kmr10k2009.htm
Table of Contents
Kinder Morgan Management, LLC Form 10-K


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

Form 10-K
 
[X]
  
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 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
(I.R.S. Employer
incorporation or organization)
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
_______________

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.  Yes [X]    No [   ]
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.  Yes [   ]   No [X]
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]   No [   ]
 
Indicate by check mark 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 [X]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [X]
 
 

 
Kinder Morgan Management, LLC Form 10-K

 
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 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 Securities Exchange Act of 1934).  Yes [   ]   No [X]
 
Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on closing prices in the daily composite list for transactions on the New York Stock Exchange on June 30, 2009 was approximately $3,163,263,547.  As of January 29, 2010, the registrant had two voting shares and 85,538,261 listed shares.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Annual Report on Form 10-K of Kinder Morgan Energy Partners, L.P. for the year ended December 31, 2009.

 
2

 
Kinder Morgan Management, LLC Form 10-K


KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
CONTENTS
 
   
Page
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51
 
  
     
     
  
     
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54
 
  
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 (“Kinder Morgan Energy Partners”), 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 and its resulting performance. Therefore, we have included Kinder Morgan Energy Partners’ Annual Report on Form 10-K for the year ended December 31, 2009 in this filing as Exhibit 99.1 and incorporated such Form 10-K herein by reference. Pursuant to the delegation of control agreement among Kinder Morgan G.P., Inc., Kinder Morgan Energy Partners, Kinder Morgan Energy Partners’ 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, delegated to us, to the fullest extent permitted under Delaware law and the Kinder Morgan Energy Partners 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 and Kinder Morgan Energy Partners’ 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 partnership agreement,
 
 
change the amount of the distribution made on the Kinder Morgan Energy Partners common units,
 
 
allow a merger or consolidation involving Kinder Morgan Energy Partners,
 
 
allow a sale or exchange of all or substantially all of the assets of Kinder Morgan Energy Partners,
 
 
dissolve or liquidate Kinder Morgan Energy Partners, or, after taking into account the creditors of Kinder Morgan Energy Partners, SFPP, L.P. or Calnev Pipe Line, L.L.C., respectively, allow Kinder Morgan Energy Partners, 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, 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 common unitholders,
 
 
take any action that, under the terms of the partnership agreement of Kinder Morgan Energy Partners, 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, 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’ 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 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, or
 
 
allow Kinder Morgan Energy Partners 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.
 
 
·
Kinder Morgan G.P., Inc.:
 
 
is not relieved of any responsibilities or obligations to Kinder Morgan Energy Partners 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 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 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 or all of our shares are owned by Kinder Morgan, Inc. (formerly Knight Inc.) and its affiliates. The partnership agreement of Kinder Morgan Energy Partners recognizes the delegation of control agreement. The delegation of control agreement also applies to the operating partnerships of Kinder Morgan Energy Partners and their partnership agreements.
 
Kinder Morgan G.P., Inc. remains the sole general partner of Kinder Morgan Energy Partners 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 will simultaneously result in the termination of our power and authority to manage and control the business and affairs of Kinder Morgan Energy Partners. 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, 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 Kinder Morgan, Inc. and its affiliates, is required.
 
Through our ownership of i-units, we are a limited partner in Kinder Morgan Energy Partners. 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. The number of additional i-units we receive is based on the amount of cash distributed by Kinder Morgan Energy Partners to its common unitholders. The amount of cash distributed by Kinder Morgan Energy Partners to its common unitholders is dependent on the operations of Kinder Morgan Energy Partners 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 until such time as there is a liquidation of Kinder Morgan Energy Partners. Therefore, we have not had, and do not expect to have material amounts of taxable income
 

 
5

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

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 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’ Annual Report on Form 10-K for the year ended December 31, 2009, which is incorporated herein by reference.
 
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. The information contained on or connected to our Internet website is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report that we file with or furnish to the Securities and Exchange Commission.
 
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, our success is dependent solely upon our operation and management of Kinder Morgan Energy Partners and its resulting performance. We are a limited partner in Kinder Morgan Energy Partners. In the event that Kinder Morgan Energy Partners 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 also affect us; see “Risk Factors” within Kinder Morgan Energy Partners’ Annual Report on Form 10-K for the year ended December 31, 2009, included in this filing as Exhibit 99.1 and incorporated herein by reference.
 
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. 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 depends on its status as a partnership for United States federal income tax purposes, as well as Kinder Morgan Energy Partners not being subject to a material amount of entity-level taxation by individual states. If the Internal Revenue Service treats Kinder Morgan Energy Partners as a corporation or if Kinder Morgan Energy Partners 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 will distribute quarterly to us and the value of our shares that we will distribute quarterly to our shareholders. The anticipated after-tax economic benefit of an investment in our shares depends largely on the treatment of Kinder Morgan Energy Partners as a partnership for United States federal income tax purposes. In order for Kinder Morgan Energy Partners 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 may not meet this requirement or current law may change so as to cause, in either event, Kinder Morgan Energy Partners to be treated as a corporation for United States federal income tax purposes or otherwise subject to federal income tax. Kinder Morgan Energy Partners 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.
 
If Kinder Morgan Energy Partners 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. Under current law, distributions to us of additional i-units would generally be taxed again as a corporate distribution, and no income, gain, losses or deductions would flow through to us. Because a tax would be imposed upon Kinder Morgan Energy Partners 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 as a corporation would result in a material reduction in the anticipated cash flows and after-tax return to us, likely causing a substantial reduction in the value of our shares.
 

 
6

 
Item 1A.  Risk Factors. (continued)
Kinder Morgan Management, LLC Form 10-K
 
 

Current law or Kinder Morgan Energy Partners’ business may change so as to cause Kinder Morgan Energy Partners to be treated as a corporation for United States federal income tax purposes or otherwise subject Kinder Morgan Energy Partners to entity-level taxation. Periodically, Congress considers substantive changes to the existing United States federal income tax laws that affect certain publicly traded partnerships. For example, at one time federal income tax legislation was proposed that would eliminate partnership tax treatment for certain such partnerships. Although currently proposed legislation would not appear to affect Kinder Morgan Energy Partners’ tax treatment as a partnership, we are unable to predict whether such proposals could 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 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’ total revenue that is apportioned to Texas. This tax reduces, and the imposition of such a tax on Kinder Morgan Energy Partners by any other state, will reduce Kinder Morgan Energy Partners’ cash available for distribution to its partners. If any state were to impose a tax upon Kinder Morgan Energy Partners as an entity, the cash available for distribution to its common unitholders would be reduced, which would reduce the value of i-units distributed quarterly to us and our shares distributed quarterly to our shareholders.
 
Kinder Morgan Energy Partners’ partnership agreement provides that if a law is enacted that subjects Kinder Morgan Energy Partners to taxation as a corporation or otherwise subjects Kinder Morgan Energy Partners to entity-level taxation for 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 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 if Kinder Morgan Energy Partners 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. If Kinder Morgan Energy Partners is liquidated and Kinder Morgan, 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.  If there is a liquidation of Kinder Morgan Energy Partners, 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. However, there may not be sufficient amounts of income and gain to cause the capital account attributable to each i-unit to be equal to that of a common unit. If they are not equal, we, and therefore our shareholders, will receive less value than would be received by an owner of common units.
 
Further, the tax indemnity provided to us by Kinder Morgan, Inc. only indemnifies us for our tax liabilities to the extent we have not received sufficient cash in the transaction generating the tax liability to pay the associated tax. Prior to any liquidation of Kinder Morgan Energy Partners, we do not expect to receive cash in a taxable transaction. If a liquidation of Kinder Morgan Energy Partners 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.
 
Our management and control of the business and affairs of Kinder Morgan Energy Partners and its operating partnerships could result in our being liable for obligations to third parties who transact business with Kinder Morgan Energy Partners and its operating partnerships and to whom we held ourselves out as a general partner. We also could be responsible for environmental costs and liabilities associated with Kinder Morgan Energy Partners’ assets in the event that it is not able to perform all of its obligations under environmental laws. Kinder Morgan Energy Partners 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 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 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 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 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
 

 
7

 
Item 1A.  Risk Factors. (continued)
Kinder Morgan Management, LLC Form 10-K
 
 

management and control of the business and affairs of Kinder Morgan Energy Partners and its operating partnerships. There are circumstances under which we may not be indemnified by Kinder Morgan Energy Partners or Kinder Morgan G.P., Inc. for liabilities we incur in managing and controlling the business and affairs of Kinder Morgan Energy Partners. 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, 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 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 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 may decrease; 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. Since our initial public offering, our shares generally have 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. 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. The market price of our shares will depend, as does the market price of the common units of Kinder Morgan Energy Partners, on many factors, including our operation and management of Kinder Morgan Energy Partners, the future performance of Kinder Morgan Energy Partners, 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.
 
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.
 
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 Kinder Morgan, 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 Kinder Morgan, 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.
 
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.
 
Kinder Morgan, 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 Kinder Morgan, Inc. to purchase shares following a purchase event is dependent on Kinder Morgan, Inc.’s financial ability to meet its obligations. There is no requirement for Kinder Morgan, Inc. to secure its obligation or comply with financial covenants to ensure its performance of these obligations. If Kinder Morgan, Inc. is unable to meet its obligations upon the occurrence of a mandatory purchase event, shareholders may not receive cash for our shares.
 

 
8

 
Item 1A.  Risk Factors. (continued)
Kinder Morgan Management, LLC Form 10-K
 
 

There is a potential for change of control if Kinder Morgan, Inc. defaults on debt. Kinder Morgan, Inc. owns all of the outstanding common equity of the general partner of Kinder Morgan Energy Partners. If Kinder Morgan, Inc. defaults on its debt, in exercising their rights as lenders, Kinder Morgan, 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 Kinder Morgan, Inc.
 
The interests of Kinder Morgan, Inc. may differ from our interests, the interests of our shareholders and the interests of unitholders of Kinder Morgan Energy Partners. Kinder Morgan, Inc. owns all of the outstanding common equity of the general partner of Kinder Morgan Energy Partners and elects all of its directors. The general partner of Kinder Morgan Energy Partners owns all of our voting shares and elects all of our directors. Furthermore, some of our directors and officers are also directors and officers of Kinder Morgan, Inc. and the general partner of Kinder Morgan Energy Partners and have fiduciary duties to manage the businesses of Kinder Morgan, Inc. and Kinder Morgan Energy Partners in a manner that may not be in the best interest of our shareholders. Kinder Morgan, Inc. has a number of interests that differ from the interests of our shareholders and the interests of the unitholders. As a result, there is a risk that important business decisions will not be made in the best interest of our shareholders.
 
Our limited liability company agreement restricts or eliminates a number of the fiduciary duties that would otherwise be owed by our board of directors to our shareholders, and the partnership agreement of Kinder Morgan Energy Partners 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, 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 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 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 provides that the general partner of Kinder Morgan Energy Partners may take into account the interests of parties other than Kinder Morgan Energy Partners in resolving conflicts of interest. Further, it provides that in the absence of bad faith by the general partner of Kinder Morgan Energy Partners 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 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 common units and our shares, other than Kinder Morgan, 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 Kinder Morgan, 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; 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 and take over our management of Kinder Morgan Energy Partners by making a tender offer for the common units at a price above their trading market price.
 
Item 1B.
Unresolved Staff Comments.

None.
 
Item 3.
Legal Proceedings.

We are not a party to any litigation.
 
Item 4.
Submission of Matters to a Vote of Security Holders.

There were no matters submitted to a vote of our shareholders during the fourth quarter of 2009.
 

 
9

 
Kinder Morgan Management, LLC Form 10-K


PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our shares are listed for trading on the New York Stock Exchange under the symbol “KMR.” The per share high and low sale prices of our shares, as reported on the New York Stock Exchange, by quarter for the last two years are provided below.
 
 
Market Price Per Share
 
 
2009
 
2008
 
 
Low
 
High
 
Low
 
High
 
Quarter Ended
                       
March 31
  $ 35.33     $ 44.97     $ 47.21     $ 56.23  
June 30
  $ 39.77     $ 46.67     $ 51.02     $ 57.32  
September 30
  $ 43.56     $ 48.29     $ 46.45     $ 56.62  
December 31
  $ 46.10     $ 55.00     $ 34.01     $ 50.80  

There were approximately 62,000 holders of our listed shares as of January 29, 2010, 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 instead make distributions on our shares in additional shares or fractions of shares. At the same time Kinder Morgan Energy Partners 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 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 Share(a)
   
Total Number of Additional
Shares Distributed
 
   
2009
   
2008
 
2009
 
2008
   
2009
   
2008
 
Quarter Ended
                                   
March 31
    0.025342       0.017716     $ 1.05     $ 0.96       2,025,208       1,305,429  
June 30
    0.022146       0.018124     $ 1.05     $ 0.99       1,814,650       1,359,153  
September 30
    0.021292       0.021570     $ 1.05     $ 1.02       1,783,310       1,646,891  
December 31
    0.018430       0.024580     $ 1.05     $ 1.05       1,576,470       1,917,189  
__________
(a)
 
This is the cash distribution paid or payable to each common unit of Kinder Morgan Energy Partners 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.

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 2009.
 
For information regarding our equity compensation plans, please refer to Item 12, included elsewhere herein.
 

 
10

 
Kinder Morgan Management, LLC Form 10-K



Item 6.
Selected Financial Data.

KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
 
   
Post- Acquisition Basis (a)
   
Pre-Acquisition Basis (a)
 
   
Year Ended December 31,
   
Seven Months
Ended
December 31,
   
Five Months
Ended
May 31,
   
Year Ended December 31,
 
   
2009
   
2008
   
2007
   
2007
   
2006
   
2005
 
   
(In millions except per share amounts)
   
(In millions except per share amounts)
 
Equity in earnings (loss) of Kinder Morgan Energy Partners.
  $ 90.6     $ 142.2     $ 65.4     $ (64.6 )   $ 131.1     $ 88.4  
Provision (benefit) for income taxes
    31.6       59.0       15.0       (23.3 )     47.0       32.1  
Net income (loss)
  $ 59.0     $ 83.2     $ 50.4     $ (41.3 )   $ 84.1     $ 56.3  
Earnings (loss) per share, basic and diluted
  $ 0.72     $ 1.11     $ 0.71     $ (0.65 )   $ 1.40     $ 1.00  
Number of shares used in computing basic and diluted earnings per share
    81.9       75.1       71.1       63.7       60.1       56.1  
Equivalent distribution value per share(b)
  $ 4.20     $ 4.02     $ 2.65     $ 0.83     $ 3.26     $ 3.13  
Total number of additional shares distributed
    7.2       6.2       3.6       1.0       4.4       3.8  
Total assets at end of period                                                    
  $ 2,534.7     $ 2,462.1     $ 2,213.8     $ 1,944.5     $ 1,707.9     $ 1,583.7  
__________
(a)
On May 30, 2007, Kinder Morgan, Inc. (formerly Knight Inc.) completed a merger transaction under which investors including Richard D. Kinder, Kinder Morgan, Inc.’s Chairman and Chief Executive Officer, acquired all of the outstanding shares of that company, referred to as the “Going Private transaction.” The purchase price of Kinder Morgan, 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 years ended December 31, 2009 and 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, December 31, 2006 and December 31, 2005 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.
(b)
This is the amount of cash distributions payable to each common unit of Kinder Morgan Energy Partners 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 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 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.
 
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 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. (“Kinder Morgan Energy Partners”). Kinder Morgan G.P., Inc. has delegated to us, to the fullest extent permitted under Delaware law and the Kinder Morgan Energy Partners partnership agreement, all of its rights and powers to manage and control the business and affairs of Kinder Morgan Energy Partners and its subsidiary operating limited partnerships and their subsidiaries, subject to Kinder Morgan G.P., Inc.’s right to approve specified actions.
 
Our consolidated financial statements include the accounts of Kinder Morgan Management, LLC and its wholly owned subsidiary, Kinder Morgan Services LLC. All material intercompany transactions and balances have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from these estimates.
 
On May 30, 2007, Kinder Morgan, Inc. merged with a wholly owned subsidiary of Kinder Morgan Holdco LLC (formerly Knight Holdco LLC), with Kinder Morgan, Inc. continuing as the surviving legal entity. The purchase price of Kinder Morgan, Inc. has been “pushed-down” and allocated to the assets and liabilities of its subsidiary companies, including us. As 
 
 
11

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


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 Kinder Morgan, Inc.’s new accounting basis to our financial statements.
 
For further information on Kinder Morgan, Inc.’s Going Private transaction and critical accounting policies, see Note 2 of the accompanying Notes to Consolidated Financial Statements.
 
Kinder Morgan Energy Partners 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 owns an interest in or operates approximately 28,000 miles of pipelines and approximately 180 terminals. Kinder Morgan Energy Partners’ 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 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 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, and its resulting performance. Therefore, we have included Kinder Morgan Energy Partners’ Annual Report on Form 10-K for the year ended December 31, 2009 in this filing as Exhibit 99.1. The following discussion should be read in conjunction with the accompanying financial statements and related notes and the financial statements of Kinder Morgan Energy Partners, which is included in this filing as Exhibit 99.1 and incorporate such Form 10-K herein by reference.
 
Business
 
Kinder Morgan G.P., Inc. has delegated to us, to the fullest extent permitted under Delaware law and Kinder Morgan Energy Partners’ limited partnership agreement, all of its rights and powers to manage and control the business and affairs of Kinder Morgan Energy Partners 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 and our equity in the earnings of Kinder Morgan Energy Partners attributable to the i-units we own. At December 31, 2009, through our ownership of i-units, we owned approximately 28.8% of all of Kinder Morgan Energy Partners’ outstanding limited partner interests. We use the equity method of accounting for our investment in Kinder Morgan Energy Partners and record earnings as described below. Our percentage ownership in Kinder Morgan Energy Partners 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.
 
Our net income (loss) for the years ended December 31, 2009 and 2008, seven months ended December 31, 2007 and five months ended May 31, 2007 was $59.0 million, $83.2 million, $50.4 million, and ($41.3) million, respectively. Our earnings, as reported in the accompanying Consolidated Statements of Income, represent equity in earnings of Kinder Morgan Energy Partners, attributable to the i-units we own, reduced by a deferred income tax provision and adjusted for the push down effect of Kinder Morgan, Inc.’s purchase of us and Kinder Morgan Energy Partners. 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. 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 and its subsidiaries into Kinder Morgan, Inc.’s financial statements, Kinder Morgan, Inc. 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 Kinder Morgan, Inc.’s or Kinder Morgan Energy Partners’ financial statements is a legal determination based on the entity that incurs the liability.
 
Kinder Morgan Energy Partners’ acquisitions from Kinder Morgan, 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
 

 
12

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


incorporated into Kinder Morgan Energy Partners’ financial statements beginning January 1, 2006, the date of common control. Kinder Morgan, Inc. 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 and we have only included these operations and earnings in our financial statements effective as of August 28, 2008.
 
Following is summarized income statement information and segment earnings contribution by business segment for Kinder Morgan Energy Partners. Additional information on Kinder Morgan Energy Partners’ results of operation and financial position are contained in its Annual Report on Form 10-K for the year ended December 31, 2009, included in this filing as Exhibit 99.1 and incorporated herein by reference (in millions).
 
Kinder Morgan Energy Partners
 
   
Year Ended December 31,
 
   
2009
   
2008
   
2007
 
Segment earnings contribution
                 
Product Pipelines
  $ 584.5     $ 546.2     $ 569.6  
Natural Gas Pipelines
    789.6       760.6       600.2  
CO2
    782.9       759.9       537.0  
Terminals
    599.0       523.8       416.0  
Kinder Morgan Canada
    154.5       141.2       (293.6 )
Total segment earnings
    2,910.5       2,731.7       1,829.2  
Depreciation, depletion and amortization expenses
    (850.8 )     (702.7 )     (547.0 )
Amortization of excess cost of investments
    (5.8 )     (5.7 )     (5.8 )
General administrative expenses
    (330.3 )     (297.9 )     (278.7 )
Interest and other non-operating expenses (a)(b)
    (439.8 )     (406.9 )     (400.4 )
Net income
    1,283.8       1,318.5       597.3  
Net income attributable to noncontrolling interests (b)
    (16.3 )     (13.7 )     (7.0 )
Net income attributable to Kinder Morgan Energy Partners
  $ 1,267.5     $ 1,304.8     $ 590.3  
                         
General Partner’s interest in net income
  $ 935.8     $ 805.8     $ 611.6  
  
                       
Limited Partners’ interest in net income
  $ 331.7     $ 499.0     $ (21.3 )
____________
(a)
Includes unallocated interest income and income tax expense and interest and debt expense.
(b)
 
2008 and 2007 restated for certain provisions concerning the accounting and reporting for noncontrolling interests, see Note 2 of the accompanying Notes to Consolidated Financial Statements.

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. 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. 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 Kinder Morgan, Inc. Pursuant to this tax indemnification agreement, Kinder Morgan, Inc. agreed to indemnify us for any tax liability attributable to our formation or our management and control of the business and affairs of Kinder Morgan Energy Partners 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 $27.4 million decrease in tax expense to $31.6 million for 2009 as compared to $59.0 million for 2008 is primarily due to a $51.6 million decrease in pretax income and the 2008 income tax expense associated with $7.7 million of out of period adjustments attributable to the nondeductible goodwill associated with our investment in Kinder Morgan Energy Partners.
 
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.
 

 
13

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


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 benefit.
 
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 Kinder Morgan, Inc. and its affiliates. Our only off-balance sheet arrangement is our equity investment in Kinder Morgan Energy Partners.
 
The number of our shares outstanding will at all times equal the number of i-units of Kinder Morgan Energy Partners, 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 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 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. We have paid share distributions totaling 7,540,357, 5,565,424, 2,402,439 and 2,028,367 shares in the years ended December 31, 2009 and 2008, seven months ended December 31, 2007 and five months ended May 31, 2007, respectively. On February 12, 2010, we paid a share distribution of 0.018430 shares per outstanding share (1,576,470 total shares) to shareholders of record as of January 29, 2010, based on the $1.05 per common unit distribution declared by Kinder Morgan Energy Partners.
 
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.
 
Kinder Morgan Energy Partners’ 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’ 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’ general partner is granted discretion by the partnership agreement, which discretion has been delegated to us, subject to the approval of the general partner in certain cases, to establish, maintain and adjust reserves for the proper conduct of its business, which might include reserves for matters such as future operating expenses, debt service, maintenance capital expenditures and rate refunds and for 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’ 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’ common units and Class B units receive distributions in cash, while we, the sole owner of Kinder Morgan Energy Partners’ 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 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 does not distribute cash to i-unit owners but retains the cash for use in its business.
 
Pursuant to Kinder Morgan Energy Partners’ partnership agreement, distributions to its unitholders are characterized either as distributions of cash from operations or as distributions of cash from interim capital transactions.  This distinction affects the distributions to its owners of common units, Class B units and i-units relative to the distributions to its general partner.
 
Cash from Operations.  Cash from operations generally refers to Kinder Morgan Energy Partners’ cash balance on the date it commenced operations, plus all cash generated by the operation of its business, after deducting related cash expenditures, net additions to or reductions in reserves, debt service and various other items.
 
Cash from Interim Capital Transactions.  Cash from interim capital transactions will generally result only from Kinder Morgan Energy Partners’ distributions that are funded from borrowings, sales of debt and equity securities and sales or other
 

 
14

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


dispositions of its assets for cash, other than inventory, accounts receivable and other current assets and assets disposed of in the ordinary course of its business.
 
Rule for Characterizing Distributions.  All available cash distributed by Kinder Morgan Energy Partners from any source will be treated as distributions of cash from operations until the sum of all available cash distributed equals the cumulative amount of cash from operations actually generated from the date it commenced operations through the end of the calendar quarter prior to that distribution.  Any distribution of available cash which, when added to the sum of all prior distributions, is in excess of the cumulative amount of cash from operations, will be considered a distribution of cash from interim capital transactions until the initial common unit price is fully recovered as described under “—Allocation of Distributions from Interim Capital Transactions.”  For purposes of calculating the sum of all distributions of available cash, the total equivalent cash amount of all distributions of i-units to us, as the holder of all i-units, will be treated as distributions of available cash, even though the distributions to us are made in additional i-units rather than cash.  Kinder Morgan Energy Partners retains this cash and uses it in its business.  To date, all of Kinder Morgan Energy Partners’ cash distributions have been treated as distributions of cash from operations.
 
Allocation of Distributions from Operations.  Kinder Morgan Energy Partners will distribute cash from operations for each quarter effectively as follows:
 
 
·
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 declared for 2009 was $932.3 million. The general partner’s incentive distribution that Kinder Morgan Energy Partners paid during 2009 to the general partner (for the fourth quarter of 2008 and the first nine months of 2009) was $906.5 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.
 
Allocation of Distributions from Interim Capital Transactions.  Any distribution by Kinder Morgan Energy Partners of available cash that would constitute cash from interim capital transactions would be distributed effectively as follows:
 
 
·
98% to all owners of common units and Class B units pro rata in cash and to us in equivalent i-units; and
 
 
·
2% to the general partner, until Kinder Morgan Energy Partners has distributed cash from this source in respect of a common unit outstanding since its original public offering in an aggregate amount per unit equal to the initial common unit price of $5.75, as adjusted for splits.
 
As cash from interim capital transactions is distributed, it would be treated as if it were a repayment of the initial public offering price of the common units.  To reflect that repayment, the first three distribution levels of cash from operations would be adjusted downward proportionately by multiplying each distribution level amount by a fraction, the numerator of which is the unrecovered initial common unit price immediately after giving effect to that distribution and the denominator of which is the unrecovered initial common unit price immediately prior to giving effect to that distribution.  For example, assuming the unrecovered initial common unit price is $5.75 per common unit and if cash from the first interim capital transaction of $2.375 per unit was distributed to owners of common units, then the amount of the first three distribution levels would each be reduced to 50% of its then current level.  The unrecovered initial common unit price generally is the amount by which the initial common unit price exceeds the aggregate distribution of cash from interim capital transactions per common unit.
 
When the initial common unit price is fully recovered, then each of the first three distribution levels will have been reduced to zero. Thereafter all distributions of available cash from all sources will be treated as if they were cash from operations and available cash will be distributed 50% to all classes of units pro rata with the distribution to i-units being made instead in the form of i-units and 50% to the general partner.
 

 
15

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


We expect that our expenditures associated with managing and controlling the business and affairs of Kinder Morgan Energy Partners and the reimbursement for these expenditures received by us from Kinder Morgan Energy Partners 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, uncertainties and assumptions. Future actions, conditions or events and future results of our operations and those of Kinder Morgan Energy Partners may differ materially from those expressed in these forward-looking statements. Please see “Information Regarding Forward-Looking Statements” for Kinder Morgan Energy Partners included in Exhibit 99.1 of this filing and incorporated herein by reference. 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, steel 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’ pipeline subsidiaries implemented by the Federal Energy Regulatory Commission, other regulatory agency or the California Public Utilities Commission;
 
·
Kinder Morgan Energy Partners’ 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’ terminals or pipelines;
 
·
Kinder Morgan Energy Partners’ 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’ 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 serves, such as the Permian Basin area of West Texas, the U.S. Rocky Mountains and the Alberta, Canada 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’ business or its ability to compete;
 
·
changes in accounting pronouncements that impact the measurement of Kinder Morgan Energy Partners’ 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 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’ 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’ facilities due to natural disasters, power shortages, strikes, riots, terrorism, war or other causes;
 
·
our or Kinder Morgan Energy Partners’ ability to obtain insurance coverage without significant levels of self-retention of risk;

 
16

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


 
·
acts of nature, sabotage, terrorism or other similar acts causing damage greater than Kinder Morgan Energy Partners’ 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;
 
·
Kinder Morgan Energy Partners’ ability 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’ 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 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 may experience;
 
·
the ability of Kinder Morgan Energy Partners to complete expansion projects on time and on budget;
 
·
the timing and success of Kinder Morgan Energy Partners’ business development efforts; and
 
·
unfavorable results of litigation and the fruition of contingencies referred to in Kinder Morgan Energy Partners’ Annual Report on Form 10-K for the year ended December 31, 2009, included in this filing as Exhibit 99.1 and incorporated herein by reference.
 
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 Item A “Risk Factors.” 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.
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.

 
17

 
Kinder Morgan Management, LLC Form 10-K



Item 8.
Financial Statements and Supplementary Data.

INDEX
 
 
Page 
     
18
 
20
 
20
 
21
 
23
 
22
 
23
 
     


 
18

 
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 Shareholders of Kinder Morgan Management, LLC:

In our opinion, the accompanying consolidated balance sheets 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, 2009 and 2008, and the results of their operations and their cash flows for the years ended December 31, 2009 and 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, 2009, 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 Management’s Report on Internal Control over Financial Reporting (not presented herein) appearing under Item 9A of the Company’s 2009 Annual Report on Form 10-K.  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 the 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 audit 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
February 25, 2010

 
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 Shareholders 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 cash flows for the period from January 1, 2007 to May 31, 2007 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 audit.  We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.



PricewaterhouseCoopers LLP
Houston, Texas
March 2, 2009, except with respect to the change in the Company’s accounting for noncontrolling interests as discussed in Note 8 (to the financial statements in the Company's Current Report on Form 8-K filed on September 18, 2009 which is not presented herein), as to which the date is September 18, 2009.


 
20

 
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
 
   
2009
   
2008
   
2007
   
May 31, 2007
 
   
(In millions)
   
(In millions)
 
Equity in earnings (loss) of Kinder Morgan Energy Partners.
  $ 90.6     $ 142.2     $ 65.4     $ (64.6 )
Income taxes
    31.6       59.0       15.0       (23.3 )
  
                               
Net Income (Loss)
  $ 59.0     $ 83.2     $ 50.4     $ (41.3 )
  
                               
Earnings (loss) per share, basic and diluted
  $ 0.72     $ 1.11     $ 0.71     $ (0.65 )
  
                               
Number of shares used in computing basic and diluted earnings per share
    81.9       75.1       71.1       63.7  


KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
   
Post-Acquisition Basis
     
Pre-Acquisition Basis
 
   
Year Ended December 31,
   
Seven Months
Ended
December 31,
   
Five Months
Ended
 
   
2009
   
2008
   
2007
   
May 31, 2007
 
   
(In millions)
   
(In millions)
 
Net Income (Loss)
  $ 59.0     $ 83.2     $ 50.4     $ (41.3 )
Other comprehensive income (loss), net of tax:
                               
Change in fair value of derivatives utilized for hedging purposes (net of tax benefit (expense) of $30.9, $(37.6), $45.6 and $6.6, respectively)
    (55.3 )     66.4       (80.7 )     (5.8 )
Reclassification of change in fair value of derivatives to net income (net of tax expense of $6.5, $38.0, $13.9 and $7.4, respectively)
    11.6       67.0       24.5       6.5  
Change in foreign currency translation adjustment (net of tax benefit (expense) of $(17.0), $19.0, $(2.3) and $(2.5), respectively)
    30.4       (33.6 )     4.1       2.2  
Minimum pension liability adjustments, other postretirement benefit plan transition obligations, pension and other postretirement benefit plan actuarial gains/losses, and reclassification of pension and other postretirement benefit plan actuarial gains/losses, prior service costs/credits and transition obligations to net income, net of tax benefit (expense) of $0.2, $(0.2) and $0.2, respectively
    (0.3 )     0.4       (0.3 )     -  
Total Other Comprehensive Income (Loss)
    (13.6 )     100.2       (52.4 )     2.9  
  
                               
Comprehensive Income (Loss)
  $ 45.4     $ 183.4     $ (2.0 )   $ (38.4 )

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

 
21

 
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,
 
   
2009
   
2008
 
   
(In millions)
 
ASSETS
           
  
           
Current Assets
           
Accounts receivable – related party
  $ 9.9     $ 7.2  
Other current assets
    1.3       0.8  
Total Current Assets
    11.2       8.0  
  
               
Investment in Kinder Morgan Energy Partners.
    2,523.5       2,454.1  
  
               
Total Assets
  $ 2,534.7     $ 2,462.1  
  
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
  
               
Current Liabilities
               
Accounts payable
  $ 2.6     $ 1.3  
Accrued other current liabilities
    8.5       6.6  
Total Current Liabilities
    11.1       7.9  
  
               
Deferred income taxes
    146.1       122.1  
  
               
Shareholders’ Equity
               
Voting shares - unlimited authorized; 2 voting shares issued and outstanding
    0.1       0.1  
Listed Shares - unlimited authorized; 85,538,261 and 77,997,904 listed shares issued and outstanding, respectively
    2,966.0       2,630.1  
Retained deficit
    (549.3 )     (272.4 )
Accumulated other comprehensive loss
    (39.3 )     (25.7 )
Total Shareholders’ Equity
    2,377.5       2,332.1  
                 
Total Liabilities and Shareholders’ Equity
  $ 2,534.7     $ 2,462.1  

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 STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
 
   
Post-Acquisition Basis
   
Pre-Acquisition Basis
 
   
Year Ended December 31,
   
Seven Months
Ended
December 31,
   
Five Months
Ended
 
   
2009
   
2008
   
2007
   
May 31, 2007
 
   
(In millions)
   
(In millions)
 
Cash Flows From Operating activities
                       
Net income (loss)
  $ 59.0     $ 83.2     $ 50.4     $ (41.3 )
Adjustments to reconcile net income to net cash flows from operating activities
                               
Deferred income taxes
    31.6       59.0       15.0       (23.3 )
Equity in (earnings) loss of Kinder Morgan Energy Partners.
    (90.6 )     (142.2 )     (65.4 )     64.6  
Changes in components of working capital
                               
Accounts receivable
    (2.7 )     21.4       (16.1 )     2.2  
Other current assets
    (0.5 )     1.5       1.0       0.7  
Accounts payable
    1.3       -       -       0.1  
Accrued other current liabilities
    1.9       (22.9 )     15.1       (3.0 )
Net Cash Flows Provided by Operating Activities
    -       -       -       -  
  
                               
Cash Flows From Investing Activities
                               
Purchase of i-units of Kinder Morgan Energy Partners
    -       -       -       (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, beginning of period
    -       -       -       -  
Cash and Cash Equivalents, end of period
  $ -     $ -     $ -     $ -  

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,
 
   
2009
   
2008
 
   
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
    77,997,904       2,630.1       72,432,480       2,374.8  
Share dividends
    7,540,357       335.9       5,565,424       289.6  
Purchase accounting adjustment
    -       -       -       (34.3 )
Ending Balance
    85,538,261       2,966.0       77,997,904       2,630.1  
  
                               
Retained Deficit
                               
Beginning Balance
            (272.4 )             (66.0 )
Net income
            59.0               83.2  
Share dividends
            (335.9 )             (289.6 )
Ending Balance
            (549.3 )             (272.4 )
  
                               
Accumulated other comprehensive loss (net of tax benefits)
                               
Derivatives
                               
Beginning Balance
            3.7               (129.7 )
Change in fair value of derivatives utilized for hedging purposes
            (55.3 )             66.4  
Reclassification of change in fair value of derivatives to net income
            11.6               67.0  
Ending Balance
            (40.0 )             3.7  
Foreign currency translation
                               
Beginning Balance
            (29.5 )             4.1  
Currency translation adjustment
            30.4               (33.6 )
Ending Balance
            0.9               (29.5 )
Employee benefit plans
                               
Beginning Balance
            0.1               (0.3 )
Pension plan amortization/adjustments
            (0.3 )             0.4  
Ending Balance
            (0.2 )             0.1  
Total accumulated other comprehensive loss
            (39.3 )             (25.7 )
  
                               
Total Shareholders’ Equity
    85,538,263     $ 2,377.5       77,997,906     $ 2,332.1  


 
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)
 
   
Post-Acquisition Basis
   
Pre-Acquisition Basis
 
   
Seven Months Ended
December 31, 2007
   
Five Months Ended
May 31,2007
 
   
Shares
   
Amount
   
Shares
   
Amount
 
   
(Dollars in millions)
   
(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
    70,030,041       2,258.6       62,301,674       2,109.4  
Listed shares issued
    -       -       5,700,000       297.9  
Share dividends
    2,402,439       116.4       2,028,367       105.2  
Share issuance costs
    -       (0.2 )     -       -  
Ending Balance
    72,432,480       2,374.8       70,030,041       2,512.5  
  
                               
Retained Deficit
                               
Beginning Balance
            -               (387.0 )
Net income (loss)
            50.4               (41.3 )
Share dividends
            (116.4 )             (105.2 )
Ending Balance
            (66.0 )             (533.5 )
  
                               
Accumulated other comprehensive loss (net of tax benefits)
                               
Derivatives
                               
Beginning Balance
            (73.5 )             (139.1 )
Change in fair value of derivatives utilized for hedging purposes
            (80.7 )             (5.8 )
Reclassification of change in fair value of derivatives to net income
            24.5               6.5  
Ending Balance
            (129.7 )             (138.4 )
Foreign currency translation
                               
Beginning Balance
            -               (3.3 )
Currency translation adjustment
            4.1               2.2  
Ending Balance
            4.1               (1.1 )
Employee retirement benefits
                               
Beginning Balance
            -               (0.3 )
Adoption of pension plan accounting principle
            (0.3 )             -  
Ending Balance
            (0.3 )             (0.3 )
Total accumulated other comprehensive loss
            (125.9 )             (139.8 )
  
                               
Total Shareholders’ Equity
    72,432,482     $ 2,183.0       70,030,043     $ 1,839.3  

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
 
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 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. (“Kinder Morgan Energy Partners”) 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, has delegated to us, to the fullest extent permitted under Delaware law and Kinder Morgan Energy Partners’ limited partnership agreement, all of its rights and powers to manage and control the business and affairs of Kinder Morgan Energy Partners, subject to the general partner’s right to approve specified actions. We are a limited partner in Kinder Morgan Energy Partners 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 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.
 
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. Effective September 30, 2009, the Financial Accounting Standards Boards’ Accounting Standards Codification became the single source of generally accepted accounting principles, and in this report, we refer to the Financial Accounting Standards Board as the FASB and the FASB Accounting Standards Codification as the Codification.
 
On May 30, 2007, Kinder Morgan, Inc. merged with a wholly owned subsidiary of Kinder Morgan Holdco LLC, with Kinder Morgan, Inc. continuing as the surviving legal entity and subsequently renamed Knight Inc. On July 15, 2009, the Company’s name was changed back to Kinder Morgan, Inc. Kinder Morgan 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 Codification topic 805, Business Combinations. The purchase price of Kinder Morgan, 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 Kinder Morgan, Inc.’s new accounting basis to our financial statements.
 
The purchase price of Kinder Morgan, 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 of approximately $224.1 million. The difference between the book value of our investment in Kinder Morgan Energy Partners (reflected within the caption “Investment in Kinder Morgan Energy Partners” in the accompanying Consolidated Balance Sheets) and our share of Kinder Morgan Energy Partners’ recognized net assets at book value (our ownership percentage in Kinder Morgan Energy Partners multiplied by the total partners’ capital on Kinder Morgan Energy Partners’ 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.
 
Notwithstanding the consolidation of Kinder Morgan Energy Partners 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 and/or its subsidiaries and vice versa.  Responsibility for settlements of obligations reflected in Kinder Morgan, Inc.’s or Kinder Morgan Energy Partners’ financial statements are a legal determination based on the entity that incurs the liability.
 

 
26

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


Cash Equivalents
 
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
 
Accounting for Investment in Kinder Morgan Energy Partners
 
We use the equity method of accounting for our investment in Kinder Morgan Energy Partners, which investment is further described in Notes 3 and 4. Kinder Morgan Energy Partners 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 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 Kinder Morgan, Inc. on our equity investment in Kinder Morgan Energy Partners. 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 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. At December 31, 2009, through our ownership of i-units, we owned approximately 28.8% of all of Kinder Morgan Energy Partners’ outstanding limited partner interests.
 
In addition, we perform impairment testing of the amount at which we carry the excess of cost over underlying fair value of net assets accounted for under the equity method when events or circumstances warrant such testing. The impairment test considers whether there is an inability to recover the carrying value of an investment that is other than temporary. As of December 31, 2009, we believed no such impairment had occurred on our investment in Kinder Morgan Energy Partners.
 
Accounting for Share Distributions
 
Our board of directors declares and we make additional share distributions at the same times that Kinder Morgan Energy Partners 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 (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 is recorded after a provision for income taxes.
 
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.  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 $146.1 million and $122.1 million as of December 31, 2009 and 2008, respectively, as presented in the accompanying Consolidated Balance Sheets. Under our current basis of accounting, we have excluded nondeductible goodwill associated with our investment in Kinder Morgan Energy Partners. 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. 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.
 
For more information on income taxes, see Note 6.
 
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.
 
Noncontrolling Interests
 
On January 1, 2009, we and Kinder Morgan Energy Partners adopted certain provisions concerning the accounting and reporting for noncontrolling interests included within the “Consolidation” Topic of the Codification.  A noncontrolling interest, previously referred to as a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent.
 

 
27

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


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 interests to be clearly identified and presented on the face of the consolidated statement of operations.  Accordingly, our presentation of Kinder Morgan Energy Partners’ 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 have been applied retrospectively for all periods presented.  
 
Subsequent Events
 
We have evaluated subsequent events, which are events or transactions that occurred after December 31, 2009 through the issuance of the accompanying Consolidated Financial Statements.
 
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, 2009, Kinder Morgan, Inc. owned approximately 12.2 million, or approximately 14.3% of our outstanding shares.
 
We have paid share distributions totaling 7,540,357, 5,565,424, 2,402,439 and 2,028,367 shares in the years ended December 31, 2009 and 2008, seven months ended December 31, 2007 and five months ended May 31, 2007, respectively.  On February 12, 2010, we paid a share distribution of 0.018430 shares per outstanding share (1,576,470 total shares) to shareholders of record as of January 29, 2010, based on the $1.05 per common unit distribution declared by Kinder Morgan Energy Partners. These distributions were 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. Upon the closing of our initial public offering in May 2001, we became a limited partner in Kinder Morgan Energy Partners 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’ 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, subject to Kinder Morgan G.P., Inc.’s right to approve certain transactions. Kinder Morgan Energy Partners 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 and the indemnity is not prohibited by law. Kinder Morgan Energy Partners consented to the terms of the delegation of control agreement including Kinder Morgan Energy Partners’ indemnity and reimbursement obligations. We do not receive a fee for our service under the delegation of control agreement, nor do we receive any margin or profit on the expense reimbursement. We incurred approximately $273.2 million, $263.5 million, $135.8 million and $116.9 million of expenses during the years ended December 31, 2009 and 2008, seven months ended December 31, 2007 and five months ended May 31, 2007, respectively, on behalf of Kinder Morgan Energy Partners. The expense reimbursements by Kinder Morgan Energy Partners 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, 2009, $9.9 million, primarily a receivable from Kinder Morgan Energy Partners 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, and Kinder Morgan Energy Partners’ operating partnerships and subsidiaries (collectively, the “Group”). Employees of KMGP Services Company, Inc., a subsidiary of Kinder Morgan G.P., Inc., are assigned to work for one or more members of the Group. When they do so, they remain under our ultimate management and control. The direct costs of all compensation, benefits expenses, employer taxes and other employer expenses for these employees are allocated and charged by Kinder Morgan Services LLC to the appropriate members of the Group, and the members of the Group reimburse Kinder Morgan Services LLC for their allocated shares of these direct costs. There is no profit or margin charged by Kinder Morgan Services LLC to the members of the Group. The administrative support necessary to implement these payroll and benefits services is provided by the human resource department of Kinder Morgan, Inc., and the related administrative costs are allocated to members of the Group in accordance with expense allocation procedures. The effect of these arrangements is that each member of the Group bears the direct
 

 
28

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


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 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 reimburses us with respect to costs incurred or allocated to us in accordance with Kinder Morgan Energy Partners’ limited partnership agreement, the delegation of control agreement among Kinder Morgan G.P., Inc., Kinder Morgan Energy Partners, us and others, and our limited liability company agreement. During the years ended December 31, 2009 and 2008, seven months ended December 31, 2007 and five months ended May 31, 2007 expenses totaled approximately $344.6 million, $310.7 million, $163.7 million and $112.1 million, respectively.
 
5.      Summarized Financial Information for Kinder Morgan Energy Partners
 
Kinder Morgan Energy Partners’ acquisition from Kinder Morgan, 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, Inc. recorded charges of $377.1 million in 2007 related to the impairment of Trans Mountain goodwill. Due to the immaterial impact of Express and Jet Fuel operations and earnings, Kinder Morgan Energy Partners and we have only included the operations and earnings of Express and Jet Fuel in our financial statements effective as of August 28, 2008.
 
Following is summarized income statement and balance sheet information for Kinder Morgan Energy Partners, a publicly traded limited partnership in which we own a significant interest (in millions). Additional information on Kinder Morgan Energy Partners’ results of operations and financial position are contained in its Annual Report on Form 10-K for the year ended December 31, 2009, which is included in this filing as Exhibit 99.1 and incorporated herein by reference.
 
Summarized Kinder Morgan Energy Partners Income Statement Information
 
   
Year Ended December 31,
 
   
2009
   
2008(a)
   
2007(a)
 
Revenues
  $ 7,003.4     $ 11,740.3     $ 9,217.7  
Operating expenses
    5,488.3       10,188.8       8,410.0  
Operating income
  $ 1,515.1     $ 1,551.5     $ 807.7  
  
                       
Income from continuing operations
  $ 1,283.8     $ 1,317.2     $ 423.4  
  
                       
Net income
  $ 1,283.8     $ 1,318.5     $ 597.3  
  
                       
Net income attributable to Kinder Morgan Energy Partners, L.P.
  $ 1,267.5     $ 1,304.8     $ 590.3  
  
                       
General Partner’s interest in net income
  $ 935.8     $ 805.8     $ 611.6  
  
                       
Limited Partners’ interest in net income
  $ 331.7     $ 499.0     $ (21.3 )

Summarized Kinder Morgan Energy Partners Balance Sheet Information
 
   
As of December 31,
 
   
2009
   
2008
 
Current assets
  $ 1,244.7     $ 1,244.4  
Noncurrent assets
  $ 19,017.5     $ 16,641.4  
  
               
Current liabilities
  $ 2,017.6     $ 1,782.1  
Noncurrent liabilities
  $ 11,520.5     $ 9,987.4  
Kinder Morgan Energy Partners’ capital
  $ 6,644.5     $ 6,045.6  
Noncontrolling interests(a)
  $ 79.6     $ 70.7  
____________

 
29

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



(a)
2008 and 2007 restated for certain provisions concerning the accounting and reporting for noncontrolling interests; see Note 2.

 
6.
Income Taxes
 
The difference between the statutory federal income taxes (and rate) and our actual income taxes (and effective tax rate) are summarized as follows (in millions, except percentages):
 
 
Post-Acquisition Basis
   
Pre-Acquisition
Basis
 
Year Ended December 31,
 
Seven Months Ended
December 31, 2007
   
Five Months Ended
May 31, 2007
 
2009
 
2008
     
Federal income tax rate
$
31.6 
 
35.0 
%
 
$
49.8
 
35.0
%
 
$
23.1
 
35.0 
%
   
$
(22.6)
 
35.0
%
Other (a)
 
(0.9)
 
(1.1)
%
   
7.7
 
5.4
%
   
(8.6)
 
(13.2)
%
     
-
 
-
%
State income tax, net of federal benefit
 
0.9 
 
1.0 
%
   
1.5
 
1.1
%
   
0.5
 
1.1 
%
     
(0.7)
 
1.1
%
Total
$
31.6 
 
34.9 
%
 
$
59.0
 
41.5
%
 
$
15.0
 
22.9 
%
   
$
(23.3)
 
36.1
%
____________
(a)
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 Kinder Morgan, Inc. Pursuant to this tax indemnification agreement, Kinder Morgan, Inc. agreed to indemnify us for any tax liability attributable to our formation or our management and control of the business and affairs of Kinder Morgan Energy Partners 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 had no unrecognized tax benefits on the balance sheet at December 31, 2009 and 2008. 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 December 31, 2009 or 2008. At December 31, 2009, tax years 2005 through 2009 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 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 that is not attributable to non-tax-deductible goodwill. We developed an estimate 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) in 2008 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 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 as our tax liabilities on liquidation may be impacted by our tax indemnification agreement with Kinder Morgan, 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
 
In August 2009, the FASB issued Accounting Standards Update No. 2009-05, “Measuring Liabilities at Fair Value.”  This Accounting Standards Update, or 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.
 

 
30

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


On January 6, 2010, the FASB issued ASU No. 2010-03, “Extractive Industries-Oil and Gas: Oil and Gas Reserve Estimation and Disclosure (Topic 932),” which aligns U.S. generally accepted accounting principles with the Securities and Exchange Commission’s (“SEC”) final rule on the “Modernization of Oil and Gas Reporting.”  The FASB and 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 the new requirements 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 have fully adopted the provisions required pursuant to the SEC’s final rule and ASU No. 2010-03; however, we are not able to disclose the impact of these new guidelines due to the impracticability of the effort that would be required to prepare reserve reports under both the old and new rules.
 
9.
Selected Quarterly Financial Data (Unaudited)
 
Quarterly Operating Results for 2009 and 2008
 
   
2009–Three Months Ended
 
   
March 31
   
June 30
   
September 30
   
December 31
 
   
(In millions except per share amounts)
 
Equity in earnings of Kinder Morgan Energy Partners
  $ 10.4     $ 25.1