Edgar Filing: KNIGHT INC.

knight10q1_2009.htm

Table of Contents

Knight Inc. Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2009

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 has submitted electronically and posted on its corporate Web site, if any, every

Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No o

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 April 30, 2009 was 100 shares.

Knight Inc. Form 10-Q

KNIGHT INC. AND SUBSIDIARIES

FORM 10-Q

QUARTER ENDED MARCH 31, 2009

Contents

		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements. (Unaudited)

	Consolidated Balance Sheets	3-4
	Consolidated Statements of Operations	5
	Consolidated Statements of Cash Flows	6-7
	Notes to Consolidated Financial Statements	8-41

Item 2.	Management’s Discussion and Analysis of Financial
	Condition and Results of Operations.	42-57

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	57

Item 4.	Controls and Procedures.	58

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings.	58

Item 1A.	Risk Factors.	58

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	58

Item 3.	Defaults Upon Senior Securities.	58

Item 4.	Submission of Matters to a Vote of Security Holders.	58

Item 5.	Other Information.	58

Item 6.	Exhibits.	58-59

SIGNATURE		60

Knight Inc. Form 10-Q

PART I. - FINANCIAL INFORMATION

Item 1. Financial Statements.

KNIGHT INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

(In millions)

	March 31, 2009		December 31, 2008
ASSETS
Current Assets
Cash and Cash Equivalents	$	110.5	$	118.6
Restricted Deposits		3.3		-
Accounts, Notes and Interest Receivable, Net		684.3		992.5
Inventories		66.5		44.2
Gas Imbalances		6.6		14.1
Fair Value of Derivative Instruments		118.5		115.2
Other		27.5		32.6
		1,017.2		1,317.2

Property, Plant and Equipment, Net		16,168.4		16,109.8
Notes Receivable—Related Parties		174.9		178.1
Investments		1,987.6		1,827.4
Goodwill		4,691.8		4,698.7
Other Intangibles, Net		246.8		251.5
Fair Value of Derivative Instruments, Non-current		577.7		828.0
Deferred Charges and Other Assets		213.7		234.2
Total Assets	$	25,078.1	$	25,444.9

Knight Inc. Form 10-Q

KNIGHT INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

(In millions except share and per share amounts)

	March 31, 2009			December 31, 2008
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Current Portion of Debt	$	530.6		$	302.5
Cash Book Overdrafts		41.8			45.2
Accounts Payable		524.5			849.8
Accrued Interest		115.3			241.9
Accrued Taxes		101.1			152.1
Gas Imbalances		12.2			12.4
Fair Value of Derivative Instruments		139.4			129.5
Other		207.4			281.3
		1,672.3			2,014.7

Long-term Debt
Outstanding Notes and Debentures		11,003.9			11,020.1
Deferrable Interest Debentures Issued to Subsidiary Trusts		35.7			35.7
Preferred Interest in General Partner of Kinder Morgan Energy Partners		100.0			100.0
Value of Interest Rate Swaps		833.3			971.0
		11,972.9			12,126.8

Deferred Income Taxes, Non-current		2,064.9			2,081.3
Fair Value of Derivative Instruments, Non-current		98.0			92.2
Other Long-term Liabilities and Deferred Credits		631.3			653.0
		14,767.1			14,953.3

Commitments and Contingencies (Notes 12 and 17)

Stockholders’ Equity
Common Stock – Authorized and Outstanding – 100 Shares, Par Value $0.01 Per Share		-			-
Additional Paid-in Capital		7,818.4			7,810.0
Retained Deficit		(3,287.0	)		(3,352.3	)
Accumulated Other Comprehensive Loss		(80.1	)		(53.4	)
Total Knight Inc. Stockholders’ Equity		4,451.3			4,404.3
Noncontrolling Interests		4,187.4			4,072.6
Total Stockholders’ Equity		8,638.7			8,476.9
Total Liabilities and Stockholders’ Equity	$	25,078.1		$	25,444.9

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

Knight Inc. Form 10-Q

KNIGHT INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In millions)

	Three Months Ended March 31,
	2009			2008
Operating Revenues
Natural Gas Sales	$	888.7		$	1,721.8
Services		661.4			807.9
Product Sales and Other		278.8			365.3
Total Operating Revenues		1,828.9			2,895.0

Operating Costs and Expenses
Gas Purchases and Other Costs of Sales		865.6			1,760.6
Operations and Maintenance		256.4			301.8
General and Administrative		92.9			86.3
Depreciation, Depletion and Amortization		264.8			218.1
Taxes, Other Than Income Taxes		39.0			52.5
Other Expenses (Income)		0.3			(0.5	)
Total Operating Costs and Expenses		1,519.0			2,418.8

Operating Income		309.9			476.2

Other Income and (Expenses)
Earnings of Equity Investees		47.2			43.7
Interest Expense, Net		(141.5	)		(210.7	)
Interest Income (Expense) – Deferrable Interest Debentures		(0.5	)		6.7
Other, Net		10.6			3.2
Total Other Income and (Expenses)		(84.2	)		(157.1	)

Income from Continuing Operations Before Income Taxes		225.7			319.1
Income Taxes		80.6			87.1
Income from Continuing Operations		145.1			232.0
Loss from Discontinued Operations, Net of Tax		(0.2	)		(0.1	)
Net Income		144.9			231.9
Net Income Attributable to Noncontrolling Interests		(29.6	)		(126.2	)

Net Income Attributable to Knight Inc.’s Stockholder	$	115.3		$	105.7

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

Knight Inc. Form 10-Q

KNIGHT INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In millions)

	Three Months Ended March 31,
	2009			2008
Cash Flows from Operating Activities
Net Income	$	144.9		$	231.9
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities
Loss from Discontinued Operations, Net of Tax		0.2			0.1
Loss on Early Extinguishment of Debt		-			18.4
Depreciation, Depletion and Amortization		264.8			218.1
Deferred Income Taxes		17.0			15.9
Income from the Allowance for Equity Funds Used During Construction		(9.3	)		-
Equity in Earnings of Equity Investees		(47.2	)		(43.7	)
Distributions from Equity Investees		60.0			24.1
Net Losses (Gains) on Sales of Assets		0.4			(0.5	)
Mark-to-Market Interest Rate Swap Gain		-			(19.8	)
Changes in Working Capital Items		(326.1	)		(307.2	)
Proceeds from (Payment for) Termination of Interest Rate Swaps		144.4			(2.5	)
Kinder Morgan Energy Partners’ Rate Reparations, Refunds and Reserve Adjustments		-			(23.3	)
Other, Net		(35.5	)		(10.9	)
Net Cash Flows Provided by Continuing Operations		213.6			100.6
Net Cash Flows Used in Discontinued Operations		(0.3	)		(0.1	)
Net Cash Flows Provided by Operating Activities		213.3			100.5

Cash Flows from Investing Activities
Capital Expenditures		(417.6	)		(638.3	)
Proceeds from Sale of 80% Interest in NGPL PipeCo LLC, Net of $1.1 Cash Sold		-			2,899.3
Proceeds from NGPL PipeCo LLC Restricted Cash		-			3,106.4
Other Acquisitions		(0.5	)		(0.3	)
Repayments from Customers		98.1			-
Net Investments in Margin Deposits		(5.8	)		(98.8	)
Distributions from Equity Investees		-			89.1
Contributions to Investments		(174.2	)		(336.5	)
Change in Natural Gas Storage and NGL Line Fill Inventory		-			(2.7	)
Net (Cost of Removal) Proceeds from Sales of Other Assets		(0.8	)		62.0
Net Cash Flows (Used in) Provided by Investing Activities	$	(500.8	)	$	5,080.2

Knight Inc. Form 10-Q

KNIGHT INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

(In millions)

	Three Months Ended March 31,
	2009			2008
Cash Flows from Financing Activities
Short-term Debt, Net	$	471.6		$	(521.4	)
Long-term Debt Issued		-			900.0
Long-term Debt Retired		(251.6	)		(5,859.9	)
Discount on Early Extinguishment of Debt		-			69.2
(Decrease) Increase in Cash Book Overdrafts		(3.3	)		35.0
Short-term Advances from (to) Unconsolidated Affiliates		1.2			(14.7	)
Cash Dividends		(50.0	)		-
Contributions from Noncontrolling Interests		287.9			384.5
Distributions to Noncontrolling Interests		(175.8	)		(143.5	)
Debt Issuance Costs		(1.5	)		(6.6	)
Other, Net		1.8			1.8
Net Cash Flows Provided by (Used in) Financing Activities		280.3			(5,155.6	)

Effect of Exchange Rate Changes on Cash		(0.9	)		(0.7	)

Net (Decrease) Increase in Cash and Cash Equivalents		(8.1	)		24.4
Cash and Cash Equivalents at Beginning of Period		118.6			148.6
Cash and Cash Equivalents at End of Period	$	110.5		$	173.0

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)

1. General

We are a large energy transportation and storage company, operating or owning an interest in approximately 36,000 miles of pipelines and approximately 170 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. We are a wholly owned subsidiary of Knight Holdco LLC, a private company. Our executive offices are located at 500 Dallas Street, Suite 1000, Houston, Texas 77002 and our telephone number is (713) 369-9000. Unless the context requires otherwise, references to “we,” “us,” “our,” or the “Company” are intended to mean Knight Inc. (formerly Kinder Morgan, Inc.) and its consolidated subsidiaries both before and after the Going Private transaction discussed below. Unless the context requires otherwise, references to “Kinder Morgan Energy Partners” 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, subject to Kinder Morgan G.P., Inc.’s right to approve certain transactions.

As further disclosed in Note 1 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2008 (“2008 Form 10-K”), on May 30, 2007, 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. This transaction is referred to in this report as “the Going Private transaction.” Effective with the closing of the Going Private transaction, all of our assets and liabilities were recorded at their estimated fair market values based on an allocation of the aggregate purchase price paid in the Going Private transaction.

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 2008 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. Canadian dollars are designated as C$. Notwithstanding the consolidation of Kinder Morgan Energy Partners and its subsidiaries into our financial statements, we are not liable for, and our assets are not available to satisfy, the obligations of Kinder Morgan Energy Partners and/or its subsidiaries and vice versa. Responsibility for payments of obligations reflected in our or Kinder Morgan Energy Partners’ financial statements is a legal determination based on the entity that incurs the liability.

On August 28, 2008, we sold our one-third interest in the net assets of the Express pipeline system (“Express”), as well as our full ownership of the net assets of the Jet Fuel pipeline system (“Jet Fuel”), to Kinder Morgan Energy Partners. We accounted for this transaction as a transfer of net assets between entities under common control. Therefore, following our sale of Express and Jet Fuel to Kinder Morgan Energy Partners, Kinder Morgan Energy Partners recognized the assets and liabilities acquired at our carrying amounts (historical cost) at the date of transfer. The results of Express and Jet Fuel are now reported in the segment referred to as Kinder Morgan Canada–KMP. For more information on our reportable business segments, see Note 13.

Knight Inc. Form 10-Q

Noncontrolling Interests in Consolidated Subsidiaries

In January 2009, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 160 establishes accounting and reporting standards for noncontrolling ownership interests in subsidiaries (previously referred to as minority interests) and is applied prospectively with the exception of the presentation and disclosure requirements, which must be applied retrospectively for all periods presented. Noncontrolling ownership interests in consolidated subsidiaries are now presented in the accompanying Consolidated Balance Sheets within equity as a component separate from stockholders’ equity. Net Income in the accompanying Consolidated Statements of Operations now includes earnings attributable to both Knight Inc.’s stockholder, and the noncontrolling interests. See Note 5 for further information regarding changes in stockholders’ equity.

3. Goodwill

Changes in the carrying amount of our goodwill for the three months ended March 31, 2009 are summarized as follows:

	December 31, 2008		Acquisitions and Purchase Price Adjustments1			Impairment of Assets		Other2			March 31, 2009
	(In millions)
Products Pipelines–KMP	$	850.0		$	-	$	-	$	-		$	850.0
Natural Gas Pipelines–KMP		1,349.2			-		-		-			1,349.2
CO2–KMP		1,521.7			-		-		-			1,521.7
Terminals–KMP		774.2			0.1		-		-			774.3
Kinder Morgan Canada–KMP		203.6			-		-		(7.0	)		196.6
Consolidated Total	$	4,698.7		$	0.1	$	-	$	(7.0	)	$	4,691.8

____________

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

2	Adjustments relate to the translation of goodwill denominated in foreign currencies.

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:

	March 31, 2009			December 31, 2008
	(In millions)
Customer Relationships, Contracts and Agreements
Gross Carrying Amount	$	270.9		$	270.9
Accumulated Amortization		(34.9	)		(30.3	)
Net Carrying Amount		236.0			240.6

Technology-based Assets, Lease Values and Other
Gross Carrying Amount		11.7			11.7
Accumulated Amortization		(0.9	)		(0.8	)
Net Carrying Amount		10.8			10.9

Total Other Intangibles, Net	$	246.8		$	251.5

Knight Inc. Form 10-Q

Amortization expense on our intangibles consisted of the following:

	Three Months Ended March 31,
	2009		2008
	(In millions)
Customer Relationships, Contracts and Agreements	$	4.6	$	5.1
Technology-based Assets, Lease Value and Other		0.1		0.1
Total Amortization	$	4.7	$	5.2

As of March 31, 2009, the weighted-average amortization period for our intangible assets was approximately 16.4 years.

5. Changes in Stockholders' Equity and Noncontrolling Interests

Changes in Stockholders' Equity

(In millions)

	Three Months Ended March 31,
	2009										2008
	Knight Inc.				Noncontrolling Interests			Total			Knight Inc.			Noncontrolling Interests			Total


Beginning Balance	$	4,404.3		$	4,072.6		$	8,476.9		$	7,821.5		$	3,314.0		$	11,135.5
Impact from Equity Transactions of Kinder Morgan Energy Partners		6.5			(10.1	)		(3.6	)		(16.0	)		(15.4	)		(31.4	)
A-1 and B Unit Amortization		1.9			-			1.9			1.9			-			1.9
Distributions to Noncontrolling Interests		-			(176.3	)		(176.3	)		-			(144.4	)		(144.4	)
Contributions from Noncontrolling Interests		-			287.9			287.9			-			384.5			384.5
Cash Dividends		(50.0	)		-			(50.0	)		-			-			-
Other		-			2.7			2.7			-			(2.0	)		(2.0	)
Comprehensive Income (Loss)
Net Income		115.3			29.6			144.9			105.7			126.2			231.9
Other Comprehensive Income (Loss), Net of Tax
Change in Fair Value of Derivatives Utilized for Hedging Purposes		15.9			17.5			33.4			(219.8	)		(189.6	)		(409.4	)
Reclassification of Change in Fair Value of Derivatives to Net Income		(20.5	)		(8.4	)		(28.9	)		115.5			75.7			191.2
Change in Employee Benefit Plans		(0.9	)		(1.4	)		(2.3	)		1.9			1.6			3.5
Change in Foreign Currency Translation Adjustment		(21.2	)		(26.7	)		(47.9	)		(24.3	)		(25.7	)		(50.0	)
Total Other Comprehensive Loss		(26.7	)		(19.0	)		(45.7	)		(126.7	)		(138.0	)		(264.7	)
Total Comprehensive Income (Loss)		88.6			10.6			99.2			(21.0	)		(11.8	)		(32.8	)
Ending Balance	$	4,451.3		$	4,187.4		$	8,638.7		$	7,786.4		$	3,524.9		$	11,311.3

The caption “Noncontrolling Interests” in the accompanying interim Consolidated Balance Sheets consists of interests in the following subsidiaries:

	March 31, 2009		December 31, 2008
	(In millions)
Kinder Morgan Energy Partners	$	2,313.2	$	2,198.2
Kinder Morgan Management		1,828.3		1,826.5
Triton Power Company LLC		37.2		39.0
Other		8.7		8.9
	$	4,187.4	$	4,072.6

Knight Inc. Form 10-Q

6. Related Party Transactions

Significant Investors

Two of Knight Holdco LLC’s investors are considered “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 March 31, 2009 and December 31, 2008, the fair values of these derivative contracts are included in the accompanying interim Consolidated Balance Sheets within the captions indicated in the following table:

	March 31, 2009			December 31, 2008
	(In millions)
Derivative Assets (Liabilities)
Current Assets: Fair Value of Derivative Instruments	$	46.5		$	60.4
Assets: Fair Value of Derivative Instruments, Non-current	$	27.2		$	20.1
Current Liabilities: Fair Value of Derivative Instruments	$	(9.8	)	$	(13.2	)
Liabilities and Stockholders’ Equity: Fair Value of Derivative Instruments, Non-current	$	(24.4	)	$	(24.1	)

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 $87.3 million and $88.5 million as of March 31, 2009 and December 31, 2008, respectively. Of these amounts, $2.5 million and $3.7 million, respectively, were included within “Current Assets: Accounts, Notes and Interest Receivable, Net” in our accompanying interim Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008 and the remainder was included within “Notes Receivable – Related Parties” in our accompanying interim Consolidated Balance Sheets at each reporting date.

NGPL PipeCo LLC

On February 15, 2008, Knight Inc. entered into an Operations and Reimbursement Agreement (“Agreement”) with Natural Gas Pipeline Company of America LLC, a wholly owned subsidiary of NGPL PipeCo LLC. The Agreement provides for Knight Inc. to be reimbursed, at cost, for pre-approved operations and maintenance costs, plus a $43.2 million annual general and administration fixed fee charge (“Fixed Fee”), for services provided under the Agreement. This Fixed Fee escalates at 3% each year until 2011 and is billed monthly. For the three months ended March 31, 2009 and 2008, these Fixed Fees totaled $11.4 million and $5.6 million, respectively.

In addition, Kinder Morgan Energy Partners purchases transportation and storage services from NGPL PipeCo LLC. For the three months ended March 31, 2009 and 2008, these purchases totaled $1.9 million and $1.7 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)

	Three Months Ended March 31,
	2009			2008
	(In millions)
Accounts Receivable	$	199.6		$	(122.8	)
Materials and Supplies Inventory		(4.3	)		(2.1	)
Other Current Assets		5.3			(38.9	)
Accounts Payable		(246.2	)		32.4
Accrued Interest		(126.5	)		(138.8	)
Accrued Taxes		(52.9	)		43.4
Other Current Liabilities		(101.1	)		(80.4	)
	$	(326.1	)	$	(307.2	)

Supplemental Disclosures of Cash Flow Information

	Three Months Ended March 31,
	2009		2008
	(In millions)
Cash Paid During the Period for
Interest, Net of Amount Capitalized	$	271.6	$	341.6
Income Taxes Paid (Net of Refunds)1	$	140.5	$	1.1

__________

1	Income taxes paid include amounts paid related to prior periods.

During the three months ended March 31, 2009 and 2008, Kinder Morgan Energy Partners acquired no assets and $0.3 million of assets, respectively, by the assumption of liabilities.

During the three months ended March 31, 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 associated with the early extinguishment of debt.

8. Income Taxes

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

	Three Months Ended March 31,
	2009			2008
	(In millions)
Income Taxes	$	80.6		$	87.1
Effective Tax Rate		35.7	%		27.3	%

During the three months ended March 31, 2009, our effective tax rate was higher than the statutory federal income tax rate of 35% due to (i) state income taxes, (ii) additional taxes resulting from non-cash deferred tax liability adjustments at Kinder Morgan Energy Partners’ TransMountain pipeline, and (iii) taxes resulting from decreases in non-deductible goodwill. The above increase to income tax expense was partially offset by adjustments to our FIN No. 48 reserve and a dividends received deduction from our 20% ownership interest in NGPL PipeCo LLC. During the three months ended March 31, 2008, our effective tax rate was lower than the statutory federal tax rate due to the impact of non-taxable non-controlling interests. This decrease to the effective tax rate was partially offset by state income taxes.

The January 2009 adoption of SFAS No. 160 changed the computation of our effective tax rate as earnings attributable to noncontrolling interests are no longer deducted from income from continuing operations before income taxes.

Knight Inc. Form 10-Q

9. Kinder Morgan Management, LLC

On February 13, 2009, Kinder Morgan Management made a share distribution of 0.024580 shares per outstanding share (1,917,189 total shares) to shareholders of record as of January 30, 2009, based on the $1.05 per common unit distribution declared by Kinder Morgan Energy Partners. On May 15, 2009, Kinder Morgan Management will make a share distribution of 0.025342 shares per outstanding share (2,025,208 total shares) to shareholders of record as of April 30, 2009, based on the $1.05 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.

10. Business Combinations, Investments, and Sales

During the first quarter of 2009, we did not enter into new business acquisitions or any new joint ventures. Pro forma consolidated income statement information that gives effect to all of the acquisitions we have made and all of the joint ventures we have entered into since January 1, 2008 as if they had occurred as of January 1, 2008 is not presented because it would not be materially different from the information presented in the accompanying interim Consolidated Statements of Operations.

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 PipeCo LLC,” 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 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 PipeCo LLC’s assets pursuant to a 15-year operating agreement. 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 12).

Investment in Rockies Express Pipeline

In the first three months of 2009, Kinder Morgan Energy Partners made capital contributions of $51.0 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 March 31, 2009, and it is included within “Cash Flows from Investing Activities: Other Investments” in the accompanying interim Consolidated Statement of Cash Flows for the three months ended March 31, 2009. Kinder Morgan Energy Partners owns a 51% equity interest in West2East Pipeline LLC.

Midcontinent Express Pipeline LLC

In the first three months of 2009, Kinder Morgan Energy Partners made capital contributions of $111.0 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 interim Consolidated Balance Sheet as of March 31, 2009, and is included within “Cash Flows from Investing Activities: Other Investments” in the accompanying interim Consolidated Statement of Cash Flows for the three months ended March 31, 2009. Kinder Morgan Energy Partners owns a 50% equity interest in Midcontinent Express Pipeline LLC.

Kinder Morgan Energy Partners received, in the first three 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 Express Pipeline LLC 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 interim Consolidated Statement of Cash Flows for the three months ended March 31, 2008.

Knight Inc. Form 10-Q

Fayetteville Express Pipeline LLC

In the first three months of 2009, Kinder Morgan Energy Partners made capital contributions of $9.0 million to Fayetteville Express Pipeline LLC, to partially fund its Fayetteville Express Pipeline construction costs. This cash contribution has been recorded as an increase to “Investments” in the accompanying interim Consolidated Balance Sheet as of March 31, 2009, and is included within “Cash Flows from Investing Activities: Other Investments” in the accompanying interim Consolidated Statement of Cash Flows for the three months ended March 31, 2009. Kinder Morgan Energy Partners owns a 50% equity interest in Fayetteville Express Pipeline LLC.

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.

11. Discontinued Operations

In October 2007, Kinder Morgan Energy Partners completed the sale of the North System natural gas liquids pipeline and its 50% ownership interest in the Heartland Pipeline Company to ONEOK Partners, L.P. for approximately $298.6 million in cash. In the first three months of 2008, Kinder Morgan Energy Partners paid a net amount of $2.4 million to ONEOK Partners, L.P. to partially settle the sale of working capital items, the allocation of pre-acquisition investee distributions, and the sale of liquids inventory balances. Due to the fair market valuation resulting from the Going Private transaction, 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 these assets were included in our Products Pipelines–KMP business segment.

12. Financing

Credit Facilities

	March 31, 2009
	Short-term Notes Payable			Commercial Paper Outstanding		Weighted- Average Interest Rate
	(In millions)

Knight Inc. – Secured Debt1		$	40.7	$	-		1.66	%
Kinder Morgan Energy Partners – Unsecured Debt2		$	439.8	$	-		1.12	%

____________

1	The average short-term debt outstanding (and related weighted-average interest rate) was $121.2 million (2.29%) during the three months ended March 31, 2009.

2	The average short-term debt outstanding (and related weighted-average interest rate) was $266.0 million (2.02%) during the three months ended March 31, 2009.

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. Knight Inc. had $8.8 million outstanding under its credit facility at December 31, 2008.

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 $2.0 billion. Borrowings under the credit facility can be used for partnership purposes and as a backup for Kinder Morgan Energy Partners’ commercial paper program. Kinder Morgan Energy Partners currently does not have access to the commercial paper market. Borrowings under Kinder Morgan Energy Partners’ commercial paper program would reduce the borrowings allowed under its credit facility.

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. One Lehman entity was a lending institution that provided $63.3 million of the credit facility. During the first quarter of 2009, Kinder Morgan Energy Partners

Knight Inc. Form 10-Q

amended its facility to remove Lehman as a lender, effectively reducing the facility by $63.3 million. The commitments of the other banks remain unchanged, and the facility is not defaulted.

As of March 31, 2009, the amount available for borrowing under Kinder Morgan Energy Partners’ credit facility was reduced by an aggregate amount of $290.0 million, consisting of (i) 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, (ii) a combined $90.8 million in three letters of credit that support tax-exempt bonds, (iii) a combined $55.9 million in letters of credit that support Kinder Morgan Energy Partners’ pipeline and terminal operations in Canada, (iv) 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 and (v) a combined $16.5 million in other letters of credit supporting other obligations of Kinder Morgan Energy Partners and its subsidiaries.

Significant Financing Transactions

On February 17, 2009, we paid a cash dividend on our common stock of $50.0 million to our sole shareholder, Knight Holdco LLC.

On February 1, 2009, Kinder Morgan Energy Partners paid $250 million to retire the principal amount of 6.30% senior notes that matured on that date. Kinder Morgan Energy Partners borrowed the necessary funds under its bank credit facility.

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.

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.

Since we are accounting for the May 31, 2007 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 March 31, 2009 were $38.8 million and $6.5 million, representing decreases to the carrying value of our long-term debt and the balance of our value of interest rate swaps, respectively.

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

On March 31, 2009, Kinder Morgan Energy Partners made a principal payment of $10.0 million on behalf of its subsidiaries, Kinder Morgan Operating L.P. “A” and Kinder Morgan Canada. As of March 31, 2009 and December 31, 2008, the measured present value of the note was $26.9 million and $36.6 million, respectively.

Contingent Debt

Cortez Pipeline Company Debt. Pursuant to a certain Throughput and Deficiency Agreement, the partners of Cortez Pipeline Company (Kinder Morgan CO2 Company, L.P. – 50% partner; a subsidiary of Exxon Mobil Corporation – 37% partner; and Cortez Vickers Pipeline Company – 13% partner) are required, on a several, proportional percentage ownership basis, to contribute capital to Cortez Pipeline Company in the event of a cash deficiency. Furthermore, due to Kinder Morgan Energy Partners’ indirect ownership of Cortez Pipeline Company through Kinder Morgan CO2 Company, L.P., Kinder Morgan Energy Partners severally guarantees 50% of the debt of Cortez Capital Corporation, a wholly owned subsidiary of Cortez Pipeline Company.

As of March 31, 2009, the debt facilities of Cortez Capital Corporation consisted of (i) $53.6 million of Series D notes due May 15, 2013; (ii) a $125 million short-term commercial paper program; and (iii) a $125 million five-year committed revolving credit facility due December 22, 2009 (to support the above-mentioned $125 million commercial paper program). Cortez Capital Corporation is unable to access commercial paper borrowings; however, it expects that its financing and liquidity needs will continue to be met through borrowings made under its long-term bank credit facility.

As of March 31, 2009, in addition to the $53.6 million of outstanding Series D notes, Cortez Capital Corporation had outstanding borrowings of $109.5 million under its five-year credit facility. Accordingly, as of March 31, 2009, Kinder Morgan Energy Partners’ contingent share of Cortez Capital Corporation’s debt was $81.6 million (50% of total guaranteed

Knight Inc. Form 10-Q

borrowings).

With respect to Cortez Capital Corporation’s Series D notes, the average interest rate on the notes is 7.14%, and the outstanding $53.6 million principal amount of the notes is due in five equal annual installments of approximately $10.7 million beginning May 2009. Shell Oil Company shares Kinder Morgan Energy Partners’ several guaranty obligations jointly and severally; however, Kinder Morgan Energy Partners is obligated to indemnify Shell for liabilities it incurs in connection with such guaranty. As of March 31, 2009, JP Morgan Chase has issued a letter of credit on Kinder Morgan Energy Partners’ behalf in the amount of $26.8 million to secure Kinder Morgan Energy Partners’ indemnification obligations to Shell for 50% of the $53.6 million in principal amount of Series D notes outstanding as of that date.

Nassau County, Florida Ocean Highway and Port Authority Debt. Kinder Morgan Energy Partners has posted a letter of credit as security for borrowings under Adjustable Demand Revenue Bonds issued by the Nassau County, Florida Ocean Highway and Port Authority. The bonds were issued for the purpose of constructing certain port improvements located in Fernandino Beach, Nassau County, Florida. Kinder Morgan Energy Partners’ subsidiary, Nassau Terminals LLC, is the operator of the marine port facilities. The bond indenture is for 30 years and allows the bonds to remain outstanding until December 1, 2020. Principal payments on the bonds are made on the first of December each year and corresponding reductions are made to the letter of credit. As of March 31, 2009, this letter of credit had a face amount of $21.2 million.

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 (London Interbank Offered Rate) with a floor of 4.25% plus a spread of 0.85%.

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%.

As of March 31, 2009, in addition to the $600 million in senior notes, Rockies Express Pipeline LLC had outstanding borrowings of $1,913.0 million under its five-year facility. Accordingly, as of March 31, 2009, Kinder Morgan Energy Partners’ contingent share of Rockies Express Pipeline LLC’s debt was $1,281.6 million (51% of total guaranteed borrowings).

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.

One of the Lehman entities was a lending bank with a $41 million commitment to the Rockies Express $2.0 billion credit facility. During the first quarter of 2009, Rockies Express Pipeline LLC amended its facility to remove Lehman as a lender, effectively reducing the facility by $41.0 million. However, 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

Knight Inc. Form 10-Q

facility is with a syndicate of financial institutions with The Royal Bank of Scotland plc as the administrative agent. Borrowings under the credit agreement are primarily used to finance the construction of the Midcontinent Express Pipeline system and to pay related expenses. One of the Lehman entities was a lending bank with a $100 million commitment to the Midcontinent Express Pipeline LLC $1.4 billion credit facility. Since declaring bankruptcy, Lehman has not met its obligations to lend under the credit 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 March 31, 2009, Midcontinent Express Pipeline LLC had borrowed $1,218.1 million under its three-year credit facility. Accordingly, as of March 31, 2009, Kinder Morgan Energy Partners’ contingent share of Midcontinent Express Pipeline LLC’s debt was $609.1 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 March 31, 2009, a letter of credit having a face amount of $33.3 million was issued under the credit facility. Accordingly, as of March 31, 2009, Kinder Morgan Energy Partners’ contingent responsibility with regard to this outstanding letter of credit was $16.7 million (50% of total face amount).

Kinder Morgan G.P., Inc. Preferred Shares

On April 15, 2009, 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 May 18, 2009 to shareholders of record as of April 30, 2009. On January 21, 2009, 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 February 18, 2009 to shareholders on record as of January 30, 2009.

Kinder Morgan Energy Partners’ Common Units

On April 15, 2009, Kinder Morgan Energy Partners declared a cash distribution of $1.05 per common unit for the first quarter of 2009, payable on May 15, 2009 to unitholders of record as of April 30, 2009. On February 13, 2009, Kinder Morgan Energy Partners paid a quarterly distribution of $1.05 per common unit for the fourth quarter of 2008, of which $175.1 million was paid to the public holders (included in noncontrolling interests) of Kinder Morgan Energy Partners common units.

On January 16, 2009, Kinder Morgan Energy Partners entered into an Equity Distribution Agreement with UBS Securities LLC to offer and sell from time to time common units having an aggregate offering value of up to $300 million through UBS Securities LLC, as sales agent, at a price agreed upon at the time of the sale. Any sale of common units would be pursuant to the terms of a separate terms agreement between Kinder Morgan Energy Partners and UBS Securities LLC.

During the first quarter of 2009, Kinder Morgan Energy Partners issued 612,083 of common units pursuant to this Agreement. After commissions of $0.6 million, Kinder Morgan Energy Partners received net proceeds of approximately $29.9 million for the issuance of these common units, and used the proceeds to reduce the borrowings under its bank credit facility.

On March 3, 2009, Kinder Morgan Energy Partners issued, in a public offering, 5,500,000 of common units at a price of $46.95 per unit, less commissions and underwriting expenses. At the time of the offering, Kinder Morgan Energy Partners granted the underwriters a 30-day option to purchase up to an additional 825,000 common units on the same terms and conditions, and pursuant to a partial exercise of this option, an additional 166,000 common units were issued on March 27, 2009. After commissions and underwriting expenses, Kinder Morgan Energy Partners received net proceeds of $258.0 million for the issuance of these 5,666,000 common units, and used the proceeds to reduce the borrowings under its bank credit facility.

These issuances, collectively, had the associated effects of increasing our (i) noncontrolling interests associated with Kinder Morgan Energy Partners by $277.8 million (ii) associated accumulated deferred income taxes by $3.7 million and (iii) paid-in capital by $6.5 million.

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 $10.0 million and $10.1 million for the three months ended March 31, 2009 and 2008, respectively. We also record as interest expense gains and losses from

Knight Inc. Form 10-Q

(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 three months ended March 31, 2008, we recorded $(29.2) million and $10.8 million of (losses) gains from the early extinguishment of debt in the captions “Interest Expense, Net” and “Interest Expense – Deferred Interest Debentures,” respectively, 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 Statement of Operations.

13. Business Segments

In accordance with the manner in which we manage our businesses, we report our operations in the following seven business segments:

NGPL PipeCo LLC—after February 15, 2008, this segment consists of our 20% interest in NGPL PipeCo LLC, a major interstate natural gas pipeline and storage system which we operate.

Power consists of a natural gas-fired electric generation facility.

Products Pipelines–KMP derives its revenues primarily from the transportation and terminaling of refined petroleum products, including gasoline, diesel fuel, jet fuel and natural gas liquids.

Natural Gas Pipelines–KMP derives its revenues primarily from the sale, transport, processing, treating, storage and gathering of natural gas.

CO2–KMP derives its revenues primarily from the production and sale of crude oil from fields in the Permian Basin of West Texas and from the transportation and marketing of carbon dioxide used as a flooding medium for recovering crude oil from mature oil fields.

Terminals–KMP derives its revenues primarily from the transloading and storing of refined petroleum products and dry and liquid bulk products, including coal, petroleum coke, cement, alumina, salt and other bulk chemicals.

Kinder Morgan Canada–KMP derives its revenues primarily from the transportation of crude oil and refined products.

The accounting policies we apply in the generation of business segment earnings are generally the same as those applied to our consolidated operations, except that (i) certain items below the “Operating Income” line (such as interest expense) are either not allocated to business segments or are not considered by management in its evaluation of business segment performance, (ii) equity in earnings of equity method investees are included in segment earnings (these equity method earnings are included in “Other Income and (Expenses)” in the accompanying interim Consolidated Statements of Operations), (iii) certain items included in operating income (such as general and administrative expenses and depreciation, depletion and amortization (“DD&A”)) are not considered by management in its evaluation of business segment performance and, thus, are not included in reported performance measures, (iv) gains and losses from incidental sales of assets are included in segment earnings and (v) our business segments that are also segments of Kinder Morgan Energy Partners include certain other income and expenses and income taxes in their segment earnings. With adjustment for these items, we currently evaluate business segment performance primarily based on segment earnings before DD&A (sometimes referred to in this report as EBDA) in relation to the level of capital employed.

Knight Inc. Form 10-Q

Business Segment Information

	Three Months Ended March 31,
	2009			2008
	(In millions)
Segment Earnings before Depreciation, Depletion, Amortization and Amortization of Excess Cost of Equity Investments
NGPL PipeCo LLC1	$	12.3		$	96.0
Power		1.1			2.1
Products Pipelines–KMP2		145.4			140.2
Natural Gas Pipelines–KMP2		200.0			188.4
CO2–KMP2		191.7			233.3
Terminals–KMP2		134.3			125.8
Kinder Morgan Canada–KMP2,3		19.5			34.6
Total Segment Earnings before DD&A		704.3			820.4
Depreciation, Depletion and Amortization		(264.8	)		(218.1	)
Amortization of Excess Cost of Equity Investments		(1.4	)		(1.4	)
Other Operating Income		11.5			-
General and Administrative Expense		(92.9	)		(86.3	)
Interest and Other, Net4		(150.3	)		(204.5	)
Add Back: Income Taxes Included in Segments Above2		19.3			9.0
Income from Continuing Operations Before Income Taxes	$	225.7		$	319.1

Revenues from External Customers
NGPL PipeCo LLC1	$	-	$	132.1
Power		6.6		7.5
Products Pipelines–KMP		188.2		198.3
Natural Gas Pipelines–KMP		1,051.7		1,912.5
CO2–KMP		253.2		319.9
Terminals–KMP		267.7		280.0
Kinder Morgan Canada–KMP3		50.0		43.9
Other		11.5		0.8
Total Revenues	$	1,828.9	$	2,895.0
Intersegment Revenues
NGPL PipeCo LLC 1	$	-	$	0.9
Terminals–KMP		0.2		0.2
Other		-		(0.8	)
Total Intersegment Revenues	$	0.2	$	0.3

	March 31, 2009
	(In millions)
Assets
NGPL PipeCo LLC 1	$	730.9
Power		53.1
Products Pipelines–KMP		5,518.4
Natural Gas Pipelines–KMP		7,754.0
CO2–KMP		4,457.4
Terminals–KMP		4,347.7
Kinder Morgan Canada–KMP3		1,503.9
Total segment assets		24,365.4
Other5		712.7
Total Consolidated Assets	$	25,078.1

____________

1	Effective February 15, 2008, we sold an 80% ownership interest in NGPL PipeCo LLC to Myria. As a result of the sale, beginning February 15, 2008, we account for our 20% ownership interest in NGPL PipeCo LLC as an equity method investment.

2	Income taxes of Kinder Morgan Energy Partners of $19.3 million and $9.0 million for the three months ended March 31, 2009 and 2008, respectively, are included in segment earnings before depreciation, depletion, amortization and amortization of excess cost of equity investments.

Knight Inc. Form 10-Q

On August 28, 2008, we sold our one-third interest in the net assets of the Express pipeline system (“Express”), as well as our full ownership of the net assets of the Jet Fuel pipeline system (“Jet Fuel”), to Kinder Morgan Energy Partners. The results of Express and Jet Fuel are now reported in the segment referred to as Kinder Morgan Canada–KMP for all periods.

4	Includes (i) interest expense and (ii) miscellaneous other income and expenses not allocated to business segments.

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

14. Accounting for Derivative Instruments and Hedging Activities

We are exposed to risks associated with unfavorable changes in the market price of natural gas, natural gas liquids and crude oil. We have exposure to interest rate risk as a result of the issuance of our debt obligations and to foreign currency risk from our investments in businesses owned and operated outside the United States. Pursuant to our management’s approved risk management policy, we use derivative contracts to hedge or reduce our exposure to certain of these risks, and we account for these hedging transactions according to the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and associated amendments (“SFAS No. 133”).

Commodity Price Risk Management

Our normal business activities expose us to risks associated with changes in the market price of natural gas, natural gas liquids and crude oil as a result of the forecasted purchase or sale of these products. As the hedged sales and purchases take place and we record them into earnings, we also reclassify the associated gains and losses included in accumulated other comprehensive income into earnings in the same line as the associated hedged transaction. The remaining gain or loss on the derivative contract in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffective portion) is recognized in earnings during the current period. We currently do not exclude any component of the derivative contracts’ gain or loss from the assessment of hedge ineffectiveness. During the three months ended March 31, 2009 and 2008, we reclassified $20.5 million of accumulated other comprehensive income and $115.5 million of accumulated other comprehensive loss, respectively, into earnings, as a result of hedged forecasted transactions occurring during the periods. Furthermore, during the three months ended March 31, 2009 and 2008, no amounts were reclassified into earnings as a result of the discontinuance of cash flow hedges. During the next twelve months, we expect to reclassify approximately $54.8 million of accumulated other comprehensive income into earnings.

As of March 31, 2009, Kinder Morgan Energy Partners had the following outstanding commodity forward contracts that were entered into to hedge forecasted energy commodity purchases and sales:

Derivatives Designated as Hedging Contracts under SFAS No. 133		Notional Quantity
Crude oil		30.6 million barrels
Natural gas		19.7 billion cubic feet1

As of March 31, 2009, Kinder Morgan Energy Partners had the following outstanding commodity forward contracts that were not designated as hedges for accounting purposes:

Derivatives Not Designated as Hedging Contracts under SFAS No. 133		Notional Quantity
Crude oil		0.1 million barrels
Natural gas		0.5 billion cubic feet1

____________

1 Notional quantities are shown net of short positions.

As of March 31, 2009, the maximum length of time over which we have hedged our exposure to the variability in future cash flows associated with energy commodity price risk is through April 2013.

Interest Rate Risk Management

In order to maintain a cost effective capital structure, it is our policy to borrow funds using a mix of fixed rate debt and variable rate debt. We use interest rate swap agreements to manage the interest rate risk associated with the fair value of our fixed rate borrowings and to effectively convert a portion of the underlying cash flows related to our long-term fixed rate debt

Knight Inc. Form 10-Q

securities into variable rate cash flows in order to achieve our desired mix of fixed and variable rate debt.

As of December 31, 2008, we were not party to any interest rate swap agreements and our subsidiary, Kinder Morgan Energy Partners was party to interest rate swap agreements with a total notional principal amount of $2.8 billion. During the first quarter of 2009, Kinder Morgan Energy Partners both terminated an existing fixed-to-variable interest rate swap agreement having a notional principal amount of $300 million and a maturity date of March 15, 2031, and entered into five additional fixed-to-variable swap agreements having a combined notional principal amount of $1 billion. Kinder Morgan Energy Partners received proceeds of $144.4 million from the early termination of the $300 million swap agreement. In addition, an existing fixed-to-variable rate swap agreement having a notional principal amount of $250 million matured on February 1, 2009. This swap agreement corresponded with the maturity of Kinder Morgan Energy Partners $250 million in principal amount of 6.30% senior notes that also matured on that date (discussed in Note 12).

Therefore, as of March 31, 2009, Kinder Morgan Energy Partners had a combined notional principal amount of $3.25 billion of fixed-to-variable interest rate swap agreements effectively converting the interest expense associated with certain series of its senior notes from fixed rates to variable rates based on an interest rate of LIBOR plus a spread. All of Kinder Morgan Energy Partners’ swap agreements have termination dates that correspond to the maturity dates of the related series of senior notes and, as of March 31, 2009, the maximum length of time over which we have hedged a portion of our exposure to the variability in the value of this debt due to interest rate risk is through January 15, 2038.

In April and May 2009, Kinder Morgan Energy Partners entered into additional fixed-to-variable interest rate swap agreements. Refer to Note 19 for further details.

Fair Value of Derivative Contracts

The following table summarizes the fair values of our derivative contracts included in the accompanying Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008 (in millions):

Fair Value of Derivative Contracts
	Asset Derivatives				Liability Derivatives
	March 31, 2009		December 31, 2008		March 31, 2009			December 31, 2008
	Balance Sheet Location	Fair Value	Balance Sheet Location	Fair Value	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value

Derivatives Designated as Hedging Contracts under SFAS No. 133
Energy Commodity Derivative Contracts	Fair Value of Derivative Instrument	$115.7	Fair Value of Derivative Instruments	$113.5	Fair Value of Derivative Instruments	$(138.6	)	Fair Value of Derivative Instruments	$(129.4	)
	Fair Value of Derivative Instruments, Non-current	76.0	Fair Value of Derivative Instruments, Non-current	48.9	Fair Value of Derivative Instruments, Non-current	(94.6	)	Fair Value of Derivative Instruments, Non-current	(92.2	)
Subtotal		191.7		162.4		(233.2	)		(221.6	)
Interest Rate Swap Agreements	Fair Value of Derivative Instruments, Non-current	475.7	Fair Value of Derivative Instruments, Non-current	747.1	Fair Value of Derivative Instruments, Non-current	(3.4	)	Fair Value of Derivative Instruments, Non-current	-

Cross Currency Swap Agreements	Fair Value of Derivative Instruments, Non-current	26.0	Fair Value of Derivative Instruments, Non-current	32.0	Fair Value of Derivative Instruments, Non-current	-		Fair Value of Derivative Instruments, Non-current	-
Total		693.4		941.5		(236.6	)		(221.6	)

Derivatives Not Designated as Hedging Contracts under SFAS No. 133
Energy Commodity Derivative Contracts	Fair Value of Derivative Instruments	2.8	Fair Value of Derivative Instruments	1.8	Fair Value of Derivative Instruments	(0.8	)	Fair Value of Derivative Instruments	(0.1	)

Total Derivatives		$696.2		$943.3		$(237.4	)		$(221.7	)

The offsetting entry to adjust the carrying value of the debt securities whose fair value was being hedged is included within “Value of Interest Rate Swaps” in the accompanying interim Consolidated Balance Sheets, which also includes any unamortized portion of proceeds received from the early termination of interest rate swap agreements. As of March 31, 2009 and December 31, 2008, this unamortized premium totaled $354.1 million and $216.8 million, respectively.

Knight Inc. Form 10-Q

Effect of Derivative Contracts on the Income Statement

The following two tables summarize the impact of our derivative contracts under SFAS No. 133 in the accompanying Consolidated Statements of Operations for the three months ended March 31, 2009 and March 31, 2008 (in millions):

Derivatives in Fair Value Hedging	Location of Gain/(Loss) Recognized in Income on	Amount of Gain/(Loss) Recognized in Income on Derivative					Hedged Items in Fair Value Hedging	Location of Gain/(Loss) Recognized in Income on Related	Amount of Gain/(Loss) Recognized in Income on Related Hedged Items
Derivatives in Fair Value Hedging	Location of Gain/(Loss) Recognized in Income on	Three Months Ended					Hedged Items in Fair Value Hedging	Location of Gain/(Loss) Recognized in Income on Related	Three Months Ended
Relationships	Derivative	2009			2008		Relationships	Hedged Item	2009		2008
Interest Rate Swap Agreements	Interest, Net – Income/(Expense)	$	(130.4	)	$	119.1	Fixed Rate Debt	Interest, Net – Income/(Expense)	$	130.4	$	(119.1	)
Total		$	(130.4	)	$	119.1	Total		$	130.4	$	(119.1	)

The table above reflects the change in the fair value of interest rate swap agreements and the change in the fair value of the associated fixed rate debt, which exactly offset each other as a result of no hedge ineffectiveness. It does not reflect the impact on interest expense of the interest rate swaps under which we pay variable and receive fixed.

Derivatives in Cash Flow	Amount of Gain/(Loss) Recognized in OCI on Derivative					Location of Gain/(Loss)Reclassified from	Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income						Location of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount	Amount of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from
Derivatives in Cash Flow	(Effective Portion)					Accumulated OCI	(Effective Portion)						Excluded from	Effectiveness Testing)
Hedging	Three Months Ended					into Income	Three Months Ended						Effectiveness	Three Months Ended
Relationships	2009		2008			(Effective Portion)	2009			2008			Testing)	2009		2008
Energy Commodity Derivative Contracts	$	15.9	$	(219.8	)	Revenues-Natural Gas Sales	$	0.5		$	—		Revenues	$	—	$	—
						Revenues-Product Sales and Other		20.1			(115.3	)
						Gas Purchases and Other Costs of Sales		(0.1	)		(0.2	)	Gas Purchases and Other Costs of Sales		—		(1.6	)
Total	$	15.9	$	(219.8	)	Total	$	20.5		$	(115.5	)	Total	$	—	$	(1.6	)

Derivatives in Net	Amount of Gain/(Loss) Recognized in OCI on Derivative					Location of Gain/(Loss) Reclassified from	Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income				Location of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount	Amount of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from
Derivatives in Net	(Effective Portion)					Accumulated OCI	(Effective Portion)				Excluded from	Effectiveness Testing)
Investment Hedging	Three Months Ended					into Income	Three Months Ended				Effectiveness	Three Months Ended
Relationships	2009			2008		(Effective Portion)	2009		2008		Testing)	2009		2008
Cross Currency Swap Agreements	$	(6.0	)	$	22.2	Revenues-Natural Gas Sales	$	-	$	-	Revenues	$	-	$	-
Total	$	(6.0	)	$	22.2	Total	$	-	$	-	Total	$	-	$	-

Derivatives Not Designated as	Location of Gain/(Loss) Recognized in	Amount of Gain/(Loss) Recognized in Income on Derivative
Derivatives Not Designated as	Location of Gain/(Loss) Recognized in	Three Months Ended
Hedging Contracts	Income on Derivative	2009			2008
Energy commodity derivative contracts	Gas Purchases and Other Costs of Sales	$	(0.4	)	$	—
Total		$	(0.4	)	$	—

Net Investment Hedges

We are exposed to foreign currency risk from our investments in businesses owned and operated outside the United States. To hedge the value of our investment in Canadian operations, we have entered into various cross-currency interest rate swap transactions that have been designated as net investment hedges in accordance with SFAS No. 133. The effective portion of

Knight Inc. Form 10-Q

the changes in fair value of these swap transactions is reported as a cumulative translation adjustment included in the caption “Accumulated Other Comprehensive Loss” in the accompanying interim Consolidated Balance Sheets. The combined notional value of our remaining cross-currency interest rate swaps at March 31, 2009 was approximately C$154.7 million.

Credit Risk

As discussed in our 2008 Form 10-K, we and Kinder Morgan Energy Partners, our subsidiary, have counterparty credit risk as a result of our use of financial derivative contracts. Our counterparties consist primarily of financial institutions, major energy companies and local distribution companies. This concentration of counterparties may impact our overall exposure to credit risk, either positively or negatively in that the counterparties may be similarly affected by changes in economic, regulatory or other conditions.

We maintain credit policies with regard to our counterparties that we believe minimize our overall credit risk. These policies include (i) an evaluation of potential counterparties’ financial condition (including credit ratings), (ii) collateral requirements under certain circumstances and (iii) the use of standardized agreements, which allow for netting of positive and negative exposure associated with a single counterparty. Based on our policies, exposure, credit and other reserves, our management does not anticipate a material adverse effect on our financial position, results of operations, or cash flows as a result of counterparty performance.

Our over-the-counter swaps and options are entered into with counterparties outside central trading organizations such as a futures, options or stock exchange. These contracts are with a number of parties, all of which have investment grade credit ratings. While we enter into derivative transactions principally with investment grade counterparties and actively monitor their ratings, it is nevertheless possible that from time to time losses will result from counterparty credit risk in the future. The maximum potential exposure to credit losses on derivative contracts as of March 31, 2009 was (in millions):

	Asset Position
Interest Rate Swap Agreements	$	475.7
Energy Commodity Derivative Contracts		194.5
Cross Currency Swap Agreements		26.0
Gross Exposure		696.2
Netting Agreement Impact		(127.5	)
Net Exposure	$	568.7

In conjunction with the purchase of exchange-traded derivative contracts or when the market value of our derivative contracts with specific counterparties exceeds established limits, we are required to provide collateral to our counterparties, which may include posting letters of credit or placing cash in margin accounts. As of March 31, 2009 and December 31, 2008, Kinder Morgan Energy Partners had outstanding letters of credit totaling less than $0.1 million and $40.0 million, respectively, in support of its hedging of commodity price risks associated with the sale of natural gas, natural gas liquids and crude oil. Additionally, as of March 31, 2009, Kinder Morgan Energy Partners had cash margin deposits associated with its commodity contract positions and over-the-counter swap partners totaling $3.3 million, and we reported this amount as “Current Assets: Restricted Deposits” in the accompanying interim Consolidated Balance Sheet. As of December 31, 2008, counterparties associated with Kinder Morgan Energy Partners’ energy commodity contract positions and over-the-counter swap agreements had margin deposits with us totaling $3.1 million, and we reported this amount within “Current Liabilities: Other” within the accompanying interim Consolidated Balance Sheet.

Kinder Morgan Energy Partners also has agreements with certain counterparties to its derivative contracts that contain provisions requiring it to post additional collateral upon a decrease in its credit rating. Based on contractual provisions as of March 31, 2009, we estimate that if Kinder Morgan Energy Partners’ credit rating was downgraded, Kinder Morgan Energy Partners would have the following additional collateral obligations (in millions):

Credit Ratings Downgraded1	Incremental Obligations		Cumulative Obligations2
One Level to BBB-/Baa3	$	75.9	$	79.2
Two Levels to Below BBB-/Baa3 (Below Investment Grade)	$	57.8	$	137.0

____________

If there are split ratings among the independent credit rating agencies, most counterparties use the higher credit rating to determine our incremental collateral obligations, while the remaining use the lower credit rating. Therefore, a one level downgrade to BBB-/Baa3 by one agency would not trigger the entire $75.9 million incremental obligation.

2	Includes current posting at current rating.

Knight Inc. Form 10-Q

Fair Value

Fair value measurements and disclosures are made in accordance with the provisions of SFAS No. 157, Fair Value Measurements. On February 12, 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, referred to as FAS 157-2 in this report. FAS 157-2 delayed the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).

Accordingly, we adopted SFAS No. 157 for financial assets and financial liabilities effective January 1, 2008. The adoption did not have a material impact on our financial statements since we already applied its basic concepts in measuring fair values. We adopted SFAS No. 157 for non-financial assets and non-financial liabilities effective January 1, 2009. This includes applying the provisions of SFAS No. 157 to (i) nonfinancial assets and liabilities initially measured at fair value in business combinations, (ii) reporting units or nonfinancial assets and liabilities measured at fair value in conjunction with goodwill impairment testing, (iii) other nonfinancial assets measured at fair value in conjunction with impairment assessments and (iv) asset retirement obligations initially measured at fair value. The adoption did not have a material impact on our financial statements since we already applied its basic concepts in measuring fair values. For more information on subsequent Staff Positions issued by the FASB pertaining to SFAS No. 157, see Note 18.

SFAS No. 157 established a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring fair value. This framework defined three levels of inputs to the fair value measurement process, and requires that each fair value measurement be assigned to a level corresponding to the lowest level input that is significant to the fair value measurement in its entirety. The three broad levels of inputs defined by the SFAS No. 157 hierarchy are as follows:

Level 1 Inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;

Level 2 Inputs—inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability; and

Level 3 Inputs—unobservable inputs for the asset or liability. These unobservable inputs reflect the entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances (which might include the reporting entity’s own data).

The following tables summarize the fair value measurements of ours and Kinder Morgan Energy Partners’ (i) energy commodity derivative contracts, (ii) interest rate swap agreements and (iii) cross currency swaps as of March 31, 2009 and December 31, 2008, based on the three levels established by SFAS No. 157 and do not include cash margin deposits, which are reported within the caption “Current Assets: Restricted Deposits” in the accompanying interim Consolidated Balance Sheets:

	Asset Fair Value Measurements Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
As of March 31, 2009	(In millions)
Energy Commodity Derivative Contracts1	$	194.5	$	0.1	$	126.5	$	67.9
Interest Rate Swap Agreements	$	475.7	$	-	$	475.7	$	-
Cross Currency Interest Rate Swap Agreements	$	26.0	$	-	$	26.0	$	-

As of December 31, 2008
Energy Commodity Derivative Contracts2	$	164.2	$	0.1	$	108.9	$	55.2
Interest Rate Swap Agreements	$	747.1	$	-	$	747.1	$	-
Cross Currency Interest Rate Swap Agreements	$	32.0	$	-	$	32.0	$	-

Knight Inc. Form 10-Q

	Liability Fair Value Measurements Using
	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
As of March 31, 2009	(In millions)
Energy Commodity Derivative Contracts3	$	(234.0	)	$	-	$	(219.5	)	$	(14.5	)
Interest Rate Swap Agreements	$	(3.4	)	$	-	$	(3.4	)	$	-

As of December 31, 2008
Energy Commodity Derivative Contracts4	$	(221.7	)	$	-	$	(210.6	)	$	(11.1	)
Interest Rate Swap Agreements	$	-		$	-	$	-		$	-

____________

1	Level 1 consists primarily of NYMEX natural gas futures. Level 2 consists primarily of OTC West Texas Intermediate hedges and NYMEX natural gas futures. Level 3 consists primarily of West Texas Sour hedges, natural gas basis swaps and West Texas Intermediate options.

2	Level 1 consists primarily of NYMEX natural gas futures. Level 2 consists primarily of OTC West Texas Intermediate hedges and OTC natural gas hedges that are settled on NYMEX. Level 3 consists primarily of West Texas Intermediate options and West Texas Sour hedges.

3	Level 2 consists primarily of OTC West Texas Intermediate hedges. Level 3 consists primarily of West Texas Sour hedges, natural gas basis swaps and West Texas Intermediate options.

4	Level 2 consists primarily of OTC West Texas Intermediate hedges. Level 3 consists primarily of natural gas basis swaps, natural gas options and West Texas Intermediate options.

The table below provides a summary of changes in the fair value of our Level 3 energy commodity derivative contracts for the three months ended March 31, 2009 and 2008:

Significant Unobservable Inputs (Level 3)

	Three Months Ended March 31,
	2009		2008
	(In millions)
Net Asset (Liability)
Beginning of Period Balance	$	44.1	$	(100.3	)
Realized and Unrealized Net Losses		6.3		(44.8	)
Purchases and Settlements		3.0		21.3
End of Period Balance