kmr10k2008.htm
Table of Contents
Kinder Morgan Management, LLC 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, 2008
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, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).  Large accelerated filer þ  Accelerated filer o  Non-accelerated filer o  Smaller reporting company 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
 
 
 

 
Kinder Morgan Management, LLC Form 10-K


The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $3,452,961,407 as of June 30, 2008.
 
The number of shares outstanding for each of the registrant’s classes of common equity, as of January 31, 2009 was approximately two voting shares and 77,997,904 listed shares.
 

 
2

 
Kinder Morgan Management, LLC Form 10-K


KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
CONTENTS
 
   
Page
Number
     
  
     
4-6
 
6-9
 
9
 
9
 
10
 
  
     
     
  
     
   
 
11
 
12
 
13-18
 
18
 
19-34
 
34
 
34-35
 
 
34
 
 
35
 
 
35
 
35
 
  
     
     
  
     
36-38
 
38-49
 
   
 
50-51
 
52-56
 
57
 
  
     
     
  
     
58-59
 
  
     
60
 
  
   
  
Note:  Individual financial statements of the parent company are omitted pursuant to the provisions of Accounting Series Release No. 302.
 

 
3

 
Kinder Morgan Management, LLC 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 Annual Report on Form 10-K for the year ended December 31, 2008. 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 (as the agreement was amended effective May 30, 2007):
 
 
·
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., or, after taking into account the creditors of Kinder Morgan Energy Partners, L.P., SFPP, L.P. or Calnev Pipe Line, L.L.C., respectively, allow Kinder Morgan Energy Partners, L.P., SFPP, L.P. or Calnev Pipe Line, L.L.C. to take any of the following actions: (a) instituting proceedings to be adjudicated bankrupt or insolvent, or (b) consenting in writing to the institution of bankruptcy or insolvency proceedings against it, or (c) filing a petition seeking or consenting to reorganization or relief under any applicable federal or state law relating to bankruptcy, or (d) consenting in writing to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of Kinder Morgan Energy Partners, L.P., SFPP, L.P. or Calnev Pipe Line, L.L.C. or a substantial part of their respective property, or (e) making any assignment for the benefit of its creditors, or (f) except as required by law, admitting in writing its inability to pay its respective debts generally as they become due,
 
 
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,
 

 
4

 
Items 1 and 2.   Business and Properties. (continued)
Kinder Morgan Management, LLC Form 10-K


 
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 the 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
 
 
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 Knight 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 sole discretion, the approval of the owners of a majority of the shares, excluding shares owned by Knight 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 receive any cash flow attributable to our ownership of the i-units, but instead we receive quarterly distributions of additional i-units from Kinder Morgan Energy Partners, L.P. The number of additional i-units we receive is based on the amount of cash distributed by Kinder Morgan Energy Partners, L.P. to its common unitholders. The amount of cash distributed by Kinder Morgan Energy Partners, L.P. to its common unitholders is dependent on the operations of Kinder Morgan Energy Partners, L.P. and its operating limited partnerships and their subsidiaries and investees, and is 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 have not had, and do not expect to have material amounts of taxable
 

 
5

 
Items 1 and 2.   Business and Properties. (continued)
Kinder Morgan Management, LLC Form 10-K


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 Annual Report on Form 10-K for the year ended December 31, 2008.
 
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.
 
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 significant 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 Annex A.
 
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.
 
The tax treatment applied to Kinder Morgan Energy Partners, L.P. depends on its status as a partnership for United States federal income tax purposes, as well as Kinder Morgan Energy Partners, L.P. not being subject to a material amount of entity-level taxation by individual states. If the Internal Revenue Service treats Kinder Morgan Energy Partners, L.P. as a corporation or Kinder Morgan Energy Partners, L.P. becomes subject to a material amount of entity-level taxation for state tax purposes, it would substantially reduce the amount of cash available for distribution to common unitholders, 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. In order for Kinder Morgan Energy Partners, L.P. to be treated as a partnership for United States federal income tax purposes, current law requires that 90% or more of its gross income for every taxable year consist of “qualifying income,” as defined in Section 7704 of the Internal Revenue Code. Kinder Morgan Energy Partners, L.P. may not meet this requirement or current law may change so as to cause, in either event, Kinder Morgan Energy Partners, L.P. to be treated as a corporation for United States federal income tax purposes or otherwise subject to United States federal income tax. Kinder Morgan Energy Partners, L.P. has not requested, and does not plan to request, a ruling from the IRS on this or any other matter affecting Kinder Morgan Energy Partners, L.P.
 
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.
 
Current law or Kinder Morgan Energy Partners, L.P.’s business 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 or otherwise subject Kinder Morgan Energy Partners, L.P. to entity-level taxation. Members of Congress are considering substantive changes to the existing United 
 

 
6

 
Kinder Morgan Management, LLC Form 10-K


States federal income tax laws that affect certain publicly traded partnerships. For example, federal income tax legislation has been proposed that would eliminate partnership tax treatment for certain publicly traded partnerships. Although the currently proposed legislation would not appear to affect Kinder Morgan Energy Partners, L.P.’s tax treatment as a partnership, we are unable to predict whether any of these changes, or other proposals, will ultimately be enacted. Any such changes could negatively impact the value of an investment in our shares.
 
In addition, because of widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise or other forms of taxation. For example, Kinder Morgan Energy Partners, L.P. is now subject to an entity-level tax on the portion of its total revenue that is generated in Texas. Specifically, the Texas margin tax is imposed at a maximum effective rate of 0.7% of Kinder Morgan Energy Partners, L.P.’s total revenue that is apportioned to Texas. This tax reduces, and the imposition of such a tax on Kinder Morgan Energy Partners, L.P. by any other state, will reduce Kinder Morgan Energy Partners, L.P.’s cash available for distribution to its partners. If any state were to impose a tax upon Kinder Morgan Energy Partners, L.P. as an entity, the cash available for distribution to its common unitholders would be reduced, which would reduce the values of i-units distributed quarterly to us and our shares distributed quarterly to our shareholders.
 
Kinder Morgan Energy Partners, L.P.’s partnership agreement provides that if a law is enacted that subjects Kinder Morgan Energy Partners, L.P. to taxation as a corporation or otherwise subjects Kinder Morgan Energy Partners, L.P. to entity-level taxation for United States federal income tax purposes, the minimum quarterly distribution and the target distribution levels will be adjusted to reflect the impact on Kinder Morgan Energy Partners, L.P. of that law.
 
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 Knight Inc. does not satisfy its obligation to purchase our shares, which is triggered by a liquidation, then the value of our 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 Knight 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 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
 

 
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Kinder Morgan Management, LLC Form 10-K


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.
 
Kinder Morgan Energy Partners, L.P. may issue additional common or other units and we may issue additional shares, which would dilute the ownership interest of our shareholders. The issuance of additional common or other units by Kinder Morgan Energy Partners, L.P. or shares by us other than in our quarterly distributions of shares may have the following effects:
 
 
·
the amount available for distributions on each share may decrease;
 
 
·
the relative voting power of each previously outstanding share will be decreased; and
 
 
·
the market price of our shares may decline.
 
The market price of our shares on any given day generally is less than the market price of the common units of Kinder Morgan Energy Partners, L.P. Since our initial public offering, our shares have generally traded on the New York Stock Exchange at prices at a discount to, but in general proximity to, the prices of common units of Kinder Morgan Energy Partners, L.P. Thus, the market price of our shares on any given day generally is less than the market price of the common units of Kinder Morgan Energy Partners, L.P. The market price of our shares will depend, as does the market price of the common units of Kinder Morgan Energy Partners, L.P., on many factors, including our operation and management of Kinder Morgan Energy Partners, L.P., the future performance of Kinder Morgan Energy Partners, L.P., conditions in the energy transportation and storage industry, general market conditions, and conditions relating to businesses that are similar to that of Kinder Morgan Energy Partners, L.P.
 
Owners of our shares have limited voting rights and therefore have little or no opportunity to influence or change our management. Kinder Morgan G.P., Inc. owns all of our shares eligible to vote on the election of our directors and, therefore, is entitled to elect all of the members of our board of directors. For a description of the limited voting rights you will have as an owner of shares, see “Description of Our Shares—Limited Voting Rights.”
 
Our shares are subject to optional and mandatory purchase provisions which could result in our shareholders having to sell our shares at a time or price they do not like and could result in a taxable event to our shareholders. If either of the optional purchase rights are exercised by Knight Inc., or if there is a mandatory purchase event, our shareholders will be required to sell our shares at a time or price that may be undesirable, and could receive less than they paid for our shares. Any sale of our shares for cash, to Knight Inc. or otherwise, will be a taxable transaction to the owner of the shares sold. Accordingly, a gain or loss will be recognized on the sale equal to the difference between the cash received and the owner’s tax basis in the shares sold. For further information regarding the optional and mandatory purchase rights, please read “Description of Our Shares—Optional Purchase” and “Description of Our Shares—Mandatory Purchase.” Please also read “Material Tax Considerations—Tax Consequences of Share Ownership.”
 
Our board of directors has the power to change the terms of the shares in ways our board determines, in its sole discretion, are not materially adverse to the owners of our shares. Our shareholders may not like the changes, and even if they believe the changes are materially adverse to the owners of shares, they may have no recourse to prevent such changes. Our shareholders may not like the changes made to the terms of the shares and may disagree with the board’s decision that the changes are not materially adverse to our shareholders. A shareholder’s recourse if it disagrees will be limited because our limited liability company agreement gives broad latitude and discretion to the board of directors and eliminates or reduces the fiduciary duties that our board of directors would otherwise owe to our shareholders. For further information regarding amendments to the shares, our limited liability company agreement and other agreements, please read “Description of Our Shares—Limited Voting Rights.”
 

 
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Kinder Morgan Management, LLC Form 10-K


Knight Inc. may be unable to purchase shares upon the occurrence of the mandatory purchase events, resulting in a loss in value of our shares. The satisfaction of the obligation of Knight Inc. to purchase shares following a purchase event is dependent on Knight Inc.’s financial ability to meet its obligations. There is no requirement for Knight Inc. to secure its obligation or comply with financial covenants to ensure its performance of these obligations. If Knight Inc. is unable to meet its obligations upon the occurrence of a mandatory purchase event, shareholders may not receive cash for our shares.
 
There is a potential for change of control if Knight Inc. defaults on debt. Knight Inc. owns all of the outstanding common equity of the general partner of Kinder Morgan Energy Partners. If Knight Inc. defaults on its debt, in exercising their rights as lenders, Knight Inc.’s lenders could acquire control of the general partner of Kinder Morgan Energy Partners or otherwise influence the general partner of Kinder Morgan Energy Partners through control of Knight Inc.
 
The interests of Knight Inc. may differ from our interests, the interests of our shareholders and the interests of unitholders of Kinder Morgan Energy Partners, L.P. Knight Inc. owns all of the outstanding common equity 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 Knight Inc. and the general partner of Kinder Morgan Energy Partners, L.P. and have fiduciary duties to manage the businesses of Knight Inc. and Kinder Morgan Energy Partners, L.P. in a manner that may not be in the best interest of our shareholders. Knight 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 of Kinder Morgan Energy Partners, L.P., 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 of Kinder Morgan Energy Partners, L.P. 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 of Kinder Morgan Energy Partners, L.P. 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 of Kinder Morgan Energy Partners, L.P., the resolution of a conflict by the general partner will not be a breach of any duty. The provisions relating to the general partner of Kinder Morgan Energy Partners, L.P. 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.
 
A person or group owning 20% or more of the aggregate number of issued and outstanding Kinder Morgan Energy Partners, L.P. common units and our shares, other than Knight Inc. and its affiliates, may not vote common units or shares; as a result, you are less likely to receive a premium for your shares in a hostile takeover. Any common units and shares owned by a person or group that owns 20% or more of the aggregate number of issued and outstanding common units and shares cannot be voted. This limitation does not apply to Knight Inc. and its affiliates. This provision may:
 
 
·
discourage a person or group from attempting to take over control of us or Kinder Morgan Energy Partners, L.P.; and
 
 
·
reduce the prices at which the common units and our shares will trade under certain circumstances.
 
For example, a third party will probably not attempt to remove the general partner of Kinder Morgan Energy Partners, L.P. and take over our management of Kinder Morgan Energy Partners, L.P. by making a tender offer for the common units at a price above their trading market price.
 
Unresolved Staff Comments.

None.
 
Legal Proceedings.

We are not a party to any litigation.
 

 
9

 
Kinder Morgan Management, LLC Form 10-K


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 2008.
 

 
10

 
Kinder Morgan Management, LLC Form 10-K


PART II
 
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
 
2008
 
2007
 
Low
 
High
 
Low
 
High
Quarter Ended
             
March 31
$47.21
 
$56.23
 
$44.42
 
$51.78
June 30
51.02
 
57.32
 
49.50
 
54.70
September 30
46.45
 
56.62
 
44.06
 
53.24
December 31
34.01
 
50.80
 
46.21
 
53.19
 
There were approximately 55,000 holders of our listed shares as of January 31, 2009, 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
 
2008
 
2007
 
2008
 
2007
 
2008
 
2007
Quarter Ended
                         
March 31
0.017716
 
0.015378
 
$
0.96
 
$
0.83
 
1,305,429
 
974,285
June 30
0.018124
 
0.016331
 
$
0.99
 
$
0.85
 
1,359,153
 
1,143,661
September 30
0.021570
 
0.017686
 
$
1.02
 
$
0.88
 
1,646,891
 
1,258,778
December 31
0.024580
 
0.017312
 
$
1.05
 
$
0.92
 
1,917,189
 
1,253,951
__________
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 2008.
 
For information regarding our equity compensation plans, please refer to Item 12, included elsewhere herein.
 

 
11

 
Kinder Morgan Management, LLC Form 10-K



Selected Financial Data.

KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
 
 
Post- Acquisition Basis1
   
Pre-Acquisition Basis1
 
Year Ended
December 31,
 
Seven Months
Ended
December 31,
   
Five Months
Ended
May 31,
 
Year Ended December 31,
 
2008
 
2007
   
2007
 
2006
 
2005
 
2004
 
(In millions except
per share amounts)
   
(In millions except per share amounts)
Equity in Earnings (Loss) of Kinder Morgan Energy Partners, L.P.
$
142.2
   
$
65.4
     
$
(64.6
)
 
$
131.1
   
$
88.4
   
$
113.5
 
Provision (Benefit) for Income Taxes
 
59.0
     
15.0
       
(23.3
)
   
47.0
     
32.1
     
38.4
 
Net Income (Loss)
$
83.2
   
$
50.4
     
$
(41.3
)
 
$
84.1
   
$
56.3
   
$
75.1
 
Earnings (Loss) Per Share, Basic and Diluted
$
1.11
   
$
0.71
     
$
(0.65
)
 
$
1.40
   
$
1.00
   
$
1.47
 
Number of Shares Used in Computing Basic and Diluted Earnings Per Share
 
75.1
     
71.1
       
63.7
     
60.1
     
56.1
     
51.2
 
Equivalent Distribution Value Per Share2
$
4.02
   
$
2.65
     
$
0.83
   
$
3.26
   
$
3.13
   
$
2.87
 
Total Number of Additional Shares Distributed
 
6.2
     
3.6
       
1.0
     
4.4
     
3.8
     
3.7
 
Total Assets at End of Period
$
2,462.1
   
$
2,213.8
     
$
1,944.5
   
$
1,707.9
   
$
1,583.7
   
$
1,639.3
 
__________
1
On May 30, 2007, Knight Inc. (formerly Kinder Morgan, Inc.) completed a merger transaction under which investors including Richard D. Kinder, Knight Inc.’s Chairman and Chief Executive Officer, acquired all of the outstanding shares of that company, referred to as the “Going Private transaction.” The acquisition was accounted for under the purchase method of accounting, as required by Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. The purchase price of Knight Inc. has been “pushed-down” and allocated to the assets and liabilities of its subsidiary companies, including us. Accordingly, our post-acquisition selected financial data shown above for the year ended December 31, 2008 and the seven months ended December 31, 2007 reflect a new basis of accounting. The selected financial data for the periods ended May 31, 2007 and December 31, 2006, 2005 and 2004 reflect the operations of the Company prior to the acquisition. Hence, there is a blackline division on the selected financial data shown above, which is intended to signify that the amounts shown for periods prior to and subsequent to the acquisition are not comparable. While the Going Private transaction closed on May 30, 2007, for convenience, the Pre-Acquisition Basis is assumed to end on May 31, 2007 and the Post-Acquisition Basis is assumed to begin on June 1, 2007. The results for the two-day period from May 30, 2007 to May 31, 2007 are not material to the data for any of the periods presented.
 
2
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.
 

 
12

 
Kinder Morgan Management, LLC Form 10-K



Item 7.

General
 
We are a limited liability company, formed in Delaware in February 2001, which has elected to be treated as a corporation for United States federal income tax purposes. Our shares trade on the New York Stock Exchange under the symbol “KMR.” Our voting shares are owned by Kinder Morgan G.P., Inc., of which Knight Inc. owns all the outstanding common equity. Kinder Morgan G.P., Inc. is the general partner of Kinder Morgan Energy Partners, L.P. Kinder Morgan G.P., Inc. has delegated to us, to the fullest extent permitted under Delaware law and the Kinder Morgan Energy Partners L.P. partnership agreement, all of its rights and powers to manage and control the business and affairs of Kinder Morgan Energy Partners L.P. and its subsidiary operating limited partnerships and their subsidiaries, subject to Kinder Morgan G.P., Inc.’s right to approve specified actions.
 
Knight Inc., a Kansas corporation and a private company, is one of the largest energy transportation and storage companies in North America, operating, either for itself or on behalf of Kinder Morgan Energy Partners, L.P., or owning an interest in approximately 37,000 miles of pipelines that transport primarily natural gas, crude oil, petroleum products and carbon dioxide, and approximately 170 terminals that store, transfer and handle products like gasoline and coal. On May 30, 2007, Kinder Morgan, Inc. merged with a wholly owned subsidiary of Knight Holdco LLC, with Kinder Morgan, Inc. continuing as the surviving legal entity and subsequently renamed Knight Inc. Knight Holdco LLC is a private company owned by Richard D. Kinder, our Chairman and Chief Executive Officer; our co-founder William V. Morgan; former Kinder Morgan, Inc. board members Fayez Sarofim and Michael C. Morgan; other members of Knight Inc.’s senior management, most of whom are also senior officers of Kinder Morgan G.P., Inc. and us; and affiliates of (i) Goldman Sachs Capital Partners, (ii) Highstar Capital, (iii) The Carlyle Group, and (iv) Riverstone Holdings LLC. This transaction is referred to in this report as the Going Private transaction.
 
The acquisition was accounted for under the purchase method of accounting, as required by Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. The purchase price of Knight Inc. has been “pushed-down” and allocated to the assets and liabilities of its subsidiary companies, including us. As a result of this transaction, we have adopted a new basis of accounting for our assets and liabilities. Therefore, in the accompanying financial information, transactions and balances prior to the closing of the Going Private transaction (the amounts labeled “Pre-Acquisition Basis”) reflect the historical basis of accounting for our assets and liabilities, while the amounts subsequent to the closing (the amounts labeled “Post-Acquisition Basis”) reflect the push-down of Knight Inc.’s new accounting basis to our financial statements. Additional information on this transaction and its effect on our financial information is contained in Note 2 of the accompanying Notes to Consolidated Financial Statements.
 
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 is a leading pipeline transportation and energy storage company in North America. Kinder Morgan Energy Partners, L.P. owns an interest in or operates approximately 26,000 miles of pipelines and approximately 170 terminals. Kinder Morgan Energy Partners, L.P.’s pipelines transport natural gas, gasoline, crude oil, carbon dioxide and other products, and its terminals store petroleum products and chemicals and handle bulk materials like coal and petroleum coke. Kinder Morgan Energy Partners, L.P. is also the leading provider of carbon dioxide for enhanced oil recovery projects in North America.
 
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 Annual Report on Form 10-K for the year ended December 31, 2008. 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 receipts associated with our managing and controlling the business and affairs of Kinder Morgan Energy Partners, L.P. and our equity in the earnings of Kinder Morgan Energy Partners, L.P. attributable to the i-units we own. At December 31, 2008, through our ownership of i-units, we owned approximately 29.3% 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 record earnings as described below. 
 

 
13

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.  (continued)
Kinder Morgan Management, LLC Form 10-K


Our percentage ownership in Kinder Morgan Energy Partners, L.P. changes over time upon the distribution of additional i-units to us or upon issuances of additional common units or other equity securities by Kinder Morgan Energy Partners, L.P.
 
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 we own, reduced by a deferred income tax provision and adjusted for the push down effect of Knight Inc.’s purchase of us and Kinder Morgan Energy Partners, L.P. The deferred income tax provision is calculated based on the book/tax basis difference created by our recognition, under accounting principles generally accepted in the United States of America, of our share of the earnings of Kinder Morgan Energy Partners, L.P. Our earnings per share (both basic and diluted) is our net income divided by our weighted-average number of outstanding shares during each period presented. There are no securities outstanding that may be converted into or exercised for our shares.
 
Notwithstanding the consolidation of Kinder Morgan Energy Partners L.P. and its subsidiaries into Knight Inc.’s financial statements, it is not liable for, and its assets are not available to satisfy, the obligations of Kinder Morgan Energy Partners and/or its subsidiaries and vice versa. Responsibility for payments of obligations reflected in Knight Inc.’s or Kinder Morgan Energy Partners L.P.’s financial statements is a legal determination based on the entity that incurs the liability.
 
Kinder Morgan Energy Partners, L.P.’s acquisitions from Knight Inc. of Trans Mountain pipeline system in April 2007, the one-third interest in the Express pipeline system (“Express”) and the full interest of the net assets of the Jet Fuel pipeline system (“Jet Fuel”) in August 2008 were accounted for as transfers of net assets between entities under common control. The carrying amounts of net assets recognized in the balance sheets of each combining entity were carried forward to the balance sheet of the combined entity, and no other assets or liabilities were recognized as a result of the combination (that is, no recognition was made for a purchase premium or discount representing any difference between the cash consideration and the book value of the net assets acquired). Trans Mountain (included in the Kinder Morgan Canada segment) has been incorporated into Kinder Morgan Energy Partners’ financial statements beginning January 1, 2006, the date of common control. Kinder Morgan Canada recorded charges of $377.1 million in 2007 related to the impairment of Trans Mountain goodwill. This amount is included in Kinder Morgan Canada’s 2007 net loss of $293.6 million. Due to the immaterial impact of Express and Jet Fuel operations and earnings, Kinder Morgan Energy Partners, L.P. and we have only included these operations and earnings in our financial statements for the four months ended December 31, 2008.
 
For the years ended December 31, 2008, 2007 and 2006, Kinder Morgan Energy Partners, L.P. reported limited partners’ net income (loss) of $499.0 million, ($21.3) million and $490.8 million, respectively. Our net income (loss) for the year ended December 31, 2008, seven months ended December 31, 2007, five months ended May 31, 2007 and year ended December 31, 2006 was $83.2 million, $50.4 million, ($41.3) million and $84.1 million, respectively.
 
Following is summarized restated income statement information and segment earnings contribution by business segment for Kinder Morgan Energy Partners, L.P. Additional information on Kinder Morgan Energy Partners, L.P.’s results of operation and financial position are contained in its Annual Report on Form 10-K for the year ended December 31, 2008, attached hereto as Annex A.
 
Kinder Morgan Energy Partners, L.P.
 
 
Year Ended December 31,
 
2008
 
2007
 
2006
 
(In millions)
Segment Earnings Contribution:
                     
Product Pipelines
$
546.2
   
$
569.6
   
$
491.2
 
Natural Gas Pipelines
 
760.6
     
600.2
     
574.8
 
CO2
 
759.9
     
537.0
     
488.2
 
Terminals
 
523.8
     
416.0
     
408.1
 
Kinder Morgan Canada
 
141.2
     
(293.6
)
   
76.5
 
Total Segment Earnings
 
2,731.7
     
1,829.2
     
2,038.8
 
Depreciation, Depletion and Amortization Expenses
 
(702.7
)
   
(547.0
)
   
(432.8
)
Amortization of Excess Cost of Investments
 
(5.7
)
   
(5.8
)
   
(5.7
)
General Administrative Expenses
 
(297.9
)
   
(278.7
)
   
(238.4
)
Interest and Other Non-Operating Expenses1
 
(420.6
)
   
(407.4
)
   
(357.8
)
Net Income
$
1,304.8
   
$
590.3
   
$
1,004.1
 
  
                     
General Partner’s Interest in Net Income
$
805.8
   
$
611.6
   
$
513.3
 
  
                     
Limited Partners’ Interest in Net Income
$
499.0
   
$
(21.3
)
 
$
490.8
 
____________

 
14

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.  (continued)
Kinder Morgan Management, LLC Form 10-K


1
Includes unallocated interest income and income tax expense, interest and debt expense, and minority interest expense.
 
Income Taxes
 
We are a limited liability company that has elected to be treated as a corporation for financial and tax reporting purposes. Our entire income tax provision (benefit) consists of deferred income tax, and deferred income tax assets and liabilities are recognized for temporary differences between the basis of our assets and liabilities. Under our new basis of accounting, we have excluded nondeductible goodwill associated with our investment in Kinder Morgan Energy Partners, L.P. Prior to the Going Private transaction we recognized temporary differences between the basis of our assets and liabilities for financial and tax reporting purposes including nondeductible goodwill associated with our investment in Kinder Morgan Energy Partners, L.P. Changes in tax legislation are included in the relevant computations in the period in which such changes are effective.
 
We are a party to a tax indemnification agreement with Knight Inc. Pursuant to this tax indemnification agreement, Knight 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.
 
The year ended December 31, 2008 provision for income taxes of $59.0 million consists of $49.8 million of federal income tax expense, $1.6 million of state income tax expense, and $7.7 million of out of period adjustments attributable to the nondeductible goodwill associated with our investment in Kinder Morgan Energy Partners, L.P. These income tax expenses were offset by approximately $0.1 million of other items.
 
The seven months ended December 31, 2007 provision for income taxes of $15.0 million consists of $23.1 million of federal income tax expense and $0.5 million of state income taxes. These income tax expenses were offset by a tax benefit of $8.6 million attributable to the nondeductible goodwill associated with our investment in Kinder Morgan Energy Partners, L.P.
 
The five months ended May 31, 2007 benefit for income taxes of $23.3 million consists of $22.6 million of federal income tax benefit and $0.7 million of state income tax expenses.
 
The year ended December 31, 2006 provision for income taxes of $47.0 million consists of $45.9 million of federal income tax expense and $1.1 million of state income taxes.
 
See Notes 6 and 7 of the accompanying Notes to Consolidated Financial Statements for additional information on income taxes and the out of period adjustments, respectively.
 
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 Knight 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., all of which 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 13, 2009, we paid a share distribution of 0.024580 shares per outstanding share (1,917,189 total shares) to shareholders of record as of January 30, 2009, based on the $1.05 per common unit distribution declared by Kinder Morgan Energy Partners, L.P.
 
On May 15, 2007, we issued 5.7 million listed shares in a public offering at a price of $52.26 per share. We used the net proceeds of $297.9 million from the sale to purchase 5.7 million i-units from Kinder Morgan Energy Partners, L.P.
 
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 Energy Partners, L.P.’s general partner is granted discretion by the partnership agreement, which discretion has been delegated to us, subject to the approval of the general partner in certain cases, to establish, maintain and adjust
 

 
15

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.  (continued)
Kinder Morgan Management, LLC Form 10-K


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.
 
The general partner and owners of Kinder Morgan Energy Partners, L.P.’s common units and Class B units receive distributions in cash, while we, the sole owner of Kinder Morgan Energy Partners, L.P.’s i-units, receive distributions in additional i-units. For each outstanding i-unit, a fraction of an i-unit will be issued. The fraction is calculated by dividing the amount of cash being distributed per Kinder Morgan Energy Partners, L.P. common unit by the average closing price of our shares over the ten consecutive trading days preceding the date on which the shares begin to trade ex-dividend under the rules of the New York Stock Exchange. The cash equivalent of distributions of i-units is treated as if it had actually been distributed for purposes of determining the distributions to the general partner, although Kinder Morgan Energy Partners, L.P. does not distribute cash to i-unit owners but retains the cash for use in its business.
 
Available cash is initially distributed 98% to the limited partners and 2% to the general partner. These distribution percentages are modified to provide for incentive distributions to be paid to the general partner in the event that quarterly distributions to unitholders exceed certain specified targets.
 
Kinder Morgan Energy Partners, L.P.’s available cash for each quarter is distributed:
 
 
·
first, 98% to the owners of all classes of units pro rata and 2% to the general partner until the owners of all classes of units have received a total of $0.15125 per unit in cash or equivalent i-units for such quarter;
 
 
·
second, 85% of any available cash then remaining to the owners of all classes of units pro rata and 15% to the general partner until the owners of all classes of units have received a total of $0.17875 per unit in cash or equivalent i-units for such quarter;
 
 
·
third, 75% of any available cash then remaining to the owners of all classes of units pro rata and 25% to the general partner until the owners of all classes of units have received a total of $0.23375 per unit in cash or equivalent i-units for such quarter; and
 
 
·
fourth, 50% of any available cash then remaining to the owners of all classes of units pro rata, to owners of common units and Class B units in cash and to owners of i-units in the equivalent number of i-units, and 50% to the general partner.
 
Incentive distributions are generally defined as all cash distributions paid to the general partner that are in excess of 2% of the aggregate value of cash and i-units being distributed. The general partner’s incentive distribution for the distributions that Kinder Morgan Energy Partners, L.P. declared for 2008 was $800.8 million. The general partner’s incentive distribution that Kinder Morgan Energy Partners, L.P. paid during 2008 to the general partner (for the fourth quarter of 2007 and the first nine months of 2008) was $754.6 million. The difference between declared and paid distributions is due to the fact that distributions for the fourth quarter of each year are declared and paid in the first quarter of the following year.
 
We expect that our expenditures associated with managing and controlling the business and affairs of Kinder Morgan Energy Partners, L.P. and the reimbursement for these expenditures received by us from Kinder Morgan Energy Partners, L.P. will continue to be equal. As stated above, the distributions we expect to receive on the i-units we own will be in the form of additional i-units. Therefore, we expect neither to generate nor to require significant amounts of cash in ongoing operations. We currently have no debt and have no plans to incur any debt. Any cash received from the sale of additional shares will immediately be used to purchase additional i-units. Accordingly, we do not anticipate any other sources or needs for additional liquidity.
 
Recent Accounting Pronouncements
 
Refer to Note 8 of the accompanying Notes to 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,
 

 
16

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.  (continued)
Kinder Morgan Management, LLC Form 10-K


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 Annex A. Many of the factors that will determine these results are beyond our ability to control or predict. Specific factors that could cause actual results to differ from those in the forward-looking statements include:
 
 
·
price trends and overall demand for natural gas liquids, refined petroleum products, oil, carbon dioxide, natural gas, electricity, 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 tariff rates charged by Kinder Morgan Energy Partners L.P.’s pipeline subsidiaries implemented by the Federal Energy Regulatory Commission, other regulatory agency 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 the ability to expand 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 it;
 
 
·
crude oil and natural gas production from exploration and production areas that Kinder Morgan Energy Partners L.P. serves, such as the Permian Basin area of West Texas, the U.S. Rocky Mountains and the Alberta oil sands;
 
 
·
changes in laws or regulations, third-party relations and approvals and 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’ ability to offer and sell equity securities and its ability to sell debt securities or obtain debt financing in sufficient amounts to implement that portion of Kinder Morgan Energy Partners’ 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, which 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 or Kinder Morgan Energy Partners, L.P.’s ability to obtain insurance coverage without significant levels 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 and credit markets conditions, including availability of credit generally, as well as inflation and interest rates;
 
 
·
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;
 
 
·
our ability to achieve cost savings and revenue growth;
 

 
17

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.  (continued)
Kinder Morgan Management, LLC 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 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, 2008 attached hereto as Annex A.
 
The foregoing list should not be construed to be exhaustive. We believe the forward-looking statements in this filing are reasonable. However, 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. We disclaim any obligation, other than as required by applicable law, 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.

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.
 

 
18

 
Kinder Morgan Management, LLC Form 10-K


Financial Statements and Supplementary Data.

INDEX
 
 
Page 
     
20-21
 
22
 
22
 
23
 
24-25
 
26
 
27-33
 
33
 
33-34
 
     


 
19

 
Item 8. Financial Statements and Supplementary Data . (continued)
Kinder Morgan Management, LLC Form 10-K




Report of Independent Registered Public Accounting Firm

To the Board of Directors
and Stockholders of Kinder Morgan Management, LLC:

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of comprehensive income, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Kinder Morgan Management, LLC and its subsidiary (the “Company”) at December 31, 2008 and 2007, and the results of their operations and their cash flows for the year ended December 31, 2008 and the period from June 1, 2007 to December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting.  Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform our audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included 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.  Our audits of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide 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
March 2, 2009

 
20

 
Item 8. Financial Statements and Supplementary Data . (continued)
Kinder Morgan Management, LLC Form 10-K







Report of Independent Registered Public Accounting Firm

To the Board of Directors
and Stockholders of Kinder Morgan Management, LLC:

In our opinion, the accompanying consolidated statements of income, of comprehensive income, of shareholders’ equity and of cash flows present fairly, in all material respects, the results of the operations and the cash flows for the period from January 1, 2007 to May 31, 2007, and the year ended December 31, 2006 of Kinder Morgan Management, LLC and its subsidiary (the “Company”) 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 our audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  Our audits include 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.




PricewaterhouseCoopers LLP
Houston, Texas 
March 2, 2009

 
21

 
Item 8. Financial Statements and Supplementary Data . (continued)
Kinder Morgan Management, LLC Form 10-K



 
KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
 
 
Post-Acquisition Basis
   
Pre-Acquisition Basis
 
Year Ended
December 31,
 
Seven Months
Ended
December 31,
   
Five Months
Ended
May 31,
 
Year Ended
December 31,
 
2008
 
2007
   
2007
 
2006
 
(In millions)
   
(In millions)
Equity in Earnings (Loss) of Kinder Morgan Energy Partners, L.P.
$
142.2
   
$
65.4
     
$
(64.6
)
 
$
131.1
 
Provision (Benefit) for Income Taxes
 
59.0
     
15.0
       
(23.3
)
   
47.0
 
  
                               
Net Income (Loss)
$
83.2
   
$
50.4
     
$
(41.3
)
 
$
84.1
 
  
                               
Earnings (Loss) Per Share, Basic and Diluted
$
1.11
   
$
0.71
     
$
(0.65
)
 
$
1.40
 
  
                               
Number of Shares Used in Computing Basic and Diluted Earnings Per Share
 
75.1
     
71.1
       
63.7
     
60.1
 


KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
Post-Acquisition Basis
   
Pre-Acquisition Basis
 
Year Ended
December 31,
 
Seven Months
Ended
December 31,
   
Five Months
Ended
May 31,
 
Year Ended
December 31,
 
2008
 
2007
   
2007
 
2006
 
(In millions)
   
(In millions)
Net Income (Loss)
$
83.2
   
$
50.4
     
$
(41.3
)
 
$
84.1
 
Other Comprehensive Income (Loss), Net of Tax:
                               
Change in Fair Value of Derivatives Utilized for Hedging Purposes (Net of Tax Benefit (Expense) of $(37.6),$45.6, $6.6, and $17.3, respectively)
 
66.4
     
(80.7
)
     
(5.8
)
   
(30.5
)
Reclassification of Change in Fair Value of Derivatives to Net Income (Net of Tax of $38.0, $13.9, $7.4, and $39.4, respectively)
 
67.0
     
24.5
       
6.5
     
69.7
 
Change in Foreign Currency Translation Adjustment (Net of Tax Benefit (Expense) of $19.0, $(2.3), $(2.5) and $1.8, respectively)
 
(33.6
)
   
4.1
       
2.2
     
(3.2
)
Minimum Pension Liability Adjustments, and reclassification of post retirement benefit and pension plan actuarial gains/losses and prior service costs/credits to net income (Net of Tax Benefit (Expense) of $(0.2) and $0.2, respectively)
 
0.4
     
(0.3
)
     
-
     
-
 
Total Other Comprehensive Income (Loss)
 
100.2
     
(52.4
)
     
2.9
     
36.0
 
  
                               
Comprehensive Income (Loss)
$
183.4
   
$
(2.0
)
   
$
(38.4
)
 
$
120.1
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 

 
22

 
Item 8.   Financial Statements and Supplementary Data . (continued)
Kinder Morgan Management, LLC Form 10-K



 

 
KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
 
 
December 31,
2008
 
December 31,
2007
 
(In millions)
 
(In millions)
ASSETS
             
  
             
Current Assets
             
Accounts Receivable – Related Party
$
7.2
   
$
28.6
 
Prepayments and Other
 
0.8
     
2.3
 
   
8.0
     
30.9
 
  
             
Investment in Kinder Morgan Energy Partners, L.P.
 
2,454.1
     
2,155.0
 
  
             
Deferred Tax Assets
 
-
     
27.9
 
  
             
Total Assets
$
2,462.1
   
$
2,213.8
 
  
             
LIABILITIES AND SHAREHOLDERS’ EQUITY
             
  
             
Current Liabilities
             
Accounts Payable
$
1.3
   
$
1.3
 
Accrued Expenses and Other
 
6.6
     
29.5
 
  
 
7.9
     
30.8
 
  
             
Deferred Tax Liabilities
 
122.1
     
-
 
  
             
Shareholders’ Equity
             
Voting Shares - Unlimited Authorized; 2 Voting Shares Issued and Outstanding
 
0.1
     
0.1
 
Listed Shares - Unlimited Authorized; 77,997,904 and 72,432,480 Listed Shares Issued and Outstanding, Respectively
 
2,630.1
     
2,374.8
 
Retained Deficit
 
(272.4
)
   
(66.0
)
Accumulated Other Comprehensive Loss
 
(25.7
)
   
(125.9
)
Total Shareholders’ Equity
 
2,332.1
     
2,183.0
 
               
Total Liabilities and Shareholders’ Equity
$
2,462.1
   
$
2,213.8
 

The accompanying notes are an integral part of these consolidated financial statements.
 

 
23

 
Item 8. Financial Statements and Supplementary Data . (continued)
Kinder Morgan Management, LLC Form 10-K



 
KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
 
 
Post-Acquisition Basis
 
Year Ended
December 31, 2008
   
Seven Months Ended
December 31, 2007
 
Shares
 
Amount
   
Shares
 
Amount
 
(Dollars in millions)
Voting Shares
                       
Beginning Balance
2
 
$
0.1
     
2
 
$
0.1
 
Ending Balance
2
   
0.1
     
2
   
0.1
 
  
                       
Listed Shares
                       
Beginning Balance
72,432,480
   
2,374.8
     
70,030,041
   
2,258.6
 
Share Dividends
5,565,424
   
289.6
     
2,402,439
   
-
 
Share Issuance Costs
-
   
-
     
-
   
116.4
 
Revaluation of Kinder Morgan Energy Partners, L.P. Investment
-
   
-
     
-
   
(0.2
)
Purchase Accounting Adjustment
-
   
(34.3
)
   
-
   
-
 
Ending Balance
77,997,904
   
2,630.1
     
72,432,480
   
2,374.8
 
  
                       
Retained Deficit
                       
Beginning Balance
     
(66.0
)
         
-
 
Net Income
     
83.2
           
50.4
 
Share Dividends
     
(289.6
)
         
(116.4
)
Ending Balance
     
(272.4
)
         
(66.0
)
  
                       
Accumulated Other Comprehensive Loss (Net of Tax Benefits)
                       
Derivatives
                       
Beginning Balance
     
(129.7
)
         
(73.5
)
Change in Fair Value of Derivatives Utilized for Hedging Purposes
     
66.4
           
(80.7
)
Reclassification of Change in Fair Value of Derivatives to Net Income
     
67.0
           
24.5
 
Ending Balance
     
3.7
           
(129.7
)
Foreign Currency Translation
                       
Beginning Balance
     
4.1
           
-
 
Currency Translation Adjustment
     
(33.6
)
         
4.1
 
Ending Balance
     
(29.5
)
         
4.1
 
Employee Benefit Plans
                       
Beginning Balance
     
(0.3
)
         
-
 
SFAS No. 158 Amortization/Adjustments
     
0.4
           
(0.3
)
Ending Balance
     
0.1
           
(0.3
)
Total Accumulated Other Comprehensive Loss
     
(25.7
)
         
(125.9
)
  
                       
Total Shareholders’ Equity
77,997,906
 
$
2,332.1
     
72,432,482
 
$
2,183.0
 


 
24

 
Item 8. Financial Statements and Supplementary Data . (continued)
Kinder Morgan Management, LLC Form 10-K



 
KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (continued)
 
 
Pre-Acquisition Basis
 
Five Months Ended
May 31,2007
 
Year Ended
December 31, 2006
 
Shares
 
Amount
 
Shares
 
Amount
 
(Dollars in millions)
Voting Shares
               
Beginning Balance
 
2
 
$
0.1
   
2
 
$
0.1
 
Ending Balance
 
2
   
0.1
   
2
   
0.1
 
  
                       
Listed Shares
                       
Beginning Balance
 
62,301,674
   
2,109.4
   
57,918,371
   
1,958.5
 
Listed Shares Issued
 
5,700,000
   
297.9
   
-
   
-
 
Share Dividends
 
2,028,367
   
105.2
   
4,383,303
   
186.5
 
Share Issuance Costs
 
-
   
-
   
-
   
(0.1
)
Revaluation of Kinder Morgan Energy Partners, L.P. Investment
 
-
   
-
   
-
   
(35.5
 
)
Ending Balance
 
70,030,041
   
2,512.5
   
62,301,674
   
2,109.4
 
  
                       
Retained Deficit
                       
Beginning Balance
       
(387.0
)
       
(284.6
)
Net Income (Loss)
       
(41.3
)
       
84.1
 
Share Dividends
       
(105.2
)
       
(186.5
)
Ending Balance
       
(533.5
)
       
(387.0
)
  
                       
Accumulated Other Comprehensive Loss (Net of Tax Benefits)
                       
Derivatives
                       
Beginning Balance
       
(139.1
)
       
(178.3
)
Change in Fair Value of Derivatives Utilized for Hedging Purposes
       
(5.8
)
       
(30.5
)
Reclassification of Change in Fair Value of Derivatives to Net Income
       
6.5
         
69.7
 
Ending Balance
       
(138.4
)
       
(139.1
)
Foreign Currency Translation
                       
Beginning Balance
       
(3.3
)
       
(0.1
)
Currency Translation Adjustment
       
2.2
         
(3.2
)
Ending Balance
       
(1.1
)
       
(3.3
)
Employee Retirement Benefits
                       
Beginning Balance
       
(0.3
)
       
-
 
Adjustment to Initially Apply SFAS No. 158
       
-
         
(0.3
)
Ending Balance
       
(0.3
)
       
(0.3
)
Total Accumulated Other Comprehensive Loss
       
(139.8
)
       
(142.7
)
  
                       
Total Shareholders’ Equity
 
70,030,043
 
$
1,839.3
   
62,301,676
 
$
1,579.8
 

The accompanying notes are an integral part of these consolidated financial statements.
 

 
25

 
Item 8. Financial Statements and Supplementary Data . (continued)
Kinder Morgan Management, LLC Form 10-K



 
KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
 
 
Post-Acquisition Basis
   
Pre-Acquisition Basis
 
Year Ended
December 31,
2008
 
Seven Months
Ended
December 31,
2007
   
Five Months
Ended
May 31, 2007
 
Year Ended
December 31,
2006
 
(In millions)
   
(In millions)
Cash Flows From Operating Activities
                               
Net Income (Loss)
$
83.2
   
$
50.4
     
$
(41.3
)
 
$
84.1
 
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities
                               
Deferred Income Taxes
 
59.0
     
15.0
       
(23.3
)
   
47.0
 
Equity in (Earnings) Loss of Kinder Morgan Energy Partners, L.P.
 
(142.2
)
   
(65.4
)
     
64.6
     
(131.1
)
Decrease (Increase) in Accounts Receivable
 
21.4
     
(16.1
)
     
2.2
     
7.6
 
Decrease (Increase) in Other Current Assets
 
1.5
     
1.0
       
0.7
     
(0.6
)
Increase (Decrease) in Accounts Payable
 
-
     
-
       
0.1
     
(1.4
)
Increase (Decrease) in Other Current Liabilities
 
(22.9
)
   
15.1
       
(3.0
)
   
(5.6
)
Net Cash Flows Provided by Operating Activities
 
-
     
-
       
-
     
-
 
  
                               
Cash Flows From Investing Activities
                               
Purchase of i-units of Kinder Morgan Energy Partners, L.P.
 
-
     
-
       
(297.9
)
   
-
 
Net Cash Flows Used in Investing Activities
 
-
     
-
       
(297.9
)
   
-
 
  
                               
Cash Flows From Financing Activities
                               
Shares Issued
 
-
     
-
       
297.9
     
-
 
Net Cash Flows Provided by Financing Activities
 
-
     
-
       
297.9
     
-
 
  
                               
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 consolidated financial statements.
 

 
26

 
Item 8. Financial Statements and Supplementary Data . (continued)
Kinder Morgan Management, LLC 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., of which Knight Inc. indirectly owns all of the outstanding common equity, is the general partner of Kinder Morgan Energy Partners, L.P. and owns all of our voting shares. Kinder Morgan G.P., Inc., pursuant to a delegation of control agreement among us, Kinder Morgan G.P., Inc. and Kinder Morgan Energy Partners, L.P., has delegated to us, to the fullest extent permitted under Delaware law and Kinder Morgan Energy Partners, L.P.’s limited partnership agreement, all of its rights and powers to manage and control the business and affairs of Kinder Morgan Energy Partners, L.P., subject to the general partner’s right to approve specified actions. We are a limited partner in Kinder Morgan Energy Partners, L.P. through our ownership of its i-units, and manage and control its business and affairs pursuant to the delegation of control agreement. Our success is dependent upon our operation and management of Kinder Morgan Energy Partners, L.P. and its resulting performance, see Note 5. Unless the context requires otherwise, references to “we,” “us,” “our,” or the “Company” are intended to mean Kinder Morgan Management, LLC and its consolidated subsidiary, Kinder Morgan Services LLC.
 
2.      Significant Accounting Policies
 
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.
 
On May 30, 2007, Kinder Morgan, Inc. merged with a wholly owned subsidiary of Knight Holdco LLC, with Kinder Morgan, Inc. continuing as the surviving legal entity and subsequently renamed Knight Inc. Knight Holdco LLC is a private company owned by Richard D. Kinder, our Chairman and Chief Executive Officer; our co-founder William V. Morgan; former Kinder Morgan, Inc. board members Fayez Sarofim and Michael C. Morgan; other members of its senior management, most of whom are also senior officers of Kinder Morgan G.P., Inc. and us; and affiliates of (i) Goldman Sachs Capital Partners, (ii) Highstar Capital, (iii) The Carlyle Group, and (iv) Riverstone Holdings LLC. This transaction is referred to in this report as the Going Private transaction. The acquisition was accounted for under the purchase method of accounting, as required by Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. The purchase price of Knight Inc. has been “pushed-down” and allocated to the assets and liabilities of its subsidiary companies, including us. As a result of this transaction, we have adopted a new basis of accounting for our assets and liabilities. Therefore, in the accompanying financial information, transactions and balances prior to the closing of the Going Private transaction (the amounts labeled “Pre-Acquisition Basis”) reflect the historical basis of accounting for our assets and liabilities, while the amounts subsequent to the closing (the amounts labeled “Post-Acquisition Basis”) reflect the push-down of Knight Inc.’s new accounting basis to our financial statements.
 
The purchase price of Knight Inc. was allocated to the assets it acquired and the liabilities it assumed based on their fair values. The push-down of this allocation of fair value to us caused a step-up in the recorded value of our investment in Kinder Morgan Energy Partners, L.P. of approximately $224.1 million and the recording of a deferred tax asset. The difference between the book value of our investment in Kinder Morgan Energy Partners, L.P. (reflected within the caption “Investment in Kinder Morgan Energy Partners, L.P.” in the accompanying Consolidated Balance Sheets) and our share of Kinder Morgan Energy Partners L.P.’s recognized net assets at book value (our ownership percentage in Kinder Morgan Energy Partners, L.P. multiplied by the total partners’ capital on Kinder Morgan Energy Partner’s, L.P.’s Consolidated Balance Sheets) consists of two pieces. First, an amount related to the difference between the recognized net assets at book value and the fair value of those net assets, and secondly, a premium in excess of the fair value of those underlying net assets referred to as equity method goodwill.
 
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.
 
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, which beginning June 1, 2007, includes an adjustment to reflect the impact of the push down of the purchase price of Knight Inc. on our equity investment in Kinder
 

 
27

 
Item 8. Financial Statements and Supplementary Data . (continued)
Kinder Morgan Management, LLC Form 10-K


Morgan Energy Partners, L.P. We also record our proportionate share of Kinder Morgan Energy Partners’ Accumulated Other Comprehensive Income as an adjustment to our investment in Kinder Morgan Energy Partners. 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, 2008, through our ownership of i-units, we owned approximately 29.3% of all of Kinder Morgan Energy Partners, L.P.’s outstanding limited partner interests.
 
In addition, we periodically reevaluate the amount at which we carry the excess of cost over fair value of net assets accounted for under the equity method to determine whether current events or circumstances warrant adjustments to our carrying value in accordance with APB Opinion No. 18. The impairment test under APB No. 18 considers whether there is an inability to recover the carrying value of an investment that is other than temporary. As of December 31, 2008, we believed no such impairment had occurred on our investment in Kinder Morgan Energy Partners, L.P.
 
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.
 
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.
 
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, 2008, Knight Inc. owned approximately 11.1 million, or approximately 14.3% of our outstanding shares.
 
On February 13, 2009, we paid a share distribution of 0.024580 shares per outstanding share (1,917,189 total shares) to shareholders of record as of January 30, 2009, based on the $1.05 per common unit distribution declared by Kinder Morgan Energy Partners, L.P. This distribution was 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
 

 
28

 
Item 8. Financial Statements and Supplementary Data . (continued)
Kinder Morgan Management, LLC Form 10-K


reimbursement. We incurred approximately $263.5 million, $135.8 million, $116.9 million and $215.5 million of expenses during the year ended December 31, 2008, the seven months ended December 31, 2007, the five months ended May 31, 2007 and the year ended December 31, 2006, 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, 2008, $7.2 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 Knight 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. 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. During the year ended December 31, 2008, the seven months ended December 31, 2007, the five months ended May 31, 2007 and the year ended December 31, 2006, expenses totaled approximately $310.7 million, $163.7 million, $112.1 million and $248.3 million, respectively.
 
5.      Summarized Financial Information for Kinder Morgan Energy Partners, L.P.
 
Kinder Morgan Energy Partners, L.P.’s acquisition from Knight Inc. of Trans Mountain pipeline system in April 2007, the one-third interest in Express and a full interest in the net assets of Jet Fuel in August 2008 were accounted for as transfers of net assets between entities under common control. The carrying amounts of net assets recognized in the balance sheets of each combining entity were carried forward to the balance sheet of the combined entity, and no other assets or liabilities were recognized as a result of the combination (that is, no recognition was made for a purchase premium or discount representing any difference between the cash consideration and the book value of the net assets acquired) Trans Mountain (included in the Kinder Morgan Canada segment) has been incorporated into Kinder Morgan Energy Partners’ financial statements beginning January 1, 2006, the date of common control. Kinder Morgan Canada recorded charges of $377.1 million in 2007 related to the impairment of Trans Mountain goodwill. This amount is included in Kinder Morgan Canada’s 2007 net loss of $293.6 million. Due to the immaterial impact of Express and Jet Fuel operations and earnings, Kinder Morgan Energy Partners, L.P. and we have only included the operations and earnings of Express and Jet Fuel in our financial statements for the four months ended December 31, 2008.
 
Following is summarized income statement 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 Annual Report on Form 10-K for the year ended December 31, 2008, which is attached hereto as Annex A.
 
Summarized Kinder Morgan Energy Partners, L.P. Income Statement Information
 
 
Year Ended December 31,
 
2008
 
2007
 
2006
 
(In millions)
Operating Revenues
$
11,740.3
 
$
9,217.7
 
$
9,048.7
Operating Expenses
 
10,188.8
   
8,410.0
   
7,757.1
Operating Income
$
1,551.5
 
$
807.7
 
$
1,291.6
  
               
Income from Continuing Operations
$
1,303.5
 
$
416.4
 
$
989.8
  
               
Net Income
$
1,304.8
 
$
590.3
 
$
1,004.1
  

 
29

 
Item 8. Financial Statements and Supplementary Data . (continued)
Kinder Morgan Management, LLC Form 10-K


Summarized Kinder Morgan Energy Partners, L.P. Balance Sheet Information
 
 
As of December 31,
 
2008
 
2007
 
(In millions)
Current Assets
$
1,244.4
 
$
1,209.7
Noncurrent Assets
$
16,641.4
 
$
13,968.1
  
         
Current Liabilities
$
1,782.1
 
$
2,558.3
Noncurrent Liabilities
$
9,987.4
 
$
8,129.6
Minority Interest
$
70.7
 
$
54.2
Partners’ Equity
$
6,045.6
 
$
4,435.7

6.      Income Taxes
 
We are a limited liability company that has elected to be treated as a corporation for federal income tax purposes. Our entire income tax provision (benefit) consists of deferred income tax and deferred income tax assets and liabilities are recognized for temporary differences between the basis of our assets and liabilities for financial and tax reporting purposes. Our deferred tax liabilities balance was $122.1 million as of December 31, 2008 and our deferred tax assets balance was $27.9 million as of December 31, 2007 as presented in the accompanying Consolidated Balance Sheets. Under our new basis of accounting, we have excluded nondeductible goodwill associated with our investment in Kinder Morgan Energy Partners, L.P. Prior to the Going Private transaction we recognized temporary differences between the basis of our assets and liabilities for financial reporting and tax purposes including nondeductible goodwill associated with our investment in Kinder Morgan Energy Partners, L.P. 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 our investment in Kinder Morgan Energy Partners, L.P.
 
 
Post-Acquisition Basis
   
Pre-Acquisition Basis
 
Year Ended
December 31,
2008
 
Seven Months
Ended
December 31,
2007
   
Five Months
Ended
May 31,
2007
 
Year Ended
December 31,
2006
Federal Income Tax Rate
 
35.0
%
   
35.0
%
     
35.0
%
   
35.0
%
Other1
 
5.4
%
   
(13.2
)%
     
-
     
-
 
State Income Tax, Net of Federal Benefit
 
1.1
%
   
1.1
%
     
1.1
%
   
0.9
%
Effective Tax Rate
 
41.5
%
   
22.9
%
     
36.1
%
   
35.9
%
__________
1
Primarily changes in nondeductible goodwill and an out of period adjustment; See Note 7, “Out of Period Adjustment” for further discussion.
 
We entered into a tax indemnification agreement with Knight Inc. Pursuant to this tax indemnification agreement, Knight 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.
 
We adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109 (“FIN 48”) on January 1, 2007 and its adoption did not result in a cumulative effect adjustment to the opening balance of the “Retained Deficit” on the accompanying Consolidated Balance Sheet.
 
For the five months ended May 31, 2007, seven months ended December 31, 2007, and year ended December 31, 2008, we had no unrecognized tax benefits on the balance sheet. In the event interest or penalties are incurred with respect to income tax matters, our policy will be to include such items in income tax expense. We did not have an accrual for interest and penalties at May 31 and December 31, 2007, or at December 31, 2008. At December 31, 2008, tax years 2004 through 2008 remained subject to examination by the Internal Revenue Service or applicable states. We do not expect any material change in the balance of our unrecognized tax benefits over the next twelve months.
 
7.      Out of Period Adjustment
 
Effective with the closing of the Going Private transaction (which was accounted for as a purchase business combination under SFAS No. 141, Business Combinations) and our change to a new basis of accounting reflecting the push down of the purchase price to us, we now provide for deferred taxes on only the portion of the book/tax basis difference in our investment in Kinder Morgan Energy Partners, L.P. that is not attributable to non-tax-deductible goodwill. We developed an estimate

 
30

 
Item 8. Financial Statements and Supplementary Data . (continued)
Kinder Morgan Management, LLC Form 10-K


that was used to determine the provision for deferred income taxes and the net deferred tax balances included in our Annual Report on Form 10-K for the year ended December 31, 2007 (“2007 Form 10-K”). Subsequent to the February 29, 2008 filing of our 2007 Form 10-K, we determined that the information used in making this estimate was deficient in some respects and, therefore, a revised estimate was developed.
 
Our consolidated financial statements for the year ended December 31, 2008 reflect the revised calculation, including the correction of our previously reported amounts. This change had the effects of (i) increasing our provision for deferred income taxes by $7.7 million (resulting in a reduction to net income of $7.7 million or $0.10 per diluted share) and (ii) creating incremental deferred income tax liability of $63.8 million, of which only the $7.7 million referred to above in (i) had an effect on our results of operations due to the application of purchase accounting. This change has not had and will not have an effect on the distributions we receive from Kinder Morgan Energy Partners, L.P. in the form of additional i-units or the share distributions we declare. In addition, the deferred tax balance may not represent the taxes that we would owe in the event of liquidation of Kinder Morgan Energy Partners, L.P. as our tax liabilities on liquidation may be impacted by our tax indemnification agreement with Knight Inc.
 
We evaluated the impact of the error and determined that it was not material to our consolidated financial statements in 2007 or 2008, and accordingly have recorded the related effects in our consolidated financial statements for the year ended December 31, 2008 (see Note 6).
 
8.      Recent Accounting Pronouncements
 
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. 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 and SFAS No. 107, Disclosures about Fair Value of Financial Instruments.
 
This Statement was adopted by us effective January 1, 2008, at which time no financial assets or liabilities, not previously required to be recorded at fair value by other authoritative literature, were designated to be recorded at fair value. As such, the adoption of this Statement did not have any impact on our consolidated financial statements.
 
On December 4, 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51. This Statement changes the accounting and reporting for noncontrolling interests in consolidated financial statements. A noncontrolling interest, sometimes referred to as a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent.
 
Specifically, SFAS No. 160 establishes accounting and reporting standards that require (i) the ownership interests in subsidiaries held by parties other than the parent to be clearly identified, labeled, and presented in the consolidated balance sheet within equity, but separate from the parent’s equity; (ii) the equity amount of consolidated net income attributable to the parent and to the noncontrolling interest to be clearly identified and presented on the face of the consolidated income statement (consolidated net income and comprehensive income will be determined without deducting minority interest, however, earnings-per-share information will continue to be calculated on the basis of the net income attributable to the parent’s shareholders); and (iii) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently and similarly—as equity transactions.
 
This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (January 1, 2009 for us). SFAS No. 160 is to be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for its presentation and disclosure requirements, which are to be applied retrospectively for all periods presented. The adoption of this Statement did not have any impact on our consolidated financial statements.
 
On December 4, 2007, the FASB issued SFAS No. 141(revised 2007), (“SFAS 141 (R)”), Business Combinations. Although this statement amends and replaces SFAS No. 141, it retains the fundamental requirements in SFAS No. 141 that (i) the purchase method of accounting be used for all business combinations; and (ii) an acquirer be identified for each business combination. SFAS No. 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. This Statement applies to all transactions or other events in which an entity (the acquirer) obtains control of one or more businesses (the
 

 
31

 
Item 8. Financial Statements and Supplementary Data . (continued)
Kinder Morgan Management, LLC Form 10-K


acquiree), including combinations achieved without the transfer of consideration; however, this Statement does not apply to a combination between entities or businesses under common control.
 
Significant provisions of SFAS No. 141(R) concern principles and requirements for how an acquirer (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.
 
This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 (January 1, 2009 for us). The adoption of this Statement did not have a material impact on our consolidated financial statements.
 
On March 19, 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities. This Statement amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and is intended to help investors better understand how derivative instruments and hedging activities affect an entity’s financial position, financial performance and cash flows through enhanced disclosure requirements. The enhanced disclosures include, among other things, (i) a tabular summary of the fair value of derivative instruments and their gains and losses, (ii) disclosure of derivative features that are credit-risk–related to provide more information regarding an entity’s liquidity, and (iii) cross-referencing within footnotes to make it easier for financial statement users to locate important information about derivative instruments.
 
This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 (January 1, 2009 for us). This Statement expands and enhances disclosure requirements only, and as such, the adoption of this Statement did not have any impact on our consolidated financial statements.
 
On April 25, 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3 Determination of the Useful Life of Intangible Assets. This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008 (January 1, 2009 for us), and interim periods within those fiscal years. The adoption of this FSP did not have a material impact on our consolidated financial statements.
 
On May 9, 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. This Statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for nongovernmental entities.
 
Statement No. 162 establishes that the GAAP hierarchy should be directed to entities because it is the entity, and not its auditor that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Statement No. 162 is effective 60 days following the U.S. Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles, and is only effective for nongovernmental entities. We do not expect the adoption of this Statement to have any effect on our consolidated financial statements.
 
On June 16, 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. This FSP clarifies that share-based payment awards that entitle their holders to receive nonforfeitable dividends before vesting should be considered participating securities. As participating securities, these instruments should be included in the calculation of basic earnings per share. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008 (January 1, 2009 for us), and interim periods within those fiscal years. The adoption of this FSP did not have an impact on our consolidated financial statements.
 
On November 24, 2008, the Financial Accounting Standards Board ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on Issue No. 08-6, or EITF 08-6, Equity Method Investment Accounting Considerations. EITF 08-6 clarifies certain accounting and impairment considerations involving equity method investments. This Issue is effective for fiscal years beginning on or after December 15, 2008 (January 1, 2009 for us), and interim periods within those fiscal years. The guidance in this Issue is to be applied prospectively for all financial statements presented. The adoption of this Issue did not have any impact on our consolidated financial statements.
 
On December 11, 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities. These pronouncements require enhanced disclosure and transparency by public entities about their involvement with variable interest entities and their continuing involvement with transferred financial assets. The disclosure requirements in these pronouncements are effective for annual and interim periods ending after December 15, 2008 (December 31, 2008 for us). The adoption of these pronouncements did not have any impact on our consolidated financial statements.
 

 
32

 
Item 8. Financial Statements and Supplementary Data . (continued)
Kinder Morgan Management, LLC Form 10-K


On December 30, 2008, the FASB issued FSP No. FAS 132(R)-1, Employer’s Disclosures About Postretirement Benefit Plan Assets, effective for financial statements ending after December 15, 2009 (December 31, 2009 for us). This FSP requires additional disclosure of pension and post retirement plan holdings regarding (i) investment asset classes, (ii) fair value measurement of assets, (iii) investment strategies, (iv) asset risk and (v) rate-of-return assumptions. We do not expect this FSP to have a material effect on our consolidated financial statements.
 
On December 31, 2008, the Securities and Exchange Commission (“SEC”) issued its final rule Modernization of Oil and Gas Reporting, which revises the disclosures required by oil and gas companies. The SEC disclosure requirements for oil and gas companies have been updated to include expanded disclosure for oil and gas activities, and certain definitions have also been changed that will impact the determination of oil and gas reserve quantities. The provisions of this final rule are effective for registration statements filed on or after January 1, 2010, and for annual reports for fiscal years ending on or after December 31, 2009. We do not expect this final rule to have a material impact on our consolidated financial statements.
 
9.     Subsequent Event
 
On February 26, 2009, Kinder Morgan Energy Partners priced a public offering of 5,500,000 of its common units at a price of $46.95 per unit, excluding an additional 825,000 common units that may be issued pursuant to an underwriters’ over-allotment option. Kinder Morgan Energy Partners expects to receive net proceeds, after commissions and underwriting expenses, of approximately $250 million for the issuance of these 5,500,000 common units, and it intends to use the proceeds to reduce the borrowings under its bank credit facility.
 
Selected Quarterly Financial Data (Unaudited)
 
Quarterly Operating Results for 2008 and 2007
 
 
2008–Three Months Ended
 
Post-Acquisition Basis
 
March 31
 
June 30
 
September 30
 
December 31
 
(In millions except per share amounts)
Equity in Earnings of Kinder Morgan Energy Partners, L.P.
$
46.5
   
$
47.5
   
$
35.8
   
$
12.4
 
Provision for Income Taxes
 
24.4
     
17.6
     
12.9
     
4.1
 
Net Income
$
22.1
   
$
29.9
   
$
22.9
   
$
8.3
 
  
                             
Earnings Per Share, Basic and Diluted
$
0.30
   
$
0.40
   
$
0.30
   
$
0.11
 
  
                             
Number of Shares Used in Computing Basic and Diluted Earnings Per Share
 
73.1
     
74.4
     
75.7
     
77.2
 
  
 
2007
 
Pre-Acquisition Basis
   
Post-Acquisition Basis
 
Three
Months
Ended
March 31
 
Two Month
Ended
May 31
   
One Month
Ended
June 30
 
Three
Months
Ended
September 30
 
Three Months
Ended
December 31
 
(In millions except
per share amounts)
   
(In millions except per share amounts)
Equity in Earnings (Loss) of Kinder Morgan Energy Partners, L.P.
$
(77.5
)
 
$
12.9
   
$
11.4
 
$
17.4
 
$
36.6
 
Provision (Benefit) for Income Taxes
 
(28.0
)
   
4.7
     
4.1
   
6.3
   
4.6
 
Net Income (Loss)
$
(49.5
)
 
$
8.2
   
$
7.3
 
$
11.1
 
$
32.0
 
  
                                 
Earnings (Loss) Per Share, Basic and
                                 
Diluted
$
(0.79
)
 
$
0.13
   
$
0.10
 
$
0.16
 
$
0.45
 
  
                                 
Number of Shares Used in Computing Basic and Diluted Earnings Per Share
 
62.8
     
65.0
     
70.0
   
70.6
   
71.8
 
  

 
33

 
Item 8. Financial Statements and Supplementary Data . (continued)
Kinder Morgan Management, LLC Form 10-K


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:
 

 
Successor Company
   
Predecessor Company
 
Year Ended
December 31,
2008
 
Seven Months
Ended
December 31,
2007
   
Five Months
Ended
May 31, 2007
 
Year Ended
December 31,
2006
 
(In millions)
   
(In millions)
Net Capitalized Costs
$
399.4
   
$
353.6
     
$
351.9
   
$
330.3
 
Costs Incurred for the Period Ended
 
142.1
     
44.7
       
25.1
     
79.1
 
Results of Operations for the Period Ended
 
10.3
     
5.1