kmr10q3_09.htm


Kinder Morgan Management, LLC Form 10-Q

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

F O R M 10-Q
 
[X]
  
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009
or

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

For the transition period from _____________to_____________

Commission file number 1-16459

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


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]  No [   ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [   ]  No [   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.  Large accelerated filer [X]  Accelerated filer [   ]  Non-accelerated filer [   ]  Smaller reporting company [   ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [   ]  No [X]
 
The number of shares outstanding for each of the registrant’s classes of common equity, as of October 30, 2009 was two voting shares and 83,754,951 listed shares.
 

 
 

 
Kinder Morgan Management, LLC Form 10-Q




KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
TABLE OF CONTENTS


  
 
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Kinder Morgan Management, LLC Form 10-Q


 
PART I - FINANCIAL INFORMATION
 
Item 1.  Financial Statements.
 
KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Millions Except Per Share Amounts)
(Unaudited)
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Equity in earnings of Kinder Morgan Energy Partners, L.P.
  $ 34.4     $ 35.8     $ 69.9     $ 129.8  
Income taxes
    13.1       12.9       26.8       54.9  
  
                               
Net Income
  $ 21.3     $ 22.9     $ 43.1     $ 74.9  
  
                               
Earnings Per Share, Basic and Diluted
  $ 0.26     $ 0.30     $ 0.53     $ 1.01  
  
                               
Number of shares used in computing Basic and Diluted Earnings per Share
    82.9       75.7       81.0       74.4  

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

 
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Kinder Morgan Management, LLC Form 10-Q


KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In Millions Except Shares)
(Unaudited)
 
   
September 30, 
2009
   
December 31, 
2008
 
ASSETS
           
  
           
Current Assets
           
Accounts receivable, related party
  $ 4.7     $ 7.2  
Other current assets
    2.6       0.8  
Total Current Assets
    7.3       8.0  
  
               
Investment in Kinder Morgan Energy Partners, L.P.
    2,518.1       2,454.1  
  
               
Total Assets
  $ 2,525.4     $ 2,462.1  
  
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
  
               
Current Liabilities
               
Accounts payable
  $ 1.1     $ 1.3  
Other current liabilities
    6.2       6.6  
Total Current Liabilities
    7.3       7.9  
  
               
Deferred income taxes
    146.8       122.1  
  
               
Shareholders’ Equity
               
Voting shares - unlimited authorized; 2 voting shares issued and outstanding
    0.1       0.1  
Listed shares - unlimited authorized; 83,754,951 and 77,997,904 listed shares issued and
outstanding, respectively
    2,879.8       2,630.1  
Retained deficit
    (479.0 )     (272.4 )
Accumulated other comprehensive loss
    (29.6 )     (25.7 )
Total Shareholders’ Equity
    2,371.3       2,332.1  
  
               
Total Liabilities and Shareholders’ Equity
  $ 2,525.4     $ 2,462.1  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
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Kinder Morgan Management, LLC Form 10-Q



KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)

   
Nine Months Ended
September 30,
 
   
2009
   
2008
 
Cash Flows From Operating Activities
           
Net Income
  $ 43.1     $ 74.9  
Adjustments to reconcile net income to net cash flows from operating activities
               
Deferred income taxes
    26.8       54.9  
Equity in earnings of Kinder Morgan Energy Partners, L.P.
    (69.9 )     (129.8 )
Accounts receivable, related party
    2.5       21.1  
Other current assets
    (1.8 )     (1.0 )
Accounts payable
    (0.2 )     0.2  
Other current liabilities
    (0.5 )     (20.3 )
Net Cash Flows Provided by Operating Activities
    -       -  
  
               
Cash Flows From Investing Activities
               
Purchase of i-units of Kinder Morgan Energy Partners, L.P.
    -       -  
Net Cash Flows Used In Investing Activities
    -       -  
                 
Cash Flows From Financing Activities
               
Shares issued
    -       -  
Net Cash Flows Provided by Financing Activities
    -       -  
  
               
Net Increase in Cash and Cash Equivalents
    -       -  
Cash and Cash Equivalents at beginning of period
    -       -  
Cash and Cash Equivalents at end of period
  $ -     $ -  

SUPPLEMENTAL CASH FLOW INFORMATION
 
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.  No cash payments for interest or income taxes were made during the periods presented.  We issue our shares or fractions thereof in distributions to our shareholders, and receive distributions from Kinder Morgan Energy Partners, L.P. on the i-units we own in the form of additional i-units in noncash transactions discussed in Note 3.
 
The accompanying notes are an integral part of these consolidated financial statements.
 

 
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Kinder Morgan Management, LLC Form 10-Q

KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
1.   General
 
Organization
 
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 Kinder Morgan, Inc. (formerly 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 for summarized income statement information for Kinder Morgan Energy Partners, L.P.  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.
 
We have prepared the accompanying unaudited interim consolidated financial statements under the rules and regulations of the Securities and Exchange Commission (“SEC”).  Under such rules and regulations, we have condensed or omitted certain information and notes normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).  We believe that our disclosures are adequate to make the information presented not misleading.  The consolidated financial statements reflect normal adjustments, and also recurring adjustments that are, in the opinion of management, necessary for a fair presentation of our financial results for the interim periods.  You should read these interim consolidated financial statements in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2008 (“2008 Form 10-K”) and Kinder Morgan Energy Partners, L.P.’s Annual Report on Form 10-K for the year ended December 31, 2008 (“Kinder Morgan Energy Partners, L.P. 2008 Form 10-K”) and Quarterly Report on Form 10-Q for the quarter ended September 30, 2009.  We have evaluated subsequent events, which are events or transactions that occurred after September 30, 2009 through November 5, 2009, the date we issued the accompanying Consolidated Financial Statements.
 
Accounting for Investments in Kinder Morgan Energy Partners, L.P.
 
We use the equity method of accounting for our investment in Kinder Morgan Energy Partners, L.P.  Kinder Morgan Energy Partners, L.P. is a publicly traded limited partnership and its common units are traded on the New York Stock Exchange under the symbol “KMP.” We record, in the period in which it is earned, our share of the earnings of Kinder Morgan Energy Partners, L.P. attributable to the i-units we own.  We receive distributions from Kinder Morgan Energy Partners, L.P. in the form of additional i-units, which increase the number of i-units we own.  We issue additional shares (or fractions thereof) to our existing shareholders in an amount equal to the additional i-units received from Kinder Morgan Energy Partners, L.P.  At September 30, 2009, through our ownership of Kinder Morgan Energy Partners, L.P. i-units, we owned approximately 29.0% of all of Kinder Morgan Energy Partners, L.P.’s outstanding limited partner interests.
 
Financial Accounting Standards Board’s Accounting Standards Codification
 
In this report, we refer to the Financial Accounting Standards Board as the FASB and the FASB’s issued Statements of Financial Accounting Standards as SFAS.
 
In June 2009, the FASB voted to approve its Accounting Standards Codification as the single source of GAAP recognized by the FASB to be applied by nongovernmental entities.  All other accounting literature not included in the Codification is considered nonauthoritative.  In this report, we refer to the FASB Accounting Standards
 

 
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Kinder Morgan Management, LLC Form 10-Q

Codification as the Codification.  It became effective for us on September 30, 2009, and although the adoption of the Codification did not have any direct effect on our consolidated financial statements, it does affect the way we reference GAAP in our financial statements and in our accounting policies.
 
The FASB now communicates new accounting standards via a new document called an Accounting Standards Update (“ASU”).  Each ASU is a transient document—not considered authoritative in its own right—and serves only to update the Codification by detailing the specific amendments to the Codification and explaining the historical basis for conclusions of a new standard.  The FASB will organize the content of each ASU using the same topics and section headings as those used in the Codification.  For more information on Codification updates and other recent accounting pronouncements, see Note 8.
 
Noncontrolling Interests
 
On January 1, 2009, we and Kinder Morgan Energy Partners, L.P. adopted certain provisions concerning the accounting and reporting for noncontrolling interests included within the “Consolidation” Topic of the Codification.  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, these provisions establish 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 and (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 statement of operations.  Accordingly, our presentation of Kinder Morgan Energy Partners, L.P.’s consolidated net income is now presented without deducting amounts attributable to its noncontrolling interests.
 
The adopted provisions apply prospectively, with the exception of the presentation and disclosure requirements, which must be applied retrospectively for all periods presented.  In addition, we filed a Current Report on Form 8-K dated September 18, 2009 (“September 18, 2009 Form 8-K”)  to update Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“Item 7”) and Item 8 “Financial Statements and Supplementary Data.” (“Item 8”) of our 2008 Form 10-K solely to reflect the retrospective presentation and disclosure requirements for noncontrolling interests.  In addition, on July 15, 2009, Knight Inc. changed its name to Kinder Morgan, Inc.  References to Knight Inc. in Item 7 and Item 8 of the September 18, 2009 Form 8-K have been replaced with Kinder Morgan, Inc.  No other items from our 2008 Form 10-K were adjusted or otherwise revised.  The September 18, 2009 Form 8-K did not reflect any subsequent information or events other than the adoption of presentation and disclosure requirements for noncontrolling interests and Kinder Morgan, Inc.’s name change.
 
Kinder Morgan Energy Partners, L.P. filed a Current Report on Form 8-K dated June 12, 2009 (“June 12, 2009 Form 8-K”) to update certain sections of the Kinder Morgan Energy Partners, L.P. 2008 Form 10-K to reflect the retrospective presentation and disclosure requirements for noncontrolling interests.  Accordingly, whenever we refer in this report to disclosures contained in our and Kinder Morgan Energy Partners, L.P.’s 2008 Form 10-K reports, such references also apply to the relevant 2008 Form 10-K items included in the September 18, 2009 Form 8-K and the June 12, 2009 Form 8-K filed by us and Kinder Morgan Energy Partners, L.P., respectively.
 
2.   Earnings Per Share
 
Both basic and diluted earnings per share are computed based on the weighted-average number of shares outstanding during each period, adjusted for share splits.  There are no securities outstanding that may be converted into or exercised for shares.
 
3.   Share Distributions
 
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, 2009, we paid a share distribution of 0.025342 shares per outstanding share (2,025,208 total shares) to shareholders of record as of April 30, 2009, based on the $1.05 per common unit distribution declared by Kinder Morgan Energy Partners, L.P.  On August 14, 2009, we paid a share
 

 
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Kinder Morgan Management, LLC Form 10-Q

distribution of 0.022146 shares per outstanding share (1,814,650 total shares) to shareholders of record as of July 31, 2009, based on the $1.05 per common unit distribution declared by Kinder Morgan Energy Partners, L.P.  On November 13, 2009, we will pay a share distribution of 0.021292 shares per outstanding share (1,783,310 total shares) to shareholders of record as of October 30, 2009, based on the $1.05 per common unit distribution declared by Kinder Morgan Energy Partners, L.P.  These distributions are paid in the form of additional shares or fractions thereof calculated by dividing Kinder Morgan Energy Partners, L.P.’s cash distribution per common unit by the average market price of a share determined for a ten-trading day period ending on the trading day immediately prior to the ex-dividend date for our shares.
 
4.   Business Activities and Related Party Transactions
 
We do not receive a fee for our services under the delegation of control agreement, nor do we receive any margin or profit when we are reimbursed for expenses incurred.  We incurred, on behalf of Kinder Morgan Energy Partners, L.P., approximately $59.7 million and $199.1 million of expenses during the three and nine months ended September 30, 2009, respectively, and approximately $61.6 million and $195.3 million of expenses during the three and nine months ended September 30, 2008, respectively.  The expense reimbursements by Kinder Morgan Energy Partners, L.P. to us are accounted for as a reduction to the expense incurred by us.  At September 30, 2009 and December 31, 2008, $4.7 million and $7.2 million, respectively, primarily receivables from Kinder Morgan Energy Partners, L.P., are recorded in the caption “Accounts receivable, related party” in the accompanying interim Consolidated Balance Sheets.
 
One of our affiliates provides, and incurs expense with respect to, payroll services to Kinder Morgan Energy Partners, L.P.  These expenses are reimbursed by Kinder Morgan Energy Partners, L.P. at cost.  These expenses totaled approximately $85.5 million and $260.2 million during the three and nine months ended September 30, 2009, respectively, and $83.9 million and $236.6 million during the three and nine months ended September 30, 2008, respectively.
 
5.   Summarized Income Statement Information for Kinder Morgan Energy Partners, L.P.
 
Following is summarized income statement information for Kinder Morgan Energy Partners, L.P.  Additional information on Kinder Morgan Energy Partners, L.P.’s results of operations and financial position are contained in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2009.
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(In millions)
 
Revenues
  $ 1,660.7     $ 3,232.8     $ 5,092.5     $ 9,448.8  
Operating costs, expenses and other
    1,254.0       2,824.9       3,973.8       8,215.3  
  
                               
Operating income
  $ 406.7     $ 407.9     $ 1,118.7     $ 1,233.5  
  
                               
Net Income
  $ 363.7     $ 332.9     $ 959.1     $ 1,049.9  

Net income above includes limited partners’ interest in net income of $123.3 million and $254.5 million for the three and nine months ended September 30, 2009, respectively, and $124.2 million and $449.8 million for the three and nine months ended September 30, 2008, respectively.  The above amounts reflect our and Kinder Morgan Energy Partners, L.P.’s January 1, 2009 adoption of certain provisions concerning the accounting and reporting for noncontrolling interests (see Note 1).
 
Our net income for the three and nine months ended September 30, 2009 was $21.3 million and $43.1 million, respectively, and $22.9 million and $74.9 million for the three and nine months ended September 30, 2008, respectively.  Our net income for the nine months ended September 30, 2009 includes a $3.2 million out of period net expense, which is primarily our share of Kinder Morgan Energy Partners, L.P.’s tax expense resulting from non-cash deferred tax liability adjustments in its Kinder Morgan Canada segment.  This information should be read in conjunction with Kinder Morgan Energy Partners, L.P.’s Annual Report on Form 10-K for the year ended December
 

 
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Kinder Morgan Management, LLC Form 10-Q

31, 2008 and its Quarterly Report on Form 10-Q for the quarter ended September 30, 2009.
 
Notwithstanding the consolidation of Kinder Morgan Energy Partners, L.P. and its subsidiaries into Kinder Morgan, Inc.’s financial statements, except as explicitly disclosed, Kinder Morgan, Inc. is not liable for, and its assets are not available to satisfy, the obligations of Kinder Morgan Energy Partners, L.P. and/or its subsidiaries and vice versa.  Responsibility for settlements of obligations reflected in Kinder Morgan, Inc.’s or Kinder Morgan Energy Partners, L.P.’s financial statements are a legal determination based on the entity that incurs the liability.
 
6.   Comprehensive Income
 
Our comprehensive income, which differs from our net income solely due to our equity in the other comprehensive income (loss) of Kinder Morgan Energy Partners, L.P. is as follows:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(In millions)
 
Net income
  $ 21.3     $ 22.9     $ 43.1     $ 74.9  
Other comprehensive income (loss), net of tax
                               
Change in fair value of derivatives utilized for hedging purposes
    3.4       134.0       (47.4 )     (90.7 )
Reclassification of change in fair value of derivatives to net income
    1.9       20.8       5.4       73.9  
Foreign currency translation adjustments
    13.9       (7.3 )     38.5       (13.5 )
Adjustments to pension and other postretirement benefit plan liabilities
    -       0.1       (0.4 )     0.5  
Total other comprehensive income (loss)
    19.2       147.6       (3.9 )     (29.8 )
Comprehensive Income
  $ 40.5     $ 170.5     $ 39.2     $ 45.1  
 
7.   Income Taxes
 
We are a limited liability company that has elected to be treated as a corporation for federal income tax purposes.  Our income taxes consist of deferred income tax.  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.  We have excluded 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.
 
Income taxes included in our Consolidated Statements of Operations are as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2009
 
2008
 
2009
 
2008
 
(In millions, except percentages)
Income taxes
$
13.1
   
$
12.9
   
$
26.8
   
$
54.9
 
Effective tax rate
 
38.1
%
   
36.0
%
   
38.3
%
   
42.3
%

For the three and nine months ended September 30, 2009, and three months ended September 30, 2008, our effective tax rate was higher than the statutory federal income tax rate of 35% primarily due to state income taxes and a decrease in our share of non-deductible goodwill associated with our investment in Kinder Morgan Energy Partners, L.P.  For the nine months ended September 30, 2008, our effective tax rate was higher than the statutory federal rate due to state income taxes as well as the out of period adjustment described below.
 

 
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Kinder Morgan Management, LLC Form 10-Q

As further disclosed in Note 6 of Notes to Consolidated Financial Statements in our 2008 Form 10-K, the out of period adjustment recorded during the nine months ended September 30, 2008 was due to a change in our estimated deferred income tax balances from what was reported as of December 31, 2007.  This change had the effect of increasing our income tax expense, and reducing net income, for the nine months ended September 30, 2008 by $7.7 million.
 
8.  Recent Accounting Pronouncements
 
Securities and Exchange Commission’s Final Rule on Oil and Gas Disclosure Requirements
 
On December 31, 2008, the 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 are currently reviewing the effects of this final rule.
 
SFAS Nos. 166 and 167
 
On June 12, 2009, the FASB published SFAS No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140,” and SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).”  These two Statements change the way entities account for securitizations and special-purpose entities, and both remain authoritative until such time that each is integrated into the Codification.
 
SFAS No. 166 will require more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets.  SFAS No. 167 changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated.  Both Statement Nos. 166 and 167 will be effective at the start of an entity’s first fiscal year beginning after November 15, 2009 (January 1, 2010 for us).  We do not expect the adoption of these Statements to have a material impact on our consolidated financial statements.
 
Accounting Standards Updates
 
In August 2009, the FASB issued ASU No. 2009-05, “Measuring Liabilities at Fair Value.”  This ASU amends the “Fair Value Measurements and Disclosures” Topic of the Codification to provide further guidance on how to measure the fair value of a liability.  ASU No. 2009-05 is effective for the first reporting period beginning after issuance (September 30, 2009 for us), and the adoption of this ASU did not have a material impact on our consolidated financial statements.
 
In September 2009, the FASB issued five separate Accounting Standards Updates (ASU 2009 07-11) that make technical corrections to the Codification and codify certain SEC Observer comments made in conjunction with previous accounting issues.  None of the five Accounting Standards Updates change existing accounting requirements.
 

 
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Kinder Morgan Management, LLC Form 10-Q

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
General
 
We are a publicly traded Delaware limited liability company, formed on February 14, 2001, that has elected to be treated as a corporation for federal income tax purposes.  Our voting shares are owned by Kinder Morgan G.P., Inc., of which Kinder Morgan, Inc. (formerly Knight Inc.) owns all the outstanding common equity.  Kinder Morgan G.P., Inc. is the general partner of Kinder Morgan Energy Partners, L.P.
 
Business
 
Kinder Morgan G.P., Inc. has delegated to us, to the fullest extent permitted under Delaware law and Kinder Morgan Energy Partners, L.P.’s limited partnership agreement, all of its rights and powers to manage and control the business and affairs of Kinder Morgan Energy Partners, L.P., subject to the general partner’s right to approve specified actions.
 
Financial Condition
 
As indicated by the accompanying interim Consolidated Balance Sheets, there has been no material change in our financial condition during the current quarter.
 
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 September 30, 2009, through our ownership of i-units, we owned approximately 29.0% of all of Kinder Morgan Energy Partners, L.P.’s outstanding limited partner interests.  We use the equity method of accounting for our investment in Kinder Morgan Energy Partners, L.P. and record earnings as described below.  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 interim Consolidated Statements of Operations, 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 purchase method of accounting push-down effect on us from Kinder Morgan, Inc.’s Going Private transaction, further described in Note 2 of the Notes to Consolidated Financial Statements included in our 2008 Form 10-K.  The deferred income tax provision is calculated based on the book/tax basis difference created by our recognition, under GAAP, 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.
 
For the three and nine months ended September 30, 2009, Kinder Morgan Energy Partners, L.P. reported limited partners’ interest in net income of $123.3 million and $254.5 million, respectively, and of $124.2 million and $449.8 million for the three and nine months ended September 30, 2008, respectively.  Our net income for the three and nine months ended September 30, 2009 was $21.3 million and $43.1 million, respectively, and $22.9 million and $74.9 million for the three and nine months ended September 30, 2008, respectively.  Our net income for the nine months ended September 30, 2009 includes a $3.2 million out of period net expense, which is primarily our share of Kinder Morgan Energy Partners, L.P.’s tax expense resulting from non-cash deferred tax liability adjustments in its Kinder Morgan Canada segment.  This information should be read in conjunction with Kinder Morgan Energy Partners, L.P.’s Annual Report on Form 10-K for the year ended December 31, 2008 and its Quarterly Report on Form 10-Q for the quarter ended September 30, 2009.
 

 
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Kinder Morgan Management, LLC Form 10-Q

Kinder Morgan Energy Partners, L.P.
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(In millions)
 
Segment earnings before depreciation, depletion, amortization and amortization of excess cost of equity investments(a)
                       
Products Pipelines
  $ 167.9     $ 130.4     $ 468.3     $ 408.7  
Natural Gas Pipelines
    197.8       185.0       560.7       555.7  
CO2
    193.2       203.3       563.3       619.7  
Terminals
    155.2       120.1       432.8       386.3  
Kinder Morgan Canada
    47.7       39.6       113.9       103.2  
Total segment earnings before DD&A
    761.8       678.4       2,139.0       2,073.6  
Total segment depreciation, depletion and amortization
    (202.9 )     (166.8 )     (616.2 )     (490.5 )
Total segment amortization of excess cost of investments
    (1.4 )     (1.4 )     (4.3 )     (4.3 )
General and administrative expenses
    (83.7 )     (73.1 )     (238.8 )     (222.7 )
Unallocable interest expenses, net of interest income
    (107.8 )     (100.5 )     (313.7 )     (298.1 )
Unallocable income tax expense
    (2.3 )     (3.7 )     (6.9 )     (8.1 )
Net Income                                                                 
    363.7       332.9       959.1       1,049.9  
Net income attributable to noncontrolling interests(b)
    (4.2 )     (3.1 )     (11.9 )     (11.2 )
Net income attributable to Kinder Morgan Energy Partners, L.P.
  $ 359.5     $ 329.8     $ 947.2     $ 1,038.7  
  
                               
General Partner’s Interest in Net Income
  $ 236.2     $ 205.6     $ 692.7     $ 588.9  
  
                               
Limited Partners’ Interest in Net Income
  $ 123.3     $ 124.2     $ 254.5     $ 449.8  
____________
(a)
Includes revenues, earnings from equity investments, allocable interest income and other, net, less operating expenses, allocable income taxes and other expense (income).
(b)
The above amounts reflect our and Kinder Morgan Energy Partners, L.P.’s January 1, 2009 adoption of certain provisions concerning the accounting and reporting for noncontrolling interests.  See Note 1 of the accompanying Notes to Consolidated Financial Statements.

Liquidity and Capital Resources
 
Our authorized capital structure consists of two classes of interests: (1) our listed shares and (2) our voting shares, collectively referred to in this document as our “shares.”  Additional classes of interests may be approved by our board and holders of a majority of our shares, excluding shares held by Kinder Morgan, Inc. and its affiliates.  The number of our shares outstanding will at all times equal the number of i-units of Kinder Morgan Energy Partners, L.P., all of which we own.  Under the terms of our limited 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.  See Note 3 of the accompanying Notes to Consolidated Financial Statements for further discussion of our share distribution activity.
 
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
 

 
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Kinder Morgan Management, LLC Form 10-Q

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, service debt or to pay dividends or to make distributions are forward-looking statements.  Forward-looking statements are not guarantees of performance.  They involve risks, uncertainties and assumptions.  Future actions, conditions or events and future results of 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 Kinder Morgan Energy Partners, L.P.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009.  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 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;
 
 
·
changes in 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;
 

 
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Kinder Morgan Management, LLC Form 10-Q

 
·
changes in accounting pronouncements that impact the measurement of Kinder Morgan Energy Partners, L.P.’s  or our results of operations, the timing of when such measurements are to be made and recorded, and the disclosures surrounding these activities;
 
 
·
our ability to offer and sell equity securities, and Kinder Morgan Energy Partners, L.P.’s ability to offer and sell equity securities and its ability to sell debt securities or obtain debt financing in sufficient amounts to implement that portion of Kinder Morgan Energy Partners, L.P.’s business plan that contemplates growth through acquisitions of operating businesses and assets and expansions of its facilities;
 
 
·
Kinder Morgan Energy Partners, L.P.’s indebtedness, 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, 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;
 
 
·
the ability of Kinder Morgan Energy Partners, L.P. to achieve cost savings and revenue growth;
 
 
·
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 Quarterly Report on Form 10-Q for the quarter ended September 30, 2009.
 
The foregoing list should not be construed to be exhaustive.  We believe the forward-looking statements in this report 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
 

 
14

 
Kinder Morgan Management, LLC Form 10-Q

statements.
 
See Item 1A “Risk Factors” of our 2008 Form 10-K for a more detailed description of these and other factors that may affect the forward-looking statements.  When considering forward-looking statements, one should keep in mind the risk factors described in our 2008 Form 10-K and in Kinder Morgan Energy Partners, L.P.’s Annual Report on Form 10-K for the year ended December 31, 2008.  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 3.  Quantitative and Qualitative Disclosures About Market Risk.
 
The nature of our business and operations is such that no activities or transactions of the type requiring discussion under this item are conducted or entered into.
 
Item 4.  Controls and Procedures.
 
As of September 30, 2009, our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934.  There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.  Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.  Based upon and as of the date of the evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  There has been no change in our internal control over financial reporting during the quarter ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
PART II - OTHER INFORMATION
 
Item 1.  Legal Proceedings.
 
We are not a party to any litigation.
 
Item 1A.  Risk Factors.
 
There have been no material changes in or additions to the risk factors disclosed in Item 1A “Risk Factors” in our 2008 Form 10-K.
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.
 
None.
 
Item 3.  Defaults Upon Senior Securities.
 
None.
 
Item 4.  Submission of Matters to a Vote of Security Holders.
 
None.
 
Item 5.  Other Information.
 
None.
 

 
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Kinder Morgan Management, LLC Form 10-Q

Item 6.  Exhibits.
 
  
 
31.1     —
 
Certification by CEO pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2     —
 
Certification by CFO pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1     —
 
Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2     —
 
Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 

 
16

 
Kinder Morgan Management, LLC Form 10-Q


SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
KINDER MORGAN MANAGEMENT, LLC
(Registrant)
 
 
November 5, 2009
/s/ Kimberly A. Dang
 
Kimberly A. Dang
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)


 
17