knight200710k.htm
Table of Contents

Knight Inc. 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 1-06446
Knight Inc. Logo
Knight Inc.
(Exact name of registrant as specified in its charter)
 
Kansas
  
48-0290000
(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:
 
None
 
Securities registered pursuant to section 12(g) of the Act:
 
None
 
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:
Yeso  No þ
 
Indicate by checkmark 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. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):  Large accelerated filer o  Accelerated filer o  Non-accelerated filer þ  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
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $0 at June 29, 2007.
 
The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of March 28, 2008 was 100 shares.

 
 

 
Knight Inc. Form 10-K


KNIGHT INC. AND SUBSIDIARIES
CONTENTS
 
   
Page
Number
     
Business and Properties                                                                                                              
4-38
 
   
5
 
   
6
 
 
  
12
 
 
  
13
 
 
  
14
 
 
  
15
 
 
  
16
 
 
  
20
 
 
  
27
 
 
  
31
 
 
  
32
 
 
  
33
 
 
  
36
 
Risk Factors                                                                                                              
38-44
 
Unresolved Staff Comments                                                                                                              
44
 
Legal Proceedings                                                                                                              
45
 
Submission of Matters to a Vote of Security Holders                                                                                                              
45
 
  
     
     
   
 
Matters and Issuer Purchases of Equity Securities                                                                                                           
46
 
Selected Financial Data                                                                                                              
46-47
 
48-91
 
  
  
48
 
  
  
49
 
  
  
52
 
  
  
53
 
  
  
56
 
  
  
58
 
  
  
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89
 
  
  
89
 
  
  
90
 
Quantitative and Qualitative Disclosures About Market Risk                                                                                                              
91-92
 
Financial Statements and Supplementary Data                                                                                                              
93-207
 
207
 
Controls and Procedures                                                                                                              
208
 
 
208
 
 
208
 
 
Changes in Internal Control over Financial Reporting                                                                                                           
208
 
Other Information                                                                                                              
208
 

 
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Knight Inc. Form 10-K



KNIGHT INC. AND SUBSIDIARIES
CONTENTS (Continued)
 
  
   
209-211
 
211-220
 
221
 
221-226
 
226
 
  
     
  
   
227-231
 
  
     
232
 
  
     

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

 
3

 
Knight Inc. 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 Knight Inc. (a private Kansas corporation incorporated on May 18, 1927, formerly known as Kinder Morgan, Inc.) and its consolidated subsidiaries. All dollars are United States dollars, except where stated otherwise. Canadian dollars are designated as C$. To convert December 31, 2007 balances denominated in Canadian dollars to U.S. dollars, we used the December 31, 2007 Bank of Canada closing exchange rate of 1.012 U.S. dollars per Canadian dollar. Unless otherwise indicated, all volumes of natural gas are stated at a pressure base of 14.73 pounds per square inch absolute and at 60 degrees Fahrenheit and, in most instances, are rounded to the nearest major multiple. In this report, the term “MMcf” means million cubic feet, the term “Bcf” means billion cubic feet, the term “bpd” means barrels per day and the terms “Dth” (dekatherms) and “MMBtus” mean million British Thermal Units (“Btus”). Natural gas liquids consist of ethane, propane, butane, iso-butane and natural gasoline. The following discussion should be read in conjunction with the accompanying Consolidated Financial Statements and related Notes.
 
(A) General Development of Business
 
We are one of the largest energy transportation and storage companies in North America. We own all the common equity of the general partner of Kinder Morgan Energy Partners, L.P. (“Kinder Morgan Energy Partners”), a publicly traded pipeline limited partnership, as well as a significant limited partner interest in Kinder Morgan Energy Partners. Due to our implementation of Emerging Issues Task Force (“EITF”) 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, we have included Kinder Morgan Energy Partners and its consolidated subsidiaries in our consolidated financial statements effective January 1, 2006. This means that the accounts, balances and results of operations of Kinder Morgan Energy Partners and its consolidated subsidiaries are now presented on a consolidated basis with ours and those of our other consolidated subsidiaries for financial reporting purposes, instead of equity method accounting as previously reported. See Note 1(B) of the accompanying Notes to Consolidated Financial Statements. Additional information concerning our investment in Kinder Morgan Energy Partners and its various businesses is contained in Note 2 of the accompanying Notes to Consolidated Financial Statements and in Kinder Morgan Energy Partners’ 2007 Annual Report on Form 10-K. We operate or own an interest in approximately 37,000 miles of pipelines and 165 terminals. Our pipelines transport natural gas, gasoline, crude oil, carbon dioxide and other products, and our terminals store petroleum products and chemicals and handle bulk materials like coal and petroleum coke. We are also the leading independent provider of carbon dioxide, commonly called “CO2,” for enhanced oil recovery projects in North America. Our executive offices are located at 500 Dallas Street, Suite 1000, Houston, Texas 77002 and our telephone number is (713) 369-9000.
 
In May 2001, Kinder Morgan Management, LLC (“Kinder Morgan Management”), one of our indirect subsidiaries (we own its only two voting shares), issued and sold its limited liability shares in an underwritten initial public offering. The net proceeds from the offering were used by Kinder Morgan Management to buy i-units from Kinder Morgan Energy Partners for $991.9 million. Upon purchase of the i-units, Kinder Morgan Management became a limited partner in Kinder Morgan Energy Partners and was delegated by Kinder Morgan Energy Partners’ general partner, the responsibility to manage and control the business and affairs of Kinder Morgan Energy Partners. The i-units are a class of Kinder Morgan Energy Partners’ limited partner interests that have been, and will be, issued only to Kinder Morgan Management. We have certain rights and obligations with respect to these securities.
 
In the initial public offering, we purchased 10% of the Kinder Morgan Management shares, with the balance purchased by the public. The equity interest in Kinder Morgan Management (which is consolidated in our financial statements) owned by the public is reflected as minority interest on our balance sheet. The earnings recorded by Kinder Morgan Management that are attributed to its shares held by the public are reported as “minority interest” in our Consolidated Statements of Operations. Subsequent to the initial public offering by Kinder Morgan Management of its shares, our ownership interest in Kinder Morgan Management has changed because (i) we recognize our share of Kinder Morgan Management’s earnings, (ii) we record the receipt of distributions attributable to the Kinder Morgan Management shares that we own, (iii) Kinder Morgan Management has made additional sales of its shares (both through public and private offerings), (iv) pursuant to an option feature that was previously available to Kinder Morgan Management shareholders but no longer exists, we exchanged certain of the Kinder Morgan Energy Partners’ common units held by us for Kinder Morgan Management shares held by the public and (v) we sold some Kinder Morgan Management shares we owned in order to generate taxable gains to offset expiring tax loss carryforwards. At December 31, 2007, we owned 10.3 million Kinder Morgan Management shares representing 14.3% of Kinder Morgan Management’s total outstanding shares. Additional information concerning the business of, and our investment in and obligations to, Kinder Morgan Management is contained in Note 3 of the accompanying Notes to Consolidated Financial Statements and in Kinder Morgan Management’s 2007 Annual Report on Form 10-K.
 

 
4

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


On November 30, 2005, we completed the acquisition of Terasen Inc., referred to in this report as Terasen. At the time of acquisition, Terasen’s two core businesses were its natural gas distribution business, (which we subsequently sold, see below) and its petroleum pipeline business (part of which, Corridor Pipeline, we subsequently sold, see below).
 
On August 28, 2006, we entered into an agreement and plan of merger whereby generally each share of our common stock would be converted into the right to receive $107.50 in cash without interest. We in turn would merge with a wholly owned subsidiary of Knight Holdco LLC, a privately owned company in which Richard D. Kinder, our Chairman and Chief Executive Officer, would be a major investor. Our board of directors, on the unanimous recommendation of a special committee composed entirely of independent directors, approved the agreement and recommended that our stockholders approve the merger. Our stockholders voted to approve the proposed merger agreement at a special meeting held on December 19, 2006. 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 our management, most of whom are also senior officers of Kinder Morgan G.P., Inc. and of Kinder Morgan Management; our 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.” We are now privately owned. See Note 1(B) of the accompanying Notes to Consolidated Financial Statements for a discussion of our new basis of accounting as a result of this transaction. Upon closing of the Going Private transaction, our common stock is no longer traded on the New York Stock Exchange.
 
In February 2007, we entered into a definitive agreement to sell our Canada-based retail natural gas distribution operations to Fortis Inc., for approximately C$3.7 billion including cash and assumed debt, and as a result of a redetermination of fair value in light of this proposed sale, we recorded a goodwill impairment charge in the fourth quarter of 2006. This sale was completed in May 2007 (see Notes 6 and 7 of the accompanying Notes to Consolidated Financial Statements). In prior periods, we referred to these operations principally as the Terasen Gas business segment.
 
In March 2007, we entered into an agreement to sell the Corridor Pipeline System to Inter Pipeline Fund in Canada for approximately C$760 million, including debt. This sale was completed in June 2007. Inter Pipeline Fund also assumed all of the debt associated with the expansion taking place on Corridor at the time of the sale.
 
Also in March 2007, we completed the sale of our U.S. retail natural gas distribution and related operations to GE Energy Financial Services, a subsidiary of General Electric Company, and Alinda Investments LLC for $710 million and an adjustment for working capital. In prior periods, we referred to these operations as the Kinder Morgan Retail business segment. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the financial results of the Terasen Gas, Corridor and Kinder Morgan Retail operations have been reclassified to discontinued operations for all periods presented. Refer to the heading “Discontinued Operations” included elsewhere in Management’s Discussion and Analysis for additional information regarding discontinued operations.
 
On April 30, 2007, Kinder Morgan, Inc. sold the Trans Mountain pipeline system to Kinder Morgan Energy Partners for approximately $550 million. The transaction was approved by the independent members of our board of directors and those of Kinder Morgan Management following the receipt, by each board, of separate fairness opinions from different investment banks. The Trans Mountain pipeline system transports crude oil and refined products from Edmonton, Alberta, Canada to marketing terminals and refineries in British Columbia and the State of Washington. An impairment of the Trans Mountain pipeline system was recorded in the first quarter of 2007; see Note 1(I) of the accompanying Notes to Consolidated Financial Statements.
 
On July 27, 2007, Kinder Morgan Energy Partners’ general partner, Kinder Morgan G.P., Inc., a Delaware corporation and our subsidiary, issued and sold 100,000 shares of Series A fixed-to-floating rate term cumulative preferred stock due 2057, receiving net proceeds of $98.6 million. The consent of holders of a majority of these preferred shares is required with respect to a commencement of or a filing of a voluntary bankruptcy proceeding with respect to Kinder Morgan Energy Partners, or either of two of Kinder Morgan Energy Partners’ subsidiaries: SFPP, L.P. and Calnev Pipe Line LLC.
 
On December 10, 2007, we entered into a definitive agreement to sell an 80% ownership interest in our NGPL business segment to Myria Acquisition Inc. (“Myria”), a Delaware corporation, for approximately $5.9 billion, subject to certain adjustments. The sale closed on February 15, 2008. We will continue to operate NGPL’s assets pursuant to a 15-year operating agreement. Myria is comprised of a syndicate of investors led by Babcock & Brown, an international investment and specialized fund and asset management group.
 
Business Strategy
 
Our business strategy is to: (i) focus on fee-based energy transportation and storage assets that are core to the energy infrastructure of growing markets within North America, (ii) increase utilization of our existing assets while controlling costs, operating safely and employing environmentally sound operating practices, (iii) leverage economies of scale from
 

 
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Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


incremental acquisitions and expansions of properties that fit within our strategy and are accretive to cash flow and (iv) maximize the benefits of our financial structure to create and return value to our stockholders as discussed following.
 
We intend to maintain a capital structure that provides flexibility and stability, while returning value to our shareholders. During 2007, we utilized cash generated from operations (including cash received from distributions attributable to our investment in Kinder Morgan Energy Partners) to pay common stock dividends (prior to the Going Private transaction), finance our capital expenditures program and pay down debt. We also made significant asset sales during 2007, including the sale of our U.S. retail natural gas distribution and related operations, the Terasen Gas business segment, the Corridor pipeline system, and the TransMountain pipeline system, which we sold to Kinder Morgan Energy Partners. We used the proceeds from these sales to pay down debt. In addition, during 2007, we announced the sale of our Colorado Power assets and an 80% interest in our Natural Gas Pipeline Company of America business segment. These sales closed in the first quarter of 2008 and the proceeds from these sales were also used to pay down debt. We expect to benefit from accretive acquisitions and capital expansions (primarily by Kinder Morgan Energy Partners). Kinder Morgan Energy Partners has a multi-year history of making accretive investments, which benefit us through our limited and general partner interests. This strategy is expected to continue, although we can provide no assurance that such investments will occur in the future.
 
We (primarily through Kinder Morgan Energy Partners) regularly consider and enter into discussions regarding potential acquisitions and are currently contemplating potential acquisitions. Any such transaction would be subject to negotiation of mutually agreeable terms and conditions, receipt of fairness opinions and approval of the respective boards of directors, if required. While there are currently no unannounced purchase agreements for the acquisition of any material business or assets, such transactions can be effected quickly, may occur at any time and may be significant in size relative to our existing assets or operations.
 
It is our intention to carry out the above business strategy, modified as necessary to reflect changing economic conditions and other circumstances. However, as discussed under “Risk Factors” elsewhere in this report, there are factors that could affect our ability to carry out our strategy or affect its level of success even if carried out.
 
Recent Developments
 
 
·
Going Private Transaction
As discussed above, on May 30, 2007, we completed the Going Private transaction, which was financed through a combination of debt and equity financing. The debt financing consisted of senior secured credit facilities provided by a credit agreement and related security and other agreements. Our obligations under the credit agreement are secured by liens on the capital stock of each of our wholly owned subsidiaries and substantially all of our and our subsidiaries’ assets (excluding those of Kinder Morgan G.P., Inc., Kinder Morgan Energy Partners, Kinder Morgan Management and their respective subsidiaries). See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Significant Financing Transactions” for further details regarding the debt financing.
 
 
·
Sale of U.S. Retail Operations
In March 2007, we completed the sale of our U.S. retail natural gas distribution and related operations to GE Energy Financial Services, a subsidiary of General Electric Company, and Alinda Investments L.L.C. for $710 million and an adjustment for working capital. The financial results of these operations have been reclassified to discontinued operations for all periods presented.
 
 
·
Sale of Terasen Gas Business Segment
In May 2007, we completed the sale of our Canada-based retail natural gas distribution operations to Fortis Inc. for approximately $3.4 billion (C$3.7 billion) including cash and assumed debt. The financial results of these operations have been reclassified to discontinued operations for all periods presented.
 
 
·
Sale of Corridor Pipeline System
In June 2007, we completed the sale of the Corridor Pipeline System to Inter Pipeline Fund for approximately $711 million (C$760 million) plus assumption of all construction debt. The financial results of these operations have been reclassified to discontinued operations for all periods presented.
 
 
·
Sale of 80% Ownership Interest in NGPL Business Segment
On December 10, 2007, we entered into a definitive agreement to sell an 80% ownership interest in our NGPL business segment to Myria for approximately $5.9 billion, subject to certain adjustments. The sale closed on February 15, 2008. We will continue to operate NGPL’s assets pursuant to a 15-year operating agreement. Myria is comprised of a syndicate of investors led by Babcock & Brown, an international investment and specialized fund and asset management group.
 

 
6

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


 
·
Debt Securities Buyback
On February 21, 2008, we commenced a cash tender offer to purchase up to $1.6 billion of Knight Inc.’s outstanding debt securities. In March 2008, we paid $1.6 billion in cash to repurchase $1.67 billion par value of debt securities. Proceeds from the completed sale of an 80% ownership interest in our NGPL business segment were used to fund this debt security purchase.
 
 
·
Repayment of Senior Secured Credit Facilities Debt
In June 2007, we repaid the borrowings outstanding under the $455 million Tranche C term loan portion of our senior secured credit facilities. On February 15, 2008, we used a portion of the proceeds from the above-referenced sale of an interest in our NGPL business segment to repay the remaining $4.6 billion outstanding under our senior secured credit facilities.
 
 
·
NGPL Re-Contracting Transportation and Storage Capacity
In 2007, NGPL extended long-term firm transportation and storage contracts with some of its largest shippers. Combined, the contracts represent approximately 0.44 million Dth per day of annual firm transportation service.
 
 
·
NGPL Storage Expansions
In April 2007, NGPL placed into service a $72.3 million expansion at its North Lansing field in East Texas that added 10 Bcf of natural gas storage service capacity. On December 7, 2007, NGPL filed an application with the Federal Energy Regulatory Commission, referred to in this report as the FERC, seeking approval to expand its Herscher Galesville storage field in Kankakee County, Illinois to add 10 Bcf of incremental firm storage service for five expansion shippers. This project is fully supported by contracts ranging from five to ten years.
 
 
·
NGPL Amarillo-Gulf Coast Line Expansion
NGPL added a new compressor station to Segment 17 of its Amarillo-Gulf Coast line that provides 140 MMcf per day of additional capacity. The $17 million project was placed in service January 6, 2007, and all of the additional capacity is fully contracted.
 
 
·
NGPL Louisiana Line Expansion
In October 2006, NGPL filed with the FERC seeking approval to expand its Louisiana Line by 200,000 Dth per day. This $88 million project is supported by five-year agreements that fully subscribe the additional capacity. On July 2, 2007, the FERC issued an order granting construction and operation of the requested facilities. NGPL accepted the order on July 6, 2007. This expansion was placed in service during the first quarter of 2008.
 
 
·
Kinder Morgan Illinois Pipeline
In July 2007, Kinder Morgan Illinois Pipeline received FERC approval to build facilities to supply natural gas transportation service for The Peoples Gas Light and Coke Co., who has signed a 10-year agreement for all the capacity. The $18 million project, which has a capacity of 360,000 Dth per day, was placed in service in December 2007.
 
 
·
Products Pipelines – KMP North System Sale
Effective October 5, 2007, Kinder Morgan Energy Partners sold its North System natural gas liquids and refined petroleum products pipeline system and its 50% ownership interest in the Heartland Pipeline Company to ONEOK Partners, L.P. for approximately $298.6 million in cash. We accounted for the North System business as a discontinued operation for all periods presented in this report.
 
 
·
Products Pipelines – KMP Pacific Operations East Line Expansion
In December 2007, Kinder Morgan Energy Partners completed a second expansion of its Pacific operations’ East Line pipeline segment. This expansion consisted of replacing approximately 130 miles of 12-inch diameter pipe between El Paso, Texas and Tucson, Arizona with new 16-inch diameter pipe, constructing additional pump stations, and adding new storage tanks at Tucson. The project, completed at a cost of approximately $154 million, will increase East Line capacity by 36% (to approximately 200,000 barrels per day) to meet the demand for refined petroleum products, and will provide a platform for further incremental expansions through horsepower additions to the system.
 
 
·
Products Pipelines – KMP CALNEV Pipeline System Expansion
On July 23, 2007, following the FERC’s expedited approval of Kinder Morgan Energy Partners’ CALNEV Pipeline’s proposed tariff rate structure, Kinder Morgan Energy Partners announced its continuing development of the approximate $426 million expansion of the pipeline system into Las Vegas, Nevada. The expansion involves the construction of a new 16-inch diameter pipeline, which will parallel existing utility corridors between Colton, California and Las Vegas in order to minimize environmental impacts. System capacity would increase to approximately 200,000 barrels per day upon completion of the expansion, and could be increased as necessary to
 

 
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Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


over 300,000 barrels per day with the addition of pump stations. The CALNEV expansion is expected to be complete in early 2011.
 
 
·
Products Pipelines – KMP Cochin Pipeline System Ownership Interest Increased to 100%
Effective January 1, 2007, Kinder Morgan Energy Partners acquired the remaining approximate 50.2% interest in the Cochin pipeline system that it did not already own from affiliates of BP for an aggregate consideration of approximately $47.8 million, consisting of $5.5 million in cash and a note payable having a fair value of $42.3 million. As part of the transaction, the seller also agreed to reimburse Kinder Morgan Energy Partners for certain pipeline integrity management costs over a five-year period in an aggregate amount not to exceed $50 million. Upon closing, Kinder Morgan Energy Partners became the operator of the pipeline.
 
 
·
Natural Gas Pipelines – KMP Rockies Express Pipeline
On February 14, 2007, the first phase of the Rockies Express pipeline system, the 327-mile REX-Entrega Project, was placed in service at a cost of approximately $745 million and provided up to 500 million cubic feet per day of natural gas capacity from the Meeker Hub in Rio Blanco County, Colorado and Wamsutter Hub in Sweetwater County, Wyoming to the Cheyenne Hub in Weld County, Colorado.
 
The Rockies Express pipeline project is an approximate $4.9 billion, 1,679-mile natural gas pipeline system, which is owned and currently being developed by Rockies Express Pipeline LLC. The Rockies Express pipeline project is to be completed in three phases: (i) a 327-mile, $745 million pipeline running from the Meeker Hub to the Cheyenne Hub with a nominal capacity of 500 million cubic feet per day; (ii) a 713-mile, $1.6 billion pipeline from the Cheyenne Hub to an interconnect in Audrain County, Missouri, transporting up to 1.5 billion cubic feet per day; and (iii) a 639-mile, $2.6 billion pipeline from Audrain County, Missouri to Clarington, located in Monroe County, Ohio. When fully completed, the Rockies Express pipeline system will have the capability to transport 1.8 billion cubic feet per day of natural gas, and binding firm commitments have been secured for all of the pipeline capacity. On January 12, 2008, interim service on the REX-West Project (second phase) commenced. Full service on the REX-West system for 1.5 billion cubic feet per day of contracted capacity is expected to commence in mid-April 2008. See Items 1 and 2 Business and Properties, (C) Narrative Description of Business, Natural Gas Pipelines – KMP, Rockies Express Pipeline for more information.
 
 
·
Natural Gas Pipelines – KMP Texas Intrastate Pipeline Project
On May 14, 2007, Kinder Morgan Energy Partners announced plans to construct a $72 million natural gas pipeline designed to bring new supplies out of East Texas to markets in the Houston and Beaumont, Texas areas. The new pipeline will consist of approximately 63 miles of 24-inch diameter pipe and multiple interconnections with other pipelines. It will connect the Kinder Morgan Tejas system in Harris County, Texas to the Kinder Morgan Texas Pipeline system in Polk County near Goodrich, Texas. In addition, Kinder Morgan Energy Partners entered into a long-term binding agreement with CenterPoint Energy Services, Inc. to provide firm transportation for a significant portion of the initial project capacity, which will consist of approximately 225 million cubic feet per day of natural gas using existing compression and be expandable to over 400 million cubic feet per day with additional compression.
 
 
·
Natural Gas Pipelines – KMP Kinder Morgan Louisiana Pipeline
On June 22, 2007, the FERC issued an order granting construction and operation of the Kinder Morgan Louisiana Pipeline project, and Kinder Morgan Energy Partners officially accepted the order on July 10, 2007. The Kinder Morgan Louisiana Pipeline is expected to cost approximately $510 million and will provide approximately 3.2 billion cubic feet per day of take-away natural gas capacity from the Cheniere Sabine Pass liquefied natural gas terminal, located in Cameron Parish, Louisiana, to various delivery points in Louisiana and will provide interconnects with many other natural gas pipelines, including NGPL. The project is supported by fully subscribed capacity and long-term customer commitments with Chevron and Total and is expected to be in service by January 1, 2009.
 
 
·
Natural Gas Pipelines – KMP Kinder Morgan Interstate Gas Transmission Colorado Lateral Project
On August 6, 2007, Kinder Morgan Interstate Gas Transmission LLC filed for regulatory approval to construct and operate a 41-mile, $29 million natural gas pipeline from the Cheyenne Hub to markets in and around Greeley, Colorado. When completed, the Colorado Lateral expansion project will provide firm transportation of up to 55 million cubic feet per day to a local utility under long-term contract. On February 21, 2008, the FERC granted the certification application.
 
 
·
Natural Gas Pipelines – KMP Midcontinent Express Pipeline
On October 9, 2007, Midcontinent Express Pipeline LLC filed an application with the FERC requesting a certificate of public convenience and necessity that would authorize construction and operation of the approximate 500-mile
 

 
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Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


Midcontinent Express Pipeline natural gas transmission system. Kinder Morgan Energy Partners currently owns a 50% interest in Midcontinent Express Pipeline LLC and Energy Transfer Partners L.P. owns the remaining interest. The Midcontinent Express Pipeline will create long-haul, firm natural gas transportation takeaway capacity, either directly or indirectly, from natural gas producing regions located in Texas, Oklahoma and Arkansas. The total project is expected to cost approximately $1.3 billion, and will have an initial transportation capacity of approximately 1.4 billion cubic feet per day of natural gas.
 
The Midcontinent Express Pipeline will originate near Bennington, Oklahoma and terminate at an interconnect with Williams’ Transcontinental Gas Pipe Line Corporation’s natural gas pipeline system near Butler, Alabama. It will also connect to NGPL’s natural gas pipeline and to Energy Transfer Partners’ 135-mile natural gas pipeline, which extends from the Barnett Shale natural gas producing area in North Texas to an interconnect with the Texoma Pipeline near Paris, Texas. The Midcontinent Express Pipeline now has long-term binding commitments from multiple shippers for approximately 1.2 billion cubic feet per day and, in order to provide a seamless transportation path from various locations in Oklahoma, the pipeline has also executed a firm capacity lease agreement with Enogex, Inc., an Oklahoma-based intrastate natural gas gathering and pipeline company that is wholly owned by OGE Energy Corp. Subject to the receipt of regulatory approvals, construction of the pipeline is expected to commence in August 2008 and the pipeline is expected to be in service during the first quarter of 2009.
 
In January 2008, in conjunction with the signing of additional binding transportation commitments, Midcontinent Express Pipeline LLC and MarkWest Pioneer, LLC (“Mark West”) entered into an option agreement that provides MarkWest a one-time right to purchase a 10% ownership interest in Midcontinent Express Pipeline LLC after the pipeline is fully constructed and placed into service. If the option is exercised, Kinder Morgan Energy Partners and Energy Transfer Partners will each own 45% of Midcontinent Express Pipeline LLC, while MarkWest will own the remaining 10%.
 
 
·
Natural Gas Pipelines – KMP Kinder Morgan Interstate Gas Transmission Pipeline System Expansion
On October 17, 2007, Kinder Morgan Energy Partners announced that it will invest approximately $23 million to expand its Kinder Morgan Interstate Gas Transmission pipeline system in order to serve five separate industrial plants (four of which produce ethanol) near Grand Island, Nebraska. The project is fully subscribed with long-term customer contracts, and subject to the receipt of regulatory approvals filed December 21, 2007, the expansion project is expected to be fully operational by the fall of 2008.
 
 
·
Natural Gas Pipelines – KMP TransColorado Gas Transmission Expansion
On December 31, 2007, TransColorado Gas Transmission LLC completed an approximate $50 million expansion to provide up to 250 million cubic feet per day of natural gas transportation, starting January 1, 2008, from the Blanco Hub to an interconnect with the Rockies Express pipeline system at the Meeker Hub.
 
 
·
CO2 – KMP Carbon Dioxide Expansion Projects
On January 17, 2007, Kinder Morgan Energy Partners announced that its CO2 business segment will invest approximately $120 million to further expand its operations and enable it to meet the increased demand for carbon dioxide in the Permian Basin. The expansion activities will take place in southwest Colorado and include developing a new carbon dioxide source field (named the Doe Canyon Deep Unit that went in service during the first quarter of 2008) and adding infrastructure at both the McElmo Dome Unit and the Cortez Pipeline. The entire expansion is expected to be completed by the middle of 2008.
 
 
·
Terminals – KMP Biodiesel Liquids Terminal Expansion
On February 28, 2007, Kinder Morgan Energy Partners announced plans to invest up to $100 million to expand its liquids terminal facilities in order to help serve the growing biodiesel market. Kinder Morgan Energy Partners entered into long-term agreements as lessor with Green Earth Fuels, LLC to build tankage that will handle biodiesel at Kinder Morgan Energy Partners’ Houston Ship Channel liquids facility. Green Earth Fuels, LLC completed construction on an 86 million gallon biodiesel production facility at Kinder Morgan Energy Partners’ Galena Park, Texas liquids terminal in the fourth quarter of 2007.
 
 
·
Terminals – KMP Vancouver Wharves Terminal Acquisition
On May 30, 2007, Kinder Morgan Energy Partners purchased the Vancouver Wharves bulk marine terminal from British Columbia Railway Company, a crown corporation owned by the Province of British Columbia, for an aggregate consideration of $57.2 million, consisting of $38.8 million in cash and $18.4 million in assumed liabilities. The Vancouver Wharves facility is located on the north shore of the Port of Vancouver’s main harbor, and includes five deep-sea vessel berths situated on a 139-acre site. The terminal assets include significant rail infrastructure, dry bulk and liquid storage, and material handling systems which allow the terminal to handle over 3.5 million tons of cargo annually.
 

 
9

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


 
·
Terminals – KMP Louisiana Terminal Assets Expansion
On July 10, 2007, Kinder Morgan Energy Partners announced a combined $41 million investment for two terminal expansions to help meet the growing need for terminal services in key markets along the Gulf Coast. The investment consists of (i) the construction of a terminal that will include liquids storage, transfer and packaging facilities at the Rubicon Plant site in Geismar, Louisiana; and (ii) the purchase of liquids storage tanks from Royal Vopak in Westwego, Louisiana. The tanks have a storage capacity of approximately 750,000 barrels for vegetable oil, biodiesel, ethanol and other liquids products. The new terminal being built in Geismar will be capable of handling inbound and outbound material via pipeline, rail, truck and barge/vessel. Construction is expected to be complete by the fourth quarter of 2008.
 
 
·
Terminals – KMP Steel Terminals Acquisition
Effective September 1, 2007, Kinder Morgan Energy Partners acquired five bulk terminal facilities from Marine Terminals, Inc. for an aggregate consideration of approximately $101.5 million, consisting of $100.3 million in cash and an assumed liability of $1.2 million. The acquired assets and operations are primarily involved in the handling and storage of steel and alloys, and also provide stevedoring and harbor services, scrap handling, and scrap processing services to customers in the steel and alloys industry. The operations are located in Blytheville, Arkansas; Decatur, Alabama; Hertford, North Carolina; and Berkley, South Carolina. Combined, the five facilities handled approximately 13.7 million tons of steel products in 2006. Under long-term contracts, the acquired terminal facilities will continue to provide handling, processing, harboring and warehousing services to Nucor Corporation, one of the nation’s largest steel and steel products companies.
 
 
·
Terminals – KMP Petroleum Coke Terminal Project
On January 16, 2008, Kinder Morgan Energy Partners announced that it plans to invest approximately $56 million to construct a petroleum coke terminal at the BP refinery located in Whiting, Indiana. Kinder Morgan Energy Partners has entered into a long-term contract to build and operate the facility, which will handle approximately 2.2 million tons of petroleum coke per year from a coker unit BP plans to construct to process heavy crude oil from Canada. The facility is expected to be in service in mid-year 2011.
 
 
·
Trans Mountain – KMP Sale of Trans Mountain to Kinder Morgan Energy Partners
On April 30, 2007, we sold the Trans Mountain pipeline system to Kinder Morgan Energy Partners for $549.1 million. The Trans Mountain pipeline system, which transports crude oil and refined products from Edmonton, Alberta, Canada to marketing terminals and refineries in British Columbia and the state of Washington, currently transports approximately 260,000 barrels per day. An additional expansion that will increase capacity of the pipeline to 300,000 barrels per day is expected to be in service by November 2008.
 
 
·
Trans Mountain – KMP Trans Mountain Pipeline Expansion
On August 23, 2007, Kinder Morgan Energy Partners announced that it has begun construction on the approximately C$485 million Anchor Loop project, the second phase of the Trans Mountain pipeline system expansion that will increase pipeline capacity from approximately 260,000 to 300,000 barrels of crude oil per day. The project is expected to be complete by November 2008. In April 2007, Kinder Morgan Energy Partners commissioned 10 new pump stations which boosted capacity on Trans Mountain from 225,000 to approximately 260,000 barrels per day.
 
 
·
Kinder Morgan Management Public Offering
On May 17, 2007, Kinder Morgan Management closed the public offering of 5,700,000 of its shares at a price of $52.26 per share. The net proceeds from the offering were used by Kinder Morgan Management to buy additional i-units from Kinder Morgan Energy Partners. Kinder Morgan Energy Partners used the proceeds of $297.9 million from its i-unit issuance to reduce the borrowings under its commercial paper program.
 
 
·
Kinder Morgan Energy Partners Public Offerings
In December 2007, Kinder Morgan Energy Partners completed a public offering of 7,130,000 of its common units, including common units sold pursuant to the underwriters’ over-allotment option, at a price of $48.09 per unit, less underwriting expenses. Kinder Morgan Energy Partners received net proceeds of $342.9 million for the issuance of these 7,130,000 common units, and used the proceeds to reduce the borrowings under its commercial paper program.
 
On February 12, 2008, Kinder Morgan Energy Partners completed an additional offering of 1,080,000 of its common units at a price of $55.65 per unit in a privately negotiated transaction. Kinder Morgan Energy Partners received net proceeds of $60.1 million for the issuance of these 1,080,000 common units, and used the proceeds to reduce the borrowings under its commercial paper program.
 

 
10

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


In March 2008, Kinder Morgan Energy Partners completed a public offering of 5,750,000 of its common units, including common units sold pursuant to the underwriters’ over-allotment option, at a price of $57.70 per unit, less commissions and underwriting expenses. Kinder Morgan Energy Partners received net proceeds of $324.2 million for the issuance of these common units, and used the proceeds to reduce the borrowings under its commercial paper program.
 
 
·
Kinder Morgan Energy Partners Debt Offerings
On January 30, 2007, Kinder Morgan Energy Partners completed a public offering of senior notes. Kinder Morgan Energy Partners issued a total of $1.0 billion in principal amount of senior notes, consisting of $600 million of 6.00% notes due February 1, 2017 and $400 million of 6.50% notes due February 1, 2037. Kinder Morgan Energy Partners received proceeds from the issuance of the notes, after underwriting discounts and commissions, of $992.8 million, and used the proceeds to reduce the borrowings under its commercial paper program.
 
On June 21, 2007, Kinder Morgan Energy Partners closed a public offering of $550 million in principal amount of 6.95% senior notes. The notes are due January 15, 2038. Kinder Morgan Energy Partners received proceeds from the issuance of the notes, after underwriting discounts and commissions, of $543.9 million, and used the proceeds to reduce its commercial paper debt.
 
On August 28, 2007, Kinder Morgan Energy Partners closed a public offering of $500 million in principal amount of 5.85% senior notes. The notes are due September 15, 2012. Kinder Morgan Energy Partners received proceeds from the issuance of the notes, after underwriting discounts and commissions, of $497.8 million, and used the proceeds to reduce its commercial paper debt.
 
On February 12, 2008, Kinder Morgan Energy Partners completed a public offering of $900 million in principal amount of senior notes, consisting of $600 million of 5.95% notes due February 15, 2018, and $300 million of 6.95% notes due January 15, 2038. Kinder Morgan Energy Partners received proceeds from the issuance of the notes, after underwriting discounts and commissions, of approximately $894.1 million, and used the proceeds to reduce the borrowings under its commercial paper program.
 
 
·
Kinder Morgan Energy Partners Cash Distribution Expectations for 2008
On November 26, 2007, Kinder Morgan Energy Partners announced that it expects to declare cash distributions of $4.02 per unit for 2008, an almost 16% increase over cash distributions of $3.48 per unit for 2007. This expectation includes contributions from assets owned by Kinder Morgan Energy Partners as of the announcement date and does not include any potential benefits from unidentified acquisitions. Additionally, this expectation does not take into account any capital costs associated with financing the payment of reparations sought by shippers on Kinder Morgan Energy Partners’ Pacific operations’ interstate pipelines. The expected growth in distributions in 2008 will be fueled by incremental earnings from Rockies Express-West (the western portion of the Rockies Express Pipeline), higher realized prices on crude oil production inclusive of hedges (budgeted production volumes for the SACROC oil field unit in 2008 are approximately equal to the volumes realized in 2007), and an anticipated strong performance from Kinder Morgan Energy Partners’ remaining business portfolio.
 
 
·
Kinder Morgan Energy Partners 2007 Capital Expenditures
During 2007, Kinder Morgan Energy Partners spent $1,691.6 million for additions to its property, plant and equipment, including both expansion and maintenance projects. Capital expenditures included the following:
 
 
·
$480.0 million in the Terminals – KMP segment, largely related to expanding the petroleum products storage capacity at liquids terminal facilities, including the construction of additional liquids storage tanks at facilities in Canada and at facilities located on the Houston Ship Channel and the New York Harbor, and to various expansion projects and improvements undertaken at multiple terminal facilities;
 
 
·
$382.5 million in the CO2 – KMP segment, mostly related to additional infrastructure, including wells and injection and compression facilities, to support the expanding carbon dioxide flooding operations at the SACROC and Yates oil field units in West Texas and to expand Kinder Morgan Energy Partners’ capacity to produce and deliver CO2 from the McElmo Dome and Doe Canyon source fields;
 
 
·
$305.7 million in the Trans Mountain – KMP segment, mostly related to pipeline expansion and improvement projects undertaken to increase crude oil and refined products delivery volumes;
 
 
·
$264.0 million in the Natural Gas Pipelines – KMP segment, mostly related to current construction of the Kinder Morgan Louisiana Pipeline and to various expansion and improvement projects on the Texas intrastate natural gas pipeline systems, including the development of additional natural gas storage capacity at natural gas storage facilities located at Markham and Dayton, Texas; and
 

 
11

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


 
·
$259.4 million in the Products Pipelines – KMP segment, mostly related to the continued expansion work on the Pacific operations’ East Line products pipeline, completion of construction projects resulting in additional capacity, and an additional refined products line on the CALNEV Pipeline in order to increase delivery service to the growing Las Vegas, Nevada market.
 
Including its share of capital expenditures for both the Rockies Express and Midcontinent Express natural gas pipeline projects, Kinder Morgan Energy Partners’ capital expansion program in 2007 was approximately $2.6 billion. Including all of its business acquisition expenditures, Kinder Morgan Energy Partners’ total spending in 2007 was $3.3 billion. Kinder Morgan Energy Partners’ capital expansion program will continue to be significant in 2008, as it expects to invest approximately $3.3 billion in expansion capital expenditures (including its share of capital expenditures for both the Rockies Express and Midcontinent Express natural gas pipeline projects), which will help drive its earnings and cash flow growth in 2009 and beyond.
 
(B) Financial Information about Segments
 
Note 15 of the accompanying Notes to Consolidated Financial Statements contains financial information about our business segments.
 
(C) Narrative Description of Business
 
Overview
 
We are an energy infrastructure provider. Our principal business segments are: (1) Natural Gas Pipeline Company of America and certain affiliates, referred to as Natural Gas Pipeline Company of America or NGPL, a major interstate natural gas pipeline and storage system; (2) Power, a business that owns and operates natural gas-fired electric generation facilities; (3) Express Pipeline System, the ownership of a one-third interest in a crude oil pipeline system, which we operate and account for under the equity method; (4) Products Pipelines – KMP, the ownership and operation of refined petroleum products pipelines that deliver gasoline, diesel fuel, jet fuel and natural gas liquids to various markets plus the ownership and/or operation of associated product terminals and petroleum pipeline transmix facilities; (5) Natural Gas Pipelines – KMP, the ownership and operation of major interstate and intrastate natural gas pipeline and storage systems; (6) CO2 – KMP, (i) the production, transportation and marketing of carbon dioxide (“CO2”) to oil fields that use CO2 to increase production of oil, (ii) ownership interests in and/or operation of oil fields in West Texas and (iii) the ownership and operation of a crude oil pipeline system in West Texas; (7) Terminals – KMP, the ownership and/or operation of liquids and bulk terminal facilities and rail transloading and materials handling facilities located throughout the United States and (8) Trans Mountain – KMP, the ownership and operation of a pipeline system that transports crude oil and refined petroleum products from Edmonton, Alberta, Canada to marketing terminals and refineries in British Columbia, Canada and the state of Washington, U.S.A. During 2006 and 2007, we reached agreements to sell certain businesses and assets in which we no longer have any continuing interest, including Terasen Gas, Corridor, North System and our Kinder Morgan Retail segment. Accordingly, the activities and assets related to these sales are presented as discontinued items in the accompanying consolidated financial statements (see Note 7 of the accompanying Notes to Consolidated Financial Statements). Notes 5 and 15 of the accompanying Notes to Consolidated Financial Statements contain additional information on asset sales and our business segments. As discussed following, certain of our operations are regulated by various federal and state regulatory bodies.
 
Natural gas transportation, storage and retail sales accounted for approximately 88.1%, 90.3%, 91.2% and 92.8% of our consolidated revenues in the seven months ended December 31, 2007, the five months ended May 31, 2007, and in 2006 and 2005, respectively. During the seven months ended December 31, 2007, the five months ended May 31, 2007, and in 2006 and 2005, we did not have revenues from any single customer that exceeded 10% of our consolidated operating revenues. Our equity in the earnings of Kinder Morgan Energy Partners (before reduction for the minority interest in Kinder Morgan Management) constituted approximately 54% of our income from continuing operations before interest and income taxes in 2005. The following table gives our segment earnings, our earnings attributable to our investment in Kinder Morgan Energy Partners (net of pre-tax minority interest) and the percent of the combined total each represents, for the seven months ended December 31, 2007, the five months ended May 31, 2007 and in 2006.
 

 
12

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K



 
Successor Company
   
Predecessor Company
 
Seven Months Ended
December 31, 2007
   
Five Months Ended
May 31, 2007
 
Year Ended
December 31, 2006
 
Amount
 
% of Total
   
Amount
 
% of Total
 
Amount
 
% of Total
 
(Dollars in millions)
   
(Dollars in millions)
Net Pre-tax Impact of Kinder Morgan Energy Partners1
$
412.0
   
47.8
%
   
$
255.2
   
47.5
%
 
$
582.9
   
47.5
%
Segment Earnings:
                                         
NGPL
 
422.8
   
49.0
%
     
267.4
   
49.8
%
   
603.5
   
49.2
%
Power
 
13.4
   
1.5
%
     
8.9
   
1.7
%
   
23.2
   
1.9
%
Express
 
14.4
   
1.7
%
     
5.4
   
1.0
%
   
17.2
   
1.4
%
Total
$
862.6
   
100.0
%
   
$
536.9
   
100.00
%
 
$
1,226.8
   
100.00
%
__________
 
1
Represents Knight Inc.’s general partner incentive and earnings from its ownership of limited partner interests in Kinder Morgan Energy Partners, net of associated minority interests.
 
Natural Gas Pipeline Company of America
 
During the seven months ended December 31, 2007 and the five months ended May 31, 2007, NGPL’s segment earnings of $422.8 million and $267.4 million, respectively, represented approximately 49.0% and 49.8%, respectively, of total segment earnings plus net pre-tax impact of Kinder Morgan Energy Partners. On December 10, 2007, we entered into a definitive agreement to sell an 80% ownership interest in our NGPL business segment to Myria for approximately $5.9 billion, subject to certain adjustments. The sale closed on February 15, 2008. We will continue to operate NGPL’s assets pursuant to a 15-year operating agreement. Myria is comprised of a syndicate of investors led by Babcock & Brown, an international investment and specialized fund and asset management group.
 
Through NGPL, we own an interest in and operate approximately 9,500 miles of interstate natural gas pipelines, storage fields, field system lines and related facilities, consisting primarily of two major interconnected natural gas transmission pipelines terminating in the Chicago, Illinois metropolitan area. The system is powered by 57 compressor stations in mainline and storage service having an aggregate of approximately 1.0 million horsepower. NGPL’s system has 837 points of interconnection with 35 interstate pipelines, 36 intrastate pipelines, 38 local distribution companies, 32 end users including power plants, and a number of gas producers, thereby providing significant flexibility in the receipt and delivery of natural gas. NGPL’s Amarillo Line originates in the West Texas and New Mexico producing areas and is comprised of approximately 4,200 miles of mainline and various small-diameter pipelines. Its other major pipeline, the Gulf Coast Line, originates in the Gulf Coast areas of Texas and Louisiana and consists of approximately 4,500 miles of mainline and various small-diameter pipelines. These two main pipelines are connected at points in Texas and Oklahoma by NGPL’s approximately 800-mile Amarillo/Gulf Coast pipeline. In addition, NGPL owns a 50% equity interest in and operates Horizon Pipeline Company, L.L.C., a joint venture with Nicor-Horizon, a subsidiary of Nicor, Inc. This joint venture owns a natural gas pipeline in northern Illinois with a capacity of 380 MMcf per day. Also, NGPL operates Kinder Morgan Illinois Pipeline LLC, an affiliate of NGPL that owns a natural gas pipeline in northern Illinois with a capacity of 360 MMcf per day.
 
NGPL provides transportation and storage services to third-party natural gas distribution utilities, marketers, producers, industrial end users and other shippers. Pursuant to transportation agreements and FERC tariff provisions, NGPL offers its customers firm and interruptible transportation, storage and no-notice services, and interruptible park and loan services. Under NGPL’s tariffs, firm transportation customers pay reservation charges each month plus a commodity charge based on actual volumes transported, including a fuel charge collected in-kind. Interruptible transportation customers pay a commodity charge based upon actual volumes transported. Reservation and commodity charges are both based upon geographical location and time of year. Under firm no-notice service, customers pay a reservation charge for the right to have up to a specified volume of natural gas delivered but, unlike with firm transportation service, are able to meet their peaking requirements without making specific nominations. NGPL has the authority to discount its rates and to negotiate rates with customers if it has first offered service to those customers under its reservation and commodity charge rate structure. NGPL’s revenues have historically been somewhat higher in the first and fourth quarters of the calendar year, reflecting higher system utilization during the colder months. During the winter months, NGPL collects higher transportation commodity revenue, higher interruptible transportation revenue, winter-only capacity revenue and higher rates on certain contracts.
 
NGPL’s principal delivery market area encompasses the states of Illinois, Indiana and Iowa and secondary markets in portions of Wisconsin, Nebraska, Kansas, Missouri and Arkansas. NGPL is the largest transporter of natural gas to the Chicago market, and we believe that its transportation rates are very competitive in the region. In 2007, NGPL delivered an average of 1.88 trillion Btus per day of natural gas to this market. Given its strategic location at the center of the North American natural gas pipeline grid, we believe that Chicago is likely to continue to be a major natural gas trading hub for growing markets in the Midwest and Northeast.
 

 
13

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


Substantially all of NGPL’s pipeline capacity is committed under firm transportation contracts ranging from one to six years. Approximately 63% of the total transportation volumes committed under NGPL’s long-term firm transportation contracts in effect on January 31, 2008 had remaining terms of less than three years. NGPL continues to actively pursue the renegotiation, extension and/or replacement of expiring contracts, and was very successful in doing so during 2007 as discussed under “Recent Developments” elsewhere in this report. Nicor Gas Company, Peoples Gas Light and Coke Company, and Northern Indiana Public Service Company (NIPSCO) are NGPL’s three largest customers in terms of operating revenues from tariff services. During 2007, approximately 50% of NGPL’s operating revenues from tariff services were attributable to its eight largest customers. Contracts representing approximately 18.3% of NGPL’s total long-haul, contracted firm transport capacity as of January 31, 2008 are scheduled to expire during 2008. In addition to these long-haul transportation agreements, NGPL also transports significant volumes for redelivery to other pipelines.  These deliveries are primarily in Louisiana and Texas.
 
NGPL is one of the nation’s largest natural gas storage operators with approximately 600 Bcf of total natural gas storage capacity, approximately 265 Bcf of working gas capacity and approximately 4.3 Bcf per day of peak deliverability from its storage facilities, which are located in major supply areas and near the markets it serves. NGPL owns and operates 13 underground storage reservoirs in eight field locations in four states. These storage assets complement its pipeline facilities and allow it to optimize pipeline deliveries and meet peak delivery requirements in its principal markets. NGPL provides firm and interruptible gas storage service pursuant to storage agreements and tariffs. Firm storage customers pay a monthly demand charge irrespective of actual volumes stored. Interruptible storage customers pay a monthly charge based upon actual volumes of gas stored.
 
Competition:  NGPL competes with other transporters of natural gas in virtually all of the markets it serves and, in particular, in the Chicago area, which is the northern terminus of NGPL’s two major pipeline segments and its largest market. These competitors include both interstate and intrastate natural gas pipelines and, historically, most of the competition has been from such pipelines with supplies originating in the United States. NGPL also faces competition from Alliance Pipeline, which began service during the 2000-2001 heating season carrying Canadian-produced natural gas into the Chicago market. However, at the same time, the Vector Pipeline was constructed for the specific purpose of transporting gas from the Chicago area to other markets, generally further north and further east. The overall impact of the increased pipeline capacity into the Chicago area, combined with additional take-away capacity and the increased demand in the area, has created a situation that remains dynamic with respect to the ultimate impact on individual transporters such as NGPL.
 
NGPL also faces competition with respect to the natural gas storage services it provides. NGPL has storage facilities in both market and supply areas, allowing it to offer varied storage services to customers. It faces competition from independent storage providers as well as storage services offered by other natural gas pipelines and local natural gas distribution companies.
 
The competition faced by NGPL with respect to its natural gas transportation and storage services is generally price-based, although there is also a significant component related to the variety, flexibility and reliability of services offered by others. NGPL’s extensive pipeline system, with access to diverse supply basins and significant storage assets in both the supply and market areas, makes it a strong competitor in many situations, but most customers still have alternative sources to meet their requirements. In addition, due to the price-based nature of much of the competition faced by NGPL, its proven track record as a low-cost provider is an important factor in its success in acquiring and retaining customers. Additional competition for storage services could result from the utilization of currently underutilized storage facilities or from conversion of existing storage facilities from one use to another. In addition, existing competitive storage facilities could, in some instances, be expanded.
 
Power
 
Power’s earnings for the seven months ended December 31, 2007 and the five months ended May 31, 2007 represented approximately 1.5% and 1.7%, respectively, of each of our total segment earnings plus net pre-tax impact of Kinder Morgan Energy Partners and our income from continuing operations before interest and income taxes. On November 20, 2007, we entered into a definitive agreement to sell our interests in three natural gas-fired power plants in Colorado to Bear Stearns. The sale closed on January 25, 2008, effective January 1, 2008, and we received net proceeds of $63.1 million. Prior to this sale, we held interests in three Colorado assets, including ownership interests in two natural gas-fired electricity generation facilities and a net profits interest in a third. We continue to have an ownership interest in a natural gas-fired electricity generation facility in Michigan and an operating agreement with a natural gas-fired electricity generation facility in Texas. The Michigan facility is operated under a tolling agreement. Under the tolling agreement, purchasers of the electrical output take the risks in the marketplace associated with the cost of fuel and the value of the electric power generated. During 2007, approximately 68% of Power’s operating revenues represented tolling revenues of the Michigan facility, 21% was derived from the Colorado facility operated as an independent power producer under a long-term contract with XCEL Energy’s Public Service Company of Colorado unit, and the remaining 11% was primarily for operating the Ft. Lupton, Colorado power facility and a gas-fired power facility in Snyder, Texas that began operations during the second quarter of 2005 and
 

 
14

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


provides electricity to Kinder Morgan Energy Partners’ SACROC operations. In recent periods, we have recorded impairment charges associated with our power business activities; see Item 6 Selected Financial Data.
 
Kinder Morgan Power previously designed, developed and constructed power projects. In 2002, following an assessment of the electric power industry’s business environment and noting a marked deterioration in the financial condition of certain power generating and marketing participants, we decided to discontinue our power development activities.
 
In February 2001, Kinder Morgan Power announced an agreement under which Williams Energy Marketing and Trading agreed to supply natural gas to and market capacity for 16 years for a 550 megawatt natural gas-fired electric power plant in Jackson, Michigan. Effective July 1, 2002, construction of this facility was completed and commercial operations commenced. Concurrently with commencement of commercial operations, (i) Kinder Morgan Power made a preferred investment in Triton Power Company LLC (now valued at approximately $15 million); and, (ii) Triton Power Company LLC, through its wholly owned subsidiary, Triton Power Michigan LLC, entered into a 40-year lease of the Jackson power facility from the plant owner, AlphaGen Power, LLC. Bear Energy LP (successor to Williams Energy Marketing and Trading) supplies all natural gas to and purchases all power from the power plant under a 16-year tolling agreement with Triton Power Michigan LLC.
 
Competition: With respect to Power’s investment in the Jackson, Michigan facility, the principal impact of competition is the level of dispatch of the plant and the related (but minor) effect on profitability.
 
Express Pipeline System
 
We own a one-third interest in the Express Pipeline System. The Express Pipeline System’s earnings for the seven months ended December 31, 2007 and the five months ended May 31, 2007 represented approximately 1.7% and 1.0%, respectively, of each of our total segment earnings plus net pre-tax impact of Kinder Morgan Energy Partners and our income from continuing operations before interest and income taxes. The Express Pipeline System is a batch-mode, common-carrier, crude pipeline system comprised of the Express Pipeline and the Platte Pipeline. The Express Pipeline System transports a wide variety of crude types produced in Alberta to markets in Petroleum Administration Defense District IV, comprised of the states in the Rocky Mountain area of the United States (“PADD IV”) and Petroleum Administration Defense District II, comprised of the states in the central area of the United States (“PADD II”). The Express Pipeline System also transports crude oil produced in PADD IV to downstream delivery points in PADD IV and to PADD II.
 
The Express Pipeline is a 780 mile, 24-inch diameter pipeline that begins at the crude pipeline hub at Hardisty, Alberta and terminates at the Casper, Wyoming facilities of the Platte Pipeline, and includes related metering and storage facilities including tanks and pump stations. At Hardisty, the Express Pipeline receives crude from certain other pipeline systems and terminals, which currently provide access to approximately 1.3 million bpd of crude moving through this delivery hub. The Express Pipeline is the major pipeline transporting Alberta crude into PADD IV. The Express Pipeline has a design capacity of 280,000 bpd, after an expansion completed in April 2005. Receipts at Hardisty averaged 213,477 bpd during the year ended December 31, 2007, compared with 226,717 bpd during the year ended December 31, 2006.
 
The Platte Pipeline is a 926 mile, 20-inch diameter pipeline that runs from the crude pipeline hub at Casper, Wyoming to refineries and interconnecting pipelines in the Wood River, Illinois area, and includes related pumping and storage facilities (including tanks). The Platte Pipeline transports crude shipped on the Express Pipeline, crude produced in PADD IV and crude received in PADD II, to downstream delivery points. It is currently the only major crude pipeline transporting crude oil from PADD IV to PADD II. Various receipt and delivery points along the Platte Pipeline, with interconnections to other pipelines, enable crude to be moved to various markets in PADD IV and PADD II. The Platte Pipeline has a capacity of 150,000 bpd when shipping heavy oil and averaged 110,757 bpd east of Casper during the year ended December 31, 2007, versus 151,552 bpd for the year ended December 31, 2006.
 
The current Express Pipeline System rate structure is a combination of committed rates and uncommitted rates. The committed rates apply to those shippers who have signed long-term (10 or 15 year) contracts with the Express Pipeline System to transport crude on a ship-or-pay basis. Uncommitted rates are the rates that apply to uncommitted services whereby shippers transport oil through the Express Pipeline System without a long-term commitment between the shipper and the Express Pipeline System. Committed rates vary according to the destination of shipments and the length of the term of the transportation services agreement, with those shippers committing to longer-term agreements receiving lower rates.
 
Express Pipeline received 105,000 bpd of additional firm service commitments to the pipeline starting April 1, 2005, bringing the total firm commitment on Express to 235,000 bpd, or 84% of its total capacity. In May 2007, contracts for 4,000 bpd expired, thereby reducing the total firm commitments to 231,000 bpd. The remaining contracts expire in 2012, 2014 and 2015 in amounts of 40%, 11% and 32% of total capacity, respectively. The remaining contracts provide for committed tolls for transportation on the Express Pipeline System, which can be increased each year by up to 2%. The capacity in excess of 231,000 bpd is made available to shippers as uncommitted capacity.
 

 
15

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


Uncommitted rates were established on a cost of service basis and can be changed in accordance with applicable regulations discussed below. See “Regulation” elsewhere in this report. The table below provides a selection of tolls at December 31.
 
 
Toll Per Barrel (US$)
 
2007
 
2006
Hardisty, Alberta to Casper, Wyoming
$
1.869
 
$
1.612
Hardisty, Alberta to Casper, Wyoming (committed)
$
1.340
 
$
1.313
Casper, Wyoming to Wood River, Illinois
$
1.562
 
$
1.497

Competition:  The Express Pipeline System pipeline to the U.S. Rocky Mountains and Midwest is one of several pipeline alternatives for Western Canadian petroleum production, and throughput on the Express Pipeline System may decline if overall petroleum production in Alberta declines or if tolls become uncompetitive compared to alternatives. The Express Pipeline System competes against other pipeline providers who could be in a position to establish and offer lower tolls, which may provide a competitive advantage in new pipeline development. Throughput on the Express Pipeline System could decline in the event of reduced petroleum product demand in the U.S. Rocky Mountains.
 
Products Pipelines – KMP
 
The Products Pipelines – KMP segment consists of Kinder Morgan Energy Partners’ refined petroleum products and natural gas liquids pipelines and associated terminals, Southeast terminals and transmix processing facilities.
 
Pacific Operations
 
The Pacific operations include Kinder Morgan Energy Partners’ SFPP, L.P. operations, CALNEV Pipeline operations and West Coast Liquid Terminals operations. The assets include interstate common carrier pipelines regulated by the FERC, intrastate pipelines in the state of California regulated by the California Public Utilities Commission, and certain non rate-regulated operations and terminal facilities.
 
The Pacific operations serve seven western states with approximately 3,000 miles of refined petroleum products pipelines and related terminal facilities that provide refined products to some of the fastest growing population centers in the United States, including California; Las Vegas and Reno, Nevada; and the Phoenix-Tucson, Arizona corridor. For 2007, the three main product types transported were gasoline (59%), diesel fuel (23%) and jet fuel (18%).
 
The CALNEV Pipeline consists of two parallel 248-mile, 14-inch and 8-inch diameter pipelines that run from Kinder Morgan Energy Partners’ facilities at Colton, California to Las Vegas, Nevada, and which also serves Nellis Air Force Base located in Las Vegas. It also includes approximately 55 miles of pipeline serving Edwards Air Force Base.
 
The Pacific operations include 15 truck-loading terminals (13 on SFPP, L.P. and two on CALNEV) with an aggregate usable tankage capacity of approximately 13.7 million barrels. The truck terminals provide services including short-term product storage, truck loading, vapor handling, additive injection, dye injection and oxygenate blending.
 
The Pacific operation’s West Coast Liquid terminals are fee-based terminals located in the Seattle, Portland, San Francisco and Los Angeles areas along the West Coast of the United States with a combined total capacity of approximately 8.3 million barrels of storage for both petroleum products and chemicals.
 
Markets.  Combined, the Pacific operations’ pipelines transport approximately 1.3 million barrels per day of refined petroleum products, providing pipeline service to approximately 31 customer-owned terminals, 11 commercial airports and 14 military bases. Currently, the Pacific operations’ pipelines serve approximately 100 shippers in the refined petroleum products market; the largest customers being major petroleum companies, independent refiners, and the United States military.
 
A substantial portion of the product volume transported is gasoline. Demand for gasoline depends on such factors as prevailing economic conditions, vehicular use patterns and demographic changes in the markets served. If current trends continue, we expect the majority of the Pacific operations’ markets to maintain growth rates that will exceed the national average for the foreseeable future. The volume of products transported is affected by various factors, principally demographic growth, economic conditions, product pricing, vehicle miles traveled, population and fleet mileage. Certain product volumes can experience seasonal variations and, consequently, overall volumes may be lower during the first and fourth quarters of each year.
 
Supply.  The majority of refined products supplied to the Pacific operations’ pipeline system come from the major refining centers around Los Angeles, San Francisco, El Paso and Puget Sound, as well as from waterborne terminals and connecting pipelines located near these refining centers.
 

 
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Items 1. and 2.   Business and Properties. (continued)
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Competition.  The two most significant competitors of the Pacific operations’ pipeline system are proprietary pipelines owned and operated by major oil companies in the area where the Pacific operations’ pipeline system delivers products and also refineries with terminals that have trucking arrangements within the Pacific operations’ market areas. We believe that high capital costs, tariff regulation, and environmental and right-of-way permitting considerations make it unlikely that a competing pipeline system comparable in size and scope to the Pacific operations will be built in the foreseeable future. However, the possibility of individual pipelines being constructed or expanded to serve specific markets is a continuing competitive factor.
 
The use of trucks for product distribution from either shipper-owned proprietary terminals or from their refining centers continues to compete for short haul movements by pipeline. The Pacific terminal operations compete with terminals owned by its shippers and by third-party terminal operators in California, Arizona and Nevada. Competitors include Shell Oil Products U.S., BP (formerly Arco Terminal Services Company), Wilmington Liquid Bulk Terminals (Vopak), NuStar and Chevron. We cannot predict with any certainty whether the use of short haul trucking will decrease or increase in the future.
 
Plantation Pipe Line Company
 
Kinder Morgan Energy Partners owns approximately 51% of Plantation Pipe Line Company, referred to in this report as Plantation, a 3,100-mile refined petroleum products pipeline system serving the southeastern United States. An affiliate of ExxonMobil owns the remaining 49% ownership interest. ExxonMobil is the largest shipper on the Plantation system both in terms of volumes and revenues. Kinder Morgan Energy Partners operates the system pursuant to agreements with Plantation Services LLC and Plantation. Plantation serves as a common carrier of refined petroleum products to various metropolitan areas, including Birmingham, Alabama; Atlanta, Georgia; Charlotte, North Carolina; and the Washington, D.C. area.
 
For the year 2007, Plantation delivered an average of 535,677 barrels per day of refined petroleum products. These delivered volumes were comprised of gasoline (63%), diesel/heating oil (23%) and jet fuel (14%). Average delivery volumes for 2007 were 3.5% lower than the 555,060 barrels per day delivered during 2006. The decrease was predominantly driven by (i) the full year impact of alternative pipeline service (initial startup mid-2006) into Southeast markets and (ii) changes in production patterns from Louisiana refineries related to refiners directing higher margin products (such as reformulated gasoline blendstock for oxygenate blending) into markets not directly served by Plantation.
 
Markets.  Plantation ships products for approximately 30 companies to terminals throughout the southeastern United States. Plantation’s principal customers are Gulf Coast refining and marketing companies, fuel wholesalers, and the United States Department of Defense. Plantation’s top five shippers represent approximately 80% of total system volumes.
 
The eight states in which Plantation operates represent a collective pipeline demand of approximately two million barrels per day of refined petroleum products. Plantation currently has direct access to about 1.5 million barrels per day of this overall market. The remaining 0.5 million barrels per day of demand lies in markets (e.g., Nashville, Tennessee; North Augusta, South Carolina; Bainbridge, Georgia; and Selma, North Carolina) currently served by another pipeline company. Plantation also delivers jet fuel to the Atlanta, Georgia; Charlotte, North Carolina; and Washington, D.C. airports (Ronald Reagan National and Dulles). Combined jet fuel shipments to these four major airports increased 3% in 2007 compared to 2006, with the majority of this growth occurring at Dulles Airport.
 
Supply.  Products shipped on Plantation originate at various Gulf Coast refineries from which major integrated oil companies and independent refineries and wholesalers ship refined petroleum products. Plantation is directly connected to and supplied by a total of ten major refineries representing approximately 2.3 million barrels per day of refining capacity.
 
Competition.  Plantation competes primarily with the Colonial pipeline system, which also runs from Gulf Coast refineries throughout the southeastern United States and extends into the northeastern states.
 
Central Florida Pipeline
 
The Central Florida pipeline system consists of a 110-mile, 16-inch diameter pipeline that transports gasoline and an 85-mile, 10-inch diameter pipeline that transports diesel fuel and jet fuel from Tampa to Orlando, with an intermediate delivery point on the 10-inch pipeline at Intercession City, Florida. In addition to being connected to Kinder Morgan Energy Partners’ Tampa terminal, the pipeline system is connected to terminals owned and operated by TransMontaigne, Citgo, BP, and Marathon Petroleum. The 10-inch diameter pipeline is connected to Kinder Morgan Energy Partners’ Taft, Florida terminal (located near Orlando) and is also the sole pipeline supplying jet fuel to the Orlando International Airport in Orlando, Florida. In 2007, the pipeline system transported approximately 113,800 barrels per day of refined products, with the product mix being approximately 69% gasoline, 12% diesel fuel, and 19% jet fuel.
 
Kinder Morgan Energy Partners also owns and operates liquids terminals in Tampa and Taft, Florida. The Tampa terminal contains approximately 1.5 million barrels of storage capacity and is connected to two ship dock facilities in the Port of Tampa. The Tampa terminal provides storage for gasoline, diesel fuel and jet fuel for further movement into either trucks or
 

 
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Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


into the Central Florida pipeline system. The Tampa terminal also provides storage and truck rack blending services for ethanol and bio-diesel. The Taft terminal contains approximately 0.7 million barrels of storage capacity, for gasoline and diesel fuel for further movement into trucks.
 
Markets.  The estimated total refined petroleum products demand in the state of Florida is approximately 800,000 barrels per day. Gasoline is, by far, the largest component of that demand at approximately 545,000 barrels per day. The total refined petroleum products demand for the Central Florida region of the state, which includes the Tampa and Orlando markets, is estimated to be approximately 360,000 barrels per day, or 45% of the consumption of refined products in the state. Kinder Morgan Energy Partners distributes approximately 150,000 barrels of refined petroleum products per day, including the Tampa terminal truck loadings. The balance of the market is supplied primarily by trucking firms and marine transportation firms. Most of the jet fuel used at Orlando International Airport is moved through Kinder Morgan Energy Partners’ Tampa terminal and the Central Florida pipeline system. The market in Central Florida is seasonal, with demand peaks in March and April during spring break and again in the summer vacation season, and is also heavily influenced by tourism, with Disney World and other attractions located near Orlando.
 
Supply.  The vast majority of refined petroleum products consumed in Florida are supplied via marine vessels from major refining centers in the Gulf Coast of Louisiana and Mississippi and refineries in the Caribbean basin. A lesser amount of refined petroleum products is being supplied by refineries in Alabama and by Texas Gulf Coast refineries via marine vessels and through pipeline networks that extend to Bainbridge, Georgia. The supply into Florida is generally transported by ocean-going vessels to the larger metropolitan ports, such as Tampa, Port Everglades near Miami, and Jacksonville. Individual markets are then supplied from terminals at these ports and other smaller ports, predominately by trucks, except the Central Florida region, which is served by a combination of trucks and pipelines.
 
Competition.  With respect to the Central Florida pipeline system, the most significant competitors are trucking firms and marine transportation firms. Trucking transportation is more competitive in serving markets close to the marine terminals on the east and west coasts of Florida. Kinder Morgan Energy Partners is utilizing tariff incentives to attract volumes to the pipeline that might otherwise enter the Orlando market area by truck from Tampa or by marine vessel into Cape Canaveral. We believe it is unlikely that a new pipeline system comparable in size and scope to the Central Florida Pipeline system will be constructed, due to the high cost of pipeline construction, tariff regulation and environmental and right-of-way permitting in Florida. However, the possibility of such a pipeline or a smaller capacity pipeline being built is a continuing competitive factor.
 
With respect to the terminal operations at Tampa, the most significant competitors are proprietary terminals owned and operated by major oil companies, such as Marathon Petroleum, BP and Citgo, located along the Port of Tampa, and the Chevron and Motiva terminals in Port Tampa. These terminals generally support the storage requirements of their parent or affiliated companies’ refining and marketing operations and provide a mechanism for an oil company to enter into exchange contracts with third parties to serve its storage needs in markets where the oil company may not have terminal assets.
 
Federal regulation of marine vessels, including the requirement under the Jones Act that United States-flagged vessels contain double-hulls, is a significant factor influencing the availability of vessels that transport refined petroleum products. Marine vessel owners are phasing in the requirement based on the age of the vessel and some older vessels are being redeployed into use in other jurisdictions rather than being retrofitted with a double-hull for use in the United States.
 
Cochin Pipeline System
 
The Cochin pipeline system consists of an approximate 1,900-mile, 12-inch diameter multi-product pipeline operating between Fort Saskatchewan, Alberta and Windsor, Ontario, including five terminals.
 
The pipeline operates on a batched basis and has an estimated system capacity of approximately 70,000 barrels per day. It includes 31 pump stations spaced at 60-mile intervals and five United States propane terminals. Underground storage is available at Fort Saskatchewan, Alberta and Windsor, Ontario through third parties. In 2007, the pipeline system transported approximately 40,600 barrels per day of natural gas liquids.
 
Markets.  The pipeline traverses three provinces in Canada and seven states in the United States and has historically transported high vapor pressure ethane, propane, butane and natural gas liquids to the Midwestern United States and eastern Canadian petrochemical and fuel markets. Current operations involve only the transportation of propane on Cochin.
 
Supply. Injection into the system can occur from BP, Provident, Keyera or Dow facilities, with connections at Fort Saskatchewan, Alberta and from Spectra at interconnects at Regina and Richardson, Saskatchewan.
 
Competition.  The pipeline competes with railcars and Enbridge Energy Partners for natural gas liquids long-haul business from Fort Saskatchewan, Alberta and Windsor, Ontario. The pipeline’s primary competition in the Chicago natural gas
 

 
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Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


liquids market comes from the combination of the Alliance pipeline system, which brings unprocessed gas into the United States from Canada, and from Aux Sable, which processes and markets the natural gas liquids in the Chicago market.
 
Cypress Pipeline
 
Kinder Morgan Energy Partners’ Cypress pipeline is an interstate common carrier natural gas liquids pipeline originating at storage facilities in Mont Belvieu, Texas and extending 104 miles east to a major petrochemical producer in the Lake Charles, Louisiana area. Mont Belvieu, located approximately 20 miles east of Houston, is the largest hub for natural gas liquids gathering, transportation, fractionation and storage in the United States.
 
Markets.  The pipeline was built to service Westlake Petrochemicals Corporation in the Lake Charles, Louisiana area under a 20-year ship-or-pay agreement that expires in 2011. The contract requires a minimum volume of 30,000 barrels per day.
 
Supply.  The Cypress pipeline originates in Mont Belvieu where it is able to receive ethane and ethane/propane mix from local storage facilities. Mont Belvieu has facilities to fractionate natural gas liquids received from several pipelines into ethane and other components. Additionally, pipeline systems that transport natural gas liquids from major producing areas in Texas, New Mexico, Louisiana, Oklahoma and the Mid-Continent region supply ethane and ethane/propane mix to Mont Belvieu.
 
Competition.  The pipeline’s primary competition into the Lake Charles market comes from Louisiana onshore and offshore natural gas liquids.
 
Southeast Terminals
 
Kinder Morgan Energy Partners’ Southeast terminal operations consist of Kinder Morgan Southeast Terminals LLC and its consolidated affiliate, Guilford County Terminal Company, LLC. Kinder Morgan Southeast Terminals LLC, Kinder Morgan Energy Partners’ wholly owned subsidiary referred to in this report as KMST, was formed for the purpose of acquiring and operating high-quality liquid petroleum products terminals located primarily along the Plantation/Colonial pipeline corridor in the southeastern United States.
 
The Southeast terminal operations consist of 24 petroleum products terminals with a total storage capacity of approximately 8.0 million barrels. These terminals transferred approximately 361,000 barrels of refined products per day during 2007 and approximately 347,000 barrels of refined products per day during 2006.
 
Markets.  KMST’s acquisition and marketing activities are focused on the southeastern United States from Mississippi through Virginia, including Tennessee. The primary function involves the receipt of petroleum products from common carrier pipelines, short-term storage in terminal tankage, and subsequent loading onto tank trucks. KMST also offered ethanol blending and storage services in northern Virginia during 2007. Longer term storage is available at many of the terminals. KMST has a physical presence in markets representing almost 80% of the pipeline-supplied demand in the Southeast and offers a competitive alternative to marketers seeking a relationship with a truly independent truck terminal service provider.
 
Supply.  Product supply is predominately from Plantation and/or Colonial pipelines. To the maximum extent practicable, we endeavor to connect KMST terminals to both Plantation and Colonial.
 
Competition.  There are relatively few independent terminal operators in the Southeast. Most of the refined petroleum products terminals in this region are owned by large oil companies (BP, Motiva, Citgo, Marathon, and Chevron) who use these assets to support their own proprietary market demands as well as product exchange activity. These oil companies are not generally seeking third-party throughput customers. Magellan Midstream Partners and TransMontaigne Product Services represent the other significant independent terminal operators in this region.
 
Transmix Operations
 
Kinder Morgan Energy Partners’ Transmix operations include the processing of petroleum pipeline transmix, a blend of dissimilar refined petroleum products that have become co-mingled in the pipeline transportation process. During pipeline transportation, different products are transported through the pipelines abutting each other, and generate a volume of different mixed products called transmix. At transmix processing facilities, pipeline transmix is processed and separated into pipeline-quality gasoline and light distillate products. Kinder Morgan Energy Partners processes transmix at six separate processing facilities located in Colton, California; Richmond, Virginia; Dorsey Junction, Maryland; Indianola, Pennsylvania; Wood River, Illinois; and Greensboro, North Carolina. Combined, its transmix facilities processed approximately 10.4 million barrels of transmix in 2007 and approximately 9.1 million barrels in 2006.
 
In 2007, Kinder Morgan Energy Partners increased the processing capacity of the recently constructed Greensboro, North Carolina transmix facility to better serve the needs of Plantation. The facility, which is located within KMST’s refined
 

 
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Items 1. and 2.   Business and Properties. (continued)
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products tank farm now has the capability to process approximately 8,500 barrels of transmix per day. In addition to providing additional processing business, the facility continues to provide Plantation a lower cost alternative compared to other transmix processing arrangements that recover ultra low sulfur diesel, and also more fully utilizes current KMST tankage at the Greensboro, North Carolina tank farm.
 
Markets.  The Gulf and East Coast refined petroleum products distribution system, particularly the Mid-Atlantic region, is the target market for Kinder Morgan Energy Partners’ East Coast transmix processing operations. The Mid-Continent area and the New York Harbor are the target markets for Kinder Morgan Energy Partners’ Illinois and Pennsylvania assets, respectively. Kinder Morgan Energy Partners’ West Coast transmix processing operations support the markets served by its Pacific operations in Southern California.
 
Supply.  Transmix generated by Plantation, Colonial, Explorer, Sun, Teppco and Kinder Morgan Energy Partners’ Pacific operations provide the vast majority of the supply. These suppliers are committed to the use of Kinder Morgan Energy Partners’ transmix facilities under long-term contracts. Individual shippers and terminal operators provide additional supply. Shell acquires transmix for processing at Indianola, Richmond and Wood River; Colton is supplied by pipeline shippers of Kinder Morgan Energy Partners’ Pacific operations; Dorsey Junction is supplied by Colonial Pipeline Company and Greensboro is supplied by Plantation.
 
Competition.  Placid Refining is Kinder Morgan Energy Partners’ main competitor for transmix business in the Gulf Coast area. There are various processors in the Mid-Continent area, primarily ConocoPhillips, Gladieux Refining and Williams Energy Services, who compete with Kinder Morgan Energy Partners’ transmix facilities. Motiva Enterprises’ transmix facility located near Linden, New Jersey is the principal competition for New York Harbor transmix supply and for the Indianola facility. A number of smaller organizations operate transmix processing facilities in the West and Southwest. These operations compete for supply that we envision as the basis for growth in the West and Southwest. The Colton processing facility also competes with major oil company refineries in California.
 
Natural Gas Pipelines – KMP
 
The Natural Gas Pipelines – KMP segment, which contains both interstate and intrastate pipelines, consists of natural gas sales, transportation, storage, gathering, processing and treating. Within this segment, Kinder Morgan Energy Partners owns approximately 14,700 miles of natural gas pipelines and associated storage and supply lines that are strategically located within the North American pipeline grid. The transportation network provides access to the major gas supply areas in the western United States, Texas and the Midwest, as well as major consumer markets.
 
Texas Intrastate Natural Gas Pipeline Group
 
The group, which operates primarily along the Texas Gulf Coast, consists of the following four natural gas pipeline systems:
 
 
·
Kinder Morgan Texas Pipeline;
 
 
·
Kinder Morgan Tejas Pipeline;
 
 
·
Mier-Monterrey Mexico Pipeline; and
 
 
·
Kinder Morgan North Texas Pipeline.
 
The two largest systems in the group are Kinder Morgan Texas Pipeline and Kinder Morgan Tejas Pipeline. These pipelines essentially operate as a single pipeline system, providing customers and suppliers with improved flexibility and reliability. The combined system includes approximately 6,000 miles of intrastate natural gas pipelines with a peak transport and sales capacity of approximately 5.2 billion cubic feet per day of natural gas and approximately 120 billion cubic feet of system natural gas storage capacity. In addition, the combined system, through owned assets and contractual arrangements with third parties, has the capability to process 915 million cubic feet per day of natural gas for liquids extraction and to treat approximately 250 million cubic feet per day of natural gas for carbon dioxide removal.
 
Collectively, the combined system primarily serves the Texas Gulf Coast by selling, transporting, processing and treating gas from multiple onshore and offshore supply sources to serve the Houston/Beaumont/Port Arthur industrial markets, local gas distribution utilities, electric utilities and merchant power generation markets. It serves as a buyer and seller of natural gas, as well as a transporter. The purchases and sales of natural gas are primarily priced with reference to market prices in the consuming region of its system. The difference between the purchase and sale prices is the rough equivalent of a transportation fee, inclusive of fuel costs.
 
Included in the operations of the Kinder Morgan Tejas system is the Kinder Morgan Border Pipeline system. Kinder Morgan Border owns and operates an approximately 97-mile, 24-inch diameter pipeline that extends from a point of interconnection
 

 
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Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


with the pipeline facilities of Pemex Gas Y Petroquimica Basica at the International Border between the United States and Mexico, to a point of interconnection with other intrastate pipeline facilities of Kinder Morgan Tejas located at King Ranch, Kleburg County, Texas. The 97-mile pipeline, referred to as the import/export facility, is capable of importing Mexican gas into the United States, and exporting domestic gas to Mexico. The imported Mexican gas is received from, and the exported domestic gas is delivered to, Pemex. The capacity of the import/export facility is approximately 300 million cubic feet of natural gas per day.
 
The Mier-Monterrey Pipeline consists of a 95-mile, 30-inch diameter natural gas pipeline that stretches from South Texas to Monterrey, Mexico and can transport up to 375 million cubic feet per day. The pipeline connects to a 1,000-megawatt power plant complex and to the PEMEX natural gas transportation system. Kinder Morgan Energy Partners has entered into a long-term contract (expiring in 2018) with Pemex, which has subscribed for all of the pipeline’s capacity.
 
The Kinder Morgan North Texas Pipeline consists of an 86-mile, 30-inch diameter pipeline that transports natural gas from an interconnect with the facilities of NGPL in Lamar County, Texas to a 1,750-megawatt electric generating facility located in Forney, Texas, 15 miles east of Dallas, Texas. It has the capacity to transport 325 million cubic feet per day of natural gas and is fully subscribed under a contract that expires in 2032. In 2006, the existing system was enhanced to be bi-directional, so that deliveries of additional supply coming out of the Barnett Shale area can be delivered into NGPL’s pipeline as well as power plants in the area.
 
Kinder Morgan Energy Partners also owns and operates various gathering systems in South and East Texas. These systems aggregate natural gas supplies into Kinder Morgan Energy Partners’ main transmission pipelines, and in certain cases, aggregate natural gas that must be processed or treated at its own or third-party facilities. Kinder Morgan Energy Partners owns plants that can process up to 115 million cubic feet per day of natural gas for liquids extraction. In addition, Kinder Morgan Energy Partners has contractual rights to process approximately 800 million cubic feet per day of natural gas at various third-party owned facilities. Kinder Morgan Energy Partners also owns and operates three natural gas treating plants that provide carbon dioxide and/or hydrogen sulfide removal. Kinder Morgan Energy Partners can treat up to 155 million cubic feet per day of natural gas for carbon dioxide removal at the Fandango Complex in Zapata County, Texas, 50 million cubic feet per day of natural gas at the Indian Rock Plant in Upshur County, Texas and approximately 45 million cubic feet per day of natural gas at the Thompsonville Facility located in Jim Hogg County, Texas.
 
The North Dayton natural gas storage facility, located in Liberty County, Texas, has two existing storage caverns providing approximately 6.3 billion cubic feet of total capacity, consisting of 4.2 billion cubic feet of working capacity and 2.1 billion cubic feet of cushion gas. Kinder Morgan Energy Partners entered into a long-term storage capacity and transportation agreement with NRG covering two billion cubic feet of natural gas working capacity that expires in March 2017. In June 2006, Kinder Morgan Energy Partners announced an expansion project that will significantly increase natural gas storage capacity at the North Dayton facility. The project is now expected to cost between $105 million and $115 million and involves the development of a new underground storage cavern that will add an estimated 6.5 billion cubic feet of incremental working natural gas storage capacity. The additional capacity is expected to be available in mid-2010.
 
Kinder Morgan Energy Partners also owns the West Clear Lake natural gas storage facility located in Harris County, Texas. Under a long term contract that expires in 2012, Coral Energy Resources, L.P. operates the facility and controls the 96 billion cubic feet of natural gas working capacity, and Kinder Morgan Energy Partners provides transportation service into and out of the facility.
 
Additionally, Kinder Morgan Energy Partners leases a salt dome storage facility located near Markham, Texas, according to the provisions of an operating lease that expires in March 2013. Kinder Morgan Energy Partners can, at its sole option, extend the term of this lease for two additional ten-year periods. The facility was expanded in 2007 and now consists of four salt dome caverns with approximately 17.3 billion cubic feet of working natural gas capacity and up to 1.1 billion cubic feet per day of peak deliverability. Kinder Morgan Energy Partners also leases two salt dome caverns, known as the Stratton Ridge Facilities, from BP America Production Company in Brazoria County, Texas. The Stratton Ridge Facilities have a combined working natural gas capacity of 1.4 billion cubic feet and a peak day deliverability of 100 million cubic feet per day. A lease with Dow Hydrocarbon & Resources, Inc. for a salt dome cavern containing approximately 5.0 billion cubic feet of working capacity expired during the third quarter of 2007.
 
Markets. Texas’ natural gas consumption is among the highest of any state. The natural gas demand profile in Kinder Morgan Energy Partners’ Texas intrastate pipeline group’s market area is primarily composed of industrial (including on-site cogeneration facilities), merchant and utility power and local natural gas distribution consumption. The industrial demand is primarily year-round load. Merchant and utility power demand peaks in the summer months and is complemented by local natural gas distribution demand that peaks in the winter months. As new merchant gas fired generation has come online and displaced traditional utility generation, Kinder Morgan Energy Partners has successfully attached many of these new generation facilities to its pipeline systems in order to maintain and grow its share of natural gas supply for power generation.
 

 
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Additionally, in 2007, Kinder Morgan Energy Partners has increased its capability and commitment to serve the growing local natural gas distribution market in the greater Houston metropolitan area.
 
Kinder Morgan Energy Partners serves the Mexico market through interconnection with the facilities of Pemex at the United States-Mexico border near Arguellas, Mexico and Kinder Morgan Energy Partners’ Meir-Monterrey Mexico pipeline. In 2007, deliveries through the existing interconnection near Arguellas fluctuated from zero to approximately 206 million cubic feet per day of natural gas, and there were several days of exports to the United States that ranged up to 250 million cubic feet per day. Deliveries to Monterrey also ranged from zero to 312 million cubic feet per day. Kinder Morgan Energy Partners primarily provides transport service to these markets on a fee for service basis, including a significant demand component, which is paid regardless of actual throughput. Revenues earned from Kinder Morgan Energy Partners’ activities in Mexico are paid in U.S. dollar equivalent.
 
Supply.  Kinder Morgan Energy Partners purchases its natural gas directly from producers attached to its system in South Texas, East Texas, West Texas and along the Texas Gulf Coast. In addition, Kinder Morgan Energy Partners also purchases gas at interconnects with third-party interstate and intrastate pipelines. While the intrastate group does not produce gas, it does maintain an active well connection program in order to offset natural declines in production along its system and to secure supplies for additional demand in its market area. The intrastate system has access to both onshore and offshore sources of supply, and is well positioned to interconnect with liquefied natural gas projects currently under development by others along the Texas Gulf Coast.
 
Competition. The Texas intrastate natural gas market is highly competitive, with many markets connected to multiple pipeline companies. Kinder Morgan Energy Partners competes with interstate and intrastate pipelines, and their shippers, for attachments to new markets and supplies and for transportation, processing and treating services.
 
Rocky Mountain Natural Gas Pipeline Group
 
The group, which operates primarily along the Rocky Mountain region of the western portion of the United States, consists of the following four natural gas pipeline systems:
 
 
·
Kinder Morgan Interstate Gas Transmission Pipeline;
 
 
·
Trailblazer Pipeline;
 
 
·
Trans-Colorado Pipeline; and
 
 
·
51% ownership interest in the Rockies Express Pipeline.
 
Kinder Morgan Interstate Gas Transmission LLC
 
Kinder Morgan Interstate Gas Transmission LLC, referred to in this report as KMIGT, owns approximately 5,100 miles of transmission lines in Wyoming, Colorado, Kansas, Missouri and Nebraska. The pipeline system is powered by 28 transmission and storage compressor stations with approximately 160,000 horsepower. KMIGT also owns the Huntsman natural gas storage facility, located in Cheyenne County, Nebraska, which has approximately 10 billion cubic feet of firm capacity commitments and provides for withdrawal of up to 169 million cubic feet of natural gas per day.
 
Under transportation agreements and FERC tariff provisions, KMIGT offers its customers firm and interruptible transportation and storage services, including no-notice service and park and loan services. For these services, KMIGT charges rates that include the retention of fuel and gas lost and unaccounted for in-kind. Under KMIGT’s tariffs, firm transportation and storage customers pay reservation charges each month plus a commodity charge based on the actual transported or stored volumes. In contrast, interruptible transportation and storage customers pay a commodity charge based upon actual transported and/or stored volumes. Under the no-notice service, customers pay a fee for the right to use a combination of firm storage and firm transportation to effect deliveries of natural gas up to a specified volume without making specific nominations. KMIGT also has the authority to make gas purchases and sales, as needed for system operations, pursuant to its currently effective FERC gas tariff.
 
KMIGT also offers its Cheyenne Market Center service, which provides nominated storage and transportation service between its Huntsman storage field and multiple interconnecting pipelines at the Cheyenne Hub, located in Weld County, Colorado. This service is fully subscribed through May 2014.
 
Markets. Markets served by KMIGT provide a stable customer base with expansion opportunities due to the system’s access to growing Rocky Mountain supply sources. Markets served by KMIGT are comprised mainly of local natural gas distribution companies and interconnecting interstate pipelines in the Mid-Continent area. End-users of the local natural gas distribution companies typically include residential, commercial, industrial and agricultural customers. The pipelines
 

 
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Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


interconnecting with KMIGT in turn deliver gas into multiple markets including some of the largest population centers in the Midwest. Natural gas demand to power pumps for crop irrigation during the summer from time-to-time exceeds heating season demand and provides KMIGT relatively consistent volumes throughout the year. In addition, KMIGT has seen a significant increase in demand from ethanol producers, and is actively seeking ways to meet the demands from the ethanol producing community.
 
Supply.  Approximately 7%, by volume, of KMIGT’s firm contracts expire within one year and 51% expire within one to five years. Over 99% of the system’s total firm transport capacity is currently subscribed with 78% of the total contracted capacity held by KMIGT’s top nine shippers.
 
Competition.  KMIGT competes with other interstate and intrastate gas pipelines transporting gas from the supply sources in the Rocky Mountain and Hugoton Basins to Mid-Continent pipelines and market centers.
 
Trailblazer Pipeline Company LLC
 
Trailblazer Pipeline Company LLC owns a 436-mile natural gas pipeline system. Trailblazer’s pipeline originates at an interconnection with Wyoming Interstate Company Ltd.’s pipeline system near Rockport, Colorado and runs through southeastern Wyoming to a terminus near Beatrice, Nebraska where it interconnects with NGPL’s and Northern Natural Gas Company’s pipeline systems. NGPL manages, maintains and operates Trailblazer, for which it is reimbursed at cost.
 
Trailblazer provides transportation services to third-party natural gas producers, marketers, local distribution companies and other shippers. Pursuant to transportation agreements and FERC tariff provisions, Trailblazer offers its customers firm and interruptible transportation. Under Trailblazer’s tariffs, firm transportation customers pay reservation charges each month plus a commodity charge based on actual volumes transported. Interruptible transportation customers pay a commodity charge based upon actual volumes transported.
 
Markets.  Significant growth in Rocky Mountain natural gas supplies has prompted a need for additional pipeline transportation service. Trailblazer has a certificated capacity of 846 million cubic feet per day of natural gas.
 
Supply.  As of December 31, 2007, none of Trailblazer’s firm contracts, by volume, expire before one year and 54%, by volume, expire within two to five years. Affiliated entities have contracted for less than 1% of the total firm transportation capacity. All of the system’s firm transport capacity is currently subscribed.
 
Competition.  The main competition that Trailblazer currently faces is from the gas supply in the Rocky Mountain area that either stays in the area or is moved west and therefore is not transported on Trailblazer’s pipeline. In addition, El Paso’s Cheyenne Plains Pipeline can transport approximately 730 million cubic feet per day of natural gas from Weld County, Colorado to Greensburg, Kansas and competes with Trailblazer for natural gas pipeline transportation demand from the Rocky Mountain area. Additional competition could come from the Rockies Express pipeline system or from proposed pipeline projects. No assurance can be given that additional competing pipelines will not be developed in the future.
 
TransColorado Gas Transmission Company LLC
 
TransColorado Gas Transmission Company LLC owns a 300-mile interstate natural gas pipeline that extends from approximately 20 miles southwest of Meeker, Colorado to Bloomfield, New Mexico. It has multiple points of interconnection with various interstate and intrastate pipelines, gathering systems, and local distribution companies. The pipeline system is powered by six compressor stations having an aggregate of approximately 39,000 horsepower. Knight Inc. manages, maintains and operates TransColorado, for which it is reimbursed at cost.
 
TransColorado has the ability to flow gas south or north. TransColorado receives gas from one coal seam natural gas treating plant located in the San Juan Basin of Colorado and from pipeline, processing plant and gathering system interconnections within the Paradox and Piceance Basins of western Colorado. Gas flowing south through the pipeline moves onto the El Paso, Transwestern and Questar Southern Trail pipeline systems. Gas moving north flows into the Colorado Interstate, Wyoming Interstate and Questar pipeline systems at the Greasewood Hub and the Rockies Express pipeline system at the Meeker Hub. TransColorado provides transportation services to third-party natural gas producers, marketers, gathering companies, local distribution companies and other shippers.
 
Pursuant to transportation agreements and FERC tariff provisions, TransColorado offers its customers firm and interruptible transportation and interruptible park and loan services. For these services, TransColorado charges rates that include the retention of fuel and gas lost and unaccounted for in-kind. Under TransColorado’s tariffs, firm transportation customers pay reservation charges each month plus a commodity charge based on actual volumes transported. Interruptible transportation customers pay a commodity charge based upon actual volumes transported. The underlying reservation and commodity charges are assessed pursuant to a maximum recourse rate structure, which does not vary based on the distance gas is
 

 
23

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


transported. TransColorado has the authority to negotiate rates with customers if it has first offered service to those customers under its reservation and commodity charge rate structure.
 
TransColorado’s approximately $50 million Blanco-Meeker Expansion Project was completed in the fourth quarter of 2007 and placed into service on January 1, 2008. The project boosted capacity on the pipeline by approximately 250 million cubic feet per day of natural gas from the Blanco Hub area in San Juan County, New Mexico through TransColorado’s existing pipeline for deliveries to the Rockies Express pipeline system at an existing point of interconnection located at the Meeker Hub in Rio Blanco County, Colorado. All of the incremental capacity is subscribed under a long-term contract with ConocoPhillips.
 
Markets.  TransColorado acts principally as a feeder pipeline system from the developing natural gas supply basins on the Western Slope of Colorado into the interstate natural gas pipelines that lead away from the Blanco Hub area of New Mexico and the interstate natural gas pipelines that lead away eastward from northwestern Colorado and southwestern Wyoming. TransColorado is one of the largest transporters of natural gas from the Western Slope supply basins of Colorado and provides a competitively attractive outlet for that developing natural gas resource. In 2007, TransColorado transported an average of approximately 734 million cubic feet per day of natural gas from these supply basins.
 
Supply.  During 2007, 94% of TransColorado’s transport business was with producers or their own marketing affiliates and 6% was with marketing companies and various gas marketers. Approximately 64% of TransColorado’s transport business in 2007 was conducted with its two largest customers. All of TransColorado’s southbound pipeline capacity is committed under firm transportation contracts that extend through year-end 2008. TransColorado’s pipeline capacity is 62% subscribed during 2009 through 2012 and TransColorado is actively pursuing contract extensions and or replacement contracts to increase firm subscription levels beyond 2008.
 
Competition.  TransColorado competes with other transporters of natural gas in each of the natural gas supply basins it serves. These competitors include both interstate and intrastate natural gas pipelines and natural gas gathering systems. TransColorado’s shippers compete for market share with shippers drawing upon gas production facilities within the New Mexico portion of the San Juan Basin. TransColorado has phased its past construction and expansion efforts to coincide with the ability of the interstate pipeline grid at Blanco, New Mexico to accommodate greater natural gas volumes. TransColorado’s transport concurrently ramped up over that period such that TransColorado now enjoys a growing share of the outlet from the San Juan Basin to the southwestern United States marketplace.
 
Historically, the competition faced by TransColorado with respect to its natural gas transportation services has generally been based upon the price differential between the San Juan and Rocky Mountain basins. New pipelines servicing these producing basins have had the effect of reducing that price differential; however, given the growth in the Piceance and Paradox basins and the direct accessibility of the TransColorado system to these basins, we believe TransColorado’s transport business to be sustainable.
 
Rockies Express Pipeline
 
Kinder Morgan Energy Partners operates and currently owns 51% of the 1,679-mile Rockies Express pipeline system, which when fully completed will be one of the largest natural gas pipelines ever constructed in North America. The approximately $4.9 billion project will have the capability to transport 1.8 billion cubic feet per day of natural gas, and binding firm commitments have been secured for all of the pipeline capacity.
 
Kinder Morgan Energy Partners’ ownership is through its 51% interest in West2East Pipeline LLC, the sole owner of Rockies Express Pipeline LLC. Sempra Pipelines & Storage, a unit of Sempra Energy, and ConocoPhillips hold the remaining ownership interests in the Rockies Express project. Kinder Morgan Energy Partners accounts for its investment under the equity method of accounting due to the fact that its ownership interest will be reduced to 50% when construction of the entire project is completed. At that time, the capital accounts of West2East Pipeline LLC will be trued up to reflect Kinder Morgan Energy Partners’ 50% economic interest in the project. We do not anticipate any additional changes in the ownership structure of the project.
 
On August 9, 2005, the FERC approved Rockies Express Pipeline LLC’s application to construct 327 miles of pipeline facilities in two phases. Phase I consisted of the following two pipeline segments: (i) a 136-mile, 36-inch diameter pipeline that extends from the Meeker Hub in Rio Blanco County, Colorado to the Wamsutter Hub in Sweetwater County, Wyoming; and (ii) a 191-mile, 42-inch diameter pipeline that extends from the Wamsutter Hub to the Cheyenne Hub in Weld County, Colorado. Phase II of the project includes the construction of three compressor stations referred to as the Meeker, Big Hole and Wamsutter compressor stations. The Meeker and Wamsutter stations were completed and placed in-service in January 2008. Construction of the Big Hole compressor station is planned to commence in the second quarter of 2008, in order to meet an expected in-service date of June 30, 2009.
 

 
24

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


On April 19, 2007, the FERC issued a final order approving Rockies Express Pipeline LLC’s application for authorization to construct and operate certain facilities comprising its proposed Rockies Express-West Project. This project is the first planned segment extension of the Rockies Express Pipeline LLC’s original certificated facilities, and is comprised of approximately 713 miles of 42-inch diameter pipeline extending eastward from the Cheyenne Hub to an interconnection with Panhandle Eastern Pipe Line located in Audrain County, Missouri. The segment extension transports approximately 1.5 billion cubic feet per day of natural gas across the following five states: Wyoming, Colorado, Nebraska, Kansas and Missouri, and includes certain improvements to pre-existing Rockies Express facilities located to the west of the Cheyenne Hub. Construction of the Rockies Express-West Project commenced on May 21, 2007, and interim firm transportation service with capacity of approximately 1.4 billion cubic feet per day began January 12, 2008. The entire project (Rockies Express-West pipeline segment) is expected to become fully operational in mid-April 2008.
 
On April 30, 2007, Rockies Express Pipeline LLC filed an application with the FERC requesting approval to construct and operate the REX-East Project, the third segment of the Rockies Express pipeline system. The Rockies Express-East Project will be comprised of approximately 639 miles of 42-inch diameter pipeline commencing from the terminus of the Rockies Express-West pipeline in Audrain County, Missouri to a terminus near the town of Clarington in Monroe County, Ohio. The pipeline segment will be capable of transporting approximately 1.8 billion cubic feet per day of natural gas. The FERC issued a draft environmental report in late November 2007 for the Rockies Express-East project, and subject to receipt of regulatory approvals, the Rockies Express-East Project is expected to begin partial service on December 31, 2008, and to be in full service in June 2009.
 
In December 2007, Rockies Express Pipeline LLC completed a non-binding open season undertaken to solicit market interest for the “Northeast Express Project,” a 375-mile extension and expansion of the Rockies Express pipeline system from Clarington, Ohio, to Princeton, New Jersey. Significant expressions of interest were received on the Northeast Express Project and negotiations with prospective shippers to enter into binding commitments are currently underway. Subject to receipt of sufficient binding commitments and regulatory approvals, the Northeast Express Project would go into service in late 2010. When complete, the Northeast Express Project would provide up to 1.8 billion cubic feet per day of transportation capacity to northeastern markets from the Lebanon Hub and other pipeline receipt points between Lebanon, Ohio and Clarington, Ohio.
 
Markets.  The Rockies Express Pipeline is capable of delivering gas to multiple markets along its pipeline system, primarily through interconnects with other interstate pipeline companies and direct connects to local distribution companies. Rockies Express Pipeline’s Zone 1 encompasses receipts and deliveries of natural gas west of the Cheyenne Hub, located in northern Colorado near Cheyenne, Wyoming. Through the Zone 1 facilities, Rockies Express Pipeline can deliver gas to TransColorado Gas Transmission Company LLC in northwestern Colorado, which can in turn transport the gas further south for delivery into the San Juan Basin area. In Zone 1, Rockies Express Pipeline can also deliver gas into western Wyoming through leased capacity on the Overthrust Pipeline Company system, or through its interconnections with Colorado Interstate Gas Company and Wyoming Interstate Company in southern Wyoming. The Rockies Express-West Project has the ability to deliver natural gas to points at the Cheyenne Hub, which could be used in markets along the Front Range of Colorado, or could be transported further east through either Rockies Express Pipeline’s Zone 2 facilities or other pipeline systems.
 
Rockies Express Pipeline’s Zone 2 extends from the Cheyenne Hub to an interconnect with the Panhandle Eastern Pipeline in Audrain County, Missouri. Through the Zone 2 facilities, Rockies Express Pipeline facilitates the delivery of natural gas into the Mid-Continent area of the Unites States through various interconnects with other major interstate pipelines in Nebraska (Northern Natural Gas Pipeline and NGPL), Kansas (ANR Pipeline), and Missouri (Panhandle Eastern Pipeline). Rockies Express Pipeline’s transportation capacity under interim service is currently 1.4 billion cubic feet per day, and when this system is placed into full service it will be capable of delivering 1.5 billion cubic feet per day through these interconnects to the Mid-Continent market.
 
Supply.  Rockies Express Pipeline directly accesses major gas supply basins in western Colorado and western Wyoming. In western Colorado, Rockies Express Pipeline has access to gas supply from the Uinta and Piceance basins in eastern Utah and western Colorado. In western Wyoming, Rockies Express Pipeline accesses the Green River Basin through its facilities that are leased from Overthrust Pipeline Company. With its connections to numerous other pipeline systems along its route, Rockies Express Pipeline has access to almost all of the major gas supply basins in Wyoming, Colorado and eastern Utah.
 
Competition.  Although there are some competitors to the Rockies Express Pipeline system that provide a similar service, there are none that can compete with the economy-of-scale that Rockies Express Pipeline provides to its shippers to transport gas from the Rocky Mountain region to the Mid-Continent markets. The REX-East Project, noted above, will put the Rockies Express Pipeline system in a very unique position of being the only pipeline capable of offering a large volume of transportation service from Rocky Mountain gas supply directly to customers in Ohio.
 
Rockies Express Pipeline could also experience competition for its Rocky Mountain gas supply from both existing and proposed systems. Questar Pipeline Company accesses many of the same basins as Rockies Express Pipeline and transports
 

 
25

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


gas to its markets in Utah and to other interconnects, which have access to the California market. In addition, there are pipelines that are proposed to use Rocky Mountain gas to supply markets on the West Coast.
 
Kinder Morgan Louisiana Pipeline
 
In September 2006, Kinder Morgan Energy Partners filed an application with the FERC requesting approval to construct and operate the Kinder Morgan Louisiana Pipeline. The natural gas pipeline project is expected to cost approximately $510 million and will provide approximately 3.2 billion cubic feet per day of take-away natural gas capacity from the Cheniere Sabine Pass liquefied natural gas terminal located in Cameron Parish, Louisiana. The project is supported by fully subscribed capacity and long-term customer commitments with Chevron and Total.
 
The Kinder Morgan Louisiana Pipeline will consist of two segments:
 
 
·
a 132-mile, 42-inch diameter pipeline with firm capacity of approximately 2.0 billion cubic feet per day of natural gas that will extend from the Sabine Pass terminal to a point of interconnection with an existing Columbia Gulf Transmission line in Evangeline Parish, Louisiana (an offshoot will consist of approximately 2.3 miles of 24-inch diameter pipeline with firm peak day capacity of approximately 300 million cubic feet per day extending away from the 42-inch diameter line to the existing Florida Gas Transmission Company compressor station in Acadia Parish, Louisiana). This segment is expected to be in service by January 1, 2009; and
 
 
·
a 1-mile, 36-inch diameter pipeline with firm capacity of approximately 1.2 billion cubic feet per day that will extend from the Sabine Pass terminal and connect to NGPL’s natural gas pipeline. This portion of the project is expected to be in service in the third quarter of 2008.
 
Kinder Morgan Energy Partners has designed and will construct the Kinder Morgan Louisiana Pipeline in a manner that will minimize environmental impacts, and where possible, existing pipeline corridors will be used to minimize impacts to communities and to the environment. As of December 31, 2007, there were no major pipeline re-routes as a result of any landowner requests.
 
Midcontinent Express Pipeline LLC
 
On October 9, 2007, Midcontinent Express Pipeline LLC filed an application with the FERC requesting a certificate of public convenience and necessity that would authorize construction and operation of the approximate 500-mile Midcontinent Express Pipeline natural gas transmission system. Kinder Morgan Energy Partners currently owns a 50% interest in Midcontinent Express Pipeline LLC and accounts for its investment under the equity method of accounting. Energy Transfer Partners, L.P. owns the remaining 50% interest. The Midcontinent Express Pipeline will create long-haul, firm natural gas transportation takeaway capacity, either directly or indirectly, from natural gas producing regions located in Texas, Oklahoma and Arkansas. The total project is expected to cost approximately $1.3 billion, and will have an initial transportation capacity of approximately 1.4 billion cubic feet per day of natural gas.
 
For additional information regarding the Midcontinent Express Pipeline, see (A) General Development of Business—Recent Developments.
 
Casper and Douglas Natural Gas Processing Systems
 
Kinder Morgan Energy Partners owns and operates the Casper and Douglas, Wyoming natural gas processing plants, which have the capacity to process up to 185 million cubic feet per day of natural gas depending on raw gas quality.
 
Markets.  Casper and Douglas are processing plants servicing gas streams flowing into KMIGT. Natural gas liquids processed by the Casper plant are sold into local markets consisting primarily of retail propane dealers and oil refiners. Natural gas liquids processed by the Douglas plant are sold to ConocoPhillips via their Powder River natural gas liquids pipeline for either ultimate consumption at the Borger refinery or for further disposition to the natural gas liquids trading hubs located in Conway, Kansas and Mont Belvieu, Texas.
 
Competition. Other regional facilities in the Greater Powder River Basin include the Hilight plant (80 million cubic feet per day) owned and operated by Anadarko, the Sage Creek plant (50 million cubic feet per day) owned and operated by Merit Energy, and the Rawlins plant (230 million cubic feet per day) owned and operated by El Paso. Casper and Douglas, however, are the only plants which provide straddle processing of natural gas flowing into KMIGT.
 
Red Cedar Gathering Company
 
Kinder Morgan Energy Partners owns a 49% equity interest in the Red Cedar Gathering Company, a joint venture organized in August 1994 and referred to in this report as Red Cedar. The remaining 51% interest in Red Cedar is owned by the
 

 
26

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


Southern Ute Indian Tribe. Red Cedar owns and operates natural gas gathering, compression and treating facilities in the Ignacio Blanco Field in La Plata County, Colorado. The Ignacio Blanco Field lies within the Colorado portion of the San Juan Basin, most of which is located within the exterior boundaries of the Southern Ute Indian Tribe Reservation. Red Cedar gathers coal seam and conventional natural gas at wellheads and several central delivery points, for treating, compression and delivery into any one of four major interstate natural gas pipeline systems and an intrastate pipeline.
 
Red Cedar also owns Coyote Gas Treating, LLC, referred to in this report as Coyote Gulch. The sole asset owned by Coyote Gulch is a 250 million cubic feet per day natural gas treating facility located in La Plata County, Colorado. The inlet gas stream treated by Coyote Gulch contains an average carbon dioxide content of between 12% and 13%. The plant treats the gas down to a carbon dioxide concentration of 2% in order to meet interstate natural gas pipeline quality specifications, and then compresses the natural gas into the TransColorado Gas Transmission pipeline for transport to the Blanco, New Mexico-San Juan Basin Hub.
 
Red Cedar’s gas gathering system currently consists of over 1,100 miles of gathering pipeline connecting more than 920 producing wells, 85,000 horsepower of compression at 24 field compressor stations and two carbon dioxide treating plants. The capacity and throughput of the Red Cedar system as currently configured is approximately 750 million cubic feet per day of natural gas.
 
Thunder Creek Gas Services, LLC
 
Kinder Morgan Energy Partners owns a 25% equity interest in Thunder Creek Gas Services, LLC, referred to in this report as Thunder Creek. Devon Energy owns the remaining 75%. Thunder Creek provides gathering, compression and treating services to a number of coal seam gas producers in the Powder River Basin of Wyoming. Throughput volumes include both coal seam and conventional plant residue gas.
 
Thunder Creek’s operations are a combination of mainline and low pressure gathering assets. The mainline assets include 125 miles of mainline pipeline, 230 miles of high and low pressure laterals, 26,635 horsepower of mainline compression and carbon dioxide removal facilities consisting of a 220 million cubic feet per day carbon dioxide treating plant complete with dehydration. The mainline assets receive gas from 53 receipt points and can deliver treated gas to seven delivery points including Colorado Interstate Gas, Wyoming Interstate Gas Company, KMIGT and three power plants. The low pressure gathering assets include five systems consisting of 194 miles of gathering pipeline and 35,329 horsepower of field compression.
 
CO2 – KMP
 
The CO2 – KMP segment consists of Kinder Morgan CO2 Company, L.P. and its consolidated affiliates, referred to in this report as KMCO2. Carbon dioxide is used in enhanced oil recovery projects as a flooding medium for recovering crude oil from mature oil fields. KMCO2’s carbon dioxide pipelines and related assets allow Kinder Morgan Energy Partners to market a complete package of carbon dioxide supply, transportation and technical expertise to the customer. Together, the CO2 –KMP business segment produces, transports and markets carbon dioxide for use in enhanced oil recovery operations. Kinder Morgan Energy Partners also holds ownership interests in several oil-producing fields and owns a 450-mile crude oil pipeline, all located in the Permian Basin region of West Texas.
 
Carbon Dioxide Reserves
 
Kinder Morgan Energy Partners owns approximately 45% of, and operates, the McElmo Dome unit in Colorado, which contains more than nine trillion cubic feet of recoverable carbon dioxide. Deliverability and compression capacity exceeds one billion cubic feet per day. Kinder Morgan Energy partners is currently installing facilities and drilling 8 wells to increase the production capacity from McElmo Dome by approximately 200 million cubic feet per day. Kinder Morgan Energy Partners also owns approximately 11% of the Bravo Dome unit in New Mexico, which contains more than one trillion cubic feet of recoverable carbon dioxide and produces approximately 290 million cubic feet per day.
 
Kinder Morgan Energy Partners also owns approximately 88% of the Doe Canyon Deep unit in Colorado, which contains more than 1.5 trillion cubic feet of carbon dioxide. Kinder Morgan Energy Partners has installed facilities and drilled six wells that began to produce approximately 100 million cubic feet per day of carbon dioxide beginning in January 2008.
 
Markets.  Kinder Morgan Energy Partners’ principal market for carbon dioxide is for injection into mature oil fields in the Permian Basin, where industry demand is expected to grow modestly for the next several years. Kinder Morgan Energy Partners is exploring additional potential markets, including enhanced oil recovery targets in California, Wyoming, the Gulf Coast, Mexico, and Canada, and coal bed methane production in the San Juan Basin of New Mexico.
 
Competition.  Kinder Morgan Energy Partners’ primary competitors for the sale of carbon dioxide include suppliers that have an ownership interest in McElmo Dome, Bravo Dome and Sheep Mountain carbon dioxide reserves, and Petro-Source
 

 
27

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


Carbon Company, which gathers waste carbon dioxide from natural gas production in the Val Verde Basin of West Texas. There is no assurance that new carbon dioxide sources will not be discovered or developed, which could compete with Kinder Morgan Energy Partners or that new methodologies for enhanced oil recovery will not replace carbon dioxide flooding.
 
Carbon Dioxide Pipelines
 
As a result of its 50% ownership interest in Cortez Pipeline Company, Kinder Morgan Energy Partners owns a 50% equity interest in and operates the approximate 500-mile, Cortez pipeline. The pipeline carries carbon dioxide from the McElmo Dome and Doe Canyon source fields near Cortez, Colorado to the Denver City, Texas hub. The Cortez pipeline currently transports over one billion cubic feet of carbon dioxide per day, including approximately 99% of the carbon dioxide transported downstream on the Central Basin pipeline and the Centerline pipeline. The tariffs charged by Cortez Pipeline are not regulated.
 
Kinder Morgan Energy Partners’ Central Basin pipeline consists of approximately 143 miles of pipe and 177 miles of lateral supply lines located in the Permian Basin between Denver City, Texas and McCamey, Texas, with a throughput capacity of 600 million cubic feet per day. At its origination point in Denver City, the Central Basin pipeline interconnects with all three major carbon dioxide supply pipelines from Colorado and New Mexico, namely the Cortez pipeline (operated by KMCO2) and the Bravo and Sheep Mountain pipelines (operated by Oxy Permian). Central Basin’s mainline terminates near McCamey where it interconnects with the Canyon Reef Carriers pipeline and the Pecos pipeline. The tariffs charged by the Central Basin pipeline are not regulated.
 
Kinder Morgan Energy Partners’ Centerline pipeline consists of approximately 113 miles of pipe located in the Permian Basin between Denver City, Texas and Snyder, Texas. The pipeline has a capacity of 300 million cubic feet per day. The tariffs charged by the Centerline pipeline are not regulated.
 
Kinder Morgan Energy Partners owns a 13% undivided interest in the 218-mile Bravo pipeline, which delivers CO2 from the Bravo Dome source field in northeast New Mexico to the Denver City hub and has a capacity of more than 350 million cubic feet per day. Tariffs on the Bravo pipeline are not regulated.
 
In addition, Kinder Morgan Energy Partners owns approximately 98% of the Canyon Reef Carriers pipeline and approximately 69% of the Pecos pipeline. The Canyon Reef Carriers pipeline extends 139 miles from McCamey, Texas, to the SACROC unit. The pipeline has a capacity of approximately 290 million cubic feet per day and makes deliveries to the SACROC, Sharon Ridge, Cogdell and Reinecke units. The Pecos pipeline is a 25-mile pipeline that runs from McCamey to Iraan, Texas. It has a capacity of approximately 120 million cubic feet per day of carbon dioxide and makes deliveries to the Yates unit. The tariffs charged on the Canyon Reef Carriers and Pecos pipelines are not regulated.
 
Markets.  The principal market for transportation on KMCO2’s carbon dioxide pipelines is to customers, including Kinder Morgan Energy Partners, using carbon dioxide for enhanced recovery operations in mature oil fields in the Permian Basin, where industry demand is expected to grow modestly for the next several years.
 
Competition.  Kinder Morgan Energy Partners’ ownership interests in the Central Basin, Cortez and Bravo pipelines are in direct competition with other carbon dioxide pipelines. Kinder Morgan Energy Partners also competes with other interest owners in McElmo Dome and Bravo Dome for transportation of carbon dioxide to the Denver City, Texas market area.
 
Oil Acreage and Wells
 
KMCO2 also holds ownership interests in oil-producing fields, including an approximate 97% working interest in the SACROC unit, an approximate 50% working interest in the Yates unit, a 21% net profits interest in the H.T. Boyd unit, an approximate 65% working interest in the Claytonville unit, an approximate 95% working interest in the Katz CB Long unit, an approximate 64% working interest in the Katz SW River unit, a 100% working interest in the Katz East River unit, and lesser interests in the Sharon Ridge unit, the Reinecke unit and the MidCross unit, all of which are located in the Permian Basin of West Texas.
 
The SACROC unit is one of the largest and oldest oil fields in the United States using carbon dioxide flooding technology. The field is comprised of approximately 56,000 acres located in the Permian Basin in Scurry County, Texas. SACROC was discovered in 1948 and has produced over 1.29 billion barrels of oil since inception. It is estimated that SACROC originally held approximately 2.7 billion barrels of oil. We have expanded the development of the carbon dioxide project initiated by the previous owners and increased production over the last several years. The Yates unit is also one of the largest oil fields ever discovered in the United States. It is estimated that it originally held more than five billion barrels of oil, of which about 29% has been produced. The field, discovered in 1926, is comprised of approximately 26,000 acres located about 90 miles south of Midland, Texas.
 

 
28

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


As of December 2007, the SACROC unit had 391 producing wells, and the purchased carbon dioxide injection rate was 211 million cubic feet per day, down from an average of 247 million cubic feet per day as of December 2006. The average oil production rate for 2007 was approximately 27,600 barrels of oil per day, down from an average of approximately 30,800 barrels of oil per day during 2006. The average natural gas liquids production rate (net of the processing plant share) for 2007 was approximately 6,300 barrels per day, an increase from an average of approximately 5,700 barrels per day during 2006.
 
Kinder Morgan Energy Partners’ plan has been to increase the production rate and ultimate oil recovery from Yates by combining horizontal drilling with carbon dioxide injection to ensure a relatively steady production profile over the next several years. Kinder Morgan Energy Partners is implementing its plan and as of December 2007, the Yates unit was producing about 27,600 barrels of oil per day. As of December 2006, the Yates unit was producing approximately 27,200 barrels of oil per day. Unlike operations at SACROC, where carbon dioxide and water is used to drive oil to the producing wells, Kinder Morgan Energy Partners is using carbon dioxide injection to replace nitrogen injection at Yates in order to enhance the gravity drainage process, as well as to maintain reservoir pressure. The differences in geology and reservoir mechanics between the two fields mean that substantially less capital will be needed to develop the reserves at Yates than is required at SACROC.
 
Kinder Morgan Energy Partners also operates and owns an approximate 65% gross working interest in the Claytonville oil field unit located in Fisher County, Texas. The Claytonville unit is located nearly 30 miles east of the SACROC unit in the Permian Basin of West Texas and is currently producing approximately 230 barrels of oil per day. Kinder Morgan Energy Partners is presently evaluating operating and subsurface technical data from the Claytonville unit to further assess redevelopment opportunities including carbon dioxide flood operations.
 
Kinder Morgan Energy Partners also operates and owns working interests in the Katz CB Long unit, the Katz Southwest River unit and Katz East River unit. The Katz field is located in the Permian Basin area of West Texas and, as of December 2007, was producing approximately 400 barrels of oil equivalent per day. Kinder Morgan Energy Partners is presently evaluating operating and subsurface technical data to further assess redevelopment opportunities for the Katz field including the potential for carbon dioxide flood operations.
 
The following table sets forth productive wells, service wells and drilling wells in the oil and gas fields in which Kinder Morgan Energy Partners owns interests as of December 31, 2007. When used with respect to acres or wells, gross refers to the total acres or wells in which Kinder Morgan Energy Partners has a working interest; net refers to gross acres or wells multiplied, in each case, by the percentage working interest owned by Kinder Morgan Energy Partners:
 
 
Productive Wells1
 
Service Wells2
 
Drilling Wells3
 
Gross
 
Net
 
Gross
 
Net
 
Gross
 
Net
Crude Oil                            
2,463
 
1,587
 
1,066
 
789
 
2
 
2
Natural Gas                            
8
 
4
 
-
 
-
 
 
Total Wells
2,471
 
1,591
 
1,066
 
789
 
2
 
2
__________
1
Includes active wells and wells temporarily shut-in. As of December 31, 2007, Kinder Morgan Energy Partners did not operate any productive wells with multiple completions.
2
Consists of injection, water supply, disposal wells and service wells temporarily shut-in. A disposal well is used for disposal of saltwater into an underground formation; a service well is a well drilled in a known oil field in order to inject liquids that enhance recovery or dispose of salt water.
3
Consists of development wells in the process of being drilled as of December 31, 2007. A development well is a well drilled in an already discovered oil field.
 
The oil and gas producing fields in which Kinder Morgan Energy Partners owns interests are located in the Permian Basin area of West Texas. The following table reflects Kinder Morgan Energy Partners’ net productive and dry wells that were completed in each of the three years ended December 31, 2007, 2006 and 2005:
 
 
2007
 
2006
 
2005
Productive
         
Development                                  
31
 
37
 
42
Exploratory                                  
-
 
-
 
-
Dry
         
Development                                  
-
 
-
 
-
Exploratory                                  
-
 
-
 
-
Total Wells                                   
31
 
37
 
42
__________

 
29

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


Notes:
The above table includes wells that were completed during each year regardless of the year in which drilling was initiated, and does not include any wells where drilling operations were not completed as of the end of the applicable year. Development wells include wells drilled in the proved area of an oil or gas reservoir.
 
The following table reflects the developed and undeveloped oil and gas acreage that Kinder Morgan Energy Partners held as of December 31, 2007:
 
 
Gross
 
Net
Developed Acres                                    
72,435
 
67,731
Undeveloped Acres                                    
8,788
 
8,129
Total                                  
81,223
 
75,860

Operating Statistics
 
Operating statistics from Kinder Morgan Energy Partners’ oil and gas producing activities for each of the years 2007, 2006 and 2005 are shown in the following table:
 
Results of Operations for Oil and Gas Producing Activities – Unit Prices and Costs
 
 
Successor Company
   
Predecessor Company
 
Seven Months Ended
December 31,
   
Five Months Ended
 
Year Ended December 31,
 
2007
   
May 31, 2007
 
2006
 
2005
Consolidated Companies1
                               
Production Costs per Barrel of Oil Equivalent2,3,4
$
17.00
     
$
15.15
   
$
13.30
   
$
10.00
 
Crude Oil Production (MBbl/d)
 
34.9
       
36.6
     
37.8
     
37.9
 
Natural Gas Liquids Production (MBbl/d)4
 
5.4
       
5.6
     
5.0
     
5.3
 
Natural Gas liquids Production from Gas Plants(MBbl/d)5
 
4.2
       
4.1
     
3.9
     
4.1
 
Total Natural Gas Liquids Production(MBbl/d)
 
9.6
       
9.7
     
8.9
     
9.4
 
Natural Gas Production (MMcf/d)4,6
 
0.8
       
0.8
     
1.3
     
3.7
 
Natural Gas Production from Gas Plants(MMcf/d)5,6
 
0.3
       
0.2
     
0.3
     
3.1
 
Total Natural Gas Production(MMcf/d)6
 
1.1
       
1.0
     
1.6
     
6.8
 
Average Sales Prices Including Hedge Gains/Losses:
                               
Crude Oil Price per Bbl7
$
36.80
     
$
35.03
   
$
31.42
   
$
27.36
 
Natural Gas Liquids Price per Bbl7
$
57.78
     
$
44.55
   
$
43.52
   
$
38.79
 
Natural Gas Price per Mcf8
$
5.86
     
$
6.41
   
$
6.36
   
$
5.84
 
Total Natural Gas Liquids Price per Bbl5
$
58.55
     
$
45.04
   
$
43.90
   
$
38.98
 
Total Natural Gas Price per Mcf5
$
5.65
     
$
6.27
   
$
7.02
   
$
5.80
 
Average Sales Prices Excluding Hedge Gains/Losses:
                               
Crude Oil Price per Bbl7
$
78.65
     
$
57.43
   
$
63.27
   
$
54.45
 
Natural Gas Liquids Price per Bbl7
$
57.78
     
$
44.55
   
$
43.52
   
$
38.79
 
Natural Gas Price per Mcf8
$
5.86
     
$
6.41
   
$
6.36
   
$
5.84
 
____________
1
Amounts relate to Kinder Morgan CO2 Company, L.P. and its consolidated subsidaries.
2
Computed using production costs, excluding transportation costs, as defined by the Securities and Exchange Commisson. Natural gas volumes were converted to barrels of oil equivalent (BOE) using a conversion factor of six mcf of natural gas to one barrel of oil.
3
Production costs include labor, repairs and maintenance, materials, supplies, fuel and power, property taxes, severance taxes, and general and administrative expenses directly related to oil and gas producing activities.
4
Includes only production attributable to leasehold ownership.
5
Includes production attributable to Kinder Morgan Energy Partners’ ownership in processing plants and third-party processing agreements.
6
Excludes natural gas production used as fuel.
7
Hedge gains/losses for crude oil and natural gas liquids are included with crude oil.
8
Natural gas sales were not hedged.
 
See Supplemental Information on Oil and Gas Producing Activities (Unaudited) to our consolidated financial statements included in this report for additional information with respect to operating statistics and supplemental information on Kinder Morgan Energy Partners’ oil and gas producing activities.
 

 
30

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


Gas and Gasoline Plant Interests
 
Kinder Morgan Energy Partners operates and owns an approximate 22% working interest plus an additional 28% net profits interest in the Snyder gasoline plant. Kinder Morgan Energy Partners also operates and owns a 51% ownership interest in the Diamond M gas plant and a 100% ownership interest in the North Snyder plant, all of which are located in the Permian Basin of West Texas. The Snyder gasoline plant processes gas produced from the SACROC unit and neighboring carbon dioxide projects, specifically the Sharon Ridge and Cogdell units, all of which are located in the Permian Basin area of West Texas. The Diamond M and the North Snyder plants contract with the Snyder plant to process gas. Production of natural gas liquids at the Snyder gasoline plant as of December 2007 was approximately 15,500 barrels per day, as compared to 15,000 barrels per day as of December 2006.
 
Crude Oil Pipeline
 
Kinder Morgan Energy Partners owns the Kinder Morgan Wink Pipeline, a 450-mile Texas intrastate crude oil pipeline system consisting of three mainline sections, two gathering systems and numerous truck delivery stations. The segment that runs from Wink to El Paso has a total capacity of 130,000 barrels of crude oil per day. The pipeline allows Kinder Morgan Energy Partners to better manage crude oil deliveries from its oil field interests in West Texas, and Kinder Morgan Energy Partners has entered into a long-term throughput agreement with Western Refining Company, L.P. to transport crude oil into Western’s 120,000 barrel per day refinery in El Paso. The 20-inch pipeline segment transported approximately 119,000 barrels of oil per day in 2007. The Kinder Morgan Wink Pipeline is regulated by both the FERC and the Texas Railroad Commission.
 
Terminals – KMP
 
The Terminals – KMP segment includes the operations of Kinder Morgan Energy Partners’ petroleum, chemical and other liquids terminal facilities (other than those included in the Products Pipelines – KMP segment) and all of Kinder Morgan Energy Partners’ coal, petroleum coke, fertilizer, steel, ores and dry-bulk material services, including all transload, engineering, conveying and other in-plant services. Combined, the segment is composed of approximately 100 owned or operated liquids and bulk terminal facilities, and more than 45 rail transloading and materials handling facilities located throughout the United States, Canada and the Netherlands. In 2007, the number of customers from whom the Terminals – KMP segment received more than $0.1 million of revenue was approximately 650.
 
Liquids Terminals
 
The liquids terminal operations primarily store refined petroleum products, petrochemicals, industrial chemicals and vegetable oil products in aboveground storage tanks and transfer products to and from pipelines, vessels, tank trucks, tank barges, and tank railcars. Combined, the liquids terminal facilities possess liquids storage capacity of approximately 47.5 million barrels, and in 2007, these terminals handled approximately 557 million barrels of petroleum, chemicals and vegetable oil products.
 
In September 2006, Kinder Morgan Energy Partners announced major expansions at its Pasadena and Galena Park, Texas terminal facilities. The expansions will provide additional infrastructure to help meet the growing need for refined petroleum products storage capacity along the Gulf Coast. The investment of approximately $195 million includes the construction of the following: (i) new storage tanks at both the Pasadena and Galena Park terminals; (ii) an additional cross-channel pipeline to increase the connectivity between the two terminals; (iii) a new ship dock at Galena Park; and (iv) an additional loading bay at the fully automated truck loading rack located at the Pasadena terminal. The expansions are supported by long-term customer commitments and will result in approximately 3.4 million barrels of additional tank storage capacity at the two terminals. Construction began in October 2006, and all of the projects are expected to be completed by the spring of 2008, with the exception of the Galena Park ship dock, which is now scheduled to be in-service by the third quarter of 2008.
 
At Perth Amboy, New Jersey, Kinder Morgan Energy Partners completed construction and placed into service nine new storage tanks with a capacity of 1.4 million barrels for gasoline, diesel and jet fuel. These tanks have been leased on a long-term basis to two customers. Kinder Morgan Energy Partners’ total investment in these facilities was approximately $69 million.
 
In June 2006, Kinder Morgan Energy Partners announced the construction of a new crude oil tank farm located in Edmonton, Alberta, Canada, and long-term contracts with customers for all of the available capacity at the facility. Situated on approximately 24 acres, the new storage facility will have nine tanks with a combined storage capacity of approximately 2.2 million barrels for crude oil. Service is expected to begin in the first quarter of 2008, and when completed, the tank farm will serve as a premier blending and storage hub for Canadian crude oil. Originally estimated at $115 million, due primarily to additional labor costs, total investment in this tank farm is projected to be $162 million on a constant U.S. dollar basis. The tank farm will have access to more than 20 incoming pipelines and several major outbound systems, including a connection with the Trans Mountain pipeline system, which currently transports up to 260,000 barrels per day of heavy crude oil and
 

 
31

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


refined products from Edmonton to marketing terminals and refineries located in the greater Vancouver, British Columbia area and Puget Sound in Washington state.
 
Competition. Kinder Morgan Energy Partners is one of the largest independent operators of liquids terminals in North America. Its primary competitors are IMTT, Magellan, Morgan Stanley, NuStar, Oil Tanking, Teppco and Vopak.
 
Bulk Terminals
 
Kinder Morgan Energy Partners’ bulk terminal operations primarily involve dry-bulk material handling services; however, Kinder Morgan Energy Partners also provides conveyor manufacturing and installation, engineering and design services and in-plant services covering material handling, conveying, maintenance and repair, railcar switching and miscellaneous marine services. Combined, Kinder Morgan Energy Partners’ dry-bulk and material transloading facilities handled approximately 87.1 million tons of coal, petroleum coke, fertilizers, steel, ores and other dry-bulk materials in 2007. Kinder Morgan Energy Partners owns or operates approximately 93 dry-bulk terminals in the United States, Canada and the Netherlands.
 
In May 2007, Kinder Morgan Energy Partners purchased certain buildings and equipment and completed a 40-year agreement to operate Vancouver Wharves, a bulk marine terminal located at the entrance to the Port of Vancouver, British Columbia. The facility consists of five vessel berths situated on a 139-acre site, extensive rail infrastructure, dry-bulk and liquid storage, and material handling systems, which allow the terminal to handle over 3.5 million tons of cargo annually. Vancouver Wharves has access to three major rail carriers connecting to shippers in western and central Canada and the U.S. Pacific Northwest. Vancouver Wharves offers a variety of inbound, outbound and value-added services for mineral concentrates, wood products, agri-products and sulfur. In addition to the aggregate consideration of approximately $57.2 million ($38.8 million in cash and the assumption of $18.4 million of assumed liabilities) paid for this facility, Kinder Morgan Energy Partners plans to invest an additional $46 million at Vancouver Wharves over the next two years to upgrade and relocate certain rail track and transloading systems, buildings and a shiploader.
 
Effective September 1, 2007, Kinder Morgan Energy Partners purchased the assets of Marine Terminals, Inc. for an aggregate consideration of approximately $101.5 million. Combined, the assets handle approximately 13.5 million tons of alloys and steel products annually from five facilities located in the southeastern United States. These strategically located terminals provide handling, processing, harboring and warehousing services primarily to Nucor Corporation, one of the largest steel and steel products companies in the world, under long-term contracts.
 
Competition. Kinder Morgan Energy Partners’ bulk terminals compete with numerous independent terminal operators, other terminals owned by oil companies, stevedoring companies and other industrials opting not to outsource terminal services. Many of Kinder Morgan Energy Partners’ bulk terminals were constructed pursuant to long-term contracts for specific customers. As a result, we believe other terminal operators would face a significant disadvantage in competing for this business.
 
Materials Services (rail transloading)
 
Kinder Morgan Energy Partners’ materials services operations include rail or truck transloading at 45 owned and non-owned facilities. The Burlington Northern Santa Fe, CSX, Norfolk Southern, Union Pacific, Kansas City Southern and A&W railroads provide rail service for these terminal facilities. Approximately 50% of the products handled are liquids, including an entire spectrum of liquid chemicals, and 50% are dry-bulk products. Many of the facilities are equipped for bi-modal operation (rail-to-truck, and truck-to-rail) or connect via pipeline to storage facilities. Several facilities provide railcar storage services. Kinder Morgan Energy Partners also designs and builds transloading facilities, performs inventory management services, and provides value-added services such as blending, heating and sparging. In 2007, the materials services operations handled approximately 347,000 railcars.
 
Competition.  Kinder Morgan Energy Partners’ material services operations compete with a variety of national transload and terminal operators across the United States, including Savage Services, Watco and Bulk Plus Logistics. Additionally, single or multi-site terminal operators are often entrenched in the network of Class 1 rail carriers.
 
Trans Mountain – KMP
 
Kinder Morgan Energy Partners’ Trans Mountain common carrier pipeline system originates at Edmonton, Alberta and transports crude oil and refined petroleum to destinations in the interior and on the west coast of British Columbia. A connecting pipeline owned by Kinder Morgan Energy Partners delivers petroleum to refineries in the state of Washington.
 
Trans Mountain’s pipeline is 715 miles in length. The capacity of the line out of Edmonton ranges from 260,000 barrels per day when heavy crude represents 20% of the total throughput to 300,000 barrels per day with no heavy crude. The pipeline system utilizes 21 pump stations controlled by a centralized computer control system.
 

 
32

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


Trans Mountain also operates a 5.3 mile spur line from its Sumas Pump Station to the U.S. – Canada international border where it connects with a 63-mile pipeline system owned and operated by Kinder Morgan Energy Partners. The pipeline system in Washington State has a sustainable throughput capacity of approximately 135,000 barrels per day when heavy crude represents approximately 25% of throughput and connects to four refineries located in northwestern Washington State. The volumes of petroleum shipped to Washington State fluctuate in response to the price levels of Canadian crude oil in relation to petroleum produced in Alaska and other offshore sources.
 
In 2007, deliveries on Trans Mountain averaged 258,540 barrels per day. This was an increase of 13% from average 2006 deliveries of 229,369 barrels per day. In April 2007, Kinder Morgan Energy Partners commissioned ten new pump stations that boosted capacity on Trans Mountain from 225,000 to approximately 260,000 barrels per day. The crude oil and refined petroleum transported through Trans Mountain’s pipeline system originates in Alberta and British Columbia. The refined and partially refined petroleum transported to Kamloops, British Columbia and Vancouver originates from oil refineries located in Edmonton. Petroleum products delivered through Trans Mountain’s pipeline system are used in markets in British Columbia, Washington State and elsewhere.
 
Overall Alberta crude oil supply has been increasing steadily over the past few years as a result of significant oilsands development with projects led by Shell Canada, Suncor Energy and Syncrude Canada. Further development is expected to continue into the future with expansions to existing oilsands production facilities as well as with new projects. In its moderate growth case, the Canadian Association of Petroleum Producers (“CAPP”) forecasts western Canadian crude oil production to increase by over 1.6 million barrels per day by 2015. This increasing supply will likely result in constrained export pipeline capacity from western Canada, which supports Trans Mountain’s view that both the demand for transportation services provided by Trans Mountain’s pipeline and the supply of crude oil will remain strong for the foreseeable future.
 
Shipments of refined petroleum represent a significant portion of Trans Mountain’s throughput. In 2007, shipments of refined petroleum and iso-octane represented 25% of throughput, as compared with 28% in 2006.
 
Regulation
 
Interstate Common Carrier Pipeline Rate Regulation – U.S. Operations
 
Some of our pipelines are interstate common carrier pipelines, subject to regulation by the FERC under the Interstate Commerce Act, or ICA. The ICA requires that we maintain our tariffs on file with the FERC, which tariffs set forth the rates we charge for providing transportation services on our interstate common carrier pipelines as well as the rules and regulations governing these services. The ICA requires, among other things, that such rates on interstate common carrier pipelines be “just and reasonable” and nondiscriminatory. The ICA permits interested persons to challenge newly proposed or changed rates and authorizes the FERC to suspend the effectiveness of such rates for a period of up to seven months and to investigate such rates. If, upon completion of an investigation, the FERC finds that the new or changed rate is unlawful, it is authorized to require the carrier to refund the revenues in excess of the prior tariff collected during the pendency of the investigation. The FERC may also investigate, upon complaint or on its own motion, rates that are already in effect and may order a carrier to change its rates prospectively. Upon an appropriate showing, a shipper may obtain reparations for damages sustained during the two years prior to the filing of a complaint.
 
On October 24, 1992, Congress passed the Energy Policy Act of 1992. The Energy Policy Act deemed petroleum products pipeline tariff rates that were in effect for the 365-day period ending on the date of enactment or that were in effect on the 365th day preceding enactment and had not been subject to complaint, protest or investigation during the 365-day period to be just and reasonable or “grandfathered” under the ICA. The Energy Policy Act also limited the circumstances under which a complaint can be made against such grandfathered rates. The rates Kinder Morgan Energy Partners charged for transportation service on its Cypress Pipeline were not suspended or subject to protest or complaint during the relevant 365-day period established by the Energy Policy Act. For this reason, we believe these rates should be grandfathered under the Energy Policy Act. Certain rates on Kinder Morgan Energy Partners’ Pacific operations’ pipeline system were subject to protest during the 365-day period established by the Energy Policy Act. Accordingly, certain of the Pacific pipelines’ rates have been, and continue to be, subject to complaints with the FERC, as is more fully described in Note 17 of the accompanying Notes to Consolidated Financial Statements.
 
Petroleum products pipelines may change their rates within prescribed ceiling levels that are tied to an inflation index. Shippers may protest rate increases made within the ceiling levels, but such protests must show that the portion of the rate increase resulting from application of the index is substantially in excess of the pipeline’s increase in costs from the previous year. A pipeline must, as a general rule, utilize the indexing methodology to change its rates. The FERC, however, uses cost-of-service ratemaking, market-based rates and settlement rates as alternatives to the indexing approach in certain specified circumstances.
 

 
33

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


Common Carrier Pipeline Rate Regulation – Canadian Operations
 
The Canadian portion of our crude oil and refined petroleum products pipeline systems is under the regulatory jurisdiction of Canada’s National Energy Board, referred to in this report as the NEB. The National Energy Board Act gives the NEB power to authorize pipeline construction and to establish tolls and conditions of service.
 
Trans Mountain – KMP
 
In November 2004, Trans Mountain entered into negotiations with the Canadian Association of Petroleum Producers and principal shippers for a new incentive toll settlement to be effective for the period starting January 1, 2006 and ending December 31, 2010. In January 2006, Trans Mountain reached agreement in principle, which was reduced to a memorandum of understanding for the 2006 toll settlement. A final agreement was reached with the Canadian Association of Petroleum Producers in October 2006 and NEB approval was received in November 2006.
 
The 2006 toll settlement incorporates an incentive toll mechanism that is intended to provide Trans Mountain with the opportunity to earn a return on equity greater than that calculated using the formula established by the NEB. In return for this opportunity, Trans Mountain has agreed to assume certain risks and provide cost certainty in certain areas. Part of the incentive toll mechanism specifies that Trans Mountain is allowed to keep 75% of the net revenue generated by throughput in excess of 92.5% of the capacity of the pipeline. The 2006 incentive toll settlement provides for base tolls which will, other than recalculation or adjustment in certain specified circumstances, remain in effect for the five-year period. The toll settlement also governs the financial arrangements for the approximately C$638 million expansions to Trans Mountain that will add 75,000 barrels per day of incremental capacity to the system by late 2008. The toll charged for the portion of Trans Mountain’s pipeline system located in the United States falls under the jurisdiction of the FERC.  See “Interstate Common Carrier Pipeline Rate Regulation – U.S. Operations” preceding.
 
Express Pipeline System
 
The Canadian segment of the Express Pipeline is regulated by the NEB as a Group 2 pipeline, which results in rates and terms of service being regulated on a complaint basis only. Express committed rates are subject to a 2% inflation adjustment April 1 of each year. The U.S. segment of the Express Pipeline and the Platte Pipeline are regulated by the FERC. See “Interstate Common Carrier Pipeline Rate Regulation – U.S. Operations.”
 
Additionally, movements on the Platte Pipeline within the State of Wyoming are regulated by the Wyoming Public Service Commission (“WPSC”), which regulates the tariffs and terms of service of public utilities that operate in the State of Wyoming. The WPSC standards applicable to rates are similar to those of the FERC and the NEB.
 
Interstate Natural Gas Transportation and Storage Regulation
 
Both the performance of and rates charged by companies performing interstate natural gas transportation and storage services are regulated by the FERC under the Natural Gas Act of 1938 and, to a lesser extent, the Natural Gas Policy Act of 1978. Beginning in the mid-1980’s, the FERC initiated a number of regulatory changes intended to create a more competitive environment in the natural gas marketplace. Among the most important of these changes were:
 
 
·
Order No. 436 (1985) requiring open-access, nondiscriminatory transportation of natural gas;
 
 
·
Order No. 497 (1988) which set forth new standards and guidelines imposing certain constraints on the interaction between interstate natural gas pipelines and their marketing affiliates and imposing certain disclosure requirements regarding that interaction; and
 
 
·
Order No. 636 (1992) which required interstate natural gas pipelines that perform open-access transportation under blanket certificates to “unbundle” or separate their traditional merchant sales services from their transportation and storage services and to provide comparable transportation and storage services with respect to all natural gas supplies whether purchased from the pipeline or from other merchants such as marketers or producers.
 
Natural gas pipelines must now separately state the applicable rates for each unbundled service they provide (i.e., for the natural gas commodity, transportation and storage). Order 636 contains a number of procedures designed to increase competition in the interstate natural gas industry, including (i) requiring the unbundling of sales services from other services; (ii) permitting holders of firm capacity on interstate natural gas pipelines to release all or a part of their capacity for resale by the pipeline; and (iii) the issuance of blanket sales certificates to interstate pipelines for unbundled services. Order 636 has been affirmed in all material respects upon judicial review, and our own FERC orders approving our unbundling plans are final and not subject to any pending judicial review.
 

 
34

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


On November 25, 2003, the FERC issued Order No. 2004, adopting revised Standards of Conduct that apply uniformly to interstate natural gas pipelines and public utilities. In light of the changing structure of the energy industry, these Standards of Conduct govern relationships between regulated interstate natural gas pipelines and all of their energy affiliates. These new Standards of Conduct were designed to eliminate the loophole in the previous regulations that did not cover an interstate natural gas pipeline’s relationship with energy affiliates that are not marketers. The rule is designed to prevent interstate natural gas pipelines from giving an undue preference to any of their energy affiliates and to ensure that transmission is provided on a nondiscriminatory basis. In addition, unlike the prior regulations, these requirements apply even if the energy affiliate is not a customer of its affiliated interstate pipeline. Our interstate natural gas pipelines are in compliance with these Standards of Conduct.
 
On November 17, 2006, the D.C. Circuit vacated Order No. 2004, as applied to natural gas pipelines, and remanded the Order back to the FERC. On January 9, 2007, the FERC issued an interim rule regarding standards of conduct in Order No. 690 to be effective immediately. The interim rule repromulgated the standards of conduct that were not challenged before the court. On January 18, 2007, the FERC issued a notice of proposed rulemaking soliciting comments on whether or not the interim rule should be made permanent for natural gas transmission providers. Please refer to Note 16 of the accompanying Notes to Consolidated Financial Statements for additional information regarding FERC Order No. 2004 and other Standards of Conduct rulemaking.
 
On August 8, 2005, Congress enacted the Energy Policy Act of 2005. The Energy Policy Act, among other things, amended the Natural Gas Act to prohibit market manipulation by any entity, directed the FERC to facilitate market transparency in the market for sale or transportation of physical natural gas in interstate commerce, and significantly increased the penalties for violations of the Natural Gas Act, the Natural Gas Policy Act of 1978, or FERC rules, regulations or orders thereunder.
 
California Public Utilities Commission Rate Regulation
 
The intrastate common carrier operations of our Pacific operations’ pipelines in California are subject to regulation by the California Public Utilities Commission, referred to in this report as the CPUC, under a “depreciated book plant” methodology, which is based on an original cost measure of investment. Intrastate tariffs filed by us with the CPUC have been established on the basis of revenues, expenses and investments allocated as applicable to the California intrastate portion of our Pacific operations’ business. Tariff rates with respect to intrastate pipeline service in California are subject to challenge by complaint by interested parties or by independent action of the CPUC. A variety of factors can affect the rates of return permitted by the CPUC, and certain other issues similar to those which have arisen with respect to our FERC regulated rates could also arise with respect to our intrastate rates. Certain of our Pacific operations’ pipeline rates have been, and continue to be, subject to complaints with the CPUC, as is more fully described in Note 17 of the accompanying Notes to Consolidated Financial Statements.
 
Texas Railroad Commission Rate Regulation
 
The intrastate common carrier operations of our natural gas and crude oil pipelines in Texas are subject to certain regulation with respect to such intrastate transportation by the Texas Railroad Commission. Although the Texas Railroad Commission has the authority to regulate our rates, the Commission has generally not investigated the rates or practices of our intrastate pipelines in the absence of shipper complaints.
 
Safety Regulation
 
Our interstate pipelines are subject to regulation by the United States Department of Transportation, referred to in this report as U.S. DOT, and our intrastate pipelines and other operations are subject to comparable state regulations with respect to their design, installation, testing, construction, operation, replacement and management. Comparable regulation exists in some states in which we conduct pipeline operations. In addition, our truck and terminal loading facilities are subject to U.S. DOT regulations dealing with the transportation of hazardous materials by motor vehicles and railcars. We believe that we are in substantial compliance with U.S. DOT and comparable state regulations.
 
The Pipeline Safety Improvement Act of 2002 provides guidelines in the areas of testing, education, training and communication. The Pipeline Safety Act requires pipeline companies to perform integrity tests on natural gas transmission pipelines that exist in high population density areas that are designated as High Consequence Areas. Testing consists of hydrostatic testing, internal magnetic flux or ultrasonic testing, or direct assessment of the piping. In addition to the pipeline integrity tests, pipeline companies must implement a qualification program to make certain that employees are properly trained. The U.S. DOT has approved our qualification program. We believe that we are in substantial compliance with this law’s requirements and have integrated appropriate aspects of this pipeline safety law into our internal Operator Qualification Program. A similar integrity management rule for refined petroleum products pipelines became effective May 29, 2001.
 

 
35

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


We are also subject to the requirements of the Federal Occupational Safety and Health Act and other comparable federal and state statutes. We believe that we are in substantial compliance with Federal OSHA requirements, including general industry standards, recordkeeping requirements and monitoring of occupational exposure to hazardous substances.
 
In general, we expect to increase expenditures in the future to comply with higher industry and regulatory safety standards. Some of these changes, such as U.S. DOT implementation of additional hydrostatic testing requirements, could significantly increase the amount of these expenditures. Such increases in our expenditures cannot be accurately estimated at this time.
 
State and Local Regulation
 
Our activities are subject to various state and local laws and regulations, as well as orders of regulatory bodies, governing a wide variety of matters, including marketing, production, pricing, pollution, protection of the environment, and safety.
 
Environmental Matters
 
Our operations are subject to federal, state and local, and some foreign laws and regulations governing the release of regulated materials into the environment or otherwise relating to environmental protection or human health or safety. We believe that our operations are in substantial compliance with applicable environmental laws and regulations.
 
We accrue liabilities for environmental matters when it is probable that obligations have been incurred and the amounts can be reasonably estimated. This policy applies to assets or businesses currently owned or previously disposed. We have accrued liabilities for probable environmental remediation obligations at various sites, including multiparty sites where the U.S. Environmental Protection Agency has identified us as one of the potentially responsible parties. The involvement of other financially responsible companies at these multiparty sites could mitigate our actual joint and several liability exposures. Although no assurance can be given, we believe that the ultimate resolution of all these environmental matters will not have a material adverse effect on our business, financial position or results of operations. We have accrued an environmental reserve in the amount of $102.6 million as of December 31, 2007. Our reserve estimates range in value from approximately $102.6 million to approximately $159.6 million, and we recorded our liability equal to the low end of the range, as we did not identify any amounts within the range as a better estimate of the liability. In addition, we have recorded a receivable of $38.0 million for expected cost recoveries that have been deemed probable. For additional information related to environmental matters, see Note 17 of the accompanying Notes to Consolidated Financial Statements.
 
Solid Waste
 
We generate both hazardous and non-hazardous solid wastes that are subject to the requirements of the Federal Resource Conservation and Recovery Act and comparable state statutes. From time to time, state regulators and the United States Environmental Protection Agency consider the adoption of stricter disposal standards for non-hazardous waste. Furthermore, it is possible that some wastes that are currently classified as non-hazardous, which could include wastes currently generated during pipeline or liquids or bulk terminal operations, may in the future be designated as “hazardous wastes.” Hazardous wastes are subject to more rigorous and costly disposal requirements than non-hazardous wastes. Such changes in the regulations may result in additional capital expenditures or operating expenses for us.
 
Superfund
 
The Comprehensive Environmental Response, Compensation and Liability Act, also known as the “Superfund” law or “CERCLA,” and analogous state laws, impose joint and several liability, without regard to fault or the legality of the original conduct, on certain classes of “potentially responsible persons” for releases of “hazardous substances” into the environment. These persons include the owner or operator of a site and companies that disposed or arranged for the disposal of the hazardous substances found at the site. CERCLA authorizes the U.S. EPA and, in some cases, third parties to take actions in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur, in addition to compensation for natural resource damages, if any. Although “petroleum” is excluded from CERCLA’s definition of a “hazardous substance,” in the course of our ordinary operations, we have and will generate materials that may fall within the definition of “hazardous substance.” By operation of law, if we are determined to be a potentially responsible person, we may be responsible under CERCLA for all or part of the costs required to clean up sites at which such materials are present, in addition to compensation for natural resource damages, if any.
 
Clean Air Act
 
Our operations are subject to the Clean Air Act, as amended, and analogous state statutes. We believe that the operations of our pipelines, storage facilities and terminals are in substantial compliance with such statutes. The Clean Air Act, as amended, contains lengthy, complex provisions that may result in the imposition over the next several years of certain pollution control requirements with respect to air emissions from the operations of our pipelines, treating facilities, storage facilities and terminals. Depending on the nature of those requirements and any additional requirements that may be imposed
 

 
36

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


by state and local regulatory authorities, we may be required to incur certain capital and operating expenditures over the next several years for air pollution control equipment in connection with maintaining or obtaining operating permits and approvals and addressing other air emission-related issues.
 
Due to the broad scope and complexity of the issues involved and the resultant complexity and nature of the regulations, full development and implementation of many Clean Air Act regulations by the U.S. EPA and/or various state and local regulators have been delayed. Therefore, until such time as the new Clean Air Act requirements are implemented, we are unable to fully estimate the effect on earnings or operations or the amount and timing of such required capital expenditures. At this time, however, we do not believe that we will be materially adversely affected by any such requirements.
 
Clean Water Act
 
Our operations can result in the discharge of pollutants. The Federal Water Pollution Control Act of 1972, as amended, also known as the Clean Water Act, and analogous state laws impose restrictions and controls regarding the discharge of pollutants into state waters or waters of the United States. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by applicable federal or state authorities. The Oil Pollution Act was enacted in 1990 and amends provisions of the Clean Water Act as they pertain to prevention and response to oil spills. Spill prevention control and countermeasure requirements of the Clean Water Act and some state laws require containment and similar structures to help prevent contamination of navigable waters in the event of an overflow or release. We believe we are in substantial compliance with these laws.
 
Other
 
Amounts we spent during 2007, 2006 and 2005 on research and development activities were not material. We employed approximately 7,600 full-time people at December 31, 2007, including employees of our indirect subsidiary KMGP Services Company, Inc., who are dedicated to the operations of Kinder Morgan Energy Partners, and employees of Kinder Morgan Canada Inc. Approximately 920 full-time hourly personnel at certain terminals and pipelines are represented by labor unions under collective bargaining agreements that expire between 2008 and 2012. KMGP Services Company, Inc., Knight Inc. and Kinder Morgan Canada Inc. each consider relations with their employees to be good. For more information on our related party transactions, see Note 1(S) of the accompanying Notes to Consolidated Financial Statements.
 
KMGP Services Company, Inc., a subsidiary of Kinder Morgan G.P., Inc., provides employees and Kinder Morgan Services LLC, a subsidiary of Kinder Morgan Management, provides centralized payroll and employee benefits services to Kinder Morgan Management, Kinder Morgan Energy Partners and Kinder Morgan Energy Partners’ operating partnerships and subsidiaries (collectively, “the Group”). Employees of KMGP Services Company, Inc. are assigned to work for one or more members of the Group. The direct costs of 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 their allocated shares of these direct costs. No profit or margin is charged by Kinder Morgan Services LLC to the members of the Group. Our human resources department provides the administrative support necessary to implement these payroll and benefits services, and the related administrative costs are allocated to members of the Group in accordance with existing expense allocation procedures. The effect of these arrangements is that each member of the Group bears the direct compensation and employee benefits costs of its assigned or partially assigned employees, as the case may be, while also bearing its allocable share of administrative costs. Pursuant to the limited partnership agreement, Kinder Morgan Energy Partners provides reimbursement for its share of these administrative costs and such reimbursements are accounted for as described above. Kinder Morgan Energy Partners reimburses Kinder Morgan Management with respect to the costs incurred or allocated to Kinder Morgan Management in accordance with Kinder Morgan Energy Partners’ limited partnership agreement, the Delegation of Control Agreement among Kinder Morgan G.P., Inc., Kinder Morgan Management, Kinder Morgan Energy Partners and others, and Kinder Morgan Management’s limited liability company agreement.
 
Our named executive officers and other employees that provide management or services to both us and the Group are employed by us. Additionally, other of our employees assist Kinder Morgan Energy Partners in the operation of its Natural Gas Pipeline assets. These employees’ expenses are allocated without a profit component between us and the appropriate members of the Group.
 
We believe that we have generally satisfactory title to the properties we own and use in our businesses, subject to liens on the assets of Knight Inc. and its subsidiaries (excluding Kinder Morgan Energy Partners and its subsidiaries) incurred in connection with the financing of the Going Private transaction, liens for current taxes, liens incident to minor encumbrances, and easements and restrictions that do not materially detract from the value of such property or the interests in those properties or the use of such properties in our businesses. We generally do not own the land on which our pipelines are constructed. Instead, we obtain the right to construct and operate the pipelines on other people’s land for a period of time. Substantially all of our pipelines are constructed on rights-of-way granted by the apparent record owners of such property. In many instances, lands over which rights-of-way have been obtained are subject to prior liens that have not been subordinated to the right-of-way grants. In some cases, not all of the apparent record owners have joined in the right-of-way grants, but in
 

 
37

 
Items 1. and 2.   Business and Properties. (continued)
Knight Form 10-K


substantially all such cases, signatures of the owners of majority interests have been obtained. Permits have been obtained from public authorities to cross over or under, or to lay facilities in or along, water courses, county roads, municipal streets and state highways, and in some instances, such permits are revocable at the election of the grantor, or, the pipeline may be required to move its facilities at its own expense. Permits have also been obtained from railroad companies to cross over or under lands or rights-of-way, many of which are also revocable at the grantor's election. Some such permits require annual or other periodic payments. In a few minor cases, property for pipeline purposes was purchased in fee.
 
(D) Financial Information about Geographic Areas
 
Note 15 of the accompanying Notes to Consolidated Financial Statements contains financial information about the geographic areas in which we do business.
 
(E) Available Information
 
We make available free of charge on or through our internet website, at www.kindermorgan.com, our annual reports 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.
 
The Going Private transaction resulted in substantially more debt to us and a downgrade of the ratings of our debt securities, which has increased our cost of capital.
 
In conjunction with the Going Private transaction, Knight Inc. incurred approximately $4.8 billion in additional debt. Moody’s Investor Services and Standard & Poor’s Rating Services downgraded the ratings assigned to Knight Inc.’s senior unsecured debt to BB- and Ba2, respectively. Upon the recent 80% ownership interest sale of our NGPL business segment, Standard & Poor’s Rating Service upgraded Knight Inc.’s senior unsecured debt to BB. Knight Inc. no longer has access to the commercial paper market and is currently utilizing its $1.0 billion revolving credit facility for its short-term borrowing needs.
 
Our substantially increased debt could adversely affect our financial health and make us more vulnerable to adverse economic conditions.
 
As a result of the Going Private transaction, we have significantly more debt outstanding and significantly higher debt service requirements than in the recent past. As of December 31, 2007, we had outstanding approximately $16.1 billion of consolidated debt (excluding Value of Interest Rate Swaps). Of this amount, $9.0 billion was debt owed by Knight Inc. and its subsidiaries, excluding Kinder Morgan Energy Partners and its subsidiaries, and is currently secured by most of our assets (other than those of Kinder Morgan G.P., Inc., Kinder Morgan Energy Partners, Kinder Morgan Management and their respective subsidiaries).
 
Our increased level of debt could have important consequences, such as:
 
 
·
limiting our ability to obtain additional financing to fund our working capital, capital expenditures, debt service requirements or potential growth or for other purposes;
 
 
·
limiting our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to make payments on our debt;
 
 
·
placing us at a competitive disadvantage compared to competitors with less debt; and
 
 
·
increasing our vulnerability to adverse economic and industry conditions.
 
Each of these factors is to a large extent dependent on economic, financial, competitive and other factors beyond our control.
 

 
38

 
Item 1A.   Risk Factors.  (continued)
Knight Inc. Form 10-K


Our large amount of floating rate debt makes us vulnerable to increases in interest rates.
 
As of December 31, 2007, we had outstanding approximately $16.1 billion of consolidated debt. Of this amount, excluding debt of Kinder Morgan Energy Partners that is consolidated with ours, approximately 53% was subject to floating interest rates, either as short-term or long-term debt of floating rate credit facilities or as long-term fixed-rate debt converted to floating rates through the use of interest rate swaps. Should interest rates increase significantly, the amount of cash required to service our debt would increase.
 
There is the potential for a change of control of the general partner of Kinder Morgan Energy Partners if we default on debt
 
We own all of the common equity of Kinder Morgan G.P., Inc., the general partner of Kinder Morgan Energy Partners. If we default on our debt, in exercising their rights as lenders, our lenders could acquire control of Kinder Morgan G.P., Inc. or otherwise influence Kinder Morgan G.P., Inc. through their control of us. While our operations provide cash independent of the dividends we receive from Kinder Morgan G.P., Inc., a change in control could materially affect our cash flow and earnings.
 
The tax treatment applied to Kinder Morgan Energy Partners depends on its status as a partnership for federal income tax purposes, as well as it not being subject to a material amount of entity-level taxation by individual states. If the Internal Revenue Service treats it as a corporation or if it 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 its partners, including us.
 
The anticipated after-tax economic benefit of an investment in Kinder Morgan Energy Partners depends largely on it being treated as a partnership for federal income tax purposes. In order for it 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 may not meet this requirement or current law may change so as to cause, in either event, it to be treated as a corporation for federal income tax purposes or otherwise subject to federal income tax. Kinder Morgan Energy Partners has not requested, and does not plan to request, a ruling from the Internal Revenue Service on this or any other matter affecting it.
 
If Kinder Morgan Energy Partners 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. Under current law, distributions to its partners would generally be taxed again as corporate distributions, and no income, gain, losses or deductions would flow through to its partners. Because a tax would be imposed on Kinder Morgan Energy Partners as a corporation, its cash available for distribution would be substantially reduced. Therefore, treatment of Kinder Morgan Energy Partners as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to its partners, likely causing a substantial reduction in the value of our interest in Kinder Morgan Energy Partners.
 
Current law or the business of Kinder Morgan Energy Partners may change so as to cause it to be treated as a corporation for federal income tax purposes or otherwise subject it 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 value of our interest in Kinder Morgan Energy Partners.
 
In addition, because of widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise or other forms of taxation. For example, Kinder Morgan Energy Partners is now subject to 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 its total revenue that is apportioned to Texas. Imposition of such a tax on Kinder Morgan Energy Partners by Texas, or any other state, will reduce its cash available for distribution to its partners, including us.
 
The Kinder Morgan Energy Partners partnership agreement provides that if a law is enacted that subjects Kinder Morgan Energy Partners to taxation as a corporation or otherwise subjects it 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 of that law on Kinder Morgan Energy Partners.
 
Kinder Morgan Energy Partners adopted certain valuation methodologies that may result in a shift of income, gain, loss and deduction between it and its unitholders. The IRS may challenge this treatment, which could adversely affect the value of the common units.
 
When Kinder Morgan Energy Partners issues additional units or engages in certain other transactions, it determines the fair market value of its assets and allocates any unrealized gain or loss attributable to its assets to the capital accounts of its
 

 
39

 
Item 1A.   Risk Factors.  (continued)
Knight Inc. Form 10-K


unitholders and us. This methodology may be viewed as understating the value of Kinder Morgan Energy Partners’ assets. In that case, there may be a shift of income, gain, loss and deduction between certain unitholders and us, which may be unfavorable to such unitholders. Moreover, under Kinder Morgan Energy Partners’ current valuation methods, subsequent purchasers of common units may have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to its tangible assets and a lesser portion allocated to its intangible assets. The IRS may challenge these valuation methods, or Kinder Morgan Energy Partners’ allocation of the Section 743(b) adjustment attributable to its tangible and intangible assets, and allocations of income, gain, loss and deduction between us and certain of its unitholders.
 
A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to Kinder Morgan Energy Partners’ partners, including us. It also could affect the amount of gain from Kinder Morgan Energy Partners’ unitholders’ sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to its unitholders’ tax returns without the benefit of additional deductions.
 
Kinder Morgan Energy Partners’ treatment of a purchaser of common units as having the same tax benefits as the seller could be challenged, resulting in a reduction in value of the common units.
 
Because Kinder Morgan Energy Partners cannot match transferors and transferees of common units, it is required to maintain the uniformity of the economic and tax characteristics of these units in the hands of the purchasers and sellers of these units. It does so by adopting certain depreciation conventions that do not conform to all aspects of the United States Treasury regulations. A successful IRS challenge to these conventions could adversely affect the tax benefits to a unitholder of ownership of the common units and could have a negative impact on their value or result in audit adjustments to unitholders’ tax returns.
 
Our senior management’s attention may be diverted from our daily operations because of significant transactions following the completion of the Going Private transaction.
 
The investors in Knight Holdco LLC include members of our senior management. Prior to consummation of the Going Private transaction, we had publicly disclosed that several significant transactions were being considered that, if pursued, would require substantial management time and attention. As a result, our senior management’s attention may be diverted from the management of our daily operations.
 
Pending Federal Energy Regulatory Commission and California Public Utilities Commission proceedings seek substantial refunds and reductions in tariff rates on some of Kinder Morgan Energy Partners’ pipelines. If the proceedings are determined adversely to Kinder Morgan Energy Partners, they could have a material adverse impact on us.
 
Regulators and shippers on our pipelines have rights to challenge the rates we charge under certain circumstances prescribed by applicable regulations. Some shippers on Kinder Morgan Energy Partners’ pipelines have filed complaints with the Federal Energy Regulatory Commission and California Public Utilities Commission that seek substantial refunds for alleged overcharges during the years in question and prospective reductions in the tariff rates on Kinder Morgan Energy Partners’ Pacific operations’ pipeline system. We may face challenges, similar to those described in Note 17 of the accompanying Notes to Consolidated Financial Statements, to the rates we receive on our pipelines in the future. Any successful challenge could adversely and materially affect our future earnings and cash flows.
 
Rulemaking and oversight, as well as changes in regulations, by the Federal Energy Regulatory Commission or other regulatory agencies having jurisdiction over our operations could adversely impact our income and operations.
 
The rates (which include reservation, commodity, surcharges, fuel and gas lost and unaccounted for) we charge shippers on our natural gas pipeline systems are subject to regulatory approval and oversight. Furthermore, regulators and shippers on our natural gas pipelines have rights to challenge the rates shippers are charged under certain circumstances prescribed by applicable regulations. We can provide no assurance that we will not face challenges to the rates we receive on our pipeline systems in the future. Any successful challenge could materially adversely affect our future earnings and cash flows. New laws or regulations or different interpretations of existing laws or regulations applicable to our assets could have a material adverse impact on our business, financial condition and results of operations.
 
Our business is subject to extensive regulation that affects our operations and costs.
 
Our assets and operations are subject to regulation by federal, state and local authorities, including regulation by the Federal Energy Regulatory Commission, referred to as the FERC, and by various authorities under federal, state and local environmental laws. Regulation affects almost every aspect of our business, including, among other things, our ability to determine terms and rates for our interstate pipeline services, to make acquisitions or to build extensions of existing facilities.
 
In addition, regulators have taken actions designed to enhance market forces in the gas pipeline industry, which have led to increased competition. In a number of U.S. markets, natural gas interstate pipelines face competitive pressure from a number
 

 
40

 
Item 1A.   Risk Factors.  (continued)
Knight Inc. Form 10-K


of new industry participants, such as alternative suppliers, as well as traditional pipeline competitors. Increased competition driven by regulatory changes could have a material impact on business in our markets and therefore adversely affect our financial condition and results of operations.
 
Energy commodity transportation and storage activities involve numerous risks that may result in accidents or otherwise adversely affect operations.
 
There are a variety of hazards and operating risks inherent to natural gas transmission and storage activities, and refined petroleum products and carbon dioxide transportation activities—such as leaks, explosions and mechanical problems that could result in substantial financial losses. In addition, these risks could result in loss of human life, significant damage to property, environmental pollution and impairment of operations, any of which also could result in substantial losses. For pipeline and storage assets located near populated areas, including residential areas, commercial business centers, industrial sites and other public gathering areas, the level of damage resulting from these risks could be greater. If losses in excess of our insurance coverage were to occur, they could have a material adverse effect on our business, financial condition and results of operations.
 
Competition could ultimately lead to lower levels of profits and adversely impact our ability to recontract for expiring transportation capacity at favorable rates.
 
For the seven months ended December 31, 2007, and the five months ended May 31, 2007, NGPL’s segment earnings represented approximately 49.0% and 49.8%, respectively, of our total segment earnings plus net pre-tax impact of Kinder Morgan Energy Partners. NGPL is an interstate natural gas pipeline that is a major supplier to the Chicago, Illinois area. In the past, interstate pipeline competitors of NGPL have constructed or expanded pipeline capacity into the Chicago area. To the extent that an excess of supply into this market area is created and persists, NGPL’s ability to recontract for expiring transportation capacity at favorable rates could be impaired. Contracts representing approximately 18.3% of NGPL’s total long-haul, contracted firm transport capacity as of January 31, 2008 have not been renewed and are scheduled to expire before the end of 2008.
 
Trans Mountain’s pipeline to the West Coast of North America and the Express System, in which we own an interest, to the U.S. Rocky Mountains and Midwest are two of several pipeline alternatives for western Canadian petroleum production. These pipelines, like all our petroleum pipelines, compete against other pipeline companies who could be in a position to offer different tolling structures, which may provide them with a competitive advantage in new pipeline development. Throughput on our pipelines may decline if tolls become uncompetitive compared to alternatives.
 
Cost overruns and delays on our expansion and new build projects could adversely affect our business.
 
We currently have several major expansion and new build projects planned or underway, including Kinder Morgan Energy Partners’ approximate $4.9 billion Rockies Express Pipeline and approximate $1.3 billion Midcontinent Express Pipeline. A variety of factors outside our control, such as weather, natural disasters and difficulties in obtaining permits and rights-of-way or other regulatory approvals, as well as the performance by third-party contractors, has resulted in, and may continue to result in, increased costs or delays in construction. Cost overruns or delays in completing a project could have a material adverse effect on our results of operations and cash flows.
 
Our rapid growth may cause difficulties integrating and constructing new operations, and we may not be able to achieve the expected benefits from any future acquisitions.
 
Part of our business strategy includes acquiring additional businesses, expanding existing assets, or constructing new facilities. If we do not successfully integrate acquisitions, expansions, or newly constructed facilities, we may not realize anticipated operating advantages and cost savings. The integration of companies that have previously operated separately involves a number of risks, including:
 
 
·
demands on management related to the increase in our size after an acquisition, an expansion, or a completed construction project;
 
 
·
the diversion of our management’s attention from the management of daily operations;
 
 
·
difficulties in implementing or unanticipated costs of accounting, estimating, reporting and other systems;
 
 
·
difficulties in the assimilation and retention of necessary employees; and
 
 
·
potential adverse effects on operating results.
 

 
41

 
Item 1A.   Risk Factors.  (continued)
Knight Inc. Form 10-K


We may not be able to maintain the levels of operating efficiency that acquired companies have achieved or might achieve separately. Successful integration of each acquisition, expansion, or construction project will depend upon our ability to manage those operations and to eliminate redundant and excess costs. Because of difficulties in combining and expanding operations, we may not be able to achieve the cost savings and other size-related benefits that we hoped to achieve after these acquisitions, which would harm our financial condition and results of operations.
 
Our acquisition strategy and expansion programs require access to new capital. Tightened credit markets or more expensive capital would impair our ability to grow.
 
Part of our business strategy includes acquiring additional businesses. We may need new capital to finance these acquisitions. Limitations on our access to capital will impair our ability to execute this strategy. We normally fund acquisitions with short-term debt and repay such debt through the issuance of equity and long-term debt. An inability to access the capital markets may result in a substantial increase in our leverage and have a detrimental impact on our credit profile.
 
Environmental regulation and liabilities could result in increased operating and capital costs.
 
Our business operations are subject to federal, state, provincial and local laws and regulations relating to environmental protection, pollution and human health and safety in the United States and Canada. For example, if an accidental leak, release or spill of liquid petroleum products, chemicals or other products occurs at or from our pipelines, or at or from our storage or other facilities, we may experience significant operational disruptions and we may have to pay a significant amount to clean up the leak, release or spill, pay for government penalties, address natural resource damages, compensate for human exposure or property damage, install costly pollution control equipment or a combination of these and other measures. The resulting costs and liabilities could materially and negatively affect our level of earnings and cash flow. In addition, emission controls required under federal, state and provincial environmental laws could require significant capital expenditures at our facilities. The costs of environmental regulation are already significant, and additional or more stringent regulation could increase these costs or could otherwise negatively affect our business.
 
We own or operate numerous properties that have been used for many years in connection with our business activities. While we have utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons or other hazardous substances may have been released at or from properties owned, operated or used by us or our predecessors, or at or from properties where such wastes have been taken for disposal. In addition, many of these properties have been owned and/or operated by third parties whose management, use and disposal of hydrocarbons or other hazardous substances were not under our control. These properties and the hazardous substances released and wastes disposed thereon may be subject to laws in the United States such as the Comprehensive Environmental Response, Compensation, and Liability Act, also known as CERCLA or the Superfund law, which impose joint and several liability without regard to fault or the legality of the original conduct. Under the regulatory schemes of the various provinces, such as British Columbia’s Environmental Management Act, Canada has similar laws with respect to properties owned, operated or used by us or our predecessors. Under such laws and implementing regulations, we could be required to remove or remediate previously disposed wastes or property contamination, including groundwater contamination caused by prior owners or operators. Imposition of such liability schemes could have a material adverse impact on our operations and financial position.
 
In addition, Kinder Morgan Energy Partners’ oil and gas development and production activities are subject to certain federal, state and local laws and regulations relating to environmental quality and pollution control. These laws and regulations increase the costs of these activities and may prevent or delay the commencement or continuance of a given operation. Specifically, Kinder Morgan Energy Partners is subject to laws and regulations regarding the acquisition of permits before drilling, restrictions on drilling activities in restricted areas, emissions into the environment, water discharges, and storage and disposition of hazardous wastes. In addition, legislation has been enacted which requires well and facility sites to be abandoned and reclaimed to the satisfaction of state authorities. The costs of environmental regulation are already significant, and additional or more stringent regulation could increase these costs or could otherwise negatively affect our business.
 
Current or future distressed financial conditions of customers could have an adverse impact on us in the event these customers are unable to pay us for the products or services we provide.
 
Some of our customers are experiencing, or may experience in the future, severe financial problems that have had or may have a significant impact on their creditworthiness. We cannot provide assurance that one or more of our financially distressed customers will not default on their obligations to us or that such a default or defaults will not have a material adverse effect on our business, financial position, future results of operations, or future cash flows. Furthermore, the bankruptcy of one or more of our customers, or some other similar proceeding or liquidity constraint, might make it unlikely that we would be able to collect all or a significant portion of amounts owed by the distressed entity or entities. In addition, such events might force such customers to reduce or curtail their future use of our products and services, which could have a material adverse effect on our results of operations and financial condition.
 

 
42

 
Item 1A.   Risk Factors.  (continued)
Knight Inc. Form 10-K


The general uncertainty associated with the current world economic and political environments in which we exist may adversely impact our financial performance.
 
Our financial performance is impacted by overall marketplace spending and demand. We are continuing to assess the effect that terrorism would have on our businesses and in response, we have increased security with respect to our assets. Recent federal legislation provides an insurance framework that should cause current insurers to continue to provide sabotage and terrorism coverage under standard property insurance policies.
 
Nonetheless, there is no assurance that adequate sabotage and terrorism insurance will be available at rates we believe are reasonable throughout 2008.
 
Increased regulatory requirements relating to the integrity of our pipelines will require us to spend additional money to comply with these requirements.
 
Through our regulated pipeline subsidiaries, we are subject to extensive laws and regulations related to pipeline integrity. There are, for example, federal guidelines for the U.S. Department of Transportation and pipeline companies in the areas of testing, education, training and communication. Compliance with laws and regulations requires significant expenditures. We have increased our capital expenditures to address these matters and expect to significantly increase these expenditures in the foreseeable future. Additional laws and regulations that may be enacted in the future or a new interpretation of existing laws and regulations could significantly increase the amount of these expenditures.
 
Future business development of our products pipelines is dependent on the supply of, and demand for, crude oil and other liquid hydrocarbons, particularly from the Alberta oilsands.
 
Our pipelines depend on production of natural gas, oil and other products in the areas serviced by our pipelines. Without reserve additions, production will decline over time as reserves are depleted and production costs may rise. Producers may shut down production at lower product prices or higher production costs, especially where the existing cost of production exceeds other extraction methodologies, such as at the Alberta oilsands. Producers in areas serviced by us may not be successful in exploring for and developing additional reserves, and the gas plants and the pipelines may not be able to maintain existing volumes of throughput. Commodity prices and tax incentives may not remain at a level which encourages producers to explore for and develop additional reserves, produce existing marginal reserves or renew transportation contracts as they expire.
 
Changes in the business environment, such as a decline in crude oil prices, an increase in production costs from higher feedstock prices, supply disruptions, or higher development costs, could result in a slowing of supply from the Alberta oilsands. In addition, changes in the regulatory environment or governmental policies may have an impact on the supply of crude oil. Each of these factors impact our customers shipping through our pipelines, which in turn could impact the prospects of new transportation contracts or renewals of existing contracts.
 
Throughput on our products pipelines may also decline as a result of changes in business conditions. Over the long term, business will depend, in part, on the level of demand for oil and natural gas in the geographic areas in which deliveries are made by pipelines and the ability and willingness of shippers having access or rights to utilize the pipelines to supply such demand. The implementation of new regulations or the modification of existing regulations affecting the oil and gas industry could reduce demand for natural gas and crude oil, increase our costs and may have a material adverse effect on our results of operations and financial condition. We cannot predict the impact of future economic conditions, fuel conservation measures, alternative fuel requirements, governmental regulation or technological advances in fuel economy and energy generation devices, all of which could reduce the demand for natural gas and oil.
 
We are subject to U.S. dollar/Canadian dollar exchange rate fluctuations.
 
As a result of our ownership of the Express Pipeline System and Kinder Morgan Energy Partners’ ownership of Trans Mountain, the Vancouver Wharves terminal, the Cochin pipeline system, and Kinder Morgan Energy Partners’ terminal expansion projects located in Canada, a portion of our assets, liabilities, revenues and expenses are denominated in Canadian dollars. We are a U.S. dollar reporting company. Fluctuations in the exchange rate between United States and Canadian dollars could expose us to reductions in the U.S. dollar value of our earnings and cash flows and a reduction in our stockholders’ equity under applicable accounting rules.
 
The future success of Kinder Morgan Energy Partners’ oil and gas development and production operations depends in part upon its ability to develop additional oil and gas reserves that are economically recoverable.
 
The rate of production from oil and natural gas properties declines as reserves are depleted. Without successful development activities, the reserves and revenues of the oil producing assets within Kinder Morgan Energy Partners’ CO2 business segment will decline. Kinder Morgan Energy Partners may not be able to develop or acquire additional reserves at an
 

 
43

 
Item 1A.   Risk Factors.  (continued)
Knight Inc. Form 10-K


acceptable cost or have necessary financing for these activities in the future. Additionally, if Kinder Morgan Energy Partners does not realize production volumes greater than, or equal to, its hedged volumes, Kinder Morgan Energy Partners will be liable to perform on hedges currently valued at greater than $1.3 billion in favor of its counter-parties.
 
The development of oil and gas properties involves risks that may result in a total loss of investment.
 
The business of developing and operating oil and gas properties involves a high degree of business and financial risk that even a combination of experience, knowledge and careful evaluation may not be able to overcome. Acquisition and development decisions generally are based on subjective judgments and assumptions that, while they may be reasonable, are by their nature speculative. It is impossible to predict with certainty the production potential of a particular property or well. Furthermore, a successful completion of a well does not ensure a profitable return on the investment. A variety of geological, operational, or market-related factors, including, but not limited to, unusual or unexpected geological formations, pressures, equipment failures or accidents, fires, explosions, blowouts, cratering, pollution and other environmental risks, shortages or delays in the availability of drilling rigs and the delivery of equipment, loss of circulation of drilling fluids or other conditions may substantially delay or prevent completion of any well, or otherwise prevent a property or well from being profitable. A productive well may become uneconomic in the event water or other deleterious substances are encountered, which impair or prevent the production of oil and/or gas from the well. In addition, production from any well may be unmarketable if it is contaminated with water or other deleterious substances.
 
The volatility of natural gas and oil prices could have a material adverse effect on our business.
 
The revenues, profitability and future growth of Kinder Morgan Energy Partners’ CO2 business segment and the carrying value of its oil and natural gas properties depend to a large degree on prevailing oil and gas prices. Prices for oil and natural gas are subject to large fluctuations in response to relatively minor changes in the supply and demand for oil and natural gas, uncertainties within the market and a variety of other factors beyond our control. These factors include, among other things, weather conditions and events such as hurricanes in the United States; the condition of the United States economy; the activities of the Organization of Petroleum Exporting Countries; governmental regulation; political stability in the Middle East and elsewhere; the foreign supply of oil and natural gas; the price of foreign imports; and the availability of alternative fuel sources.
 
A sharp decline in the price of natural gas or oil prices would result in a commensurate reduction in our revenues, income and cash flows from the production of oil and natural gas and could have a material adverse effect on the carrying value of Kinder Morgan Energy Partners’ proved reserves. In the event prices fall substantially, Kinder Morgan Energy Partners may not be able to realize a profit from its production and would operate at a loss. In recent decades, there have been periods of both worldwide overproduction and underproduction of hydrocarbons and periods of both increased and relaxed energy conservation efforts. Such conditions have resulted in periods of excess supply of, and reduced demand for, crude oil on a worldwide basis and for natural gas on a domestic basis. These periods have been followed by periods of short supply of, and increased demand for, crude oil and natural gas. The excess or short supply of crude oil or natural gas has placed pressures on prices and has resulted in dramatic price fluctuations even during relatively short periods of seasonal market demand.
 
Our use of hedging arrangements could result in financial losses or reduce our income.
 
We currently engage in hedging arrangements to reduce our exposure to fluctuations in the prices of oil and natural gas. These hedging arrangements expose us to risk of financial loss in some circumstances, including when production is less than expected, when the counterparty to the hedging contract defaults on its contract obligations, or when there is a change in the expected differential between the underlying price in the hedging agreement and the actual prices received. In addition, these hedging arrangements may limit the benefit we would otherwise receive from increases in prices for oil and natural gas.
 
The accounting standards regarding hedge accounting are very complex, and even when we engage in hedging transactions (for example, to mitigate our exposure to fluctuations in commodity prices or currency exchange rates or to balance our exposure to fixed and floating interest rates) that are effective economically, these transactions may not be considered effective for accounting purposes. Accordingly, our financial statements may reflect some volatility due to these hedges, even when there is no underlying economic impact at that point. In addition, it is not always possible for us to engage in a hedging transaction that completely mitigates our exposure to commodity prices. Our financial statements may reflect a gain or loss arising from an exposure to commodity prices for which we are unable to enter into a completely effective hedge.
 
Item 1B.  Unresolved Staff Comments.
 
None.
 

 

 
44

 
 
Knight Form 10-K


Item 3.    Legal Proceedings.
 
The reader is directed to Note 17 of the accompanying Notes to Consolidated Financial Statements, which is incorporated herein by reference.
 
Item 4.    Submission of Matters to a Vote of Security Holders.
 
None.
 

 
45

 
 
Knight Form 10-K


PART II
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
  
Prior to the Going Private transaction, our common stock was listed for trading on the New York Stock Exchange under the symbol “KMI.” Dividends paid and the high and low sale prices per share, as reported on the New York Stock Exchange, of our common stock by quarter for the last two years are provided below.
 
 
Market Price Per Share
 
2007
 
2006
 
Low
 
High
 
Low
 
High
Quarter Ended:
             
March 31                                                     
$104.97
 
$107.02
 
$89.13
 
$103.75
June 301                                                     
$105.32
 
$108.14
 
$81.00
 
$103.00
September 30                                                 
n/a
 
n/a
 
$99.50
 
$105.00
December 31                                                  
n/a
 
n/a
 
$104.00
 
$106.20
  
 
Dividends Paid Per Share
 
2007
 
2006
Quarter Ended:
     
March 31                                                     
$0.8750
 
$0.8750
June 301                                                     
$0.8750
 
$0.8750
September 30                                                 
n/a
 
$0.8750
December 31                                                 
n/a
 
$0.8750
__________
1
As a result of the Going Private transaction, our common stock ceased trading on May 30, 2007.
 
There were no sales of unregistered equity securities during the period covered by this report, and we repurchased none of our equity securities during the fourth quarter of 2007.
 
For information regarding our equity compensation plans, please refer to Item 12, included elsewhere herein.
 
Item 6.

Five-Year Review1
Knight Inc. and Subsidiaries
 
 
Successor
Company
   
Predecessor Company
 
Seven Months Ended
   
Five Months
                               
 
December 31,
   
Ended
 
Year Ended December 31,
 
20072
   
May 31, 2007
 
20063,4
 
20054
 
2004
 
2003
 
(In millions)
   
(In millions)
Operating Revenues
$
6,394.7
     
$
4,165.1
   
$
10,208.6
   
$
1,025.6
   
$
877.7
   
$
848.8
 
Gas Purchases and Other Costs of Sales
 
3,656.6
       
2,490.4
     
6,339.4
     
302.6
     
194.2
     
232.1
 
Other Operating Expenses5,6
 
1,695.3
       
1,469.9
     
2,124.0
     
341.7
     
342.5
     
316.5
 
Operating Income
 
1,042.8
       
204.8
     
1,745.2
     
381.3
     
341.0
     
300.2
 
Other Income and (Expenses)
 
(566.9
)
     
(302.0
)
   
(858.9
)
   
470.0
     
365.2
     
281.5
 
Income (Loss) from Continuing Operations
Before Income Taxes
 
475.9
       
(97.2
)
   
886.3
     
851.3
     
706.2
     
581.7
 
Income Taxes
 
227.4
       
135.5
     
285.9
     
337.1
     
208.0
     
225.1
 
Income (Loss) from Continuing Operations
 
248.5
       
(232.7
)
   
600.4
     
514.2
     
498.2
     
356.6
 
Income (Loss) from Discontinued Operations, Net of Tax7
 
(1.5
)
     
298.6
     
(528.5
)
   
40.4
     
23.9
     
25.1
 
Net Income
$
247.0
     
$
65.9
   
$
71.9
   
$
554.6
   
$
522.1
   
$
381.7
 
  
                                               
Capital Expenditures8
$
1,287.0
     
$
652.8
   
$
1,375.6
   
$
134.1
   
$
103.2
   
$
132.0
 
__________
1
Includes significant impacts from acquisitions and dispositions of assets. See Notes 4 and 5 of the accompanying Notes to Consolidated Financial Statements for additional information.

 
46

 
Item 6.   Selected Financial Data  (continued)
Knight Form 10-K


 
2
Includes significant impacts resulting from the Going Private transaction. See Note 1(B) of the accompanying Notes to Consolidated Financial Statements for additional information.
3
Due to our adoption of EITF No. 04-5, effective January 1, 2006 the accounts, balances and results of operations of Kinder Morgan Energy Partners are included in our financial statements and we no longer apply the equity method of accounting to our investments in Kinder Morgan Energy Partners. See Note 1(B) of the accompanying Notes to Consolidated Financial Statements.
4
Includes the results of Terasen Inc. subsequent to its November 30, 2005 acquisition by us. See Notes 4, 6 and 7 of the accompanying Notes to Consolidated Financial Statements for information regarding Terasen.
5
Includes charges of $1.2 million, $6.5 million, $33.5 million, and $44.5 million in 2006, 2005, 2004 and 2003, respectively, to reduce the carrying value of certain power assets.
6
Includes an impairment charge of $377.1 million in the five months ended May 31, 2007 relating to Kinder Morgan Energy Partners’ acquisition of Trans Mountain pipeline from Knight Inc. on April 30, 2007. See Note 1(I) of the accompanying Notes to Consolidated Financial Statements.
7
Includes a charge of $650.5 million in 2006 to reduce the carrying value of Terasen Inc.; see Note 6 of the accompanying Notes to Consolidated Financial Statements.
8
Capital Expenditures shown are for continuing operations only.
 
 
As of December 31,
         
 
Successor Company
   
Predecessor Company
 
20071
       
20062
     
20053
     
2004
     
2003
   
 
(In millions)
       
(In millions, except percentages)
Total Assets                        
$
36,101.0
         
$
26,795.6
       
$
17,451.6
       
$
10,116.9
       
$
10,036.7
     
  
                                                           
Capitalization:
                                                           
Common Equity4
$
8,069.2
 
30
%
   
$
3,657.5
 
20
%
 
$
4,051.4
 
34
%
 
$
2,919.5
 
45
%
 
$
2,691.8
 
39
%
Deferrable Interest Debentures
 
283.1
 
1
%
     
283.6
 
2
%
   
283.6
 
2
%
   
283.6
 
4
%
   
283.6
 
4
%
Capital Securities
 
-
 
-
       
106.9
 
1
%
   
107.2
 
1
%
   
-
 
-
     
-
 
-
 
Minority Interests
 
3,314.0
 
13
%
     
3,095.5
 
17
%
   
1,247.3
 
10
%
   
1,105.4
 
17
%
   
1,010.1
 
15
%
Outstanding Notes and Debentures5
 
14,814.6
 
56
%
     
10,623.9
 
60
%
   
6,286.8
 
53
%
   
2,258.0
 
34
%
   
2,837.5
 
42
%
Total Capitalization
$
26,480.9
 
100
%
   
$
17,767.4
 
100
%
 
$
11,976.3
 
100
%
 
$
6,566.5
 
100
%
 
$
6,823.0
 
100
%
__________
1
Includes significant impacts resulting from the Going Private transaction. See Note 1(B) of the accompanying Notes to Consolidated Financial Statements for additional information.
2
Due to our adoption of EITF No. 04-5, effective January 1, 2006 the accounts, balances and results of operations of Kinder Morgan Energy Partners are included in our financial statements and we no longer apply the equity method of accounting to our investments in Kinder Morgan Energy Partners. See Note 1(B) of the accompanying Notes to Consolidated Financial Statements.
3
Reflects the acquisition of Terasen Inc. on November 30, 2005. See Notes 4, 6 and 7 of the accompanying Notes to Consolidated Financial Statements for information regarding this acquisition.
4
Excluding Accumulated Other Comprehensive Income/Loss.
5
Excluding the value of interest rate swaps and short-term debt. See Note 10 of the accompanying Notes to Consolidated Financial Statements.
 

 
47

 
Knight Form 10-K


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

General
 
The following discussion should be read in conjunction with the accompanying Consolidated Financial Statements and related Notes.
 
We are an energy infrastructure provider through our direct ownership and operation of energy-related assets, and through our ownership interests in and operation of Kinder Morgan Energy Partners. As described in “Business Strategy” under Items 1 and 2 “Business and Properties” elsewhere in this report, our strategy and focus continues to be on ownership of fee-based energy-related assets which are core to the energy infrastructure of North America and serve growing markets. These assets tend to have relatively stable cash flows while presenting us with opportunities to expand our facilities to serve additional customers and nearby markets. We evaluate the performance of our investment in these assets using, among other measures, segment earnings before depreciation, depletion and amortization. In addition, please see “Recent Developments” under Items 1 and 2 “Business and Properties” elsewhere in this report.
 
On August 28, 2006, we entered into an agreement and plan of merger whereby generally each share of our common stock would be converted into the right to receive $107.50 in cash without interest. We in turn would merge with a wholly owned subsidiary of Knight Holdco LLC, a privately owned company in which Richard D. Kinder, our Chairman and Chief Executive Officer, would be a major investor. Our board of directors, on the unanimous recommendation of a special committee composed entirely of independent directors, approved the agreement and recommended that our stockholders approve the merger. Our stockholders voted to approve the proposed merger agreement at a special meeting held on December 19, 2006. 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 our management, most of whom are also senior officers of Kinder Morgan G.P., Inc. and of Kinder Morgan Management; our 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. As a result of this transaction, referred to herein as “the Going Private transaction,” (i) we are now privately owned, (ii) our stock is no longer traded on the New York Stock Exchange, and (iii) we have adopted a new basis of accounting for our assets and liabilities.
 
As a result of our adoption of a new basis of accounting, amounts in this discussion and analysis and in the accompanying consolidated financial statements for dates and periods prior to the closing of the Going Private transaction are labeled “Predecessor Company” (and reflect the historical basis of accounting for our assets and liabilities), while amounts for dates and periods after the closing are labeled “Successor Company” (and reflect the new basis of accounting for our assets and liabilities). In addition, solely for the purpose of providing a basis of comparing 2007 with previous years, we have provided certain full-year 2007 information that combines amounts reflecting both the historical and new basis for our assets and liabilities. Additional information on the Going Private transaction and its effect on our financial information is contained in Note 1(B) of the accompanying Notes to Consolidated Financial Statements.
 
In this report, unless the context requires otherwise, references to “we,” “us,” “our,” or the “Company” are intended to mean Knight Inc. and its consolidated subsidiaries, including Kinder Morgan Energy Partners, L.P., both before and after the Going Private transaction. Unless the context requires otherwise, references to “Kinder Morgan Energy Partners” are intended to mean Kinder Morgan Energy Partners, L.P. and its consolidated subsidiaries, a publicly traded pipeline master limited partnership in which we own the general partner interest and significant limited partner interests and whose transactions and balances are consolidated with ours beginning January 1, 2006 as discussed elsewhere herein.
 
In February 2007, we entered into a definitive agreement to sell our Canada-based retail natural gas distribution operations to Fortis Inc., for approximately C$3.7 billion including cash and assumed debt, and as a result of a redetermination of fair value in light of this proposed sale, we recorded an estimated goodwill impairment charge of approximately $650.5 million in the fourth quarter of 2006. This sale was completed in May 2007 (see Note 6 of the accompanying Notes to Consolidated Financial Statements). In prior periods, we referred to these operations principally as the Terasen Gas business segment. In March 2007, we entered into an agreement to sell the Corridor Pipeline System to Inter Pipeline Fund in Canada for approximately C$760 million, including debt. This sale was completed in June 2007. Inter Pipeline Fund also assumed all of the debt associated with the expansion taking place on Corridor at the time of the sale. Also in March 2007, we completed the sale of our U.S. retail natural gas distribution and related operations to GE Energy Financial Services, a subsidiary of General Electric Company, and Alinda Investments LLC for $710 million and an adjustment for working capital. In prior periods, we referred to these operations as the Kinder Morgan Retail business segment. In December 2007, we entered into a definitive agreement to sell an 80% ownership interest in our NGPL business segment at a price equivalent to a total enterprise value of approximately $5.9 billion, subject to certain adjustments (see Note 1(M)) of the accompanying Notes to Consolidated Financial Statements. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for
 

 
48

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


the Impairment or Disposal of Long-Lived Assets, the financial results of the Terasen Gas, Corridor and Kinder Morgan Retail operations have been reclassified to discontinued operations for all periods presented, and 80% of the assets and liabilities associated with the NGPL business segment are included in assets and liabilities held for sale captions, with the remaining 20% included in the investment caption in the accompanying Consolidated Balance Sheet at December 31, 2007. Refer to the heading “Discontinued Operations” included elsewhere in Management’s Discussion and Analysis for additional information regarding discontinued operations.
 
On April 30, 2007, Kinder Morgan, Inc. sold the Trans Mountain pipeline system to Kinder Morgan Energy Partners for approximately $550 million. The transaction was approved by the independent members of our board of directors and those of Kinder Morgan Management following the receipt, by each board, of separate fairness opinions from different investment banks. The Trans Mountain pipeline system transports crude oil and refined products from Edmonton, Alberta, Canada to marketing terminals and refineries in British Columbia and the State of Washington. An impairment of the Trans Mountain pipeline system was recorded in the first quarter of 2007; see Note 1(I) of the accompanying Notes to Consolidated Financial Statements.
 
As discussed in Note 1(B) of the accompanying Notes to Consolidated Financial Statements, due to our adoption of EITF No. 04-5, effective as of January 1, 2006, Kinder Morgan Energy Partners and its consolidated subsidiaries are included as consolidated subsidiaries of Knight Inc. in our consolidated financial statements. Accordingly, their accounts, balances and results of operations are included in our consolidated financial statements for periods beginning on and after January 1, 2006, and we no longer apply the equity method of accounting to our investment in Kinder Morgan Energy Partners. Notwithstanding the consolidation of Kinder Morgan Energy Partners and its subsidiaries into our financial statements pursuant to EITF 04-5, we are not liable for, and our assets are not available to satisfy, the obligations of Kinder Morgan Energy Partners and/or its subsidiaries and vice versa. Responsibility for payments of obligations reflected in our or Kinder Morgan Energy Partners’ financial statements is a legal determination based on the entity that incurs the liability. The determination of responsibility for payment among entities in our consolidated group of subsidiaries was not impacted by the adoption of EITF 04-5.
 
Our adoption of a new basis of accounting for our assets and liabilities as a result of the Going Private transaction, our adoption of EITF No. 04-5, our acquisition of Terasen Inc., the reclassification of the financial results of our retail natural gas distribution and related operations and our Corridor operations, the impairment of goodwill described above and other acquisitions and divestitures (including the transfer of certain assets to Kinder Morgan Energy Partners) discussed in Notes 1(B), 4, 5, 6, 7 and 19 of the accompanying Notes to Consolidated Financial Statements affect comparisons of our financial position and results of operations between periods.
 
On November 20, 2007, we entered into a definitive agreement to sell our interests in three natural gas-fired power plants in Colorado to Bear Stearns. The closing of the sale occurred on January 25, 2008, effective January 1, 2008, and we received net proceeds of $63.1 million.
 
To convert December 31, 2007 and 2006 balances denominated in Canadian dollars to U.S. dollars, we used the December 31, 2007 and 2006 Bank of Canada closing exchange rate of 1.012 and 0.8581 U.S. dollars per Canadian dollar, respectively.
 
Critical Accounting Policies and Estimates
 
Our discussion and analysis of financial condition and results of operations are based on our consolidated financial statements, prepared in accordance with accounting principles generally accepted in the United States of America and contained within this report. Certain amounts included in or affecting our consolidated financial statements and related disclosure must be estimated, requiring us to make certain assumptions with respect to values or conditions that cannot be known with certainty at the time the financial statements are prepared. The reported amounts of our assets and liabilities, revenues and expenses and associated disclosures with respect to contingent assets and obligations are necessarily affected by these estimates. We evaluate these estimates on an ongoing basis, utilizing historical experience, consultation with experts and other methods we consider reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from our estimates. Any effects on our business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.
 
In preparing our consolidated financial statements and related disclosures, we must use estimates in determining the economic useful lives of our assets, the effective income tax rate to apply to our pre-tax income, deferred income tax assets, deferred income tax liabilities, obligations under our employee benefit plans, provisions for uncollectible accounts receivable, the fair values used to allocate purchase price and to determine possible asset impairment charges, cost and timing of environmental remediation efforts, potential exposure to adverse outcomes from judgments, environmental claims, litigation settlements or transportation rate cases, reserves for legal fees, exposures under contractual indemnifications, unbilled revenues, and various other recorded or disclosed amounts. Certain of these accounting estimates are of more significance in our financial statement preparation process than others, which policies are discussed following. Our policies and estimation
 

 
49

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


methodologies are generally the same in both the predecessor and successor company periods, except where explicitly discussed.
 
Environmental Matters
 
With respect to our environmental exposure, we utilize both internal staff and external experts to assist us in identifying environmental issues and in estimating the costs and timing of remediation efforts. We expense or capitalize, as appropriate, environmental expenditures that relate to current operations, and we record environmental liabilities when environmental assessments and/or remedial efforts are probable and we can reasonably estimate the costs. We do not discount environmental liabilities to a net present value, and we recognize receivables for anticipated associated insurance recoveries when such recoveries are deemed to be probable.
 
The recording of environmental accruals often coincides with the completion of a feasibility study or the commitment to a formal plan of action, but generally, we recognize and/or adjust our environmental liabilities following routine reviews of potential environmental issues and claims that could impact our assets or operations. These adjustments may result in increases in environmental expenses and primarily result from quarterly reviews of potential environmental issues and resulting changes in environmental liability estimates. In making these liability estimations, we consider the effect of environmental compliance, pending legal actions against us, and potential third-party liability claims. For more information on our environmental disclosures, see Note 17 of the accompanying Notes to Consolidated Financial Statements.
 
Legal Matters
 
We are subject to litigation and regulatory proceedings as a result of our business operations and transactions. We utilize both internal and external counsel in evaluating our potential exposure to adverse outcomes from orders, judgments or settlements. To the extent that actual outcomes differ from our estimates, or additional facts and circumstances cause us to revise our estimates, our earnings will be affected. In general, we expense legal costs as incurred. When we identify specific litigation that is expected to continue for a significant period of time and require substantial expenditures, we identify a range of possible costs expected to be required to litigate the matter to a conclusion or reach an acceptable settlement. If no amount within this range is a better estimate than any other amount, we record a liability equal to the low end of the range. Any such liability recorded is revised as better information becomes available.
 
As of December 31, 2007, our most significant ongoing litigation proceedings involve Kinder Morgan Energy Partners’ Pacific operations. Tariffs charged by Kinder Morgan Energy Partners’ Pacific operations’ pipeline systems are subject to certain proceedings at the Federal Energy Regulatory Commission (“FERC”) involving shippers’ complaints regarding the interstate rates, as well as practices and the jurisdictional nature of certain facilities and services. Generally, the interstate rates on Kinder Morgan Energy Partners’ Pacific operations’ pipeline systems are “grandfathered” under the Energy Policy Act of 1992 unless “substantially changed circumstances” are found to exist. To the extent “substantially changed circumstances” are found to exist, Kinder Morgan Energy Partners’ Pacific operations may be subject to substantial exposure under these FERC complaints and could, therefore, owe reparations and/or refunds to complainants as mandated by the FERC or the United States’ judicial system.  For more information on Kinder Morgan Energy Partners’ Pacific operations’ regulatory proceedings, see Note 17 to our consolidated financial statements included elsewhere in this report.
 
Intangible Assets
 
Intangible assets are those assets which provide future economic benefit but have no physical substance. We account for our intangible assets according to the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. These accounting pronouncements introduced the concept of indefinite life intangible assets and provided that all identifiable intangible assets having indefinite useful economic lives, including goodwill, will not be subject to periodic amortization. Such assets are not to be amortized unless and until their lives are determined to be finite. Instead, the carrying amount of a recognized intangible asset with an indefinite useful life must be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of the asset has decreased below its carrying value. For the Predecessor Company, an impairment measurement test date of January 1 of each year was selected; for the Successor Company, we expect to use an annual impairment measurement date of May 31.
 
As of December 31, 2007, our goodwill was $8,174.0 million. Included in this goodwill balance is $250.1 million related to the Trans Mountain – KMP business segment, which we sold to Kinder Morgan Energy Partners on April 30, 2007. This sale transaction caused us to reconsider the fair value of the Trans Mountain pipeline system in relation to its carrying value, and to make a determination as to whether the associated goodwill was impaired. As a result of our analysis, we recorded a goodwill impairment charge of $377.1 million in the first quarter of 2007.
 
Our remaining intangible assets, excluding goodwill, include customer relationships, contracts and agreements, technology-based assets and lease value. These intangible assets have definite lives, are being amortized on a straight-line basis over their
 

 
50

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


estimated useful lives, and are reported separately as “Other Intangibles, Net” in the accompanying Consolidated Balance Sheets. As of December 31, 2007 and 2006, these intangibles totaled $321.1 million and $229.5 million, respectively.
 
Estimated Net Recoverable Quantities of Oil and Gas
 
We use the successful efforts method of accounting for Kinder Morgan Energy Partners’ oil and gas producing activities. The successful efforts method inherently relies on the estimation of proved reserves, both developed and undeveloped. The existence and the estimated amount of proved reserves affect, among other things, whether certain costs are capitalized or expensed, the amount and timing of costs depleted or amortized into income and the presentation of supplemental information on oil and gas producing activities. The expected future cash flows to be generated by oil and gas producing properties used in testing for impairment of such properties also rely in part on estimates of net recoverable quantities of oil and gas.
 
Proved reserves are the estimated quantities of oil and gas that geologic and engineering data demonstrates with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Estimates of proved reserves may change, either positively or negatively, as additional information becomes available and as contractual, economic and political conditions change.
 
Hedging Activities
 
We engage in a hedging program that utilizes derivative contracts to mitigate (offset in whole or in part) our exposure to fluctuations in energy commodity prices, fluctuations in currency exchange rates and to balance our exposure to fixed and floating interest rates, and we believe that these hedges are generally effective in realizing these objectives. However, the accounting standards regarding hedge accounting are complex, and even when we engage in hedging transactions that are effective economically, these transactions may not be considered effective for accounting purposes.
 
According to the provisions of current accounting standards, to be considered effective, changes in the value of a derivative contract or its resulting cash flows must substantially offset changes in the value or cash flows of the item being hedged. A perfectly effective hedge is one in which changes in the value of the derivative contract exactly offset changes in the value of the hedged item or expected cash flow of the future transactions in reporting periods covered by the derivative contract. The ineffective portion of the gain or loss and any component excluded from the computation of the effectiveness of the derivative contract must be reported in earnings immediately; accordingly, our financial statements may reflect some volatility due to these hedges.
 
In addition, it is not always possible for us to engage in a hedging transaction that completely mitigates our exposure to unfavorable changes in commodity prices. For example, when we purchase a commodity at one location and sell it at another, we may be unable to hedge completely our exposure to a differential in the price of the product between these two locations. Even when we cannot enter into a completely effective hedge, we often enter into hedges that are not completely effective in those instances where we believe to do so would be better than not hedging at all, but due to the fact that the part of the hedging transaction that is not effective in offsetting undesired changes in commodity prices (the ineffective portion) is required to be recognized currently in earnings, our financial statements may reflect a gain or loss arising from an exposure to commodity prices for which we are unable to enter into a completely effective hedge.
 
Employee Benefit Plans
 
With respect to the amount of income or expense we recognize in association with our pension and retiree medical plans, we must make a number of assumptions with respect to both future financial conditions (for example, medical costs, returns on fund assets and market interest rates) as well as future actions by plan participants (for example, when they will retire and how long they will live after retirement). Most of these assumptions have relatively minor impacts on the overall accounting recognition given to these plans, but two assumptions in particular, the discount rate and the assumed long-term rate of return on fund assets, can have significant effects on the amount of expense recorded and liability recognized. We review historical trends, future expectations, current and projected market conditions, the general interest rate environment and benefit payment obligations to select these assumptions. The discount rate represents the market rate for a high quality corporate bond. The selection of these assumptions is further discussed in Note 12 of the accompanying Notes to Consolidated Financial Statements. While we believe our choices for these assumptions are appropriate in the circumstances, other assumptions could also be reasonably applied and, therefore, we note that, at our current level of pension and retiree medical funding, a change of 1% in the long-term return assumption would increase (decrease) our annual retiree medical expense by approximately $725,000 ($725,000) and would increase (decrease) our annual pension expense by $2.6 million ($2.6 million) in comparison to that recorded in 2007. Similarly, a 1% change in the discount rate would increase (decrease) our accumulated postretirement benefit obligation by $6.9 million ($6.3 million) and would increase (decrease) our projected pension benefit obligation by $31.5 million ($28.0 million) compared to those balances as of December 31, 2007.
 

 
51

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


Income Taxes
 
We record a valuation allowance to reduce our deferred tax assets to an amount that is more likely than not to be realized. While we have considered estimated future taxable income and prudent and feasible tax planning strategies in determining the amount of our valuation allowance, any change in the amount that we expect to ultimately realize will be included in income in the period in which such a determination is reached. In addition, we do business in a number of states with differing laws concerning how income subject to each state’s tax structure is measured and at what effective rate such income is taxed. Therefore, we must make estimates of how our income will be apportioned among the various states in order to arrive at an overall effective tax rate. Changes in our effective rate, including any effect on previously recorded deferred taxes, are recorded in the period in which the need for such change is identified.
 
Consolidated Financial Results
 
The following discussion of consolidated financial results should be read in conjunction with the accompanying Consolidated Statement of Operations and related supplemental disclosures. The following discussion is a comparison of the for the years ended December 31, 2006 and 2005 (predecessor basis) with the combined consolidated financial results for the year ended December 31, 2007, which amounts include both predecessor (pre-Going Private) and successor (post-Going Private) balances. These combined consolidated financial results, while in our opinion useful for comparing our results between these periods, do not represent a measure prepared in accordance with generally accepted accounting principles. As discussed in Note 1(B) of the accompanying Notes to Consolidated Financial Statements, due to our adoption of EITF No. 04-5, beginning January 1, 2006, the accounts, balances and results of operations of Kinder Morgan Energy Partners are included in our consolidated financial statements and we no longer apply the equity method of accounting to our investment in Kinder Morgan Energy Partners.
 
 
Combined Results
 
Successor Company
   
Predecessor Company
 
For the Year Ended December 31, 2007
 
Seven Months Ended December 31, 2007
   
Five Months Ended May 31, 2007
 
Year Ended December 31, 2006
 
Year Ended December 31, 2005
 
(In millions)
   
(In millions)
Equity in Earnings of Kinder Morgan Energy Partners1,2
$
-
   
$
-
     
$
-
   
$
-
   
$
605.4
 
Segment Earnings before Depreciation, Depletion and Amortization of Excess Cost of Equity Investments:
                                       
NGPL
 
690.2
     
422.8
       
267.4
     
603.5
     
534.8
 
Power
 
22.3
     
13.4
       
8.9
     
23.2
     
16.5
 
Express
 
19.8
     
14.4
       
5.4
     
17.2
     
2.0