Edgar Filing: KNIGHT INC.

knight10q3_2008.htm

Table of Contents

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 September 30, 2008

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)

(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 o No þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer þ

Smaller reporting company o

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

Yes o No þ

Number of outstanding shares of Common stock, $0.01 par value, as of October 31, 2008 was 100 shares.

Knight Inc. Form 10-Q

KNIGHT INC. AND SUBSIDIARIES

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2008

Contents

		Page
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	9-64

Item 2.	Management’s Discussion and Analysis of Financial
	Condition and Results of Operations.	65-103

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	103

Item 4.	Controls and Procedures.	103

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings.	104

Item 1A.	Risk Factors.	104-107

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	107

Item 3.	Defaults Upon Senior Securities.	107

Item 4.	Submission of Matters to a Vote of Security Holders.	107

Item 5.	Other Information.	107

Item 6.	Exhibits.	108

SIGNATURE		109

Knight Inc. Form 10-Q

PART I. - FINANCIAL INFORMATION

Item 1. Financial Statements.

KNIGHT INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

(In millions)

	September 30, 2008			December 31, 2007
ASSETS
Current Assets
Cash and Cash Equivalents	$	126.6		$	148.6
Restricted Deposits		27.6			67.9
Accounts, Notes and Interest Receivable, Net		981.4			975.2
Inventories		44.2			37.8
Gas Imbalances		6.3			26.9
Assets Held for Sale		-			3,353.3
Fair Value of Derivative Instruments		37.8			37.1
Other		42.1			36.8
		1,266.0			4,683.6

Property, Plant and Equipment, Net
Property, Plant and Equipment		16,648.9			15,080.9
Accumulated Depreciation, Depletion and Amortization		(744.6	)		(277.0	)
		15,904.3			14,803.9

Notes Receivable – Related Parties		192.8			87.9
Investments		1,824.9			1,996.2
Goodwill		4,775.7			8,174.0
Other Intangibles, Net		256.2			321.1
Assets Held for Sale, Non-current		-			5,634.6
Fair Value of Derivative Instruments, Non-current		260.0			142.4
Deferred Charges and Other Assets		228.8			257.3
Total Assets	$	24,708.7		$	36,101.0

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

Knight Inc. Form 10-Q

KNIGHT INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

(In millions except share and per share amounts)

	September 30, 2008			December 31, 2007
LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities
Current Maturities of Long-term Debt	$	289.7		$	79.8
Notes Payable		270.0			888.1
Cash Book Overdrafts		74.2			30.7
Accounts Payable		841.0			943.7
Accrued Interest		95.9			242.7
Accrued Taxes		252.7			728.2
Gas Imbalances		19.9			23.7
Liabilities Held for Sale		-			168.2
Fair Value of Derivative Instruments		611.6			594.7
Other		274.0			240.0
		2,729.0			3,939.8

Long-term Debt
Outstanding Notes and Debentures		10,800.6			14,714.6
Deferrable Interest Debentures Issued to Subsidiary Trusts		35.7			283.1
Preferred Interest in General Partner of Kinder Morgan Energy Partners		100.0			100.0
Value of Interest Rate Swaps		233.8			199.7
		11,170.1			15,297.4

Deferred Income Taxes, Non-current		1,714.6			1,849.4
Liabilities Held for Sale, Non-current		-			2,424.1
Fair Value of Derivative Instruments, Non-current		1,018.7			836.8
Other Long-term Liabilities and Deferred Credits		579.7			618.0
		14,483.1			21,025.7

Minority Interests in Equity of Subsidiaries		3,474.3			3,314.0

Commitments and Contingencies (Notes 13 and 18)

Stockholder’s Equity
Common Stock – Authorized and Outstanding – 100 Shares, Par Value $0.01 Per Share		-			-
Additional Paid-in Capital		7,811.9			7,822.2
Retained Earnings (Deficit)		(3,399.2	)		247.0
Accumulated Other Comprehensive Loss		(390.4	)		(247.7	)
		4,022.3			7,821.5
Total Liabilities and Stockholder’s Equity	$	24,708.7		$	36,101.0

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

Knight Inc. Form 10-Q

KNIGHT INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In millions)

	Successor Company
	Three Months Ended September 30,
	2008			2007
Operating Revenues
Natural Gas Sales	$	2,183.3		$	1,451.8
Transportation and Storage		700.9			849.2
Oil and Product Sales		412.4			308.0
Total Operating Revenues		3,296.6			2,609.0

Operating Costs and Expenses
Gas Purchases and Other Costs of Sales		2,179.2			1,482.8
Operations and Maintenance		360.8			357.0
General and Administrative		85.9			77.9
Depreciation, Depletion and Amortization		217.2			204.1
Taxes, Other Than Income Taxes		48.0			46.6
Other Expense (Income), Net		7.2			(2.4	)
Total Operating Costs and Expenses		2,898.3			2,166.0

Operating Income		398.3			443.0

Other Income and (Expenses)
Earnings of Equity Investees		42.9			26.7
Interest Expense, Net		(141.5	)		(252.6	)
Interest Expense – Deferrable Interest Debentures, Net		(0.5	)		(5.4	)
Minority Interests		(106.8	)		(52.4	)
Other, Net		4.4			5.4
Total Other Income and (Expenses)		(201.5	)		(278.3	)

Income from Continuing Operations Before Income Taxes		196.8			164.7
Income Taxes		87.9			74.6
Income from Continuing Operations		108.9			90.1
Loss from Discontinued Operations, Net of Tax		(0.2	)		(4.4	)

Net Income	$	108.7		$	85.7

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

Knight Inc. Form 10-Q

KNIGHT INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In millions)

	Successor Company						Predecessor Company
	Nine Months Ended September 30, 2008			Four Months Ended September 30, 2007			Five Months Ended May 31, 2007
Operating Revenues
Natural Gas Sales	$	6,369.8		$	2,013.7		$	2,430.6
Transportation and Storage		2,187.5			1,124.7			1,350.5
Oil and Product Sales		1,194.8			407.5			384.0
Total Operating Revenues		9,752.1			3,545.9			4,165.1

Operating Costs and Expenses
Gas Purchases and Other Costs of Sales		6,433.9			2,040.0			2,490.4
Operations and Maintenance		977.4			463.8			476.1
General and Administrative		264.0			107.9			283.6
Depreciation, Depletion and Amortization		651.0			276.3			261.0
Taxes, Other Than Income Taxes		151.6			62.1			74.4
Other Expense (Income), Net		4.5			(6.4	)		(2.3	)
Goodwill Impairment		4,033.3			-			377.1
Total Operating Costs and Expenses		12,515.7			2,943.7			3,960.3

Operating Income (Loss)		(2,763.6	)		602.2			204.8

Other Income and (Expenses)
Earnings of Equity Investees		141.9			35.9			38.3
Interest Expense, Net		(493.8	)		(336.1	)		(241.1	)
Interest Expense – Deferrable Interest Debentures, Net		5.6			(7.3	)		(9.1	)
Minority Interests		(359.4	)		(86.9	)		(90.7	)
Other, Net		18.1			6.1			0.6
Total Other Income and (Expenses)		(687.6	)		(388.3	)		(302.0	)

Income (Loss) from Continuing Operations Before Income Taxes		(3,451.2	)		213.9			(97.2	)
Income Taxes		194.4			95.9			135.5
Income (Loss) from Continuing Operations		(3,645.6	)		118.0			(232.7	)
Income (Loss) from Discontinued Operations, Net of Tax		(0.6	)		(2.1	)		298.6

Net Income (Loss)	$	(3,646.2	)	$	115.9		$	65.9

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

Knight Inc. Form 10-Q

KNIGHT INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In millions)

	Successor Company						Predecessor Company
	Nine Months Ended September 30, 2008			Four Months Ended September 30, 2007			Five Months Ended May 31, 2007
Cash Flows from Operating Activities
Net Income (Loss)	$	(3,646.2	)	$	115.9		$	65.9
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities
(Income) Loss from Discontinued Operations, Net of Tax		0.6			13.2			(287.9	)
Loss from Goodwill Impairment		4,033.3			-			377.1
Loss on Early Extinguishment of Debt		23.6			-			4.4
Depreciation, Depletion and Amortization		651.0			278.6			264.9
Deferred Income Taxes		46.4			14.2			138.7
Equity in Earnings of Equity Investees		(141.9	)		(36.8	)		(39.1	)
Distributions from Equity Investees		185.0			45.1			48.2
Minority Interests in Income of Consolidated Subsidiaries		359.4			86.9			90.7
Gains from Property Casualty Indemnifications		-			-			(1.8	)
Net Losses (Gains) on Sales of Assets		4.4			(7.0	)		(2.6	)
Mark-to-Market Interest Rate Swap Gain		(19.8	)		-			-
Foreign Currency Loss		0.2			-			15.5
Changes in Gas in Underground Storage		(28.0	)		34.5			(84.2	)
Changes in Working Capital Items		(851.7	)		(13.6	)		(202.9	)
(Payment for) Proceeds from Termination of Interest Rate Swaps		(2.5	)		(2.2	)		51.9
Kinder Morgan Energy Partners’ Rate Reparations, Refunds and Reserve Adjustments		(10.7	)		-			-
Other, Net		(19.3	)		(16.7	)		54.4
Cash Flows Provided by Continuing Operations		583.8			512.1			493.2
Net Cash Flows (Used in) Provided by Discontinued Operations		(0.7	)		(2.5	)		109.8
Net Cash Flows Provided by Operating Activities		583.1			509.6			603.0

Cash Flows from Investing Activities
Purchase of Predecessor Stock		-			(11,534.3	)		-
Capital Expenditures		(1,922.8	)		(656.1	)		(652.8	)
Proceeds from Sale of 80% Interest in NGPL PipeCo LLC, Net of $1.1 Million Cash Sold		2,899.3			-			-
Proceeds from NGPL PipeCo LLC Restricted Cash		3,106.4			-			-
Acquisitions		(16.4	)		(119.7	)		(42.1	)
Net Proceeds from (Investments in) Margin Deposits		40.3			(22.9	)		(54.8	)
Distributions from Equity Investees		92.5			-			-
Other Investments		(342.1	)		(17.5	)		(29.7	)
Change in Natural Gas Storage and NGL Line Fill Inventory		(2.5	)		6.3			8.4
Property Casualty Indemnifications		-			-			8.0
Net Proceeds (Cost of Removal) from Sales of Other Assets		113.3			10.6			(1.5	)
Net Cash Flows Provided by (Used in) Continuing Investing Activities		3,968.0			(12,333.6	)		(764.5	)
Net Cash Flows Provided by Discontinued Investing Activities		-			190.9			1,488.2
Net Cash Flows Provided by (Used in) Investing Activities	$	3,968.0		$	(12,142.7	)	$	723.7

Knight Inc. Form 10-Q

KNIGHT INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

(In millions)

	Successor Company						Predecessor Company
	Nine Months Ended September 30, 2008			Four Months Ended September 30, 2007			Five Months Ended May 31, 2007
Cash Flows from Financing Activities
Short-term Debt, Net	$	(323.1	)	$	62.7		$	(247.5	)
Long-term Debt Issued		1,600.1			5,805.0			1,000.0
Long-term Debt Retired		(5,878.3	)		(827.7	)		(302.4	)
Issuance of Kinder Morgan, G.P., Inc. Preferred Stock		-			100.0
Discount on Early Extinguishment of Debt		69.2			-			-
Cash Book Overdraft		43.5			(2.0	)		(14.9	)
Common Stock Issued		-			-			9.9
Excess Tax Benefits from Share-based Payment Arrangements		-			-			56.7
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 (to) from Unconsolidated Affiliates		2.7			(2.7	)		2.3
Cash Dividends, Common Stock		-			-			(234.9	)
Minority Interests, Contributions		385.0			-			-
Minority Interests, Distributions		(463.3	)		(127.6	)		(248.9	)
Debt Issuance Costs		(14.3	)		(66.6	)		(13.1	)
Other, Net		8.9			0.5			(4.3	)
Net Cash Flows (Used in) Provided by Continuing Financing Activities		(4,569.6	)		9,872.5			300.8
Net Cash Flows Provided by Discontinued Financing Activities		-			-			140.1
Net Cash Flows (Used in) Provided by Financing Activities		(4,569.6	)		9,872.5			440.9

Effect of Exchange Rate Changes on Cash		(3.5	)		(2.4	)		7.6

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

Net Increase (Decrease) in Cash and Cash Equivalents		(22.0	)		(1,763.0	)		1,772.5
Cash and Cash Equivalents at Beginning of Period		148.6			1,902.3			129.8
Cash and Cash Equivalents at End of Period	$	126.6		$	139.3		$	1,902.3

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

Knight Inc. Form 10-Q

KNIGHT INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

General

We are a large energy transportation and storage company, operating or owning an interest in approximately 37,000 miles of pipelines and approximately 165 terminals. We have both regulated and nonregulated operations. We also own all the common equity of the general partner of, and a significant limited partner interest in, Kinder Morgan Energy Partners, L.P., a publicly traded pipeline limited partnership. 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 in Note 2 below. Unless the context requires otherwise, references to “Kinder Morgan Energy Partners” and “KMP” 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” or “KMR,” is a publicly traded Delaware limited liability company that was formed on February 14, 2001. Kinder Morgan G.P., Inc., the general partner of Kinder Morgan Energy Partners, owns all of Kinder Morgan Management’s voting shares. 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.

2.	Significant Accounting Policies

Basis of Presentation

We have prepared the accompanying unaudited interim consolidated financial statements under the rules and regulations of the Securities and Exchange Commission (“SEC”). Under such SEC rules and regulations, we have condensed or omitted certain information and notes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Our management believes, however, that our disclosures are adequate to make the information presented not misleading. The consolidated financial statements reflect normal adjustments, and also recurring adjustments that are, in the opinion of management, necessary for a fair presentation of our financial results for the interim periods. You should read these interim consolidated financial statements in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2007 (“2007 Form 10-K”).

Our consolidated financial statements include the accounts of Knight Inc. and our majority-owned subsidiaries, as well as those of Kinder Morgan Energy Partners, Kinder Morgan Management and Triton Power Company LLC, which we have the ability to exercise significant influence over their operating and financial policies. Investments in jointly owned operations in which we hold a 50% or less interest (other than Kinder Morgan Energy Partners, Kinder Morgan Management and Triton Power Company LLC) 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.

On May 30, 2007, we completed our Going Private transaction whereby Kinder Morgan, Inc. merged with a wholly owned subsidiary of Knight Holdco LLC, with Kinder Morgan, Inc. continuing as the surviving legal entity and subsequently renamed Knight Inc. Knight Holdco LLC is a private company owned by Richard D. Kinder, our Chairman and Chief Executive Officer; our co-founder William V. Morgan; former Kinder Morgan, Inc. board members Fayez Sarofim and Michael C. Morgan; other members of our senior management, most of whom are also senior officers of Kinder Morgan G.P., Inc. and Kinder Morgan Management; and affiliates of (i) Goldman Sachs Capital Partners, (ii) American International Group, Inc., (iii) The Carlyle Group, and (iv) Riverstone Holdings LLC. As a result of the Going Private transaction, we are now privately owned, our stock is no longer traded on the New York Stock Exchange, and we have adopted a new basis of accounting for our assets and liabilities. This transaction 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 SEC 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

Knight Inc. Form 10-Q

in our assets and liabilities, while the amounts subsequent to the closing (labeled “Successor Company”) reflect the push down of the investors’ new accounting basis to our financial statements. Hence, there is a blackline division on the financial statements and relevant notes, which is intended to signify that the amounts shown for periods prior to and subsequent to the Going Private transaction are not comparable.

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 an allocation of the aggregate 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, Kinder Morgan Management and Triton Power Company 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 Kinder Morgan Energy Partners and 14% in the case of Kinder Morgan Management). 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 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 Allocation of the Purchase Price is as Follows
Current Assets	$	1,551.2
Investments		897.8
Goodwill		13,674.3
Property, Plant and Equipment, Net		15,520.0
Deferred Charges and Other Assets		1,639.8
Current Liabilities		(3,279.5	)
Other Liabilities and Deferred Credits
Deferred Income Taxes, Non-current		(2,519.4	)
Other Deferred Credits		(1,786.3	)
Long-term Debt		(9,855.9	)
Minority Interests in Equity of Subsidiaries		(3,314.6	)
	$	12,527.4

The following is a reconciliation of shares purchased and contributed and the Going Private transaction purchase price (in millions except per share information):

	Number of Shares		Price per Share		Total Value
Shares Purchased with Cash	107.6	$	107.50	$	11,561.3

Shares Contributed
Richard D. Kinder	24.0	$	101.00		2,424.0
Other Knight Inc. Management and Board Members	2.7	$	107.50		295.2
Total Shares Contributed	26.7				2,719.2

Total Shares Outstanding as of May 31, 2007	134.3				14,280.5

Less: Portion of Shares Acquired using Knight Inc. Cash on Hand					(1,756.8	)
Add: Cash Contributions by Management At or After May 30, 2007					3.7
Purchase Price				$	12,527.4

Knight Inc. Form 10-Q

The shares contributed by members of management and the board members other than Richard D. Kinder who were investors in the Going Private transaction were valued at $107.50 per share, the same as the amount per share paid to the public shareholders in the Going Private transaction. Richard D. Kinder agreed to value the shares he contributed at $101.00 per share because Mr. Kinder agreed to participate in the transaction at less than the merger price in order to help increase the merger price for the other public shareholders.

Transfer of Net Assets Between Entities Under Common Control

We account for the transfer of net assets between entities under common control by carrying forward the net assets recognized in the balance sheets of each combining entity 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 affect the income statement of the combined entity.

Goodwill

Changes in the carrying amount of our goodwill for the nine months ended September 30, 2008 are summarized as follows:

	December 31, 2007		Acquisitions and Purchase Price Adjustments1				Impairment of Assets			Other2			September 30, 2008
	(In millions)
Products Pipelines – KMP	$	2,179.4		$	(43.1	)	$	(1,266.5	)	$	(6.9	)	$	862.9
Natural Gas Pipelines – KMP		3,201.0			266.8			(2,090.2	)		(10.6	)		1,367.0
CO2 – KMP		1,077.6			457.2			-			(3.7	)		1,531.1
Terminals – KMP		1,465.9			(3.2	)		(676.6	)		(4.5	)		781.6
Kinder Morgan Canada – KMP		250.1			-			-			(17.0	)		233.1
Consolidated Total	$	8,174.0		$	677.7		$	(4,033.3	)	$	(42.7	)	$	4,775.7

_______________

1	Adjustments relate primarily to a reallocation between goodwill and property, plant, and equipment in our final purchase price allocation.

2	Adjustments include (i) the translation of goodwill denominated in foreign currencies and (ii) reductions in the allocation of equity method goodwill due to reductions in our ownership percentage of Kinder Morgan Energy Partners.

We evaluate for the impairment of goodwill in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. For this purpose, we have six reporting units as follows: (i) Products Pipelines – KMP (excluding associated terminals), (ii) Products Pipelines Terminals – KMP (evaluated separately from Products Pipelines for goodwill purposes), (iii) Natural Gas Pipelines – KMP, (iv) CO2 – KMP, (v) Terminals – KMP and (vi) Kinder Morgan Canada – KMP. 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 September 30, 2008 and December 31, 2007, we have reported $138.2 million of equity method goodwill within the caption “Investments” in the accompanying interim Consolidated Balance Sheets.

In the second quarter of 2008, we finalized the purchase price allocation associated with our May 2007 Going Private transaction, establishing the fair values of our individual assets and liabilities including assigning the associated goodwill to our six reporting units, in each case as of the May 31, 2007 acquisition date. The goodwill that arose in conjunction with this acquisition, which constitutes all of our recorded goodwill, was determined to be associated with the general partner and significant limited partner interests in Kinder Morgan Energy Partners (a publicly traded master limited partnership, or “MLP”) that we acquired as part of this business combination. The goodwill was attributable, in part, to the difference between the market multiples that are paid to acquire the general partner interest in an MLP and the market multiples that are (or would be) paid to acquire the individual assets that comprise the MLP.

In conjunction with our annual impairment test of the carrying value of this goodwill, performed as of May 31, 2008, we determined that the fair value of certain reporting units that are part of our investment in Kinder Morgan Energy Partners were less than the carrying values. In addition, the fair value of each reporting unit was determined from the present value of the expected future cash flows from the applicable reporting unit (inclusive of a terminal value calculated using a market multiple for the individual assets). For the reporting units where the fair value was less than the carrying value, we determined the implied fair value of goodwill. The implied fair value of goodwill within each reporting unit was then compared to the carrying value of goodwill of each such unit, resulting in the following goodwill impairment by our reporting units: Products Pipelines – KMP (excluding associated terminals) – $1.19 billion, Products Pipelines Terminals –

Knight Inc. Form 10-Q

KMP (separate from Products Pipelines – KMP for goodwill impairment purposes) - $70 million, Natural Gas Pipelines – KMP – $2.09 billion, and Terminals – KMP – $677 million, for a total impairment of $4.03 billion. We have finalized our goodwill impairment calculation initially recorded in the second quarter of 2008. This resulted in an increase to the goodwill impairment by our Products Pipelines – KMP (excluding associated terminals) reporting unit of $152.6 million and a decrease to the goodwill impairment by our Natural Gas Pipelines – KMP reporting unit of $152.6 million, with no net impact to the total goodwill impairment charge. The goodwill impairment is a non-cash charge and does not have any impact on our cash flow.

While the fair value of the CO2 – KMP segment exceeded its carrying value as of the date of our goodwill impairment test, decreases in the market value of crude oil led us to reconsider this analysis as of September 30, 2008. This analysis again showed that the fair value of the CO2 – KMP segment exceeded its carrying value, however the amount by which the fair value exceeded the carrying value decreased. If the market price of crude oil continues to decline, we may need to record non-cash goodwill impairment charges on this reporting unit in future periods.

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. 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 information obtained regarding the fair values of the Trans Mountain pipeline system assets, we recorded a goodwill impairment charge of $377.1 million in the first quarter of 2007.

4.	Other Intangibles

Our intangible assets other than goodwill include customer relationships, contracts and agreements, technology-based assets, lease values and other long-term assets. 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:

	September 30, 2008				December 31, 2007
	(In millions)
Customer Relationships, Contracts and Agreements
Gross Carrying Amount1		$	270.9			$	321.3
Accumulated Amortization			(25.7	)			(11.6	)
Net Carrying Amount			245.2				309.7

Technology-based Assets, Lease Values and Other
Gross Carrying Amount			11.7				11.7
Accumulated Amortization			(0.7	)			(0.3	)
Net Carrying Amount			11.0				11.4

Total Other Intangibles, Net		$	256.2			$	321.1

_______________

The change in the Gross Carrying Amount is primarily due to (i) a decrease of approximately $18 million for Kinder Morgan Energy Partners’ allocated purchase price to Marine Terminals, Inc.’s bulk terminal assets and (ii) a decrease of approximately $32 million for Knight Inc.’s allocated purchase price to the assets belonging to the Products Pipelines, Natural Gas Pipelines, CO2, and Terminals segments, related to the Going Private transaction. These adjustments had the effect of increasing “Goodwill” and decreasing “Other Intangibles, Net” by the described amounts.

Knight Inc. Form 10-Q

Amortization expense on our intangibles consisted of the following:

	Successor Company								Predecessor Company
	Three Months Ended September 30,				Nine Months Ended September 30,		Four Months Ended September 30,		Five Months Ended May 31,
	2008		2007		2008		2007		2007
	(In millions)								(In millions)
Customer Relationships, Contracts and Agreements	$	4.6	$	3.9	$	14.1	$	5.1	$	6.1
Technology-based Assets, Lease Value and Other		0.2		0.1		0.4		0.1		0.2
Total Amortization	$	4.8	$	4.0	$	14.5	$	5.2	$	6.3

As of September 30, 2008, the weighted-average useful lives for our intangible assets was approximately 16.8 years.

5.	Minority Interests

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

	September 30, 2008		December 31, 2007
	(In millions)
Kinder Morgan Energy Partners	$	1,717.8	$	1,616.0
Kinder Morgan Management		1,705.8		1,657.7
Triton Power Company LLC		41.4		29.2
Other		9.3		11.1
	$	3,474.3	$	3,314.0

6.	Related Party Transactions

Significant Investors

As discussed in Note 2, as a result of the Going Private transaction, a number of individuals and entities became significant investors in us via their investment in Knight Holdco LLC. 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 September 30, 2008 and December 31, 2007, the fair values of these derivative contracts are included in the accompanying interim Consolidated Balance Sheets within the captions indicated in the following table:

	September 30, 2008			December 31, 2007
	(In millions)
Derivative Assets (Liabilities)
Assets: Fair Value of Derivative Instruments, Non-current	$	13.6		$	-
Current Liabilities: Fair Value of Derivative Instruments	$	(256.3	)	$	(239.8	)
Liabilities and Stockholder’s Equity: Fair Value of Derivative Instruments, Non-current	$	(594.2	)	$	(386.5	)

Knight Inc. Form 10-Q

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 $88.5 million and $89.7 million as of September 30, 2008 and December 31, 2007, respectively. Of these amounts, $2.5 million and $2.4 million, respectively, were included within “Current Assets: Accounts, Notes and Interest Receivable, Net” in our accompanying interim Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007 and the remainder was included within “Notes Receivable – Related Parties” in our accompanying interim Consolidated Balance Sheets at each reporting date.

Express US Holdings LP Note Receivable

On June 30, 2008, we exchanged our C$113.6 million preferred equity interest in Express US Holdings LP for two subordinated notes from Express US Holdings LP with a combined face value of $111.4 million (C$113.6 million).

As of September 30, 2008, the outstanding note receivable balance, representing the translated amount included in our consolidated financial statements in U.S. dollars, was $106.7 million, and we included this amount in the accompanying interim Consolidated Balance Sheet within the caption “Notes Receivable – Related Parties.”

On August 28, 2008, Knight Inc. sold its one-third interest in the net assets of the Express pipeline system (“Express”), as well as Knight Inc.’s full ownership of the net assets of the Jet Fuel pipeline system (“Jet Fuel”), to Kinder Morgan Energy Partners. This transaction included the sale of Knight Inc.’s subordinated notes described above. Due to the inclusion of Kinder Morgan Energy Partners and its subsidiaries in our consolidated financial statements (resulting from the implementation of EITF 04-5), Knight Inc. accounted for this transaction as a transfer of net assets between entities under common control. Therefore, following Knight Inc.’s sale of Express and Jet Fuel to Kinder Morgan Energy Partners, Kinder Morgan Energy Partners recognized the assets and liabilities acquired at Knight Inc.’s carrying amounts (historical cost) at the date of transfer; see Note 14 for additional information relating to this sale.

NGPL PipeCo LLC

On February 15, 2008, Knight Inc. entered in to an Operations and Reimbursement agreement with Natural Gas Pipeline Company of America LLC, a wholly owned subsidiary of NGPL PipeCo LLC. The agreement provides for a $3.7 million monthly charge from Knight Inc. to Natural Gas Pipeline Company of America LLC related to general and administrative expenses. For the period from February 15, 2008 to September 30, 2008 and the three months ended September 30, 2008, these charges were $27.8 million and $11.1 million, respectively.

In addition, Kinder Morgan Energy Partners purchases transportation and storage services from NGPL PipeCo LLC. For the period from February 15, 2008 to September 30, 2008 and the three months ended September 30, 2008, these purchases totaled $5.0 million and $2.4 million, respectively.

Knight Inc. Form 10-Q

7.	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)

	Successor Company						Predecessor Company
	Nine Months Ended September 30, 2008			Four Months Ended September 30, 2007			Five Months Ended May 31, 2007
	(In millions)						(In millions)
Accounts Receivable	$	(55.5	)	$	70.2		$	(31.9	)
Materials and Supplies Inventory		(7.3	)		0.8			(1.7	)
Other Current Assets		29.0			3.6			0.5
Accounts Payable		(89.3	)		(7.8	)		26.3
Accrued Interest		(145.3	)		(51.1	)		(22.5	)
Accrued Taxes		(502.3	)		(47.0	)		(114.0	)
Other Current Liabilities		(81.0	)		17.7			(59.6	)
	$	(851.7	)	$	(13.6	)	$	(202.9	)

Supplemental Disclosures of Cash Flow Information

	Successor Company				Predecessor Company
	Nine Months Ended September 30, 2008		Four Months Ended September 30, 2007		Five Months Ended May 31, 2007
	(In millions)				(In millions)
Cash Paid During the Period for
Interest, Net of Amount Capitalized	$	623.0	$	390.3	$	381.8
Income Taxes Paid, Including Prior Period Amounts	$	622.9	$	141.8	$	133.3

During the nine months ended September 30, 2008, the four months ended September 30, 2007 and the five months ended May 31, 2007, Kinder Morgan Energy Partners acquired $3.4 million, $1.0 million and $18.5 million, respectively, of assets by the assumption of liabilities.

During the nine months ended September 30, 2008, we recognized non-cash activity of $45.8 million for unamortized fair value adjustments recorded in purchase accounting related to the Going Private transaction and $41.7 million for unamortized debt issuance costs, both associated with the early extinguishment of debt.

On June 30, 2008, we exchanged our preferred equity interest in Express US Holdings LP for two subordinated notes from Express US Holdings LP with a combined face value of $111.4 million (C$113.6 million); see Note 11 for additional information regarding this exchange.

In May 2007, Kinder Morgan Energy Partners issued 266,813 common units, representing approximately $15.0 million of value, in settlement of an obligation included in the purchase price of seven bulk terminal operations acquired from Trans-Global Solutions, Inc. on April 29, 2005.

Knight Inc. Form 10-Q

8.	Income Taxes

Income Taxes from Continuing Operations included in our Consolidated Statements of Operations were as follows:

	Successor Company												Predecessor Company
	Three Months Ended September 30,						Nine Months Ended September 30,			Four Months Ended September 30,			Five Months Ended May 31,
	2008			2007			2008			2007			2007
	(In millions)												(In millions)
Income Taxes	$	87.9		$	74.6		$	194.4		$	95.9		$	135.5
Effective Tax Rate1		44.7	%		45.3	%		33.4	%		44.8	%		48.4	%

_______________

Excludes goodwill impairment charges related to non-deductible goodwill; see Note 3.

During the nine months ended September 30, 2008, our effective tax rate was lower than the statutory federal income tax rate of 35% primarily due to (i) a reduction of approximately $53 million in deferred income tax liabilities, and income tax expense, related to the termination of certain of our subsidiaries’ presence in Canada resulting in the elimination of future taxable gains and (ii) the special tax deduction permitted for dividends received from domestic corporations. These decreases to the effective tax rate were partially offset by state income taxes and the impact of consolidating the Kinder Morgan Management income tax provision.

During the three months ended September 30, 2008, three months ended September 30, 2007, four months ended September 30, 2007 and five months ended May 31, 2007, our effective tax rate was higher than the statutory federal income tax rate of 35% due to (i) state income taxes, (ii) the impact of consolidating the Kinder Morgan Management income tax provision, (iii) foreign earnings subject to different tax rates and (iv) the impact of consolidating Kinder Morgan Energy Partners’ income tax provision. During the five months ended May 31, 2007, our effective tax rate was also higher due to non-deductible fees associated with the Going Private transaction.

9.	Comprehensive Income (Loss)

Our comprehensive income (loss) is as follows:

	Successor Company
	Three Months Ended September 30,
	2008			2007
	(In millions)
Net Income	$	108.7		$	85.7
Other Comprehensive Income (Loss), Net of Tax
Change in Fair Value of Derivatives Utilized for Hedging Purposes		543.4			(25.5	)
Reclassification of Change in Fair Value of Derivatives to Net Income		(70.5	)		(20.2	)
Employee Benefit Plans
Prior Service Cost Arising During Period		(0.1	)		-
Net Gain Arising During Period		0.2			-
Amortization of Net Loss Included in Net Periodic Benefit Costs		-			(0.1	)
Change in Foreign Currency Translation Adjustment		(22.8	)		14.1
Other Comprehensive Income (Loss), Net of Tax		450.2			(31.7	)

Comprehensive Income	$	558.9		$	54.0

Knight Inc. Form 10-Q

	Successor Company						Predecessor Company
	Nine Months Ended September 30, 2008			Four Months Ended September 30, 2007			Five Months Ended May 31, 2007
	(In millions)						(In millions)
Net Income (Loss)	$	(3,646.2	)	$	115.9		$	65.9
Other Comprehensive Income (Loss), Net of Tax
Change in Fair Value of Derivatives Utilized for Hedging Purposes		(253.5	)		(44.5	)		(21.3	)
Reclassification of Change in Fair Value of Derivatives to Net Income		140.9			(21.1	)		10.3
Employee Benefit Plans
Prior Service Cost Arising During Period		0.2			-			(1.7	)
Net Gain Arising During Period		1.3			-			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		(0.1	)		(0.1	)		1.4
Change in Foreign Currency Translation Adjustment		(31.5	)		12.7			40.1
Other Comprehensive Income (Loss), Net of Tax		(142.7	)		(53.0	)		39.8

Comprehensive Income (Loss)	$	(3,788.9	)	$	62.9		$	105.7

The Accumulated Other Comprehensive Loss balance of $390.4 million included in the accompanying interim Consolidated Balance Sheet at September 30, 2008 consisted of (i) $367.1 million representing unrecognized net losses on hedging activities, (ii) $5.2 million representing foreign currency translation gain adjustments and (iii) $0.2 million and $28.3 million representing unrecognized prior service costs and net losses relating to the employee benefit plans, respectively.

10.	Kinder Morgan Management, LLC

On August 14, 2008, Kinder Morgan Management made a share distribution of 0.018124 shares per outstanding share (1,359,153 total shares) to shareholders of record as of July 31, 2008, based on the $0.99 per common unit distribution declared by Kinder Morgan Energy Partners. On November 14, 2008, Kinder Morgan Management will make a share distribution of 0.021570 shares per outstanding share (1,646,891 total shares) to shareholders of record as of October 31, 2008, based on the $1.02 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 of the market closing prices 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.

11.	Business Combinations, Investments, and Sales

During the first nine months of 2008, we recorded purchase price adjustments related to Kinder Morgan Energy Partners’ previously completed acquisitions of bulk terminal operations acquired effective May 30, 2007 and September 1, 2007, respectively and made a preliminary purchase price allocation related to a liquids terminal facility acquired by Kinder Morgan Energy Partners on August 15, 2008.

Vancouver Wharves

On May 30, 2007, Kinder Morgan Energy Partners purchased the Vancouver Wharves bulk marine terminal from British Columbia Railway Company, a crown corporation owned by the Province of British Columbia, for an aggregate consideration of $59.5 million, consisting of $38.8 million in cash and $20.7 million in assumed liabilities. The Vancouver Wharves facility is located on the north shore of the Port of Vancouver’s main harbor and includes five deep-sea vessel berths situated on a 139-acre site. The terminal assets include significant rail infrastructure, dry bulk and liquid storage, and material handling systems that allow the terminal to handle over 3.5 million tons of cargo annually.

Knight Inc. Form 10-Q

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. Final purchase price adjustments were made in the first half of 2008 to reflect the fair value of acquired assets and expected value of assumed liabilities. The adjustments increased “Property, Plant and Equipment, Net” by $2.7 million, reduced working capital balances by $1.6 million, and increased “Other Long-term Liabilities and Deferred Credits” by $1.1 million. Based on Kinder Morgan Energy Partners’ estimate of fair market values, we allocated $53.4 million of the combined purchase price to “Property, Plant and Equipment, Net,” and $6.1 million to items included within “Current Assets.”

Marine Terminals, Inc.

On September 1, 2007, Kinder Morgan Energy Partners acquired certain bulk terminals assets from Marine Terminals, Inc. for an aggregate consideration of approximately $102.1 million, consisting of $100.8 million in cash and assumed liabilities of $1.3 million. The acquired assets and operations are primarily involved in the handling and storage of steel and alloys. The operations consist of two separate facilities located in Blytheville, Arkansas, and individual terminal facilities located in Decatur, Alabama, Hertford, North Carolina, and Berkley, South Carolina. Combined, the five facilities handle approximately 13.5 million tons of alloys and steel products annually and also provide stevedoring and harbor services, scrap handling, and scrap processing services to customers in the steel and alloys industry. The acquisition both expanded and complemented Kinder Morgan Energy Partners’ existing ferro alloy terminal operations and will provide customers further access to Kinder Morgan Energy Partners’ growing national network of marine and rail terminals. All of the acquired assets are included in the Terminals – KMP business segment.

In the first nine months of 2008, Kinder Morgan Energy Partners paid an additional $0.5 million for purchase price settlements, and made purchase price adjustments to reflect final fair value of acquired assets and final expected value of assumed liabilities. Kinder Morgan Energy Partners’ 2008 adjustments primarily reflected changes in the allocation of the purchase cost to intangible assets acquired. Based on Kinder Morgan Energy Partners’ estimate of fair market values, we allocated $60.8 million of the combined purchase price to “Property, Plant and Equipment, Net,” $21.7 million to “Other Intangibles, Net,” $18.6 million to “Goodwill,” and $1.0 million to “Current Assets: Other” and “Deferred Charges and Other Assets.”

The allocation to “Other Intangibles, Net” included a $20.1 million amount representing the fair value of a service contract entered into with Nucor Corporation, a large domestic steel company with significant operations in the Southeast region of the United States. For valuation purposes, the service contract was determined to have a useful life of 20 years, and pursuant to the contract’s provisions, the acquired terminal facilities will continue to provide Nucor with handling, processing, harboring and warehousing services.

The allocation to “Goodwill,” which is expected to be deductible for tax purposes, was based on the fact that this acquisition both expanded and complemented Kinder Morgan Energy Partners’ existing ferro alloy terminal operations and will provide Nucor and other customers further access to Kinder Morgan Energy Partners’ growing national network of marine and rail terminals. We believe the acquired value of the assets, including all contributing intangible assets, exceeded the fair value of acquired identifiable net assets and liabilities—in the aggregate, these factors represented goodwill.

Wilmington, North Carolina Liquids Terminal

On August 15, 2008, Kinder Morgan Energy Partners purchased certain terminal assets from Chemserve, Inc. for an aggregate consideration of $12.7 million, consisting of $11.8 million in cash and $0.9 million in assumed liabilities. The liquids terminal facility is located in Wilmington, North Carolina and stores petroleum products and chemicals. The terminal includes significant transportation infrastructure, and provides liquid and heated storage and custom tank blending capabilities for agricultural and chemical products. The acquisition both expanded and complemented Kinder Morgan Energy Partners’ existing Mid-Atlantic region terminal operations, and all of the acquired assets are included in the Terminals – KMP business segment. In the third quarter of 2008, we made a preliminary allocation of the purchase price to reflect the fair value of assets acquired; however, the final purchase price allocation is expected to be made in the fourth quarter of 2008, including a final allocation to “Goodwill.”

Sale of 80% of NGPL PipeCo LLC

On February 15, 2008, we sold an 80% ownership interest in NGPL PipeCo LLC (formerly MidCon Corp.), which owns Natural Gas Pipeline of America and certain affiliates, collectively referred to as “NGPL,” to Myria Acquisition Inc. (“Myria”) for approximately $2.9 billion. We also received $3.0 billion of cash previously held in escrow related to a notes offering by NGPL PipeCo LLC in December 2007, the net proceeds of which were distributed to us principally as repayment of intercompany indebtedness and partially as a dividend, immediately prior to the closing of the sale to Myria. Pursuant to

Knight Inc. Form 10-Q

the purchase agreement, Myria acquired all 800 Class B shares and we retained all 200 Class A shares of NGPL PipeCo LLC. We will continue to operate NGPL’s assets pursuant to a 15-year operating agreement. Myria is owned by a syndicate of investors led by Babcock & Brown, an international investment and specialized fund and asset management group. The total proceeds from this sale of $5.9 billion were used to pay off the entire outstanding balances of our senior secured credit facility’s Tranche A and Tranche B term loans, to repurchase $1.67 billion of our outstanding debt securities and to reduce balances outstanding under our $1.0 billion revolving credit facility (see Note 13).

Investment in Rockies Express Pipeline

In the first nine months of 2008, Kinder Morgan Energy Partners made capital contributions of $306.0 million to West2East Pipeline LLC (the sole owner of Rockies Express Pipeline LLC) to partially fund its Rockies Express Pipeline construction costs. This cash contribution was recorded as an increase to “Investments” in the accompanying interim Consolidated Balance Sheet as of September 30, 2008, and it was included within “Cash Flows from Investing Activities: Other Investments” in the accompanying interim Consolidated Statement of Cash Flows for the nine months ended September 30, 2008. Kinder Morgan Energy Partners owns a 51% equity interest in West2East Pipeline LLC.

On June 24, 2008, Rockies Express Pipeline LLC completed a private offering of an aggregate $1.3 billion in principal amount of fixed rate senior notes. Rockies Express Pipeline LLC received net proceeds of approximately $1.29 billion from this offering, after deducting the initial purchasers’ discount and estimated offering expenses, and virtually all of the net proceeds from the sale of the notes were used to repay Rockies Express Pipeline LLC’s short-term commercial paper borrowings.

All payments of principal and interest in respect of these senior notes are the sole obligation of Rockies Express Pipeline LLC. Noteholders will have no recourse against Kinder Morgan Energy Partners, Sempra Energy or ConocoPhillips (the two other member owners of West2East Pipeline LLC), or against any of Kinder Morgan Energy Partners’ or their respective officers, directors, employees, shareholders, members, managers, unitholders or affiliates for any failure by Rockies Express Pipeline LLC to perform or comply with its obligations pursuant to the notes or the indenture.

Midcontinent Express Pipeline LLC

In the first nine months of 2008, Kinder Morgan Energy Partners made capital contributions of $27.5 million to Midcontinent Express Pipeline LLC to partially fund its Midcontinent Express Pipeline construction costs. This cash contribution has been recorded as an increase to “Investments” in the accompanying Consolidated Balance Sheet as of September 30, 2008, and has been included within “Cash Flows from Investing Activities: Other Investments” in the accompanying Consolidated Statement of Cash Flows for the nine months ended September 30, 2008. Kinder Morgan Energy Partners owns a 50% equity interest in Midcontinent Express Pipeline LLC.

Kinder Morgan Energy Partners received, in the first nine months of 2008, an $89.1 million return of capital from Midcontinent Express Pipeline LLC. In February 2008, Midcontinent Express Pipeline LLC entered into and then made borrowings under a new $1.4 billion three-year, unsecured revolving credit facility due February 28, 2011. Midcontinent then made distributions (in excess of cumulative earnings) to its two member owners to reimburse them for prior contributions made to fund its pipeline construction costs, and this cash receipt has been included in “Distributions from Equity Investees” in the accompanying Consolidated Statement of Cash Flows for the nine months ended September 30, 2008.

Fayetteville Express Pipeline LLC

On October 1, 2008, Kinder Morgan Energy Partners announced that it has entered into a 50/50 joint venture with Energy Transfer Partners, L.P. to build and develop the Fayetteville Express Pipeline, a new natural gas pipeline that will provide shippers in the Arkansas Fayetteville Shale area with takeaway natural gas capacity, added flexibility, and further access to growing markets. Fayetteville Express Pipeline LLC will construct the approximately 185-mile pipeline, which will originate in Conway County, Arkansas, continue eastward through White County, Arkansas, and terminate at an interconnect with Trunkline Gas Company’s pipeline in Quitman County, Mississippi. The new pipeline will also interconnect with NGPL’s pipeline in White County, Arkansas, Texas Gas Transmission LLC’s pipeline in Coahoma County, Mississippi, and ANR Pipeline Company’s pipeline in Quitman County, Mississippi. NGPL’s pipeline is operated and 20% owned by us.

The Fayetteville Express Pipeline will have an initial capacity of 2.0 billion cubic feet of natural gas per day. Pending necessary regulatory approvals, the approximately $1.3 billion pipeline project is expected to be in service by late 2010 or early 2011. Fayetteville Express Pipeline LLC has secured binding 10-year commitments totaling approximately 1.85 billion cubic feet per day, and depending on shipper support, capacity on the proposed pipeline may be increased.

Knight Inc. Form 10-Q

Other Sales

On January 25, 2008, we sold our interests in three natural gas-fired power plants in Colorado to Bear Stearns. We received net proceeds of $63.1 million.

On April 1, 2008, Kinder Morgan Energy Partners sold its 25% interest in Thunder Creek Gas Services, LLC. Kinder Morgan Energy Partners received cash proceeds of approximately $50.7 million for its investment.

On June 30, 2008, Knight Inc. exchanged a $111.4 million (C$113.6 million) preferred equity interest in Express US Holdings LP and the accrued interest thereon for $40.5 million in cash (the majority of which was received in July 2008) and two subordinated notes issued by Express US Holdings LP with a combined face value of $111.4 million (C$113.6 million). Immediately prior to the exchange, the subordinated notes were held by two other partners in Express US Holdings LP. On August 28, 2008, Knight Inc. sold the one-third interest in the net assets of Express and our full ownership of Jet Fuel to Kinder Morgan Energy Partners. This transaction included the sale of the aforementioned subordinated notes. Due to the inclusion of Kinder Morgan Energy Partners and its subsidiaries in Knight Inc.’s consolidated financial statements (resulting from the implementation of EITF 04-5), Knight Inc. accounted for this transaction as a transfer of net assets between entities under common control. Therefore, following Kinder Morgan Energy Partners’ acquisition of Express and Jet Fuel from Knight Inc., Kinder Morgan Energy Partners recognized the assets and liabilities acquired at Knight Inc.’s carrying amounts (historical cost) at the date of transfer; see Note 14. These notes are included in the accompanying interim Consolidated Balance Sheet at September 30, 2008, under the caption “Notes Receivable – Related Parties.” The two notes have an interest rate of 12%, payable quarterly, and are due on January 9, 2023.

12.	Discontinued Operations

North System Natural Gas Liquids Pipeline System

In October 2007, Kinder Morgan Energy Partners completed the sale of its North System and its 50% ownership interest in the Heartland Pipeline Company to ONEOK Partners, L.P. for approximately $298.6 million in cash. In the nine months ended September 30, 2008, Kinder Morgan Energy Partners paid $2.4 million to ONEOK Partners, L.P. to fully settle both the sale of working capital items and the allocation of pre-acquisition investee distributions, and to partially settle the sale of liquids inventory balances. Due to the fair market valuation resulting from the Going Private transaction (see Note 2), the consideration Kinder Morgan Energy Partners received from the sale of its North System was equal to its carrying value; therefore no gain or loss was recorded on this disposal transaction. 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 were 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. All of the assets were included in our Products Pipelines – KMP business segment.

Terasen Pipelines (Corridor) Inc.

In June 2007, we completed the sale of Terasen Pipelines (Corridor) Inc. (“Corridor”) to Inter Pipeline Fund, a Canada-based company. Corridor 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). The sale price was approximately $711 million (C$760 million) plus the buyer’s assumption of all of the debt related to Corridor, including the debt associated with the expansion taking place on Corridor at the time of the sale. The consideration was equal to Corridor’s carrying value, therefore no gain or loss was recorded on this disposal transaction.

Terasen Inc.

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 plus the buyers’ assumption of debt. The sale did not include the assets of Kinder Morgan Canada (formerly Terasen Pipelines) discussed in the preceding paragraph. 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 $223.3 million of this loss was utilized to reduce capital gains principally associated with the sale of our U.S.-based retail gas operations (see below) resulting in a tax benefit of approximately $82.2 million. The remaining capital loss carryforward of $775.3 million was utilized to reduce the capital gain associated with our sale of an 80% ownership interest in NGPL PipeCo LLC (see Note 11).

Knight Inc. Form 10-Q

Natural Gas Distribution and Retail Operations

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 and an adjustment for 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) in the first quarter of 2007. Our Natural Gas Pipelines – KMP business segment (i) provides natural gas transportation and storage services and sells natural gas to and (ii) 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 will likely continue to a similar extent into the future. For the five months ended May 31, 2007, revenues and expenses of our continuing operations totaling $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, a subsidiary of General Electric Company, to provide certain administrative functions for a limited period of time and for the lease of office space. We do 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 disposed assets.

Earnings of Discontinued Operations

The financial results of discontinued operations have been reclassified for all periods presented and reported in the caption, “Income (Loss) from Discontinued Operations, Net of Tax” in our accompanying interim Consolidated Statements of Operations. Summarized financial results of these operations are as follows:

	Successor Company												Predecessor Company
	Three Months Ended September 30,						Nine Months Ended September 30,			Four Months Ended September 30,			Five Months Ended May 31,
	2008			2007			2008			2007			2007
	(In millions)												(In millions)
Operating Revenues	$	-		$	14.4		$	-		$	19.2		$	921.8

Income (Loss) from Discontinued Operations Before Income Taxes		(0.2	)		(1.4	)		(0.6	)		0.9			393.2
Income Taxes		-			(3.0	)		-			(3.0	)		(94.6	)
Income (Loss) from Discontinued Operations	$	(0.2	)	$	(4.4	)	$	(0.6	)	$	(2.1	)		298.6

The cash flows attributable to discontinued operations are included in our accompanying interim Consolidated Statements of Cash Flows for the nine months ended September 30, 2008, the four months ended September 30, 2007, and the five months ended May 31, 2007 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 Discontinued Financing Activities.”

13.

Financing

Credit Facilities

	September 30, 2008
	Short-term Notes Payable			Commercial Paper Outstanding		Weighted- Average Interest Rate
	(In millions)

Knight Inc. – Secured Debt1		$	270.0	$	-		3.62	%
Kinder Morgan Energy Partners – Unsecured Debt2		$	295.0	$	-		5.00	%

____________

The average short-term debt outstanding (and related weighted-average interest rate) was $196.8 million (3.61%) and $185.6 million (4.38%) during the three and nine months ended September 30, 2008, respectively.

The average short-term debt outstanding (and related weighted-average interest rate) was $163.5 million (3.34%) and $329.6 million (3.48%) during the three and nine months ended September 30, 2008, respectively.

Knight Inc. Form 10-Q

The Knight Inc. $1.0 billion six-year senior secured credit facility matures on May 30, 2013 and includes a sublimit of $300 million for the issuance of letters of credit and a sublimit of $50 million for swingline loans. Knight Inc. does not have a commercial paper program.

The Kinder Morgan Energy Partners $1.85 billion five-year unsecured bank credit facility matures August 18, 2010 and can be amended to allow for borrowings up to $2.1 billion. Borrowings under the credit facility can be used for partnership purposes and as a backup for Kinder Morgan Energy Partners’ commercial paper program. Borrowings under Kinder Morgan Energy Partners’ commercial paper program reduce the borrowings allowed under its credit facility. On October 13, 2008, Standard & Poor’s Rating Services lowered Kinder Morgan Energy Partners’ short-term credit rating to A-3 from A-2. See Note 20 regarding subsequent events.

The outstanding balance under Kinder Morgan Energy Partners’ five-year credit facility was $295.0 million as of September 30, 2008. As of December 31, 2007, there were no borrowings under the credit facility. As of December 31, 2007, Kinder Morgan Energy Partners had $589.1 million of commercial paper outstanding with an average interest rate of 5.58%. The borrowings under Kinder Morgan Energy Partners’ commercial paper program were used principally to finance the acquisitions and capital expansions that Kinder Morgan Energy Partners made during 2007.

Kinder Morgan Energy Partners’ five-year credit facility is with a syndicate of financial institutions and Wachovia Bank, National Association is the administrative agent. On September 15, 2008, Lehman Brothers Holdings Inc. filed for bankruptcy protection under the provisions of Chapter 11 of the U.S. Bankruptcy Code. No Lehman Brothers affiliate is an administrative agent for Kinder Morgan Energy Partners or any of its subsidiaries; however, one of the Lehman entities is a lending bank providing less than 5% of the commitments in Kinder Morgan Energy Partners’ bank credit facility. Since Lehman Brothers declared bankruptcy, its affiliate, which is a party to Kinder Morgan Energy Partners’ credit facility, has notified Kinder Morgan Energy Partners that it will not meet obligations to lend under that agreement. Thus, the available capacity of Kinder Morgan Energy Partners’ facility will be reduced by the Lehman commitment (less than 5% of the facility). The commitments of the other banks remain unchanged and the facility is not defaulted.

As of September 30, 2008, the amount available for borrowing under Kinder Morgan Energy Partners’ credit facility was reduced by an aggregate amount of $681.5 million, consisting of (i) a combined $375 million in three letters of credit that support its hedging of commodity price risks associated with the sale of natural gas, natural gas liquids and crude oil, (ii) a $100 million letter of credit that supports certain proceedings with the California Public Utilities Commission involving refined products tariff charges on the intrastate common carrier operations of Kinder Morgan Energy Partners’ Pacific operations’ pipelines in the state of California, (iii) a combined $86.9 million in three letters of credit that support tax-exempt bonds, (iv) a combined $55.9 million in letters of credit that support Kinder Morgan Energy Partners’ pipeline and terminal operations in Canada, (v) a $26.8 million letter of credit that supports Kinder Morgan Energy Partners’ indemnification obligations on the Series D note borrowings of Cortez Capital Corporation, (vi) a $19.9 million letter of credit that supports the construction of Kinder Morgan Energy Partners’ Kinder Morgan Louisiana Pipeline (a natural gas pipeline), and (vii) a combined $17 million in other letters of credit supporting other obligations of Kinder Morgan Energy Partners and its subsidiaries.

Significant Debt Financing Transactions

On June 6, 2008, Kinder Morgan Energy Partners completed a public offering of a total of $700 million in principal amount of senior notes, consisting of $375 million of 5.95% notes due February 15, 2018, and $325 million of 6.95% notes due January 15, 2038. Kinder Morgan Energy Partners received proceeds from the issuance of the notes, after underwriting discounts and commissions, of approximately $687.7 million, and used the proceeds to reduce the borrowings under its commercial paper program. The notes due in 2018 constitute a further issuance of the $600 million aggregate principal amount of 5.95% notes Kinder Morgan Energy Partners issued on February 12, 2008 and form a single series with those notes. The notes due in 2038 constitute a further issuance of the combined $850 million aggregate principal amount of 6.95% notes Kinder Morgan Energy Partners issued on June 21, 2007 and February 12, 2008 and form a single series with those notes.

On February 12, 2008, Kinder Morgan Energy Partners completed a public offering of senior notes. Kinder Morgan Energy Partners issued a total of $900 million in principal amount of senior notes, consisting of $600 million of 5.95% notes due February 15, 2018, and $300 million of 6.95% notes due January 15, 2038. Kinder Morgan Energy Partners received proceeds from the issuance of the notes, after underwriting discounts and commissions, of approximately $894.1 million, and used the proceeds to reduce the borrowings under its commercial paper program. The notes due in 2038 constitute a further issuance of the $550 million aggregate principal amount of 6.95% notes Kinder Morgan Energy Partners issued on June 21, 2007 and form a single series with those notes.

Knight Inc. Form 10-Q

In February 2008, approximately $4.6 billion of the proceeds from the completed sale of an 80% ownership interest in NGPL PipeCo LLC were used to pay off and retire our senior secured credit facility’s Tranche A and Tranche B term loans and to pay down amounts outstanding at that time under our $1.0 billion revolving credit facility as follows:

	Debt Paid Down and/or Retired
	(In millions)
Knight Inc.
Senior Secured Credit Term Loan Facilities
Tranche A Term Loan, Due 2013		$	995.0
Tranche B Term Loan, Due 2014			3,183.5
Credit Facility
$1.0 billion Secured Revolver, Due May 2013			375.0
Total Paid Down and/or Retired		$	4,553.5

In March 2008, using primarily proceeds from the completed sale of an 80% ownership interest in NGPL PipeCo LLC, along with cash on hand and borrowings under our $1.0 billion revolving credit facility, we repurchased approximately $1.67 billion par value of our outstanding debt securities for $1.6 billion in cash as follows:

	Par Value of Debt Repurchased
	(In millions)
Knight Inc.
Debentures
6.50% Series, Due 2013		$	18.9
6.67% Series, Due 2027			143.0
7.25% Series, Due 2028			461.0
7.45% Series, Due 2098			124.1
Senior Notes
6.50% Series, Due 2012			160.7
Kinder Morgan Finance Company, LLC
6.40% Series, Due 2036			513.6
Deferrable Interest Debentures Issued to Subsidiary Trusts
8.56% Junior Subordinated Deferrable Interest Debentures Due 2027			87.3
7.63% Junior Subordinated Deferrable Interest Debentures Due 2028			160.6
Repurchase of Outstanding Debt Securities		$	1,669.2

On May 30, 2007, we terminated our $800 million five-year credit facility dated August 5, 2005 and entered into a $5.8 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: (i) a $1.0 billion senior secured Tranche A term loan facility with a term of six years and six months (subsequently retired), (ii) a $3.3 billion senior secured Tranche B term loan facility, with a term of seven years (subsequently retired), (iii) a $455 million senior secured Tranche C term loan facility with a term of three years (subsequently retired), and (iv) a $1.0 billion senior secured revolving credit facility with a term of six years. The revolving credit facility includes a sublimit of $300 million for the issuance of letters of credit and a sublimit of $50 million swingline loans and can be used for general corporate purposes.

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.

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 its fair value and the adjustments are being amortized until the debt securities mature. The unamortized fair value adjustment balances reflected within the caption “Long-term Debt” in the accompanying interim Consolidated Balance Sheet at September 30, 2008 were $46.4 million and $0.6 million, representing a decrease to the carrying value of our long-term debt and an increase in the balance of our value of interest rate swaps,

Knight Inc. Form 10-Q

respectively.

Kinder Morgan Operating L.P. “A” and Kinder Morgan Canada Company

As part of the purchase price consideration for Kinder Morgan Energy Partners’ January 1, 2007 acquisition of the remaining approximately 50.2% interest in the Cochin pipeline system that it did not already own, 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 equal annual installments of $10.0 million on March 31 in each of 2008, 2009, 2010, 2011 and 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 September 30, 2008 and December 31, 2007, the outstanding balance under the note was $36.1 million and $44.6 million, respectively.

Central Florida Pipeline LLC Debt

On July 23, 2008, Central Florida Pipeline LLC, a Kinder Morgan Energy Partners subsidiary, paid $5.0 million to retire the outstanding principal amount of its 7.84% senior notes that matured on that date.

Kinder Morgan Operating L.P. “B” Debt

As of December 31, 2007, Kinder Morgan Energy Partners’ subsidiary, Kinder Morgan Operating L.P. “B,” was the obligor of a principal amount of $23.7 million of tax-exempt bonds due April 1, 2024. The bonds were issued by the Jackson-Union Counties Regional Port District, a political subdivision embracing the territories of Jackson County and Union County in the state of Illinois. These variable rate demand bonds bear interest at a weekly floating market rate and as of December 31, 2007, Kinder Morgan Energy Partners had an outstanding letter of credit issued by Wachovia in the amount of $24.1 million that backed-up the $23.7 million principal amount of the bonds and $0.4 million of accrued interest.

In September 2008, pursuant to the standby purchase agreement provisions contained in the bond indenture—which require the sellers of those guarantees to buy the debt back—certain investors elected to put (sell) back their bonds at par plus accrued interest. A total principal and interest amount of $5.2 million was tendered and drawn against Kinder Morgan Energy Partners’ letter of credit and accordingly, Kinder Morgan Energy Partners paid this amount pursuant to the letter of credit reimbursement provisions. As of September 30, 2008, Kinder Morgan Energy Partners’ outstanding balance under the bonds was $18.5 million, and the interest rate on these bonds was 9.65%. Kinder Morgan Energy Partners’ outstanding letter of credit issued by Wachovia totaled $18.9 million, which backs-up the $18.5 million principal amount of the bonds and $0.4 million of interest on the bonds for up to 55 days computed at 12% per annum on the principal amount thereof.

Rockies Express Pipeline LLC

Pursuant to certain guaranty agreements, all three member owners of West2East Pipeline LLC (which owns all of the member interests in Rockies Express Pipeline LLC) have agreed to guarantee, severally in the same proportion as their percentage ownership of the member interests in West2East Pipeline LLC, borrowings under Rockies Express Pipeline LLC’s (i) $2.0 billion five-year, unsecured revolving credit facility due April 28, 2011, (ii) $2.0 billion commercial paper program, and (iii) $600 million in principal amount of floating rate senior notes due August 20, 2009. The three member owners and their respective ownership interests consist of the following: Kinder Morgan Energy Partners’ subsidiary Kinder Morgan W2E Pipeline LLC – 51%, a subsidiary of Sempra Energy – 25%, and a subsidiary of ConocoPhillips – 24%.

Borrowings under the Rockies Express Pipeline LLC commercial paper program are primarily used to finance the construction of the Rockies Express interstate natural gas pipeline and to pay related expenses. The credit facility, which can be amended to allow for borrowings up to $2.5 billion, supports borrowings under the commercial paper program, and borrowings under the commercial paper program reduce the borrowings allowed under the credit facility. The $600 million in principal amount of senior notes were issued on September 20, 2007. The notes are unsecured and are not redeemable prior to maturity. Interest on the notes is paid and computed quarterly at an interest rate of three-month LIBOR (with a floor of 4.25%) plus a spread of 0.85%. See Note 20 regarding subsequent events.

Upon issuance of the notes, Rockies Express Pipeline LLC entered into two floating-to-fixed interest rate swap agreements having a combined notional principal amount of $600 million and maturity dates of August 20, 2009. On September 24, 2008, Rockies Express Pipeline LLC terminated one of the aforementioned interest rate swaps that had Lehman Brothers as the counterparty. The notional principal amount of the terminated swap agreement was $300 million. The remaining interest rate swap agreement effectively converts the interest expense associated with $300 million of these senior notes from its stated variable rate to a fixed rate of 5.47%.

Knight Inc. Form 10-Q

As of September 30, 2008, in addition to the $600 million in senior notes, Rockies Express Pipeline LLC had $406.7 million of commercial paper outstanding with a weighted-average interest rate of approximately 3.58%, and outstanding borrowings of $447.5 million under its five-year facility. Accordingly, as of September 30, 2008, Kinder Morgan Energy Partners’ contingent share of Rockies Express Pipeline LLC’s debt was $741.6 million (51% of total guaranteed borrowings). In addition, there is a $31.4 million letter of credit outstanding as of September 30, 2008, issued by JP Morgan Chase. Kinder Morgan Energy Partners’ contingent responsibility with regard to this letter of credit was $16.0 million (51% of face amount).

In October 2008, Standard & Poor’s Rating Services lowered Rockies Express Pipeline LLC short-term credit rating to A-3 from A-2. As a result of this revision and current commercial paper market conditions, Rockies Express Pipeline LLC is unable to access additional commercial paper borrowings. However, Rockies Express Pipeline LLC expects that short-term financing and liquidity needs will continue to be met through borrowings made under its $2.0 billion five-year, unsecured revolving credit facility.

No Lehman Brothers affiliate is an administrative agent for Rockies Express Pipeline LLC; however, one of the Lehman affiliates is a lending bank providing less than 5% of Rockies Express Pipeline LLC’s $2.0 billion credit facility. Since Lehman Brothers declared bankruptcy, its affiliate, which is a party to the Rockies Express Pipeline LLC credit facility, notified Rockies Express Pipeline LLC that it will not meet its obligations to lend under this agreement. Thus, the available capacity of Rockies Express Pipeline LLC’s facility will be reduced by the Lehman commitment (less than 5% of the facility). The commitments of the other banks remain unchanged and the facility is not defaulted.

Midcontinent Express Pipeline LLC

Pursuant to certain guaranty agreements, each of the two member owners of Midcontinent Express Pipeline LLC have agreed to guarantee, severally in the same proportion as their percentage ownership of the member interests in Midcontinent Express Pipeline LLC, borrowings under Midcontinent Express Pipeline LLC’s $1.4 billion three-year, unsecured revolving credit facility, entered into on February 29, 2008 and due February 28, 2011. The facility is with a syndicate of financial institutions with The Royal Bank of Scotland plc as the administrative agent. Borrowings under the credit agreement will be used to finance the construction of the Midcontinent Express Pipeline system and to pay related expenses. No Lehman Brothers affiliate is an administrative agent for Midcontinent Express Pipeline LLC; however, one of the Lehman affiliates is a lending bank providing less than 10% of Midcontinent Express Pipeline LLC’s $1.4 billion credit facility. Since Lehman Brothers declared bankruptcy, its affiliate, which is a party to the Midcontinent Express Pipeline LLC credit facility, has notified Midcontinent Express Pipeline LLC that it will not meet its obligations to lend under that agreement. Thus, the available capacity of Midcontinent Express Pipeline LLC’s facility will be reduced by the Lehman commitment (less than 10% of the facility). The commitments of the other banks remain unchanged and the facility is not defaulted.

Midcontinent Express Pipeline LLC is an equity method investee of Kinder Morgan Energy Partners, and the two member owners and their respective ownership interests consist of the following: Kinder Morgan Energy Partners’ subsidiary Kinder Morgan Operating L.P. “A” – 50%, and Energy Transfer Partners, L.P. – 50%. As of September 30, 2008, Midcontinent Express Pipeline LLC had borrowed $525.0 million under its three-year credit facility. Accordingly, as of September 30, 2008, Kinder Morgan Energy Partners’ contingent share of Midcontinent Express Pipeline LLC’s debt was $262.5 million (50% of total borrowings). Furthermore, the revolving credit facility can be used for the issuance of letters of credit to support the construction of the Midcontinent Express Pipeline, and as of September 30, 2008, a letter of credit having a face amount of $33.3 million was issued under the credit facility. Accordingly, as of September 30, 2008, Kinder Morgan Energy Partners’ contingent responsibility with regard to this outstanding letter of credit was $16.7 million (50% of total face amount).

In addition, Midcontinent Express Pipeline LLC entered into a $197 million reimbursement agreement dated September 4, 2007, with JPMorgan Chase as the administrative agent. The agreement included covenants and required payments of fees that are common in such arrangements, and both Kinder Morgan Energy Partners and Energy Transfer Partners, L.P. agreed to guarantee borrowings under the reimbursement agreement in the same proportion as the associated percentage membership interests. This reimbursement agreement expired on September 3, 2008.

Kinder Morgan Energy Partners’ Common Units

On October 14, 2008, Kinder Morgan Energy Partners declared a cash distribution of $1.02 per common unit for the third quarter of 2008, payable on November 14, 2008 to unitholders of record as of October 31, 2008. On August 14, 2008, Kinder Morgan Energy Partners paid a quarterly distribution of $0.99 per common unit for the quarterly period ended June 30, 2008, of which $161.1 million was paid to the public holders (included in minority interests) of Kinder Morgan Energy Partners common units.

Knight Inc. Form 10-Q

On March 3, 2008, Kinder Morgan Energy Partners completed a public offering of 5,750,000 of its common units at a price of $57.70 per unit, including common units sold pursuant to the underwriters’ over-allotment option, less commissions and underwriting expenses. Kinder Morgan Energy Partners received net proceeds of $324.2 million for the issuance of these common units, and used the proceeds to reduce the borrowings under its commercial paper program.

On February 12, 2008, Kinder Morgan Energy Partners completed an offering of 1,080,000 of its common units at a price of $55.65 per unit in a privately negotiated transaction. Kinder Morgan Energy Partners received net proceeds of $60.1 million for the issuance of these 1,080,000 common units, and used the proceeds to reduce the borrowings under its commercial paper program.

The combined effect of the above transactions had the associated effects of increasing our (i) minority interests associated with Kinder Morgan Energy Partners by $368.9 million and (ii) associated accumulated deferred income taxes by $5.6 million and reducing our (i) goodwill by $25.8 million and (ii) paid-in capital by $16.0 million.

In connection with Kinder Morgan Energy Partners’ acquisition on August 28, 2008 of Knight Inc.’s one-third ownership interest in Express and Knight Inc.’s full ownership of Jet Fuel, Kinder Morgan Energy Partners issued 2,014,693 common units to Knight Inc. The units were valued at $116.0 million. See Note 11 for additional information regarding this transaction.

Kinder Morgan G.P., Inc. Preferred Shares

On October 15, 2008, Kinder Morgan G.P., Inc.’s board of directors declared a quarterly cash distribution on its Series A Fixed-to-Floating Rate Term Cumulative Preferred Stock of $20.825 per share payable on November 18, 2008 to shareholders of record as of October 31, 2008. On July 16, 2008, Kinder Morgan G.P., Inc.’s board of directors declared a quarterly cash dividend on its Series A Fixed-to-Floating Rate Term Cumulative Preferred Stock of $20.825 per share, which was paid on August 18, 2008 to shareholders on record as of July 31, 2008.

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 $11.0 million and $30.4 million for the three and nine months ended September 30, 2008, respectively and $11.7 million, $14.6 million, and $12.2 million for the three months ended September 30, 2007, the four months ended September 30, 2007, and the five months ended May 31, 2007, respectively. We also record as interest expense gains and losses from (i) the reacquisition of debt, (ii) the termination of interest rate swaps designated as fair value hedges for which the hedged liability has been extinguished and (iii) the termination of interest rate swaps designated as cash flow hedges for which the forecasted interest payments will no longer occur. During the nine months ended September 30, 2008, we recorded a $34.4 million loss from the early extinguishment of debt in the caption “Interest Expense, Net,” consisting of an $18.1 million gain on the debt repurchased in the tender more than offset by a $41.7 million loss from the write-off of debt issuance costs associated with the $5.8 billion secured credit facility. We also recorded $10.8 million in gains from the early extinguishment of debt in the caption “Interest Expense – Deferred Interest Debentures,” and $19.8 million of gains from the termination of interest rate swaps designated as fair value hedges, for which the hedged liability was extinguished, in the caption “Interest Expense, Net” in the accompanying interim Consolidated Statements of Operations.

14.	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 LLC and certain affiliates (“NGPL”), a major interstate natural gas pipeline and storage system in which we currently have a 20% interest; (2) Power, the ownership and operation of natural gas-fired electric generation facilities; (3) 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; (4) Natural Gas Pipelines – KMP, the ownership and operation of major interstate and intrastate natural gas pipeline and storage systems; (5) 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; (6) 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 (7) Kinder Morgan Canada – KMP, the ownership and operation of (i) 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, (ii) a one-third interest in a crude oil pipeline system that

Knight Inc. Form 10-Q

transports crude oil from Hardisty, Alberta, Canada through Casper, Wyoming to the Wood River, Illinois area and (iii) a 25-mile long pipeline system, transporting jet fuel to Vancouver International Airport.

In conjunction with our annual impairment test of the carrying value of this goodwill, performed as of May 31, 2008, we determined that the fair value of certain reporting units that are part of our investment in Kinder Morgan Energy Partners were less than the carrying values. The fair value of each reporting unit was determined from the present value of the expected future cash flows from the applicable reporting unit (inclusive of a terminal value calculated using a market multiple for the individual assets). The implied fair value of goodwill within each reporting unit was then compared to the carrying value of goodwill of each such unit, resulting in the following goodwill impairments by our reporting unit:

Products Pipelines – KMP (excluding associated terminals) – $1.19 billion,

Products Pipelines Terminals – KMP (separate from Products Pipelines – KMP for goodwill impairment purposes) - $70 million,

Natural Gas Pipelines – KMP – $2.09 billion, and

Terminals – KMP – $677 million, for a total impairment of $4.03 billion.

We have finalized our goodwill impairment calculation initially recorded in the second quarter of 2008. This resulted in an increase to the goodwill impairment by our Products Pipelines – KMP (excluding associated terminals) reporting unit of $152.6 million and a decrease to the goodwill impairment by our Natural Gas Pipelines – KMP reporting unit of $152.6 million, with no net impact to the total goodwill impairment charge. The goodwill impairment is a non-cash charge and does not have any impact on our cash flow.

On August 28, 2008, Knight Inc. sold its one-third interest in the net assets of Express and of the net assets of Jet Fuel to Kinder Morgan Energy Partners for approximately 2 million Kinder Morgan Energy Partners’ common units worth approximately $116 million. Express is a crude oil pipeline system that runs from Alberta to Illinois. Jet Fuel is a fuel pipeline that serves the Vancouver, British Columbia airport. Results for Express were previously reported in the segment referred to as “Express” and are now reported in the Kinder Morgan Canada – KMP segment. Due to the inclusion of Kinder Morgan Energy Partners and its subsidiaries in Knight Inc.’s consolidated financial statements (resulting from the implementation of EITF 04-5), Knight Inc. accounted for this transaction as a transfer of net assets between entities under common control. Therefore, following Kinder Morgan Energy Partners’ acquisition of Express and Jet Fuel from Knight Inc., Kinder Morgan Energy Partners recognized the assets and liabilities acquired at Knight Inc.’s carrying amounts (hi