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EX-32.1 - EXHIBIT - KINDER MORGAN MANAGEMENT LLCkmr-2014930ex321.htm
EX-31.1 - EXHIBIT - KINDER MORGAN MANAGEMENT LLCkmr-2014930ex311.htm
EX-99.1 - EXHIBIT - KINDER MORGAN MANAGEMENT LLCkmp-2014930ex991.htm
EX-31.2 - EXHIBIT - KINDER MORGAN MANAGEMENT LLCkmr-2014930ex312.htm
EXCEL - IDEA: XBRL DOCUMENT - KINDER MORGAN MANAGEMENT LLCFinancial_Report.xls
EX-32.2 - EXHIBIT - KINDER MORGAN MANAGEMENT LLCkmr-2014930ex322.htm

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

F O R M 10-Q
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

or

[   ]
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 1-16459
KINDER MORGAN MANAGEMENT, LLC
(Exact name of registrant as specified in its charter)

Delaware
  
76-0669886
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)

1001 Louisiana Street, Suite 1000, Houston, Texas 77002
(Address of principal executive offices) (zip code)
Registrant’s telephone number, including area code: 713-369-9000


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 has submitted electronically and posted on its corporate Website, 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 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 þ Accelerated filer o  Non-accelerated filer o (Do not check if a smaller reporting company)  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 for each of the registrant’s classes of common equity, as of October 24, 2014 was four voting shares and 133,966,224 listed shares.

DOCUMENTS INCORPORATED BY REFERENCE

Quarterly Report on Form 10-Q of Kinder Morgan Energy Partners, L.P. for the quarter ended September 30, 2014.


Kinder Morgan Management, LLC Form 10-Q



KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
TABLE OF CONTENTS


  
 
Page
Number
 
Glossary
 
Information Regarding Forward-Looking Statements
 
 
 
 
PART I. FINANCIAL INFORMATION
 
  
 
 
Item 1.
Financial Statements. (Unaudited)
 
 
Consolidated Statements of Income and Comprehensive Income – Three and Nine Months Ended September 30, 2014 and 2013
 
Consolidated Balance Sheets – September 30, 2014 and December 31, 2013
 
Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2014 and 2013
 
Consolidated Statements of Shareholders’ Equity – Nine Months Ended September 30, 2014 and 2013
 
Notes to Consolidated Financial Statements                                                                                                 
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
 
 
 
Item 4.
Controls and Procedures.
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings.
 
 
 
Item 1A.
Risk Factors.
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
 
 
 
Item 3.
Defaults Upon Senior Securities.
 
 
 
Item 4.
Mine Safety Disclosures.                                                                                                         
 
 
 
Item 5.
Other Information.
 
 
 
Item 6.
Exhibits.
 
 
 
 
Signature
 


 

1

Kinder Morgan Management, LLC Form 10-Q



KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
 
 
Company Abbreviations
 
 
 
 
 
 
 
Copano
=
Copano Energy, L.L.C.
 
KMI
=
Kinder Morgan, Inc. and its majority-owned and controlled subsidiaries
EPNG
=
El Paso Natural Gas Company, L.L.C.
 
KMP
=
Kinder Morgan Energy Partners, L.P. and its majority-owned and controlled subsidiaries
EPB
=
El Paso Pipeline Partners, L.P. and its majority-owned and controlled subsidiaries
 
TGP
=
Tennessee Gas Pipeline Company, L.L.C.
KMGP
=
Kinder Morgan G.P., Inc.
 
 
 
 
 
 
 
 
 
 
 
Unless the context otherwise requires, references to “we,” “us,” “our” or “KMR” are intended to mean Kinder Morgan Management, LLC, and its consolidated subsidiary, Kinder Morgan Services LLC.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Industry and Other Terms
 
 
 
 
 
 
 
CO2
=
carbon dioxide
 
LLC
=
limited liability company
FASB
=
Financial Accounting Standards Board
 
SEC
=
United States Securities and Exchange Commission
GAAP
=
United States Generally Accepted Accounting Principles
 
 
 
 
 
 
 
 
 
 
 
 


2

Kinder Morgan Management, LLC Form 10-Q


Information Regarding Forward-Looking Statements
 
This report includes forward-looking statements. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. They use words such as “anticipate,” “believe,” “intend,” “plan,” “projection,” “forecast,” “strategy,” “position,” “continue,” “estimate,” “expect,” “may,” or the negative of those terms or other variations of them or comparable terminology. In particular, statements expressed or implied concerning future actions, conditions or events, future operating results or the ability to generate sales, income or cash flow, or to pay dividends or to make distributions are forward-looking statements. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Future actions, conditions or events and future results of our operations and those of KMP may differ materially from those expressed in these forward-looking statements. Please see “Information Regarding Forward-Looking Statements” for KMP included in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, included in this filing as Exhibit 99.1 and incorporated herein by reference. Many of the factors that will determine these results are beyond our ability to control or predict.
 
See “Information Regarding Forward-Looking Statements” and Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 (2013 Form 10-K) and Item 1A “Risk Factors” included elsewhere in this report for a more detailed description of factors that may affect the forward-looking statements. When considering forward-looking statements, one should keep in mind the risk factors described in our 2013 Form 10-K and the KMP Annual Report on Form 10-K for the year ended December 31, 2013 (KMP 2013 Form 10-K). The risk factors could cause our actual results to differ materially from those contained in any forward-looking statement. Because of these risks and uncertainties, you should not place undue reliance on any forward-looking statement. We plan to provide updates to projections included in this report when we believe previously disclosed projections no longer have a reasonable basis.


3

Kinder Morgan Management, LLC Form 10-Q


PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements.
 
KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In millions except per share amounts)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Equity in earnings of Kinder Morgan Energy Partners, L.P.
$
138

 
$
69

 
$
274

 
$
340

Income tax expense
46

 
22

 
93

 
149

 
 
 
 
 
 
 
 
Net income
$
92

 
$
47

 
$
181

 
$
191

 
 
 
 
 
 
 
 
Earnings per share
 

 
 

 
 

 
 

Basic and diluted
$
0.69

 
$
0.39

 
$
1.39

 
$
1.61

 
 
 
 
 
 
 
 
Number of shares used in computing earnings per share
 

 
 

 
 

 
 

Basic and diluted
133

 
121

 
129

 
118



 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
92

 
$
47

 
$
181

 
$
191

Equity in other comprehensive income (loss) of Kinder Morgan Energy Partners L.P., net of tax (expense) benefit of $(3), $-, $5, and $6 million, respectively
6

 

 
(9
)
 
(11
)
Comprehensive income
$
98

 
$
47

 
$
172

 
$
180


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


4

Kinder Morgan Management, LLC Form 10-Q


KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In millions, except shares)
 
 
September 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets
 
 
 
Accounts receivable – affiliated party
$
14

 
$
10

Other current assets
1

 
1

Total current assets
15

 
11

 
 
 
 
Investment in Kinder Morgan Energy Partners, L.P.
4,475

 
4,081

 
 
 
 
Total Assets
$
4,490

 
$
4,092

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

 
 
 
 
Current liabilities
 

 
 

Accounts payable
$
3

 
$
3

Other current liabilities
12

 
8

Total current liabilities
15

 
11

 
 
 
 
Deferred income taxes
155

 
73

 
 
 
 
     Total Liabilities
170

 
84

 
 
 
 
Commitments and contingencies (Note 7)
 
 
 
 
 
 
 
Shareholders’ Equity
 

 
 

Voting shares – unlimited authorized; 4 voting shares issued and outstanding

 

Listed shares – unlimited authorized; 133,966,224 and 125,323,730 listed shares issued and outstanding, respectively
6,816

 
6,113

Retained deficit
(2,490
)
 
(2,108
)
Accumulated other comprehensive (loss) income
(6
)
 
3

Total Shareholders’ Equity
4,320

 
4,008

 
 
 
 
Total Liabilities and Shareholders’ Equity
$
4,490

 
$
4,092

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

5

Kinder Morgan Management, LLC Form 10-Q


KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)

 
Nine Months Ended September 30,
 
2014
 
2013
Cash Flows From Operating Activities
 
 
 
Net income
$
181

 
$
191

Adjustments to reconcile net income to net cash flows from operating activities
 

 
 

Deferred income taxes
93

 
149

Equity in earnings of Kinder Morgan Energy Partners, L.P.
(274
)
 
(340
)
Changes in components of working capital
 

 
 

Accounts receivable – affiliated party
(4
)
 
(3
)
Other current assets

 
(1
)
Other current liabilities
4

 
4

Net Cash Provided by Operating Activities

 

 
 
 
 
Cash Flows From Investing Activities
 
 
 
Purchase of i-units of Kinder Morgan Energy Partners, L.P.
(134
)
 
(145
)
Net Cash Used in Investing Activities
(134
)
 
(145
)
 
 
 
 
Cash Flows From Financing Activities
 
 
 
Proceeds from issuance of shares
134

 
145

Net Cash Provided by Financing Activities
134

 
145

 
 
 
 
Net Increase in Cash and Cash Equivalents

 

Cash and Cash Equivalents, beginning of period

 

Cash and Cash Equivalents, end of period
$

 
$


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

6

Kinder Morgan Management, LLC Form 10-Q


KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In millions, except shares)
(Unaudited)

 
Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
Shares
 
Amount
 
Shares
 
Amount
Voting Shares
 
 
 
 
 
 
 
Beginning Balance
4

 
$

 
3

 
$

Share distributions

 

 
1

 

Ending Balance
4

 

 
4

 

 
 
 
 
 
 
 
 
Listed Shares
 
 
 
 
 
 
 
Beginning Balance
125,323,730

 
6,113

 
115,118,335

 
5,201

Share distributions
6,907,981

 
563

 
5,411,719

 
449

Share issuances
1,734,513

 
134

 
1,757,300

 
145

Tax impact of KMI drop-down to KMP (Note 3)

 

 

 
26

Tax impact of KMP Acquisition of Copano (Note 3)

 
6

 

 
63

Ending Balance
133,966,224

 
6,816

 
122,287,354

 
5,884

 
 
 
 
 
 
 
 
Retained Deficit
 
 
 
 
 
 
 
Beginning Balance
 
 
(2,108
)
 
 
 
(1,755
)
Net income
 
 
181

 
 
 
191

Share distributions
 
 
(563
)
 
 
 
(449
)
Ending Balance
 
 
(2,490
)
 
 
 
(2,013
)
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive (Loss) Income (net of tax)
 
 
 
 
 
 
 
Beginning Balance
 
 
3

 
 
 
18

Changes in accumulated other comprehensive loss
 
 
(9
)
 
 
 
(11
)
Ending Balance
 
 
(6
)
 
 
 
7

 
 
 
 
 
 
 
 
Total Shareholders’ Equity
133,966,228

 
$
4,320

 
122,287,358

 
$
3,878


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



7

Kinder Morgan Management, LLC Form 10-Q


KINDER MORGAN MANAGEMENT, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
1.   General
 
Organization
 
Kinder Morgan Management, LLC is a publicly traded Delaware LLC that was formed on February 14, 2001. We are a limited partner of KMP, a publicly traded limited partnership whose common units are traded on the New York Stock Exchange under the symbol “KMP,” through our ownership of all of KMP’s i-units. KMGP, the common equity of which is indirectly wholly owned by KMI, is the general partner of KMP and owns all of our voting shares. KMGP, pursuant to a delegation of control agreement among us, KMGP and KMP, has delegated to us, to the fullest extent permitted under Delaware law and KMP’s limited partnership agreement, all of its rights and powers to manage and control the business and affairs of KMP, subject to KMGP’s right to approve specified actions. Our success is dependent upon our operation and management of KMP and its resulting performance. See Note 5 for summarized income statement information for KMP.  
 
We have prepared our accompanying unaudited consolidated financial statements under the rules and regulations of the SEC. These rules and regulations conform to the accounting principles contained in the FASB’s Accounting Standards Codification. Under such rules and regulations, all significant intercompany items have been eliminated in consolidation. Additionally, we have condensed or omitted certain information and notes normally included in financial statements prepared in conformity with the codification. We believe, however, that our disclosures are adequate to make the information presented not misleading.

Our accompanying unaudited consolidated financial statements reflect normal adjustments, and also recurring adjustments that are, in the opinion of management, necessary for a fair statement of our financial results for the interim periods, and certain amounts from prior periods have been reclassified to conform to the current presentation. Interim results are not necessarily indicative of results for a full year; accordingly, you should read these interim consolidated financial statements in conjunction with our consolidated financial statements and related notes included in our 2013 Form 10-K. For additional information, see the KMP 2013 Form 10-K and KMP’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, included in this filing as Exhibit 99.1 and incorporated herein by reference.
  
Significant KMP Transactions

On May 1, 2013, KMP completed the acquisition of Copano, for a total purchase price of approximately $5.2 billion, including the assumption of debt and all other liabilities. It was a 100% unit for unit transaction with an exchange ratio of 0.4563 KMP common units for each Copano common unit. Copano, a midstream natural gas company with operations primarily in Texas, Oklahoma and Wyoming, provides comprehensive services to natural gas producers, including natural gas gathering, processing and treating and natural gas liquids fractionation.

Effective March 1, 2013, KMP acquired from KMI the remaining 50% ownership interest it did not already own in both EPNG and the El Paso midstream assets or Kinder Morgan Altamont LLC (formerly, El Paso Midstream Investment Company, L.L.C.), which we refer to in this report as the “midstream assets,” for an aggregate consideration of approximately $1.7 billion (including KMP’s proportional share of assumed debt borrowings as of March 1, 2013). In this report, we refer to this acquisition of assets by KMP from KMI as the “March 2013 drop-down transaction” and the combined group of assets acquired by KMP from KMI as the “March 2013 drop-down asset group.” KMP acquired its initial 50% ownership interest in the midstream assets from an investment vehicle affiliated with Kohlberg Kravis Roberts and Co. L.P. effective June 1, 2012. 

KMI acquired all of the assets included in the March 2013 drop-down asset group as part of its May 25, 2012 acquisition of El Paso Corporation. KMI accounted for its acquisition of the March 2013 drop-down asset group under the acquisition method of accounting, and KMP accounted for the March 2013 drop-down transaction as a combination of entities under common control. Accordingly, the KMP information in Note 5 has been prepared to reflect the transfer of EPNG and the remaining 50% of ownership interests in the midstream assets from KMI to KMP as if such transfers had taken place on the date when EPNG and the midstream assets met the accounting requirements for entities under common control — May 25, 2012 for EPNG and June 1, 2012 for the midstream assets. Specifically, KMP (i) consolidates its now 100% investments in the drop-down asset group as of the effective dates of common control, recognizing the acquired assets and assumed liabilities at KMI’s carrying value (including all of KMI’s purchase accounting adjustments); (ii) recognized any difference between its purchase price and the carrying value of the net assets it acquired as an adjustment to its Partners’ Capital (specifically, as an adjustment to its general partner’s and its noncontrolling interests’ capital interests); and (iii) retrospectively adjusted its consolidated financial statements, for any date after the effective dates of common control.

8

Kinder Morgan Management, LLC Form 10-Q



Additionally, because KMI both controls KMP and consolidates KMP’s financial statements into its consolidated financial statements as a result of its ownership of KMP’s general partner, KMP fully allocated to its general partner (i) the earnings of the March 2013 drop-down asset group for the periods beginning on the effective dates of common control (described above) and ending March 1, 2013 and (ii) incremental severance expense related to KMI’s acquisition of El Paso Corporation and allocated to KMP from KMI. These amounts are reported in “General Partner’s interest in pre-acquisition income from operations and severance expense of March 2013 drop-down asset group” in Note 5. The severance expense allocated to KMP was associated with the March 2013 drop-down asset group; however, KMP does not have any obligation to, nor did KMP pay, any amounts related to this expense.

For all periods beginning after the acquisition date of March 1, 2013, KMP allocated its earnings (including the earnings from the March 2013 drop-down asset group) to all of its partners according to its partnership agreement.

Investments in KMP
 
We use the equity method of accounting for our investment in KMP. We record, in the period in which it is earned, our share of the earnings of KMP attributable to the i-units we own.  We receive distributions from KMP in the form of additional i-units, which increase the number of i-units we own.  We issue additional shares (or fractions thereof) to our existing shareholders in an amount equal to the additional i-units received from KMP. At September 30, 2014, through our ownership of KMP i-units, we owned approximately 28.8% of all of KMP’s outstanding limited partner interests.

Recent Developments
On August 9, 2014, we entered into a definitive merger agreement (the “KMR Merger Agreement”) with KMI pursuant to which KMI will acquire directly or indirectly all of our outstanding shares that KMI and its subsidiaries do not already own. Upon the terms and subject to the conditions set forth in the KMR Merger Agreement, a wholly owned subsidiary of KMI will merge with and into KMR (the “KMR Merger”), with KMR as the surviving limited liability company.  KMI may, in its sole discretion and immediately after the KMR Merger, cause KMR to be merged with and into a wholly owned subsidiary of KMI (the "Second Step Merger Sub") with Second Step Merger Sub surviving such merger.
KMI has also entered into a merger agreement with KMP (the “KMP Merger Agreement”) and a merger agreement with EPB (the “EPB Merger Agreement”) pursuant to which KMI will acquire all of the outstanding common units of KMP and EPB that KMI and its subsidiaries do not already own. The transactions contemplated by the KMR Merger Agreement, the KMP Merger Agreement and the EPB Merger Agreement are referred to collectively as the “Merger Transactions.”
At the effective time of the KMR Merger, each voting share and listed share of KMR issued and outstanding (excluding listed shares owned by KMGP or KMI or any of its other subsidiaries, which shall be cancelled) will be converted into the right to receive 2.4849 shares of KMI common stock.
The completion of the KMR Merger is subject to the concurrent completion of the mergers contemplated by the KMP Merger Agreement and the EPB Merger Agreement. The completion of the KMR Merger is also subject to the satisfaction or waiver of customary closing conditions, including but not limited to: (a) approval of the KMR Merger Agreement by KMR’s shareholders; and (b) approval by KMI’s stockholders of (i) the amendment of KMI’s certificate of incorporation to increase the number of authorized shares of KMI common stock and (ii) the issuance of KMI common stock in the Merger Transactions, as required pursuant to certain rules of the New York Stock Exchange.
The KMR Merger Agreement contains certain customary termination rights for both KMR and KMI, and further provides that, in the event of termination of the KMR Merger Agreement under certain circumstances, KMR or KMI may be required to pay the other party a termination fee equal to $311 million. Either KMR or KMI may terminate the KMR Merger Agreement if the closing of the KMR Merger has not occurred on or before May 11, 2015.
The KMR Merger Agreement also contains customary covenants and agreements, including covenants and agreements relating to the conduct of KMR’s business between the date of the signing of the KMR Merger Agreement and the closing of the transactions contemplated under the KMR Merger Agreement. On October 22, 2014, we, KMP, EPB and KMI each (i) announced November 20, 2014 as the date for the respective special meetings of shareholders or unitholders to vote on the proposals related to the Merger Transactions; and (ii) commenced mailing of proxy materials to the respective shareholders or unitholders. Unitholders and shareholders of record at the close of business on October 20, 2014, will be entitled to vote at the applicable special meeting.

9

Kinder Morgan Management, LLC Form 10-Q


2.   Earnings per Share
 
Both basic and diluted earnings per share are computed based on the weighted-average number of shares outstanding during each period, adjusted for share splits. There are no securities outstanding that may be converted into or exercised for shares.
 
3.  Capitalization

As discussed above in Note 1, KMI completed the March 2013 drop-down transaction with KMP during the first quarter of 2013 and during the second quarter of 2013, KMP acquired Copano. The March 2013 drop-down transaction was treated as an intercompany transfer of assets between KMI (an affiliate and shareholder of us) and KMP. KMP’s May 2013 acquisition of Copano in a unit for unit transaction with an exchange ratio of 0.4563 KMP common units for each Copano common unit resulted in KMP recording approximately $1.1 billion of nondeductible goodwill. Our and KMI’s accounting policy is to apply the look-through method of recording deferred taxes on the outside book tax basis difference in its investments without regard to nondeductible goodwill. The adjustments to our deferred tax liability as a result of (i) the intercompany transaction (including the associated transfer of nondeductible goodwill to KMP); and (ii) the increase in KMP’s nondeductible goodwill during the measurement period related to the Copano acquisition, are reflected as offsets to our shareholders’ equity. As a result of these two transactions, we have recorded decreases to our deferred tax liability and offsetting increases to our shareholders’ equity in the amounts of $6 million and $89 million in the nine months ended September 30, 2014 and 2013, respectively.
 
On May 4, 2012, we entered into an equity distribution agreement with Credit Suisse Securities (USA) LLC (Credit Suisse). Pursuant to the provisions of the equity distribution agreement, we may sell from time to time through Credit Suisse, as our sales agent, our shares having an aggregate offering amount of up to $500 million. During the nine months ended September 30, 2014, we issued 1,734,513 of our shares pursuant to our equity distribution agreement. We received net proceeds of $134 million from the issuance of these shares and we used the proceeds to purchase additional KMP i-units.
Sales of shares pursuant to our equity distribution agreement are made by means of ordinary brokers’ transactions on the New York Stock Exchange at market prices, in block transactions or as otherwise agreed between us and Credit Suisse. Under the terms of this agreement, we also may sell shares to Credit Suisse as principal for its own account at a price agreed upon at the time of the sale. Any sale of shares to Credit Suisse as principal would be pursuant to the terms of a separate agreement between us and Credit Suisse.
Our equity distribution agreement provides us the right, but not the obligation, to sell shares in the future, at prices we deem appropriate.  We retain at all times complete control over the amount and the timing of each sale, and we will designate the maximum number of shares to be sold through Credit Suisse, on a daily basis or otherwise as we and Credit Suisse agree.  Credit Suisse will then use its reasonable efforts to sell, as our sales agent and on our behalf, all of the designated shares.  We may instruct Credit Suisse not to sell shares if the sales cannot be effected at or above the price designated by us in any such instruction. Either we or Credit Suisse may suspend the offering of shares pursuant to the agreement by notifying the other party.

Share Distributions

Under the terms of our LLC agreement, except in connection with our liquidation, we do not pay distributions on our shares in cash but instead make distributions on our shares in additional shares or fractions of shares. At the same time KMP makes a distribution on its common units and i-units, we distribute on each of our shares that fraction of a share determined by dividing the amount of the cash distribution to be made by KMP on each common unit by the average closing market price of a share determined for the ten-trading day period ending on the trading day immediately prior to the ex-dividend date for our shares. The following table presents share distributions we have paid or declared in the three and nine months ended September 30, 2014 and 2013.

10

Kinder Morgan Management, LLC Form 10-Q



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Equivalent distribution value per share declared for the period(a)
$
1.40

 
$
1.35

 
$
4.17

 
$
3.97

Equivalent distribution value per share paid in the period(a)
$
1.39

 
$
1.32

 
$
4.13

 
$
3.91

Total number of share distributions paid in the period
2,283,909

 
1,880,172

 
6,907,981

 
5,411,720

__________
(a)
This is the cash distribution for each KMP common unit declared for the period or paid in the period, as applicable, indicated and is used to calculate our distribution of shares as discussed above. Because of this calculation, the market value of the shares distributed on the date of distribution may be less or more than the cash distribution per common unit of KMP.  

Subsequent Event
On October 15, 2014, we declared a share distribution, payable on November 14, 2014 to shareholders of record as of October 31, 2014. This share distribution will be determined by dividing:
$1.40, the cash amount to be distributed per KMP common unit

by

the average of our shares’ closing market prices from October 15-28, 2014, the ten consecutive trading days preceding the date on which our shares began to trade ex-dividend under the rules of the New York Stock Exchange.

4.   Business Activities and Related Party Transactions
 
We do not receive a fee for our services under the delegation of control agreement, nor do we receive any margin or profit when we are reimbursed for expenses incurred. We incurred, on behalf of KMP, approximately $86 million and $266 million of expenses during the three and nine months ended September 30, 2014, respectively and approximately $82 million and $245 million of expenses during the three and nine months ended September 30, 2013, respectively. The expense reimbursements by KMP to us are accounted for as a reduction to the expense incurred by us. At September 30, 2014 and December 31, 2013, $14 million and $10 million, respectively, primarily receivables from KMP, are recorded in the caption “Accounts receivable – affiliated party” in the accompanying interim consolidated balance sheets.

One of our affiliates provides, and incurs expense with respect to, payroll and related services to KMP. These expenses are reimbursed by KMP at cost. These expenses totaled approximately $93 million and $324 million during the three and nine months ended September 30, 2014, respectively and approximately $93 million and $337 million during the three and nine months ended September 30, 2013, respectively.
 
5.    Summarized Income Statement Information for KMP

Following is summarized income statement information for KMP (in millions).

11

Kinder Morgan Management, LLC Form 10-Q


 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenues
$
3,933

 
$
3,381

 
$
11,162

 
$
9,059

Operating costs, expenses and other
2,772

 
2,514

 
8,213

 
6,807

Operating income
$
1,161

 
$
867

 
$
2,949

 
$
2,252

 
 
 
 
 
 
 
 
Net income(a)
$
976

 
$
697

 
$
2,399

 
$
2,499

 
 
 
 
 
 
 
 
Net income attributable to KMP
963

 
689

 
2,370

 
2,472

 
 
 
 
 
 
 
 
General Partner’s interest in pre-acquisition income from operations and severance expense of March 2013 drop-down asset group
1

 
(2
)
 
(5
)
 
11

Remaining General Partner’s interest in income from continuing operations
476

 
436

 
1,393

 
1,260

 
 
 
 
 
 
 
 
Limited Partners’ interest in net income
486

 
255

 
982

 
1,201

____________
(a)
Three and nine month 2014 amounts include $198 million of earnings associated with the early termination of a long-term natural gas transportation contract with a customer. The nine month 2013 amounts include (i) a $558 million gain from the remeasurement of KMP’s previously held 50% equity interest in Eagle Ford Gathering LLC to fair value as a result of KMP’s acquisition of Copano in May 2013 and (ii) a $177 million increase in expense associated with adjustments to legal liabilities related to both transportation rate case and environmental matters. The three and nine month 2013 amounts include a $1 million decrease and a $140 million increase, respectively, in after-tax loss and gain amounts from the sale of KMP’s equity and debt investments in the Express pipeline system.

Notwithstanding the consolidation of KMP and its subsidiaries into KMI’s financial statements, except as explicitly disclosed, KMI is not liable for, and its assets are not available to satisfy, the obligations of KMP and/or its subsidiaries and vice versa. Responsibility for settlements of obligations reflected in KMI’s or KMP’s financial statements are a legal determination based on the entity that incurs the liability.
 
6.   Income Taxes
 
We are an LLC that has elected to be treated as a corporation for federal income tax purposes. Our income taxes consist solely of deferred income tax. Deferred income tax assets and liabilities are recognized for temporary differences between the basis of our assets and liabilities for financial and tax reporting purposes. We have excluded nondeductible goodwill associated with our investment in KMP. Currently, our only such temporary difference results from our investment in KMP. Changes in tax legislation are included in the relevant computations in the period in which such changes are effective.

Income taxes included in our interim consolidated statements of income are as follows (in millions, except percentages):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Income tax expense
$
46

 
$
22

 
$
93

 
$
149

Effective tax rate
33.3
%
 
31.9
%
 
33.9
%
 
43.8
%

For the three and nine months ended September 30, 2014, our effective tax rate was lower than the statutory federal rate of 35% primarily due to an increase in our share of nondeductible goodwill associated with our investment in KMP, partially offset by state income taxes.

For the three months ended September 30, 2013, our effective tax rate was lower than the statutory federal rate of 35% primarily due to an increase in our share of nondeductible goodwill associated with our investment in KMP. For the nine months ended September 30, 2013, our effective tax rate was higher than the statutory federal rate of 35% primarily due to state income taxes and a decrease in our share of nondeductible goodwill associated with our investment in KMP.


12

Kinder Morgan Management, LLC Form 10-Q


7. Legal Proceedings

Mission Valley Terminal Lawsuit

In August 2007, the City of San Diego, on its own behalf and purporting to act on behalf of the People of the State of California, filed a lawsuit against KMR and several affiliates seeking injunctive relief and unspecified damages allegedly resulting from hydrocarbon and methyl tertiary butyl ether (MTBE) impacted soils and groundwater beneath the City’s stadium property in San Diego arising from historic operations at the Mission Valley terminal facility.  The case was filed in the Superior Court of California, San Diego County, case number 37-2007-00073033-CU-OR-CTL.  On September 26, 2007, we removed the case to the U.S. District Court, Southern District of California, case number 07CV1883WCAB.  The City disclosed in discovery that it is seeking approximately $170 million in damages for alleged lost value/lost profit from the redevelopment of the City’s property and alleged lost use of the water resources underlying the property.  Later, in 2010, the City amended its initial disclosures to add claims for restoration of the site as well as a number of other claims that increased its claim for damages to approximately $365 million.

On November 29, 2012, the Court issued a Notice of Tentative Rulings on the parties’ summary adjudication motions.  The Court tentatively granted our partial motions for summary judgment on the City’s claims for water and real estate damages and the State’s claims for violations of California Business and Professions Code § 17200, tentatively denied the City’s motion for summary judgment on its claims of liability for nuisance and trespass, and tentatively granted our cross motion for summary judgment on such claims.  On January 25, 2013, the Court rendered judgment in favor of all defendants on all claims asserted by the City.

On February 20, 2013, the City of San Diego filed a notice of appeal of this case to the U.S. Court of Appeals for the Ninth Circuit.  The appeal is currently pending.

This site has been, and currently is, under the regulatory oversight and order of the California Regional Water Quality Control Board (RWQCB).  KMP’s subsidiary, SFPP, L.P. (SFPP), has completed the soil and groundwater remediation at the City of San Diego’s stadium property site and will continue quarterly sampling and monitoring through 2014 as part of the compliance evaluation required by the RWQCB. SFPP's remediation effort is now focused on its adjacent Mission Valley Terminal site.

On May 7, 2013, the City of San Diego petitioned the California Superior Court for a writ of mandamus seeking an order setting aside the RWQCB’s approval of an amendment to KMP’s permit to increase the discharge of water from KMP’s groundwater treatment system to the City of San Diego’s municipal storm sewer system. On October 10, 2014, the court ruled that the City’s petition was moot and dismissed the case because the amendment to the permit was no longer required and had been rescinded by the RWQCB at the request of SFPP upon SFPP’s completion of soil and groundwater remediation at the City’s stadium property site.
     
Litigation Relating to the Merger Transactions

Four putative class action lawsuits were filed in the Court of Chancery of the State of Delaware in connection with the proposed merger transactions: (i) William Bryce Arendt v. Kinder Morgan Energy Partners, L.P., et al., Case No. 10093-VCL; (ii) The Haynes Family Trust U/A. v. Kinder Morgan Energy Partners, L.P., et al., Case No. 10118-VCL; (iii) George H. Edwards, et al., v. El Paso Pipeline Partners, L.P., et al., Case No. 10160-VCL; and (iv) Irwin Berlin v. Kinder Morgan Energy Partners, L.P., et al., Case No. 10191-VCL. On September 28, 2014, the Arendt and Haynes actions were consolidated under the caption In re Kinder Morgan Energy Partners, L.P. Unitholders Litigation, Case No. 10093-VCL, with the complaint in the Haynes action designated as the operative complaint. Among the relief sought in the complaints filed in these lawsuits is to enjoin one or more of the proposed merger transactions.

The plaintiffs in the In re Kinder Morgan Energy Partners, L.P. Unitholders Litigation action allege that (i) KMR, KMGP, and individual defendants breached the express terms of and their duties under the KMP partnership agreement, including the implied duty of good faith and fair dealing, by entering into the KMP Transaction and by failing to adequately disclose material facts related to the transaction; (ii) KMI aided and abetted such breach; and (iii) KMI tortiously interfered with the rights of the plaintiffs and the putative class under the KMP partnership agreement by causing KMGP and the individual defendants to breach their duties under the KMP partnership agreement. Further, plaintiffs allege that the KMP partnership agreement mandates that the transaction be approved by two-thirds of KMP’s limited partner interests.

On September 26, 2014, plaintiffs filed a motion for expedited proceedings. On September 29, 2014, plaintiffs filed a motion for a preliminary injunction seeking to enjoin the KMP vote.

13

Kinder Morgan Management, LLC Form 10-Q



In the George H. Edwards, et al. v. El Paso Pipeline Partners, L.P., et al. action, plaintiffs allege that (i) El Paso Pipeline GP Company, L.L.C. (EPGP) breached the implied duty of good faith and fair dealing by approving the EPB transaction in bad faith; (ii) EPGP, the EPGP directors named as defendants, E Merger Sub LLC, and KMI aided and abetted such breach; (iii) EPGP breached its duties under the EPB partnership agreement, including the implied duty of good faith and fair dealing; and (iv) EPB, the EPGP directors named as defendants, E Merger Sub LLC, and KMI aided and abetted such breach and tortiously interfered with the rights of the EPB unitholders under the EPB partnership agreement.

The plaintiffs also allege that (i) KMR and KMGP breached their duties under the KMP partnership agreement including the implied duty of good faith and fair dealing; and (ii) KMP, the KMGP directors named as defendants, P Merger Sub LLC, and KMI aided and abetted such breach and tortiously interfered with the rights of the KMP unitholders under the KMP partnership agreement. In addition, plaintiffs allege that KMR and KMGP breached the residual fiduciary duties owed to KMP unitholders, and KMP, the KMGP directors named as defendants, P Merger Sub LLC, and KMI aided and abetted such breach. Finally, plaintiffs allege that the KMP partnership agreement mandates that the KMP merger be approved, alternatively, by at least 95% of all of KMP’s limited partner interests, by at least two-thirds of KMP’s limited partner interests, or by at least two-thirds of KMP’s common unitholders. On September 26, 2014, plaintiffs filed a motion for expedited discovery, and a motion for a preliminary injunction seeking to enjoin the KMP vote.

On October 7, 2014, the Court ruled that expedited discovery and expedited proceedings could proceed with respect to claims relating to the vote required to approve the KMP merger. The Court has scheduled a hearing on this matter for October 31, 2014.

In the Irwin Berlin v. Kinder Morgan Energy Partners, L.P., et al. action, plaintiff alleges that (i) KMR, KMGP, KMI, and members of the Board of Directors of KMGP breached their fiduciary duties by entering into the KMP Transaction and by failing to adequately disclose material facts related to the transaction; (ii) KMI aided and abetted such breach; and (iii) KMGP breached its duty of good faith and fair dealing. Although KMP is listed as a defendant in the caption, no claims are asserted against it in the complaint.

The defendants believe the allegations against them lack merit, and they intend to vigorously defend these lawsuits.
                                                                                                                                                                                                                     
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
General
 
We are a publicly traded Delaware LLC, formed on February 14, 2001, that has elected to be treated as a corporation for federal income tax purposes. Our voting shares are owned by KMGP, of which KMI owns all the outstanding common equity. KMGP is the general partner of KMP.

Recent Developments

On August 9, 2014, KMI entered into a separate definitive merger agreement with each of KMP, KMR and EPB, pursuant to which KMI will acquire directly or indirectly all of the outstanding common units of KMP and EPB and all of the outstanding shares of KMR that KMI and its subsidiaries do not already own (the “Merger Transactions”).  The Merger Transactions are subject to approval of the stockholders, shareholders and unitholders of KMI, KMP, KMR and EPB, as applicable, and are expected to close in the fourth quarter of 2014. For a further discussion of the Merger Transactions, see Note 1 “General—Recent Developments.”

Business
 
We are a limited partner of KMP through our ownership of all of KMP’s i-units. KMGP has delegated to us, to the fullest extent permitted under Delaware law and KMP’s limited partnership agreement, all of its rights and powers to manage and control the business and affairs of KMP, subject to KMGP’s right to approve specified actions.

 See Note 1 to our consolidated financial statements included elsewhere in this report regarding the drop-down of assets from KMI to KMP.



14

Kinder Morgan Management, LLC Form 10-Q


Financial Condition
 
As indicated by the accompanying interim consolidated balance sheets, there has been no material change in our financial condition during the current quarter.

Results of Operations
 
Our results of operations consist of the offsetting expenses and receipts associated with our managing and controlling the business and affairs of KMP and our equity in the earnings of KMP attributable to the i-units we own. At September 30, 2014, through our ownership of i-units, we owned approximately 28.8% of all of KMP’s outstanding limited partner interests. We use the equity method of accounting for our investment in KMP and record earnings as described below. Our percentage ownership in KMP changes over time upon the distribution of additional i-units to us or upon issuances of additional common units or other equity securities by KMP.
 
Our earnings, as reported in the accompanying interim consolidated statements of income, represent equity in earnings of KMP attributable to the i-units we own, reduced by a deferred income tax provision. The deferred income tax provision is calculated based on the book/tax basis difference created by our recognition, under GAAP, of our share of the earnings of KMP. Our earnings per share (both basic and diluted) is our net income divided by our weighted-average number of outstanding shares during each period presented. There are no securities outstanding that may be converted into or exercised for our shares.
 
Following is summarized income statement information and segment earnings contribution by business segment for KMP. This information should be read in conjunction with the KMP 2013 Form 10-K, and the KMP Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, included in this filing as Exhibit 99.1 and incorporated herein by reference.

KMP 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(In millions)
Segment earnings before depreciation, depletion, amortization expense and amortization of excess cost of equity investments(a)
 
 
 
 
 
 
 
Natural Gas Pipelines(b)
$
863

 
$
635

 
$
2,221

 
$
2,315

CO2
388

 
340

 
1,083

 
1,040

Products Pipelines(c)
222

 
202

 
633

 
399

Terminals
249

 
217

 
696

 
610

Kinder Morgan Canada(d)
50

 
43

 
138

 
286

Total segment earnings before depreciation, depletion, amortization expense and amortization of excess cost of equity investments
1,772

 
1,437

 
4,771

 
4,650

Depreciation, depletion and amortization
(427
)
 
(377
)
 
(1,234
)
 
(1,062
)
Amortization of excess cost of equity investments
(3
)
 
(3
)
 
(11
)
 
(7
)
General and administrative expense
(126
)
 
(136
)
 
(411
)
 
(433
)
Interest expense, net of unallocable interest income
(238
)
 
(220
)
 
(708
)
 
(637
)
Unallocable income tax expense
(2
)
 
(4
)
 
(8
)
 
(10
)
Income from continuing operations
976

 
697

 
2,399

 
2,501

Loss from discontinued operations

 

 

 
(2
)
Net income
976

 
697

 
2,399

 
2,499

Net income attributable to noncontrolling interests
(13
)
 
(8
)
 
(29
)
 
(27
)
Net income attributable to KMP
$
963

 
$
689

 
$
2,370

 
$
2,472

 
 
 
 
 
 
 
 
General Partner’s interest in pre-acquisition income from operations and severance expense of March 2013 drop-down asset group
$
1

 
$
(2
)
 
$
(5
)
 
$
11

Remaining General Partner’s interest in income from continuing operations
476

 
436

 
1,393

 
1,260

Limited Partners’ interest in net income
486

 
255

 
982

 
1,201


15

Kinder Morgan Management, LLC Form 10-Q


___________
(a)
Includes revenues, earnings from equity investments, allocable interest income and other, net, less operating expenses,
allocable income taxes and other income, net.  Operating expenses include natural gas purchases and other costs of sales, operations and maintenance expenses, and taxes, other than income taxes.
(b)
Three and nine month 2014 amounts include $198 million of earnings associated with the early termination of a long-term natural gas transportation contract with a customer. Nine month 2013 amount includes a $558 million non-cash gain from the remeasurement of KMP’s previously held 50% equity interest in Eagle Ford Gathering LLC to fair value as a result of KMP’s acquisition of Copano in May 2013.
(c)
Nine month 2013 amount includes a $177 million increase in expense associated with adjustments to legal liabilities related to both transportation rate case and environmental matters.
(d)
Three and nine month 2013 amounts include a $1 million decrease and a $141 million increase, respectively, after-tax loss and gain amounts from the sale of KMP’s equity and debt investments in the Express pipeline system.

For the three and nine months ended September 30, 2014, KMP reported limited partners’ interest in net income of $486 million and $982 million, respectively, and $255 million and $1.2 billion for the three and nine months ended September 30, 2013, respectively. We reported net income for the three and nine months ended September 30, 2014 of $92 million and $181 million, respectively and net income of $47 million and $191 million for the three and nine months ended September 30, 2013, respectively.

Our net income for the three and nine months ended September 30, 2014 includes an increase of $35 million, net of income tax, which relates to our share of KMP’s $198 million of earnings associated with the early termination of a long-term natural gas transportation contract with a customer.

Our net income for the nine months ended September 30, 2013 includes (i) an increase of $100 million, net of income tax, which relates to our share of KMP’s $558 million gain from the remeasurement of KMP’s previously held 50% equity interest in Eagle Ford Gathering LLC to fair value as a result of KMP’s acquisition of Copano in May 2013; (ii) a decrease of $32 million, net of income tax, which relates to our share of KMP’s $177 million increase in expense associated with adjustments to legal liabilities related to both transportation rate case and environmental matters; and (iii) an increase of $27 million, net of tax, which relates to our share of KMP’s $140 million, net of tax, gain from the sale of its equity and debt investments in the Express pipeline system.
Liquidity and Capital Resources
 
Our authorized capital structure consists of two classes of interests: (1) our listed shares and (2) our voting shares, collectively referred to in this document as our “shares.” Additional classes of interests may be approved by our board and holders of a majority of our shares, excluding shares held by KMI and its affiliates.

The number of our shares outstanding will at all times equal the number of i-units of KMP outstanding, all of which we own. Under the terms of our LLC agreement, except in connection with our liquidation, we do not pay cash distributions on our shares in cash but we make distributions on our shares in additional shares or fractions of shares. At the same time KMP makes a distribution on its common units and i-units, we distribute on each of our shares that fraction of a share determined by dividing the amount of the cash distribution to be made by KMP on each common unit by the average closing market price of a share determined for a ten-trading day period ending on the trading day immediately prior to the ex-dividend date for our shares. See Note 3 of the accompanying notes to consolidated financial statements for further discussion of our share distribution activity.
 
We expect that our expenditures associated with managing and controlling the business and affairs of KMP and the reimbursement for these expenditures received by us from KMP will continue to be equal. As stated above, the distributions we expect to receive on the i-units we own will be in the form of additional i-units. Therefore, we expect neither to generate nor to require significant amounts of cash in ongoing operations. We currently have no debt and have no plans to incur any debt. Any cash received from the sale of additional shares will immediately be used to purchase additional i-units. Accordingly, we do not anticipate any other sources or needs for additional liquidity.
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
 
The nature of our business and operations is such that no activities or transactions of the type requiring discussion under this item are conducted or entered into.
 

16

Kinder Morgan Management, LLC Form 10-Q


Item 4.  Controls and Procedures.
 
As of September 30, 2014, our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon and as of the date of the evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There has been no change in our internal control over financial reporting during the quarter ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

PART II - OTHER INFORMATION
 
Item 1.  Legal Proceedings. 
See Note 7 “Legal Proceedings” to our consolidated financial statements.
 
Item 1A. Risk Factors.
 
There have been no material changes in or additions to the risk factors disclosed in Part I, Item 1A “Risk Factors” in our 2013 Form 10-K. Below are additional risk factors related to the recent announcement of our proposed merger with KMI.

Risks Relating to the Proposed Merger
The mergers that are part of the Merger Transactions are contingent upon each other, and the KMR merger is subject to other substantial conditions and may not be consummated even if the required KMI stockholder and KMR shareholder approvals are obtained.
Completion of the KMR merger is contingent upon completion of the KMP merger and the EPB merger, and vice versa. No merger will occur unless all three mergers occur. The KMP merger and the EPB merger are subject to the satisfaction or waiver of their own conditions, including approval of merger agreements by KMP’s and EPB’s respective unitholders, some of which are out of the control of KMI and all of which are out of the control of KMR. Further, KMI’s stockholders must approve an amendment to KMI’s certificate of incorporation to increase the number of authorized shares of KMI common stock and must approve the issuance of KMI common stock in the three mergers.
The KMR merger agreement contains other conditions that, if not satisfied or waived, would result in the KMR merger not occurring, even though the KMI stockholders and the KMR shareholders may have voted in favor of the merger-related proposals presented to them. Satisfaction of some of these other conditions to the KMR merger, such as receipt of required regulatory approvals, is not entirely in the control of KMI or KMR. In addition, KMI and KMR can agree not to consummate the KMR merger even if all stockholder and shareholder approvals have been received. The closing conditions to the KMR merger may not be satisfied, and KMI or KMR may choose not to, or may be unable to, waive an unsatisfied condition, which may cause the KMR merger not to occur.
KMR is subject to provisions that limit its ability to pursue alternatives to the KMR merger, could discourage a potential competing acquirer of KMR from making a favorable alternative transaction proposal and, in specified circumstances under the KMR merger agreement, could require KMR to pay a termination fee of $311 million to KMI.
Under the KMR merger agreement, KMR is restricted from entering into alternative transactions. Unless and until the KMR merger agreement is terminated, subject to specified exceptions KMR is restricted from soliciting, initiating, knowingly facilitating, knowingly encouraging or knowingly inducing or negotiating, any inquiry, proposal or offer for a competing acquisition proposal with any person. Under the KMR merger agreement, in the event of a potential change by the KMR special committee or the KMR board of its recommendation with respect to the KMR merger in light of a superior proposal or an intervening event, KMR must provide KMI with five days’ notice to allow KMI to propose an adjustment to the terms and conditions of the KMR merger agreement. These provisions could discourage a third party that may have an interest in

17

Kinder Morgan Management, LLC Form 10-Q


acquiring all or a significant part of KMR from considering or proposing that acquisition, even if such third party were prepared to pay consideration with a higher per share market value than the market value proposed to be received or realized in the KMR merger, or might result in a potential competing acquirer of KMR proposing to pay a lower price than it would otherwise have proposed to pay because of the added expense of the termination fee that may become payable in specified circumstances.
Under the KMR merger agreement, KMR may be required to pay to KMI a termination fee of $311 million if the KMR merger agreement is terminated under specified circumstances. If such a termination fee is payable, the payment of this fee could have material and adverse consequences to the financial condition and operations of KMR.
KMI and the other parties will incur substantial transaction-related costs in connection with the Transactions.
KMI and the other parties to the Transactions, including KMR, expect to incur a number of non-recurring transaction-related costs associated with completing the Transactions, which are currently estimated to total approximately $90 million, excluding expenses associated with expected financing, which expenses could be substantial. Non-recurring transaction costs include, but are not limited to, fees paid to legal, financial and accounting advisors, filing fees and printing costs. There can be no assurance that the elimination of certain costs due to the fact that KMP, KMR and EPB will no longer be public companies will offset the incremental transaction-related costs over time. Thus, any net cost savings may not be achieved in the near term, the long term or at all.
Failure to complete, or significant delays in completing, the KMR merger could negatively affect the trading price of KMR shares and the future business and financial results of KMR.
Completion of the KMR merger is not assured and is subject to risks, including the risks that approval of the KMR merger by the KMR shareholders or by governmental agencies is not obtained or that other closing conditions are not satisfied. If the KMR merger is not completed, or if there are significant delays in completing the KMR merger, the trading prices of KMR shares and the future business and financial results of KMR could be negatively affected, and will be subject to several risks, including the following:
KMR may be liable for damages to KMI under the terms and conditions of the KMR merger agreement;
negative reactions from the financial markets, including declines in the prices of KMR shares due to the fact that current prices may reflect a market assumption that the KMR merger will be completed;
having to pay certain significant costs relating to the KMR merger, including, in certain circumstances, a termination fee of $311 million; and
the attention of management of KMR will have been diverted to the KMR merger rather than its own operations and pursuit of other opportunities that could have been beneficial to KMR.
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.
 
None.
 
Item 3.  Defaults Upon Senior Securities.
 
None.
 
Item 4.  Mine Safety Disclosures.
 
None.
 
Item 5.  Other Information.
 
None.


18

Kinder Morgan Management, LLC Form 10-Q


Item 6.  Exhibits.
 
2.1

 
Agreement and Plan of Merger, dated as of August 9, 2014, among Kinder Morgan Management, LLC, Kinder Morgan, Inc. and R Merger Sub LLC (filed as exhibit 2.1 to Kinder Morgan Management, LLC’s Current Report on Form 8-K filed on August 12, 2014 and incorporated herein by reference).

10.1

 
Support Agreement, dated as of August 9, 2014, by and among Kinder Morgan Energy Partners, L.P., Kinder Morgan G.P., Inc., Kinder Morgan Management, LLC, El Paso Pipeline Partners, L.P., El Paso Pipeline GP Company, L.L.C., Richard D. Kinder and RDK Investments, Ltd (filed as exhibit 10.1 to Kinder Morgan Management, LLC’s Current Report on Form 8-K filed on August 12, 2014 and incorporated herein by reference).

31.1

 
Certification by Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2

 
Certification by Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1

 
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2

 
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1

 
Kinder Morgan Energy Partners, L. P. Quarterly Report on Form 10-Q for the quarter ended September 30, 2014.
101

 
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) our Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013; (ii) our Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013; (iii) our Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013; (iv) our Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013; (v) our Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2014 and 2013; and (vi) the notes to our Consolidated Financial Statements.



19

Kinder Morgan Management, LLC Form 10-Q


SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
By:
KINDER MORGAN MANAGEMENT, LLC,
 
 
 
 
Registrant
  
Date:
October 27, 2014
 
 
By:
 
/s/ Kimberly A. Dang
 
 
 
 
 
 
Kimberly A. Dang
Vice President and Chief Financial Officer
(principal financial and accounting officer)


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