Edgar Filing: KNIGHT INC.

Knight Inc. 2007 2nd Quarter Form 10-Q

Table of Contents

Knight Inc. Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

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.

(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)

(713) 369-9000

(Registrant’s telephone number, including area code)

Kinder Morgan, Inc.

(Former name, former address and former fiscal year, if changed since last report)

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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of July 31, 2006 was 100 shares.

Knight Inc. Form 10-Q

KNIGHT INC. AND SUBSIDIARIES

FORM 10-Q

QUARTER ENDED JUNE 30, 2007

Contents


		Page Number
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements. (Unaudited)

	Consolidated Balance Sheets	3-4
	Consolidated Statements of Operations	5-6
	Consolidated Statements of Cash Flows	7-8
	Notes to Consolidated Financial Statements	9-61

Item 2.	Management’s Discussion and Analysis of Financial
	Condition and Results of Operations	62-93

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	93

Item 4.	Controls and Procedures.	93

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings.	94

Item 1A.	Risk Factors.	94-96

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	96

Item 3.	Defaults Upon Senior Securities.	96

Item 4.	Submission of Matters to a Vote of Security Holders.	96

Item 5.	Other Information.	96

Item 6.	Exhibits.	96-97

SIGNATURE		98

Knight Inc. Form 10-Q

PART I. - FINANCIAL INFORMATION

Item 1. Financial Statements.

CONSOLIDATED BALANCE SHEETS (Unaudited)

Knight Inc. and Subsidiaries

(In millions)


	Successor Company			Predecessor Company
	June 30, 2007			December 31, 2006
ASSETS:
Current Assets:
Cash and Cash Equivalents	$	148.0		$	129.8
Restricted Deposits		3.2			-
Accounts, Notes and Interest Receivable, Net:
Trade		997.9			1,173.3
Related Parties		8.5			10.4
Inventories		195.9			275.0
Gas Imbalances		11.9			14.9
Assets Held for Sale		-			87.9
Rate Stabilization		-			124.3
Other		124.2			204.2
		1,489.6			2,019.8

Notes Receivable – Related Parties		88.5			89.7

Investments		938.8			1,084.6

Goodwill		13,503.4			3,043.8

Other Intangibles, Net		221.9			229.5

Property, Plant and Equipment, Net:
Property, Plant and Equipment		15,932.4			21,145.9
Accumulated Depreciation, Depletion and Amortization		(67.8	)		(2,306.3	)
		15,864.6			18,839.6

Assets Held for Sale, Non-current		-			422.3

Deferred Charges and Other Assets		312.0			1,066.3

Total Assets	$	32,418.8		$	26,795.6

The accompanying notes are an integral part of these statements.

Knight Inc. Form 10-Q

CONSOLIDATED BALANCE SHEETS (Unaudited)

Knight Inc. and Subsidiaries

(In millions except share and per share amounts)


	Successor Company			Predecessor Company
	June 30, 2007			December 31, 2006
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current Liabilities:
Current Maturities of Long-term Debt	$	318.5		$	511.2
Notes Payable		710.5			1,665.3
Cash Book Overdrafts		45.2			59.6
Accounts Payable		888.1			1,115.5
Accrued Interest		217.4			220.4
Accrued Taxes		147.5			85.5
Gas Imbalances		23.4			29.2
Rate Stabilization		-			11.4
Liabilities Held for Sale		-			78.3
Other		617.5			840.0
		2,968.1			4,616.4

Other Liabilities and Deferred Credits:
Deferred Income Taxes		2,333.0			3,144.0
Liabilities Held for Sale, Non-current		-			7.9
Other		1,115.4			1,349.4
		3,448.4			4,501.3

Long-term Debt:
Outstanding Notes and Debentures		14,346.5			10,623.9
Deferrable Interest Debentures Issued to Subsidiary Trusts		283.1			283.6
Capital Securities		-			106.9
Value of Interest Rate Swaps		(54.6	)		46.4
		14,575.0			11,060.8

Minority Interests in Equity of Subsidiaries		3,584.3			3,095.5

Stockholders’ Equity:
Common Stock-
Authorized – 100 Shares, Par Value $0.01 Per Share at June 30, 2007 and 300,000,000 Shares, Par Value $5 Per Share at December 31, 2006
Outstanding – 100 Shares at June 30, 2007 and 149,166,709 Shares at December 31, 2006 Before Deducting 15,022,751 Shares Held in Treasury		-			745.8
Additional Paid-in Capital		7,831.2			3,048.9
Retained Earnings		30.2			778.7
Treasury Stock		-			(915.9	)
Accumulated Other Comprehensive Loss		(18.4	)		(135.9	)
Total Stockholders’ Equity		7,843.0			3,521.6

Total Liabilities and Stockholders’ Equity	$	32,418.8		$	26,795.6

The accompanying notes are an integral part of these statements.

Knight Inc. Form 10-Q

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

Knight Inc. and Subsidiaries

(In millions except per share amounts)


	Successor Company			Predecessor Company
	One Month Ended June 30, 2007			Two Months Ended May 31, 2007			Three Months Ended June 30, 2006
Operating Revenues:
Natural Gas Sales	$	561.9		$	1,012.7		$	1,497.9
Transportation and Storage		274.5			550.5			757.6
Oil and Product Sales		80.5			134.9			188.6
Other		24.9			31.2			44.1
Total Operating Revenues		941.8			1,729.3			2,488.2

Operating Costs and Expenses:
Gas Purchases and Other Costs of Sales		557.2			1,037.9			1,521.4
Operations and Maintenance		109.1			193.2			294.9
General and Administrative		30.0			173.2			88.0
Depreciation, Depletion and Amortization		73.0			109.6			128.6
Taxes, Other Than Income Taxes		15.7			31.3			44.2
Other Income, Net		(4.0	)		(0.1	)		(15.1	)
Total Operating Costs and Expenses		781.0			1,545.1			2,062.0

Operating Income		160.8			184.2			426.2

Other Income and (Expenses):
Earnings of Equity Investees		9.5			14.7			23.6
Interest Expense, Net		(84.6	)		(104.7	)		(138.8	)
Interest Expense – Deferrable Interest Debentures		(1.9	)		(3.6	)		(5.5	)
Minority Interests		(34.5	)		(32.5	)		(96.8	)
Other, Net		1.8			6.1			7.7
Total Other Income and (Expenses)		(109.7	)		(120.0	)		(209.8	)

Income from Continuing Operations Before Income Taxes		51.1			64.2			216.4
Income Taxes		21.4			47.7			64.3
Income from Continuing Operations		29.7			16.5			152.1
Income from Discontinued Operations, Net of Tax		0.5			61.8			5.1

Net Income	$	30.2		$	78.3		$	157.2

The accompanying notes are an integral part of these statements.

Knight Inc. Form 10-Q

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

Knight Inc. and Subsidiaries

(In millions except per share amounts)


	Successor Company			Predecessor Company
	One Month Ended June 30, 2007			Five Months Ended May 31, 2007			Six Months Ended June 30, 2006
Operating Revenues:
Natural Gas Sales	$	561.9		$	2,430.6		$	3,215.7
Transportation and Storage		274.5			1,354.5			1,521.4
Oil and Product Sales		80.5			325.8			363.0
Other		24.9			76.1			73.9
Total Operating Revenues		941.8			4,187.0			5,174.0

Operating Costs and Expenses:
Gas Purchases and Other Costs of Sales		557.2			2,490.5			3,267.4
Operations and Maintenance		109.1			483.1			555.7
General and Administrative		30.0			283.6			170.3
Depreciation, Depletion and Amortization		73.0			264.9			253.0
Taxes, Other Than Income Taxes		15.7			75.5			88.0
Other Income, Net		(4.0	)		(2.3	)		(15.1	)
Impairment of Assets		-			377.1			-
Total Operating Costs and Expenses		781.0			3,972.4			4,319.3

Operating Income		160.8			214.6			854.7

Other Income and (Expenses):
Earnings of Equity Investees		9.5			39.1			53.8
Interest Expense, Net		(84.6	)		(251.9	)		(268.2	)
Interest Expense – Deferrable Interest Debentures		(1.9	)		(9.1	)		(11.0	)
Minority Interests		(34.5	)		(90.7	)		(186.9	)
Other, Net		1.8			11.4			(10.0	)
Total Other Income and (Expenses)		(109.7	)		(301.2	)		(422.3	)

Income (Loss) from Continuing Operations Before Income Taxes		51.1			(86.6	)		432.4
Income Taxes		21.4			135.4			143.4
Income (Loss) from Continuing Operations		29.7			(222.0	)		289.0
Income from Discontinued Operations, Net of Tax		0.5			287.9			61.9

Net Income	$	30.2		$	65.9		$	350.9

The accompanying notes are an integral part of these statements.

Knight Inc. Form 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Knight Inc. and Subsidiaries

Increase (Decrease) in Cash and Cash Equivalents

(In millions)


	Successor Company			Predecessor Company
	One Month Ended June, 30, 2007			Five Months Ended May 31, 2007			Six Months Ended June 30, 2006
Cash Flows From Operating Activities:
Net Income	$	30.2		$	65.9		$	350.9
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Income from Discontinued Operations, Net of Tax		(0.5	)		(287.9	)		(61.9	)
Loss from Impairment of Assets		-			377.1			-
Depreciation, Depletion and Amortization		73.0			264.9			253.0
Deferred Income Taxes		4.1			138.7			41.3
Equity in Earnings of Equity Investees		(9.5	)		(39.1	)		(53.8	)
Distributions from Equity Investees		22.5			48.2			46.4
Minority Interests in Income of Consolidated Subsidiaries		34.5			90.7			186.9
Gains from Property Casualty Indemnifications		-			(1.8	)		-
Net Gains on Sales of Assets		(4.5	)		(2.6	)		(18.1	)
Mark-to-Market Interest Rate Swap Loss		-			-			22.3
Foreign Currency Loss		-			15.5			-
Changes in Gas in Underground Storage		(5.0	)		(84.2	)		(81.6	)
Changes in Working Capital Items		107.9			(220.6	)		(49.8	)
Net Proceeds from Termination of Interest Rate Swaps		-			51.9			-
Other, Net		(31.9	)		76.9			0.1
Net Cash Flows Provided by Continuing Operations		220.8			493.6			635.7
Net Cash Flows (Used in) Provided by Discontinued Operations		(2.1	)		109.8			248.8
Net Cash Flows Provided by Operating Activities		218.7			603.4			884.5

Cash Flows From Investing Activities:
Purchase of Predecessor Stock		(11,534.3	)		-			-
Capital Expenditures		(148.8	)		(652.8	)		(662.9	)
Acquisition of Entrega		-			-			(244.6	)
Acquisition of Terasen		-			-			(9.9	)
Other Acquisitions		(5.7	)		(42.1	)		(120.3	)
Net (Investments in) Proceeds from Margin Deposits		35.8			(54.8	)		(46.0	)
Other Investments		(14.6	)		(29.7	)		(3.6	)
Change in Natural Gas Storage and NGL Line Fill Inventory		1.5			8.4			(12.9	)
Property Causalty Indemnifications		-			8.0			-
Net (Cost of Removal) Proceeds from sales of Other Assets		7.5			(1.5	)		49.6
Net Cash Flows Used in Continuing Investing Activities		(11,658.6	)		(764.5	)		(1,050.6	)
Net Cash Flows Provided by Discontinued Investing Activities		199.9			1,488.2			28.7
Net Cash Flows (Used in) Provided by Investing Activities	$	(11,458.7	)	$	723.7		$	(1,021.9	)

Knight Inc. Form 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Knight Inc. and Subsidiaries

Increase (Decrease) in Cash and Cash Equivalents

(In millions)


	Successor Company			Predecessor Company
	One Month Ended June, 30, 2007			Five Months Ended May 31, 2007			Six Months Ended June 30, 2006
Cash Flows From Financing Activities:
Short-term Debt, Net	$	(230.2	)	$	(247.5	)	$	973.8
Long-term Debt Issued		5,305.0			1,000.0			-
Long-term Debt Retired		(455.5	)		(302.4	)		(2.9	)
Increase (Decrease) in Cash Book Overdrafts		0.5			(14.9	)		14.2
Common Stock Issued		-			9.9			16.9
Excess Tax Benefits from Share-based Payment Arrangements		-			56.7			5.8
Cash Paid to Share-based Award Holders Due to Going Private Transaction		(181.1	)		-			-
Issuance of Kinder Morgan Management, LLC Shares		-			297.9			-
Contributions From Successor Investors		5,112.0			-			-
Short-term Advances From (To) Unconsolidated Affiliates		(2.3	)		2.1			(7.3	)
Treasury Stock Acquired		-			-			(34.3	)
Cash Dividends, Common Stock		-			(234.9	)		(234.1	)
Minority Interests, Contributions		-			-			105.5
Minority Interests, Distributions		-			(248.9	)		(337.1	)
Debt Issuance Costs		(62.7	)		(13.1	)		(3.6	)
Other, Net		-			(4.3	)		(2.1	)
Net Cash Flows Provided by Continuing Financing Activities		9,485.7			300.6			494.8
Net Cash Flows Provided by (Used in) Discontinued Financing Activities		-			140.1			(289.4	)
Net Cash Flows Provided by Financing Activities		9,485.7			440.7			205.4

Effect of Exchange Rate Changes on Cash		-			7.4			4.6

Effect of Accounting Change on Cash		-			-			12.1

Cash Balance Included in Assets Held for Sale		-			(2.7	)		-

Net (Decrease) Increase in Cash and Cash Equivalents		(1,754.3	)		1,772.5			84.7
Cash and Cash Equivalents at Beginning of Period		1,902.3			129.8			116.6
Cash and Cash Equivalents at End of Period	$	148.0		$	1,902.3		$	201.3

For supplemental cash flow information, see Note 1(K).

The accompanying notes are an integral part of these statements.

Knight Inc. Form 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

General

We are a large energy transportation and storage company, operating or owning an interest in approximately 38,000 miles of pipelines and approximately 155 terminals. We have both regulated and nonregulated operations. We also own the general partner interest and a significant limited partner interest in Kinder Morgan Energy Partners, L.P., a publicly traded pipeline limited partnership. We began including 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 presented on a consolidated basis with ours and those of our other consolidated subsidiaries for financial reporting purposes; see the discussion under Note 1(A) “Basis of Presentation” following. Our executive offices are located at 500 Dallas Street, Suite 1000, Houston, Texas 77002 and our telephone number is (713) 369-9000. Unless the context requires otherwise, references to “we,” “us,” “our,” or the “Company” are intended to mean Knight Inc. (formerly Kinder Morgan, Inc.) and its consolidated subsidiaries both before and after the going private transaction discussed below. 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.

Kinder Morgan Management, LLC, referred to in this report as Kinder Morgan Management, is a publicly traded Delaware limited liability company that was formed on February 14, 2001. Kinder Morgan G.P., Inc., our indirect wholly owned subsidiary, owns all of Kinder Morgan Management’s voting shares. Kinder Morgan Management’s shares (other than the voting shares we hold) are traded on the New York Stock Exchange under the ticker symbol “KMR.” Kinder Morgan Management, pursuant to a delegation of control agreement, has been delegated, to the fullest extent permitted under Delaware law, all of Kinder Morgan G.P., Inc.’s power and authority to manage and control the business and affairs of Kinder Morgan Energy Partners, L.P., subject to Kinder Morgan G.P., Inc.’s right to approve certain transactions.

We have prepared the accompanying unaudited interim consolidated financial statements under the rules and regulations of the Securities and Exchange Commission. Under such rules and regulations, we have condensed or omitted certain information and notes normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America. We believe, however, that our disclosures are adequate to make the information presented not misleading. The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of our financial results for the interim periods presented. You should read these interim consolidated financial statements in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2006 (“2006 Form 10-K”).

On August 28, 2006, we entered into a definitive merger agreement under which investors including Richard D. Kinder, our Chairman and Chief Executive Officer, would acquire all of our outstanding common stock for $107.50 per share in cash. This acquisition of our common stock and related transactions are referred to in this report as the Going Private transaction. 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. Additional investors in the going-private transaction 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; our 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.

On May 30, 2007, this Going Private transaction closed, with Kinder Morgan, Inc. continuing as the surviving legal entity and subsequently renamed “Knight Inc.” We are privately owned. Upon closing of the transaction, our common stock is no longer traded on the New York Stock Exchange.

To convert June 30, 2007 balances denominated in Canadian dollars to U.S. dollars, we used the June 30, 2007 Bank of Canada closing exchange rate of 0.9386 U.S. dollars per Canadian dollar. All dollars are U.S. dollars, except where stated otherwise. Canadian dollars are designated as C$.

Nature of Operations and Summary of Significant Accounting Policies

For a complete discussion of our significant accounting policies, see Note 1 of Notes to Consolidated Financial Statements included in our 2006 Form 10-K.

(A) Basis of Presentation

Our consolidated financial statements include the accounts of Knight Inc. and our majority-owned subsidiaries, as well as those of Kinder Morgan Energy Partners. Investments in jointly owned operations in which we hold a 50% or less interest

Knight Inc. Form 10-Q

(other than Kinder Morgan Energy Partners) and have the ability to exercise significant influence over their operating and financial policies are accounted for under the equity method. All material intercompany transactions and balances have been eliminated. Certain prior period amounts have been reclassified to conform to the current presentation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from these estimates.

As discussed preceding, on May 30, 2007, all of our outstanding common stock was acquired by a group of investors including Richard D. Kinder, our Chairman and Chief Executive Officer, in the Going Private transaction. This acquisition was a “business combination” for accounting purposes, requiring that these investors, pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations, record the assets acquired and liabilities assumed at their fair market values as of the acquisition date, resulting in a new basis of accounting.

As a result of the application of the Security and Exchange Commission rules and guidance regarding “push down” accounting, the investors’ new accounting basis in our assets and liabilities is reflected in our financial statements effective with the closing of the Going Private transaction. Therefore, in the accompanying consolidated financial statements, transactions and balances prior to the closing of the Going Private transaction (the amounts labeled “Predecessor Company”) reflect the historical accounting basis in our assets and liabilities, while the amounts subsequent to the closing (labeled “Successor Company”) reflect the push down of the investors’ new basis to our financial statements. The Going Private transaction closed on May 30, 2007. While the Going Private transaction closed on May 30, 2007, for convenience, the Predecessor Company is assumed to end on May 31, 2007 and the Successor Company is assumed to begin on June 1, 2007. The results for the two day period, from May 30 to May 31, 2007, are not material to any of the periods presented.

As required by SFAS No. 141 (applied by the investors and pushed down to our financial statements), effective with the closing of the Going Private transaction, all of our assets and liabilities have been recorded at their estimated fair market values based on a preliminary allocation of the purchase price paid in the Going Private transaction. To the extent that we consolidate less than wholly owned subsidiaries (such as Kinder Morgan Energy Partners, L.P. and Kinder Morgan Management, LLC), the reported assets and liabilities for these entities have been given a new accounting basis only to the extent of our economic ownership interest in those entities. Therefore, the assets and liabilities of these entities are included in our financial statements, in part, at a new accounting basis reflecting the investors’ purchase of our economic interest in these entities (approximately 50% in the case of KMP and 14% in the case of KMR). The remaining percentage of these assets and liabilities, reflecting the continuing minority ownership interest, is included at its historical accounting basis. The purchase price paid in the Going Private transaction and the preliminary allocation of that purchase price is as follows:


	(In millions)
The Total Purchase Price Consisted of the Following:
Cash Paid	$	5,112.0
Kinder Morgan, Inc. Shares Contributed		2,719.2
Equity Contributed		7,831.2
Cash from Issuances of Long-term Debt		4,696.2
Total Purchase Price	$	12,527.4

The Preliminary Allocation of the Purchase Price is as Follows:
Current Assets	$	1,544.7
Goodwill		13,502.0
Investments		942.7
Property, Plant and Equipment, Net		15,777.4
Deferred Charges and Other Assets		1,602.0
Current Liabilities		(3,270.2	)
Deferred Income Taxes		(2,582.1	)
Other Deferred Credits		(1,774.6	)
Long-term Debt		(9,855.4	)
Minority Interests		(3,356.2	)
Accumulated Other Comprehensive Income		(2.9	)
	$	12,527.4

As with all purchase accounting transactions, the preliminary allocation of purchase price resulting from the Going Private transaction as shown preceding and as reflected in the accompanying consolidated financial statements will be adjusted during an allocation period as better or more complete information becomes available, principally third party valuation information. Some of these adjustments may be significant. Generally, this allocation period will not exceed one year, and

Knight Inc. Form 10-Q

will end when we are no longer waiting for information that is known to be available or obtainable.

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 are including Kinder Morgan Energy Partners and its consolidated subsidiaries as consolidated subsidiaries in our consolidated financial statements effective January 1, 2006. Notwithstanding the consolidation of Kinder Morgan Energy Partners and its subsidiaries into our financial statements pursuant to EITF 04-5, except as explicitly disclosed, 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.

(B)

Stock-Based Compensation

Effective January 1, 2006, we implemented Statement of Financial Accounting Standards (“SFAS”) No. 123R (revised 2004), Share-Based Payment (“SFAS No. 123R”). This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), and requires companies to expense the value of employee stock options and similar awards. Because we used the fair-value method of accounting for stock-based compensation for pro forma disclosure under SFAS No. 123, we applied SFAS No. 123R using the modified prospective method. Under this transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS No. 123 for pro forma disclosures.

In March 2007, all stock options and restricted stock held by employees of our discontinued U. S. Retail operations became fully vested. In May 2007, all restricted stock units held by employees of our discontinued Terasen gas operations became fully vested and any contingent stock unit grants were fully expensed. Finally, on May 30, 2007 all remaining stock options and restricted stock became fully vested and were exercised upon the closing of the Going Private transaction. We recorded expense of $25.7 million related to the accelerated vesting of these awards.

(C) Nature of Operations

Our business activities include: (i) transporting, storing and selling natural gas, (ii) transporting crude oil and transporting, storing and processing refined petroleum products, (iii) producing, transporting and selling carbon dioxide, commonly called CO₂, for use in, and selling crude oil produced from, enhanced oil recovery operations, (iv) transloading, storing and delivering a wide variety of bulk, petroleum, petrochemical and other liquid products at terminal facilities located across the United States, and (v) operating and, in previous periods, constructing electric generation facilities.

(D) Revenue Recognition Policies

We recognize revenues as services are rendered or goods are delivered and, if applicable, title has passed.

We provide various types of natural gas storage and transportation services to customers. When we provide these services, the natural gas remains the property of these customers at all times. In many cases (generally described as “firm service”), the customer pays a two-part rate that includes (i) a fixed fee reserving the right to transport or store natural gas in our facilities and (ii) a per-unit rate for volumes actually transported or injected into/withdrawn from storage. The fixed-fee component of the overall rate is recognized as revenue in the period the service is provided. The per-unit charge is recognized as revenue when the volumes are delivered to the customers’ agreed upon delivery point, or when the volumes are injected into/withdrawn from our storage facilities. In other cases (generally described as “interruptible service”), there is no fixed fee associated with the services because the customer accepts the possibility that service may be interrupted at our discretion in order to serve customers who have purchased firm service. In the case of interruptible service, revenue is recognized in the same manner utilized for the per-unit rate for volumes actually transported under firm service agreements. In addition to our “firm” and “interruptible” services, we also provide a Line Pack Service (“LPS”) to assist customers in managing short-term gas surpluses or deficits. Revenues are recognized based on the terms negotiated under these contracts.

We provide crude oil transportation services and refined petroleum products transportation and storage services to customers. Revenues are recorded when products are delivered and services have been provided. These amounts are adjusted according to terms prescribed by the toll settlements with shippers and approved by regulatory authorities.

We recognize bulk terminal transfer service revenues based on volumes loaded and unloaded. We recognize liquids terminal tank rental revenue ratably over the contract period. We recognize liquids terminal throughput revenue based on volumes received and volumes delivered. Liquids terminal minimum take-or-pay revenue is recognized at the end of the contract year or contract term depending on the terms of the contract. We recognize transmix processing revenues based on volumes

Knight Inc. Form 10-Q

processed or sold, and if applicable, when title has passed. We recognize energy-related product sales revenues based on delivered quantities.

Revenues from the sale of oil and natural gas liquids production are recorded using the entitlement method. Under the entitlement method, revenue is recorded when title passes based on our net interest. We record our entitled share of revenues based on entitled volumes and contracted sales prices. Revenues from the sale of natural gas production are recognized when the natural gas is sold. Since there is a ready market for oil and gas production, we sell the majority of our products soon after production at various locations, at which time title and risk of loss pass to the buyer. As a result, we maintain a minimum amount of product inventory in storage associated with these activities and the differences between actual production and sales is not significant.

(E) Inventories

Our Inventories consist of the following:


	Successor Company			Predecessor Company
	June 30, 2007			December 31, 2006
	(In millions)
Gas in Underground Storage (Current)		$	151.6		$	225.2
Product Inventories			20.6			20.4
Materials and Supplies			23.7			29.4
		$	195.9		$	275.0

(F) Goodwill

In accordance with the provisions of SFAS No. 141, Business Combinations, as a result of the Going Private transaction, all previously recorded goodwill assigned to our reportable segments at May 31, 2007 was eliminated, and the goodwill arising from this transaction was allocated among our segments. Changes in the carrying amount of our goodwill for the five months ended May 31, 2007 and the month ended June 30, 2007 are summarized as follows:


Predecessor Company:	December 31, 2006		Adjustments³			May 31, 2007
	(In millions)
Power Segment	$	24.8	$	-		$	24.8
Kinder Morgan Canada Segment¹		65.0		(65.0	)		-
Terasen Gas Segment²		692.6		(692.6	)		-
KMP – Products Pipelines Segment		943.4		(14.1	)		929.3
KMP – Natural Gas Pipelines Segment		288.4		-			288.4
KMP – CO₂ Segment		72.4		(0.5	)		71.9
KMP – Terminals Segment		365.2		(2.7	)		362.5
KMP – Trans Mountain Segment¹		592.0		(360.2	)		231.8

Consolidated Total	$	3,043.8	$	(1,135.1	)	$	1,908.7


Successor Company:	Allocation of Goodwill June 1, 2007		Adjustments⁴		June 30, 2007
	(In millions)
NGPL Segment	$	4,624.3	$	-	$	4,624.3
KMP – Products Pipelines Segment		2,586.9		-		2,586.9
KMP – Natural Gas Pipelines Segment		3,058.7		-		3,058.7
KMP – CO₂ Segment		1,454.2		-		1,454.2
KMP – Terminals Segment		1,546.1		-		1,546.1
KMP – Trans Mountain Segment		231.8		1.4		233.2

Consolidated Total	$	13,502.0	$	1.4	$	13,503.4

_________________

Knight Inc. Form 10-Q

Kinder Morgan Energy Partners acquired Trans Mountain from us on April 30, 2007. Prior to this transaction, Trans Mountain was in the Kinder Morgan Canada Segment. After the $377.1 million impairment of this asset, discussed further below, the remaining goodwill related to Trans Mountain was transferred to the KMP – Trans Mountain Segment. As a result of the sale of Terasen Pipelines (Corridor) Inc. and the transfer of Trans Mountain to Kinder Morgan Energy Partners, the business segment referred to in previous filings as Kinder Morgan Canada is no longer reported. See Note 9.

As discussed in Note 6, we closed the sale of our Terasen Gas segment on May 17, 2007.

Adjustments include (i) changes discussed in 1 and 2 above, (ii) the translation of goodwill denominated in foreign currencies and (iii) reductions in the allocation of equity method goodwill due to reductions in KMI’s ownership percentage of KMP.

⁴

Adjustment to Trans Mountain segment due to translation of goodwill denominated in foreign currency.

We evaluate for the impairment of goodwill in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. Our annual impairment tests determined that the carrying value of goodwill was not impaired. For the investments we continue to account for under the equity method of accounting, the premium or excess cost over underlying fair value of net assets is referred to as equity method goodwill and is not subject to amortization but rather to impairment testing in accordance with APB No. 18, The Equity Method of Accounting for Investments in Common Stock. As of both June 30, 2007 and December 31, 2006, we have reported $138.2 million of equity method goodwill within the caption “Investments” in the accompanying Consolidated Balance Sheets. This amount is based on the best information available to management at this time. In conjunction with the Going Private transaction, we are currently evaluating the recorded amount of equity method goodwill.

On April 18, 2007, we announced that Kinder Morgan Energy Partners would acquire the Trans Mountain pipeline system from us. (This transaction was completed April 30, 2007; see Note 15.) This transaction caused us to evaluate the fair value of the Trans Mountain pipeline system, in determining whether goodwill related to these assets was impaired. Accordingly, based on our consideration of supporting third-party information obtained regarding the fair values of the Trans Mountain pipeline system assets, a goodwill impairment charge of $377.1 million was recorded in the first quarter of 2007.

(G) Other Intangibles, Net

Our intangible assets other than goodwill include lease value, contracts, customer relationships and agreements. These intangible assets have definite lives, are being amortized on a straight-line basis over their estimated useful lives, and are reported separately as “Other Intangibles, Net” in the accompanying interim Consolidated Balance Sheets. Following is information related to our intangible assets:


	Successor Company				Predecessor Company
	June 30, 2007				December 31, 2006
	(In millions)
Customer Relationships, Contracts and Agreements:
Gross Carrying Amount		$	211.4			$	253.8
Accumulated Amortization			(1.2	)			(36.2	)
Net Carrying Amount			210.2				217.6

Technology-based Assets, Lease Value and Other:
Gross Carrying Amount			11.7				13.3
Accumulated Amortization			-				(1.4	)
Net Carrying Amount			11.7				11.9

Total Other Intangibles, Net		$	221.9			$	229.5

Knight Inc. Form 10-Q

Amortization expense on our intangibles consisted of the following (in millions):


	Successor Company		Predecessor Company
	One Month Ended June 30,		Two Months Ended May 31,		Three Months Ended June 30,		Five Months Ended May 31,		Six Months Ended June 30,
	2007		2007		2006		2007		2006
Customer Relationships, Contracts and Agreements	$	1.2	$	2.5	$	3.8	$	6.1	$	7.4
Technology-based Assets, Lease Value and Other¹		-		0.1		-		0.2		0.1
Total Amortization	$	1.2	$	2.6	$	3.8	$	6.3	$	7.5

_______________

Expense for the one month ended June 30, 2007 and the three months ended June 30, 2006 was less than $0.1 million.

As of June 30, 2007, the weighted-average amortization period for our intangible assets was approximately 17.8 years. Our estimated amortization expense for these assets for each of the next five fiscal years is approximately $15.1 million, $14.8 million, $13.8 million, $13.7 million and $13.6 million, respectively. The amortization periods are based on the best information available to management at this time. In conjunction with the Going Private transaction, we are currently evaluating the amortization periods of our intangible assets.

(H) Accounting for Minority Interests

The caption “Minority Interests in Equity of Subsidiaries” in the accompanying interim Consolidated Balance Sheets consists of the following:


	Successor Company		Predecessor Company
	June 30,		December 31,
	2007		2006
	(In millions)
Kinder Morgan Energy Partners	$	1,863.1	$	1,727.7
Kinder Morgan Management, LLC		1,681.8		1,328.4
Triton Power		26.2		25.9
Other		13.2		13.5
	$	3,584.3	$	3,095.5

On May 15, 2007, Kinder Morgan Energy Partners paid a quarterly distribution of $0.83 per common unit for the quarterly period ended March 31, 2007, of which $123.2 million was paid to the public holders (represented in minority interests) of Kinder Morgan Energy Partners’ common units. On July 18, 2007, Kinder Morgan Energy Partners declared a distribution of $0.85 per common unit for the quarterly period ended June 30, 2007. The distribution will be paid on August 14, 2007, to unitholders of record as of July 31, 2007.

(I) Asset Retirement Obligations (“ARO”)

We have recorded an obligation associated with the retirement of tangible long-lived assets and the associated retirement costs.

We have included $1.4 million of our total asset retirement obligations as of June 30, 2007 in the caption “Current Liabilities: Other” and the remaining $51.9 million in the caption “Other Liabilities and Deferred Credits: Other” in the accompanying interim Consolidated Balance Sheet. A reconciliation of the changes in our accumulated asset retirement obligations for the one month ended June 30, 2007, the five months ended May 31, 2007 and the six months ended June 30, 2006 are as follows, and additional information regarding our asset retirement obligations is included in our 2006 Form 10-K:

Knight Inc. Form 10-Q


	Successor Company		Predecessor Company
	One Month Ended June 30,		Five Months Ended May 31,			Six Months Ended June 30,
	2007		2007			2006
	(In millions)		(In millions)
Beginning of Period	$	53.1	$	52.5		$	3.2
KMP ARO Consolidated into KMI¹		-		-			43.2
Additions		-		0.2			5.0
Liabilities Settled		-		(0.7	)		(1.2	)
Accretion Expense		0.2		1.1			1.2
End of Period	$	53.3	$	53.1		$	51.4

Represents asset retirement obligation balances of Kinder Morgan Energy Partners as of December 31, 2005. Due to our adoption of EITF No. 04-5, beginning January 1, 2006, the transactions, accounts and balances of Kinder Morgan Energy Partners are included in our consolidated results as discussed in Note 1(A).

(J) Related Party Transactions

Significant Investors

As discussed under “General” elsewhere herein, as a result of the Going Private transaction, a number of individuals and entities became significant investors in us. Of those, by virtue of the size of their ownership interest, two of those investors became “related parties” to us as that term is defined in the authoritative accounting literature; (i) American International Group, Inc. and certain of its affiliates (“AIG”) and (ii) Goldman Sachs Capital Partners and certain of its affiliates (“Goldman Sachs”). We enter into transactions with certain AIG affiliates in the ordinary course of their conducting insurance and insurance-related activities, although no individual transaction is, and all such transactions collectively are not, material to our consolidated financial statements. We conduct commodity risk management activities in the ordinary course of implementing our risk management strategies in which the counterparty to certain of our derivative transactions is an affiliate of Goldman Sachs. In conjunction with these activities, we are a party (through one of our subsidiaries engaged in the production of crude oil) to a hedging facility with J. Aron & Company/Goldman Sachs, which requires us to provide certain periodic information but does not require the posting of margin. As a result of changes in the market value of our derivative positions, we have recorded both amounts receivable from and payable to Goldman Sachs affiliates. At June 30, 2007, the fair values of these derivative contracts are included in the accompanying interim Consolidated Balance Sheet within the captions indicated in the following table (in millions):


Derivative Asset (Liability):
Current Assets: Other	$	0.2
Current Liabilities: Other		(85.3	)
Other Liabilities and Deferred Credits: Other		(185.4	)

Plantation Pipe Line Company Note Receivable

Kinder Morgan Energy Partners has a seven-year note receivable bearing interest at the rate of 4.72% per annum from Plantation Pipe Line Company, its 51.17%-owned equity investee. The outstanding note receivable balance was $93.1 million and $92.0 million as of December 31, 2006 and June 30, 2007, respectively. Of these amounts, $3.4 million and $3.5 million were included within “Accounts, Notes and Interest Receivable, Net: Related Parties” in our accompanying interim Consolidated Balance Sheet as of December 31, 2006 and June 30, 2007, respectively, and the remainder was included within “Notes Receivable – Related Parties” in our accompanying interim Consolidated Balance Sheet at each reporting date.

Knight Inc. Form 10-Q

(K) Cash Flow Information

We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Changes in Working Capital Items:
(Net of Effects of Acquisitions and Sales)
Increase (Decrease) in Cash and Cash Equivalents


	Successor Company			Predecessor Company
	One Month Ended June 30,			Five Months Ended May 31,			Six Months Ended June 30,
	2007			2007			2006
	(In millions)			(In millions)
Accounts Receivable	$	(12.1	)	$	(32.1	)	$	258.6
Materials and Supplies Inventory		(1.9	)		(1.7	)		(6.4	)
Other Current Assets		0.5			0.5			24.6
Accounts Payable		49.4			26.7			(433.2	)
Other Current Liabilities		72.0			(214.0	)		106.6
	$	107.9		$	(220.6	)	$	(49.8	)

Supplemental Disclosures of Cash Flow Information:


	Successor Company		Predecessor Company
	One Month Ended June 30,		Five Months Ended May 31,		Six Months Ended June 30,
	2007		2007		2006
	(In millions)		(In millions)
Cash Paid During the Period for:
Interest, Net of Amount Capitalized	$	41.2	$	381.8	$	318.8
Income Taxes Paid, Including Amounts Related to Prior Periods	$	5.1	$	133.3	$	193.9

As discussed in Note 1(A), 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. Therefore, we have included Kinder Morgan Energy Partners’ cash and cash equivalents at January 1, 2006 of $12.1 million as an “Effect of Accounting Change on Cash” in the accompanying Consolidated Statement of Cash Flows.

We made non-cash grants of restricted shares of common stock during the six months ended June 30, 2006.

In March 2006, Kinder Morgan Energy Partners made a $17.0 million contribution of net assets, increasing its investment in Coyote Gas Treating, LLC.

During the five months ended May 31, 2007 and the six months ended June 30, 2006, we acquired $18.5 million and $3.8 million, respectively, of assets by the assumption of liabilities.

(L) Interest Expense

“Interest Expense, Net” as presented in the accompanying interim Consolidated Statements of Operations is interest expense net of the debt component of the allowance for funds used during construction, which was $2.9 million, $6.3 million, $9.5 million, $12.2 million and $15.5 million for the one month ended June 30, 2007, the two months ended May 31, 2007, the three months ended June 30, 2006, the five months ended May 31, 2007 and the six months ended June 30, 2006, respectively.

(M) Income Taxes

The effective tax rate (calculated by dividing the amount in the caption “Income Taxes” as shown in the accompanying interim Consolidated Statements of Operations by the amount in the caption “Income from Continuing Operations Before

Knight Inc. Form 10-Q

Income Taxes”) was 41.9% for the one month ended June 30, 2007, 74.3% for the two months ended May 31, 2007 and, excluding the $377.1 million pre-tax impairment charge related to nondeductible goodwill of Kinder Morgan Canada, 46.6% for the five months ended May 31, 2007. These effective tax rates reflect, among other factors, differences from the federal statutory tax rate of 35% due to increases attributable to (i) state income taxes, (ii) minority interest associated with Kinder Morgan Management, (iii) taxes on corporate subsidiary and equity earnings of Kinder Morgan Energy Partners, (iv) fees incurred by the Going Private transaction, which we are currently evaluating to determine deductibility, and decreases attributable to (i) the tax benefit from our Terasen acquisition structure and (ii) taxes applicable to our foreign operations. The effective tax rate was 29.7% for the three months ended June 30, 2006 and 33.2% for the six months ended June 30, 2006. These effective tax rates reflect, among other factors, differences from the federal statutory tax rate of 35% due to increases attributable to (i) state income taxes, (ii) minority interest associated with Kinder Morgan Management, (iii) taxes on corporate subsidiary and equity earnings of Kinder Morgan Energy Partners and (iv) taxes applicable to our Canadian operations and decreases attributable to (i) a reduction in the effective tax rate applied in calculating deferred taxes due to a decrease in the state effective tax rate and (ii) tax benefits resulting from our Terasen Inc. acquisition financing structure.

We closed the sale of Terasen Inc. to Fortis Inc. on May 17, 2007, for sales proceeds of approximately $3.4 billion (C$3.7 billion) including cash and assumed debt. We recorded a book gain on this disposition of $55.7 million in May 2007. The sale resulted in a capital loss of $998.6 million for tax purposes. Approximately $53 million of this loss will be utilized to reduce capital gain principally associated with the sale of our U.S.-based retail gas operations resulting in a tax benefit of approximately $19.7 million and a capital loss carryforward of $945.6 million, which expires in 2012. A valuation allowance has been recorded for the full amount of the capital loss carryforward.

We adopted the provisions of Interpretation No. 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109 (“FIN 48”) on January 1, 2007. The total amount of unrecognized tax benefits as of the date of adoption was $63.1 million. Included in the balance of unrecognized tax benefits at January 1, 2007, are $41.6 million of tax benefits that, if recognized, would affect the effective tax rate. We recorded a $4.8 million decrease in the January 1, 2007 retained earnings balance as a result of the implementation of FIN 48.

We recognize interest and penalties related to unrecognized tax benefits in income tax expense. This accounting policy is a continuation of our historical policy and will continue to be applied in the future. We had approximately $13.6 million of interest and no penalties accrued as of January 1, 2007.

The Company believes it is reasonably possible that our liability for unrecognized tax benefits will decrease by approximately $30 million in the next 12 months due to the anticipated closing of U.S. federal and state tax audits. We expect favorable resolution of issues including federal tax credits and methodologies utilized in state apportionment of taxable income.

There have been no material changes in our liability for unrecognized tax benefits, interest, penalties or the estimated change in the liability for the next twelve months.

The Company is subject to taxation in the U.S., various states and Canada. The Company has U.S., Canadian and state tax years open to examination for the periods 1999 – 2006.

(N) Transfer of Net Assets Between Entities Under Common Control

We account for the transfer of net assets between entities under common control in accordance with the method of accounting prescribed by SFAS No. 141. Under this method, the carrying amount of net assets recognized in the balance sheets of each combining entity are carried forward to the balance sheet of the combined entity, and no other assets or liabilities are recognized as a result of the combination. Transfers of net assets between entities under common control do not impact the income statement of the combined entity.

Knight Inc. Form 10-Q

Comprehensive Income

Our comprehensive income is as follows (in millions):


	Successor Company			Predecessor Company
	One Month Ended June 30, 2007			Two Months Ended May 31, 2007			Three Months Ended June 30, 2006
Net Income	$	30.2		$	78.3		$	157.2
Other Comprehensive Income (Loss), Net of Tax:
Change in Fair Value of Derivatives Utilized for Hedging Purposes		(19.0	)		0.5			(9.0	)
Reclassification of Change in Fair Value of Derivatives to Net Income		(0.9	)		(0.3	)		3.0
Employee Benefit Plans:
Prior Service Cost Arising During Period		-			(1.7	)		-
Net Gain Arising During Period		-			11.4			-
Amortization of Prior Service Cost Included in Net Periodic Benefit Costs		-			(0.2	)		-
Amortization of Net Loss Included in Net Periodic Benefit Costs		-			0.5			-
Change in Foreign Currency Translation Adjustment		(1.4	)		30.8			112.1
Other Comprehensive Income (Loss)		(21.3	)		41.0			106.1

Comprehensive Income	$	8.9		$	119.3		$	263.3


	Successor Company			Predecessor Company
	One Month Ended June 30, 2007			Five Months Ended May 31, 2007			Six Months Ended June 30, 2006
Net Income	$	30.2		$	65.9		$	350.9
Other Comprehensive Income (Loss), Net of Tax:
Change in Fair Value of Derivatives Utilized for Hedging Purposes		(19.0	)		(21.3	)		2.9
Reclassification of Change in Fair Value of Derivatives to Net Income		(0.9	)		10.3			17.1
Employee Benefit Plans:
Prior Service Cost Arising During Period		-			(1.7	)		-
Net Gain Arising During Period		-			11.4			-
Amortization of Prior Service Cost Included in Net Periodic Benefit Costs		-			(0.4	)		-
Amortization of Net Loss Included in Net Periodic Benefit Costs		-			1.4			-
Change in Foreign Currency Translation Adjustment		(1.4	)		40.1			69.3
Other Comprehensive Income (Loss)		(21.3	)		39.8			89.3

Comprehensive Income	$	8.9		$	105.7		$	440.2

The Accumulated Other Comprehensive Loss balance of $18.4 million at June 30, 2007 consisted of (i) $17.0 million representing unrecognized net losses on hedging activities and (ii) $1.4 million representing foreign currency translation adjustments.

Kinder Morgan Management, LLC

On May 15, 2007, Kinder Morgan Management made a distribution of 0.015378 of its shares per outstanding share (974,285 total shares) to shareholders of record as of April 30, 2007, based on the $0.83 per common unit distribution declared by Kinder Morgan Energy Partners. On August 14, 2007, Kinder Morgan Management will make a distribution of 0.016331 of

Knight Inc. Form 10-Q

its shares per outstanding share (1,143,661 total shares) to shareholders of record as of July 31, 2007, based on the $0.85 per common unit distribution declared by Kinder Morgan Energy Partners. Kinder Morgan Management’s distributions are paid in the form of additional shares or fractions thereof calculated by dividing the Kinder Morgan Energy Partners cash distribution per common unit by the average market price of a Kinder Morgan Management share determined for a ten-trading day period ending on the trading day immediately prior to the ex-dividend date for the shares.

Business Combinations, Acquisitions and Joint Ventures

The following acquisitions were accounted for as business combinations and the assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The preliminary allocation of assets (and any liabilities assumed) may be adjusted to reflect the final determined amounts during a period of time following the acquisition. Although the time that is required to identify and measure the fair value of the assets acquired and the liabilities assumed in a business combination will vary with circumstances, generally our allocation period ends when we no longer are waiting for information that is known to be available or obtainable. The results of operations from these acquisitions are included in our consolidated financial statements from the acquisition date.

Interest in Cochin Pipeline

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 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.

The Cochin Pipeline is a multi-product liquids pipeline consisting of approximately 1,900 miles of 12-inch diameter pipe operating between Fort Saskatchewan, Alberta, and Windsor, Ontario, Canada. The entire Cochin pipeline system traverses three provinces in Canada and seven states in the United States, serving the Midwestern United States and eastern Canadian petrochemical and fuel markets. Its operations are included as part of the Products Pipelines - KMP business segment.

As of June 30, 2007, the entire purchase price has been allocated to property, plant and equipment. The allocation of the purchase price was preliminary, pending final determination of working capital and deferred income tax balances at the time of acquisition. We expect these final purchase price adjustments to be made by the end of 2007.

Vancouver Wharves Terminal

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 aggregate consideration of $56.6 million, consisting of $38.3 million in cash and $18.3 million in assumed liabilities. We have preliminarily allocated $7.5 million of the combined purchase price to current assets and the remaining $49.1 million to property, plant and equipment.

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. Vancouver Wharves also has access to three major rail carriers connecting to shippers in western and central Canada and the U.S. Pacific Northwest. The acquisition both expanded and complemented Kinder Morgan Energy Partners’ existing terminal operations, and all of the acquired assets are included in the Terminals – KMP business segment. As of June 30, 2007, Kinder Morgan Energy Partners expects to spend approximately $45.3 million on future capital improvement projects at the terminal.

Pro forma information regarding consolidated income statement information that assumes all of the acquisitions we have made and joint ventures we have entered into since January 1, 2006, including the ones listed above, had occurred as of January 1, 2006, is not materially different from the information presented in our accompanying consolidated statements of income.

Investment and Sales

In the first half of 2007, Kinder Morgan Energy Partners invested $28.3 million for its share of construction costs of the Midcontinent Express Pipeline. Kinder Morgan Energy Partners owns a 50% equity interest in the 500-mile interstate natural gas pipeline that is expected to cost a total of $1.25 billion and upon completion will extend between Bennington, Oklahoma and Butler, Alabama.

Knight Inc. Form 10-Q

During the first quarter of 2006, we sold power generation equipment for $7.5 million (net of marketing fees). This equipment was a portion of the equipment that became surplus as a result of our decision to exit the power development business. We recognized a pre-tax gain of $1.5 million associated with this sale. The book value of the remaining surplus power generation equipment available for sale at June 30, 2007 was $4.3 million.

Effective April 1, 2006, Kinder Morgan Energy Partners sold its Douglas natural gas gathering system and its Painter Unit fractionation facility to Momentum Energy Group, LLC for approximately $42.5 million in cash. Kinder Morgan Energy Partners’ investment in the net assets it sold in this transaction, including all transaction related accruals, was approximately $24.5 million, most of which represented property, plant and equipment, and Kinder Morgan Energy Partners recognized approximately $18.0 million of gain on the sale of these net assets, and used the proceeds to reduce the outstanding balance on its commercial paper borrowings.

The Douglas gathering system is comprised of approximately 1,500 miles of 4-inch to 16-inch diameter pipe that gathers approximately 26 million cubic feet per day of natural gas from 650 active receipt points. Gathered volumes are processed at Kinder Morgan Energy Partners’ Douglas plant (which Kinder Morgan Energy Partners retained), located in Douglas, Wyoming. As part of the transaction, Kinder Morgan Energy Partners executed a long-term processing agreement with Momentum Energy Group, LLC, which dedicates volumes from the Douglas gathering system to the Douglas processing plant. The Painter Unit, located near Evanston, Wyoming, consists of a natural gas processing plant and fractionator, a nitrogen rejection unit, a natural gas liquids terminal, and interconnecting pipelines with truck and rail loading facilities. Prior to the sale, Kinder Morgan Energy Partners leased the plant to BP, which operates the fractionator and the associated Millis terminal and storage facilities for its own account.

Upon the sale of Kinder Morgan Energy Partners’ Douglas gathering system, Kinder Morgan Energy Partners reclassified a net loss of $2.9 million on derivative contracts that effectively hedged uncertain future cash flows associated with forecasted Douglas gathering transactions from “Accumulated Other Comprehensive Loss” into net income. We included the net amount of the gain, $15.1 million, within the caption “Operating Costs and Expenses: Other Income, Net” in our accompanying consolidated statements of operations for the three and six months ended June 30, 2006.

Divestitures subsequent to June 30, 2007

On July 2, 2007, Kinder Morgan Energy Partners announced that it entered into an agreement to sell its North System and its 50% ownership interest in the Heartland Pipeline Company to ONEOK Partners, L.P. for approximately $300 million in cash. The North System consists of an approximately 1,600-mile interstate common carrier pipeline system that delivers natural gas liquids and refined petroleum products from south central Kansas to the Chicago area. Also included in the sale are eight propane truck-loading terminals, located at various points in three states along the pipeline system, and one multi-product terminal complex located in Morris, Illinois. Subject to the receipt of certain consents and regulatory approvals, this transaction is planned to close in the third quarter of 2007.

Discontinued Operations

On March 5, 2007, we entered into a definitive agreement to sell Terasen Pipelines (Corridor) Inc. to Inter Pipeline Fund, a Canada-based company. Terasen Pipelines (Corridor) Inc. transports diluted bitumen from the Athabasca Oil Sands Project near Fort McMurray, Alberta, to the Scotford Upgrader near Fort Saskatchewan, Alberta. The sale did not include any other assets of Kinder Morgan Canada (formerly Terasen Pipelines). This transaction closed on June 15, 2007, for approximately $711 million (C$760 million) plus assumption of all construction debt. The consideration was equal to Terasen Pipelines (Corridor) Inc.’s carrying value, therefore no gain or loss was recorded on this disposal transaction.

We closed the sale of Terasen Inc. to Fortis Inc. on May 17, 2007, for sales proceeds of approximately $3.4 billion (C$3.7 billion) including cash and assumed debt. We recorded a book gain on this disposition of $55.7 million in the second quarter of 2007. The sale resulted in a capital loss of $998.6 million for tax purposes. Approximately $53 million of this loss will be utilized to reduce capital gain principally associated with the sale of our U.S.-based retail gas operations (see below) resulting in a tax benefit of approximately $19.7 million and a capital loss carryforward of $945.6 million which expires in 2012. A valuation allowance has been recorded for the full amount of the capital loss carryforward. Based on a revised estimate of the fair values of this reporting unit based principally on this definitive sales agreement, an estimated goodwill impairment charge of approximately $650.5 million was recorded in the fourth quarter of 2006.

In March 2007, we completed the sale of our U.S.-based 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 plus working capital. In conjunction with this sale, we recorded a pre-tax gain of $251.8 million (net of $3.9 million of transaction costs). Our Natural Gas Pipelines – KMP business segment (1) provides natural gas transportation and storage services and sells natural gas to and (2) receives natural gas transportation and storage services, natural gas and natural gas liquids and other gas supply services from the discontinued U.S.-based retail natural gas distribution business. These transactions are continuing after the sale of this business and are expected to continue to a similar extent into the future. For the three and six

Knight Inc. Form 10-Q

months ended June 30, 2006 and the five months ended May 31, 2007, revenues and expenses of our continuing operations totaling $5.5 million and $0.4 million, $12.3 million and $1.1 million, and $3.1 million and $1.2 million, respectively for products and services sold to and purchased from our discontinued U.S.-based retail natural gas distribution operations prior to its sale in March 2007, have been eliminated in our accompanying interim Consolidated Statements of Operations. We are currently receiving fees from SourceGas, as subsidiary of GE, to provide certain administrative functions for a limited period of time and for the lease of office space. We will not have any significant continuing involvement in or retain any ownership interest in these operations and, therefore, the continuing cash flows discussed above are not considered direct cash flows of the disposal group.

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the financial results of these operations have been reclassified to discontinued operations for all periods presented and reported in the caption, “Income from Discontinued Operations, Net of Tax” in our accompanying interim Consolidated Statements of Operations. Summarized financial results information of these operations is as follows:


	Successor Company		Predecessor Company
	One Month Ended June 30, 2007		Two Months Ended May 31, 2007		Three Months Ended June 30, 2006
	(In millions)		(In millions)
Operating Revenues	$	4.9	$	214.6	$	349.3

Earnings (Loss) from Discontinued Operations Before Income Taxes		0.5		48.8		(10.6	)
Income Taxes		-		13.0		15.7
Earnings from Discontinued Operations	$	0.5	$	61.8	$	5.1


	Successor Company		Predecessor Company
	One Month Ended June 30, 2007		Five Months Ended May 31, 2007			Six Months Ended June 30, 2006
	(In millions)		(In millions)
Operating Revenues	$	4.9	$	899.9		$	1,096.8

Earnings (Loss) from Discontinued Operations Before Income Taxes		0.5		382.5			67.9
Income Taxes		-		(94.6	)		(6.0	)
Earnings from Discontinued Operations	$	0.5	$	287.9		$	61.9

The cash flows attributable to discontinued operations are included in our accompanying interim Consolidated Statements of Cash Flows for the one month ended June 30, 2007, the five months ended May 31, 2007 and the six months ended June 30, 2006 in the captions “Net Cash Flows (Used in) Provided by Discontinued Operations”, “Net Cash Flows Provided by Discontinued Investing Activities” and “Net Cash Flows Provided by (Used in) Discontinued Financing Activities”.

Financing

On May 17, 2007 and June 15, 2007, we closed transactions to sell Terasen Inc. and Terasen Pipelines (Corridor) Inc., respectively. Our consolidated debt was reduced by the debt balances of Terasen Inc. and Terasen Pipelines (Corridor) Inc., of approximately $2.9 billion, as a result of these sales transactions. See Note 6 for additional information regarding our Discontinued Operations.

Knight Inc. Form 10-Q

Notes Payable

We and our consolidated subsidiaries had the following credit facilities outstanding at June 30, 2007.

Credit Facilities

Knight Inc.¹

$1.0 billion, six-year and six-month secured term facility, due November 2013

$3.3 billion, seven-year secured term facility, due May 2014

$1.0 billion, six-year secured revolver, due May 2013

Kinder Morgan Energy Partners²

$1.85 billion, five-year unsecured revolver, due August 2010

On January 5, 2007, after shareholder approval of the merger agreement associated with the Going Private transaction was announced, Kinder Morgan, Inc.’s debt rating was downgraded by Standard & Poor’s Rating Services to BB- due to the anticipated increase in debt related to the proposed transaction. Knight Inc.’s debt credit ratings are currently rated BB- by Standard & Poor’s Rating Services. On April 11, 2007, Fitch also lowered its rating to BB in anticipation of the transaction and upon completion of the Going Private transaction on May 30, 2007, Moody’s investor Service lowered its rating to Ba2. With the completion of the Going Private transaction and these rating changes, we do not have access to the commercial paper market. As a result, we are currently utilizing our $1.0 billion revolving credit facility for Knight Inc.’s short-term borrowing needs.

As discussed following, the loan agreements we had in place prior to the Going Private transaction were cancelled and replaced with a new loan agreement. Our indentures related to publicly issued notes do not contain covenants related to maintenance of credit ratings. Accordingly, no such covenants were impacted by the downgrade in our credit ratings occasioned by the Going Private transaction.

On January 5, 2007, after shareholder approval of the merger agreement associated with the Going Private transaction was announced, Kinder Morgan Energy Partners’ credit rating was downgraded to BBB by Standard & Poor’s Rating Services due to the anticipated increase in Kinder Morgan, Inc.’s debt related to the proposed transaction. Kinder Morgan Energy Partners’ credit rating was downgraded by Fitch Ratings from BBB+ to BBB on April 11, 2007 and upon completion of the Going Private transaction, was downgraded from Baa1 to Baa2 by Moody’s Investors Service.

These facilities can be used by the respective borrowers for each entity’s general corporate or partnership purposes and include financial covenants and events of default that are common in such arrangements. Kinder Morgan Energy Partners’ facility can be used as backup for its commercial paper program. The margin paid with respect to borrowings and the facility fees paid on the total commitment varies based on the senior debt investment rating of the respective borrowers. Amounts outstanding under the term facilities have maturity dates greater than one year and accordingly are classified as long-term debt. Conversely, amounts outstanding under the revolving credit facilities or an associated commercial paper program have maturities not to exceed twelve months from the date of issue and accordingly are classified as short-term debt. See Note 10 of Notes to Consolidated Financial Statements included in our 2006 Form 10-K for additional information regarding our credit facilities.

In the following table of short-term borrowings, Kinder Morgan Energy Partners’ commercial paper is supported by its respective credit facility, and is comprised of unsecured short-term notes with maturities not to exceed 270 days from the date of issue. The short-term borrowings, including commercial paper, shown in the table below, totaling $710.5 million, are reported under the caption “Notes Payable” in the accompanying interim Consolidated Balance Sheet at June 30, 2007.


	June 30, 2007
	Short-term Borrowings Outstanding Under Revolving Credit Facility			Commercial Paper Outstanding		Weighted Average Interest Rate of Short-term Debt Outstanding
	(In millions)
Knight Inc.
$1.0 billion		$	315.0	$	-		6.78	%
Kinder Morgan Energy Partners
$1.85 billion		$	-	$	395.5		5.47	%

Knight Inc. Form 10-Q

At June 30, 2007, Rockies Express Pipeline LLC, a subsidiary of West2East Pipeline LLC, had a $2.0 billion five-year credit facility outstanding, which can be amended to allow for borrowings up to $2.5 billion. West2East Pipeline LLC, including its subsidiary Rockies Express Pipeline LLC, is accounted for under the equity method of accounting. Borrowings under this credit facility do not reduce the borrowings allowed under the credit facilities previously described. All three owners of West2East Pipeline LLC have agreed to guarantee borrowings under the Rockies Express credit facility and under the Rockies Express $2.0 billion commercial paper program severally in the same proportion as their percentage ownership of the member interests in Rockies Express Pipeline LLC. As of June 30, 2007, Rockies Express Pipeline LLC had $1,350.4 million of commercial paper outstanding with a weighted-average interest rate of 5.40%, and there were no borrowings under its five-year credit facility. Accordingly, as of June 30, 2007, Kinder Morgan Energy Partners’ contingent share of Rockies Express’ debt was $688.7 million (51% of total commercial paper borrowings).

The following represents average short-term borrowings outstanding and the weighted-average interest rates during the periods shown, for the below listed borrowers. The commercial paper and bankers’ acceptances are supported by their respective credit facilities. The commercial paper and bankers’ acceptances borrowings are comprised of unsecured short-term notes with maturities not to exceed 364 days from the date of issue.


	Successor Company					Predecessor Company
	One Month Ended June 30, 2007					Two Months Ended May 31, 2007					Three Months Ended June 30, 2006
	Average Short-term Debt Outstanding		Weighted- Average Interest Rate of Short-term Debt Outstanding			Average Short-term Debt Outstanding		Weighted-Average Interest Rate of Short-term Debt Outstanding			Average Short-term Debt Outstanding		Weighted-Average Interest Rate of Short-term Debt Outstanding
	(In millions of U.S. dollars)
Credit Facilities:
Knight Inc.¹
$1.0 billion	$	122.5		6.70	%	$	-		-	%	$	-		-	%
Kinder Morgan, Inc.²
$800 million	$	-		-	%	$	-		-	%	$	57.0		5.70	%

Commercial Paper and Bankers’ Acceptances:
Kinder Morgan, Inc.²
$800 million	$	-		-	%	$	-		-	%	$	5.0		5.12	%
Kinder Morgan Energy Partners
$1.85 billion	$	778.0		5.40	%	$	686.7		5.39	%	$	1,170.2		5.06	%
Terasen Inc.³
C$450 million	$	-		-	%	$	78.9		4.36	%	$	117.7		5.07	%
Terasen Gas Inc.³
C$500 million	$	-		-	%	$	116.9		4.24	%	$	112.4		3.87	%
Terasen Pipelines (Corridor) Inc.³
C$375 million	$	443.7		4.33	%	$	388.9		4.25	%	$	123.8		3.90	%

In conjunction with the Going Private transaction, Kinder Morgan, Inc. changed its name to Knight Inc. and entered into a $5.755 billion credit agreement dated May 30, 2007, which included three term credit facilities, discussed following, and one revolving credit facility. Knight Inc. does not have a commercial paper program.

Our $800 million credit facility was terminated on May 30, 2007.

On February 26, 2007 and March 5, 2007, we entered into two definitive agreements to sell Terasen Inc., including Terasen Gas Inc., and Terasen Pipelines (Corridor) Inc., respectively. These transactions closed on May 17, 2007 and June 15, 2007, respectively (See Note 6). Accordingly, the average short-term debt outstanding and the associated weighted-average interest rate under the Terasen Inc. facilities for the two months ended May 31, 2007 and under the Terasen Pipelines (Corridor) Inc. facility for the one month ended June 30, 2007 are only through the respective dates of sale.

Knight Inc. Form 10-Q


	Successor Company					Predecessor Company
	One Month Ended June 30, 2007					Five Months Ended May 31, 2007					Six Months Ended June 30, 2006
	Average Short-term Debt Outstanding		Weighted- Average Interest Rate of Short-term Debt Outstanding			Average Short-term Debt Outstanding		Weighted-Average Interest Rate of Short-term Debt Outstanding			Average Short-term Debt Outstanding		Weighted-Average Interest Rate of Short-term Debt Outstanding
	(In millions of U.S. dollars)
Credit Facilities:
Knight Inc.¹
$1.0 billion	$	122.5		6.70	%	$	-		-	%	$	-		-	%
Kinder Morgan, Inc.²
$800 million	$	-		-	%	$	134.5		5.81	%	$	57.0		5.70	%

Commercial Paper and Bankers’ Acceptances:
Kinder Morgan, Inc.²
$800 million	$	-		-	%	$	-		-	%	$	4.4		4.86	%
Kinder Morgan Energy Partners
$1.85 billion	$	778.0		5.40	%	$	614.0		5.40	%	$	993.9		4.88	%
Terasen Inc.³
C$450 million	$	-		-	%	$	79.9		4.34	%	$	110.8		4.48	%
Terasen Gas Inc.³
C$500 million	$	-		-	%	$	141.5		4.23	%	$	161.1		3.58	%
Terasen Pipelines (Corridor) Inc.³
C$375 million	$	443.7		4.33	%	$	298.8		4.24	%	$	123.5		3.65	%

Our $800 million credit facility was terminated on May 30, 2007.

On February 26, 2007 and March 5, 2007, we entered into two definitive agreements to sell Terasen Inc., including Terasen Gas Inc., and Terasen Pipelines (Corridor) Inc., respectively. These transactions closed on May 17, 2007 and June 15, 2007, respectively (See Note 6). Accordingly, the average short-term debt outstanding and the associated weighted-average interest rate under the Terasen Inc. facilities for the five months ended May 31, 2007 and under the Terasen Pipelines (Corridor) Inc. facility for the one month ended June 30, 2007 are only through the respective dates of sale.

On May 30, 2007, we terminated our $800 million five-year credit facility dated August 5, 2005 and entered into a $5.755 billion credit agreement with a syndicate of financial institutions and Citibank, N.A., as administrative agent. The senior secured credit facilities consist of the following:

a $1.0 billion senior secured Tranche A term loan facility with a term of six years and six months;

a $3.3 billion senior secured Tranche B term loan facility, with a term of seven years;

a $455 million senior secured Tranche C term loan facility with a term of three years (subsequently retired, see below) and

a $1.0 billion senior secured revolving credit facility with a term of six years. The revolving credit facility includes a sublimit of $350 million for the issuance of letters of credit and swingline loans.

In June 2007, we repaid the borrowings outstanding under the Tranche C term facility. At June 30, 2007, we had $4.3 billion outstanding under the term loan facilities at a weighted-average interest rate of 6.80%. Average borrowings outstanding under the term loan facilities for the one month ended June 30, 2007 was $4.7 billion at a weighted-average interest rate of 6.78%.

The senior secured credit facilities allow for one or more incremental term loan facilities and/or to increase commitments under the revolving credit facility in an aggregate amount of up to $1.5 billion provided certain conditions are met. These senior secured credit facilities were used for financing the Going Private transaction (see Note 1(A)), paying fees and expenses incurred in connection with the Going Private transaction and are available for repaying or refinancing certain maturing debt and providing ongoing working capital and funds for other general corporate purposes.

Knight Inc. Form 10-Q

Loans under the senior secured credit facilities will bear interest, at Knight Inc.’s option, at:

a rate equal to LIBOR (London Interbank Offered Rate) plus an applicable margin, or

a rate equal to the higher of (a) U.S. prime rate and (b) the federal funds effective rate plus 0.50%, in each case, plus an applicable margin.

The swingline loans will bear interest at:

a rate equal to the higher of (a) U.S. prime rate and (b) the federal funds effective rate plus 0.50%, in each case, plus an applicable margin.

After the effective date of the Going Private transaction, the applicable margins for the Tranche A, the Tranche B, the Tranche C and revolving credit facilities will be subject to decrease pursuant to a leverage-based pricing grid. In addition, the credit agreement provides for customary commitment fees and letter of credit fees under the revolving credit facility. The credit agreement contains customary terms and conditions and is unconditionally guaranteed by each of our wholly-owned material domestic restricted subsidiaries, to the extent permitted by applicable law and contract. Voluntary prepayments can be made at any time without premium or penalty. Equal quarterly principal payments are required on the Tranche A term credit facility, totaling 1% per year of the original principal amount borrowed through 2012, followed by three quarterly payments of 23.625% of the original principal amount due each of the first three quarters in 2013, with a final payment of 23.625% at maturity. Equal quarterly principal payments are required on the Tranche B term credit facility, totaling 1% per year of the original principal amount borrowed through March of 2014, with the remaining balance due at maturity. Mandatory payments of term loans must be made with:

100% of the net cash proceeds of non-ordinary course of business asset sales (subject to reinvestment rights, except that the proceeds of certain non-core asset sales are to be applied to amounts outstanding under the Tranche C facility without any reinvestment rights);

100% of the net cash proceeds of issuances of debt (other than permitted debt);

100% of the net cash proceeds from insurances proceeds or proceeds of a condemnation award from a casualty event;

100% of the net cash proceeds from any permitted sale leaseback; and

50% of Knight Inc.’s annual excess cash flow (as defined), with such percentage subject to reduction based on Knight Inc.’s leverage.

Since we are accounting for the Going Private transaction in accordance with SFAS No. 141, Business Combinations, we have adjusted our basis in our long-term debt to reflect their fair values. Accordingly, we made fair value adjustments of $95.6 million and $2.2 million representing decreases to the carrying value of our long-term debt and our value of interest rate swaps, respectively, which is reflected within the caption “Long-term Debt” of the accompanying interim Consolidated Balance Sheet at June 30, 2007, which adjustments will be amortized until the debt securities mature.

On April 28, 2006, Rockies Express Pipeline LLC entered into a $2.0 billion five-year, unsecured revolving credit facility due April 28, 2011. This credit facility supports a $2.0 billion commercial paper program that was established in May 2006, and borrowings under the commercial paper program reduce the borrowings allowed under the credit facility. This facility can be amended to allow for borrowings up to $2.5 billion. Borrowings under the Rockies Express credit facility and commercial paper program are primarily used to finance the construction of the Rockies Express interstate natural gas pipeline and to pay related expenses, and the borrowings do not reduce the borrowings allowed under our credit facilities described elsewhere in this report. Additionally, effective June 30, 2006, West2East Pipeline LLC (and its subsidiary Rockies Express Pipeline LLC) was deconsolidated and subsequently is accounted for under the equity method of accounting (See Note 3.) All three owners have agreed to guarantee borrowings under the Rockies Express credit facility and under the Rockies Express commercial paper program in the same proportion as their percentage ownership of the member interests in Rockies Express Pipeline LLC. As of June 30, 2007, Rockies Express Pipeline LLC had $1,350.4 million of commercial paper outstanding, and there were no borrowings under its five-year credit facility. Accordingly, as of June 30, 2007, Kinder Morgan Energy Partners’ contingent share of Rockies Express’ debt was $688.7 million.

On February 22, 2006, Kinder Morgan Energy Partners entered into a nine-month $250 million credit facility due November 21, 2006 with a syndicate of financial institutions, and Wachovia Bank, National Association as the administrative agent. Borrowings under the credit facility can be used for general partnership purposes and as backup for Kinder Morgan Energy Partners’ commercial paper program and include financial covenants and events of default that are common in such

Knight Inc. Form 10-Q

arrangements. This agreement was terminated in August 2006, concurrent with Kinder Morgan Energy Partners’ increase of its 5-year credit facility from $1.6 billion to $1.85 billion.

Long-term Debt

On June 21, 2007, Kinder Morgan Energy Partners issued $550 million of its 6.95% senior notes due January 15, 2038. Kinder Morgan Energy Partners used the $543.9 million net proceeds received after underwriting discounts and commissions to reduce the borrowings under its commercial paper program.

On May 7, 2007, we retired our $300 million 6.80% Senior Notes due March 1, 2008 at 101.39% of the face amount. We recorded a pre-tax loss of $4.2 million in connection with this early extinguishment of debt.

On January 30, 2007, Kinder Morgan Energy Partners completed a public offering of senior notes, issuing 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 approximately $992.8 million, and used the proceeds to reduce the borrowings under its commercial paper program.

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 (see Note 4). As part of Kinder Morgan Energy Partners’ purchase price, two of its subsidiaries issued a long-term note payable to the seller having a fair value of $42.3 million. Kinder Morgan Energy Partners valued the debt equal to the present value of amounts to be paid, determined using an annual interest rate of 5.40%. The principal amount of the note, along with interest, is due in five annual installments of $10.0 million beginning March 31, 2008. The final payment is due March 31, 2012. Kinder Morgan Energy Partners’ subsidiaries Kinder Morgan Operating L.P. “A” and Kinder Morgan Canada Company are the obligors on the note, and as of June 30, 2007, the outstanding balance under the note was $43.4 million.

For the two and five months ended May 31, 2007, average borrowings under TGVI’s C$350 million credit facility were $255.2 million and $255.1 million, respectively at a weighted-average rate of 4.42% and 4.43%, respectively. For the two and five months ended May 31, 2007, average borrowings under the C$20 million demand facility were $3.2 million and $3.3 million, respectively at a weighted-average rate of 5.31%.

Common Stock – Financing of the Going Private Transaction

On May 30, 2007, investors led by Richard D. Kinder, our Chairman and Chief Executive Officer, completed the Going Private transaction agreement that was announced on August 28, 2006 to acquire all of our outstanding common stock for $107.50 per share in cash. As of the closing date of the Going Private transaction, Kinder Morgan, Inc. had 149,316,603 common shares outstanding, before deducting 15,030,135 shares held in treasury. The Going Private transaction, including associated fees and expenses, was financed through (i) $5.0 billion in new equity financing from private equity funds and other entities providing equity financing, (ii) approximately $2.9 billion from rollover investors, who were certain current or former directors, officers or other members of management of Kinder Morgan, Inc. (or entities controlled by such persons) that directly or indirectly reinvested all or a portion of their equity interests in Kinder Morgan, Inc. and/or cash in exchange for equity interests in Knight Holdco LLC, the parent of the surviving entity of the Going Private transaction, (iii) approximately $4.8 billion of new debt financing, (iv) approximately $4.5 billion of our existing indebtedness (excluding debt of Terasen Pipelines (Corridor) Inc., which was divested on June 15, 2007) and (v) $1.7 billion of cash on hand resulting from the sale of our U.S.-based and Canada-based retail natural gas distribution operations (see Note 6). In connection with the Going Private transaction, on May 30, 2007, we filed a certificate with the State of Kansas changing the total number of shares of all classes of stock that can be authorized for issuance under our restated articles of incorporation, as amended, to 100 shares of common stock having a par value of $0.01 per share. On May 30, 2007, we issued 100 shares of our common stock to Knight Midco Inc. After the Going Private transaction was completed, we (Kinder Morgan, Inc.) changed our name to Knight Inc. and our shares were delisted from the New York Stock Exchange.

On May 15, 2007, we paid a cash dividend on our common stock of $0.875 per share to shareholders of record as of April 30, 2007.

Kinder Morgan Energy Partners’ Common Units

On May 15, 2007, Kinder Morgan Energy Partners paid a cash distribution of $0.83 per common unit for the quarterly period ended March 31, 2007, of which $123.2 million was paid to the public holders of Kinder Morgan Energy Partners’ common units. The distributions were declared on April 18, 2007, payable to unitholders of record as of April 30, 2007. On July 18, 2007, Kinder Morgan Energy Partners declared a cash distribution of $0.85 per common unit for the quarterly period ended June 30, 2007. The distribution will be paid on August 14, 2007, to unitholders of record as of July 31, 2007. See Note 1(H) for additional information regarding our minority interests.

Knight Inc. Form 10-Q

Kinder Morgan Management

On May 17, 2007, Kinder Morgan Management sold 5.7 million listed shares in a registered offering. None of the shares in the offering were purchased by us. Kinder Morgan Management used the net proceeds from the sale to purchase 5.7 million i-units from Kinder Morgan Energy Partners. Kinder Morgan Energy Partners used the net proceeds of approximately $298 million to reduce its outstanding commercial paper debt. Additional information concerning the business of, and our obligations to, Kinder Morgan Management is contained in Kinder Morgan Management’s Annual Report on Form 10-K for the year ended December 31, 2006.

Common Stock Repurchase Plan

The following table summarizes our common stock repurchases during the second quarter of 2007.

Our Purchases of Our Predecessor Common Stock


Period	Total Number of Shares Purchased		Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs¹		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
April 1 to April 30, 2007		-		$	-		-		$	18,203,665
May 1 to May 31, 2007		-		$	-		-		$	-
June 1 to June 30, 2007		-		$	-		-		$	-

Total		-		$	-		-		$	-

On August 14, 2001, we announced a plan to repurchase $300 million of our outstanding common stock, which program was increased to $400 million, $450 million, $500 million, $550 million, $750 million, $800 million and $925 million in February 2002, July 2002, November 2003, April 2004, November 2004, April 2005 and November 2005, respectively.

As of May 30, 2007, all the outstanding shares of the common stock of Kinder Morgan, Inc. (Predecessor common stock) were converted into cash rights as a result of the close of the Going Private transaction.

As of May 30, 2007, we had repurchased a total of approximately $906.8 million (14,934,300 shares) of our Predecessor outstanding common stock under the program. No shares of our common stock were repurchased in the three months or six months ended June 30, 2007. No shares of our common stock were repurchased in the three months ended June 30, 2006. In the six months ended June 30, 2006, we repurchased $31.5 million (339,800 shares) of our common stock.

Business Segments

In accordance with the manner in which we manage our businesses, including the allocation of capital and evaluation of business segment performance, we report our operations in the following segments: (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, the ownership and operation of natural gas-fired electric generation facilities; (3) Express Pipeline System, the ownership of a one-third interest in a crude pipeline system accounted 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, the production, transportation and marketing of carbon dioxide (“CO₂”) to oil fields that use CO₂ to increase production of oil plus ownership interests in and/or operation of oil fields in West Texas and 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 Canada; and (8) Trans Mountain – KMP, the ownership and operation of a pipeline system that transports crude oil and refined products from Edmonton, Alberta, Canada to marketing terminals and refineries in British Columbia, Canada and the State of Washington, U.S.A. In May 2007, we completed the sale of our Canada-based retail natural gas distribution operations to Fortis Inc. In prior periods, we referred to these operations principally as the Terasen Gas business segment. In June 2007, we completed the sale of the Corridor Pipeline System to Inter Pipeline Fund. As a result of the sale of Corridor and the transfer of Trans Mountain to Kinder Morgan Energy Partners, the business segment referred to in prior filings as Kinder Morgan Canada is no longer reported. The results of Trans Mountain are now reported in the business segment referred to herein as Trans Mountain – KMP. The results of the Express

Knight Inc. Form 10-Q

Pipeline system, which also was reported in the Kinder Morgan Canada business segment in previous periods, is now reported in the segment referred to as “Express.” 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. In prior periods, we referred to these operations as the Kinder Morgan Retail business segment. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the financial results of Terasen Gas, Corridor and Kinder Morgan Retail have been reclassified to discontinued operations for all periods presented. See Note 7 for additional information regarding discontinued operations.

The accounting policies we apply in the generation of business segment earnings are generally the same as those applied to our consolidated operations and described in Note 1 of Notes to Consolidated Financial Statements included in our 2006 Form 10-K, except that certain items included in earnings from continuing operations are either not allocated to business segments or are not considered by management in its evaluation of business segment performance. In general, the items not included in segment results are interest expense, general and administrative expenses and depreciation, depletion and amortization expenses (“DD&A”). In addition, for our business segments that are not also business segments of Kinder Morgan Energy Partners (currently the NGPL, Power and Express business segments), certain items included in “Other Income and (Expenses)” and income taxes are not included in segment results. With adjustment for these items, we currently evaluate business segment performance primarily based on segment earnings before DD&A in relation to the level of capital employed. Beginning in 2007, the segment earnings measure was changed from segment earnings to segment earnings before DD&A for segments not also segments of Kinder Morgan Energy Partners. This change was made to conform our disclosure to the internal reporting we use as a result of the Going Private transaction. This segment measure change has been reflected in the prior periods shown in this document in order to achieve comparability. Because Kinder Morgan Energy Partners’ partnership agreement requires it to distribute 100% of its available cash to its partners on a quarterly basis (Kinder Morgan Energy Partners’ available cash consists primarily of all of its cash receipts, less cash disbursements and changes in reserves), we consider each period’s earnings before all non-cash depreciation, depletion and amortization expenses to be an important measure of business segment performance for our segments that are also segments of Kinder Morgan Energy Partners. In addition, for our business segments that are also business segments of Kinder Morgan Energy Partners, we use segment earnings before depreciation, depletion and amortization expenses internally as a measure of profit and loss used for evaluating business segment performance and for deciding how to allocate resources to these business segments. We account for intersegment sales at market prices, while we account for asset transfers at either market value or, in some instances, book value. Financial information by segment follows (in millions):

Knight Inc. Form 10-Q

BUSINESS SEGMENT INFORMATION


	Successor Company			Predecessor Company
	One Month Ended June 30, 2007			Two Months Ended May 31, 2007			Three Months Ended June 30, 2006
	(In millions)			(In millions)
Segment Earnings before Depreciation, Depletion, Amortization and Amortization of Excess Cost of Equity Investments:
NGPL	$	59.4		$	107.1		$	145.9
Power		2.4			3.2			5.0
Express		2.7			1.8			3.5
Products Pipelines – KMP¹		50.1			95.7			119.2
Natural Gas Pipelines – KMP¹		49.8			93.8			150.9
CO₂ – KMP¹		57.2			84.6			124.1
Terminals – KMP¹		38.3			71.8			101.6
Trans Mountain – KMP¹		8.8			20.8			17.7
Total Segment Earnings Before DD&A		268.7			478.8			667.9
Depreciation, Depletion and Amortization		(73.0	)		(109.6	)		(128.6	)
Amortization of Excess Cost of Equity Investments		(0.5	)		(1.0	)		(1.4	)
Other		0.6			1.6			2.9
Interest and Corporate Expenses, Net²		(144.7	)		(312.2	)		(327.6	)
Add Back: Income Taxes Included in Segments Above¹		-			6.6			3.2
Income from Continuing Operations Before Income Taxes	$	51.1		$	64.2		$	216.4

Revenues from External Customers:
NGPL	$	99.2		$	161.5		$	250.2
Power		8.9			8.3			17.9
Products Pipelines – KMP		71.7			143.4			189.0
Natural Gas Pipelines – KMP		587.9			1,105.2			1,596.3
CO₂ – KMP		79.8			132.6			185.8
Terminals – KMP		79.5			149.3			219.9
Trans Mountain – KMP		14.4			28.9			28.9
Other		0.4			0.1			0.2
Total Revenues	$	941.8		$	1,729.3		$	2,488.2

Intersegment Revenues:
NGPL	$	0.6		$	1.4		$	1.2
Natural Gas Pipelines – KMP		-			-			5.5
Terminals – KMP		0.1			0.1			0.4
Total Intersegment Revenues	$	0.7		$	1.5		$	7.1

Depreciation, Depletion and Amortization:
NGPL	$	5.9		$	18.3		$	26.2
Power		-			0.3			0.5
Products Pipelines – KMP		9.2			14.9			20.5
Natural Gas Pipelines – KMP		6.8			10.8			16.0
CO₂ – KMP³		39.8			47.4			42.0
Terminals – KMP		9.5			13.9			18.7
Trans Mountain – KMP		1.5			3.5			4.7
Other		0.3			0.5			-
Total Consolidated Depreciation, Depletion and Amortization	$	73.0		$	109.6		$	128.6

Capital Expenditures – Continuing Operations:
NGPL	$	15.1		$	28.3		$	40.6
Products Pipelines – KMP		23.3			43.2			64.5
Natural Gas Pipelines – KMP		32.5			39.7			189.1
CO₂ – KMP		28.4			43.7			58.9
Terminals – KMP		41.9			77.3			55.0
Trans Mountain – KMP		6.0			66.8			19.9
Other		1.6			-			17.0
Total Capital Expenditures – Continuing Operations	$	148.8		$	299.0		$	445.0

Knight Inc. Form 10-Q

Income taxes of Kinder Morgan Energy Partners of $6.6 million and $3.2 million for the two months ended May 31, 2007 and the three months ended June 30, 2006, respectively, are included in segment earnings before depreciation, depletion, amortization and amortization of excess cost of equity investments.

Includes (i) general and administrative expense, (ii) interest expense, (iii) minority interests and (iv) miscellaneous other income and expenses not allocated to business segments.

Includes depreciation, depletion and amortization expense associated with (i) oil and gas producing and gas processing activities in the amount of $38.0 million, $43.8 million and $37.3 million for, the one month ended June 30, 2007, the two months ended May 31, 2007 and the three months ended June 30, 2006, respectively, and (ii) sales and transportation services activities in the amount of $1.8 million, $3.6 million and $4.7 million for, the one month ended June 30, 2007, the two months ended May 31, 2007 and the three months ended June 30, 2006, respectively.


	Successor Company			Predecessor Company
	One Month Ended June 30, 2007			Five Months Ended May 31, 2007			Six Months Ended June 30, 2006
	(In millions)			(In millions)
Segment Earnings before Depreciation, Depletion, Amortization and Amortization of Excess Cost of Equity Investments:
NGPL	$	59.4		$	267.4		$	298.7
Power		2.4			8.9			11.2
Express		2.7			5.4			7.2
Products Pipelines – KMP¹		50.1			238.9			245.0
Natural Gas Pipelines – KMP¹		49.8			228.5			294.4
CO₂ – KMP¹		57.2			210.0			245.8
Terminals – KMP¹		38.3			172.3			191.6
Trans Mountain – KMP¹		8.8			(337.4	)		34.1
Total Segment Earnings Before DD&A		268.7			794.0			1,328.0
Depreciation, Depletion and Amortization		(73.0	)		(264.9	)		(253.0	)
Amortization of Excess Cost of Equity Investments		(0.5	)		(2.4	)		(2.8	)
Other		0.6			2.9			5.6
Interest and Corporate Expenses, Net²		(144.7	)		(631.8	)		(657.3	)
Less Income Taxes Included in Segments Above¹		-			15.6			11.9
(Loss) Income from Continuing Operations Before Income Taxes	$	51.1		$	(86.6	)	$	432.4

Revenues from External Customers:
NGPL	$	99.2		$	424.5		$	507.8
Power		8.9			19.9			28.2
Products Pipelines – KMP		71.7			353.7			369.5
Natural Gas Pipelines – KMP		587.9			2,637.6			3,419.5
CO₂ – KMP		79.8			324.2			360.5
Terminals – KMP		79.5			364.2			426.3
Trans Mountain – KMP		14.4			62.8			60.5
Other		0.4			0.1			1.7
Total Revenues	$	941.8		$	4,187.0		$	5,174.0

Intersegment Revenues:
NGPL	$	0.6		$	2.0		$	1.7
Natural Gas Pipelines – KMP		-			3.0			12.3
Terminals – KMP		0.1			0.3			0.4
Total Intersegment Revenues	$	0.7		$	5.3		$	14.4

Depreciation, Depletion and Amortization:
NGPL	$	5.9		$	45.3		$	51.9
Power³		-			(4.2	)		1.1
Products Pipelines – KMP		9.2			37.5			40.7
Natural Gas Pipelines – KMP		6.8			26.8			32.0
CO₂ – KMP⁴		39.8			116.3			81.3
Terminals – KMP		9.5			34.4			36.0
Trans Mountain – KMP		1.5			8.2			9.7
Other		0.3			0.6			0.3
Total Consolidated Depreciation, Depletion and Amortization	$	73.0		$	264.9		$	253.0

Knight Inc. Form 10-Q

BUSINESS SEGMENT INFORMATION (continued)

Income taxes of Kinder Morgan Energy Partners of $0.0 million, $15.6 million and $11.9 million for one month ended June 30, 2007, the five months ended May 31, 2007 and the six months ended June 30, 2006, respectively, are included in segment earnings.

Includes (i) general and administrative expense, (ii) interest expense, (iii) minority interests and (iv) miscellaneous other income and expenses not allocated to business segments.

2007 includes a $5.0 million credit from the adjustment of a reserve related to the purchase of power generating equipment.

⁴

Includes depreciation, depletion and amortization expense associated with (i) oil and gas producing and gas processing activities in the amount of $38.0 million, $107.4 million and $71.9 million for, the one month ended June 30, 2007, the five months ended May 31, 2007 and the six months ended June 30, 2006, respectively, and (ii) sales and transportation services activities in the amount of $1.8 million, $8.9 million and $9.4 million for, the one month ended June 30, 2007, the five months ended May 31, 2007 and the six months ended June 30, 2006, respectively


	Successor Company		Predecessor Company
	One Month Ended June 30, 2007		Five Months Ended May 31, 2007		Six Months Ended June 30, 2006
	(In millions)		(In millions)
Capital Expenditures – Continuing Operations:
NGPL	$	15.1	$	77.3	$	69.2
Products Pipelines – KMP		23.3		79.5		121.2
Natural Gas Pipelines – KMP		32.5		66.6		209.6
CO₂ – KMP¹		28.4		133.3		133.1
Terminals – KMP		41.9		169.9		97.3
Trans Mountain – KMP		6.0		109.0		24.9
Other		1.6		17.2		7.6
Total Capital Expenditures – Continuing Operations	$	148.8	$	652.8	$	662.9


	Successor Company
	June 30, 2007
	(In millions)
Assets:
NGPL	$	6,470.3
Power		140.0
Express		399.6
Products Pipelines – KMP		7,476.2
Natural Gas Pipelines – KMP		7,249.7
CO₂ – KMP		4,389.4
Terminals – KMP		4,439.8
Trans Mountain – KMP		1,161.6
Total segment assets		31,726.6
Other¹		692.2
Total Consolidated Assets	$	32,418.8

Includes assets of discontinued operations, cash, restricted deposits, market value of derivative instruments (including interest rate swaps) and miscellaneous corporate assets (such as information technology and telecommunications equipment) not allocated to individual segments.

Knight Inc. Form 10-Q

GEOGRAPHIC INFORMATION

Following is geographic information regarding the revenues and long-lived assets of our business segments.


	Successor Company
	One Month Ended June 30, 2007
	United States		Canada		Mexico and Other¹		Total
	(In millions)
Revenues from External Customers:
NGPL	$	99.2	$	-	$	-	$	99.2
Power		8.9		-		-		8.9
Products Pipelines – KMP		71.7		-		-		71.7
Natural Gas Pipelines – KMP		586.8		-		1.1		587.9
CO₂ – KMP		79.8		-		-		79.8
Terminals – KMP		75.6		3.6		0.3		79.5
Trans Mountain		-		14.4		-		14.4
Other		-		0.4		-		0.4
	$	922.0	$	18.4	$	1.4	$	941.8


	Predecessor Company
	Two Months Ended May 31, 2007
	United States		Canada				Mexico and Other¹			Total
	(In millions)
Revenues from External Customers:
NGPL	$	161.5	$	-		$		-	$		161.5
Power		8.3		-				-			8.3
Products Pipelines – KMP		147.5		(4.1	)			-			143.4
Natural Gas Pipelines – KMP		1,102.8		-				2.4			1,105.2
CO₂ – KMP		132.6		-				-			132.6
Terminals – KMP		148.5		-				0.8			149.3
Trans Mountain		-		28.9				-			28.9
Other		-		0.1				-			0.1
	$	1,701.2	$	24.9		$		3.2	$		1,729.3


	Predecessor Company
	Three Months Ended June 30, 2006
	United States		Canada		Mexico and Other¹		Total
	(In millions)
Revenues from External Customers:
NGPL	$	250.2	$	-	$	-	$	250.2
Power		17.9		-		-		17.9
Products Pipelines – KMP		186.3		2.7		-		189.0
Natural Gas Pipelines – KMP		1,592.8		-		3.5		1,596.3
CO₂ – KMP		185.8		-		-		185.8
Terminals – KMP		218.6		-		1.3		219.9
Trans Mountain		-		28.9		-		28.9
Other		-		0.2		-		0.2
	$	2,451.6	$	31.8	$	4.8	$	2,488.2

Knight Inc. Form 10-Q


	Predecessor Company
	Five Months Ended June 30, 2007
	United States		Canada		Mexico and Other¹		Total
	(In millions)
Revenues from External Customers:
NGPL	$	424.5	$	-	$	-	$	424.5
Power		19.9		-		-		19.9
Products Pipelines – KMP		351.4		2.3		-		353.7
Natural Gas Pipelines – KMP		2,631.8		-		5.8		2,637.6
CO₂ – KMP		324.2		-		-		324.2
Terminals – KMP		362.0				2.2		364.2
Trans Mountain		-		62.8		-		62.8
Other		-		0.1		-		0.1
	$	4,113.8	$	65.2	$	8.0	$	4,187.0


	Predecessor Company
	Six Months Ended June 30, 2006
	United States		Canada		Mexico and Other¹		Total
	(In millions)
Revenues from External Customers:
NGPL	$	507.8	$	-	$	-	$	507.8
Power		28.2		-		-		28.2
Products Pipelines – KMP		363.1		6.4		-		369.5
Natural Gas Pipelines – KMP		3,412.5		-		7.0		3,419.5
CO₂ – KMP		360.5		-		-		360.5
Terminals – KMP		423.6		-		2.7		426.3
Trans Mountain		-		60.5		-		60.5
Other		-		1.7		-		1.7
	$	5,095.7	$	68.6	$	9.7	$	5,174.0


	Successor Company
	At June 30, 2007
	United States		Canada		Mexico and Other¹		Total
	(In millions)
Long-lived Assets²:
NGPL	$	1,618.5	$	-	$	-	$	1,618.5
Power		116.7		-		-		116.7
Express		279.7		119.9		-		399.6
Products Pipelines – KMP		4,733.4		-		-		4,733.4
Natural Gas Pipelines – KMP		3,367.7		-		83.5		3,451.2
CO₂ – KMP		2,788.5		-		-		2,788.5
Terminals – KMP		2,543.3		-		8.2		2,551.5
Trans Mountain – KMP		-		871.9		-		871.9
Other³		647.8		24.8		-		672.6
	$	16,095.6	$	1,016.6	$	91.7	$	17,203.9

________________

Terminals – KMP includes revenues of $0.3 million, $0.8 million, $1.3 million, $2.2 million and $2.7 million for the one month ended June 30, 2007, the two months ended May 31, 2007, the three months ended June 30, 2006, the five months ended May 31, 2007 and the six months ended June 30, 2006, respectively, and long-lived assets of $8.2 million at June 30, 2007 attributable to operations in the Netherlands.

Long-lived assets exclude goodwill and other intangibles, net.

Principally consists of the long-lived assets of discontinued operations

Knight Inc. Form 10-Q

10.

Accounting for Derivative Instruments and Hedging Activities

We are exposed to risks associated with changes in the market price of natural gas, natural gas liquids and crude oil as a result of our expected future purchase or sale of these products. We have exposure to interest rate risk as a result of the issuance of variable and fixed rate debt and commercial paper and to foreign currency risk from our investments in businesses owned and operated outside the United States. Pursuant to our risk management policy, we engage in derivative transactions for the purpose of mitigating these risks, which transactions are accounted for in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and associated amendments (“SFAS No. 133”).

Commodity Price Risk Management

Our normal business activities expose us to risks associated with changes in the market price of natural gas, natural gas liquids and crude oil. Apart from our derivatives for retail distribution gas supply contracts under Terasen Gas (the sale of which was closed during the second quarter, see Note 6), during each period presented in the accompanying interim consolidated statements of operations, our derivative activities relating to the mitigation of these risks were designated and qualified as cash flow hedges in accordance with SFAS No. 133. We recognized a pre-tax gain of approximately $0.5 million in the month ended June 30, 2007, and a pre-tax gain of $0.1 million and pre-tax loss of $0.7 million in the two months and five months ended May 31, 2007, respectively, and pre-tax gains of approximately $2.5 million and $1.7 million in the three and six month periods ending June 30, 2006, respectively, as a result of ineffectiveness of these hedges, which amounts are reported within the captions “Natural Gas Sales,” “Oil and Product Sales” and “Gas Purchases and Other Costs of Sales” in the accompanying interim Consolidated Statements of Operations. There was no component of these derivatives instruments’ gain or loss excluded from the assessment of hedge effectiveness. As the hedged sales and purchases take place and we record them into earnings, we also reclassify the associated gains and losses included in accumulated other comprehensive income into earnings. During the month ended June 30, 2007 and the two and five months ended May 31, 2007, we reclassified gains of $0.9 million, gains of $0.3 million, and losses of $11.4 million, respectively, of accumulated other comprehensive loss into earnings, as a result of hedged forecasted transactions occurring during these periods. During the three and six months ended June 30, 2006 we reclassified $3.0 million and $17.1 million, respectively, of accumulated other comprehensive income into earnings as a result of hedged forecasted transactions occurring during these periods. During the five months ended May 31, 2007, we reclassified $1.1 million of net gains into earnings as a result of the discontinuance of cash flow hedges due to a determination that the forecasted transactions would no longer occur by the end of the originally specified time period. During the month ended June 30, 2007 and the two months ended May 31, 2007, we did not reclassify any of our accumulated other comprehensive loss into earnings as a result of the discontinuance of cash flow hedges. During the next twelve months, we expect to reclassify approximately $9.1 million of gains from accumulated other comprehensive income to earnings.

Derivative instruments that are entered into for the purpose of mitigating commodity price risk include swaps, futures and options. The fair values of these derivative contracts reflect the amounts that we would receive or pay to terminate the contracts at the reporting date and are included in the accompanyhing interim Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006 within the captions indicated in the following table (in millions):


	Successor Company			Predecessor Company
	June 30, 2007			December 31, 2006
Derivatives Asset (Liability)
Current Assets: Other	$	66.7		$	133.6
Current Assets: Assets Held for Sale		-			9.0
Deferred Charges and Other Assets		6.2			13.8
Assets Held for Sale, Non-current		-			0.1
Current Liabilities: Other		(397.4	)		(556.9	)
Current Liabilities: Liabilities Held for Sale		-			(18.0	)
Other Liabilities and Deferred Credits: Other		(550.9	)		(510.2	)
Other Liabilities and Deferred Credits: Liabilities Held for Sale, Non-current		-			(0.1	)

Our over-the-counter swaps and options are entered into with counterparties outside central trading organizations such as a futures, options or stock exchange. These contracts are with a number of parties all of which have investment grade credit ratings. While we enter into derivative transactions principally with investment grade counterparties and actively monitor their ratings, it is nevertheless possible that from time to time losses will result from counterparty credit risk.

Knight Inc. Form 10-Q

Interest Rate Risk Management

We have exposure to interest rate risk as a result of the issuance of variable and fixed rate debt and commercial paper. We enter into interest rate swap agreements to mitigate our exposure to changes in the fair value of our fixed rate debt agreements. These hedging relationships are accounted for under SFAS No. 133 as qualifying fair value hedges. Accordingly, the carrying value of the swap is adjusted to its fair value as of the end of each reporting period, and an offsetting entry is made to adjust the carrying value of the debt securities whose fair value is being hedged. The fair value of the swaps of $18.1 million and $137.8 million at June 30, 2007 is included in the accompanying interim Consolidated Balance Sheet within the captions “Deferred Charges and Other Assets” and “Other Liabilities and Deferred Credits: Other,” respectively. We record interest expense equal to the floating rate payments, which is accrued monthly and paid semi-annually.

On June 21, 2007, Kinder Morgan Energy Partners entered into an interest rate swap agreement with a notional principal amount of $100 million, which effectively converts a portion of the interest expense associated with its 6.95% senior notes due January 15, 2038 from fixed rate to floating rate.

On March 15, 2007, we assigned our position in $250 million of interest rate swap agreements associated with our 6.50% debentures due 2012 to a third party. On May 14, 2007, we assigned an additional $150 million of our interest rate swap agreements associated with the same 6.50% debentures to a third party. We paid a total of approximately $6.9 million to exit our position in these swap agreements, which amounts are being amortized to interest expense over the period the 6.50% debentures remain outstanding.

On February 21, 2007, we terminated $250 million of our interest rate swap agreements associated with our 7.25% debentures due 2028 and received $19.1 million in cash. On March 7, 2007, we terminated the remaining $250 million of our interest rate swap agreements associated with our 7.25% debentures due 2028 and received $24.8 million in cash. These amounts are being amortized to interest expense over the period the 7.25% debentures remain outstanding.

In the first quarter of 2007, Kinder Morgan Energy Partners both entered into additional interest rate swap agreements having a combined notional principal amount of $400 million and a maturity date of February 1, 2017, and terminated an existing interest rate swap agreement having a notional principal amount of $100 million and a maturity date of March 15, 2032. Kinder Morgan Energy Partners received $15.0 million from the early termination of this swap agreement, and this amount is being amortized over the remaining life of the original swap period.

As of June 30, 2007 we had outstanding the following interest rate swap agreements being accounted for as fair value hedges under SFAS No. 133:

(i)

fixed-to-floating interest rate swap agreements with notional principal amounts of $375 million, $425 million and $275 million, respectively. These swaps effectively convert 50% of the interest expense associated with Kinder Morgan Finance Company, ULC’s 5.35% Senior Notes due 2011, 5.70% Senior Notes due 2016 and 6.40% Senior Notes due 2036, respectively, from fixed rates to floating rates (the $375 million swap agreement associated with the 5.35% Senior Notes was terminated in August 2007, see Note 15),

(ii)

a fixed-to-floating interest rate swap agreement, which effectively converts a portion of the interest expense associated with our 6.50% Senior Notes due in 2012 from fixed to floating rate with a notional principal amount of $350 million,

(iii)

fixed-to-floating interest rate swap agreements under Kinder Morgan Energy Partners having a combined notional principal amount of $2.5 billion, which effectively convert the interest expense associated with certain series of its senior notes from fixed rates to floating rates.

Net Investment Hedges

We are exposed to foreign currency risk from our investments in businesses owned and operated outside the United States. To hedge the value of our investment in Canadian operations, we have entered into various cross-currency interest rate swap transactions that have been designated as net investment hedges in accordance with SFAS No. 133. We have recognized no ineffectiveness through the income statement as a result of these hedging relationships during the month ended June 30, 2007 and the two and five months ended May 31, 2007. The effective portion of the changes in fair value of these swap transactions is reported as a cumulative translation adjustment under the caption “Accumulated Other Comprehensive Loss” in the accompanying interim Consolidated Balance Sheets.

Due to the divestiture of much of our Canadian operations (see Note 6), we terminated approximately C$2,213 million of our cross-currency interest rate swaps during the second quarter of 2007. We paid a total of approximately US$194.5 million to terminate these swaps, which amount was recorded in Other Comprehensive Income as part of our currency translation adjustment. The combined notional value of our remaining cross-currency interest rate swaps at June 30, 2007 is

Knight Inc. Form 10-Q

approximately C$281.6 million. The fair value of the swaps as of June 30, 2007 is a liability of US$35.4 million which is included in the caption “Other Liabilities and Deferred Credits: Other” in the accompanying interim Consolidated Balance Sheet.

11.

Employee Benefits

Knight Inc.

(A)

Retirement Plans

The components of net periodic pension cost for our retirement plans are as follows (in millions):


	Successor Company			Predecessor Company
	One Month Ended June 30,			Two Months Ended May 31,			Three Months Ended June 30,			Five Months Ended May 31,			Six Months Ended June 30,
	2007			2007			2006			2007			2006
Service Cost	$	0.9		$	1.8		$	2.8		$	4.5		$	5.6
Interest Cost		1.1			2.2			3.1			5.6			6.3
Expected Return on Assets		(1.9	)		(3.8	)		(5.3	)		(9.6	)		(10.7	)
Amortization of Prior Service Credit		-			-			0.1			0.1			0.1
Amortization of Net Loss		-			-			0.4			0.2			0.8
Net Periodic Pension Cost	$	0.1		$	0.2		$	1.1		$	0.8		$	2.1

We previously disclosed in our 2006 Form 10-K that we expected to make no contributions to the retirement plans during 2007. As of June 30, 2007, no contributions have been made and we do not expect to make any additional contributions to these plans during 2007.

(B)

Other Postretirement Employee Benefits

The components of net periodic pension cost for Terasen Inc.’s postretirement benefit plans through the close of its sale on May 17, 2007 (see Note 6) were as follows (in millions):


	Predecessor Company
	For the Period April 1 – May 17,		Three Months Ended June 30,		For the Period January 1 – May 17,		Six Months Ended June 30,
	2007		2006		2007		2006
Service Cost	$	0.2	$	0.4	$	0.6	$	0.8
Interest Cost		0.5		0.9		1.4		1.8
Net Periodic Postretirement Benefit Cost	$	0.7	$	1.3	$	2.0	$	2.6

Kinder Morgan Energy Partners

In connection with Kinder Morgan Energy Partners’ acquisition of SFPP, L.P. (referred to in this report as SFPP) and Kinder Morgan Bulk Terminals, Inc. in 1998, Kinder Morgan Energy Partners acquired certain liabilities for pension and postretirement benefits. Kinder Morgan Energy Partners provides medical and life insurance benefits to current employees, their covered dependents and beneficiaries of SFPP and Kinder Morgan Bulk Terminals. Kinder Morgan Energy Partners also provides the same benefits to former salaried employees of SFPP. Additionally, Kinder Morgan Energy Partners will continue to fund these costs for those employees currently in the plan during their retirement years. SFPP’s postretirement benefit plan is frozen, and no additional participants may join the plan.

The noncontributory defined benefit pension plan covering the former employees of Kinder Morgan Bulk Terminals is the Kinder Morgan, Inc. Retirement Plan. The benefits under this plan are based primarily upon years of service and final average pensionable earnings; however, benefit accruals were frozen as of December 31, 1998.

Net periodic benefit costs for the SFPP postretirement benefit plan was a credit of approximately $0.1 million in the five month period ending May 31, 2007, recognized ratably over the period, and $0.1 million in each of the three months and six months ended June 30, 2006. The credits resulted in increases to income, largely due to amortizations of an actuarial gain and a negative prior service cost. As of June 30, 2007, Kinder Morgan Energy Partners’ estimated overall net periodic postretirement benefit cost for the year 2007 will be a credit of approximately $0.3 million. This amount could change in the remaining months of 2007 if there is a significant event, such as a plan amendment or a plan curtailment, which would require a remeasurement of liabilities.

Knight Inc. Form 10-Q

12.

Regulatory Matters

The following updates the disclosure in Note 18 to our audited financial statements included in our 2006 Form 10-K with respect to developments that occurred during 2007.

Notice of Proposed Rulemaking – Natural Gas Price Transparency

On April 19, 2007, the Federal Energy Regulatory Commission, referred to as the FERC in this report, issued a notice of proposed rulemaking in Docket Nos. RM07-10-000 and AD06-11-000 regarding price transparency provisions of Section 23 of the Natural Gas Act and the Energy Policy Act. In the notice, the FERC proposes to revise its regulations to (i) require that intrastate pipelines post daily the capacities of, and volumes flowing through, their major receipt and delivery points and mainline segments in order to make available the information to track daily flows of natural gas throughout the United States; and (ii) require that buyers and sellers of more than a de minimis volume of natural gas report annual numbers and volumes of relevant transactions to the FERC in order to make possible an estimate of the size of the physical U.S. natural gas market, assess the importance of the use of index pricing in that market, and determine the size of the fixed-price trading market that produces the information. The FERC believes these revisions to its regulations will facilitate price transparency in markets for the sale or transportation of physical natural gas in interstate commerce. Initial comments were filed on July 11, 2007 and reply comments are due on August 23, 2007. In addition, the FERC scheduled an informal workshop in this proceeding on July 24, 2007, to discuss implementation and other technical issues associated with the proposals set forth in the notice of proposed rulemaking. Since this is a proposed rulemaking in which the FERC will consider initial and reply comments from industry participants, it is not clear what impact the final rule will have on the business of our intrastate and interstate pipeline companies.

FERC Order No. 2004/690

Since November 2003, the FERC issued Orders No. 2004, 2004-A, 2004-B, 2004-C, and 2004-D, adopting new Standards of Conduct as applied to natural gas pipelines. The primary change from existing regulation was to make such standards applicable to an interstate natural gas pipeline’s interaction with many more affiliates (referred to as “energy affiliates”), including intrastate/Hinshaw natural gas pipelines (in general, a Hinshaw pipeline is a pipeline that receives gas at or within a state boundary, is regulated by an agency of that state, and all the gas it transports is consumed within that state), processors and gatherers and any company involved in natural gas or electric markets (including natural gas marketers) even if they do not ship on the affiliated interstate natural gas pipeline. Local distribution companies were excluded, however, if they do not make sales to customers not physically attached to their system. The Standards of Conduct require, among other things, separate staffing of interstate pipelines and their energy affiliates (but support functions and senior management at the central corporate level may be shared) and strict limitations on communications from an interstate pipeline to an energy affiliate.

Every interstate natural gas pipeline was required to file an Order No. 2004 compliance plan with the FERC, and on July 20, 2006, the FERC accepted our interstate pipelines’ May 19, 2005 compliance filing under Order No. 2004. On November 17, 2006, the United States Court of Appeals for the District of Columbia Circuit, in Docket No. 04-1183, vacated FERC Orders 2004, 2004-A, 2004-B, 2004-C, and 2004-D as applied to natural gas pipelines, and remanded these same orders back to the FERC.

On January 9, 2007, the FERC issued an Interim Rule, effective January 9, 2007, in response to the court’s action. In the Interim Rule, the FERC readopted the Standards of Conduct, but revised or clarified with respect to issues, which had been appealed to the court. Specifically, the following changes were made:

the Standards of Conduct apply only to the relationship between interstate gas transmission pipelines and their marketing affiliates, not their energy affiliates;

all risk management personnel can be shared;

the requirement to post discretionary tariff actions was eliminated (but interstate gas pipelines must still maintain a log of discretionary tariff waivers);

lawyers providing legal advice may be shared employees; and

new interstate gas transmission pipelines are not subject to the Standards of Conduct until they commence service.

The FERC clarified that all exemptions and waivers issued under Order No. 2004 remain in effect. On January 18, 2007, the FERC issued a notice of proposed rulemaking seeking comments regarding whether or not the Interim Rule should be made permanent for natural gas transmission providers. On March 21, 2007, FERC issued an Order on Clarification and Rehearing of the Interim Rule that granted clarification that the Standards of Conduct only apply to natural gas transmission providers

Knight Inc. Form 10-Q

that are affiliated with a marketing or brokering entity that conducts transportation transactions on such gas transmission provider’s pipeline.

Natural Gas Pipeline Expansion Filings

Rockies Express Pipeline-Currently Certificated Facilities

As of March 31, 2007, Kinder Morgan Energy Partners operates and owns a 51% ownership interest in West2East Pipeline LLC, a limited liability company that is the sole owner of Rockies Express Pipeline LLC. ConocoPhillips owns a 24% ownership interest in West2East Pipeline LLC and Sempra Energy holds the remaining 25% interest. When construction of the entire Rockies Express Pipeline project is completed, Kinder Morgan Energy Partners’ ownership interest will be reduced to 50% at which time the capital accounts of West2East Pipeline LLC will be trued up to reflect Kinder Morgan Energy Partners’ 50% economics in the project. According to the provisions of current accounting standards, due to the fact that Kinder Morgan Energy Partners will receive 50% of the economic benefits from the Rockies Express project on an ongoing basis, Kinder Morgan Energy Partners is not considered the primary beneficiary of West2East Pipeline LLC and thus, will account for its investment under the equity method of accounting.

On August 9, 2005, the FERC approved the application of Rockies Express Pipeline LLC, formerly known as Entrega Gas Pipeline LLC, to construct 327 miles of pipeline facilities in two phases. For phase I (consisting of two pipeline segments), Rockies Express was granted authorization to construct and operate approximately 136 miles of pipeline extending northward from the Meeker Hub, located at the northern end of Kinder Morgan Energy Partners’ TransColorado pipeline system in Rio Blanco County, Colorado, to the Wamsutter Hub in Sweetwater County, Wyoming (segment 1), and then construct approximately 191 miles of pipeline eastward to the Cheyenne Hub in Weld County, Colorado (segment 2). Construction of segments 1 and 2 has been completed, with interim service commencing on segment 1 on February 24, 2006, and full in-service of both segments on February 14, 2007. For phase II, Rockies Express was authorized to construct three compressor stations referred to as the Meeker, Big Hole and Wamsutter compressor stations. The Meeker and Wamsutter stations are currently under construction and are planned to be in service in the fourth quarter of 2007. Construction of the Big Hole compressor station is planned to commence in the fourth quarter of 2008, in order to meet an expected in-service date of June 30, 2009.

Rockies Express Pipeline-West Project

On April 19, 2007, the FERC issued a final order approving the Rockies Express 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’ currently certificated facilities, and it will be comprised of approximately 713 miles of 42-inch diameter pipeline extending from the Cheyenne Hub to an interconnection with Panhandle Eastern Pipe Line located in Audrain County, Missouri. The segment extension proposes to transport approximately 1.5 billion cubic feet per day of natural gas across the following five states: Wyoming, Colorado, Nebraska, Kansas and Missouri. The project will also include certain improvements to existing Rockies Express facilities located to the west of the Cheyenne Hub. Construction commenced on May 21, 2007.

Rockies Express Pipeline-East Project

On June 13, 2006, the FERC agreed with Rockies Express’ participation in the pre-filing process for development of the “Rockies Express-East Project.” 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 to a terminus near the town of Clarington in Monroe County, Ohio. The segment proposes to transport approximately 1.8 billion cubic feet per day of natural gas. On August 13, 2006, the FERC issued its notice of intent to prepare an environmental impact statement for the proposed project and hosted nine scoping meetings from September 11 through September 15, 2006 in various locations along the route. During this pre-filing process, Rockies Express has encountered opposition from certain landowners in the states of Indiana and Ohio. Rockies Express is actively participating in community outreach meetings with landowners and agencies located in these states to resolve any differences they may have with the project. Rockies Express is confident that a mutual agreement and/or understanding will be reached with most of these parties. On April 30, 2007, Rockies Express filed an application with the FERC requesting a certificate of public convenience and necessity that would authorize construction and operation of the Rockies Express-East Project. The application requests that a FERC order be issued by February 1, 2008 in order to meet both a December 30, 2008 project in-service date for the proposed pipeline and partial compression, and a June 30, 2009 in-service date for the remaining compression.

TransColorado Pipeline

On April 19, 2007, the FERC issued an order approving TransColorado Gas Transmission Company’s application for authorization to construct and operate certain facilities comprising its proposed “Blanco-Meeker Expansion Project.” Upon implementation, this project will facilitate the transportation of up to approximately 250 million cubic feet per day of natural

Knight Inc. Form 10-Q

gas from the Blanco Hub area in San Juan County, New Mexico through TransColorado’s existing interstate pipeline for delivery to the Rockies Express Pipeline at an existing point of interconnection located in the Meeker Hub in Rio Blanco County, Colorado. Construction commenced on May 9, 2007.

Kinder Morgan Louisiana Pipeline

On September 8, 2006, in FERC Docket No. CP06-449, Kinder Morgan Louisiana Pipeline LLC filed an application with the FERC requesting approval to construct and operate the Kinder Morgan Louisiana Pipeline, an interstate natural gas pipeline. The pipeline will extend approximately 135 miles from Cheniere’s Sabine Pass liquefied natural gas terminal 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. The entire approximately $500 million project is expected to be in service in the second quarter of 2009. Also on September 8, 2006, in FERC Docket No. CP06-448, NGPL requested authorization to abandon, by long-term operating lease, 200,000 Dth per day of firm capacity to Kinder Morgan Louisiana Pipeline LLC in Cameron Parish, Louisiana, where NGPL will interconnect with the project.

On March 15, 2007, the FERC issued a preliminary determination that the authorizations requested, subject to some minor modifications, will be in the public interest. This order does not consider or evaluate any of the environmental issues in this proceeding. On April 19, 2007, the FERC issued the final Environmental Impact Statement (“EIS”), which addresses the potential environmental effects of the construction and operation of the Kinder Morgan Louisiana Pipeline. The final EIS was prepared to satisfy the requirements of the National Environmental Policy Act. It concluded that approval of the Kinder Morgan Louisiana Pipeline project would have limited adverse environmental impacts. On June 22, 2007, the FERC issued an order granting construction and operation of the project. Kinder Morgan Louisiana Pipeline accepted the order on July 10, 2007.

Kinder Morgan Illinois Pipeline

On September 14, 2006, in FERC Docket No. CP06-455, Kinder Morgan Illinois Pipeline LLC filed seeking a certificate from the FERC to acquire long-term lease capacity on NGPL and build facilities to supply transportation service for Peoples Gas Light and Coke Co., who has signed a 10-year agreement for all the capacity. The $13.3 million project would have a capacity of 360,000 Dth/day and is expected to be operational by the 2007-08 winter heating season. Also on September 14, 2006, in FERC Docket No. CP06-454, NGPL requested authorization to abandon, by long-term operating lease, 360,000 Dth per day to Kinder Morgan Illinois Pipeline LLC. On July 22, 2007, the FERC issued an order that granted the abandonment of capacity by NGPL to Kinder Morgan Illinois Pipeline as well as authorized the construction and operation of the proposed project by Kinder Morgan Illinois Pipeline.

NGPL Louisiana Line

On October 10, 2006, in FERC Docket No. CP07-3, NGPL filed seeking approval to expand its Louisiana Line by 200,000 Dth/day. This $66 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.

13.

Litigation, Environmental and Other Contingencies

Below is a brief description of our ongoing material legal proceedings including any material developments that occurred in such proceedings during the six months ended June 30, 2007. Additional information with respect to these proceedings can be found in Note 19 to our audited financial statements that were included in our 2006 Form 10-K. This Note also contains a description of any material legal proceedings that were initiated during the six months ended June 30, 2007.

Federal Energy Regulatory Commission Proceedings

SFPP, L.P. is the subsidiary limited partnership that owns Kinder Morgan Energy Partners’ Pacific operations, excluding CALNEV Pipe Line LLC and related terminals acquired from GATX Corporation. The tariffs and rates charged by SFPP are subject to numerous ongoing proceedings at the FERC, including shippers’ complaints and protests regarding interstate rates on Kinder Morgan Energy Partners’ Pacific operations’ pipeline systems. In general, these complaints allege the rates and tariffs charged by Kinder Morgan Energy Partners’ Pacific operations are not just and reasonable. The issues involved in these proceedings include, among others: (i) whether certain of Kinder Morgan Energy Partners’ Pacific operations’ rates are “grandfathered” under the Energy Policy Act of 1992, referred to in this note as EPAct 1992, and therefore deemed to be just and reasonable; (ii) whether “substantially changed circumstances” have occurred with respect to any grandfathered rates such that those rates could be challenged; (iii) the capital structure to be used in computing the “starting rate base” of Kinder Morgan Energy Partners’ Pacific operations; (iv) the level of income tax allowance SFPP may include in its rates; and (v) the

Knight Inc. Form 10-Q

recovery of civil and regulatory litigation expenses and certain pipeline reconditioning and environmental costs incurred by Kinder Morgan Energy Partners’ Pacific operations. In May 2005, the FERC issued a statement of general policy stating it will permit pipelines to include in cost of service a tax allowance to reflect actual or potential tax liability on their public utility income attributable to all partnership or limited liability company interests, if the ultimate owner of the interest has an actual or potential income tax liability on such income. Whether a pipeline’s owners have such actual or potential income tax liability will be reviewed by the FERC on a case-by-case basis. Although the new policy is generally favorable for pipelines that are organized as pass-through entities, it still entails rate risk due to the case-by-case review requirement. The new tax allowance policy and the FERC’s application of that policy to Kinder Morgan Energy Partners’ Pacific operations were appealed to the United States Court of Appeals for the District of Columbia Circuit, referred to in this note as the D.C. Court.

On May 29, 2007, the D.C. Court issued an opinion upholding the FERC’s tax allowance policy. Because the extent to which an interstate oil pipeline is entitled to an income tax allowance is subject to a case-by-case review at the FERC, the level of income tax allowance to which SFPP will ultimately be entitled is not certain. The D.C. Court’s May 29 decision also upheld the FERC’s determination that a rate is no longer subject to grandfathering protection under EPAct 1992 when there has been a substantial change in the overall rate of return of the pipeline, rather than in one cost element. Further, the D.C. Court declined to consider arguments that there were errors in the FERC’s method for determining substantial change, finding that the parties had not first raised such allegations with the FERC. On July 13, 2007, SFPP filed a petition for rehearing with the D.C. Court, arguing that SFPP did raise allegations with the FERC respecting these calculation errors.

In this Note, we refer to SFPP, L.P. as SFPP; CALNEV Pipe Line LLC as Calnev; Chevron Products Company as Chevron; Navajo Refining Company, L.P. as Navajo; ARCO Products Company as ARCO; BP West Coast Products, LLC as BP WCP; Texaco Refining and Marketing Inc. as Texaco; Western Refining Company, L.P. as Western Refining; Mobil Oil Corporation as Mobil; ExxonMobil Oil Corporation as ExxonMobil; Tosco Corporation as Tosco; ConocoPhillips Company as ConocoPhillips; Ultramar Diamond Shamrock Corporation as Ultramar; and Valero Energy Corporation as Valero.

Following is a listing of certain current FERC proceedings pertaining to Kinder Morgan Energy Partners’ Pacific operations:


Proceedings	Complainants	Defendants	Summary
FERC Docket No. OR92-8 et al.	Chevron; Navajo; ARCO; BP WCP; Western Refining; ExxonMobil; Tosco; and Texaco (Ultramar is an intervenor.)	SFPP	Consolidated proceeding involving shipper complaints against certain East Line and West Line rates. All five issues (and others) described four paragraphs above this chart are involved in these proceedings. Portions of this proceeding have been appealed (and re-appealed) to the D.C. Court and remanded to the FERC. BP WCP, Chevron, and ExxonMobil have requested a hearing on remanded grandfathering and income tax allowance issues, which is pending action by the FERC.
FERC Docket Nos. OR92-8-028, et al.	BP WCP; ExxonMobil; Chevron; ConocoPhillips; and Ultramar	SFPP	Proceeding involving shipper complaints against SFPP’s Watson Station rates. A settlement was reached for April 1, 1999 forward; whether SFPP owes reparations for shipments prior to that date is still before the FERC.
FERC Docket No. OR96-2 et al.	All Shippers except Chevron (which is an intervenor)	SFPP	Consolidated proceeding involving shipper complaints against all SFPP rates. All five issues (and others) described four paragraphs above this chart are involved in these proceedings. Portions of this proceeding have been appealed (and re-appealed) to the D.C. Court and remanded to the FERC. On May 29, 2007, the D.C. Court upheld the FERC’s income tax allowance policy and upheld FERC’s determination that SFPP’s West Line rates were no longer grandfathered under EPAct 1992; however, the D.C. Court refused to consider arguments that there were errors in the FERC’s method for determining

Knight Inc. Form 10-Q


Proceedings	Complainants	Defendants	Summary
FERC Docket No. OR96-2 et al. (continued)			substantial change as to the rates at issue in the OR96-2 proceeding, finding that the parties had not first raised such allegations with FERC. SFPP has filed a petition for rehearing with the D.C. Court. SFPP’s compliance filings establishing the amount of its income tax allowance for the years at issue in the OR92-8 and OR96-2 proceedings are currently pending before the FERC, and certain shippers have filed a motion for a hearing on this issue. On July 5, 2007, BP WCP and Chevron filed a motion for immediate payment of reparations to shippers. The FERC has not acted on this motion. BP WCP, Chevron, and ExxonMobil have requested a hearing on remanded grandfathering and income tax allowance issues, which is pending action by FERC. With respect to the FERC’s order on the Sepulveda rate, a compliance filing has been made and requests forto be protracted, with decisions of the FERC often appealed to the federal courts. Based on our review of these FERC proceedings, we estimate that shippers are seeking approximately $275 million in reparation and refund payments and approximately $30 million in annual rate reductions.o be protracted, with decisions of the FERC often appealed to the federal courts. Based on our review of these FERC proceedings, we estimate that shippers are seeking approximately $275 million in reparation and refund payments and approximately $30 million in annual rate reductions.rehearing have been filed.
FERC Docket No. OR02-4 and OR03-5	Chevron	SFPP	Chevron initiated proceeding to permit Chevron to become complainant in OR96-2. Appealed to D.C. Court and held in abeyance pending final disposition of the OR 96-2 proceedings.
FERC Docket No. OR04-3	America West Airlines; Southwest Airlines; Northwest Airlines; and Continental Airlines	SFPP	Complaint alleges that West Line and Watson Station rates are unjust and unreasonable. Watson Station issues severed and consolidated into a proceeding focused only on Watson-related issues (see above). No FERC action on complaint against West Line rates; request for hearing and for consolidation with other proceedings filed and pending before the FERC.
FERC Docket No. OR03-5, OR05-4 and OR05-5	BP WCP; ExxonMobil; and ConocoPhillips (other shippers intervened)	SFPP	Complaints allege that SFPP’s interstate rates are not just and reasonable. The FERC has held these complaints in abeyance pending conclusion of other pending SFPP proceedings. Request for hearing and for consolidation with other proceedings filed and pending before the FERC.
FERC Docket No. OR03-5-001	BP WCP; ExxonMobil; and ConocoPhillips (other shippers intervened)	SFPP	The FERC severed the portions of the complaints in Docket Nos. OR03-5, OR05-4, and OR05-5 regarding SFPP’s North and Oregon Line rates into a separate proceeding in Docket No. OR03-5-001. The complaints in this new docket are held in abeyance pending the outcome of ongoing settlement discussions. Request for hearing and for consolidation with other proceedings filed and pending before the FERC.
FERC Docket No. OR07-1	Tesoro	SFPP	Complaint alleges that SFPP’s North Line rates are not just and reasonable. Complaint held in abeyance pending resolution at the D.C. Court of, among other things, income tax allowance and grandfathering issues. The D.C.

Knight Inc. Form 10-Q


Proceedings	Complainants	Defendants	Summary
FERC Docket No. OR07-1 (continued)			Court issued an opinion on these issues on May 29, 2007, upholding the FERC’s income tax allowance policy.
FERC Docket No. OR07-2	Tesoro	SFPP	Complaint alleges that SFPP’s West Line rates are not just and reasonable. Complaint held in abeyance pending resolution at the D.C. Court of, among other things, income tax allowance and grandfathering issues. The D.C. Court issued an opinion on these issues on May 29, 2007, upholding the FERC’s income tax allowance policy. A request that the FERC set the complaint for hearing – which SFPP opposed – is pending before the FERC.
FERC Docket No. OR07-3	BP WCP; Chevron; ExxonMobil; Tesoro; and Valero Marketing	SFPP	Complaint alleges that SFPP’s North Line indexed rate increase was not just and reasonable. Complaint dismissed; requests for rehearing filed by Chevron, Tesoro and Valero. Petitions for review filed by BP WCP and ExxonMobil at the D.C. Court. Petitions for review held in abeyance.
FERC Docket No. OR07-4	BP WCP; Chevron; and ExxonMobil	SFPP; Kinder Morgan G.P., Inc.; Kinder Morgan, Inc.	Complaint alleges that SFPP’s rates are not just and reasonable. Complaint held in abeyance pending resolution at the D.C. Court of, among other things, income tax allowance and grandfathering issues. The D.C. Court issued an opinion on these issues on May 29, 2007, upholding the FERC’s income tax allowance policy.
FERC Docket No. OR07-5 and OR07-7 (consolidated)	ExxonMobil; Tesoro	Calnev; Kinder Morgan G.P., Inc.; Kinder Morgan, Inc.	Complaints allege that none of Calnev’s current rates are just or reasonable. In light of the D.C. Court’s May 29, 2007 ruling, on July 19, 2007, the FERC: gave complainants 90 days to amend their Complaints with respect to challenges against the pipeline’s grandfathered rates; accepted the Complaints to the extent they challenge the rates in excess of the grandfathered rate; held the Complaints in abeyance pending a FERC decision on any amended complaints; dismissed with prejudice the Complaints against Kinder Morgan G.P., Inc. and Kinder Morgan, Inc.; denied Tesoro’s request for consolidation with Docket No. IS06-296; and consolidated Docket Nos. OR07-5 and OR07-7.
FERC Docket No. OR07-6	ConocoPhillips	SFPP	Complaint alleges that SFPP’s North Line indexed rate increase was not just and reasonable. Complaint dismissed.
FERC Docket No. OR07-8	BP WCP	SFPP	Complaint alleges that SFPP’s 2005 indexed rate increase was not just and reasonable. On June 6, 2007, the FERC dismissed challenges to SFPP’s underlying rate but held in abeyance the portion of the Complaint addressing SFPP’s July 1, 2005 index-based rate increases. SFPP requested rehearing on July 6, 2007.

Knight Inc. Form 10-Q


Proceedings	Complainants	Defendants	Summary
FERC Docket No. OR07-9	BP WCP	SFPP	Complaint alleges that SFPP’s ultra low sulphur diesel (ULSD) recovery fee violates the filed rate doctrine and that, in any event, the recovery fee is unjust and urnreasonable. On July 6, 2007, the FERC dismissed the complaint.
FERC Docket No. OR07-10	BP WCP, ConocoPhillips, Valero, ExxonMobil	Calnev	Calnev filed a petition with the FERC on May 14, 2007, requesting that the FERC issue a declaratory order approving Calnev’s proposed rate methodology and granting other relief with respect to a substantial proposed expansion of Calnev’s mainline pipeline system. On July 19, 2007, the FERC granted Calnev’s petition for declaratory order.
FERC Docket No. OR07-11	ExxonMobil	SFPP	Complaint alleges that SFPP’s 2005 indexed rate increase was not just and reasonable. The FERC has not acted on this complaint.
FERC Docket No. OR07-14	BP WCP Chevron	SFPP, Calnev Operating Limited Partnership D, Kinder Morgan Energy Partners, L.P., Kinder Morgan Management, LLC, Kinder Morgan G.P., Inc., Kinder Morgan, Inc., and Knight Holdco, LLC	Complaint alleges violations of the Interstate Commerce Act and FERC’s cash management regulations, seeks review of the FERC Form 6 annual reports of SFPP and Calnev, and again requests interim refunds and reparations. The FERC has not acted on this complaint.
FERC Docket No. IS05-230 (North Line rate case)	Shippers	SFPP	SFPP filed to increase North Line rates to reflect increased costs due to installation of new pipe between Concord and Sacramento, California. Various shippers protested. Administrative law judge decision pending before the FERC on exceptions.
FERC Docket No. IS05-327	Shippers	SFPP	SFPP filed to increase certain rates on its pipelines pursuant to the FERC’s indexing methodology. Various shippers protested, but the FERC determined that the tariff filings were consistent with its regulations. The D.C. Court dismissed a petition for review, citing a lack of jurisdiction to review a decision by the FERC not to order an investigation.
FERC Docket No. IS06-283 (East Line rate case)	Shippers	SFPP	SFPP filed to increase East Line rates to reflect increased costs due to installation of new pipe between El Paso, Texas and Tucson, Arizona. Various shippers protested. Procedural schedule suspended pending resolution at the D.C. Court of, among other things, income tax allowance and grandfathering issues. The D.C. Court issued an opinion on these issues on May 29, 2007, upholding the FERC’s income tax allowance policy. A settlement judge has been appointed and settlement discussions are ongoing.

Knight Inc. Form 10-Q


Proceedings	Complainants	Defendants	Summary
FERC Docket No. IS06-296	ExxonMobil	Calnev	Calnev sought to increase its interstate rates pursuant to the FERC’s indexing methodology. ExxonMobil has protested and a procedural schedule is in place. Calnev’s motion to dismiss or to hold the investigation in abeyance is currently pending before the FERC.
FERC Docket No. IS06-356	Shippers	SFPP	SFPP filed to increase certain rates on its pipelines pursuant to the FERC’s indexing methodology. Various shippers protested, but the FERC found the tariff filings consistent with its regulations. The FERC has rescinded the index increase for the East Line rates, and SFPP has requested rehearing. The D.C. Court dismissed a petition for review, citing the rehearing request pending before the FERC.
FERC Docket No. IS07-137 (ULSD Surcharge)	Shippers	SFPP	SFPP filed tariffs to include a per barrel ULSD recovery fee and a surcharge for ULSD-related litigation costs on diesel products. Various shippers protested. Tariffs accepted subject to refund and proceeding held in abeyance pending resolution of other proceedings involving SFPP. With no investigation established, SFPP rescinded ULSD litigation surcharge in compliance with the FERC order. Request for rehearing filed by Chevron and Tesoro.
FERC Docket No. IS07-229	BP WCP ExxonMobil	SFPP	SFPP filed to increase certain rates on its pipelines pursuant to the FERC’s indexing methodology. Two shippers protested, but the FERC found the tariff filings consistent with its regulations.
FERC Docket No. IS07-234	BP WCP ExxonMobil	Calnev	Calnev filed to increase certain rates on its pipeline pursuant to the FERC’s indexing methodology. Two shippers protested, but the FERC found the tariff filings consistent with its regulations.
Motions to compel payment of interim damages (Various dockets)	Shippers	SFPP, Kinder Morgan G.P., Inc., Kinder Morgan, Inc.	Proceeding seeks payment of interim damages or escrow of funds pending resolution of various complaints and protests involving SFPP. No FERC action on motions.

In 2003, Kinder Morgan Energy Partners made aggregate payments of $44.9 million for reparations and refunds pursuant to a FERC order related to Docket Nos. OR92-8 et al. In 2005, SFPP received a FERC order in OR92-8 and OR96-2 that directed it to submit compliance filings and revised tariffs. Pursuant to the compliance filing, SFPP reduced its rates effective May 1, 2006. We currently estimate the impact of the rate reductions to be approximately $25 million in 2007. In 2005, Kinder Morgan Energy Partners recorded an accrual of $105.0 million for an expense attributable to an increase in its reserves related to its rate case liability. We assume that any additional reparations and accrued interest thereon will be paid no earlier than the third quarter of 2007. Kinder Morgan Energy Partners had previously estimated the combined annual impact of the rate reductions and the payment of reparations sought by shippers would be approximately $0.15 of distributable cash flow per unit on Kinder Morgan Energy Partners and we previously estimated $0.18 per share on Knight Inc. Based on our review of two separate orders issued by the FERC (on December 16, 2005 and on February 13, 2006), and subject to the ultimate resolution of these issues in SFPP’s compliance filings and subsequent judicial appeals, we now expect the total annual impact on Kinder Morgan Energy Partners will be less than $0.15 per unit and the total annual impact on our earnings per share will be less than $0.18 per share.

In general, if the shippers are successful in proving their claims, they are entitled to reparations or refunds of any excess tariffs or rates paid during the two-year period prior to the filing of their complaint, and Kinder Morgan Energy Partners’ Pacific operations may be required to reduce the amount of its tariffs or rates for particular services. These proceedings tend

Knight Inc. Form 10-Q

to be protracted, with decisions of the FERC often appealed to the federal courts. Based on our review of these FERC proceedings, we estimate that shippers are seeking approximately $275 million in reparation and refund payments and approximately $30 million in annual rate reductions.

California Public Utilities Commission Proceeding

On April 7, 1997, ARCO, Mobil and Texaco filed a complaint against SFPP with the California Public Utilities Commission, referred to in this Note as the CPUC. The complaint challenges rates charged by SFPP for intrastate transportation of refined petroleum products through its pipeline system in the State of California and requests prospective rate adjustments.

In October 2002, the CPUC issued a resolution, referred to in this report as the Power Surcharge Resolution, approving a 2001 request by SFPP to raise its California rates to reflect increased power costs. The resolution approving the requested rate increase also required SFPP to submit cost data for 2001, 2002, and 2003, and to assist the CPUC in determining whether SFPP’s overall rates for California intrastate transportation services are reasonable. The resolution reserves the right to require refunds, from the date of issuance of the resolution, to the extent the CPUC’s analysis of cost data to be submitted by SFPP demonstrates that SFPP’s California jurisdictional rates are unreasonable in any fashion.

On December 26, 2006, Tesoro filed a complaint challenging the reasonableness of SFPP’s intrastate rates for the three-year period from December 2003 through December 2006 and requesting approximately $8 million in reparations. As a result of previous SFPP rate filings and related protests, the rates that are the subject of the Tesoro complaint are being collected subject to refund.

SFPP also has various, pending ratemaking matters before the CPUC that are unrelated to the above-referenced complaints and the Power Surcharge Resolution. Protests to these rate increase applications have been filed by various shippers. As a consequence of the protests, the related rate increases are being collected subject to refund.

All of the above matters have been consolidated and assigned to a single administrative law judge. A decision from the CPUC regarding the CPUC complaints and the Power Surcharge Resolution is expected by the third quarter of 2007. No schedule has been established for hearing and resolution of the consolidated proceedings other than the 1997 CPUC complaint and the Power Surcharge Resolution. Based on our review of these CPUC proceedings, we estimate that shippers are seeking approximately $100 million in reparation and refund payments and approximately $35 million in annual rate reductions.

Carbon Dioxide Litigation

Shores and First State Bank of Denton Lawsuits

Kinder Morgan CO₂ Company, L.P. (referred to in this Note as Kinder Morgan CO₂), Kinder Morgan G.P., Inc., and Cortez Pipeline Company were among the named defendants in Shores, et al. v. Mobil Oil Corp., et al., No. GC-99-01184 (Statutory Probate Court, Denton County, Texas filed December 22, 1999) and First State Bank of Denton, et al. v. Mobil Oil Corp., et al., No. 8552-01 (Statutory Probate Court, Denton County, Texas filed March 29, 2001). These cases were originally filed as class actions on behalf of classes of overriding royalty interest owners (Shores) and royalty interest owners (Bank of Denton) for damages relating to alleged underpayment of royalties on carbon dioxide produced from the McElmo Dome Unit. On February 22, 2005, the trial judge dismissed both cases for lack of jurisdiction. Some of the individual plaintiffs in these cases re-filed their claims in new lawsuits (discussed below).

Armor/Reddy Lawsuit

On May 13, 2004, William Armor filed a case alleging the same claims for underpayment of royalties on carbon dioxide produced from the McElmo Dome Unit against Kinder Morgan CO₂, Kinder Morgan G.P., Inc., and Cortez Pipeline Company, among others. Armor v. Shell Oil Company, et al., No. 04-03559 (14th Judicial District Court, Dallas County, Texas filed May 13, 2004).

On May 20, 2005, Josephine Orr Reddy and Eastwood Capital, Ltd. filed a case in Dallas state district court alleging the same claims for underpayment of royalties. Reddy and Eastwood Capital, Ltd. v. Shell Oil Company, et al., No. 05-5021 (193rd Judicial District Court, Dallas County, Texas filed May 20, 2005). The defendants include Kinder Morgan CO₂ and Kinder Morgan Energy Partners, L.P. On June 23, 2005, the plaintiff in the Armor lawsuit filed a motion to transfer and consolidate the Reddy lawsuit with the Armor lawsuit. On June 28, 2005, the court in the Armor lawsuit ordered that the Reddy lawsuit be transferred and consolidated into the Armor lawsuit.

Effective March 5, 2007, the parties executed a final settlement agreement, which provides for the dismissal of the lawsuit and the plaintiffs’ claims with prejudice to be refiled. On June 12, 2007, the Dallas state district court signed its order dismissing the case and all claims with prejudice.

Knight Inc. Form 10-Q

Gerald O. Bailey et al. v. Shell Oil Co. et al./Southern District of Texas Lawsuit

Kinder Morgan CO₂, Kinder Morgan Energy Partners, L.P. and Cortez Pipeline Company are among the defendants in a proceeding in the federal courts for the southern district of Texas. Gerald O. Bailey et al. v. Shell Oil Company et al., (Civil Action Nos. 05-1029 and 05-1829 in the U.S. District Court for the Southern District of Texas—consolidated by Order dated July 18, 2005). The plaintiffs are asserting claims for underpayment of royalties on carbon dioxide produced from the McElmo Dome Unit. The plaintiffs assert claims for fraud/fraudulent inducement, real estate fraud, negligent misrepresentation, breach of fiduciary and agency duties, breach of contract and covenants, violation of the Colorado Unfair Practices Act, civil theft under Colorado law, conspiracy, unjust enrichment, and open account. Plaintiffs Gerald O. Bailey, Harry Ptasynski, and W.L. Gray & Co. have also asserted claims as private relators under the False Claims Act and for violation of federal and Colorado antitrust laws. The plaintiffs seek actual damages, treble damages, punitive damages, a constructive trust and accounting, and declaratory relief. The defendants have filed motions for summary judgment on all claims. No trial date has been set.

Effective March 5, 2007, all defendants and plaintiffs Bridwell Oil Company, the Alicia Bowdle Trust, and the Estate of Margaret Bridwell Bowdle executed a final settlement agreement, which provides for the dismissal of these plaintiffs’ claims with prejudice to being refiled. On June 10, 2007, the Houston federal district court entered an order of partial dismissal by which the claims by and against the settling plaintiffs were dismissed with prejudice. The claims asserted by Bailey, Ptasynski, and Gray are not included within the settlement or the order of partial dismissal.

Bridwell Oil Company Wichita County Lawsuit

On March 1, 2004, Bridwell Oil Company, one of the named defendants in the above-described Bailey action, filed a new matter in which it asserted claims that are virtually identical to the claims it asserted in the Bailey lawsuit. Bridwell Oil Co. v. Shell Oil Co. et al., No. 160,199-B (78^th Judicial District Court, Wichita County, Texas filed March 1, 2004). The defendants in this action include, among others, Kinder Morgan CO₂, Kinder Morgan Energy Partners, L.P., and Cortez Pipeline Company. The case was abated pending resolution of the Bailey action discussed above.

Effective March 5, 2007, the parties executed a final settlement agreement, which provides for the dismissal of the lawsuit and the plaintiffs’ claims with prejudice to being refiled. On June 14, 2007, the Wichita County state district court signed its order dismissing the case and all claims with prejudice.

Ptasynski Colorado Federal District Court Lawsuit

On April 7, 2006, Harry Ptasynski, one of the plaintiffs in the Bailey action discussed above, filed suit against Kinder Morgan G.P., Inc. in Colorado federal district court. Harry Ptasynski v. Kinder Morgan G.P., Inc., No. 06-CV-00651 (LTB) (U.S. District Court for the District of Colorado). Ptasynski, who holds an overriding royalty interest at McElmo Dome, asserted claims for civil conspiracy, violation of the Colorado Organized Crime Control Act, violation of Colorado antitrust laws, violation of the Colorado Unfair Practices Act, breach of fiduciary duty and confidential relationship, violation of the Colorado Payment of Proceeds Act, fraudulent concealment, breach of contract and implied duties to market and good faith and fair dealing, and civil theft and conversion. Ptasynski sought actual damages, treble damages, forfeiture, disgorgement, and declaratory and injunctive relief. The Colorado court transferred the case to Houston federal district court, and Ptasynski voluntarily dismissed the case on May 19, 2006. Ptasynski also filed an appeal in the Tenth Circuit seeking to overturn the Colorado court’s order transferring the case to Houston federal district court. Harry Ptasynski v. Kinder Morgan G.P., Inc., No. 06-1231 (10^th Cir.). Briefing in the appeal was completed on November 27, 2006. On April 4, 2007, the Tenth Circuit Court of Appeals dismissed the appeal as moot in light of Ptasynski’s voluntary dismissal of the case.

CO₂ Claims Arbitration

Cortez Pipeline Company and Kinder Morgan CO₂, successor to Shell CO₂ Company, Ltd., were among the named defendants in CO₂ Committee, Inc. v. Shell Oil Co., et al., an arbitration initiated on November 28, 2005. The arbitration arose from a dispute over a class action settlement agreement, which became final on July 7, 2003 and disposed of five lawsuits formerly pending in the U.S. District Court, District of Colorado. The plaintiffs in such lawsuits primarily included overriding royalty interest owners, royalty interest owners, and small share working interest owners who alleged underpayment of royalties and other payments on carbon dioxide produced from the McElmo Dome Unit. The settlement imposed certain future obligations on the defendants in the underlying litigation. The plaintiff in the arbitration is an entity that was formed as part of the settlement for the purpose of monitoring compliance with the obligations imposed by the settlement agreement. The plaintiff alleged that, in calculating royalty and other payments, defendants used a transportation expense in excess of what is allowed by the settlement agreement, thereby causing alleged underpayments of approximately $12 million. The plaintiff also alleged that Cortez Pipeline Company should have used certain funds to further reduce its debt, which, in turn, would have allegedly increased the value of royalty and other payments by approximately $0.5 million. Defendants denied that there was any breach of the settlement agreement. On August 7, 2006, the arbitration panel issued its opinion finding that defendants did not breach the settlement agreement. On October 25, 2006, the defendants filed an

Knight Inc. Form 10-Q

application to confirm the arbitration decision in New Mexico federal district court. On June 21, 2007, the New Mexico federal district court entered final judgment confirming the August 7, 2006 arbitration decision.

MMS Notice of Noncompliance and Civil Penalty

On December 20, 2006, Kinder Morgan CO₂ received a “Notice of Noncompliance and Civil Penalty: Knowing or Willful Submission of False, Inaccurate, or Misleading Information—Kinder Morgan CO₂ Company, L.P., Case No. CP07-001” from the U.S. Department of the Interior, Minerals Management Service, referred to in this Note as the MMS. This Notice, and the MMS’ position that Kinder Morgan CO₂ has violated certain reporting obligations, relates to a disagreement between the MMS and Kinder Morgan CO₂ concerning the approved transportation allowance to be used in valuing McElmo Dome carbon dioxide for purposes of calculating federal royalties. The Notice of Noncompliance and Civil Penalty assesses a civil penalty of approximately $2.2 million as of December 15, 2006 (based on a penalty of $500.00 per day for each of 17 alleged violations) for Kinder Morgan CO₂’s alleged submission of false, inaccurate, or misleading information relating to the transportation allowance, and federal royalties for CO₂ produced at McElmo Dome, during the period from June 2005 through October 2006. The MMS contends that false, inaccurate, or misleading information was submitted in the 17 monthly Form 2014s containing remittance advice reflecting the royalty payments for the referenced period because they reflected Kinder Morgan CO₂’s use of the Cortez Pipeline tariff as the transportation allowance. The MMS claims that the Cortez Pipeline tariff is not the proper transportation allowance and that Kinder Morgan CO₂ should have used its “reasonable actual costs” calculated in accordance with certain federal product valuation regulations as amended effective June 1, 2005. The MMS stated that civil penalties would continue to accrue at the same rate until the alleged violations are corrected.

The MMS set a due date of January 20, 2007 for Kinder Morgan CO₂’s payment of the approximately $2.2 million in civil penalties, with interest to accrue daily on that amount in the event payment is not made by such date. Kinder Morgan CO₂ has not paid the penalty. On January 2, 2007, Kinder Morgan CO₂ submitted a response to the Notice of Noncompliance and Civil Penalty challenging the assessment in the Office of Hearings and Appeals of the Department of the Interior. On February 1, 2007, Kinder Morgan CO₂ filed a petition to stay the accrual of penalties until the dispute is resolved. On February 22, 2007, an administrative law judge of the U.S. Department of the Interior issued an order denying Kinder Morgan CO₂’s petition to stay the accrual of penalties. No pre-hearing hearing date or pre-hearing schedule has been set in this matter.

Kinder Morgan CO₂ disputes the Notice of Noncompliance and Civil Penalty and believes that it has meritorious defenses. Kinder Morgan CO₂ contends that use of the Cortez pipeline tariff as the transportation allowance for purposes of calculating federal royalties was approved by the MMS in 1984. This approval was later affirmed as open-ended by the Interior Board of Land Appeals in the 1990s. Accordingly, Kinder Morgan CO₂ has stated to the MMS that its use of the Cortez tariff as the approved federal transportation allowance is authorized and proper. Kinder Morgan CO₂ also disputes the allegation that it has knowingly or willfully submitted false, inaccurate, or misleading information to the MMS. Kinder Morgan CO₂’s use of the Cortez Pipeline tariff as the approved federal transportation allowance has been the subject of extensive discussion between the parties. The MMS was, and is, fully apprised of that fact and of the royalty valuation and payment process followed by Kinder Morgan CO₂ generally.

MMS Order to Report and Pay

On March 20, 2007, Kinder Morgan CO₂ received an “Order to Report and Pay” from the Minerals Management Service. The MMS contends that Kinder Morgan CO₂ has over-reported transportation allowances and underpaid royalties by approximately $4.6 million for the period from January 1, 2005 through December 31, 2006 as a result of its use of the Cortez pipeline tariff as the transportation allowance in calculating federal royalties. As noted in the discussion of the Notice of Noncompliance and Civil Penalty proceeding, the MMS claims that the Cortez Pipeline tariff is not the proper transportation allowance and that Kinder Morgan CO₂ must use its “reasonable actual costs” calculated in accordance with certain federal product valuation regulations. The MMS set a due date of April 13, 2007 for Kinder Morgan CO₂’s payment of the $4.6 million in claimed additional royalties, with possible late payment charges and civil penalties for failure to pay the assessed amount. Kinder Morgan CO₂ has not paid the $4.6 million, and on April 19, 2007, it submitted a notice of appeal and statement of reasons in response to the Order to Report and Pay, challenging the Order and appealing it to the Director of the MMS in accordance with 30 CFR 290.100, et seq. Also on April 19, 2007, Kinder Morgan CO₂ submitted a petition to suspend compliance with the Order to Report and Pay pending the appeal. The MMS granted Kinder Morgan CO2’s petition to suspend, and approved self-bonding on June 12, 2007. Kinder Morgan CO2 filed a supplemental statement of reasons in support of its appeal of the Order to Report and Pay on June 15, 2007.

In addition to the Order to Report and Pay, in April 2007, Kinder Morgan CO₂ received an “Audit Issue Letter” sent by the Colorado Department of Revenue on behalf of the U.S. Department of the Interior. In the letter, the Department of Revenue states that Kinder Morgan CO₂ has over-reported transportation allowances and underpaid royalties (due to the use of the Cortez pipeline tariff as the transportation allowance for purposes of federal royalties) in the amount of $8.5 million for the

Knight Inc. Form 10-Q

period from April 2000 through December 2004. Kinder Morgan CO₂ responded to the letter in May 2007, outlining its position why use of the Cortez tariff-based transportation allowance is proper.

Kinder Morgan CO₂ disputes the Order to Report and Pay and the Colorado Department of Revenue Audit Issue Letter, and as noted above, it contends that use of the Cortez pipeline tariff as the transportation allowance for purposes of calculating federal royalties was approved by the MMS in 1984 and was affirmed as open-ended by the Interior Board of Land Appeals in the 1990s. The appeal to the MMS Director of the Order to Report and Pay does not provide for an oral hearing. No further submission or briefing deadlines have been set.

J. Casper Heimann, Pecos Slope Royalty Trust and Rio Petro LTD, individually and on behalf of all other private royalty and overriding royalty owners in the Bravo Dome Carbon Dioxide Unit, New Mexico similarly situated v. Kinder Morgan CO₂ Company, L.P., No. 04-26-CL (8^th Judicial District Court, Union County New Mexico)

This case involves a purported class action against Kinder Morgan CO₂ alleging that it has failed to pay the full royalty and overriding royalty (“royalty interests”) on the true and proper settlement value of compressed carbon dioxide produced from the Bravo Dome Unit in the period beginning January 1, 2000. The complaint purports to assert claims for violation of the New Mexico Unfair Practices Act, constructive fraud, breach of contract and of the covenant of good faith and fair dealing, breach of the implied covenant to market, and claims for an accounting, unjust enrichment, and injunctive relief. The purported class is comprised of current and former owners, during the period January 2000 to the present, who have private property royalty interests burdening the oil and gas leases held by the defendant, excluding the Commissioner of Public Lands, the United States of America, and those private royalty interests that are not unitized as part of the Bravo Dome Unit. The plaintiffs allege that they were members of a class previously certified as a class action by the United States District Court for the District of New Mexico in the matter Doris Feerer, et al. v. Amoco Production Company, et al., USDC N.M. Civ. No. 95-0012 (the “Feerer Class Action”). Plaintiffs allege that Kinder Morgan CO₂’s method of paying royalty interests is contrary to the settlement of the Feerer Class Action. Kinder Morgan CO₂ filed a motion to compel arbitration of this matter pursuant to the arbitration provisions contained in the Feerer Class Action settlement agreement, which motion was denied. Kinder Morgan CO₂ appealed this decision to the New Mexico Court of Appeals, which affirmed the decision of the trial court. The New Mexico Supreme Court granted further review in October 2006, and after hearing oral argument, the New Mexico Supreme Court quashed its prior order granting review. Kinder Morgan CO₂intends to file a petition for certiorari with the United States Supreme Court in August 2007 seeking further review.

In addition to the matters listed above, audits and administrative inquiries concerning Kinder Morgan CO₂’s payments on carbon dioxide produced from the McElmo Dome Unit are currently ongoing. These audits and inquiries involve federal agencies and the State of Colorado.

Commercial Litigation Matters

Union Pacific Railroad Company Easements

SFPP and Union Pacific Railroad Company (the successor to Southern Pacific Transportation Company and referred to in this Note as UPRR) are engaged in a proceeding to determine the extent, if any, to which the rent payable by SFPP for the use of pipeline easements on rights-of-way held by UPRR should be adjusted pursuant to existing contractual arrangements for the ten-year period beginning January 1, 2004 (Union Pacific Railroad Company vs. Santa Fe Pacific Pipelines, Inc., SFPP, L.P., Kinder Morgan Operating L.P. “D”, Kinder Morgan G.P., Inc., et al., Superior Court of the State of California for the County of Los Angeles, filed July 28, 2004). In February 2007, a trial began to determine the amount payable for easements on UPRR rights-of-way. The trial is ongoing and is expected to conclude in the fourth quarter of 2007.

SFPP and UPRR are also engaged in multiple disputes over the circumstances under which SFPP must pay for a relocation of its pipeline within the UPRR right-of-way and the safety standards that govern relocations. SFPP believes that it must pay for relocation of the pipeline only when so required by the railroad’s common carrier operations, and in doing so, it need only comply with standards set forth in the federal Pipeline Safety Act in conducting relocations. In July 2006, a trial before a judge regarding the circumstances under which SFPP must pay for relocations concluded, and the judge determined that SFPP must pay for any relocations resulting from any legitimate business purpose of the UPRR. SFPP expects to appeal any final statement of decision to this effect. In addition, UPRR contends that it has complete discretion to cause the pipeline to be relocated at SFPP’s expense at any time and for any reason, and that SFPP must comply with the more expensive American Railway Engineering and Maintenance-of-Way standards. Each party is seeking declaratory relief with respect to its positions regarding relocations.

It is difficult to quantify the effects of the outcome of these cases on SFPP because SFPP does not know UPRR’s plans for projects or other activities that would cause pipeline relocations. Even if SFPP is successful in advancing its positions, significant relocations for which SFPP must nonetheless bear the expense (i.e. for railroad purposes, with the standards in the federal Pipeline Safety Act applying) would have an adverse effect on our financial position and results of operations. These effects would be even greater in the event SFPP is unsuccessful in one or more of these litigations.

Knight Inc. Form 10-Q

United States of America, ex rel., Jack J. Grynberg v. K N Energy (Civil Action No. 97-D-1233, filed in the U.S. District Court, District of Colorado).

This multi-district litigation proceeding involves four lawsuits filed in 1997 against numerous Kinder Morgan companies. These suits were filed pursuant to the federal False Claims Act and allege underpayment of royalties due to mismeasurement of natural gas produced from federal and Indian lands. The complaints are part of a larger series of similar complaints filed by Mr. Grynberg against 77 natural gas pipelines (approximately 330 other defendants) in various courts throughout the country which were consolidated and transferred to the District of Wyoming.

In May 2005, a Special Master appointed in this litigation found that because there was a prior public disclosure of the allegations and that Grynberg was not an original source, the Court lacked subject matter jurisdiction. As a result, the Special Master recommended that the Court dismiss all the Kinder Morgan defendants. In October 2006, the United States District Court for the District of Wyoming upheld the dismissal of each case against the Kinder Morgan defendants on jurisdictional grounds. Grynberg has appealed this Order to the Tenth Circuit Court of Appeals. A procedural schedule has been issued and briefing will be complete in the fourth quarter of 2007.

Prior to the dismissal order on jurisdictional grounds, the Kinder Morgan defendants filed Motions to Dismiss and for Sanctions alleging that Grynberg filed his Complaint without evidentiary support and for an improper purpose. On January 8, 2007, after the dismissal order, the Kinder Morgan defendants also filed a Motion for Attorney Fees under the False Claim Act. On April 24, 2007 the Court held a hearing on the Motions to Dismiss and for Sanctions and the Requests for Attorney Fees. A decision on those matters has not yet been issued.

Weldon Johnson and Guy Sparks, individually and as Representative of Others Similarly Situated v. Centerpoint Energy, Inc. et. al., No. 04-327-2 (Circuit Court, Miller County Arkansas).

On October 8, 2004, plaintiffs filed the above-captioned matter against numerous defendants including Kinder Morgan Texas Pipeline L.P.; Kinder Morgan Energy Partners, L.P.; Kinder Morgan G.P., Inc.; KM Texas Pipeline, L.P.; Kinder Morgan Texas Pipeline G.P., Inc.; Kinder Morgan Tejas Pipeline G.P., Inc.; Kinder Morgan Tejas Pipeline, L.P.; Gulf Energy Marketing, LLC; Tejas Gas, LLC; and MidCon Corp. (the “Kinder Morgan defendants”). The complaint purports to bring a class action on behalf of those who purchased natural gas from the CenterPoint defendants from October 1, 1994 to the date of class certification.

The complaint alleges that CenterPoint Energy, Inc., by and through its affiliates, has artificially inflated the price charged to residential consumers for natural gas that it allegedly purchased from the non-CenterPoint defendants, including the Kinder Morgan defendants. The complaint further alleges that in exchange for CenterPoint’s purchase of such natural gas at above market prices, the non-CenterPoint defendants, including the Kinder Morgan defendants, sell natural gas to CenterPoint’s non-regulated affiliates at prices substantially below market, which affiliates in turn sell such natural gas to commercial and industrial consumers and gas marketers at market price. The complaint purports to assert claims for fraud, unlawful enrichment and civil conspiracy against all of the defendants, and seeks relief in the form of actual, exemplary and punitive damages, interest, and attorneys’ fees. Based on the information available to date and our preliminary investigation, the Kinder Morgan defendants believe that the claims against them are without merit and intend to defend against them vigorously.

Federal Investigation at Cora and Grand Rivers Coal Facilities

On June 22, 2005, Kinder Morgan Energy Partners announced that the Federal Bureau of Investigation is conducting an investigation related to coal terminal facilities of its subsidiaries located in Rockwood, Illinois and Grand Rivers, Kentucky. The investigation involves certain coal sales from their Cora, Illinois and Grand Rivers, Kentucky coal terminals that occurred from 1997 through 2001. During this time period, the subsidiaries sold excess coal from these two terminals for their own account, generating less than $15 million in total net sales. Excess coal is the weight gain that results from moisture absorption into existing coal during transit or storage and from scale inaccuracies, which are typical in the industry. During the years 1997 through 1999, the subsidiaries collected, and, from 1997 through 2001, the subsidiaries subsequently sold, excess coal for their own account, as they believed they were entitled to do under then-existing customer contracts. Kinder Morgan Energy Partners has conducted an internal investigation of the allegations and discovered no evidence of wrongdoing or improper activities at these two terminals.

We believe that the federal authorities are also investigating coal inventory practices at one or more of our other terminals. While we have no indication of the direction of this additional investigation, Kinder Morgan Energy Partners’ records do not reflect any sales of excess coal from its other terminals, and we are not aware of any wrongdoing or improper activities at Kinder Morgan Energy Partners’ terminals. Kinder Morgan Energy Partners is cooperating fully with federal law enforcement authorities in this investigation, and several of its officers and employees may be interviewed formally by federal authorities. We do not believe there is any basis for criminal charges, and we are engaged in discussions to resolve any possible criminal charges.

Knight Inc. Form 10-Q

Queen City Railcar Litigation

On August 28, 2005, a railcar containing the chemical styrene began leaking styrene gas in Cincinnati, Ohio while en route to Kinder Morgan Energy Partners’ Queen City Terminal. The railcar was sent by the Westlake Chemical Corporation from Louisiana, transported by Indiana & Ohio Railway, and consigned to Westlake at its dedicated storage tank at Queen City Terminals, Inc., a subsidiary of Kinder Morgan Bulk Terminals, Inc. The railcar leak resulted in the evacuation of many residents and the alleged temporary closure of several businesses in the Cincinnati area. A class action complaint and a suit filed by the City of Cincinnati arising out of this accident have been settled. However, one member of the settlement class, the Estate of George W. Dameron, opted out of the settlement, and the Administratrix of the Dameron Estate filed a wrongful death lawsuit on November 15, 2006 in the Hamilton County Court of Common Pleas, Case No. A0609990. The complaint, which is asserted against each of the defendants involved in the class action suit, alleges that styrene exposure caused the death of Mr. Dameron. Kinder Morgan Energy Partners intends to vigorously defend against the estate’s claim.

As part of the settlement of the class action claims, the non-Kinder Morgan defendants have agreed to settle remaining claims asserted by businesses and will obtain a release of such claims favoring all defendants, including Kinder Morgan Energy Partners and its affiliates, subject to the retention by all defendants of their claims against each other for contribution and indemnity. Kinder Morgan Energy Partners expects that a claim will be asserted by other defendants against Kinder Morgan Energy Partners seeking contribution or indemnity for any settlements funded exclusively by other defendants, and Kinder Morgan Energy Partners expects to vigorously defend against any such claims.

Leukemia Cluster Litigation

Richard Jernee, et al. v. Kinder Morgan Energy Partners, et al., No. CV03-03482 (Second Judicial District Court, State of Nevada, County of Washoe) (“Jernee”).

Floyd Sands, et al. v. Kinder Morgan Energy Partners, et al., No. CV03-05326 (Second Judicial District Court, State of Nevada, County of Washoe) (“Sands”).

On May 30, 2003, plaintiffs, individually and on behalf of Adam Jernee, filed a civil action in the Nevada State trial court against us and several Kinder Morgan related entities and individuals and additional unrelated defendants. Plaintiffs in the Jernee matter claim that defendants negligently and intentionally failed to inspect, repair and replace unidentified segments of their pipeline and facilities, allowing “harmful substances and emissions and gases” to damage “the environment and health of human beings.” Plaintiffs claim “Adam Jernee’s death was caused by leukemia that, in turn, is believed to be due to exposure to industrial chemicals and toxins.” Plaintiffs purport to assert claims for wrongful death, premises liability, negligence, negligence per se, intentional infliction of emotional distress, negligent infliction of emotional distress, assault and battery, nuisance, fraud, strict liability (ultra hazardous acts), and aiding and abetting, and seek unspecified special, general and punitive damages. On August 28, 2003, a separate group of plaintiffs, represented by the counsel for the plaintiffs in the Jernee matter, individually and on behalf of Stephanie Suzanne Sands, filed a civil action in the Nevada State trial court against the same defendants and alleging the same claims as in the Jernee case with respect to Stephanie Suzanne Sands. The Jernee case has been consolidated for pretrial purposes with the Sands case. In May 2006, the court granted defendants’ motions to dismiss as to the counts purporting to assert claims for fraud, but denied defendants’ motions to dismiss as to the remaining counts, as well as defendants’ motions to strike portions of the complaint. Defendant Kennametal, Inc. has filed a third-party complaint naming the United States and the United States Navy (the “United States”) as additional defendants. In response, the United States removed the case to the United States District Court for the District of Nevada and filed a motion to dismiss the third-party complaint, which motion is currently pending. Plaintiff has also filed a motion to dismiss the United States and/or to remand the case back to state court. Briefing on these motions has been completed and the motions remain pending. Based on the information available to date, our own preliminary investigation, and the positive results of investigations conducted by State and Federal agencies, we believe that the remaining claims against Kinder Morgan Energy Partners in these matters are without merit and intend to defend against them vigorously.

Pipeline Integrity and Releases

From time to time, our pipelines experience leaks and ruptures. These leaks and ruptures may cause explosions, fire, damage to the environment, damage to property and/or personal injury or death. Often these leaks and ruptures are caused by third parties that strike and rupture our pipelines during excavation or construction. In connection with these incidents, we may be sued for damages caused by an alleged failure to properly mark the locations of our pipelines and/or to properly maintain our pipelines. Depending upon the facts and circumstances of a particular incident, state and federal regulatory authorities may seek civil and/or criminal fines and penalties.

We believe that we conduct our operations in accordance with applicable law and many of these incidents are caused by the negligence of third parties. We seek to cooperate with state and federal regulatory authorities in connection with the clean up of the environment caused by such leaks and ruptures and with any investigations as to the facts and circumstances surrounding the incidents.

Knight Inc. Form 10-Q

Harrison County Texas Pipeline Rupture

On May 13, 2005, NGPL experienced a rupture on its 36-inch diameter Gulf Coast #3 natural gas pipeline in Harrison County, Texas. The pipeline rupture resulted in an explosion and fire that severely damaged the Harrison County Power Project plant (“HCCP”), an adjacent power plant. In addition, local residents within an approximate one-mile radius were evacuated by local authorities until the site was secured. On October 24, 2006, suit was filed under Cause No. 06-1030 in the 71st Judicial District Court of Harrison County, Texas against NGPL and us by Plaintiffs, Entergy Power Ventures, L.P., Northeast Texas Electric Cooperative, Inc., East Texas Electric Cooperative, Inc. and Arkansas Electric Cooperative Corporation, owners and interest holders in the HCCP. The Plaintiffs allege claims of breach of contract, negligence, gross negligence, and trespass, and are seeking to recover for property damage and for losses due to business interruption. We are working with outside legal counsel and our insurance adjusters to evaluate and adjust this claim as necessary.

Walnut Creek, California Pipeline Rupture

On November 9, 2004, excavation equipment operated by Mountain Cascade, Inc. (“MCI”), a third-party contractor on a water main installation project hired by East Bay Municipal Utility District (“EBMUD”), struck and ruptured an underground petroleum pipeline owned and operated by SFPP in Walnut Creek, California. An explosion occurred immediately following the rupture that resulted in five fatalities and several injuries to employees or contractors of MCI. The explosion and fire also caused property damage.

In May 2005, the California Division of Occupational Safety and Health (“CalOSHA”) issued two civil citations against Kinder Morgan Energy Partners relating to this incident assessing civil fines of approximately $0.1 million based upon its alleged failure to mark the location of the pipeline properly prior to the excavation of the site by the contractor. In June 2005, the Office of the California State Fire Marshal, Pipeline Safety Division, referred to in this report as the CSFM, issued a notice of violation against Kinder Morgan Energy Partners which also alleged that it did not properly mark the location of the pipeline in violation of state and federal regulations. The CSFM assessed a proposed civil penalty of $0.5 million. The location of the incident was not SFPP’s work site, nor did SFPP have any direct involvement in the water main replacement project. We believe that SFPP acted in accordance with applicable law and regulations, and further that according to California law, excavators, such as the contractor on the project, must take the necessary steps (including excavating with hand tools) to confirm the exact location of a pipeline before using any power operated or power driven excavation equipment. Accordingly, we disagree with certain of the findings of CalOSHA and the CSFM, and SFPP has appealed the civil penalties while, at the same time, is continuing to work cooperatively with CalOSHA and the CSFM to resolve these matters.

CalOSHA, with the assistance of the Contra Costa County District Attorney’s office, is continuing to investigate the facts and circumstances surrounding the incident for possible criminal violations. Kinder Morgan Energy Partners has been notified by the Contra Costa County District Attorney’s office that it intends to pursue criminal charges against it in connection with the Walnut Creek pipeline rupture. We have responded by reiterating our belief that the facts and circumstances do not warrant criminal charges. We are currently engaged in discussions with the Contra Costa County District Attorney’s office in an effort to resolve any possible criminal charges, which resolution may result in Kinder Morgan Energy Partners agreeing to plead no contest with respect to certain criminal charges and civil claims, paying a fine and penalties, and agreeing to certain injunctive relief. In the event that we are able to reach such a resolution, we do not expect that such resolution would have a material adverse effect on our business, financial position, results of operations or cash flows. In the event that we are not able to reach a resolution, we anticipate that the Contra Costa County District Attorney will pursue criminal charges, and we intend to defend such charges vigorously.

As a result of the accident, nineteen separate lawsuits were filed. The majority of the cases were personal injury and wrongful death actions that alleged, among other things, that SFPP/Kinder Morgan Energy Partners failed to properly field mark the area where the accident occurred.

Following court ordered mediation, the Kinder Morgan Energy Partners defendants have settled with plaintiffs in all of the wrongful death cases and the personal injury and property damages cases. These settlements either have become final by order of the court or are awaiting court approval. The only civil cases which remain unsettled at present are certain cross-claims for contribution and indemnity by and between various engineering company defendants and the Kinder Morgan Energy Partners defendants. The parties are currently continuing discovery on the remaining cases.

Consent Agreement Regarding Cordelia, Oakland and Donner Summit California Releases

Kinder Morgan Energy Partners and SFPP have entered into an agreement in principle regarding the terms of a proposed Consent Agreement with various governmental agencies to resolve civil claims relating to the unintentional release of petroleum products during three pipeline incidents in northern California. The releases occurred (i) in the Suisun Marsh area near Cordelia in Solano County in April 2004, (ii) in Oakland in February 2005 and (iii) near Donner Pass in April 2005. The agreement was reached with the United States Environmental Protection Agency, referred to in this Note as the EPA,

Knight Inc. Form 10-Q

Department of the Interior, Department of Justice and the National Oceanic and Atmospheric Administration, as well as the State of California Department of Fish and Game, Office of Spill Prevention and Response, and the Regional Water Quality Control Boards for the San Francisco and Lahontan regions. Under the Consent Agreement, Kinder Morgan Energy Partners agreed to pay approximately $3.8 million in civil penalties, $1.3 million in natural resource damages and assessment costs and approximately $0.2 million in agency response and future remediation monitoring costs. All of the civil penalties have been reserved for as of June 30, 2007. In addition, Kinder Morgan Energy Partners agreed to perform enhancements in its Pacific operations relative to its spill prevention, response and reporting practices, the majority of which have already been implemented.

The Consent Agreement was filed with the United States District Court for the Eastern District of California on May 29, 2007, and became effective July 26, 2007. Kinder Morgan Energy Partners has substantially completed remediation and restoration activities in consultation with the appropriate state and federal regulatory agencies at the location of each release. Remaining restoration work at the Suisun Marsh and Donner Pass areas is expected to be completed in the fall of 2007.

Baker, California

In November 2004, the CALNEV Pipeline experienced a failure from external damage near Baker, California, resulting in a release of gasoline that affected approximately two acres of land in the high desert administered by The U.S. Bureau of Land Management. Remediation has been conducted and continues for product in the soils. All agency requirements have been met and the site will be clos