. The committee is comprised of 19 executive-level employees of Kinder Morgan, Inc. or KMGP Services Company, Inc. whose job responsibilities involve operations exposed to commodity market risk and other external risks in the ordinary course of business. The committee is chaired by Kinder Morgan Energy Partners, L.P.’s President and is charged with the following three responsibilities:

·

establish and review risk limits consistent with Kinder Morgan Energy Partners, L.P.’s risk tolerance philosophy;

·

recommend to our audit committee any changes, modifications, or amendments to Kinder Morgan Energy Partners, L.P.’s risk management policy; and



49



Item 13.

Certain Relationships and Related Transactions. (continued)

KMR Form 10-K



·

address and resolve any other high-level risk management issues.

Other

Generally, we make all decisions relating to the management and control of Kinder Morgan Energy Partners, L.P.’s business. Kinder Morgan G.P., Inc. owns all of our voting securities and is our sole managing member. Kinder Morgan, Inc., through its wholly owned and controlled subsidiary Kinder Morgan (Delaware), Inc., owns all the common stock of Kinder Morgan G.P., Inc. Certain conflicts of interest could arise as a result of the relationships among Kinder Morgan Energy Partners, L.P., Kinder Morgan G.P., Inc., Kinder Morgan, Inc. and us. The directors and officers of Kinder Morgan, Inc. have fiduciary duties to manage Kinder Morgan, Inc., including selection and management of its investments in its subsidiaries and affiliates, in a manner beneficial to the shareholders of Kinder Morgan, Inc. In general, we have a fiduciary duty to manage Kinder Morgan Energy Partners, L.P. in a manner beneficial to Kinder Morgan Energy Partners, L.P. unitholders. The partnership agreements for Kinder Morgan Energy Partners, L.P. and its operating partnerships contain provisions that allow us to take into account the interests of parties in addition to Kinder Morgan Energy Partners, L.P. in resolving conflicts of interest, thereby limiting our fiduciary duty to Kinder Morgan Energy Partners, L.P. unitholders, as well as provisions that may restrict the remedies available to Kinder Morgan Energy Partners, L.P. unitholders for actions taken that might, without such limitations, constitute breaches of fiduciary duty.

The partnership agreements provide that in the absence of bad faith by us, the resolution of a conflict by us will not be a breach of any duties. The duty of the directors and officers of Kinder Morgan, Inc. to the shareholders of Kinder Morgan, Inc. may, therefore, come into conflict with our duties and the duties of our directors and officers to Kinder Morgan Energy Partners, L.P. unitholders. The audit committee of our board of directors will, at our request, review (and is one of the means for resolving) conflicts of interest that may arise between Kinder Morgan, Inc. or its subsidiaries, on the one hand, and Kinder Morgan Energy Partners, L.P., on the other hand.

Except for transactions through the retail division of Kinder Morgan, Inc., employees must obtain authorization from the appropriate business unit president of the relevant company or head of corporate function; and directors, business unit presidents, executive officers and heads of corporate functions must obtain authorization from the non-interested members of the audit committee of the applicable board of directors for any business relationship or proposed business transaction in which they or an immediate family member has a direct or indirect interest, or from which they or an immediate family member may derive a personal benefit (a “related party transaction”). The maximum dollar amount of related party transactions that may be approved as described above in this paragraph in any calendar year will be $1.0 million. Any related party transactions that would bring the total value of such transactions to greater than $1.0 million will be referred to the audit committee of the appropriate board of directors for approval or to determine the procedure for approval.

Director Independence

Pursuant to a delegation of control agreement among Kinder Morgan Energy Partners, L.P., its general partner, us and others, we manage and control the business and affairs of Kinder Morgan Energy Partners, L.P., except that we cannot take certain specified actions without the approval of Kinder Morgan Energy Partners, L.P.’s general partner. The limited partnership agreement of Kinder Morgan Energy Partners, L.P. provides for a general partner of the Partnership rather than a board of directors. Through the operation of Kinder Morgan Energy Partners, L.P.’s limited partnership agreement and the delegation of control agreement, our board of directors performs the functions of and is the equivalent of a board of directors of Kinder Morgan Energy Partners, L.P. Similarly, the standing committees of our board function as standing committees of the board of Kinder Morgan Energy Partners, L.P. Our board of directors is comprised of the same persons who comprise Kinder Morgan Energy Partners, L.P.’s general partner’s board of directors. References in this report to the board mean our board acting as the delegate of and as the board of directors of Kinder Morgan Energy Partners, L.P.’s general partner, and references to committees mean committees of the board acting as the delegate of and as the committees of the board of directors of Kinder Morgan Energy Partners, L.P.’s general partner.

The board has adopted governance guidelines for the board and charters for the audit committee, nominating and governance committee and compensation committee. The governance guidelines and the rules of the New York Stock Exchange require that a majority of the directors be independent, as described in those guidelines, the committee charters and rules, respectively. Copies of the guidelines and committee charters are available on our internet website at www.kindermorgan.com. To assist in making determinations of independence, the board has determined that the following categories of relationships are not material relationships that would cause the affected director not to be independent:

·

If the director was an employee, or had an immediate family member who was an executive officer, of us or Kinder Morgan Energy Partners, L.P. or any of its affiliates, but the employment relationship ended more than three years prior to the date of determination (or, in the case of employment of a director as an interim chairman, interim chief executive officer or interim executive officer, such employment relationship ended by the date of determination);



50



Item 13.

Certain Relationships and Related Transactions. (continued)

KMR Form 10-K



·

If during any twelve month period within the three years prior to the determination the director received no more than, and has no immediate family member that received more than, $100,000 in direct compensation from Kinder Morgan Energy Partners, L.P. or its affiliates, other than (i) director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service), (ii) compensation received by a director for former service as an interim chairman, interim chief executive officer or interim executive officer, and (iii) compensation received by an immediate family member for service as an employee (other than an executive officer);

·

If the director is at the date of determination a current employee, or has an immediate family member that is at the date of determination a current executive officer, of another company that has made payments to, or received payments from, Kinder Morgan Energy Partners, L.P. and its affiliates for property or services in an amount which, in each of the three fiscal years prior to the date of determination, was less than the greater of $1.0 million or 2% of such other company’s annual consolidated gross revenues. Contributions to tax-exempt organizations are not considered payments for purposes of this determination;

·

If the director is also a director, but is not an employee or executive officer, of Kinder Morgan Energy Partners, L.P.’s general partner or another affiliate or affiliates of us or Kinder Morgan Energy Partners, L.P., so long as such director is otherwise independent; and

·

If the director beneficially owns less than 10% of each class of voting securities of us, Kinder Morgan, Inc., Kinder Morgan Energy Partners, L.P. or its general partner.

The board has affirmatively determined that Messrs. Gaylord, Hultquist and Waughtal, who constitute a majority of the directors, are independent as described in our governance guidelines and the New York Stock Exchange rules. Each of them meets the standards above and has no other relationship with us. In conjunction with all regular quarterly and certain special board meetings, these three non-management directors also meet in executive session without members of management. In January 2007, Mr. Waughtal was elected for a one year term to serve as lead director to develop the agendas for and preside at these executive sessions of independent directors.

The governance guidelines and our audit committee charter, as well as the rules of the New York Stock Exchange and the Securities and Exchange Commission, require that members of the audit committee satisfy independence requirements in addition to those above. The board has determined that all of the members of the audit committee are independent as described under the relevant standards.

Item 14.

Principal Accounting Fees and Services.

The following sets forth fees billed for the audit and other services provided by PricewaterhouseCoopers LLP to us for the fiscal years ended December 31, 2006, and December 31, 2005:

 

Year Ended December 31,

 

2006

 

2005

 

(In dollars)

Audit fees1

$

180,000

 

$

189,000

Total

$

180,000

 

$

189,000


1

Includes fees for integrated audit of annual financial statements and internal control over financial reporting, reviews of the related quarterly financial statements and reviews of documents filed with the Securities and Exchange Commission.

All services rendered by PricewaterhouseCoopers LLP are permissible under applicable laws and regulations, and were pre-approved by our Audit Committee, consistent with the Audit Committee’s charter, which requires the pre-approval of all audit and non-audit services. The Audit Committee’s primary purposes include the following:

·

monitor the integrity of our financial statements, financial reporting processes, systems of internal controls regarding finance, accounting and legal compliance and disclosure controls and procedures;

·

monitor our compliance with legal and regulatory requirements;

·

select, appoint, engage, oversee, retain, evaluate and terminate our external auditors, pre-approve all audit and non-audit services to be provided, consistent with all applicable laws, to us by our external auditors, and establish the fees and other compensation to be paid to our external auditors;

·

monitor and evaluate the qualifications, independence and performance of our external auditors and internal auditing function; and



51



Item 14.

Principal Accounting Fees and Services. (continued)

KMR Form 10-K



·

establish procedures for the receipt, retention, response to and treatment of complaints, including confidential, anonymous submissions by our employees, regarding accounting, internal controls, disclosure or auditing matters, and provide an avenue of communication among our external auditors, management, the internal auditing function and our Board of Directors.

The Audit Committee has reviewed the external auditors’ fees for audit and non audit services for fiscal year 2006. The Audit Committee considered whether such non-audit services are compatible with maintaining the external auditors’ independence and has concluded that they are compatible at this time.

Furthermore, the audit committee will review the external auditors’ proposed audit scope and approach as well as the performance of the external auditors. It also has direct responsibility for and sole authority to resolve any disagreements between our management and our external auditors regarding financial reporting, will regularly review with the external auditors any problems or difficulties the auditors encountered in the course of their audit work, and will, at least annually, use its reasonable efforts to obtain and review a report from the external auditors addressing the following (among other items):

·

the auditors’ internal quality-control procedures;

·

any material issues raised by the most recent internal quality-control review, or peer review, of the external auditors;

·

the independence of the external auditors; and

·

the aggregate fees billed by our external auditors for each of the previous two fiscal years.



52



KMR Form 10-K



PART IV

Item 15.  Exhibits and Financial Statement Schedules.

(a) 1.

Financial Statements

Reference is made to the index of financial statements and supplementary data under Item 8 in Part II.

KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

We have no valuation or qualifying accounts subject to disclosure in Schedule II.

3.

Exhibits

Exhibit

Number

Description

3.1

Form of Certificate of Formation of the Company (filed as Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (Registration No. 333-55868) and incorporated by reference herein).

3.2

Second Amended and Restated Limited Liability Company Agreement of the Company (filed as Exhibit 4.2 to the Company’s Registration Statement on Form 8-A/A filed on July 24, 2002 and incorporated by reference herein).

4.1

Form of certificate representing shares of the Company (filed as Exhibit 4.3 to the Company’s Registration Statement on Form 8-A/A filed on July 24, 2002 and incorporated by reference herein).

4.2

Form of Purchase Provisions between the Company and Kinder Morgan, Inc. (included as Annex B to the Second Amended and Restated Limited Liability Company Agreement filed as Exhibit 4.2 to the Company’s Registration Statement on Form 8-A/A filed on July 24, 2002 and incorporated by reference herein).

4.3

Registration Rights Agreement dated May 18, 2001 among the Company, Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc. (Exhibit 4.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002).

10.1

Form of Tax Indemnity Agreement between the Company and Kinder Morgan, Inc. (filed as Exhibit 10.1 to the Company’s Registration Statement on Form S-1 (Registration No. 333-55868) and incorporated by reference herein).

10.2

Delegation of Control Agreement among Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc. and Kinder Morgan Energy Partners, L.P. and its operating partnerships (filed as Exhibit 10.1 to the Kinder Morgan Energy Partners, L.P. June 30, 2001 Form 10-Q (Commission File No. 1-11234)).

10.3

Resignation and Non-Compete Agreement, dated as of July 21, 2004, between KMGP Services, Inc. and Michael C. Morgan (Exhibit 10.4 to Kinder Morgan Management, LLC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).

21.1*

List of Subsidiaries.

23.1*

Consent of PricewaterhouseCoopers LLP.

31.1*

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



53



Item 15.  Exhibits and Financial Statement Schedules. (continued)

KMR Form 10-K



  

Exhibit

Number

Description

32.1*

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

__________

* Filed herewith.

  



54



KMR Form 10-K



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.

 

KINDER MORGAN MANAGEMENT, LLC

(Registrant)

 

By

/s/ Kimberly A. Dang

 

 

Kimberly A. Dang

Vice President and Chief Financial Officer

Date: March 1, 2007

 


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities set forth below and as of the date set forth above.

/s/ Richard D. Kinder

  

Director, Chairman and Chief Executive Officer

Richard D. Kinder

 

(Principal Executive Officer)

  

 

 

/s/ Kimberly A. Dang

  

Vice President and Chief Financial Officer (Principal

Kimberly A. Dang

 

Financial Officer and Principal Accounting Officer)

  

 

 

/s/ Edward O. Gaylord

 

Director

Edward O. Gaylord

 

 

  

 

 

/s/ Gary L. Hultquist

 

Director

Gary L. Hultquist

 

 

  

 

 

/s/ C. Park Shaper

 

Director and President

C. Park Shaper

 

 

  

 

 

/s/ Perry M. Waughtal

 

Director

Perry M. Waughtal

 

 

 

 

 




55



Annex A


                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549


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


                                    Form 10-K


                [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

                     OF THE SECURITIES EXCHANGE ACT OF 1934


                   For the fiscal year ended December 31, 2006


                                       Or


              [ ] 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: 1-11234


                       Kinder Morgan Energy Partners, L.P.

             (Exact name of registrant as specified in its charter)


                    Delaware                        76-0380342

        (State or other jurisdiction of         (I.R.S. Employer

         incorporation or organization)         Identification No.)


                  500 Dallas, Suite 1000, Houston, Texas 77002

               (Address of principal executive offices)(zip code)


        Registrant's telephone number, including area code: 713-369-9000


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


           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 if the registrant is a well-known seasoned issuer,

as defined in Rule 405 of the Securities Act of 1933. Yes [X] No [ ]


     Indicate by check mark if the registrant is not required to file reports

pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.

Yes [ ] No [X]


     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]


     Indicate by check mark whether the registrant is a large accelerated filer,

an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of

the Securities Exchange Act of 1934). Large accelerated filer [X] Accelerated

filer [ ] Non-accelerated filer [ ]


                                       1

<PAGE>



     Indicate by check mark whether the registrant is a shell company (as

defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [X]


     Aggregate market value of the voting and non-voting common equity 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 June 30, 2006 was

approximately $6,538,368,966. As of January 31, 2007, the registrant had

162,823,583 Common Units outstanding.











                                       2


<PAGE>



                       KINDER MORGAN ENERGY PARTNERS, L.P.


                                TABLE OF CONTENTS


                                                                          Page

                                                                         Number

                                                                         ------


               PART I

Items 1 and 2. Business and Properties....................................   4

                General Development of Business...........................   4

                 Business Strategy........................................   5

                 Recent Developments......................................   6

                Financial Information about Segments......................  14

                Narrative Description of Business.........................  14

                 Products Pipelines.......................................  14

                 Natural Gas Pipelines....................................  22

                 CO2......................................................  30

                 Terminals................................................  34

                Major Customers...........................................  39

                Regulation................................................  39

                Environmental Matters.....................................  42

                Other.....................................................  45

                Financial Information about Geographic Areas..............  45

                Available Information.....................................  46

Item 1A.       Risk Factors...............................................  46

Item 1B.       Unresolved Staff Comments..................................  53

Item 3.        Legal Proceedings..........................................  53

Item 4.        Submission of Matters to a Vote of Security Holders........  53


               PART II

Item 5.        Market for Registrant's Common Equity, Related Stockholder

                Matters and Issuer Purchases of Equity Securities.........  54

Item 6.        Selected Financial Data....................................  55

Item 7.        Management's Discussion and Analysis of Financial

                Condition and Results of Operations.......................  57

                Critical Accounting Policies and Estimates................  57

                Results of Operations.....................................  61

                Liquidity and Capital Resources...........................  88

                Recent Accounting Pronouncements..........................  99

                Information Regarding Forward-Looking Statements..........  99

Item 7A.       Quantitative and Qualitative Disclosures About

                Market Risk............................................... 101

                Energy Commodity Market Risk.............................. 101

                Interest Rate Risk........................................ 103

Item 8.        Financial Statements and Supplementary Data................ 104

Item 9.        Changes in and Disagreements with Accountants on

               Accounting and Financial Disclosure........................ 104

Item 9A.       Controls and Procedures.................................... 104

Item 9B.       Other Information.......................................... 106


               PART III

Item 10.       Directors, Executive Officers and Corporate Governance..... 107

                Directors and Executive  Officers of our General

                Partner and its Delegate.................................. 107

                Corporate Governance...................................... 109

                Section 16(a) Beneficial Ownership Reporting Compliance... 110

Item 11.       Executive Compensation..................................... 110

Item 12.       Security Ownership of Certain Beneficial Owners and

               Management and Related Stockholder Matters................. 125

Item 13.       Certain Relationships and Related Transactions, and

               Director Independence...................................... 128

Item 14.       Principal Accounting Fees and Services..................... 129


               PART IV

Item 15.       Exhibits and Financial Statement Schedules................. 131

               Index to Financial Statements.............................. 134

Signatures................................................................ 241



                                       3





<PAGE>


                                     PART I


Items 1 and 2.  Business and Properties.


     In this report, unless the context requires otherwise, references to "we,"

"us," "our," "KMP" or the "Partnership" are intended to mean Kinder Morgan

Energy Partners, L.P., a Delaware limited partnership, our operating limited

partnerships and their subsidiaries. Our common units, which represent limited

partner interests in us, trade on the New York Stock Exchange under the symbol

"KMP." The address of our principal executive offices is 500 Dallas, Suite 1000,

Houston, Texas 77002, and our telephone number at this address is (713)

369-9000. You should read the following discussion and analysis in conjunction

with our consolidated financial statements included elsewhere in this report.


(a) General Development of Business


     Kinder Morgan Energy Partners, L.P. is one of the largest publicly-traded

pipeline limited partnerships in the United States in terms of market

capitalization and the owner and operator of the largest independent refined

petroleum products pipeline system in the United States in terms of volumes

delivered. We own or operate approximately 26,000 miles of pipelines and

approximately 150 terminals. Our pipelines transport more than two million

barrels per day of gasoline and other petroleum products and up to seven billion

cubic feet per day of natural gas. Our terminals handle over 80 million tons of

coal and other dry-bulk materials annually and have a liquids storage capacity

of almost 70 million barrels for petroleum products and chemicals. We are also

the leading independent provider of carbon dioxide for enhanced oil recovery

projects in the United States.


     As of December 31, 2006, Kinder Morgan, Inc. and its consolidated

subsidiaries, referred to in this report as KMI, owned, through its general and

limited partner interests, an approximate 14.7% interest in us. KMI's common

stock trades on the New York Stock Exchange under the symbol "KMI," and KMI is

one of the largest energy transportation and storage companies in North America,

operating or owning an interest in, either for itself or on our behalf,

approximately 43,000 miles of pipelines and approximately 155 terminals. KMI and

its consolidated subsidiaries also distribute natural gas to approximately 1.1

million customers.


     In addition to the distributions it receives from its limited and general

partner interests, KMI also receives an incentive distribution from us as a

result of its ownership of our general partner. This incentive distribution is

calculated in increments based on the amount by which quarterly distributions to

our unitholders exceed specified target levels as set forth in our partnership

agreement, reaching a maximum of 50% of distributions allocated to the general

partner for distributions above $0.23375 per limited partner unit per quarter.

Including both its general and limited partner interests in us, at the 2006

distribution level, KMI received approximately 49% of all quarterly "Available

Cash" distributions (as defined in our partnership agreement) from us, with

approximately 42% and 7% of all quarterly distributions from us attributable to

KMI's general partner and limited partner interests, respectively. The actual

level of distributions KMI will receive in the future will vary with the level

of distributions to our limited partners determined in accordance with our

partnership agreement.


     In February 2001, Kinder Morgan Management, LLC, a Delaware limited

liability company referred to in this report as KMR, was formed. Our general

partner owns all of KMR's voting securities and, pursuant to a delegation of

control agreement, our general partner has delegated to KMR, to the fullest

extent permitted under Delaware law and our partnership agreement, all of its

power and authority to manage and control our business and affairs, except that

KMR cannot take certain specified actions without the approval of our general

partner. Under the delegation of control agreement, KMR, as the delegate of our

general partner, manages and controls our business and affairs and the business

and affairs of our operating limited partnerships and their subsidiaries.

Furthermore, in accordance with its limited liability company agreement, KMR's

activities are limited to being a limited partner in, and managing and

controlling the business and affairs of us, our operating limited partnerships

and their subsidiaries.


     KMR's shares represent limited liability company interests and trade on the

New York Stock Exchange under the symbol "KMR." Since its inception, KMR has

used substantially all of the net proceeds received from the public offerings of

its shares to purchase i-units from us, thus becoming a limited partner in us.

The i-units are a separate class of limited partner interests in us and are

issued only to KMR. Under the terms of our partnership agreement, the i-units

are entitled to vote on all matters on which the common units are entitled to

vote.






                                       4


<PAGE>


     In general, our limited partner units, consisting of i-units, common units

and Class B units (the Class B units are similar to our common units except that

they are not eligible for trading on the New York Stock Exchange), will vote

together as a single class, with each i-unit, common unit and Class B unit

having one vote. We pay our quarterly distributions from operations and interim

capital transactions to our common and Class B unitholders in cash, and we pay

our quarterly distributions to KMR in additional i-units rather than in cash. As

of December 31, 2006, KMR, through its ownership of our i-units, owned

approximately 27.0% of all of our outstanding limited partner units.


     On May 29, 2006, KMI announced that its board of directors had received a

proposal from investors led by Richard D. Kinder, Chairman and Chief Executive

Officer of KMI, to acquire all of the outstanding shares of KMI for $100 per

share in cash. The investors include members of senior management of KMI, most

of whom are also senior officers of our general partner and of KMR. KMI's board

of directors formed a special committee composed entirely of independent

directors to consider the proposal. On August 28, 2006, KMI entered into a

definitive merger agreement under which the investors would acquire all of KMI's

outstanding common stock (except for shares held by certain stockholders and

investors) for $107.50 per share in cash, without interest, and KMI's board of

directors, on the unanimous recommendation of the special committee, approved

the agreement and recommended that its stockholders approve the merger.


     On December 19, 2006, KMI announced that its stockholders voted to approve

the proposed merger agreement providing for the acquisition of KMI by the

investors, which include: Richard D. Kinder, other senior members of KMI

management, co-founder Bill Morgan, current board members Fayez Sarofim and Mike

Morgan, and affiliates of Goldman Sachs Capital Partners, American International

Group, Inc., The Carlyle Group, and Riverstone Holdings LLC. On January 25,

2007, KMI announced that it had received Hart-Scott-Rodino Antitrust

Improvements Act clearance for the proposed acquisition. The Federal Trade

Commission had challenged the participation of certain investors, but those

investors reached a settlement with the FTC that clears the way for the

acquisition of KMI to proceed. Currently, the only outstanding approvals are

from certain state regulatory utility commissions. The California Public

Utilities Commission issued a procedural schedule which could delay the closing

of the transaction until the second quarter of 2007; however, KMI is working

diligently with the CPUC to try to expedite the matter and is hopeful that the

transaction can be closed in the first quarter of 2007. Upon closing of the

transaction, KMI's common stock will no longer be traded on the New York Stock

Exchange.


Business Strategy


     The objective of our business strategy is to grow our portfolio of

businesses by:


     o    focusing on stable, fee-based energy transportation and storage assets

          that are core to the energy infrastructure of growing markets within

          the United States;


     o    increasing utilization of our existing assets while controlling costs,

          operating safely, and employing environmentally sound operating

          practices;


     o    leveraging economies of scale from incremental acquisitions and

          expansions of assets that fit within our strategy and are accretive to

          cash flow and earnings; and


     o    maximizing the benefits of our financial structure to create and

          return value to our unitholders.


     Primarily, our business model consists of owning and/or operating a solid

asset base designed to generate stable, fee-based income and distributable cash

flow that together provide overall long-term value to our unitholders. We own

and manage a diversified portfolio of energy transportation and storage assets.

Our operations are conducted through our five operating limited partnerships and

their subsidiaries and are grouped into four reportable business segments. These

segments are as follows:


     o    Products Pipelines--which consists of approximately 10,000 miles of

          refined petroleum products pipelines that deliver gasoline, diesel

          fuel, jet fuel and natural gas liquids to various markets; plus over

          60 associated



                                       5




<PAGE>


          product terminals and petroleum pipeline transmix processing

          facilities serving customers across the United States;


     o    Natural Gas Pipelines--which consists of approximately 14,000 miles of

          natural gas transmission pipelines and gathering lines, plus natural

          gas storage, treating and processing facilities, through which natural

          gas is gathered, transported, stored, treated, processed and sold;


     o    CO2--which produces, transports through pipelines and markets carbon

          dioxide, commonly called CO2, to oil fields that use carbon dioxide to

          increase production of oil; owns interests in and/or operates ten oil

          fields in West Texas; and owns and operates a crude oil pipeline

          system in West Texas; and


     o    Terminals--which consists of approximately 95 owned or operated

          liquids and bulk terminal facilities and more than 60 rail

          transloading and materials handling facilities located throughout the

          United States, that together transload, store and deliver a wide

          variety of bulk, petroleum, petrochemical and other liquids products

          for customers across the United States.


     Generally, as utilization of our pipelines and terminals increases, our

fee-based revenues increase. We do not face significant risks relating directly

to short-term movements in commodity prices for two principal reasons. First, we

primarily transport and/or handle products for a fee and are not engaged in

significant unmatched purchases and resales of commodity products. Second, in

those areas of our business where we do face exposure to fluctuations in

commodity prices, primarily oil production in our CO2 business segment, we

engage in a hedging program to mitigate this exposure.


     We regularly consider and enter into discussions regarding potential

acquisitions, including those from KMI or its affiliates, and are currently

contemplating potential acquisitions. Any such transaction would be subject to

negotiation of mutually agreeable terms and conditions, receipt of fairness

opinions and approval of the respective boards of directors. While there are

currently no unannounced purchase agreements for the acquisition of any material

business or assets, such transactions can be effected quickly, may occur at any

time and may be significant in size relative to our existing assets or

operations.


     It is our intention to carry out the above business strategy, modified as

necessary to reflect changing economic conditions and other circumstances.

However, as discussed under Item 1A "Risk Factors" below, there are factors that

could affect our ability to carry out our strategy or affect its level of

success even if carried out.


Recent Developments


     The following is a brief listing of significant developments since December

31, 2005. Additional information regarding most of these items may be found

elsewhere in this report.


     o    On January 12, 2006, we announced a major expansion project that will

          provide additional infrastructure to help meet the growing need for

          terminal services in key markets along the East Coast. The investment

          of approximately $45 million includes the construction of new liquids

          storage tanks at our Perth Amboy, New Jersey liquids terminal located

          along the Arthur Kill River in the New York Harbor area. The Perth

          Amboy expansion involves the construction of nine new storage tanks

          with a capacity of 1.4 million barrels for gasoline, diesel and jet

          fuel. The expansion was driven by continued strong demand for refined

          products in the Northeast, much of which is being met by imported fuel

          arriving via the New York Harbor. The new tanks were expected to be in

          service beginning in the first quarter of 2007, however, due to

          inconsistencies in the soils underneath these tanks, we now estimate

          that the tank foundations will cost significantly more than originally

          budgeted, bringing the total investment to approximately $56 million

          and delaying the in-service date to the third quarter of 2007;


     o    Effective February 23, 2006, Rockies Express Pipeline LLC acquired

          Entrega Gas Pipeline LLC from EnCana Corporation for $244.6 million in

          cash. West2East Pipeline LLC is a limited liability company and is the

          sole owner of Rockies Express Pipeline LLC. We contributed 66 2/3% of

          the consideration for this purchase, which corresponded to our

          percentage ownership of West2East Pipeline LLC at that time.

          At the time of

                                       6

<PAGE>


          acquisition, Sempra Energy held the remaining 33 1/3% ownership




          interest and contributed this same proportional amount of the total

          consideration.


          On the acquisition date, Entrega Gas Pipeline LLC owned the Entrega

          Pipeline, an interstate natural gas pipeline that now consists of two

          segments: (i) a 136-mile, 36-inch diameter pipeline that extends from

          the Meeker Hub in Rio Blanco County, Colorado to the Wamsutter Hub in

          Sweetwater County, Wyoming and (ii) a 191-mile, 42-inch diameter

          pipeline that extends from the Wamsutter Hub to the Cheyenne Hub in

          Weld County, Colorado, where it will ultimately connect with the

          Rockies Express Pipeline, an interstate natural gas pipeline that is

          currently being developed by Rockies Express Pipeline LLC. In the

          first quarter of 2006, EnCana Corporation completed construction of

          the pipeline segment that extends from the Meeker Hub to the Wamsutter

          Hub, and interim service began on that portion of the pipeline on

          February 24, 2006. In February 2007, we completed construction of the

          second pipeline segment that extends from the Wamsutter Hub to the

          Cheyenne Hub and service began on the first two pipeline segments on

          February 14, 2007. However, our operating revenues and our operating

          expenses were not impacted during the construction or interim service

          periods due to the fact that regulatory accounting provisions require

          capitalization of revenues and expenses until the second segment of

          the project was complete and in-service.


          In April 2006, Rockies Express Pipeline LLC merged with and into

          Entrega Gas Pipeline LLC, and the surviving entity was renamed Rockies

          Express Pipeline LLC. Going forward, the entire pipeline system (the

          two Entrega segments described above and the two Rockies Express

          segments that are currently being developed and described below) will

          be known as the Rockies Express Pipeline.


          On May 31, 2006, Rockies Express Pipeline LLC filed an application

          with the FERC for authorization to construct and operate certain

          facilities comprising its proposed Rockies Express-West project. This

          project is the first planned eastward extension of the certificated

          Rockies Express segments, described above. The Rockies Express-West

          project will be comprised of approximately 713 miles of 42-inch

          diameter pipeline extending from the Cheyenne Hub to an

          interconnection with Panhandle Eastern Pipe Line located in Audrain

          County, Missouri. The segment extension will have capacity to

          transport up to 1.5 billion cubic feet per day of natural gas across

          the following five states: Wyoming, Colorado, Nebraska, Kansas and

          Missouri. The project will also include certain improvements to

          existing Rockies Express facilities located to the west of the

          Cheyenne Hub.


          On June 30, 2006, ConocoPhillips exercised its option to acquire a 25%

          ownership interest in West2East Pipeline LLC (and indirectly its

          subsidiary Rockies Express Pipeline LLC). On that date, a 24%

          ownership interest was transferred to ConocoPhillips, and an

          additional 1% interest will be transferred once construction of the

          entire Rockies Express Pipeline project is completed. Through our

          subsidiary Kinder Morgan W2E Pipeline LLC, we continue to operate the

          project but our equity ownership interest decreased from 66 2/3% to

          51%. Sempra's ownership interest in West2East Pipeline LLC decreased

          to 25% (down from 33 1/3%). When construction of the entire project is

          completed, our ownership interest will be reduced to 50% at which time

          the capital accounts of West2East Pipeline LLC will be trued up to

          reflect our 50% economics in the project. We do not anticipate any

          additional changes in the ownership structure of the project.


          On September 21, 2006, the FERC issued a favorable preliminary

          determination on all non-environmental issues of the Rockies

          Express-West project, approving Rockies Express' application (i) to

          construct and operate the 713 miles of new natural gas transmission

          facilities from the Cheyenne Hub and (ii) to lease capacity from

          Questar Overthrust Pipeline Company, which will extend the Rockies

          Express system 140 miles west from Wamsutter to the Opal Hub in

          Wyoming. Pending completion of the FERC environmental review and the

          issuance of a certificate, the Rockies Express-West project is

          expected to begin service in January 2008.


          The final segment of the Rockies Express Pipeline consists of an

          approximate 635-mile pipeline segment that will extend from eastern

          Missouri to the Clarington Hub in eastern Ohio. Rockies Express will

          file a separate application in the future for this proposed Rockies

          Express-East project. In June 2006, we made the National Environmental

          Policy Act pre-filing for Rockies Express-East with the FERC. This

          project is expected to begin interim service as early as December 31,

          2008, and to be fully completed by June 2009. When fully

          completed, the combined 1,675-mile Rockies Express Pipeline system

          will be one of the largest natural gas







                                       7

<PAGE>


          pipelines ever constructed in North America. The approximately $4.4

          billion project will have the capability to transport 1.8 billion

          cubic feet per day of natural gas, and binding firm commitments have

          been secured for virtually all of the pipeline capacity;


     o    On March 7, 2006, our Pacific operations filed a revised cost of

          service filing with the FERC in accordance with the FERC's December

          16, 2005 order addressing two cases: (i) the phase two initial

          decision, issued September 9, 2004, which would establish the basis

          for prospective rates and the calculation of reparations for

          complaining shippers with respect to our Pacific operations' West Line

          and East Line pipelines, and (ii) certain cost of service issues

          remanded to the FERC by the United States Court of Appeals for the

          District of Columbia Circuit in its July 2004 BP West Coast Products

          v. FERC opinion, including the level of income tax allowance that our

          Pacific operations is entitled to include in its interstate rates. The

          December 16, 2005 order did not address the FERC's March 2004 phase

          one rulings on the grandfathered state of our Pacific operations'

          rates that are currently pending on appeal before the District of

          Columbia Circuit Court of Appeals.


          On April 28, 2006, the FERC issued an order accepting our Pacific

          operations' compliance filing and revised tariffs, which lowered its

          West Line and East Line rates in conformity with previous FERC orders,

          and these lower tariff rates became effective May 1, 2006. Further, we

          were required to calculate estimated reparations for complaining

          shippers consistent with the December 16, 2005 FERC order, and various

          parties have submitted comments to the FERC challenging aspects of the

          costs of service and tariff rates reflected in our compliance filings.

          The FERC indicated that a subsequent order would address the issues

          raised in these comments. In December 2005, we recognized a $105.0

          million non-cash expense attributable to an increase in our reserves

          related to our rate case liability; however, we are not able to

          predict with certainty the final outcome of the pending FERC

          proceedings, or whether we can reach a settlement with some or all of

          the complainants. For additional information, see Note 16 to our

          consolidated financial statements;


     o    On March 9, 2006, we announced that we have entered into a long-term

          agreement with Drummond Coal Sales, Inc. that will support a $70

          million expansion of our Pier IX bulk terminal located in Newport

          News, Virginia. The agreement has a term that can be extended for up

          to 30 years. The project includes the construction of a new ship dock

          and the installation of additional equipment; it is expected to

          increase throughput at the terminal by approximately 30% and will

          allow the terminal to begin receiving shipments of imported coal. The

          expansion is expected to be completed in the first quarter of 2008.

          Upon completion, the terminal will have an import capacity of up to 9

          million tons annually. Currently, our Pier IX terminal can store

          approximately 1.4 million tons of coal and 30,000 tons of cement on

          its 30-acre storage site;


     o    Effective April 1, 2006, we sold our Douglas natural gas gathering

          system and our Painter Unit fractionation facility to Momentum Energy

          Group, LLC for approximately $42.5 million in cash. Our investment in

          net assets, including all transaction related accruals, was

          approximately $24.5 million, most of which represented property, plant

          and equipment, and we recognized approximately $18.0 million of gain

          on the sale of these net assets.


          Additionally, with regard to the natural gas operating activities of

          our Douglas gathering system, we utilized certain derivative financial

          contracts to offset (hedge) our exposure to fluctuating expected

          future cash flows caused by periodic changes in the price of natural

          gas and natural gas liquids. According to the provisions of current

          accounting principles, when an asset generating a hedged transaction

          is disposed of prior to the occurrence of the transaction, the net

          cumulative gain or loss previously recognized in equity should be

          transferred to net income in the current period. Accordingly, we

          reclassified a net loss of $2.9 million from "Accumulated other

          comprehensive loss" into net income on those derivative contracts that

          effectively hedged uncertain future cash flows associated with

          forecasted Douglas gathering transactions. We included the net amount

          of the gain, $15.1 million, within the caption "Other expense

          (income)" in our accompanying consolidated statement of income for the

          year ended December 31, 2006;





     o    On April 5, 2006, Kinder Morgan Production Company L.P. purchased

          various oil and gas properties from Journey Acquisition - I, L.P. and

          Journey 2000, L.P. for an aggregate consideration of approximately

          $63.9 million, consisting of $60.3 million in cash and $3.6 million in

          assumed liabilities. The acquisition was effective March 1, 2006.

          However, in the second and third quarters of 2006, we divested certain

          acquired



                                       8

<PAGE>


          properties that were not considered candidates for carbon dioxide

          enhanced oil recovery, thus reducing our total investment. We received

          proceeds of approximately $27.1 million from the sale of these

          properties. The acquired properties are primarily located in the

          Permian Basin area of West Texas and New Mexico, produce approximately

          430 barrels of oil equivalent per day, and include some fields with

          potential for enhanced oil recovery development near our current

          carbon dioxide operations;


     o    On April 18, 2006, we announced that our Texas intrastate natural gas

          pipeline group had entered into a long-term agreement with CenterPoint

          Energy Resources Corp. to provide the natural gas utility with firm

          transportation and storage services. Under the terms of the agreement,

          CenterPoint has contracted for one billion cubic feet per day of

          transportation capacity and 16 billion cubic feet of storage capacity,

          effective April 1, 2007. CenterPoint owns and operates the largest

          local natural gas distribution company in Houston, Texas, and the

          agreement helps ensure the Houston metropolitan area has access to

          reliable and diverse supplies of natural gas in order to meet the

          growing demand;


     o    In April 2006, we acquired terminal assets and operations from A&L

          Trucking, L.P. and U.S. Development Group in three separate

          transactions for an aggregate consideration of approximately $61.9

          million, consisting of $61.6 million in cash and $0.3 million in

          assumed liabilities. The first transaction included the acquisition of

          equipment and infrastructure for the storing and loading of bulk steel

          at a 30-acre site along the Houston Ship Channel leased through the

          Port of Houston. The second acquisition included the purchase of a

          rail terminal at the Port of Houston that handles both bulk and

          liquids products. The rail terminal offers a variety of loading,

          storage and staging services for up to 900 cars at a time, and

          complements our existing Texas petroleum coke terminal operations by

          providing bulk product customers with rail transportation options.

          Thirdly, we acquired the entire membership interest of Lomita Rail

          Terminal LLC, a limited liability company that owns a high-volume rail

          ethanol terminal in Carson, California. The terminal has the

          capability to receive and offload up to 100 railcars within a 24-hour

          period, and serves approximately 80% of the Southern California demand

          for reformulated fuel blend ethanol with expandable

          offloading/distribution capacity;


     o    On May 17, 2006, we entered into a settlement agreement and filed an

          offer of settlement with the FERC in response to certain challenges by

          complainants with regard to delivery tariffs and gathering enhancement

          fees at our Pacific operations' Watson Station, located in Carson,

          California. On August 2, 2006, the FERC approved the settlement

          without modification and directed that it be implemented. Pursuant to

          the settlement, we filed a new tariff, which took effect September 1,

          2006, lowering our Pacific Operations' going-forward rate, and we also

          paid refunds to all shippers for the period April 1, 1999 through

          August 31, 2006.


          On September 28, 2006, we filed a refund report with the FERC, setting

          forth the refunds that had been paid and describing how the refund

          calculations were made. On December 5, 2006, the FERC approved our

          refund report with respect to all shippers except ExxonMobil, and it

          remanded the ExxonMobil refund issue to an administrative law judge

          for a determination as to whether additional funds were due. On

          January 16, 2007, we and ExxonMobil informed the presiding judge that

          we had reached a settlement in principle regarding the ExxonMobil

          refund issue, and in February 2007, we and ExxonMobil reached

          agreement regarding ExxonMobil's protest of the refund report, and

          the protest was withdrawn. As of December 31, 2006, we made aggregate

          payments pursuant to the agreement, including accrued interest, of

          $19.1 million;


     o    On June 1, 2006, we announced that we had completed and fully placed

          into service our $210 million expansion of our Pacific operations'




          East Line pipeline segment. The completion of the project included the

          construction of a new pump station, a 490,000 barrel tank facility

          near El Paso, Texas, and upgrades to existing stations and terminals

          between El Paso and Phoenix, Arizona. Initially proposed in October

          2002, the expansion also includes the replacement of 160 miles of

          8-inch diameter pipe between El Paso and Tucson, Arizona, and 84 miles

          of 8-inch diameter pipe between Tucson and Phoenix with new

          state-of-the-art 12-inch and 16-inch diameter pipe, respectively. We

          announced the completion of the pipeline portion of the project on

          April 19, 2006, and new transportation tariffs designed to earn a

          return on our construction costs went into effect June 1, 2006.


          In addition, we continue working on our second East Line expansion

          project, which we announced on August 4, 2005. This second expansion

          consists of replacing approximately 140 miles of 12-inch diameter pipe

          between El Paso and Tucson with 16-inch diameter pipe, constructing

          additional pump stations, and adding


                                       9

<PAGE>


          new storage tanks at Tucson. The project is expected to cost

          approximately $145 million. We are currently working on engineering

          design and obtaining necessary pipeline permits, and construction is

          expected to begin in May 2007. The project, scheduled for completion

          in December 2007, will increase East Line capacity by another 8% and

          will provide the platform for further incremental expansions through

          horsepower additions to the system;


     o    On June 8, 2006, we announced an approximate $76 million expansion

          project that will significantly increase capacity at our North Dayton,

          Texas natural gas storage facility. The project involves the

          development of a new underground cavern that will add an estimated 5.5

          billion cubic feet of incremental working natural gas storage

          capacity. Currently, two existing storage caverns at the facility

          provide approximately 4.2 billion cubic feet of working gas capacity.

          Our North Dayton natural gas storage facility is connected to our

          Texas Intrastate natural gas pipeline system, and the expansion will

          greatly enhance storage options for natural gas coming from new and

          growing supply areas located in East Texas and from liquefied natural

          gas along the Texas Gulf Coast. Project costs are now anticipated to

          range from $76 to $82 million, and the additional capacity is expected

          to be available in mid-2009;


     o    On June 21, 2006, we announced that we, through our Kinder Morgan

          Terminals Canada, ULC subsidiary, began construction on a new $115

          million crude oil tank farm located in Edmonton, Alberta, Canada,

          located slightly north of KMI's Trans Mountain Pipeline crude oil

          storage facility. In addition, we entered into long-term contracts

          with customers for all of the available capacity at the facility, with

          options to extend the agreements beyond the original terms. Situated

          on approximately 24 acres, the new storage facility will have nine

          tanks with a combined storage capacity of approximately 2.2 million

          barrels for crude oil. Service is expected to begin in the fourth

          quarter of 2007, and when completed, the tank farm will serve as a

          premier blending and storage hub for Canadian crude oil. The tank farm

          will have access to more than 20 incoming pipelines and several major

          outbound systems, including a connection with KMI's 710-mile Trans

          Mountain Pipeline system, which currently transports up to 225,000

          barrels per day of heavy crude oil and refined products from Edmonton

          to marketing terminals and refineries located in the greater

          Vancouver, British Columbia area and Puget Sound in Washington State;


     o    On June 23, 2006, our TransColorado Gas Transmission Company filed an

          application for authorization with the FERC to construct and operate

          certain facilities comprising its proposed "Blanco-Meeker Expansion

          Project." Upon implementation, this approximately $58 million project

          will facilitate the transportation of up to approximately 250 million

          cubic feet per day of natural gas northbound from the Blanco Hub area

          in San Juan County, New Mexico through TransColorado's existing

          interstate pipeline for delivery to the Rockies Express Pipeline at an

          existing point of interconnection located in the Meeker Hub in Rio

          Blanco County, Colorado. The expansion is expected to begin service on

          January 1, 2008, subject to receipt of all necessary regulatory

          approvals;


     o    In August 2006, we completed a public offering of 5,750,000 of our

          common units, including common units sold pursuant to the

          underwriters' over-allotment option, at a price of $44.80 per unit,

          less commissions and underwriting expenses. We received net proceeds

          of $248.0 million for the issuance of these 5,750,000 common units,

          and we used the proceeds to reduce the borrowings under our commercial




          paper program;


     o    Effective August 28, 2006, we terminated our $250 million unsecured

          nine month credit facility due November 21, 2006, and we increased our

          five-year unsecured revolving credit facility from a total commitment

          of $1.6 billion to $1.85 billion. Our five-year credit facility

          remains due August 18, 2010; however, the facility can now be amended

          to allow for borrowings up to $2.1 billion. There were no borrowings

          under our five-year credit facility as of December 31, 2006. Our

          credit facility primarily serves as a backup to our commercial paper

          program, which had $1,098.2 million outstanding as of December 31,

          2006;


     o    On September 8, 2006, we filed an application with the FERC requesting

          approval to construct and operate our Kinder Morgan Louisiana

          Pipeline. The project is expected to cost approximately $500 million

          and will provide approximately 3.2 billion cubic feet per day of

          take-away natural gas capacity from the Cheniere Sabine Pass liquefied

          natural gas terminal located in Cameron Parish, Louisiana. The project

          is supported by fully subscribed capacity and long-term customer

          commitments with Chevron and Total. Various water and environmental

          surveys have been completed and we procured long-lead items, such as

          line pipe and mainline



                                       10

<PAGE>


          block valves. We are currently finalizing interconnect agreements,

          preparing detailed designs of the facilities and acquiring necessary

          right-of-ways.


          The Kinder Morgan Louisiana Pipeline will consist of two segments: (i)

          a 132-mile, 42-inch diameter pipeline with firm capacity of

          approximately 2.0 billion cubic feet per day of natural gas that will

          extend from the Sabine Pass terminal to a point of interconnection

          with an existing Columbia Gulf Transmission line in Evangeline Parish,

          Louisiana (an offshoot will consist of approximately 2.3 miles of

          24-inch diameter pipeline with firm peak day capacity of approximately

          300 million cubic feet per day extending away from the 42-inch

          diameter line to the existing Florida Gas Transmission Company

          compressor station in Acadia Parish, Louisiana); and (ii) a 1-mile,

          36-inch diameter pipeline with firm capacity of approximately 1.2

          billion cubic feet per day that will extend from the Sabine Pass

          terminal and connect to KMI's Natural Gas Pipeline Company of

          America's natural gas pipeline. In addition, in exchange for shipper

          commitments to the project, we have granted options to acquire equity

          in the project, which, if fully exercised, could result in us owning a

          minimum interest of 80% after the project is completed. The 132-mile

          pipeline segment is expected to be in service in the second quarter of

          2009, and the 1-mile segment is expected to be in service in the third

          quarter of 2008.


          On January 26, 2007, the FERC issued a draft Environmental Impact

          Statement which addresses the potential environmental effects of the

          construction and operation of the Kinder Morgan Louisiana Pipeline.

          The draft EIS was prepared to satisfy the requirements of the National

          Environmental Policy Act. It concluded that approval of the proposed

          project would have limited adverse environmental impact. The public

          will have until March 19, 2007 to file comments on the draft, which

          will be taken into account in the preparation of the final

          Environmental Impact Statement;


     o    On September 11, 2006, we announced major expansions at our Pasadena

          and Galena Park, Texas liquids terminal facilities located on the

          Houston Ship Channel. The expansions will provide additional

          infrastructure to help meet the growing need for refined petroleum

          products storage capacity along the Gulf Coast. The investment of

          approximately $195 million will include the construction of the

          following: (i) new storage tanks at both our Pasadena and Galena Park

          terminals; (ii) an additional cross-channel pipeline to increase the

          connectivity between the two terminals; (iii) a new ship dock at

          Galena Park; and (iv) an additional loading bay at our fully automated

          truck loading rack located at our Pasadena terminal. The expansions

          are supported by long-term customer commitments and will result in

          approximately 3.4 million barrels of additional tank storage capacity

          at the two terminals. Construction began in October 2006 and all of

          the projects are expected to be completed by the spring of 2008;


     o    On October 19, 2006, we announced the third of three investments in

          our CALNEV refined petroleum products pipeline system. CALNEV is a

          550-mile pipeline that currently transports approximately 140,000




          barrels of refined products per day of gasoline, diesel fuel and jet

          fuel from the Los Angeles, California area to the Las Vegas, Nevada

          market through parallel 14-inch and 8-inch diameter pipelines.

          Combined, the $413 million in capital improvements will upgrade and

          expand pipeline capacity and help provide sufficient fuel supply to

          the Las Vegas, Nevada market for the next several years. The

          investments include the following:


          o    the first project, estimated to cost approximately $10 million,

               involves pipeline expansions that will increase current

               transportation capacity by 3,200 barrels per day (2.2%), as well

               as the construction of two new 80,000 barrel storage tanks at our

               Las Vegas terminal;


          o    the second project, expected to cost approximately $15 million,

               includes the installation of new and upgraded pumping equipment

               and piping at our Colton, California terminal, a new booster

               station with two pumps at Cajon, California, and piping upgrades

               at our Las Vegas terminal; and


          o    the third project, expected to cost approximately $388 million,

               includes construction of a new 16-inch diameter pipeline that

               will further expand the system and which would increase system

               capacity to approximately 200,000 barrels per day upon

               completion. Capacity could be increased as necessary to over

               300,000 barrels per day with the addition of pump stations. The

               new 16-inch diameter pipeline will parallel existing utility

               corridors between Colton and Las Vegas in order to minimize

               environmental impacts. It will transport gasoline and diesel, as

               well as military jet fuel for Nellis Air Force Base, which



                                       11

<PAGE>


               is located eight miles northeast of downtown Las Vegas. The

               existing 14-inch diameter pipeline will be dedicated to

               commercial jet fuel service for McCarran International Airport in

               Las Vegas and for any future commercial airports planned for the

               Las Vegas market. The 8-inch diameter pipeline that currently

               serves McCarran would be purged and held for future service. The

               expansion is subject to environmental permitting, rights-of-way

               acquisition and the receipt of approvals from the FERC

               authorizing rates that are economic to CALNEV. Start-up of the

               new pipeline is scheduled for early 2010;


               In addition, we are currently working with our customers to

               determine interest in the construction of a new refined products

               distribution terminal to be located south of Henderson, Nevada;


     o    Effective November 20, 2006, we acquired all of the membership

          interests of Transload Services, LLC for an aggregate consideration of

          approximately $16.8 million, consisting of $15.4 million in cash, an

          obligation to pay $0.9 million currently held as security for the

          collection of certain accounts receivable and for the perfection of

          certain real property title rights, and $0.5 million of assumed

          liabilities. Transload Services, LLC is a leading provider of

          innovative, high quality material handling and steel processing

          services, operating 14 steel-related terminal facilities located in

          the Chicago metropolitan area and various cities in the United States.

          Its operations include transloading services, steel fabricating and

          processing, warehousing and distribution, and project staging. The

          combined operations include over 92 acres of outside storage and

          445,000 square feet of covered storage that offers customers

          environmentally controlled warehouses with indoor rail and truck

          loading facilities for handling temperature and humidity sensitive

          products;


     o    Effective December 1, 2006, we acquired all of the membership

          interests in Devco USA L.L.C. for an aggregate consideration of

          approximately $7.3 million, consisting of $4.8 million in cash, $1.6

          million in common units, and $0.9 million of assumed liabilities. The

          primary asset acquired was a technology based identifiable intangible

          asset--a proprietary process that transforms molten sulfur into

          premium solid formed pellets that are environmentally friendly, easy

          to handle and store, and safe to transport. The process was developed

          internally by Devco's engineers and employees. Devco, a Tulsa,

          Oklahoma based company, has more than 20 years of sulfur handling

          expertise and we believe the acquisition and subsequent application of

          this acquired technology complements our existing dry-bulk terminal

          operations;





     o    On December 13, 2006, we announced that we had entered into a joint

          development of the Midcontinent Express Pipeline with Energy Transfer

          Partners, L.P., and the start of a binding open season for the

          pipeline's firm natural gas transportation capacity. The approximate

          $1.25 billion interstate natural gas pipeline project will consist of

          an approximate 500-mile pipeline that will originate near Bennington,

          Oklahoma, be routed through Perryville, Louisiana, and terminate at an

          interconnect with Williams' Transco natural gas pipeline system in

          Butler, Alabama. We will own 50% of the equity in the project and

          Energy Transfer Partners, L.P. will own the remaining 50% interest.

          The new pipeline will also connect to KMI's Natural Gas Pipeline

          Company of America's natural gas pipeline and to Energy Transfer

          Partners' previously announced 135-mile, 36-inch diameter natural gas

          pipeline, which extends from the Barnett Shale natural gas producing

          area in North Texas to an interconnect with its 30-inch diameter

          Texoma Pipeline near Paris, Texas.


          The Midcontinent Express Pipeline will have an initial transportation

          capacity of 1.4 billion cubic feet per day of natural gas, and pending

          necessary regulatory approvals, is expected to be in service by

          February 2009. The pipeline has prearranged binding commitments from

          multiple shippers for approximately 850,000 cubic feet per day,

          including a binding commitment for 500,000 cubic feet per day from

          Chesapeake Energy Marketing, Inc., an affiliate of Chesapeake Energy

          Corporation. Additionally, in order to provide a seamless

          transportation path from various locations in Oklahoma, the

          Midcontinent Express Pipeline has also executed a firm capacity lease

          agreement for up to 500,000 cubic feet per day with Enogex, Inc., an

          Oklahoma-based intrastate natural gas gathering and pipeline company

          that is wholly-owned by OGE Energy Corp.;


     o    On December 14, 2006, we announced that we expect to declare cash

          distributions of $3.44 per unit for 2007, an almost 6% increase over

          our cash distributions of $3.26 per unit for 2006. This expectation

          includes contributions from assets owned by us as of the announcement

          date and does not include any potential benefits from unidentified

          acquisitions. We expect our growth to accelerate in the second half of

          2007, and we anticipate that our fourth quarter 2007 distribution per

          unit will be approximately 10% higher than our



                                       12

<PAGE>


          cash distribution per unit of $0.83 for the fourth quarter of 2006.

          Furthermore, while we expect that we will continue to be able to grow

          our distribution per unit at about 8% per year over the long-term, the

          increase in 2008 is expected to be greater than 8%, due mainly to the

          anticipated in service date of January 2008 for the western portion of

          the Rockies Express Pipeline;


     o    During 2006, we spent $1,058.3 million for additions to our property,

          plant and equipment, including both expansion and maintenance

          projects. Our capital expenditures included the following:


          o    $307.7 million in our Terminals segment, largely related to

               expanding the petroleum products storage capacity at our liquids

               terminal facilities, including the construction of additional

               liquids storage tanks at our facilities on the Houston Ship

               Channel, and to various expansion projects and improvements

               undertaken at multiple bulk terminal facilities;


          o    $283.0 million in our CO2 segment, mostly related to additional

               infrastructure, including wells and injection and compression

               facilities, to support the expanding carbon dioxide flooding

               operations at the SACROC and Yates oil field units in West Texas;


          o    $271.6 million in our Natural Gas Pipelines segment, mostly

               related to the inclusion of the capital expenditures of Rockies

               Express Pipeline LLC during the six-month period we included its

               results in our consolidated financial statements, as well as

               various expansion and improvement projects on our Texas

               Intrastate natural gas pipeline systems, including the

               development of additional natural gas storage capacity at our

               natural gas storage facilities located at Markham and Dayton,

               Texas; and


          o    $196.0 million in our Products Pipelines segment, mostly related

               to the continued expansion work on our Pacific operations' East

               Line products pipeline, the construction of an additional refined

               products line on our CALNEV Pipeline in order to increase

               delivery service to the growing Las Vegas, Nevada market, and to




               the combined expansion projects at the 24 refined products

               terminals included within our Southeast terminal operations.


     o    On January 15, 2007, we announced that we had entered into an

          agreement with affiliates of BP to increase our ownership interest in

          the Cochin pipeline system to 100%. We purchased our original

          undivided 32.5% ownership interest in the Cochin pipeline system in

          November 2000, and we currently own a 49.8% ownership interest. BP

          Canada Energy Company, an affiliate of BP, owns the remaining 50.2%

          ownership interest and is the operator of the pipeline. The agreement

          is subject to due diligence, regulatory clearance and other customary

          closing conditions. The transaction is expected to close in the first

          quarter of 2007, and upon closing, we will become the operator of the

          pipeline;


     o    On January 17, 2007, we announced that our CO2 business segment will

          invest approximately $120 million to further expand its operations and

          enable it to meet the increased demand for carbon dioxide in the

          Permian Basin. The expansion activities will take place in southwest

          Colorado and will include developing a new carbon dioxide source field

          and adding infrastructure at both the McElmo Dome Unit and the Cortez

          Pipeline. Specifically, the expansion will involve developing a new

          carbon dioxide source field in Dolores County, Colorado (named the Doe

          Canyon Deep Unit), adding eight carbon dioxide production wells at the

          McElmo Dome Unit, increasing transportation capacity on the Cortez

          Pipeline, and constructing a new pipeline that will connect the Cortez

          Pipeline to the new Doe Canyon Deep Unit. Initial construction

          activities have begun with expected in-service dates commencing in

          early 2008. The entire expansion is expected to be completed by the

          middle of 2008. Upon completion, these expansion projects are expected

          to be immediately accretive to distributable cash available to our

          unitholders; and


     o    On January 30, 2007, we completed a public offering of senior notes.

          We issued a total of $1.0 billion in principal amount of senior notes,

          consisting of $600 million of 6.00% notes due February 1, 2017, and

          $400 million of 6.50% notes due February 1, 2037. We received proceeds

          from the issuance of the notes, after underwriting discounts and

          commissions, of approximately $992.8 million, and we used the proceeds

          to reduce the borrowings under our commercial paper program.




                                       13

<PAGE>


(b) Financial Information about Segments


     For financial information on our four reportable business segments, see

Note 15 to our consolidated financial statements.


(c) Narrative Description of Business


Products Pipelines


     Our Products Pipelines segment consists of our refined petroleum products

and natural gas liquids pipelines and their associated terminals, our Southeast

terminals and our transmix processing facilities.


     Pacific Operations


     Our Pacific operations include our SFPP, L.P. operations, our CALNEV

Pipeline operations and our West Coast terminals operations. The assets include

interstate common carrier pipelines regulated by the FERC, intrastate pipelines

in the State of California regulated by the California Public Utilities

Commission, and certain non rate-regulated operations and terminal facilities.


     Our Pacific operations serve seven western states with approximately 3,000

miles of refined petroleum products pipelines and related terminal facilities

that provide refined products to some of the fastest growing population centers

in the United States, including California; Las Vegas and Reno, Nevada; and the

Phoenix-Tucson, Arizona corridor. For 2006, the three main product types

transported were gasoline (61%), diesel fuel (22%) and jet fuel (17%).


     Our Pacific operations' pipeline system consists of seven pipeline

segments, which include the following:


     o    the West Line, which consists of approximately 515 miles of primary

          pipeline and currently transports products for 37 shippers from six

          refineries and three pipeline terminals in the Los Angeles Basin to

          Phoenix, Arizona and various intermediate commercial and military

          delivery points. Products for the West Line also come through the Los




          Angeles and Long Beach port complexes;


     o    the East Line, which is comprised of two parallel pipelines,

          12-inch/16-inch diameter and 8-inch/12 inch diameter, originating in

          El Paso, Texas and continuing approximately 300 miles west to our

          Tucson terminal, and one 12-inch diameter line continuing northwest

          approximately 130 miles from Tucson to Phoenix. Products received by

          the East Line at El Paso come from a refinery in El Paso and through

          inter-connections with non-affiliated pipelines;


     o    the San Diego Line, which is a 135-mile pipeline serving major

          population areas in Orange County (immediately south of Los Angeles)

          and San Diego. The same refineries and terminals that supply the West

          Line also supply the San Diego Line;


     o    the CALNEV Line, which consists of two parallel 248-mile, 14-inch and

          8-inch diameter pipelines that run from our facilities at Colton,

          California to Las Vegas, Nevada, and which also serves Nellis Air

          Force Base located in Las Vegas. It also includes approximately 55

          miles of pipeline serving Edwards Air Force Base;


     o    the North Line, which consists of approximately 864 miles of trunk

          pipeline in five segments that transport products from Richmond and

          Concord, California to Brisbane, Sacramento, Chico, Fresno, Stockton

          and San Jose, California, and Reno, Nevada. The products delivered

          through the North Line come from refineries in the San Francisco Bay

          Area and from various pipeline and marine terminals;


     o    the Bakersfield Line, which is a 100-mile, 8-inch diameter pipeline

          serving Fresno, California; and


     o    the Oregon Line, which is a 114-mile pipeline transporting products to

          Eugene, Oregon for 18 shippers from marine terminals in Portland,

          Oregon and from the Olympic Pipeline.




                                       14

<PAGE>


     Our Pacific operation's West Coast terminals are fee-based terminals

located in several strategic locations along the west coast of the United States

with a combined total capacity of approximately 8.3 million barrels of storage

for both petroleum products and chemicals. The Carson terminal and the connected

Los Angeles Harbor terminal are located near the many refineries in the Los

Angeles Basin. The combined Carson/LA Harbor system is connected to numerous

other pipelines and facilities throughout the Los Angeles area, which gives the

system significant flexibility and allows customers to quickly respond to market

conditions.


     The Richmond terminal is located in the San Francisco Bay Area. The

facility serves as a storage and distribution center for chemicals, lubricants

and paraffin waxes. It is also the principal location in northern California

through which tropical oils are imported for further processing, and from which

United States' produced vegetable oils are exported to consumers in the Far

East. We also have two petroleum product terminals located in Portland, Oregon

and one in Seattle, Washington.


     Our Pacific operations include 15 truck-loading terminals (13 on SFPP, L.P.

and two on CALNEV) with an aggregate usable tankage capacity of approximately

13.5 million barrels. The truck terminals provide services including short-term

product storage, truck loading, vapor handling, additive injection, dye

injection and oxygenate blending.


     Markets. Combined, our Pacific operations' pipelines transport

approximately 1.2 million barrels per day of refined petroleum products,

providing pipeline service to approximately 31 customer-owned terminals, 11

commercial airports and 14 military bases. Currently, our Pacific operations'

pipelines serve approximately 93 shippers in the refined petroleum products

market; the largest customers being major petroleum companies, independent

refiners, and the United States military.


     A substantial portion of the product volume transported is gasoline. Demand

for gasoline depends on such factors as prevailing economic conditions,

vehicular use patterns and demographic changes in the markets served. If current

trends continue, we expect the majority of our Pacific operations' markets to

maintain growth rates that will exceed the national average for the foreseeable

future. Currently, the California gasoline market is approximately one million

barrels per day. The Arizona gasoline market, which is served primarily by us,

is approximately 178,000 barrels per day. Nevada's gasoline market is

approximately 71,000 barrels per day and Oregon's is approximately 100,000

barrels per day. The diesel and jet fuel market is approximately 545,000 barrels




per day in California, 86,000 barrels per day in Arizona, 33,000 barrels per day

in Nevada and 62,000 barrels per day in Oregon.


     The volume of products transported is affected by various factors,

principally demographic growth, economic conditions, product pricing, vehicle

miles traveled, population and fleet mileage. Certain product volumes can

experience seasonal variations and, consequently, overall volumes may be lower

during the first and fourth quarters of each year.


     Supply. The majority of refined products supplied to our Pacific

operations' pipeline system come from the major refining centers around Los

Angeles, San Francisco and Puget Sound, as well as from waterborne terminals

located near these refining centers.


     Competition. The most significant competitors of our Pacific operations'

pipeline system are proprietary pipelines owned and operated by major oil

companies in the area where our pipeline system delivers products as well as

refineries with related terminal and trucking arrangements within our market

areas. We believe that high capital costs, tariff regulation, and environmental

and right-of-way permitting considerations make it unlikely that a competing

pipeline system comparable in size and scope to our Pacific operations will be

built in the foreseeable future. However, the possibility of individual

pipelines being constructed or expanded to serve specific markets is a

continuing competitive factor.


     The use of trucks for product distribution from either shipper-owned

proprietary terminals or from their refining centers continues to compete for

short haul movements by pipeline. We cannot predict with any certainty whether

the use of short haul trucking will decrease or increase in the future.




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<PAGE>


     Longhorn Partners Pipeline is a pipeline that transports refined products

from refineries on the Gulf Coast to El Paso and other destinations in Texas.

Increased product supply in the El Paso area has resulted in some shift of

volumes transported into Arizona from our West Line to our East Line. Increased

movements into the Arizona market from El Paso could displace lower tariff

volumes supplied from Los Angeles on our West Line. Such shift of supply

sourcing has not had, and is not expected to have, a material effect on our

operating results.


     Our Pacific operation's terminals compete with terminals owned by our

shippers and by third party terminal operators in Sacramento, San Jose,

Stockton, Colton, Orange County, Mission Valley, and San Diego, California,

Phoenix and Tucson, Arizona and Las Vegas, Nevada. Short haul trucking from the

refinery centers is also a competitive factor to terminals close to the

refineries. Competitors of our Carson terminal in the refined products market

include Shell Oil Products U.S. and BP (formerly Arco Terminal Services

Company). In the crude/black oil market, competitors include Pacific Energy,

Wilmington Liquid Bulk Terminals (Vopak) and BP. Competition to our Richmond

terminal's chemical business comes primarily from IMTT. Competitors to our

Portland, Oregon terminals include ST Services, ChevronTexaco and Shell Oil

Products U.S. Competitors to our Seattle petroleum products terminal primarily

include BP and Shell Oil Products U.S.


     Plantation Pipe Line Company


     We own approximately 51% of Plantation Pipe Line Company, a 3,100-mile

refined petroleum products pipeline system serving the southeastern United

States. An affiliate of ExxonMobil owns the remaining 49% ownership interest.

ExxonMobil is the largest shipper on the Plantation system both in terms of

volumes and revenues. We operate the system pursuant to agreements with

Plantation Services LLC and Plantation Pipe Line Company. Plantation serves as a

common carrier of refined petroleum products to various metropolitan areas,

including Birmingham, Alabama; Atlanta, Georgia; Charlotte, North Carolina; and

the Washington, D.C. area.


     For the year 2006, Plantation delivered an average of 555,060 barrels per

day of refined petroleum products. These delivered volumes were comprised of

gasoline (67%), diesel/heating oil (20%) and jet fuel (13%). Average delivery

volumes for 2006 were 6.8% lower than the 595,248 barrels per day delivered

during 2005. The decrease was predominantly driven by alternative pipeline

service into Southeast markets and to changes in supply patterns from Louisiana

refineries related to new ultra low sulfur diesel and ethanol blended gasoline

requirements.


     Markets. Plantation ships products for approximately 40 companies to

terminals throughout the southeastern United States. Plantation's principal

customers are Gulf Coast refining and marketing companies, fuel wholesalers, and




the United States Department of Defense. Plantation's top five shippers

represent approximately 82% of total system volumes.


     The eight states in which Plantation operates represent a collective

pipeline demand of approximately two million barrels per day of refined

petroleum products. Plantation currently has direct access to about 1.5 million

barrels per day of this overall market. The remaining 0.5 million barrels per

day of demand lies in markets (e.g., Nashville, Tennessee; North Augusta, South

Carolina; Bainbridge, Georgia; and Selma, North Carolina) currently served by

another pipeline company. Plantation also delivers jet fuel to the Atlanta,

Georgia; Charlotte, North Carolina; and Washington, D.C. airports (Ronald Reagan

National and Dulles). Combined jet fuel shipments to these four major airports

decreased 13% in 2006 compared to 2005, due primarily to a 19% decrease in

shipments to Atlanta Hartsfield-Jackson International Airport and a 35% decrease

in shipments to Charlotte-Douglas International airport, which was largely the

result of air carriers realizing lower wholesale prices on jet fuel transported

by competing pipelines.


     Supply. Products shipped on Plantation originate at various Gulf Coast

refineries from which major integrated oil companies and independent refineries

and wholesalers ship refined petroleum products. Plantation is directly

connected to and supplied by a total of ten major refineries representing

approximately 2.3 million barrels per day of refining capacity.


     Competition. Plantation competes primarily with the Colonial pipeline

system, which also runs from Gulf Coast refineries throughout the southeastern

United States and extends into the northeastern states.





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<PAGE>


     Central Florida Pipeline


     Our Central Florida pipeline system consists of a 110-mile, 16-inch

diameter pipeline that transports gasoline and an 85-mile, 10-inch diameter

pipeline that transports diesel fuel and jet fuel from Tampa to Orlando, with an

intermediate delivery point on the 10-inch pipeline at Intercession City,

Florida. In addition to being connected to our Tampa terminal, the pipeline

system is connected to terminals owned and operated by TransMontaigne, Citgo,

BP, and Marathon Petroleum. The 10-inch diameter pipeline is connected to our

Taft, Florida terminal (located near Orlando) and is also the sole pipeline

supplying jet fuel to the Orlando International Airport in Orlando, Florida. In

2006, the pipeline system transported approximately 112,000 barrels per day of

refined products, with the product mix being approximately 69% gasoline, 13%

diesel fuel, and 18% jet fuel.


     We also own and operate liquids terminals in Tampa and Taft, Florida. The

Tampa terminal contains approximately 1.4 million barrels of storage capacity

and is connected to two ship dock facilities in the Port of Tampa. In early

2007, a new tank will go into service, increasing storage capacity to

approximately 1.5 million barrels. The Tampa terminal provides storage for

gasoline, diesel fuel and jet fuel for further movement into either trucks

through five truck-loading racks or into the Central Florida pipeline system.

The Tampa terminal also provides storage for non-fuel products, predominantly

spray oil used to treat citrus crops; ethanol; and bio-diesel. These products

are delivered to the terminal by vessel or railcar and loaded onto trucks

through truck-loading racks. The Taft terminal contains approximately 0.7

million barrels of storage capacity, providing storage for gasoline and diesel

fuel for further movement into trucks through 13 truck-loading racks.


     Markets. The estimated total refined petroleum products demand in the State

of Florida is approximately 800,000 barrels per day. Gasoline is, by far, the

largest component of that demand at approximately 545,000 barrels per day. The

total refined petroleum products demand for the Central Florida region of the

state, which includes the Tampa and Orlando markets, is estimated to be

approximately 360,000 barrels per day, or 45% of the consumption of refined

products in the state. We distribute approximately 150,000 barrels of refined

petroleum products per day including the Tampa terminal truck loadings. The

balance of the market is supplied primarily by trucking firms and marine

transportation firms. Most of the jet fuel used at Orlando International Airport

is moved through our Tampa terminal and the Central Florida pipeline system. The

market in Central Florida is seasonal, with demand peaks in March and April

during spring break and again in the summer vacation season, and is also heavily

influenced by tourism, with Disney World and other amusement parks located in

Orlando.


     Supply. The vast majority of refined petroleum products consumed in Florida

is supplied via marine vessels from major refining centers in the Gulf Coast of

Louisiana and Mississippi and refineries in the Caribbean basin. A lesser amount




of refined petroleum products is being supplied by refineries in Alabama and by

Texas Gulf Coast refineries via marine vessels and through pipeline networks

that extend to Bainbridge, Georgia. The supply into Florida is generally

transported by ocean-going vessels to the larger metropolitan ports, such as

Tampa, Port Everglades near Miami, and Jacksonville. Individual markets are then

supplied from terminals at these ports and other smaller ports, predominately by

trucks, except the Central Florida region, which is served by a combination of

trucks and pipelines.


     Competition. With respect to the Central Florida pipeline system, the most

significant competitors are trucking firms and marine transportation firms.

Trucking transportation is more competitive in serving markets close to the

marine terminals on the east and west coasts of Florida. We are utilizing tariff

incentives to attract volumes to the pipeline that might otherwise enter the

Orlando market area by truck from Tampa or by marine vessel into Cape Canaveral.

We believe it is unlikely that a new pipeline system comparable in size and

scope to our Central Florida Pipeline system will be constructed, due to the

high cost of pipeline construction, tariff regulation and environmental and

right-of-way permitting in Florida. However, the possibility of such a pipeline

or a smaller capacity pipeline being built is a continuing competitive factor.


     With respect to the terminal operations at Tampa, the most significant

competitors are proprietary terminals owned and operated by major oil companies,

such as Marathon Petroleum, BP and Citgo, located along the Port of Tampa, and

the ChevronTexaco and Motiva terminals in Port Tampa. These terminals generally

support the storage requirements of their parent or affiliated companies'

refining and marketing operations and provide a mechanism for

an oil company to enter into exchange contracts with third parties to serve its

storage needs in markets where the oil company may not have terminal assets.




                                       17

<PAGE>



     Federal regulation of marine vessels, including the requirement, under the

Jones Act, that United States-flagged vessels contain double-hulls, is a

significant factor influencing the availability of vessels that transport

refined petroleum products. Marine vessel owners are phasing in the requirement

based on the age of the vessel and some older vessels are being redeployed into

use in other jurisdictions rather than being retrofitted with a double-hull for

use in the United States.


     North System


     Our North System consists of an approximate 1,600-mile interstate common

carrier pipeline system that delivers natural gas liquids and refined petroleum

products for approximately 50 shippers from south central Kansas to the Chicago

area. Through interconnections with other major liquids pipelines, our North

System's pipeline system connects mid-continent producing areas to markets in

the Midwest and eastern United States. We also have defined sole carrier rights

to use capacity on an extensive pipeline system owned by Magellan Midstream

Partners, L.P. that interconnects with our North System. This capacity lease

agreement, which requires us to pay approximately $2.3 million per year, is in

place until February 2013 and contains a five-year renewal option.


     In addition to our capacity lease agreement with Magellan, we also have a

reversal agreement with Magellan to help provide for the transport of

summer-time surplus butanes from Chicago area refineries to storage facilities

at Bushton, Kansas. We have an annual minimum joint tariff commitment of $0.6

million to Magellan for this agreement. Our North System has approximately 7.7

million barrels of storage capacity, which includes caverns, steel tanks,

pipeline line-fill and leased storage capacity. This storage capacity provides

operating efficiencies and flexibility in meeting seasonal demands of shippers

and provides propane storage for our truck-loading terminals.


     We also own a 50% ownership interest in the Heartland Pipeline Company,

which owns the Heartland pipeline system, a natural gas liquids pipeline that

ships liquids products in the Midwest. We include our equity interest in

Heartland as part of our North System operations. ConocoPhillips owns the

remaining 50% interest in the Heartland Pipeline Company. The Heartland pipeline

comprises one of our North System's main line sections that originate at

Bushton, Kansas and terminates at a storage and terminal area in Des Moines,

Iowa. We operate the Heartland pipeline, and ConocoPhillips operates Heartland's

Des Moines, Iowa terminal and serves as the managing partner of Heartland.

Heartland leases to ConocoPhillips 100% of the Heartland terminal capacity at

Des Moines for $1.0 million per year on a year-to-year basis. The Heartland

pipeline lease fee, payable to us for reserved pipeline capacity, is paid

monthly, with an annual adjustment. The 2007 lease fee will be approximately

$1.1 million.





     In addition, our North System has eight propane truck-loading terminals at

various points in three states along the pipeline system and one multi-product

complex at Morris, Illinois, in the Chicago area. Propane, normal butane and

natural gasoline can be loaded at our Morris terminal.


     Markets. Our North System currently serves approximately 50 shippers in the

upper Midwest market, including both users and wholesale marketers of natural

gas liquids. These shippers include the three major refineries in the Chicago

area. Wholesale marketers of natural gas liquids primarily make direct large

volume sales to major end-users, such as propane marketers, refineries,

petrochemical plants and industrial concerns. Market demand for natural gas

liquids varies in respect to the different end uses to which natural gas liquids

products may be applied. Demand for transportation services is influenced not

only by demand for natural gas liquids but also by the available supply of

natural gas liquids.


     Supply. Natural gas liquids extracted or fractionated at the Bushton gas

processing plant have historically accounted for a significant portion

(approximately 15%) of the natural gas liquids transported through our North

System. Other sources of natural gas liquids transported in our North System

include large oil companies, marketers, end-users and natural gas processors

that use interconnecting pipelines to transport hydrocarbons. Refined petroleum

products transported by Heartland on our North System are supplied primarily

from the National Cooperative Refinery Association crude oil refinery in

McPherson, Kansas and the ConocoPhillips crude oil refinery in Ponca City,

Oklahoma. In an effort to obtain the greatest benefit from our North System's

line-fill on a year round basis, we added isobutane as a component of line-fill

in 2005, and we increased the proportion of normal butane and reduced the

proportion of propane. We believe this restructured line-fill helps mitigate any

operational constraints that could result from shippers holding reduced

inventory levels at any point in the year.




                                       18

<PAGE>



     Competition. Our North System competes with other natural gas liquids

pipelines and to a lesser extent with rail carriers. In most cases, established

pipelines are the lowest cost alternative for the transportation of natural gas

liquids and refined petroleum products. With respect to the Chicago market, our

North System competes with other natural gas liquids pipelines that deliver into

the area and with railcar deliveries primarily from Canada. Other Midwest

pipelines and area refineries compete with our North System for propane terminal

deliveries. Our North System also competes indirectly with pipelines that

deliver product to markets that our North System does not serve, such as the

Gulf Coast market area. Heartland competes with other refined petroleum products

carriers in the geographic market served. Heartland's principal competitor is

Magellan Midstream Partners, L.P.


     Cochin Pipeline System


     We own 49.8% of the Cochin pipeline system, a joint venture that operates

an approximate 1,900-mile, 12-inch diameter multi-product pipeline operating

between Fort Saskatchewan, Alberta and Sarnia, Ontario, including five

terminals. BP Canada Energy Company, an affiliate of BP, owns the remaining

50.2% ownership interest and is the operator of the pipeline. On January 15,

2007, we announced that we had entered into an agreement with BP Canada Energy

Company to increase our ownership interest in the Cochin pipeline system to

100%. The agreement is subject to due diligence, regulatory clearance and other

standard closing conditions. The transaction is expected to close in the first

quarter of 2007, and upon closing, we will become the operator of the pipeline.


     The pipeline operates on a batched basis and has an estimated system

capacity of approximately 112,000 barrels per day. Its peak capacity is

approximately 124,000 barrels per day. It includes 31 pump stations spaced at 60

mile intervals and five United States propane terminals. Associated underground

storage is available at Fort Saskatchewan, Alberta and Windsor, Ontario.


     Markets. The pipeline traverses three provinces in Canada and seven states

in the United States transporting high vapor pressure ethane, propane, butane

and natural gas liquids to the Midwestern United States and eastern Canadian

petrochemical and fuel markets. The system operates as a National Energy Board

(Canada) and FERC (United States) regulated common carrier, shipping products on

behalf of its owners as well as other third parties. The system is connected to

the Enterprise pipeline system in Minnesota and in Iowa, and connects with our

North System at Clinton, Iowa. The Cochin pipeline system has the ability to

access the Canadian Eastern Delivery System via the Windsor Storage Facility

Joint Venture at Windsor, Ontario.


     Supply. Injection into the system can occur from BP, EnerPro or Dow




fractionation facilities at Fort Saskatchewan, Alberta; from Provident Energy

storage at five points within the provinces of Canada; or from the Enterprise

West Junction, in Minnesota.


     Competition. The pipeline competes with railcars and Enbridge Energy

Partners for natural gas liquids long-haul business from Fort Saskatchewan,

Alberta and Windsor, Ontario. The pipeline's primary competition in the Chicago

natural gas liquids market comes from the combination of the Alliance pipeline

system, which brings unprocessed gas into the United States from Canada, and

from Aux Sable, which processes and markets the natural gas liquids in the

Chicago market.


     Cypress Pipeline


     Our Cypress pipeline is an interstate common carrier natural gas liquids

pipeline originating at storage facilities in Mont Belvieu, Texas and extending

104 miles east to a major petrochemical producer in the Lake Charles, Louisiana

area. Mont Belvieu, located approximately 20 miles east of Houston, is the

largest hub for natural gas liquids gathering, transportation, fractionation and

storage in the United States.


     Markets. The pipeline was built to service Westlake Petrochemicals

Corporation in the Lake Charles, Louisiana area under a 20-year ship-or-pay

agreement that expires in 2011. The contract requires a minimum volume of 30,000

barrels per day.


     Supply. The Cypress pipeline originates in Mont Belvieu where it is able to

receive ethane and ethane/propane mix from local storage facilities. Mont

Belvieu has facilities to fractionate natural gas liquids received from

several



                                       19

<PAGE>


pipelines into ethane and other components. Additionally, pipeline systems that

transport natural gas liquids from major producing areas in Texas, New Mexico,

Louisiana, Oklahoma and the Mid-Continent Region supply ethane and

ethane/propane mix to Mont Belvieu.


     Competition. The pipeline's primary competition into the Lake Charles

market comes from Louisiana onshore and offshore natural gas liquids.


     Southeast Terminals


     Our Southeast terminal operations consist of Kinder Morgan Southeast

Terminals LLC and its consolidated affiliate, Guilford County Terminal Company,

LLC. Kinder Morgan Southeast Terminals LLC, a wholly-owned subsidiary referred

to in this report as KMST, was formed in 2003 for the purpose of acquiring and

operating high-quality liquid petroleum products terminals located primarily

along the Plantation/Colonial pipeline corridor in the Southeastern United

States.


     Since its formation, KMST has acquired 24 petroleum products terminals with

a total storage capacity of approximately 7.8 million barrels. These terminals

transferred approximately 347,000 barrels of refined products per day during

2006.


     The 24 terminals consist of the following:


     o    seven petroleum products terminals acquired from ConocoPhillips and

          Phillips Pipe Line Company in December 2003. The terminals are located

          in the following markets: Selma, North Carolina; Charlotte, North

          Carolina; Spartanburg, South Carolina; North Augusta, South Carolina;

          Doraville, Georgia; Albany, Georgia; and Birmingham, Alabama. The

          terminals contain approximately 1.2 million barrels of storage

          capacity. ConocoPhillips has entered into a long-term contract with us

          to use the terminals. All seven terminals are served by the Colonial

          Pipeline and three are also connected to the Plantation Pipeline;


     o    seven petroleum products terminals acquired from ExxonMobil

          Corporation in March 2004. The terminals are located at the following

          locations: Newington, Virginia; Richmond, Virginia; Roanoke, Virginia;

          Greensboro, North Carolina; Charlotte, North Carolina; Knoxville,

          Tennessee; and Collins, Mississippi. The terminals have a combined

          storage capacity of approximately 3.2 million barrels for gasoline,

          jet fuel and diesel fuel. ExxonMobil has entered into a long-term

          contract to use the terminals. All seven of these terminals are

          connected to products pipelines owned by either Plantation Pipe Line

          Company or Colonial Pipeline Company;


     o    nine petroleum products terminals acquired from Charter Terminal




          Company and Charter-Triad Terminals in November 2004. Three terminals

          are located in Selma, North Carolina, and the remaining facilities are

          located in Greensboro and Charlotte, North Carolina; Chesapeake and

          Richmond, Virginia; Athens, Georgia; and North Augusta, South

          Carolina. The terminals have a combined storage capacity of

          approximately 3.2 million barrels for gasoline, jet fuel and diesel

          fuel. We fully own seven of the terminals and jointly own the

          remaining two. All nine terminals are connected to Plantation or

          Colonial pipelines; and


     o    one petroleum products terminal acquired from Motiva Enterprises, LLC

          in December 2006. The terminal, located in Roanoke, Virginia, has

          storage capacity of approximately 180,000 barrels per day for refined

          petroleum products and is served exclusively by the Plantation

          Pipeline. Motiva Enterprises, LLC has entered into a long-term

          contract to use the terminal.


     Markets. KMST's acquisition and marketing activities are focused on the

Southeastern United States from Mississippi through Virginia, including

Tennessee. The primary function involves the receipt of petroleum products from

common carrier pipelines, short-term storage in terminal tankage, and subsequent

loading onto tank trucks. Longer term storage is also available at many of the

terminals. KMST has a physical presence in markets representing almost 80% of

the pipeline-supplied demand in the Southeast and offers a competitive

alternative to marketers seeking a relationship with a truly independent truck

terminal service provider.




                                       20

<PAGE>


     Supply. Product supply is predominately from Plantation and/or Colonial

pipelines. To the maximum extent practicable, we endeavor to connect KMST

terminals to both Plantation and Colonial.


     Competition. There are relatively few independent terminal operators in the

Southeast. Most of the refined petroleum products terminals in this region are

owned by large oil companies (BP, Motiva, Citgo, Marathon, and Chevron) who use

these assets to support their own proprietary market demands as well as product

exchange activity. These oil companies are not generally seeking third party

throughput customers. Magellan Midstream Partners and TransMontaigne Product

Services represent the other independent terminal operators in this region.


     Transmix Operations


     Our Transmix operations include the processing of petroleum pipeline

transmix, a blend of dissimilar refined petroleum products that have become

co-mingled in the pipeline transportation process. During transportation,

different products are transported through the pipelines abutting each other,

and the volume of different mixed products is called transmix. At our transmix

processing facilities, we process and separate pipeline transmix into

pipeline-quality gasoline and light distillate products. We process transmix at

six separate processing facilities located in Colton, California; Richmond,

Virginia; Dorsey Junction, Maryland; Indianola, Pennsylvania; Wood River,

Illinois; and Greensboro, North Carolina.


     At our Dorsey Junction, Maryland facility, transmix processing is performed

for Colonial Pipeline Company on a "for fee" basis pursuant to a long-term

contract that expires in 2012. We process transmix on a "for fee" basis for

Shell Trading (U.S.) Company, referred to as Shell, according to the provisions

of a long-term contract that expires in 2011 at our transmix facilities located

in Richmond, Virginia; Indianola, Pennsylvania; and Wood River, Illinois. At

these locations, Shell procures transmix supply from pipelines and other

parties, pays a processing fee to us, and then sells the processed gasoline and

fuel oil through their marketing and distribution networks. The arrangement

includes a minimum annual processing volume and a per barrel fee to us, as well

as an opportunity to extend the processing agreement beyond 2011.


     Our Colton processing facility is located adjacent to our products terminal

in Colton, California, and it produces refined petroleum products that are

delivered into our Pacific operations' pipelines for shipment to markets in

Southern California and Arizona. The facility can process over 5,000 barrels of

transmix per day. In June 2006, Duke Energy Merchants exercised an early

termination provision contained in our long term processing contract due to

expire in 2010. Following Duke's exercise, we transitioned to processing

transmix at Colton for various pipeline shippers directly on a "for fee" basis

arrangement.


     Our Richmond, Virginia processing facility is supplied by the Colonial and

Plantation pipelines as well as deep-water barges (25 feet draft), transport

truck and rail. The facility can process approximately 7,500 barrels per day.




Our Dorsey Junction processing facility is located within Colonial's Dorsey

Junction terminal facility, near Baltimore, Maryland. The facility can process

approximately 5,000 barrels per day. Our Indianola processing facility is

located near Pittsburgh, Pennsylvania and is accessible by truck, barge and

pipeline. It primarily processes transmix from the Buckeye, Colonial, Sun and

Teppco pipelines. It has capacity to process 12,000 barrels of transmix per day.

Our Wood River processing facility is constructed on property owned by

ConocoPhillips and is accessible by truck, barge and pipeline. It primarily

processes transmix from both the Explorer and ConocoPhillips pipelines. It has

capacity to process 5,000 barrels of transmix per day.


     In the second quarter of 2006, we completed construction and placed into

service our approximately $11 million Greensboro, North Carolina transmix

facility, which is located along KMST's refined products tank farm. The facility

includes an atmospheric distillation column with a direct fired natural gas

heater to process up to 6,000 barrels of transmix per day for Plantation and

other interested parties. In addition to providing additional processing

business, the facility also gives Plantation a lower cost alternative that

recovers ultra low sulfur diesel, and more fully utilizes current KMST tankage

at the Greensboro, North Carolina tank farm.


     Markets. The Gulf and East Coast refined petroleum products distribution

system, particularly the Mid-Atlantic region, is the target market for our East

Coast transmix processing operations. The Mid-Continent area and the New York

Harbor are the target markets for our Illinois and Pennsylvania assets,

respectively. Our West Coast transmix processing operations support the markets

served by our Pacific operations in Southern Califormia.




                                       21

<PAGE>



     Supply. Transmix generated by Colonial, Plantation, Sun, Teppco, Explorer

and our Pacific operations provide the vast majority of the supply. These

suppliers are committed to the use of our transmix facilities under long-term

contracts. Individual shippers and terminal operators provide additional supply.

Shell acquires transmix for processing at Indianola, Richmond and Wood River;

Colton is supplied by pipeline shippers of our Pacific operations; and Dorsey

Junction is supplied by Colonial Pipeline Company.


     Competition. Placid Refining is our main competitor in the Gulf Coast area.

There are various processors in the Mid-Continent area, primarily

ConocoPhillips, Gladieux Refining and Williams Energy Services, who compete with

our transmix facilities. A new transmix facility located near Linden, New Jersey

and owned by Motiva Enterprises LLC is the principal competition for New York

Harbor transmix supply and for our Indianola facility. A number of smaller

organizations operate transmix processing facilities in the West and Southwest.

These operations compete for supply that we envision as the basis for growth in

the West and Southwest. Our Colton processing facility also competes with major

oil company refineries in California.


Natural Gas Pipelines


     Our Natural Gas Pipelines segment, which contains both interstate and

intrastate pipelines, consists of natural gas sales, transportation, storage,

gathering, processing and treating. Within this segment, we own approximately

14,000 miles of natural gas pipelines and associated storage and supply lines

that are strategically located at the center of the North American pipeline

grid. Our transportation network provides access to the major gas supply areas

in the western United States, Texas and the Midwest, as well as major consumer

markets.


     Texas Intrastate Natural Gas Pipeline Group


     The group, which operates primarily along the Texas Gulf Coast, consists of

the following four natural gas pipeline systems:


     o    our Kinder Morgan Texas Pipeline;


     o    our Kinder Morgan Tejas Pipeline;


     o    our Mier-Monterrey Mexico Pipeline; and


     o    our Kinder Morgan North Texas Pipeline.


     The two largest systems in the group are our Kinder Morgan Texas Pipeline

and our Kinder Morgan Tejas Pipeline. These pipelines essentially operate as a

single pipeline system, providing customers and suppliers with improved

flexibility and reliability. The combined system includes approximately 6,000

miles of intrastate natural gas pipelines with a peak transport and sales




capacity of approximately 5.2 billion cubic feet per day of natural gas and

approximately 120 billion cubic feet of on system contracted natural gas storage

capacity. In addition, the system, through owned assets and contractual

arrangements with third parties, has the capability to process 915 million cubic

feet per day of natural gas for liquids extraction and to treat approximately

250 million cubic feet per day of natural gas for carbon dioxide removal.


     Collectively, the system primarily serves the Texas Gulf Coast,

transporting, processing and treating gas from multiple onshore and offshore

supply sources to serve the Houston/Beaumont/Port Arthur, Texas industrial

markets, as well as local gas distribution utilities, electric utilities and

merchant power generation markets. It serves as a buyer and seller of natural

gas, as well as a transporter of natural gas. The purchases and sales of natural

gas are primarily priced with reference to market prices in the consuming region

of its system. The difference between the purchase and sale prices is the rough

equivalent of a transportation fee and fuel costs.


     Included in the operations of our Kinder Morgan Tejas system is our Kinder

Morgan Border Pipeline system. Kinder Morgan Border owns and operates an

approximately 97-mile, 24-inch diameter pipeline that extends from a point of

interconnection with the pipeline facilities of Pemex Gas Y Petroquimica Basica

at the International Border between the United States and Mexico, to a point of

interconnection with other intrastate pipeline facilities of Kinder




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Morgan Tejas located at King Ranch, Kleburg County, Texas. The 97-mile pipeline,

referred to as the import/export facility, is capable of importing Mexican gas

into the United States, and exporting domestic gas to Mexico. The imported

Mexican gas is received from, and the exported domestic gas is delivered to,

Pemex. The capacity of the import/export facility is approximately 300 million

cubic feet of natural gas per day.


     Our Mier-Monterrey Pipeline consists of a 95-mile, 30-inch diameter natural

gas pipeline that stretches from south Texas to Monterrey, Mexico and can

transport up to 375 million cubic feet per day. The pipeline connects to a

1,000-megawatt power plant complex and to the PEMEX natural gas transportation

system. We have entered into a long-term contract (expiring in 2018) with Pemex,

which has subscribed for all of the pipeline's capacity.