kmr10k2007.htm
Table of Contents
Kinder Morgan Management, LLC Form 10-K


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
  
þ
  
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007
or
 
o
  
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____to_____

Commission File Number 1-16459
KMR Logo
Kinder Morgan Management, LLC
(Exact name of registrant as specified in its charter)
  
Delaware
  
76-0669886
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
  
500 Dallas Street, Suite 1000, Houston, Texas 77002
(Address of principal executive offices, including zip code)

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

Securities registered pursuant to Section 12(b) of the Act:
  
Title of each class
  
Name of each exchange
on which registered
Shares Representing Limited Liability Company Interests
  
New York Stock Exchange

Securities registered pursuant to section 12(g) of the Act:
 
None
(Title of class)

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

 
 

 
Kinder Morgan Management, LLC Form 10-K


The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $3,108,216,679 as of June 29, 2007.
 
The number of shares outstanding for each of the registrant’s classes of common equity, as of January 31, 2008 was approximately two voting shares and 72,432,480 listed shares.

 
2

 
Kinder Morgan Management, LLC Form 10-K


KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
 
CONTENTS
 
   
Page
Number
     
  
     
Business and Properties                                                                                                               
4-6
 
Risk Factors                                                                                                               
6-8
 
Unresolved Staff Comments                                                                                                               
8
 
Legal Proceedings                                                                                                               
8
 
Submission of Matters to a Vote of Security Holders                                                                                                               
8
 
  
     
     
  
     
   
 
of Equity Securities                                                                                                           
9
 
Selected Financial Data                                                                                                               
10
 
11-17
 
Quantitative and Qualitative Disclosures About Market Risk                                                                                                               
17
 
Financial Statements and Supplementary Data                                                                                                               
18-33
 
33
 
Controls and Procedures                                                                                                               
34
 
 
34
 
 
34
 
 
Changes in Internal Control over Financial Reporting                                                                                                           
34
 
Other Information                                                                                                               
34
 
  
     
     
  
     
Directors, Executive Officers and Corporate Governance                                                                                                 
35-37
 
Executive Compensation                                                                                                               
38-50
 
   
 
Related Stockholder Matters                                                                                                           
50-51
 
51-58
 
Principal Accounting Fees and Services                                                                                                               
59
 
  
     
     
  
     
Exhibits and Financial Statement Schedules                                                                                                               
60-61
 
  
     
Signatures                                                                                                                                  
62
 
  
Annex A
  
   
Note:  Individual financial statements of the parent company are omitted pursuant to the provisions of Accounting Series Release No. 302.

 
3

 
Kinder Morgan Management, LLC Form 10-K


PART I
 
Items 1 and 2.  Business and Properties.
 
In this report, unless the context requires otherwise, references to “we,” “us,” “our,” or the “Company” are intended to mean Kinder Morgan Management, LLC and its consolidated subsidiary. Our shares representing limited liability company interests are traded on the New York Stock Exchange under the symbol “KMR”. Our executive offices are located at 500 Dallas Street, Suite 1000, Houston, Texas 77002 and our telephone number is (713) 369-9000.
 
We are a publicly traded Delaware limited liability company that was formed on February 14, 2001. We are a limited partner in Kinder Morgan Energy Partners, L.P., and manage and control its business and affairs pursuant to a delegation of control agreement. Our success is dependent upon our operation and management of Kinder Morgan Energy Partners, L.P. and its resulting performance. Therefore, we have attached hereto as Annex A Kinder Morgan Energy Partners, L.P.’s 2007 Annual Report on Form 10-K. Pursuant to the delegation of control agreement among Kinder Morgan G.P., Inc., Kinder Morgan Energy Partners, L.P., Kinder Morgan Energy Partners, L.P.’s operating partnerships and us (as the agreement was amended effective May 30, 2007):
 
 
·
Kinder Morgan G.P., Inc., as general partner of Kinder Morgan Energy Partners, L.P., delegated to us, to the fullest extent permitted under Delaware law and the Kinder Morgan Energy Partners, L.P. partnership agreement, and we assumed, all of Kinder Morgan G.P., Inc.’s power and authority to manage and control the business and affairs of Kinder Morgan Energy Partners, L.P. and Kinder Morgan Energy Partners, L.P.’s operating partnerships; and
 
 
·
We have agreed that we will not take any of the following actions without the approval of Kinder Morgan G.P., Inc.:
 
 
amend or propose an amendment to the Kinder Morgan Energy Partners, L.P. partnership agreement,
 
 
change the amount of the distribution made on the Kinder Morgan Energy Partners, L.P. common units,
 
 
allow a merger or consolidation involving Kinder Morgan Energy Partners, L.P.,
 
 
allow a sale or exchange of all or substantially all of the assets of Kinder Morgan Energy Partners, L.P.,
 
 
dissolve or liquidate Kinder Morgan Energy Partners, L.P., or, after taking into account the creditors of Kinder Morgan Energy Partners, L.P., SFPP, L.P. or Calnev Pipe Line, L.L.C., respectively, allow Kinder Morgan Energy Partners, L.P., SFPP, L.P. or Calnev Pipe Line, L.L.C. to take any of the following actions: (a) instituting proceedings to be adjudicated bankrupt or insolvent, or (b) consenting in writing to the institution of bankruptcy or insolvency proceedings against it, or (c) filing a petition seeking or consenting to reorganization or relief under any applicable federal or state law relating to bankruptcy, or (d) consenting in writing to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of Kinder Morgan Energy Partners, L.P., SFPP, L.P. or Calnev Pipe Line, L.L.C. or a substantial part of their respective property, or (e) making any assignment for the benefit of its creditors, or (f) except as required by law, admitting in writing its inability to pay its respective debts generally as they become due,
 
 
take any action requiring unitholder approval,
 
 
call any meetings of the Kinder Morgan Energy Partners, L.P. common unitholders,
 
 
take any action that, under the terms of the partnership agreement of Kinder Morgan Energy Partners, L.P., must or should receive a special approval of the conflicts and audit committee of Kinder Morgan G.P., Inc.,
 
 
take any action that, under the terms of the partnership agreement of Kinder Morgan Energy Partners, L.P., cannot be taken by the general partner without the approval of all outstanding units,
 
 
settle or compromise any claim or action directly against or otherwise relating to indemnification of our or the general partner’s (and respective affiliates) officers, directors, managers or members or relating to our structure or securities,
 
 
settle or compromise any claim or action relating to the i-units, which are a separate class of Kinder Morgan Energy Partners, L.P.’s limited partnership interests, our shares or any offering of our shares,
 
 
settle or compromise any claim or action involving tax matters,
 

 
4

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


 
allow Kinder Morgan Energy Partners, L.P. to incur indebtedness if the aggregate amount of its indebtedness then exceeds 50% of the market value of the then outstanding units of Kinder Morgan Energy Partners, L.P., or
 
 
allow Kinder Morgan Energy Partners, L.P. to issue units in one transaction, or in a series of related transactions, having a market value in excess of 20% of the market value of then outstanding units of Kinder Morgan Energy Partners, L.P.
 
 
·
Kinder Morgan G.P., Inc.:
 
 
is not relieved of any responsibilities or obligations to Kinder Morgan Energy Partners, L.P. or its unitholders as a result of such delegation,
 
 
owns, or one of its affiliates owns, all of our voting shares, and
 
 
will not withdraw as general partner of Kinder Morgan Energy Partners, L.P. or transfer to a non-affiliate all of its interest as general partner, unless approved by both the holders of a majority of each of the i-units and the holders of a majority of all units voting as a single class, excluding common units and Class B units held by Kinder Morgan G.P., Inc. and its affiliates and excluding the number of i-units corresponding to the number of our shares owned by Kinder Morgan G.P., Inc. and its affiliates.
 
 
·
Kinder Morgan Energy Partners, L.P. has agreed to:
 
 
recognize the delegation of rights and powers to us,
 
 
indemnify and protect us and our officers and directors to the same extent as it does with respect to Kinder Morgan G.P., Inc. as general partner, and
 
 
reimburse our expenses to the same extent as it does with respect to Kinder Morgan G.P., Inc. as general partner.
 
The delegation of control agreement will continue in effect until either Kinder Morgan G.P., Inc. has withdrawn or been removed as the general partner of Kinder Morgan Energy Partners, L.P. or all of our shares are owned by Knight Inc. and its affiliates. The partnership agreement of Kinder Morgan Energy Partners, L.P. recognizes the delegation of control agreement. The delegation of control agreement also applies to the operating partnerships of Kinder Morgan Energy Partners, L.P. and their partnership agreements.
 
Kinder Morgan G.P., Inc. remains the sole general partner of Kinder Morgan Energy Partners, L.P. and all of its operating partnerships. Kinder Morgan G.P., Inc. retains all of its general partner interests and shares in the profits, losses and distributions from all of these partnerships.
 
The withdrawal or removal of Kinder Morgan G.P., Inc. as general partner of Kinder Morgan Energy Partners, L.P. will simultaneously result in the termination of our power and authority to manage and control the business and affairs of Kinder Morgan Energy Partners, L.P. Similarly, if Kinder Morgan G.P., Inc.’s power and authority as general partner are modified in the partnership agreement of Kinder Morgan Energy Partners, L.P., then the power and authority delegated to us will be modified on the same basis. The delegation of control agreement can be amended by all parties to the agreement, but on any amendment that would reduce the time for any notice to which owners of our shares are entitled or that would have a material adverse effect on our shares, as determined by our board of directors in its discretion, the approval of the owners of a majority of the shares, excluding shares owned by Knight Inc. and its affiliates, is required.
 
Through our ownership of i-units, we are a limited partner in Kinder Morgan Energy Partners, L.P. We do not expect to have any cash flow attributable to our ownership of the i-units, but we expect that we will receive quarterly distributions of additional i-units from Kinder Morgan Energy Partners, L.P. The number of additional i-units we receive will be based on the amount of cash to be distributed by Kinder Morgan Energy Partners, L.P. to an owner of one of its common units. The amount of cash distributed by Kinder Morgan Energy Partners, L.P. to its owners of common units is dependent on the operations of Kinder Morgan Energy Partners, L.P. and its operating limited partnerships and their subsidiaries and investees, and will be determined in accordance with its partnership agreement.
 
We have elected to be treated as a corporation for federal income tax purposes. Because we are treated as a corporation for federal income tax purposes, an owner of our shares will not report on its federal income tax return any of our items of income, gain, loss and deduction relating to an investment in us.
 
We are subject to federal income tax on our taxable income; however, the i-units owned by us generally are not entitled to allocations of income, gain, loss or deduction of Kinder Morgan Energy Partners, L.P. until such time as there is a liquidation of Kinder Morgan Energy Partners, L.P. Therefore, we do not anticipate that we will have material amounts of taxable
 

 
5

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


income resulting from our ownership of the i-units unless we enter into a sale or exchange of the i-units or Kinder Morgan Energy Partners, L.P. is liquidated.
 
We have no properties. Our assets consist of a small amount of working capital and the i-units that we own.
 
We have no employees. For more information, see Note 4 of the accompanying Notes to Consolidated Financial Statements and Kinder Morgan Energy Partners, L.P.’s report on Form 10-K for the year ended December 31, 2007.
 
We make available free of charge on or through our Internet website, at http://www.kindermorgan.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
 
Item 1A.  Risk Factors
 
You should carefully consider the risks described below, in addition to the other information contained in this document. Realization of any of the following risks could have a material adverse effect on our business, financial condition, cash flows and results of operations.
 
Because our only assets are the i-units issued by Kinder Morgan Energy Partners, L.P., our success is dependent solely upon our operation and management of Kinder Morgan Energy Partners, L.P. and its resulting performance. We are a limited partner in Kinder Morgan Energy Partners, L.P. In the event that Kinder Morgan Energy Partners, L.P. decreases its cash distributions to its common unitholders, distributions of i-units on the i-units that we own will decrease correspondingly, and distributions of additional shares to owners of our shares will decrease as well. The risk factors that affect Kinder Morgan Energy Partners, L.P. also affect us; see “Risk Factors” for Kinder Morgan Energy Partners, L.P. included in Annex A.
 
The value of the quarterly distribution of an additional fractional share may be less than the cash distribution on a common unit of Kinder Morgan Energy Partners, L.P. The fraction of a Kinder Morgan Management, LLC share to be issued per share outstanding with each quarterly distribution is based on the average closing price of the shares for the ten consecutive trading days preceding the ex-dividend date for our shares. Because the market price of our shares may vary substantially over time, the market value of our shares on the date a shareholder receives a distribution of additional shares may vary substantially from the cash the shareholder would have received had the shareholder owned common units instead of our shares.
 
The tax treatment applied to Kinder Morgan Energy Partners, L.P. depends on its status as a partnership for federal income tax purposes, as well as Kinder Morgan Energy Partners, L.P. not being subject to a material amount of entity-level taxation by individual states. If the Internal Revenue Service treats Kinder Morgan Energy Partners, L.P. as a corporation or Kinder Morgan Energy Partners, L.P. becomes subject to a material amount of entity-level taxation for state tax purposes, it would substantially reduce the amount of cash available for distribution to common unitholders and the value of i-units that Kinder Morgan Energy Partners, L.P. will distribute quarterly to us and the value of our shares that we will distribute quarterly to our shareholders. The anticipated benefit of an investment in our shares depends largely on the treatment of Kinder Morgan Energy Partners, L.P. as a partnership for federal income tax purposes. In order for Kinder Morgan Energy Partners, L.P. to be treated as a partnership for federal income tax purposes, current law requires that 90% or more of its gross income for every taxable year consist of “qualifying income,” as defined in Section 7704 of the Internal Revenue Code. Kinder Morgan Energy Partners, L.P. may not meet this requirement or current law may change so as to cause, in either event, Kinder Morgan Energy Partners, L.P. to be treated as a corporation for federal income tax purposes or otherwise subject to federal income tax. Kinder Morgan Energy Partners, L.P. has not requested, and does not plan to request, a ruling from the Internal Revenue Service on this or any other matter affecting Kinder Morgan Energy Partners, L.P.
 
If Kinder Morgan Energy Partners, L.P. were to be treated as a corporation for federal income tax purposes, it would pay federal income tax on its income at the corporate tax rate, which is currently a maximum of 35%, and would pay state income taxes at varying rates. Distributions to us of additional i-units would generally be taxed as a corporate distribution. Because a tax would be imposed upon Kinder Morgan Energy Partners, L.P. as a corporation, the cash available for distribution to common unitholders would be substantially reduced, which would reduce the values of i-units distributed quarterly to us and our shares distributed quarterly to our shareholders. Treatment of Kinder Morgan Energy Partners, L.P. as a corporation would cause a substantial reduction in the value of our shares.
 
Current law or Kinder Morgan Energy Partners, L.P.’s business may change so as to cause Kinder Morgan Energy Partners, L.P. to be treated as a corporation for federal income tax purposes or otherwise subject Kinder Morgan Energy Partners, L.P. to entity-level taxation. Members of Congress are considering substantive changes to the existing federal income tax laws that affect certain publicly-traded partnerships. For example, federal income tax legislation has been proposed that would eliminate partnership tax treatment for certain publicly-traded partnerships. Although the currently proposed legislation would not appear to affect Kinder Morgan Energy Partners, L.P.’s tax treatment as a partnership, we are unable to predict whether any of these changes, or other proposals, will ultimately be enacted. Any such changes could negatively impact the
 

 
6

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


value of an investment in our shares.
 
In addition, because of widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise or other forms of taxation. For example, Kinder Morgan Energy Partners, L.P. is now subject to a new entity-level tax on the portion of its total revenue that is generated in Texas. Specifically, the Texas margin tax is imposed at a maximum effective rate of 0.7% of Kinder Morgan Energy Partners, L.P.’s total revenue that is apportioned to Texas. Imposition of such a tax on Kinder Morgan Energy Partners, L.P. by Texas, or any other state, will reduce Kinder Morgan Energy Partners, L.P.’s cash available for distribution to its partners. If any state were to impose a tax upon Kinder Morgan Energy Partners, L.P. as an entity, the cash available for distribution to its common unitholders would be reduced, which would reduce the values of i-units distributed quarterly to us and our shares distributed quarterly to our shareholders.
 
Kinder Morgan Energy Partners, L.P.’s partnership agreement provides that if a law is enacted that subjects Kinder Morgan Energy Partners, L.P. to taxation as a corporation or otherwise subjects Kinder Morgan Energy Partners, L.P. to entity-level taxation for federal income tax purposes, the minimum quarterly distribution and the target distribution levels will be adjusted to reflect the impact on Kinder Morgan Energy Partners, L.P. of that law.
 
As an owner of i-units, we may not receive value equivalent to the common unit value for our i-unit interest in Kinder Morgan Energy Partners, L.P. if Kinder Morgan Energy Partners, L.P. is liquidated. As a result, a shareholder may receive less per share in our liquidation than is received by an owner of a common unit in a liquidation of Kinder Morgan Energy Partners, L.P. If Kinder Morgan Energy Partners, L.P. is liquidated and Knight Inc. does not satisfy its obligation to purchase your shares, which is triggered by a liquidation, then the value of your shares will depend on the after-tax amount of the liquidating distribution received by us as the owner of i-units. The terms of the i-units provide that no allocations of income, gain, loss or deduction will be made in respect of the i-units until such time as there is a liquidation of Kinder Morgan Energy Partners, L.P. If there is a liquidation of Kinder Morgan Energy Partners, L.P., it is intended that we will receive allocations of income and gain in an amount necessary for the capital account attributable to each i-unit to be equal to that of a common unit. As a result, we will likely realize taxable income upon the liquidation of Kinder Morgan Energy Partners, L.P. However, there may not be sufficient amounts of income and gain to cause the capital account attributable to each i-unit to be equal to that of a common unit. If they are not equal, we, and therefore our shareholders, will receive less value than would be received by an owner of common units.
 
Further, the tax indemnity provided to us by Knight Inc. only indemnifies us for our tax liabilities to the extent we have not received sufficient cash in the transaction generating the tax liability to pay the associated tax. Prior to any liquidation of Kinder Morgan Energy Partners, L.P., we do not expect to receive cash in a taxable transaction. If a liquidation of Kinder Morgan Energy Partners, L.P. occurs, however, we likely would receive cash which would need to be used at least in part to pay taxes. As a result, our residual value and the value of our shares likely will be less than the value of the common units upon the liquidation of Kinder Morgan Energy Partners, L.P.
 
Our management and control of the business and affairs of Kinder Morgan Energy Partners, L.P. and its operating partnerships could result in our being liable for obligations to third parties who transact business with Kinder Morgan Energy Partners, L.P. and its operating partnerships and to whom we held ourselves out as a general partner. We could also be responsible for environmental costs and liabilities associated with Kinder Morgan Energy Partners, L.P.’s assets in the event that it is not able to perform all of its obligations under environmental laws. Kinder Morgan Energy Partners, L.P. may not be able to reimburse or indemnify us as a result of its insolvency or bankruptcy. The primary adverse impact of that insolvency or bankruptcy on us would be the decline in or elimination of the value of our i-units, which are our only significant assets. Assuming under these circumstances that we have some residual value in our i-units, a direct claim by creditors of Kinder Morgan Energy Partners, L.P. against us could further reduce our net asset value and cause us also to declare bankruptcy. Another risk with respect to third party claims will occur, however, under the circumstances when Kinder Morgan Energy Partners, L.P. is financially able to pay us, but for some other reason does not reimburse or indemnify us. For example, to the extent that Kinder Morgan Energy Partners, L.P. fails to satisfy any environmental liabilities for which it is responsible, we could be held liable under environmental laws. For additional information, see the following risk factor.
 
If we are not fully indemnified by Kinder Morgan Energy Partners, L.P. for all the liabilities we incur in performing our obligations under the delegation of control agreement, we could face material difficulties in paying those liabilities, and the net value of our assets could be adversely affected. Under the delegation of control agreement, we have been delegated management and control of the business and affairs of Kinder Morgan Energy Partners, L.P. and its operating partnerships. There are circumstances under which we may not be indemnified by Kinder Morgan Energy Partners, L.P. or Kinder Morgan G.P., Inc. for liabilities we incur in managing and controlling the business and affairs of Kinder Morgan Energy Partners, L.P. These circumstances include:
 

 
7

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


 
·
if we act in bad faith; and
 
 
·
if we breach laws like the federal securities laws, where indemnification may not be allowed.
 
If in the future we cease to manage and control the business and affairs of Kinder Morgan Energy Partners, L.P., we may be deemed to be an investment company for purposes of the Investment Company Act of 1940. In that event, we would either have to register as an investment company under the Investment Company Act, obtain exemptive relief from the Securities and Exchange Commission, or modify our organizational structure or our contract rights to fall outside the definition of an investment company. Registering as an investment company could, among other things, materially limit our ability to engage in transactions with our affiliates, including the purchase and sale of certain securities or other property to or from our affiliates, restrict our ability to borrow funds or engage in other transactions involving leverage, and require us to add directors who are independent of us or our affiliates.
 
The interests of Knight Inc. may differ from our interests, the interests of our shareholders and the interests of unitholders of Kinder Morgan Energy Partners, L.P. Knight Inc. owns all of the outstanding common equity of the general partner of Kinder Morgan Energy Partners, L.P. and elects all of its directors. The general partner of Kinder Morgan Energy Partners, L.P. owns all of our voting shares and elects all of our directors. Furthermore, some of our directors and officers are also directors and officers of Knight Inc. and the general partner of Kinder Morgan Energy Partners, L.P. and have fiduciary duties to manage the businesses of Knight Inc. and Kinder Morgan Energy Partners, L.P. in a manner that may not be in the best interest of our shareholders. Knight Inc. has a number of interests that differ from the interests of our shareholders and the interests of the unitholders. As a result, there is a risk that important business decisions will not be made in the best interest of our shareholders.
 
Our limited liability company agreement restricts or eliminates a number of the fiduciary duties that would otherwise be owed by our board of directors to our shareholders, and the partnership agreement of Kinder Morgan Energy Partners, L.P. restricts or eliminates a number of the fiduciary duties that would otherwise be owed by the general partner to the unitholders. Modifications of state law standards of fiduciary duties may significantly limit the ability of our shareholders and the unitholders to successfully challenge the actions of our board of directors and the general partner, respectively, in the event of a breach of their fiduciary duties. These state law standards include the duties of care and loyalty. The duty of loyalty, in the absence of a provision in the limited liability company agreement or the limited partnership agreement to the contrary, would generally prohibit our board of directors or the general partner from taking any action or engaging in any transaction as to which it has a conflict of interest. Our limited liability company agreement and the limited partnership agreement of Kinder Morgan Energy Partners, L.P. contain provisions that prohibit our shareholders and the limited partners, respectively, from advancing claims that otherwise might raise issues as to compliance with fiduciary duties or applicable law. For example, the limited partnership agreement of Kinder Morgan Energy Partners, L.P. provides that the general partner may take into account the interests of parties other than Kinder Morgan Energy Partners, L.P. in resolving conflicts of interest. Further, it provides that in the absence of bad faith by the general partner, the resolution of a conflict by the general partner will not be a breach of any duty. The provisions relating to the general partner apply equally to us as its delegate. Our limited liability company agreement provides that none of our directors or officers will be liable to us or any other person for any acts or omissions if they acted in good faith.
 
Unresolved Staff Comments.

None.
 
Legal Proceedings.

We are not a party to any litigation.
 
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 2007.
 

 
8

 
Kinder Morgan Management, LLC Form 10-K


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

Our shares are listed for trading on the New York Stock Exchange under the symbol “KMR.” The per share high and low sale prices of our shares, as reported on the New York Stock Exchange, by quarter for the last two years are provided below.
 
 
Market Price Per Share
 
2007
 
2006
 
Low
 
High
 
Low
 
High
Quarter Ended:
             
March 31
$44.42
 
$51.78
 
$41.21
 
$47.25
June 30
$49.50
 
$54.70
 
$40.09
 
$45.06
September 30
$44.06
 
$53.24
 
$41.35
 
$43.60
December 31
$46.21
 
$53.19
 
$41.26
 
$47.05

There were approximately 41,000 holders of our listed shares as of January 31, 2008, which includes individual participants in security position listings.
 
Under the terms of our limited liability company agreement, except in connection with our liquidation, we do not pay distributions on our shares in cash but we make distributions on our shares in additional shares or fractions of shares. At the same time Kinder Morgan Energy Partners, L.P. makes a distribution on its common units and i-units, we distribute on each of our shares that fraction of a share determined by dividing the amount of the cash distribution to be made by Kinder Morgan Energy Partners, L.P. on each common unit by the average market price of a share determined for the ten-trading day period ending on the trading day immediately prior to the ex-dividend date for our shares.
 
 
Share Distributions
 
Shares Distributed Per Outstanding Share
 
Equivalent Distribution Value Per Share1
 
Total Number of Additional Shares Distributed
Quarter Ended:
2007
 
2006
 
2007
 
2006
 
2007
 
2006
March 31
0.015378
 
0.018566
 
$
0.83
 
$
0.81
 
 974,285
 
1,093,826
June 30
0.016331
 
0.018860
 
$
0.85
 
$
0.81
 
1,143,661
 
1,131,777
September 30
0.017686
 
0.018981
 
$
0.88
 
$
0.81
 
1,258,778
 
1,160,520
December 31
0.017312
 
0.016919
 
$
0.92
 
$
0.83
 
1,253,951
 
1,054,082
__________
1
This is the cash distribution paid or payable to each common unit of Kinder Morgan Energy Partners, L.P. for the quarter indicated and is used to calculate our distribution of shares as discussed above. Because of this calculation, the market value of the shares distributed on the date of distribution may be less or more than the cash distribution per common unit of Kinder Morgan Energy Partners, L.P.
 
There were no sales of unregistered equity securities during the periods covered by this report. We did not repurchase any shares during the fourth quarter of 2007.
 
For information regarding our equity compensation plans, please refer to Item 12, included elsewhere herein.
 

 
9

 
Kinder Morgan Management, LLC Form 10-K



Selected Financial Data.

KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
 
 
Post-
   
Pre-Acquisition Basis1
 
Acquisition
Basis1
   
Restated2
           
 
Seven Months Ended December 31,
   
Five Months Ended
May 31,
 
Year Ended December 31,
 
2007
   
2007
 
2006
 
2005
 
2004
 
2003
 
(In millions except per share amounts)
   
(In millions except per share amounts)
Equity in Earnings (Loss) of Kinder Morgan Energy Partners, L.P.
$
65.4
   
$
(64.6
)
 
$
131.1
 
$
88.4
 
$
113.5
 
$
94.8
Provision (Benefit) for Income Taxes
 
15.0
     
(23.3
)
   
47.0
   
32.1
   
38.4
   
36.0
Net Income
$
50.4
   
$
(41.3
)
 
$
84.1
 
$
56.3
 
$
75.1
 
$
58.8
Earnings (Loss) Per Share, Basic and Diluted
$
0.71
   
$
(0.65
)
 
$
1.40
 
$
1.00
 
$
1.47
 
$
1.24
Number of Shares Used in Computing Basic and Diluted Earnings Per Share
 
71.1
     
63.7
     
60.1
   
56.1
   
51.2
   
47.4
Equivalent Distribution Value Per Share3
$
2.65
   
$
0.83
   
$
3.26
 
$
3.13
 
$
2.87
 
$
2.63
Total Number of Additional Shares Distributed
 
3.6
     
1.0
     
4.4
   
3.8
   
3.7
   
3.3
Total Assets at End of Period
$
2,213.8
   
$
1,944.5
   
$
1,707.9
 
$
1,583.7
 
$
1,639.3
 
$
1,506.3
__________
1
On May 30, 2007, Knight Inc. (formerly Kinder Morgan, Inc.) completed a merger transaction under which investors including Richard D. Kinder, Knight Inc.’s Chairman and Chief Executive Officer, acquired all of the outstanding shares of that company, referred to as the “Going Private transaction.” The acquisition was accounted for under the purchase method of accounting, as required by Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. The purchase price of Knight Inc. has been “pushed-down” and allocated to the assets and liabilities of its subsidiary companies, including us. Accordingly, our post-acquisition selected financial data shown above for the seven months ended December 31, 2007 reflect a new basis of accounting. The selected financial data for the periods ended May 31, 2007 and December 31, 2006, 2005, 2004 and 2003 reflect the operations of the Company prior to the acquisition. Hence, there is a blackline division on the selected financial data shown above, which is intended to signify that the amounts shown for periods prior to and subsequent to the acquisition are not comparable. While the Going Private transaction closed on May 30, 2007, for convenience, the Pre-Acquisition Basis is assumed to end on May 31, 2007 and the Post-Acquisition Basis is assumed to begin on June 1, 2007. The results for the two-day period from May 30, 2007 to May 31, 2007 are not material to the data for any of the periods presented.
2
See Note 5 of the accompanying Notes to Consolidated Financial Statements.
3
This is the amount of cash distributions payable to each common unit of Kinder Morgan Energy Partners, L.P. for each period shown. Under the terms of our limited liability company agreement, except in connection with our liquidation, we do not pay distributions on our shares in cash but we make distributions on our shares in additional shares or fractions of shares. At the same time Kinder Morgan Energy Partners, L.P. makes a distribution on its common units and i-units, we distribute on each of our shares that fraction of a share determined by dividing the amount of the cash distribution to be made by Kinder Morgan Energy Partners, L.P. on each common unit by the average market price of a share determined for a ten-trading day period ending on the trading day immediately prior to the ex-dividend date for our shares. Because of this calculation, the market value of the shares distributed on the date of distribution may be less or more than the cash distribution per common unit of Kinder Morgan Energy Partners, L.P.
 

 
10

 
Kinder Morgan Management, LLC Form 10-K



Item 7.

General
 
We are a publicly traded Delaware limited liability company, formed on February 14, 2001, that has elected to be treated as a corporation for federal income tax purposes. Our voting shares are owned by Kinder Morgan G.P., Inc., of which Knight Inc. owns all the outstanding common equity. Kinder Morgan G.P., Inc. is the general partner of Kinder Morgan Energy Partners, L.P.
 
Knight Inc., a Kansas corporation and a private company formerly known as Kinder Morgan, Inc., is one of the largest energy transportation and storage companies in North America, operating, either for itself or on behalf of Kinder Morgan Energy Partners, L.P., or owning an interest in more than 37,000 miles of pipelines that transport primarily natural gas, crude oil, petroleum products and carbon dioxide, and approximately 165 terminals that store, transfer and handle products like gasoline and coal. On August 28, 2006, Kinder Morgan, Inc. entered into an agreement and plan of merger whereby generally each share of Kinder Morgan, Inc. common stock would be converted into the right to receive $107.50 in cash without interest. Kinder Morgan, Inc. in turn would merge with a wholly owned subsidiary of Knight Holdco LLC, a privately owned company in which Richard D. Kinder, Kinder Morgan, Inc.’s Chairman and Chief Executive Officer, would be a major investor. On May 30, 2007, the merger closed, with Kinder Morgan, Inc. continuing as the surviving legal entity and subsequently renamed “Knight Inc.” Additional investors in Knight Holdco LLC include the following: other senior members of Knight Inc. management, most of whom are also senior officers of Kinder Morgan G.P., Inc.; Kinder Morgan, Inc. co-founder William V. Morgan; Kinder Morgan, Inc. board members Fayez Sarofim and Michael C. Morgan; and affiliates of (i) Goldman Sachs Capital Partners; (ii) American International Group, Inc.; (iii) The Carlyle Group; and (iv) Riverstone Holdings LLC. This transaction is referred to in this report as the Going Private transaction. As a result of this transaction, we have adopted a new basis of accounting for our assets and liabilities. Therefore, in the accompanying financial information, transactions and balances prior to the closing of the Going Private transaction (the amounts labeled “Pre-Acquisition Basis”) reflect the historical basis of accounting for our assets and liabilities, while the amounts subsequent to the closing (the amounts labeled “Post-Acquisition Basis”) reflect the push-down of Knight Inc.’s new accounting basis to our financial statements. The amounts labeled “Combined” include, in some instances, balances reflecting both the historical and the new push-down basis of accounting and, as such, do not represent amounts prepared in accordance with generally accepted accounting principles, but in our opinion are useful for comparing results between periods. Additional information on this transaction and its effect on our financial information is contained in Note 1(A) of the accompanying Notes to Consolidated Financial Statements.
 
Kinder Morgan Energy Partners, L.P. is one of the largest publicly traded pipeline limited partnerships in the United States in terms of market capitalization, and is a leading pipeline transportation and energy storage company in North America. Kinder Morgan Energy Partners, L.P. owns an interest in or operates more than 25,000 miles of pipelines and approximately 165 terminals. Kinder Morgan Energy Partners, L.P.’s pipelines transport natural gas, gasoline, crude oil, carbon dioxide and other products, and its terminals store petroleum products and chemicals and handle bulk materials like coal and petroleum coke. Kinder Morgan Energy Partners, L.P. is also the leading provider of carbon dioxide for enhanced oil recovery projects in North America.
 
We are a limited partner in Kinder Morgan Energy Partners, L.P., and manage and control its business and affairs pursuant to a delegation of control agreement. Our success is dependent upon our operation and management of Kinder Morgan Energy Partners, L.P. and its resulting performance. Therefore, we have attached hereto as Annex A Kinder Morgan Energy Partners, L.P.’s 2007 Annual Report on Form 10-K. The following discussion should be read in conjunction with the accompanying financial statements and related notes.
 
Business
 
Kinder Morgan G.P., Inc. has delegated to us, to the fullest extent permitted under Delaware law and Kinder Morgan Energy Partners, L.P.’s limited partnership agreement, all of its rights and powers to manage and control the business and affairs of Kinder Morgan Energy Partners, L.P. subject to Kinder Morgan G.P., Inc.’s right to approve specified actions.
 
Results of Operations
 
Our results of operations consist of the offsetting expenses and receipts associated with our managing and controlling the business and affairs of Kinder Morgan Energy Partners, L.P. and our equity in the earnings of Kinder Morgan Energy Partners, L.P. attributable to the i-units we own. At December 31, 2007, through our ownership of i-units, we owned approximately 29.2% of all of Kinder Morgan Energy Partners, L.P.’s outstanding limited partner interests. We use the equity method of accounting for our investment in Kinder Morgan Energy Partners, L.P. and we record earnings as described below. Our percentage ownership in Kinder Morgan Energy Partners, L.P. changes over time upon the distribution of additional i-units to us or upon issuances of additional common units or other equity securities by Kinder Morgan Energy Partners, L.P.
 

 
11

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


Our earnings, as reported in the accompanying Consolidated Statements of Income, represent equity in earnings of Kinder Morgan Energy Partners, L.P. attributable to the i-units we own, reduced by a deferred income tax provision and adjusted for the push down effect of Knight Inc.’s purchase of us and Kinder Morgan Energy Partners, L.P. The deferred income tax provision is calculated based on the book/tax basis difference created by our recognition, under accounting principles generally accepted in the United States of America, of our share of the earnings of Kinder Morgan Energy Partners, L.P. Our earnings per share (both basic and diluted) is our net income divided by our weighted-average number of outstanding shares during each period presented. There are no securities outstanding that may be converted into or exercised for our shares.
 
Upon the implementation of Emerging Issues Task Force Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights, effective January 1, 2006, Knight Inc., our parent, no longer accounted for its investment in Kinder Morgan Energy Partners, L.P. under the equity method of accounting, but instead included the accounts, balances and results of operations of Kinder Morgan Energy Partners, L.P. in its consolidated financial statements. This resulted in Knight Inc. and Kinder Morgan Energy Partners, L.P. being entities under common control.
 
Kinder Morgan Energy Partners, L.P.’s acquisition of Trans Mountain from Knight Inc. on April 30, 2007 was accounted for as a transfer of net assets between entities under common control, and the method of accounting prescribed by SFAS No. 141, Business Combinations, for such transfers is similar to the pooling-of-interests method of accounting. Under this method, the carrying amount of net assets recognized in the balance sheets of each combining entity are carried forward to the balance sheet of the combined entity, and no other assets or liabilities are recognized as a result of the combination (that is, no recognition is made for a purchase premium or discount representing any difference between the cash consideration and the book value of the net assets acquired). This treatment is consistent with the concept of poolings as combinations of common stockholder (or unitholder) interests. Similarly, the income statement of the combined entity for the year of combination is presented as if the entities had been combined for the full year, and all comparative financial statements are presented as if the entities had previously been combined as of January 1, 2006, the date of common control.
 
As a result, all Kinder Morgan Energy Partners, L.P. financial information included in this report has been presented as though the transfer of Trans Mountain from Knight Inc. to Kinder Morgan Energy Partners, L.P. had occurred at the date when both Trans Mountain and Kinder Morgan Energy Partners, L.P. met the accounting requirements for entities under common control (January 1, 2006). The impact of this restatement on our results of operations was to reduce our Equity in Earnings of Kinder Morgan Energy Partners, L.P. and Net Income by $96.4 million and $61.6 million, respectively for the four months ended April 30, 2007 and increase our Equity in Earnings of Kinder Morgan Energy Partners, L.P. and Net Income by $7.9 million and $5.1 million, respectively, for the year ended December 31, 2006.
 
Our results for the seven months ended December 31, 2007 are affected by the push-down of the application of the purchase method of accounting related to the May 30, 2007 Going Private transaction. However, we believe that combining the Pre-Acquisition Basis and the Post-Acquisition Basis periods is useful for comparing results even though such combined amounts do not represent amounts prepared in accordance with generally accepted accounting principles. The following discussion is based on the results for the years ended December 31, 2007, 2006 and 2005 rather than the pre-acquisition and post-acquisition periods.
 
For the years ended December 31, 2007, 2006 and 2005, Kinder Morgan Energy Partners, L.P. reported limited partners’ net income (loss) of ($21.3) million, $490.8 million and $334.9 million, respectively. Our combined net income for the year ended December 31, 2007 was $9.1 million and our net income for the years ended December31, 2006 and 2005 was $84.1 million and $56.3 million, respectively. Following is summarized restated income statement information and segment earnings contribution by business segment for Kinder Morgan Energy Partners, L.P. Additional information on Kinder Morgan Energy Partners, L.P.’s results of operation and financial position are contained in its Annual Report on Form 10-K for the year ended December 31, 2007, attached hereto as Annex A.
 

 
12

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


Kinder Morgan Energy Partners, L.P.
 
 
Year Ended December 31,
 
2007
 
2006
 
2005
 
(In millions)
Segment Earnings Contribution:
                     
Product Pipelines
$
569.6
   
$
491.2
   
$
370.1
 
Natural Gas Pipelines
 
600.2
     
574.8
     
500.3
 
CO2
 
537.0
     
488.2
     
470.9
 
Terminals
 
416.0
     
408.1
     
314.6
 
Trans Mountain
 
(293.6
)
   
76.5
     
-
 
Total Segment Earnings
 
1,829.2
     
2,038.8
     
1,655.9
 
Depreciation, Depletion and Amortization Expenses
 
(547.0
)
   
(432.8
)
   
(349.8
)
Amortization of Excess Cost of Investments
 
(5.8
)
   
(5.7
)
   
(5.6
)
Interest and Corporate Administrative Expenses1
 
(686.1
)
   
(596.2
)
   
(488.3
)
Net Income
$
590.3
   
$
1,004.1
   
$
812.2
 
  
                     
General Partners’ Interest in Net Income
$
611.6
   
$
513.3
   
$
477.3
 
  
                     
Limited Partner’s Interest in Net Income
$
(21.3
)
 
$
490.8
   
$
334.9
 
__________
1
Includes interest and debt expense, general and administrative expenses, minority interest expense and other insignificant items.
 
Income Taxes
 
We are a limited liability company that has elected to be treated as a corporation for federal income tax purposes. Deferred income tax assets and liabilities are recognized for temporary differences between the basis of our assets and liabilities for financial reporting and tax purposes. Under our new basis of accounting, we have excluded nondeductible goodwill associated with our investment in Kinder Morgan Energy Partners, L.P. Prior to the Going Private transaction we recognized temporary differences between the basis of our assets and liabilities for financial reporting and tax purposes including nondeductible goodwill associated with our investment in Kinder Morgan Energy Partners, L.P. Changes in tax legislation are included in the relevant computations in the period in which such changes are effective.
 
The income tax provision decreased from $47.0 million in 2006 to a combined income tax benefit of $8.3 million in 2007, a decrease of $55.3 million (117.7%). The net decrease of $55.3 million principally results from a decrease in pre-tax income of $130.3 million and our accounting policy to exclude nondeductible goodwill associated with our investment in Kinder Morgan Energy partners, L.P. as a temporary difference between the basis of this investment for financial reporting and tax purposes.
 
The income tax provision increased from $32.1 million in 2005 to $47.0 million in 2006, an increase of $14.9 million (46.4%). The net increase of $14.9 million principally results from an increase in pre-tax income of $42.7 million.
 
The effective tax rate used in computing our income tax provision was 22.9%, 36.1%, 35.9% and 36.3% for the seven months ended December 31, 2007, the five months ended May 31, 2007 and the years ended December 31, 2006 and 2005, respectively. The lower effective tax rate of 22.9% for the seven months ended December 31, 2007 results principally from the impact of nondeductible goodwill associated with our investment in Kinder Morgan Energy Partners, L.P.
 
We are a party to a tax indemnification agreement with Knight Inc. Pursuant to this tax indemnification agreement, Knight Inc. agreed to indemnify us for any tax liability attributable to our formation or our management and control of the business and affairs of Kinder Morgan Energy Partners, L.P., and for any taxes arising out of a transaction involving the i-units we own to the extent the transaction does not generate sufficient cash to pay our taxes with respect to such transaction.
 
See Note 2E of the accompanying Notes to Consolidated Financial Statements for additional information on income taxes.
 
Liquidity and Capital Resources
 
Our authorized capital structure consists of two classes of interests: (1) our listed shares and (2) our voting shares, collectively referred to in this document as our “shares.” Additional classes of interests may be approved by our board and
 

 
13

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


holders of a majority of our shares, excluding shares held by Knight Inc. and its affiliates. Our only off-balance sheet arrangement is our equity investment in Kinder Morgan Energy Partners, L.P.
 
The number of our shares outstanding will at all times equal the number of i-units of Kinder Morgan Energy Partners, L.P., all of which we own. Under the terms of our limited liability company agreement, except in connection with our liquidation, we do not pay distributions on our shares in cash but we make distributions on our shares in additional shares or fractions of shares. At the same time Kinder Morgan Energy Partners, L.P. makes a distribution on its common units and i-units, we distribute on each of our shares that fraction of a share determined by dividing the amount of the cash distribution to be made by Kinder Morgan Energy Partners, L.P. on each common unit by the average market price of a share determined for a ten-trading day period ending on the trading day immediately prior to the ex-dividend date for our shares.
 
On February 14, 2008, we paid a share distribution of 0.017312 shares per outstanding share (1,253,951 total shares) to shareholders of record as of January 31, 2008, based on the $0.92 per common unit distribution declared by Kinder Morgan Energy Partners, L.P. This distribution was paid in the form of additional shares or fractions thereof based on the average market price of a share determined for a ten-trading day period ending on the trading day immediately prior to the ex-dividend date for our shares.
 
On May 15, 2007, we issued 5.7 million listed shares in a public offering at a price of $52.26 per share. We used the net proceeds of $297.9 million from the sale to purchase 5.7 million i-units from Kinder Morgan Energy Partners, L.P.
 
Kinder Morgan Energy Partners, L.P.’s partnership agreement requires that it distribute 100% of available cash, as defined in the partnership agreement, to its partners within 45 days following the end of each calendar quarter in accordance with their respective percentage interests. Available cash consists generally of all of Kinder Morgan Energy Partners, L.P.’s cash receipts, including cash received by its operating partnerships and net reductions in reserves, less cash disbursements and net additions to reserves and amounts payable to the former general partner of SFPP, L.P. in respect of its remaining 0.5% interest in SFPP, L.P.
 
Kinder Morgan Energy Partners, L.P.’s general partner is granted discretion by the partnership agreement, which discretion has been delegated to us, subject to the approval of the general partner in certain cases, to establish, maintain and adjust reserves for future operating expenses, debt service, maintenance capital expenditures, rate refunds and distributions for the next four quarters. These reserves are not restricted by magnitude, but only by type of future cash requirements with which they can be associated. When we determine Kinder Morgan Energy Partners, L.P.’s quarterly distributions, we consider current and expected reserve needs along with current and expected cash flows to identify the appropriate sustainable distribution level.
 
The general partner and owners of Kinder Morgan Energy Partners, L.P.’s common units and Class B units receive distributions in cash, while we, the sole owner of Kinder Morgan Energy Partners, L.P.’s i-units, receive distributions in additional i-units. For each outstanding i-unit, a fraction of an i-unit will be issued. The fraction is calculated by dividing the amount of cash being distributed per Kinder Morgan Energy Partners, L.P. common unit by the average closing price of our shares over the ten consecutive trading days preceding the date on which the shares begin to trade ex-dividend under the rules of the New York Stock Exchange. The cash equivalent of distributions of i-units is treated as if it had actually been distributed for purposes of determining the distributions to the general partner, although Kinder Morgan Energy Partners, L.P. does not distribute cash to i-unit owners but retains the cash for use in its business.
 
Available cash is initially distributed 98% to the limited partners and 2% to the general partner. These distribution percentages are modified to provide for incentive distributions to be paid to the general partner in the event that quarterly distributions to unitholders exceed certain specified targets.
 
Kinder Morgan Energy Partners, L.P.’s available cash for each quarter is distributed:
 
 
·
first, 98% to the owners of all classes of units pro rata and 2% to the general partner until the owners of all classes of units have received a total of $0.15125 per unit in cash or equivalent i-units for such quarter;
 
 
·
second, 85% of any available cash then remaining to the owners of all classes of units pro rata and 15% to the general partner until the owners of all classes of units have received a total of $0.17875 per unit in cash or equivalent i-units for such quarter;
 
 
·
third, 75% of any available cash then remaining to the owners of all classes of units pro rata and 25% to the general partner until the owners of all classes of units have received a total of $0.23375 per unit in cash or equivalent i-units for such quarter; and
 
 
·
fourth, 50% of any available cash then remaining to the owners of all classes of units pro rata, to owners of common units and Class B units in cash and to owners of i-units in the equivalent number of i-units, and 50% to the general partner.
 

 
14

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


Incentive distributions are generally defined as all cash distributions paid to the general partner that are in excess of 2% of the aggregate value of cash and i-units being distributed. The general partner’s incentive distribution for the distributions that Kinder Morgan Energy Partners, L.P. declared for 2007 was $611.9 million. The general partner’s incentive distribution that Kinder Morgan Energy Partners, L.P. paid during 2007 to the general partner (for the fourth quarter of 2006 and the first nine months of 2007) was $559.6 million. The difference between declared and paid distributions is due to the fact that distributions for the fourth quarter of each year are declared and paid in the first quarter of the following year. In addition, Kinder Morgan G.P., Inc. waived $20.1 million of its 2006 incentive distribution for the fourth quarter of 2006, which was paid in the first quarter of 2007, in order to fund the annual bonus for employees.
 
We expect that our expenditures associated with managing and controlling the business and affairs of Kinder Morgan Energy Partners, L.P. and the reimbursement for these expenditures received by us from Kinder Morgan Energy Partners, L.P. will continue to be equal. As stated above, the distributions we expect to receive on the i-units we own will be in the form of additional i-units. Therefore, we expect neither to generate nor to require significant amounts of cash in ongoing operations. We currently have no debt and have no plans to incur any debt. Any cash received from the sale of additional shares will immediately be used to purchase additional i-units. Accordingly, we do not anticipate any other sources or needs for additional liquidity.
 
Recent Accounting Pronouncements
 
Refer to Note 6 of the accompanying Consolidated Financial Statements for information regarding recent accounting pronouncements.
 
Information Regarding Forward-looking Statements
 
This filing includes forward-looking statements. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. They use words such as “anticipate,” “believe,” “intend,” “plan,” “projection,” “forecast,” “strategy,” “position,” “continue,” “estimate,” “expect,” “may,” or the negative of those terms or other variations of them or comparable terminology. In particular, statements, express or implied, concerning future actions, conditions or events, future operating results or the ability to generate sales, income or cash flow or to pay dividends or make distributions are forward-looking statements. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Future actions, conditions or events and future results of our operations and those of Kinder Morgan Energy Partners, L.P. may differ materially from those expressed in these forward-looking statements. Please see “Information Regarding Forward-Looking Statements” for Kinder Morgan Energy Partners, L.P. included in Annex A. Many of the factors that will determine these results are beyond our ability to control or predict. Specific factors that could cause actual results to differ from those in the forward-looking statements include:
 
 
·
price trends and overall demand for natural gas liquids, refined petroleum products, oil, carbon dioxide, natural gas, coal and other bulk materials and chemicals in North America;
 
 
·
economic activity, weather, alternative energy sources, conservation and technological advances that may affect price trends and demand;
 
 
·
changes in Kinder Morgan Energy Partners, L.P.’s tariff rates implemented by the Federal Energy Regulatory Commission or the California Public Utilities Commission;
 
 
·
Kinder Morgan Energy Partners, L.P.’s ability to acquire new businesses and assets and integrate those operations into its existing operations, as well as its ability to make expansions to its facilities;
 
 
·
difficulties or delays experienced by railroads, barges, trucks, ships or pipelines in delivering products to or from Kinder Morgan Energy Partners, L.P.’s terminals or pipelines;
 
 
·
Kinder Morgan Energy Partners, L.P.’s ability to successfully identify and close acquisitions and make cost-saving changes in operations;
 
 
·
shut-downs or cutbacks at major refineries, petrochemical or chemical plants, ports, utilities, military bases or other businesses that use Kinder Morgan Energy Partners, L.P.’s services or provide services or products to Kinder Morgan Energy Partners, L.P.;
 
 
·
crude oil and natural gas production from exploration and production areas that Kinder Morgan Energy Partners, L.P. serves, including, among others, the Permian Basin area of West Texas;
 

 
15

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


 
·
changes in laws or regulations, third-party relations and approvals, decisions of courts, regulators and governmental bodies that may adversely affect Kinder Morgan Energy Partners, L.P.’s business or its ability to compete;
 
 
·
changes in accounting pronouncements that impact the measurement of Kinder Morgan Energy Partners, L.P.’s or our results of operations, the timing of when such measurements are to be made and recorded, and the disclosures surrounding these activities;
 
 
·
our ability to offer and sell equity securities and Kinder Morgan Energy Partners, L.P.’s ability to offer and sell equity securities and debt securities or obtain debt financing in sufficient amounts to implement that portion of Kinder Morgan Energy Partners, L.P.’s business plan that contemplates growth through acquisitions of operating businesses and assets and expansions of its facilities;
 
 
·
Kinder Morgan Energy Partners, L.P.’s indebtedness could make it vulnerable to general adverse economic and industry conditions, limit its ability to borrow additional funds and/or place it at competitive disadvantages compared to its competitors that have less debt or have other adverse consequences;
 
 
·
interruptions of electric power supply to Kinder Morgan Energy Partners, L.P.’s facilities due to natural disasters, power shortages, strikes, riots, terrorism, war or other causes;
 
 
·
our and Kinder Morgan Energy Partners, L.P.’s ability to obtain insurance coverage without significant levels of self-retention of risk;
 
 
·
acts of nature, sabotage, terrorism or other similar acts causing damage greater than Kinder Morgan Energy Partners, L.P.’s insurance coverage limits;
 
 
·
capital markets conditions;
 
 
·
the political and economic stability of the oil producing nations of the world;
 
 
·
national, international, regional and local economic, competitive and regulatory conditions and developments;
 
 
·
the ability of Kinder Morgan Energy Partners, L.P. to achieve cost savings and revenue growth;
 
 
·
inflation;
 
 
·
interest rates;
 
 
·
the pace of deregulation of retail natural gas and electricity;
 
 
·
foreign exchange fluctuations;
 
 
·
the timing and extent of changes in commodity prices for oil, natural gas, electricity and certain agricultural products;
 
 
·
the extent of Kinder Morgan Energy Partners, L.P.’s success in discovering, developing and producing oil and gas reserves, including the risks inherent in exploration and development drilling, well completion and other development activities;
 
 
·
engineering and mechanical or technological difficulties that Kinder Morgan Energy Partners, L.P. may experience with operational equipment, in well completions and workovers, and in drilling new wells;
 
 
·
the uncertainty inherent in estimating future oil and natural gas production or reserves that Kinder Morgan Energy Partners, L.P. may experience;
 
 
·
the ability of Kinder Morgan Energy Partners, L.P. to complete expansion projects on time and on budget;
 
 
·
the timing and success of Kinder Morgan Energy Partners, L.P.’s business development efforts; and
 
 
·
unfavorable results of litigation involving Kinder Morgan Energy Partners, L.P. and the fruition of contingencies referred to in Kinder Morgan Energy Partners, L.P.’s Annual Report on Form 10-K for the year ended December 31, 2007, attached hereto as Annex A.
 

 
16

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


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



 
Financial Statements and Supplementary Data.

INDEX
 
 
Page 
     
19-20
 
Consolidated Statements of Income                                                                              
21
 
21
 
Consolidated Balance Sheets                                                                              
22
 
23-24
 
Consolidated Statements of Cash Flows                                                                              
25
 
26-31
 
32
 
33
 
     


 
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 Stockholders of Kinder Morgan Management, LLC:

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of comprehensive income, of shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of Kinder Morgan Management, LLC and its subsidiary (the “Company”) at December 31, 2007, and the results of their operations and their cash flows for 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, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting.  Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audit.  We conducted our audit 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 and whether effective internal control over financial reporting was maintained in all material respects.  Our audit 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 audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

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

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


 
PricewaterhouseCoopers LLP
Houston, Texas
February 27, 2008


 
19

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





Report of Independent Registered Public Accounting Firm

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

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of comprehensive income, of shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of Kinder Morgan Management, LLC and its subsidiary (the “Company”) at December 31, 2006, and the results of their operations and their cash flows for the periods January 1, 2007 to May 31, 2007, and the years ended December 31, 2006 and 2005 in conformity with accounting principles generally accepted in the United States of America.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.




PricewaterhouseCoopers LLP
Houston, Texas
February 27, 2008


 
20

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



 
CONSOLIDATED STATEMENTS OF INCOME
Kinder Morgan Management, LLC and Subsidiary
 
 
Post-Acquisition
   
Pre-Acquisition Basis
 
Basis
   
Restated; See Note 5.
       
 
Seven Months Ended December 31,
   
Five Months Ended
May 31,
 
Year Ended December 31,
 
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, L.P.
$
65.4
     
$
(64.6
)
 
$
131.1
   
$
88.4
 
Provision (Benefit) for Income Taxes
 
15.0
       
(23.3
)
   
47.0
     
32.1
 
  
                               
Net Income (Loss)
$
50.4
     
$
(41.3
)
 
$
84.1
   
$
56.3
 
  
                               
Earnings (Loss) Per Share, Basic and Diluted
$
0.71
     
$
(0.65
)
 
$
1.40
   
$
1.00
 
  
                               
Number of Shares Used in Computing Basic and Diluted Earnings Per Share
 
71.1
       
63.7
     
60.1
     
56.1
 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
Post-Acquisition
   
Pre-Acquisition Basis
 
Basis
   
Restated; See Note 5.
       
 
Seven Months Ended December 31,
   
Five Months Ended
May 31,
 
Year Ended December 31,
 
2007
   
2007
 
2006
 
2005
 
(In millions)
   
(In millions)
Net Income (Loss)
$
50.4
     
$
(41.3
)
 
$
84.1
   
$
56.3
 
Other Comprehensive Income (Loss), Net of Tax:
                               
Change in Fair Value of Derivatives Utilized for Hedging Purposes (Net of Tax Benefit of $45.6, $6.6, $17.3 and $99.0, respectively)
 
(80.7
)
     
(5.8
)
   
(30.5
)
   
(173.7
)
Reclassification of Change in Fair Value of Derivatives to Net Income (Net of Tax of $13.9, $7.4, $39.4 and $40.2, respectively)
 
24.5
       
6.5
     
69.7
     
70.4
 
Change in Foreign Currency Translation Adjustment
 
4.1
       
2.2
     
(3.2
)
   
(0.1
)
Minimum Pension Liability Adjustments, and reclassification of post-retirement benefit and pension plan actuarial gains/losses and prior service costs/credits to net income
 
(0.3
)
     
-
     
-
     
-
 
Total Other Comprehensive Income (Loss)
 
(52.4
)
     
2.9
     
36.0
     
(103.4
)
  
                               
Comprehensive Income (Loss)
$
(2.0
)
   
$
(38.4
)
 
$
120.1
   
$
(47.1
)

The accompanying notes are an integral part of these statements.
 

 
21

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



 
CONSOLIDATED BALANCE SHEETS
Kinder Morgan Management, LLC and Subsidiary
 
 
Post-Acquisition Basis
   
Pre-Acquisition Basis
Restated; See Note 5
 
December 31,
2007
   
December 31,
2006
 
(In millions)
   
(In millions)
ASSETS
               
  
               
Current Assets:
               
Accounts Receivable – Related Party
$
28.6
     
$
14.7
 
Prepayments and Other
 
2.3
       
4.0
 
   
30.9
       
18.7
 
  
               
Investment in Kinder Morgan Energy Partners, L.P.
 
2,155.0
       
1,689.2
 
  
               
Deferred Tax Assets
 
27.9
       
-
 
  
               
Total Assets
$
2,213.8
     
$
1,707.9
 
  
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
  
               
Current Liabilities:
               
Accounts Payable
$
1.3
     
$
1.2
 
Accrued Expenses and Other
 
29.5
       
17.4
 
  
 
30.8
       
18.6
 
  
               
Deferred Income Taxes
 
-
       
109.5
 
  
               
Shareholders’ Equity:
               
Voting Shares - Unlimited Authorized; 2 Voting Shares Issued and Outstanding
 
0.1
       
0.1
 
Listed Shares - Unlimited Authorized; 72,432,480 and 62,301,674  Listed Shares Issued and Outstanding, Respectively
 
2,374.8
       
2,109.4
 
Retained Deficit
 
(66.0
)
     
(387.0
)
Accumulated Other Comprehensive Loss
 
(125.9
)
     
(142.7
)
Total Shareholders’ Equity
 
2,183.0
       
1,579.8
 
                 
Total Liabilities and Shareholders’ Equity
$
2,213.8
     
$
1,707.9
 

The accompanying notes are an integral part of these statements.
 

 
22

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



 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Kinder Morgan Management, LLC and Subsidiary
 
 
Post-Acquisition Basis
 
Seven Months Ended
December 31, 2007
 
Shares
 
Amount
 
(Dollars in millions)
Voting Shares:
         
Beginning Balance                                                                                   
2
 
$
0.1
 
Ending Balance                                                                                   
2
   
0.1
 
  
         
Listed Shares:
         
Beginning Balance                                                                                   
70,030,041
   
2,258.6
 
Share Dividends                                                                                   
2,402,439
   
116.4
 
Share Issuance Costs                                                                                   
     
(0.2
)
Ending Balance                                                                                   
72,432,480
   
2,374.8
 
  
         
Retained Deficit:
         
Beginning Balance
     
-
 
Net Income
     
50.4
 
Share Dividends
     
(116.4
)
Ending Balance
     
(66.0
)
  
         
Accumulated Other Comprehensive Loss (Net of Tax Benefits):
         
Derivatives:
         
Beginning Balance
     
(73.5
)
Change in Fair Value of Derivatives Utilized for Hedging Purposes
     
(80.7
)
Reclassification of Change in Fair Value of Derivatives to Net Income
     
24.5
 
Ending Balance
     
(129.7
)
Foreign Currency Translation:
         
Beginning Balance
     
-
 
Currency Translation Adjustment
     
4.1
 
Ending Balance
     
4.1
 
Employee Benefit Plans:
         
Beginning Balance
     
-
 
SFAS No. 158 Amortization/Adjustments
     
(0.3
)
Ending Balance
     
(0.3
)
Total Accumulated Other Comprehensive Loss
     
(125.9
)
  
         
Total Shareholders’ Equity                                                                                      
72,432,482
 
$
2,183.0
 

The accompanying notes are an integral part of these statements.
 

 
23

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



 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (continued)
Kinder Morgan Management, LLC and Subsidiary
 
 
Pre-Acquisition Basis
 
Restated; See Note 5
           
 
Five Months Ended
 
Year Ended December 31,
 
May 31,2007
 
2006
 
2005
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
(Dollars in millions)
Voting Shares:
                     
Beginning Balance
2
 
$
0.1
   
2
 
$
0.1
   
2
 
$
0.1
 
Ending Balance
2
   
0.1
   
2
   
0.1
   
2
   
0.1
 
  
                                 
Listed Shares:
                                 
Beginning Balance
62,301,674
   
2,109.4
   
57,918,371
   
1,958.5
   
54,157,639
   
1,778.11
 
Listed Shares Issued
5,700,000
   
297.9
   
-
   
-
   
-
   
-
 
Share Dividends
2,028,367
   
105.2
   
4,383,303
   
186.5
   
3,760,732
   
168.8
 
Share Issuance Costs
-
   
-
   
-
   
(0.1
)
 
-
   
-
 
Revaluation of Kinder Morgan Energy Partners, L.P. Investment
-
   
-
   
-
   
(35.5
 
)
 
-
   
11.6
 
Ending Balance
70,030,041
   
2,512.5
   
62,301,674
   
2,109.4
   
57,918,371
   
1,958.5
 
  
                                 
Retained Deficit:
                                 
Beginning Balance
     
(387.0
)
       
(284.6
)
       
(172.1
)
Net Income (Loss)
     
(41.3
)
       
84.1
         
56.3
 
Share Dividends
     
(105.2
)
       
(186.5
)
       
(168.8
)
Ending Balance
     
(533.5
)
       
(387.0
)
       
(284.6
)
  
                                 
Accumulated Other Comprehensive Loss (Net of Tax Benefits):
                                 
Derivatives:
                                 
Beginning Balance
     
(139.1
)
       
(178.3
)
       
(75.0
)
Change in Fair Value of Derivatives Utilized for Hedging Purposes
     
(5.8
)
       
(30.5
)
       
(173.7
)
Reclassification of Change in Fair Value of Derivatives to Net Income
     
6.5
         
69.7
         
70.4
 
Ending Balance
     
(138.4
)
       
(139.1
)
       
(178.3
)
Foreign Currency Translation:
                                 
Beginning Balance
     
(3.3
)
       
(0.1
)
       
-
 
Currency Translation Adjustment
     
2.2
         
(3.2
)
       
(0.1
)
Ending Balance
     
(1.1
)
       
(3.3
)
       
(0.1
)
Employee Retirement Benefits:
                                 
Beginning Balance
     
(0.3
)
       
-
         
-
 
Adjustment to Initially Apply SFAS No. 158
     
-
         
(0.3
)
       
-
 
Ending Balance
     
(0.3
)
       
(0.3
)
       
-
 
Total Accumulated Other Comprehensive Loss
     
(139.8
)
       
(142.7
)
       
(178.4
)
  
                                 
Total Shareholders’ Equity
70,030,043
 
$
1,839.3
   
62,301,676
 
$
1,579.8
   
57,918,373
 
$
1,495.6
 

The accompanying notes are an integral part of these statements.
 

 
24

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



 
CONSOLIDATED STATEMENTS OF CASH FLOWS
Kinder Morgan Management, LLC and Subsidiary
Increase (Decrease) in Cash and Cash Equivalents
 
 
Post-Acquisition Basis
   
Pre-Acquisition Basis
 
Seven Months
   
Restated; See Note 5
   
 
Ended
   
Five Months
       
 
December 31,
   
Ended
 
Year Ended December 31,
 
2007
   
May 31, 2007
 
2006
 
2005
 
(In millions)
   
(In millions)
Cash Flows From Operating Activities:
                               
Net Income (Loss)
$
50.4
     
$
(41.3
)
 
$
84.1
   
$
56.3
 
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
                               
Deferred Income Taxes
 
15.0
       
(23.3
)
   
47.0
     
32.1
 
Equity in Earnings (Loss) of Kinder Morgan Energy Partners, L.P.
 
(65.4
)
     
64.6
     
(131.1
)
   
(88.4
)
(Increase) Decrease in Accounts Receivable
 
(16.1
)
     
2.2
     
7.6
     
2.6
 
Decrease (Increase) in Other Current Assets
 
1.0
       
0.7
     
(0.6
)
   
(0.8
)
Increase (Decrease) in Accounts Payable
 
-
       
0.1
     
(1.4
)
   
1.4
 
Increase (Decrease) in Other Current Liabilities
 
15.1
       
(3.0
)
   
(5.6
)
   
(3.2
)
Net Cash Flows Provided by Operating Activities
 
-
       
-
     
-
     
-
 
  
                               
Cash Flows From Investing Activities:
                               
Purchase of i-units of Kinder Morgan Energy Partners, L.P.
 
-
       
(297.9
)
   
-
     
-
 
Net Cash Flows Used in Investing Activities
 
-
       
(297.9
)
   
-
     
-
 
  
                               
Cash Flows From Financing Activities:
                               
Shares Issued
 
-
       
297.9
     
-
     
-
 
Share Issuance Costs
 
-
       
-
     
-
     
-
 
Net Cash Flows Provided by Financing Activities
 
-
       
297.9
     
-
     
-
 
  
                               
Net Increase in Cash and Cash Equivalents
 
-
       
-
     
-
     
-
 
Cash and Cash Equivalents at Beginning of Period
 
-
       
-
     
-
     
-
 
Cash and Cash Equivalents at End of Period
$
-
     
$
-
   
$
-
   
$
-
 

The accompanying notes are an integral part of these statements.
 

 
25

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

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.      General
 
Kinder Morgan Management, LLC is a publicly traded Delaware limited liability company that was formed on February 14, 2001. Kinder Morgan G.P., Inc., of which Knight Inc. indirectly owns all of the outstanding common equity, is the general partner of Kinder Morgan Energy Partners, L.P. and owns all of our voting shares. Kinder Morgan G.P., Inc., pursuant to a delegation of control agreement among us, Kinder Morgan G.P., Inc. and Kinder Morgan Energy Partners, L.P., has delegated to us, to the fullest extent permitted under Delaware law and Kinder Morgan Energy Partners, L.P.’s limited partnership agreement, all of its rights and powers to manage and control the business and affairs of Kinder Morgan Energy Partners, L.P., subject to the general partner’s right to approve specified actions. We are a limited partner in Kinder Morgan Energy Partners, L.P. through our ownership of its i-units, and manage and control its business and affairs pursuant to the delegation of control agreement. Our success is dependent upon our operation and management of Kinder Morgan Energy Partners, L.P. and its resulting performance, see Note 5. Unless the context requires otherwise, references to “we,” “us,” “our,” or the “Company” are intended to mean Kinder Morgan Management, LLC and its consolidated subsidiary, Kinder Morgan Services LLC.
 
2.      Significant Accounting Policies
 
(A) Basis of Presentation
 
Our consolidated financial statements include the accounts of Kinder Morgan Management, LLC and its wholly owned subsidiary, Kinder Morgan Services LLC. All material intercompany transactions and balances have been eliminated.
 
On August 28, 2006, Kinder Morgan, Inc. entered into an agreement and plan of merger whereby generally each share of Kinder Morgan, Inc. common stock would be converted into the right to receive $107.50 in cash without interest. Kinder Morgan, Inc. in turn would merge with a wholly owned subsidiary of Knight Holdco LLC, a privately owned company in which Richard D. Kinder, Kinder Morgan, Inc.’s Chairman and Chief Executive Officer, would be a major investor. On May 30, 2007, the merger closed, with Kinder Morgan, Inc. continuing as the surviving legal entity and subsequently renamed “Knight Inc.” Additional investors in Knight Holdco LLC include the following: other senior members of Knight Inc. management, most of whom are also senior officers of Kinder Morgan G.P., Inc.; Kinder Morgan, Inc. co-founder William V. Morgan; Kinder Morgan, Inc. board members Fayez Sarofim and Michael C. Morgan; and affiliates of (i) Goldman Sachs Capital Partners; (ii) American International Group, Inc.; (iii) The Carlyle Group; and (iv) Riverstone Holdings LLC. This transaction is referred to in this report as the Going Private transaction. The acquisition was accounted for under the purchase method of accounting, as required by Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. The purchase price of Knight Inc. has been “pushed-down” and allocated to the assets and liabilities of its subsidiary companies, including us. Accordingly, our post-acquisition consolidated financial statements reflect a new basis of accounting. Our Consolidated Statements of Income and our Consolidated Statements of Cash Flows for the periods ended May 31, 2007, December 31, 2006 and December 31, 2005 and the Consolidated Balance Sheet as of December 31, 2006 reflect the operations of the Company prior to the acquisition. Hence, there is a blackline division on the financial statements and relevant footnotes, which is intended to signify that the amounts shown for periods prior to and subsequent to the acquisition are not comparable. While the Going Private transaction closed on May 30, 2007, for convenience, the Pre-Acquisition Basis is assumed to end on May 31, 2007 and the Post-Acquisition Basis is assumed to begin on June 1, 2007. The results for the two-day period from May 30, 2007 to May 31, 2007 are not material to any of the periods presented.
 
The purchase price of Knight Inc. was preliminarily allocated to the assets it acquired and the liabilities it assumed based on their estimated fair values. The push-down of this allocation of fair value to us caused a step-up in the recorded value of our investment in Kinder Morgan Energy Partners, L.P. of approximately $224.1 million and the recording of a deferred tax asset. The difference between the book value of our investment in Kinder Morgan Energy Partners, L.P. and our share of their recognized net assets at book value 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 the underlying net assets referred to as equity method goodwill. As with all purchase accounting transactions, the preliminary allocation of purchase price resulting from the purchase of Knight Inc. will be adjusted during an allocation period as better or more complete information becomes available. Some of these adjustments may be significant. Generally, this allocation period will not exceed one year, and will end when Knight Inc. is no longer waiting for information that is known to be available or obtainable. The allocation of purchase price resulting from the purchase of Knight Inc. is not final.
 
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.
 

 
26

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


Our results have been restated for the periods beginning January 1, 2006 through April 30, 2007 due to the restatement of Kinder Morgan Energy Partners, L.P.’s results for those periods to include the results of the Trans Mountain acquisition as if it had occurred on January 1, 2006. Refer to Note 5 for more information on the restatement of results of Kinder Morgan Energy Partners, L.P.
 
(B) Accounting for Investment in Kinder Morgan Energy Partners, L.P.
 
We use the equity method of accounting for our investment in Kinder Morgan Energy Partners, L.P., which investment is further described in Notes 3 and 4. Kinder Morgan Energy Partners, L.P. is a publicly traded limited partnership and is traded on the New York Stock Exchange under the symbol “KMP.” We record, in the period in which it is earned, our share of the earnings of Kinder Morgan Energy Partners, L.P. attributable to the i-units we own, which beginning June 1, 2007, includes an adjustment to reflect the impact of the push down of the purchase price of Knight Inc. on our equity investment in Kinder Morgan Energy Partners, L.P. We receive distributions from Kinder Morgan Energy Partners, L.P. in the form of additional i-units, which increase the number of i-units we own. We issue additional shares (or fractions thereof) of the Company to our existing shareholders in an amount equal to the additional i-units received from Kinder Morgan Energy Partners, L.P. At December 31, 2007, through our ownership of i-units, we owned approximately 29.2% of all of Kinder Morgan Energy Partners, L.P.’s outstanding limited partner interests.
 
(C) Accounting for Share Distributions
 
Our board of directors declares and we make additional share distributions at the same times that Kinder Morgan Energy Partners, L.P. declares and makes distributions on the i-units to us, so that the number of i-units we own and the number of our shares outstanding remain equal. We account for the share distributions we make by charging retained earnings and crediting outstanding shares with amounts that equal the number of shares distributed multiplied by the closing price of the shares on the date the distribution is payable. As a result, we expect that our retained earnings will always be in a deficit position because (i) distributions per unit for Kinder Morgan Energy Partners, L.P. (which serve to reduce our retained earnings) are based on ”Available Cash” as defined by its partnership agreement, which amount generally exceeds the earnings per unit (which serve to increase our retained earnings) and (ii) the impact on our retained earnings attributable to our equity in the earnings of Kinder Morgan Energy Partners, L.P. is recorded after a provision for income taxes.
 
(D) Earnings Per Share
 
Both basic and diluted earnings per share are computed based on the weighted-average number of shares outstanding during each period, adjusted for share splits. There are no securities outstanding that may be converted into or exercised for shares.
 
(E) Income Taxes
 
We are a limited liability company that has elected to be treated as a corporation for federal income tax purposes. Deferred income tax assets and liabilities are recognized for temporary differences between the basis of our assets and liabilities for financial reporting and tax purposes. Under our new basis of accounting, we have excluded nondeductible goodwill associated with our investment in Kinder Morgan Energy Partners, L.P. Prior to the Going Private transaction we recognized temporary differences between the basis of our assets and liabilities for financial reporting and tax purposes including nondeductible goodwill associated with our investment in Kinder Morgan Energy Partners, L.P. Changes in tax legislation are included in the relevant computations in the period in which such changes are effective. Currently, our only such temporary difference results from our investment in Kinder Morgan Energy Partners, L.P.
 
The effective tax rate utilized in computing our income tax provision was 22.9%, 36.1%, 35.9% and 36.3% for the seven months ended December 31, 2007, the five months ended May 31, 2007 and the years ended December 31, 2006 and 2005, respectively. The effective tax rate for all periods includes the 35% federal statutory rate and a provision for state income taxes. The lower effective tax rate of 22.9% for the seven months ended December 31, 2007 is impacted significantly by nondeductible goodwill associated with our investment in Kinder Morgan Energy Partners, L.P.
 
We entered into a tax indemnification agreement with Knight Inc. Pursuant to this tax indemnification agreement, Knight Inc. agreed to indemnify us for any tax liability attributable to our formation or our management and control of the business and affairs of Kinder Morgan Energy Partners, L.P. and for any taxes arising out of a transaction involving the i-units we own to the extent the transaction does not generate sufficient cash to pay our taxes with respect to such transaction.
 

 
27

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


(F) Cash Flow Information
 
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. No cash payments for interest or income taxes were made during the periods presented.
 
3.      Capitalization
 
Our authorized capital structure consists of two classes of interests: (1) our listed shares and (2) our voting shares, collectively referred to in this document as our “shares.” Prior to the May 2001 initial public offering of our shares, our issued capitalization consisted of $100,000 contributed by Kinder Morgan, G.P., Inc. for two voting shares. At December 31, 2007, Knight Inc. owned approximately 10.3 million, or approximately 14.3% of our outstanding shares.
 
On February 14, 2008, we paid a share distribution of 0.017312 shares per outstanding share (1,253,951 total shares) to shareholders of record as of January 31, 2008, based on the $0.92 per common unit distribution declared by Kinder Morgan Energy Partners, L.P. This distribution was paid in the form of additional shares or fractions thereof based on the average market price of a share determined for a ten-trading day period ending on the trading day immediately prior to the ex-dividend date for our shares.
 
4.           Business Activities and Related Party Transactions
 
At no time after our formation and prior to our initial public offering did we have any operations or own any interest in Kinder Morgan Energy Partners, L.P. Upon the closing of our initial public offering in May 2001, we became a limited partner in Kinder Morgan Energy Partners, L.P. and, pursuant to a delegation of control agreement, we assumed the management and control of its business and affairs. Under the delegation of control agreement, Kinder Morgan G.P., Inc. delegated to us, to the fullest extent permitted under Delaware law and the Kinder Morgan Energy Partners, L.P. partnership agreement, all of Kinder Morgan G.P., Inc.’s power and authority to manage and control the business and affairs of Kinder Morgan Energy Partners, L.P., subject to Kinder Morgan G.P., Inc.’s right to approve certain transactions. Kinder Morgan Energy Partners, L.P. will either pay directly or reimburse us for all expenses we incur in performing under the delegation of control agreement and will be obligated to indemnify us against claims and liabilities provided that we have acted in good faith and in a manner we believed to be in, or not opposed to, the best interests of Kinder Morgan Energy Partners, L.P. and the indemnity is not prohibited by law. Kinder Morgan Energy Partners, L.P. consented to the terms of the delegation of control agreement including Kinder Morgan Energy Partners, L.P.’s indemnity and reimbursement obligations. We do not receive a fee for our service under the delegation of control agreement, nor do we receive any margin or profit on the expense reimbursement. We incurred approximately $135.8 million, $116.9 million, $215.5 million and $178.4 million of expenses during the seven months ended December 31, 2007, the five months ended May 31, 2007 and the years ended December 31, 2006 and 2005, respectively, on behalf of Kinder Morgan Energy Partners, L.P. The expense reimbursements by Kinder Morgan Energy Partners, L.P. to us are accounted for as a reduction to the expense incurred by us. The net monthly balance payable or receivable from these activities is settled in cash in the following month. At December 31, 2007, $28.6 million, primarily a receivable from Kinder Morgan Energy Partners, L.P., is recorded in the caption “Accounts Receivable, Related Party” in the accompanying Consolidated Balance Sheet.
 
Kinder Morgan Services LLC is our wholly owned subsidiary and provides centralized payroll and employee benefits services to us, Kinder Morgan G.P., Inc., Kinder Morgan Energy Partners, L.P. and Kinder Morgan Energy Partners, L.P.’s operating partnerships and subsidiaries (collectively, the “Group”). Employees of KMGP Services Company, Inc., a subsidiary of Kinder Morgan G.P., Inc., are assigned to work for one or more members of the Group. When they do so, they remain under our ultimate management and control. The direct costs of all compensation, benefits expenses, employer taxes and other employer expenses for these employees are allocated and charged by Kinder Morgan Services LLC to the appropriate members of the Group, and the members of the Group reimburse Kinder Morgan Services LLC for their allocated shares of these direct costs. There is no profit or margin charged by Kinder Morgan Services LLC to the members of the Group. The administrative support necessary to implement these payroll and benefits services is provided by the human resource department of Knight Inc., and the related administrative costs are allocated to members of the Group in accordance with expense allocation procedures. The effect of these arrangements is that each member of the Group bears the direct compensation and employee benefits costs of its assigned or partially assigned employees, as the case may be, while also bearing its allocable share of administrative costs. Pursuant to its limited partnership agreement, Kinder Morgan Energy Partners, L.P. reimburses Kinder Morgan Services LLC for its share of these administrative costs, and such reimbursements are accounted for as described above. Additionally, Kinder Morgan Energy Partners, L.P. reimburses us with respect to costs incurred or allocated to us in accordance with Kinder Morgan Energy Partners, L.P.’s limited partnership agreement, the delegation of control agreement among Kinder Morgan G.P., Inc., Kinder Morgan Energy Partners, L.P., us and others, and our limited liability company agreement. During the seven months ended December 31, 2007, the five months ended May 31, 2007 and the twelve months ended December 31, 2006 and 2005 the expenses totaled approximately $163.7 million, $112.1 million, $248.3, million and $215.3 million, respectively.
 

 
28

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


5.      Summarized Financial Information for Kinder Morgan Energy Partners, L.P.
 
Upon the implementation of Emerging Issues Task Force Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights, effective January 1, 2006, Knight Inc., our parent, no longer accounted for its investment in Kinder Morgan Energy Partners, L.P. under the equity method of accounting, but instead included the accounts, balances and results of operations of Kinder Morgan Energy Partners, L.P. in its consolidated financial statements. This resulted in Knight Inc. and Kinder Morgan Energy Partners, L.P. being entities under common control.
 
Kinder Morgan Energy Partners, L.P.’s acquisition of Trans Mountain from Knight Inc. on April 30, 2007 was accounted for as a transfer of net assets between entities under common control, and the method of accounting prescribed by SFAS No. 141, Business Combinations, for such transfers is similar to the pooling-of-interests method of accounting. Under this method, the carrying amount of net assets recognized in the balance sheets of each combining entity are carried forward to the balance sheet of the combined entity, and no other assets or liabilities are recognized as a result of the combination (that is, no recognition is made for a purchase premium or discount representing any difference between the cash consideration and the book value of the net assets acquired). This treatment is consistent with the concept of poolings as combinations of common stockholder (or unitholder) interests. Similarly, the income statement of the combined entity for the year of combination is presented as if the entities had been combined for the full year, and all comparative financial statements are presented as if the entities had previously been combined as of January 1, 2006, the date of common control.
 
As a result, all Kinder Morgan Energy Partners, L.P. financial information included in this report has been presented as though the transfer of Trans Mountain from Knight Inc. to Kinder Morgan Energy Partners, L.P. had occurred at the date when both Trans Mountain and Kinder Morgan Energy Partners, L.P. met the accounting requirements for entities under common control (January 1, 2006). Following is summarized income statement information for Kinder Morgan Energy Partners, L.P., a publicly traded limited partnership in which we own a significant interest. Additional information on Kinder Morgan Energy Partners, L.P.’s results of operations and financial position are contained in its Annual Report on Form 10-K for the year ended December 31, 2007, which is attached hereto as Annex A.
 
Summarized Income Statement Information
 
 
Year Ended December 31,
 
2007
 
2006
 
2005
 
(In millions)
Operating Revenues
$
9,217.7
 
$
9,048.7
 
$
9,745.9
Operating Expenses
 
8,410.0
   
7,757.1
   
8,730.1
Operating Income
$
807.7
 
$
1,291.6
 
$
1,015.8
  
               
Income from Continuing Operations
$
416.4
 
$
989.8
 
$
812.4
  
               
Net Income
$
590.3
 
$
1,004.1
 
$
812.2
  
Summarized Balance Sheet Information
 
 
As of December 31,
 
2007
 
2006
 
(In millions)
Current Assets                                                       
$
1,209.7
 
$
1,036.8
Noncurrent Assets                                                       
$
13,968.1
 
$
12,505.4
  
         
Current Liabilities                                                       
$
2,558.3
 
$
3,137.3
Noncurrent Liabilities                                                       
$
8,129.6
 
$
5,396.4
Minority Interest                                                       
$
54.2
 
$
60.2

6.      Recent Accounting Pronouncements
 
On September 15, 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement establishes a single definition of fair value and a framework for measuring fair value in generally accepted accounting principles. SFAS No. 157 also expands disclosures about fair value measurements. The provisions of this Statement apply to other accounting pronouncements that require or permit fair value measurements. Accordingly, this Statement does not require any new fair value measurements.
 

 
29

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


On February 12, 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).
 
The remainder of SFAS No. 157 was adopted by us effective January 1, 2008. The adoption of this Statement did not have an impact on our consolidated financial statements since we already apply its basic concepts in measuring fair values.
 
On September 29, 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statement Nos. 87, 88, 106 and 132(R). This Statement requires an employer to (i) recognize the overfunded or underfunded status of a defined benefit pension plan or postretirement benefit plan (other than a multiemployer plan) as an asset or liability in its statement of financial position (effective December 31, 2006 for us); (ii) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year and disclose certain additional information (effective December 31, 2008 for us); and (iii) recognize changes in the funded status of a plan in the year in which the changes occur through comprehensive income. While earlier application of the recognition of measurement date provisions is allowed, we have opted not to adopt this part of the Statement early.
 
We currently have no defined benefit pension and other postretirement benefit plans. For us, the adoption of part (i) of SFAS No. 158 described above did not have a material effect on our statement of financial position as of December 31, 2006.
 
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109 (“FIN 48”), which became effective for us beginning in 2007. FIN 48 addressed the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
 
Our adoption of FIN 48 on January 1, 2007 did not result in a cumulative effect adjustment to retained earnings. At January 1, 2007, we had no unrecognized tax benefits on the balance sheet. In the event interest or penalties are incurred with respect to income tax matters, our policy will be to include such items in income tax expense. We did not have an accrual for interest and penalties at January 1, 2007. At December 31, 2007, tax years 2004 through 2007 remained subject to examination by the Internal Revenue Service and applicable states. We do not expect any material change in the balance of our unrecognized tax benefits over the next twelve months.
 
In June 2006, the FASB ratified the consensuses reached by the Emerging Issues Task Force on EITF 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation). According to the provisions of EITF 06-3:
 
 
·
taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer may include, but are not limited to, sales, use, value added, and some excise taxes; and
 
 
·
that the presentation of such taxes on either a gross (included in revenues and costs) or a net (excluded from revenues) basis is an accounting policy decision that should be disclosed pursuant to Accounting Principles Board Opinion No. 22 (as amended), Disclosure of Accounting Policies. In addition, for any such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant. The disclosure of those taxes can be done on an aggregate basis.
 
EITF 06-3 should be applied to financial reports for interim and annual reporting periods beginning after December 15, 2006 (January 1, 2007 for us). The adoption of EITF 06-3 had no effect on our consolidated financial statements.
 
On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement provides companies with an option to report selected financial assets and liabilities at fair value.
 
The Statement’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. The Statement also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities.
 
SFAS No. 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The Statement does not eliminate disclosure requirements included in other accounting standards,
 

 
30

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


including requirements for disclosures about fair value measurements included in SFAS No. 157, discussed above, and SFAS No. 107 Disclosures about Fair Value of Financial Instruments.
 
This Statement was adopted by us effective January 1, 2008, at which time no financial assets or liabilities, not previously required to be recorded at fair value by other authoritative literature, were designated to be recorded at fair value. As such, the adoption of this Statement did not have any impact on our consolidated financial statements.
 
On December 4, 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51. This Statement changes the accounting and reporting for noncontrolling interests in consolidated financial statements. A noncontrolling interest, sometimes referred to as a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent.
 
Specifically, SFAS No. 160 establishes accounting and reporting standards that require (i) the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated balance sheet within equity, but separate from the parent’s equity; (ii) the equity amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated income statement (consolidated net income and comprehensive income will be determined without deducting minority interest, however, earnings-per-share information will continue to be calculated on the basis of the net income attributable to the parent’s shareholders); and (iii) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently and similarly—as equity transactions.
 
This Statement is effective for fiscal years, and interim period within those fiscal years, beginning on or after December 15, 2008 (January 1, 2009 for us). Early adoption is not permitted. SFAS No. 160 shall be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for its presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. We are currently reviewing the effects of this Statement.
 
On December 4, 2007, the FASB issued SFAS 141(R)(revised 2007), Business Combinations. Although this statement amends and replaces SFAS No. 141, it retains the fundamental requirements in SFAS No. 141 that (i) the purchase method of accounting be used for all business combinations; and (ii) an acquirer be identified for each business combination. SFAS No. 141R defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. This Statement applies to all transactions or other events in which an entity (the acquirer) obtains control of one or more businesses (the acquiree), including combinations achieved without the transfer of consideration; however, this Statement does not apply to a combination between entities or businesses under common control.
 
Significant provisions of SFAS No. 141R concern principles and requirements for how an acquirer (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.
 
This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 (January 1, 2009 for us). Early adoption is not permitted. We are currently reviewing the effects of this Statement.
 

 
31

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


 
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly Operating Results for 2007 and 2006
 
 
2007
 
Pre-Acquisition Basis
   
Post-Acquisition Basis
 
Restated; See Note 5
     
 
Three
Months
Ended
March 31
 
Two Months
Ended
May 31
   
One Month
Ended
June 30
 
Three
Months
Ended
September 30
 
Three Months
Ended
December 31
 
(In millions except
per share amounts)
   
(In millions except per share amounts)
Equity in Earnings (Loss) of Kinder Morgan Energy Partners, L.P.
$
(77.5
)
 
$
12.9
   
$
11.4
 
$
17.4
 
$
36.6
 
Provision (Benefit) for Income Taxes
 
(28.0
)
   
4.7
     
4.1
   
6.3
   
4.6
 
Net Income
$
(49.5
)
 
$
8.2
   
$
7.3
 
$
11.1
 
$
32.0
 
  
                                 
Earnings (Loss) Per Share, Basic and Diluted
$
(0.79
)
 
$
0.13
   
$
0.10
 
$
0.16
 
$
0.45
 
  
                                 
Number of Shares Used in Computing Basic and Diluted Earnings Per Share
 
62.8
     
65.0
     
70.0
   
70.6
   
71.8
 
  
 
2006-Three Months Ended
 
Pre-Acquisition Basis
 
Restated; See Note 5
 
March 31
 
June 30
 
September 30
 
December 31
 
(In millions except per share amounts)
Equity in Earnings of Kinder Morgan Energy Partners, L.P.
$
32.6
 
$
33.2
 
$
25.7
 
$
39.6
 
Provision for Income Taxes
 
11.8
   
11.7
   
9.2
   
14.3
 
Net Income
$
20.8
 
$
21.5
 
$
16.5
 
$
25.3
 
  
                       
Earnings Per Share, Basic and Diluted
$
0.36
 
$
0.36
 
$
0.27
 
$
0.41
 
  
                       
Number of Shares Used in Computing Basic and Diluted Earnings Per Share
 
58.4
   
59.5
   
60.6
   
61.7
 
  

 
32

 
Item 8.