knight10q2_2008.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
x
  
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008
or

o
  
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________to_____________

Commission file number 1-06446

Knight Inc.
(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 þ  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
 
The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of August 13, 2008 was 100 shares.

 
 
 
Knight Inc. Form 10-Q

KNIGHT INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2008


Contents


  
  
Page
 
     
 
  
    
 
3-4
 
5-6
 
7-8
 
9-65
  
    
 
 
66-97
  
    
97
  
    
97
  
    
 
  
    
98
  
    
98-100
  
    
100
  
    
100
  
    
100
  
    
100
  
    
101
  
    
102


 
2
 
Knight Inc. Form 10-Q


PART I. - FINANCIAL INFORMATION
 
Item 1.  Financial Statements.
 
KNIGHT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In millions)
 
 
June 30,
2008
  
December 31,
2007
ASSETS:
              
Current Assets:
              
Cash and Cash Equivalents
$
180.9
    
$
148.6
  
Restricted Deposits
  
275.0
      
67.9
  
Accounts, Notes and Interest Receivable, Net:
              
Trade
  
1,423.3
      
970.0
  
Related Parties
  
22.1
      
5.2
  
Inventories:
              
Product
  
74.5
      
19.5
  
Materials and Supplies
  
19.1
      
18.3
  
Gas Imbalances
  
9.7
      
26.9
  
Assets Held for Sale
  
-
      
3,353.3
  
Fair Value of Derivative Instruments
  
78.0
      
37.1
  
Other
  
50.9
      
36.8
  
   
2,133.5
      
4,683.6
  
   
              
Notes Receivable – Related Parties
  
197.4
      
87.9
  
  
              
Investments
  
1,864.9
      
1,996.2
  
  
              
Goodwill
  
4,995.7
      
8,174.0
  
   
              
Other Intangibles, Net
  
261.0
      
321.1
  
  
              
Property, Plant and Equipment, Net:
              
Property, Plant and Equipment
  
15,952.6
      
15,080.9
  
Accumulated Depreciation, Depletion and Amortization
  
(673.9
)
    
(277.0
)
   
15,278.7
      
14,803.9
  
   
              
Assets Held for Sale, Non-current
  
-
      
5,634.6
  
  
              
Deferred Charges and Other Assets:
              
Fair Value of Derivative Instruments
  
196.2
      
142.4
  
Other
  
212.0
      
257.3
  
   
408.2
      
399.7
  
  
              
Total Assets
$
25,139.4
    
$
36,101.0
  

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

 
3
 
Knight Inc. Form 10-Q


KNIGHT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In millions except share and per share amounts)
 
 
June 30,
2008
  
December 31,
2007
LIABILITIES AND STOCKHOLDERS’ EQUITY:
              
Current Liabilities:
              
Current Maturities of Long-term Debt
$
275.9
    
$
79.8
  
Notes Payable
  
265.0
      
888.1
  
Cash Book Overdrafts
  
49.1
      
30.7
  
Accounts Payable:
              
Trade
  
1,315.3
      
943.1
  
Related Parties
  
2.1
      
0.6
  
Accrued Interest
  
219.2
      
242.7
  
Accrued Taxes
  
381.2
      
728.2
  
Gas Imbalances
  
16.4
      
23.7
  
Liabilities Held for Sale
  
-
      
168.2
  
Fair Value of Derivative Instruments
  
1,191.4
      
594.7
  
Other
  
316.8
      
240.0
  
   
4,032.4
      
3,939.8
  
               
Other Liabilities and Deferred Credits:
              
Deferred Income Taxes, Non-current
  
1,349.9
      
1,849.4
  
Liabilities Held for Sale, Non-current
  
-
      
2,424.1
  
Fair Value of Derivative Instruments
  
2,004.5
      
836.8
  
Other
  
600.0
      
618.0
  
   
3,954.4
      
5,728.3
  
  
              
Long-term Debt:
              
Outstanding Notes and Debentures
  
10,534.3
      
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
  
164.8
      
199.7
  
  
  
10,834.8
      
15,297.4
  
  
              
Minority Interests in Equity of Subsidiaries
  
2,872.0
      
3,314.0
  
               
Commitments and Contingencies (Note 19)
              
  
              
Stockholders’ Equity:
              
Common Stock – Authorized and Outstanding – 100 Shares, Par Value $0.01 Per Share
  
-
      
-
  
Additional Paid-in Capital
  
7,810.0
      
7,822.2
  
Retained Earnings (Deficit)
  
(3,507.9
)
    
247.0
  
Accumulated Other Comprehensive Loss
  
(856.3
)
    
(247.7
)
Total Stockholders’ Equity
  
3,445.8
      
7,821.5
  
  
              
Total Liabilities and Stockholders’ Equity
$
25,139.4
    
$
36,101.0
  

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

 
4
 
Knight Inc. Form 10-Q


KNIGHT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In millions)
 
 
Successor
Company
    
Predecessor
Company
 
Three Months
Ended
June 30, 2008
  
One Month
Ended
June 30, 2007
    
Two Months
Ended
May 31, 2007
Operating Revenues:
                        
Natural Gas Sales
$
2,464.7
    
$
561.9
      
$
1,012.7
  
Transportation and Storage
  
678.7
      
275.5
        
549.4
  
Oil and Product Sales
  
417.1
      
99.5
        
158.6
  
Total Operating Revenues
  
3,560.5
      
936.9
        
1,720.7
  
  
                        
Operating Costs and Expenses:
                        
Gas Purchases and Other Costs of Sales
  
2,494.1
      
557.2
        
1,037.9
  
Operations and Maintenance
  
314.8
      
106.8
        
189.9
  
General and Administrative
  
91.8
      
30.0
        
173.2
  
Depreciation, Depletion and Amortization
  
215.7
      
72.2
        
108.0
  
Taxes, Other Than Income Taxes
  
51.1
      
15.5
        
30.9
  
Other Income, Net
  
(2.2
)
    
(4.0
)
      
(0.1
)
Goodwill Impairment
  
4,033.3
      
-
        
-
  
Total Operating Costs and Expenses
  
7,198.6
      
777.7
        
1,539.8
  
  
                        
Operating Income (Loss)
  
(3,638.1
)
    
159.2
        
180.9
  
  
                        
Other Income and (Expenses):
                        
Earnings of Equity Investees
  
55.3
      
9.2
        
14.5
  
Interest Expense, Net
  
(141.6
)
    
(83.5
)
      
(97.0
)
Interest Expense – Deferrable Interest Debentures
  
(0.6
)
    
(1.9
)
      
(3.6
)
Minority Interests
  
(126.4
)
    
(34.5
)
      
(32.5
)
Other, Net
  
10.5
      
0.7
        
(1.6
)
Total Other Income and (Expenses)
  
(202.8
)
    
(110.0
)
      
(120.2
)
  
                        
Income (Loss) from Continuing Operations Before Income Taxes
  
(3,840.9
)
    
49.2
        
60.7
  
Income Taxes
  
19.4
      
21.3
        
47.8
  
Income (Loss) from Continuing Operations
  
(3,860.3
)
    
27.9
        
12.9
  
Income (Loss) from Discontinued Operations, Net of Tax
  
(0.3
)
    
2.3
        
65.4
  
  
                        
Net Income (Loss)
$
(3,860.6
)
  
$
30.2
      
$
78.3
  

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

 
5
 
Knight Inc. Form 10-Q

KNIGHT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In millions)
 
 
Successor
Company
    
Predecessor
Company
 
Six Months
Ended
June 30, 2008
  
One Month
Ended
June 30, 2007
    
Five Months
Ended
May 31, 2007
Operating Revenues:
                        
Natural Gas Sales
$
4,186.5
    
$
561.9
      
$
2,430.6
  
Transportation and Storage
  
1,486.6
      
275.5
        
1,350.5
  
Oil and Product Sales
  
782.4
      
99.5
        
384.0
  
Total Operating Revenues
  
6,455.5
      
936.9
        
4,165.1
  
  
                        
Operating Costs and Expenses:
                        
Gas Purchases and Other Costs of Sales
  
4,254.7
      
557.2
        
2,490.4
  
Operations and Maintenance
  
616.6
      
106.8
        
476.1
  
General and Administrative
  
178.1
      
30.0
        
283.6
  
Depreciation, Depletion and Amortization
  
433.8
      
72.2
        
261.0
  
Taxes, Other Than Income Taxes
  
103.6
      
15.5
        
74.4
  
Other Income, Net
  
(2.7
)
    
(4.0
)
      
(2.3
)
Goodwill Impairment
  
4,033.3
      
-
        
377.1
  
Total Operating Costs and Expenses
  
9,617.4
      
777.7
        
3,960.3
  
  
                        
Operating Income (Loss)
  
(3,161.9
)
    
159.2
        
204.8
  
  
                        
Other Income and (Expenses):
                        
Earnings of Equity Investees
  
99.0
      
9.2
        
38.3
  
Interest Expense, Net
  
(352.3
)
    
(83.5
)
      
(241.1
)
Interest Expense – Deferrable Interest Debentures
  
6.1
      
(1.9
)
      
(9.1
)
Minority Interests
  
(252.6
)
    
(34.5
)
      
(90.7
)
Other, Net
  
13.7
      
0.7
        
0.6
  
Total Other Income and (Expenses)
  
(486.1
)
    
(110.0
)
      
(302.0
)
  
                        
Income (Loss) from Continuing Operations Before Income Taxes
  
(3,648.0
)
    
49.2
        
(97.2
)
Income Taxes
  
106.5
      
21.3
        
135.5
  
Income (Loss) from Continuing Operations
  
(3,754.5
)
    
27.9
        
(232.7
)
Income (Loss) from Discontinued Operations, Net of Tax
  
(0.4
)
    
2.3
        
298.6
  
  
                        
Net Income (Loss)
$
(3,754.9
)
  
$
30.2
      
$
65.9
  

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

 
6
 
Knight Inc. Form 10-Q


KNIGHT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In millions)
 
 
Successor
Company
    
Predecessor Company
 
Six Months
Ended
June 30, 2008
  
One Month
Ended
June 30, 2007
    
Five Months
Ended
May 31, 2007
Cash Flows from Operating Activities:
                        
Net Income (Loss)
$
(3,754.9
)
  
$
30.2
      
$
65.9
  
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
                        
Loss (Income) from Discontinued Operations, Net of Tax
  
0.4
      
(0.5
)
      
(287.9
)
Loss from Goodwill Impairment
  
4,033.3
      
-
        
377.1
  
Loss on Early Extinguishment of Debt
  
23.6
      
-
        
-
  
Depreciation, Depletion and Amortization
  
433.8
      
73.0
        
264.9
  
Deferred Income Taxes
  
33.6
      
4.1
        
138.7
  
Equity in Earnings of Equity Investees
  
(99.0
)
    
(9.5
)
      
(39.1
)
Distributions from Equity Investees
  
83.7
      
22.5
        
48.2
  
Minority Interests in Income of Consolidated Subsidiaries
  
252.6
      
34.5
        
90.7
  
Gains from Property Casualty Indemnifications
  
-
      
-
        
(1.8
)
Net Gains on Sales of Assets
  
(2.8
)
    
(4.5
)
      
(2.6
)
Mark-to-Market Interest Rate Swap Gain
  
(19.8
)
    
-
        
-
  
Foreign Currency (Gain) Loss
  
(0.2
)
    
-
        
15.5
  
Changes in Gas in Underground Storage
  
(28.0
)
    
(5.0
)
      
(84.2
)
Changes in Working Capital Items
  
(542.0
)
    
107.9
        
(202.9
)
(Payment for) Proceeds from Termination of Interest Rate Swaps
  
(2.5
)
    
-
        
51.9
  
Kinder Morgan Energy Partners’ Rate Reparations, Refunds and Reserve Adjustments
  
(23.3
)
    
-
        
-
  
Other, Net
  
(7.3
)
    
(31.9
)
      
58.8
  
Cash Flows Provided by Continuing Operations
  
381.2
      
220.8
        
493.2
  
Net Cash Flows (Used in) Provided by Discontinued Operations
  
(0.5
)
    
(2.1
)
      
109.8
  
Net Cash Flows Provided by Operating Activities
  
380.7
      
218.7
        
603.0
  
  
                        
Cash Flows from Investing Activities:
                        
Purchase of Predecessor Stock
  
-
      
(11,534.3
)
      
-
  
Capital Expenditures
  
(1,269.2
)
    
(148.8
)
      
(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
  
(4.2
)
    
(5.7
)
      
(42.1
)
Net (Investments in) Proceeds from Margin Deposits
  
(207.1
)
    
35.8
        
(54.8
)
Distributions from Equity Investees
  
89.1
      
-
        
-
  
Other Investments
  
(339.4
)
    
(14.6
)
      
(29.7
)
Change in Natural Gas Storage and NGL Line Fill Inventory
  
(2.7
)
    
1.5
        
8.4
  
Property Casualty Indemnifications
  
-
      
-
        
8.0
  
Net Proceeds (Cost of Removal) from Sales of Other Assets
  
113.0
      
7.5
        
(1.5
)
Net Cash Flows Provided by (Used in) Continuing Investing Activities
  
4,385.2
      
(11,658.6
)
      
(764.5
)
Net Cash Flows Provided by Discontinued Investing Activities
  
-
      
199.9
        
1,488.2
  
Net Cash Flows Provided by (Used in) Investing Activities
$
4,385.2
    
$
(11,458.7
)
    
$
723.7
  


 
7
 
Knight Inc. Form 10-Q


KNIGHT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
(In millions)
 
 
Successor
Company
    
Predecessor
Company
 
Six Months
Ended
June 30, 2008
  
One Month
Ended
June 30, 2007
    
Five Months Ended
May 31, 2007
Cash Flows from Financing Activities:
                        
Short-term Debt, Net
$
(623.1
)
  
$
(230.2
)
    
$
(247.5
)
Long-term Debt Issued
  
1,600.1
      
5,305.0
        
1,000.0
  
Long-term Debt Retired
  
(5,861.5
)
    
(455.5
)
      
(302.4
)
Discount on Early Extinguishment of Debt
  
69.2
      
-
        
-
  
Cash Book Overdraft
  
18.5
      
0.5
        
(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
  
(11.5
)
    
(2.3
)
      
2.3
  
Cash Dividends, Common Stock
  
-
      
-
        
(234.9
)
Minority Interests, Contributions
  
384.8
      
-
        
-
  
Minority Interests, Distributions
  
(300.9
)
    
-
        
(248.9
)
Debt Issuance Costs
  
(12.1
)
    
(62.7
)
      
(13.1
)
Other, Net
  
3.9
      
-
        
(4.3
)
Net Cash Flows (Used in) Provided by Continuing Financing Activities
  
(4,732.6
)
    
9,485.7
        
300.8
  
Net Cash Flows Provided by Discontinued Financing Activities
  
-
      
-
        
140.1
  
Net Cash Flows (Used in) Provided by Financing Activities
  
(4,732.6
)
    
9,485.7
        
440.9
  
                         
Effect of Exchange Rate Changes on Cash
  
(1.0
)
    
-
        
7.6
  
                         
Cash Balance Included in Assets Held for Sale
  
-
      
-
        
(2.7
)
  
                        
Net Increase (Decrease) in Cash and Cash Equivalents
  
32.3
      
(1,754.3
)
      
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
$
180.9
    
$
148.0
      
$
1,902.3
  

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

 
8
 
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 37,000 miles of pipelines and approximately 165 terminals. We have both regulated and nonregulated operations. We also own the general partner interest and a significant limited partner interest in Kinder Morgan Energy Partners, L.P., a publicly traded pipeline limited partnership. 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” (its NYSE ticker symbol) 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., of which we indirectly own all of the outstanding common equity, owns all of Kinder Morgan Management’s voting shares. Kinder Morgan Management’s non-voting shares (as opposed to the voting shares we hold) are traded on the New York Stock Exchange under the ticker symbol “KMR.” Kinder Morgan Management, pursuant to a delegation of control agreement, has been delegated, to the fullest extent permitted under Delaware law, all of Kinder Morgan G.P., Inc.’s power and authority to manage and control the business and affairs of Kinder Morgan Energy Partners, L.P., subject to Kinder Morgan G.P., Inc.’s right to approve certain transactions.
 
2.
Summary of 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, in which we have a preferred investment. Investments in jointly owned operations in which we hold a 50% or less interest (other than Kinder Morgan Energy Partners and Triton Power Company LLC) and have the ability to exercise significant influence over their operating and financial policies are accounted for under the equity method. All material intercompany transactions and balances have been eliminated. Certain prior period amounts have been reclassified to conform to the current presentation.
 
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 (i) we are now privately owned, (ii) our stock is no longer traded on the New York Stock Exchange, and (iii) we have adopted a new basis of accounting for our assets and liabilities. 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
 

 
9
 
Knight Inc. Form 10-Q

Private transaction. Therefore, in the accompanying consolidated financial statements, transactions and balances prior to the closing of the Going Private transaction (the amounts labeled “Predecessor Company”) reflect the historical accounting basis in our assets and liabilities, while the amounts subsequent to the closing (labeled “Successor Company”) reflect the push down of the investors’ new basis to our financial statements. 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 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 KMP and 14% in the case of KMR). The remaining percentage of these assets and liabilities, reflecting the continuing minority ownership interest, is included at its historical accounting basis. The purchase price paid in the Going Private transaction and the 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
  
13,892.4
  
Property, Plant and Equipment, Net
  
15,281.5
  
Deferred Charges and Other Assets
  
1,639.8
  
Current Liabilities
  
(3,279.5
)
Other Liabilities and Deferred Credits:
      
Deferred Income Taxes, Non-current
  
(2,499.0
)
Other Deferred Credits
  
(1,786.3
)
Long-term Debt
  
(9,855.9
)
Minority Interests in Equity of Subsidiaries
  
(3,314.6
)
 
$
12,527.4
  

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.
 

 
10
 
Knight Inc. Form 10-Q

3.
Goodwill
 
Changes in the carrying amount of our goodwill for the six months ended June 30, 2008 are summarized as follows:
 
 
December 31,
2007
  
Acquisitions
and
Purchase Price
Adjustments1
  
Impairment
of Assets
  
Other2
  
June 30,
2008
 
(In millions)
Products Pipelines – KMP
$
2,179.4
      
$
(24.3
)
    
$
(1,113.9
)
  
$
(6.9
)
  
$
1,034.3
  
Natural Gas Pipelines – KMP
  
3,201.0
        
444.5
        
(2,242.8
)
    
(10.6
)
    
1,392.1
  
CO2 – KMP
  
1,077.6
        
467.4
        
-
      
(3.7
)
    
1,541.3
  
Terminals – KMP
  
1,465.9
        
-
        
(676.6
)
    
(4.5
)
    
784.8
  
Trans Mountain – KMP
  
250.1
        
-
        
-
      
(6.9
)
    
243.2
  
  
                                          
Consolidated Total
$
8,174.0
      
$
887.6
      
$
(4,033.3
)
  
$
(32.6
)
  
$
4,995.7
  
_______________
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) TransMountain – 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 June 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, “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 impairments by our reporting unit: Products Pipelines – KMP (excluding associated terminals) – $1.04 billion, Products Pipelines Terminals – KMP (separate from Products Pipelines – KMP for goodwill impairment purposes) - $70 million, Natural Gas Pipelines – KMP – $2.24 billion, and Terminals – KMP – $677 million, for a total impairment of $4.03 billion. While the impairment test is substantially complete, final adjustments may be recorded in the third quarter of 2008. The goodwill impairment charge recorded in this quarter, and any subsequent adjustments, are non-cash and do not have any impact on our cash flow.
 
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, a goodwill impairment charge of $377.1 million was recorded in the first quarter of 2007.
 

 
11
 
Knight Inc. Form 10-Q

4.
Other Intangibles
 
Our intangible assets other than goodwill include customer relationships, contracts and agreements, technology-based assets, and lease value. These intangible assets have definite lives, are being amortized on a straight-line basis over their 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:
 
 
June 30,
2008
  
December 31,
2007
 
(In millions)
Customer Relationships, Contracts and Agreements:
                      
Gross Carrying Amount1
  
$
270.9
        
$
321.3
    
Accumulated Amortization
    
(21.1
)
        
(11.6
)
  
Net Carrying Amount
    
249.8
          
309.7
    
                       
Technology-based Assets, Lease Value and Other:
                      
Gross Carrying Amount
    
11.7
          
11.7
    
Accumulated Amortization
    
(0.5
)
        
(0.3
)
  
Net Carrying Amount
    
11.2
          
11.4
    
                       
Total Other Intangibles, Net
  
$
261.0
        
$
321.1
    
_______________
 
1
The change in the Gross Carrying Amount is due primarily 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’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 that amount.
 
Amortization expense on our intangibles consisted of the following:
 
 
Successor  Company
    
Predecessor  Company
 
Three Months Ended
June 30,
  
Six Months
 Ended
June,
  
One Month
Ended
June 30,
    
Two Months
Ended
May 31,
  
Five Months
Ended
May 31,
 
2008
  
2008
  
2007
    
2007
  
2007
 
(In millions)
    
(In millions)
Customer Relationships, Contracts and Agreements
$
4.4
    
$
9.5
    
$
1.2
      
$
2.5
    
$
6.1
  
Technology-based Assets, Lease Value and Other
  
0.1
      
0.2
      
-
        
0.1
      
0.2
  
Total Amortization
$
4.5
    
$
9.7
    
$
1.2
      
$
2.6
    
$
6.3
  

As of June 30, 2008, the weighted-average amortization period for our intangible assets was approximately 17.0 years.
 
5.
Accounting for Minority Interests
 
The caption “Minority Interests in Equity of Subsidiaries” in the accompanying interim Consolidated Balance Sheets consists of the following:
 
 
June 30,
2008
  
December 31,
2007
 
(In millions)
Kinder Morgan Energy Partners
$
1,270.7
    
$
1,616.0
  
Kinder Morgan Management, LLC
  
1,558.3
      
1,657.7
  
Triton Power Company LLC
  
33.1
      
29.2
  
Other
  
9.9
      
11.1
  
 
$
2,872.0
    
$
3,314.0
  


 
12
 
Knight Inc. Form 10-Q

6.
Asset Retirement Obligations
 
We have recorded liabilities associated with estimated future legal obligations to retire certain tangible long-lived assets.
 
We have included $1.4 million of our total asset retirement obligations (“ARO”) as of June 30, 2008 in the caption “Current Liabilities: Other” and the remaining $75.9 million in the caption “Other Liabilities and Deferred Credits: Other” in the accompanying interim Consolidated Balance Sheet. A reconciliation of the changes in our accumulated ARO is as follows. Additional information regarding our ARO is included in our 2007 Form 10-K.
 
 
Successor
Company
    
Predecessor
Company
 
Six Months
Ended
  
One Month
Ended
    
Five Months
Ended
 
June 30, 2008
  
June 30, 2007
    
May 31, 2007
 
(In millions)
    
(In millions)
Beginning of Period
$
55.0
    
$
53.1
      
$
52.5
  
Additions
  
25.5
      
-
        
0.2
  
Liabilities Settled
  
(1.8
)
    
-
        
(0.7
)
Liabilities Sold1
  
(2.8
)
    
-
        
-
  
Accretion Expense
  
1.4
      
0.2
        
1.1
  
End of Period
$
77.3
    
$
53.3
      
$
53.1
  
_______________
 
1
ARO liabilities associated with the NGPL business segment, 80% of which was sold in February 2008 (see Note 12).
 
7.
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. By virtue of the size of their ownership interest, two of those investors became “related parties” to us as that term is defined in the authoritative accounting literature: (i) American International Group, Inc. and certain of its affiliates (“AIG”) and (ii) Goldman Sachs Capital Partners and certain of its affiliates (“Goldman Sachs”). We enter into transactions with certain AIG affiliates in the ordinary course of their conducting insurance and insurance-related activities, although no individual transaction is, and all such transactions collectively are not, material to our consolidated financial statements. We conduct commodity risk management activities in the ordinary course of implementing our risk management strategies in which the counterparty to certain of our derivative transactions is an affiliate of Goldman Sachs. In conjunction with these activities, we are a party (through one of our subsidiaries engaged in the production of crude oil) to a hedging facility with J. Aron & Company/Goldman Sachs, which requires us to provide certain periodic information but does not require the posting of margin. As a result of changes in the market value of our derivative positions, we have recorded both amounts receivable from and payable to Goldman Sachs affiliates. At June 30, 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:
 
 
June 30,
2008
  
December 31,
2007
 
(In millions)
Derivative Assets (Liabilities):
              
Deferred Charges and Other Assets: Fair Value of Derivative Instruments
$
7.8
    
$
-
  
Current Liabilities: Fair Value of Derivative Instruments
$
(566.7
)
  
$
(239.8
)
Other Liabilities and Deferred Credits: Fair Value of Derivative Instruments
$
(1,154.5
)
  
$
(386.5
)

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 June 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: Related Parties” in our accompanying interim Consolidated Balance Sheets as of June 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
 

 
13
 
Knight Inc. Form 10-Q

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); see Note 12.
 
8.
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
 
Six Months
Ended
June 30, 2008
  
One Month
Ended
June 30, 2007
    
Five Months
Ended
May 31, 2007
 
(In millions)
    
(In millions)
Accounts Receivable
$
(463.7
)
  
$
(12.1
)
    
$
(31.9
)
Materials and Supplies Inventory
  
(5.3
)
    
(1.9
)
      
(1.7
)
Other Current Assets
  
(34.2
)
    
0.5
        
0.5
  
Accounts Payable
  
364.1
      
49.4
        
26.3
  
Other Current Liabilities
  
(402.9
)
    
72.0
        
(196.1
)
 
$
(542.0
)
  
$
107.9
      
$
(202.9
)

Supplemental Disclosures of Cash Flow Information:
 
 
Successor
Company
    
Predecessor
Company
 
Six Months
Ended
June 30, 2008
  
One Month
Ended
June 30, 2007
    
Five Months
Ended
May 31, 2007
 
(In millions)
    
(In millions)
Cash Paid During the Period for:
                        
Interest, Net of Amount Capitalized
$
358.0
    
$
41.2
      
$
381.8
  
Income Taxes Paid, Including Prior Period Amounts
$
399.6
    
$
5.1
      
$
133.3
  

During the six months ended June 30, 2008 and the five months ended May 31, 2007, Kinder Morgan Energy Partners acquired $2.3 million and $18.5 million, respectively, of assets by the assumption of liabilities.
 
During the six months ended June 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 12.
 
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.
 

 
14
 
Knight Inc. Form 10-Q

9.
Income Taxes
 
Income taxes from Continuing Operations included in our Consolidated Statements of Operations were as follows:
 
 
Successor
Company
    
Predecessor
Company
 
Three Months
Ended
June 30, 2008
  
One Month
Ended
June 30, 2007
    
Two Months
Ended
May 31, 2007
 
(Dollars in millions)
    
(Dollars in
millions)
Income Taxes                                          
$
19.4
    
$
21.3
      
$
47.8
  
Effective Tax Rate1                                          
  
10.1
%
    
43.3
%
      
78.7
%

 
Successor
Company
    
Predecessor
Company
 
Six Months
Ended
June 30, 2008
  
One Month
Ended
June 30, 2007
    
Five Months
Ended
May 31, 2007
 
(Dollars in millions)
    
(Dollars in
millions)
Income Taxes                                          
$
106.5
    
$
21.3
      
$
135.5
  
Effective Tax Rate1                                          
  
27.6
%
    
43.3
%
      
48.4
%
_______________
 
1
Excludes goodwill impairment charges related to non-deductible goodwill; see Note 3.
 
During the three and six months ended June 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 one month ended June 30, 2007 and the two 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, (iv) the impact of consolidating Kinder Morgan Energy Partners’ income tax provision, and (v) non-deductible fees associated with the Going Private transaction.
 

 
15
 
Knight Inc. Form 10-Q

10.
Comprehensive Income (Loss)
 
Our comprehensive income (loss) is as follows:
 
 
Successor
Company
    
Predecessor
Company
 
Three Months
Ended
June 30, 2008
  
One Month
Ended
June 30, 2007
    
Two Months
Ended
May 31, 2007
 
(In millions)
    
(In millions)
Net Income (Loss)
$
(3,860.6
)
  
$
30.2
      
$
78.3
  
Other Comprehensive Income (Loss), Net of Tax:
                        
Change in Fair Value of Derivatives Utilized for Hedging Purposes
  
(577.3
)
    
(19.0
)
      
0.5
  
Reclassification of Change in Fair Value of Derivatives to Net Income
  
95.9
      
(0.9
)
      
(0.3
)
Employee Benefit Plans:
                        
Prior Service Cost Arising During Period
  
(0.1
)
    
-
        
(1.7
)
Net Gain Arising During Period
  
(0.4
)
    
-
        
11.4
  
Amortization of Prior Service Cost Included in Net Periodic Benefit Costs
  
(0.1
)
    
-
        
(0.2
)
Amortization of Net Loss Included in Net Periodic Benefit Costs
  
0.1
      
-
        
0.5
  
Change in Foreign Currency Translation Adjustment
  
15.6
      
(1.4
)
      
30.8
  
Other Comprehensive Income (Loss)
  
(466.3
)
    
(21.3
)
      
41.0
  
  
                        
Comprehensive Income (Loss)
$
(4,326.9
)
  
$
8.9
      
$
119.3
  

 
Successor
Company
    
Predecessor
Company
 
Six Months
Ended
June 30, 2008
  
One Month
Ended
June 30, 2007
    
Five Months
Ended
May 31, 2007
 
(In millions)
    
(In millions)
Net Income (Loss)
$
(3,754.9
)
  
$
30.2
      
$
65.9
  
Other Comprehensive Income (Loss), Net of Tax:
                        
Change in Fair Value of Derivatives Utilized for Hedging Purposes
  
(797.0
)
    
(19.0
)
      
(21.3
)
Reclassification of Change in Fair Value of Derivatives to Net Income
  
211.4
      
(0.9
)
      
10.3
  
Employee Benefit Plans:
                        
Prior Service Cost Arising During Period
  
0.3
      
-
        
(1.7
)
Net Gain Arising During Period
  
1.1
      
-
        
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
)
    
-
        
1.4
  
Change in Foreign Currency Translation Adjustment
  
(8.7
)
    
(1.4
)
      
40.1
  
Other Comprehensive Income (Loss)
  
(593.0
)
    
(21.3
)
      
39.8
  
  
                        
Comprehensive Income (Loss)
$
(4,347.9
)
  
$
8.9
      
$
105.7
  

The Accumulated Other Comprehensive Loss balance of $856.3 million included in the accompanying interim Consolidated Balance Sheet at June 30, 2008 consisted of (i) $837.1 million representing unrecognized net losses on hedging activities, (ii) $9.8 million representing foreign-currency translation gain adjustments, (iii) $0.3 million, and $28.7 million representing unrecognized prior service costs and net losses relating to the employee benefit plans, respectively.
 

 
16
 
Knight Inc. Form 10-Q

11.
Kinder Morgan Management, LLC
 
On May 15, 2008, Kinder Morgan Management made a distribution of 0.017716 of its shares per outstanding share (1,305,429 total shares) to shareholders of record as of April 30, 2008, based on the $0.96 per common unit distribution declared by Kinder Morgan Energy Partners. On August 14, 2008, Kinder Morgan Management will pay a share distribution of .018124 shares per outstanding share (1,359,152 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. Kinder Morgan Management’s distributions are paid in the form of additional shares or fractions thereof calculated by dividing the Kinder Morgan Energy Partners cash distribution per common unit by the average market price of a Kinder Morgan Management share determined for a ten-trading day period ending on the trading day immediately prior to the ex-dividend date for the shares.
 
12.
Business Combinations, Investments, and Sales
 
During the first six months of 2008, we did not complete any previously unannounced material business acquisitions or enter into any new joint ventures; however, we did record 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.
 
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.
 
The acquisition both expanded and complemented Kinder Morgan Energy Partners’ existing terminal operations and all of the acquired assets are included in our 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 Liabilities and Deferred Credits: Other” by $1.1 million.
 
Additionally, on September 1, 2007, Kinder Morgan Energy Partners acquired certain bulk terminals assets from Marine Terminals, Inc. for an aggregate consideration of approximately $101.6 million, consisting of $100.4 million in cash and an assumed liability of $1.2 million. The acquired assets and operations are included in our Terminals – KMP business segment and 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.
 
Based on Kinder Morgan Energy Partner’s 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,” $18.1 million to “Goodwill,” and $1.0 million to “Current Assets: Other” or “Deferred Charges and Other Assets: Other.”  As of June 30, 2008, the allocation of the purchase price was preliminary, pending final determination of certain post-closing adjustments pursuant to the purchase and sale agreement. We do not expect these final purchase price adjustments to be significant, and we expect all adjustments and settlements will be completed in the third quarter of 2008.
 
The allocation to “Other Intangibles, Net” included a $20.1 million amount representing the fair value of a service contract, acquired with the bulk terminal facilities from Marine Terminals, Inc., 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.
 

 
17
 
Knight Inc. Form 10-Q

Sale of 80% of NGPL
 
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 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 14).
 
Investment in Rockies Express Pipeline
 
In the first six 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 to “Investments” in the accompanying interim Consolidated Balance Sheet as of June 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 six months ended June 30, 2008. Kinder Morgan Energy Partners owns a 51% equity interest in the West2East Pipeline LLC.
 
On June 24, 2008, Rockies Express Pipeline LLC completed a private offering of senior notes. It issued an aggregate $1.3 billion in principal amount of fixed rate senior notes under an indenture between itself and U.S. Bank National Association, as trustee, in a private transaction that was not subject to the registration requirements of the Securities Act of 1933, but instead was subject to the requirements of Rule 144A under the Act. 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 short-term commercial paper borrowings.
 
The indenture included the issuance of three separate series of notes, as follows:
 
 
·
$500 million in principal amount of 6.25% senior notes due July 15, 2013;
 
 
·
$550 million in principal amount of 6.85% senior notes due July 15, 2018; and
 
 
·
$250 million in principal amount of 7.50% senior notes due July 15, 2038.
 
Interest on the notes will be paid semiannually on January 15 and July 15 of each year, commencing on January 15, 2009. All payments of principal and interest in respect of the notes are the sole obligation of Rockies Express Pipeline LLC. Noteholders will have no recourse against Kinder Morgan Energy Partners, Sempra Energy or ConocoPhillips, 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.
 
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, we exchanged our $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. These notes are included in the accompanying interim Consolidated Balance Sheet at June 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.
 

 
18
 
Knight Inc. Form 10-Q

We continue to own a one-third common equity interest in Express US Holdings LP.
 
13.
Discontinued Operations
 
North System Natural Gas Liquids Pipeline System
 
On October 5, 2007, Kinder Morgan Energy Partners announced that it had completed the previously announced 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 six months ended June 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.
 
On March 5, 2007, we entered into a definitive agreement to sell 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). This transaction closed on June 15, 2007, for approximately $711 million (C$760 million) plus 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 and assumed 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, which expires in 2012, was utilized to reduce the capital gain associated with our sale of an 80% ownership interest in NGPL (see Note 12).
 
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
 
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the financial results of these operations have been reclassified to discontinued operations for all periods presented and reported in the caption,
 

 
19
 
Knight Inc. Form 10-Q

“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
June 30, 2008
  
One Month
Ended
June 30, 2007
    
Two Months
Ended
May 31, 2007
 
(In millions)
    
(In millions)
Operating Revenues
$
-
    
$
9.8
      
$
223.2
  
                         
Earnings (Loss) from Discontinued Operations
Before Income Taxes
  
(0.3
)
    
2.3
        
52.4
  
Income Taxes
  
-
      
-
        
13.0
  
Earnings (Loss) from Discontinued Operations
$
(0.3
)
  
$
2.3
      
$
65.4
  

 
Successor
Company
    
Predecessor
Company
 
Six Months
Ended
June 30, 2008
  
One Month
Ended
June 30, 2007
    
Five Months
Ended
May 31, 2007
 
(In millions)
    
(In millions)
Operating Revenues
$
-
    
$
9.8
      
$
921.8
  
                         
Earnings (Loss) from Discontinued Operations
Before Income Taxes
  
(0.4
)
    
2.3
        
393.2
  
Income Taxes
  
-
      
-
        
(94.6
)
Earnings (Loss) from Discontinued Operations
$
(0.4
)
  
$
2.3
      
$
298.6
  

The cash flows attributable to discontinued operations are included in our accompanying interim Consolidated Statements of Cash Flows for the six months ended June 30, 2008, the one month ended June 30, 2007, and 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.”
 
14.
Financing
 
Notes Payable
 
 
June 30, 2008
 
Short-term
Borrowings
Outstanding
Under
Revolving
Credit Facility
  
Commercial
Paper
Outstanding
  
Weighted-
Average
Interest Rate of
Short-term Debt
Outstanding
 
(In millions)
                           
Knight Inc. – Secured Debt1
  
$
265.0
    
$
-
      
3.61
%
  
Kinder Morgan Energy Partners – Unsecured Debt2
  
$
-
    
$
-
      
-
%
  
 
____________
 
1
The average short-term debt outstanding (and related weighted-average interest rate) was $168.4 million (3.95%) and $180.0 million (4.81%) during the three and six months ended June 30, 2008, respectively.
 
2
The average short-term debt outstanding (and weighted-average interest rate) was $380.4 million (2.85%) and $413.6 million (3.50%) during the three and six months ended June 30, 2008, respectively.
 
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
 

 
20
 
Knight Inc. Form 10-Q

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. There were no borrowings under the $1.85 billion credit facility as of June 30, 2008 or as of December 31, 2007. 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 2008 and 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. As of June 30, 2008, the amount available for borrowing under Kinder Morgan Energy Partners’ credit facility was reduced by an aggregate amount of $929.2 million, consisting of (i) a combined $620 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 $92.1 million in three letters of credit that support tax-exempt bonds issued by subsidiaries of Kinder Morgan Energy Partners, (iv) a combined $53.4 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, respectively, 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.
 
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.