NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Organization

General

Unless the context requires otherwise, references to "we," "us," "our" or the "Partnership" are intended to mean Kinder Morgan Energy Partners, L.P. and its consolidated subsidiaries. We have prepared the accompanying unaudited consolidated financial statements under the rules and regulations of the Securities and Exchange Commission. Under such rules and regulations, we have condensed or omitted certain information and notes normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America. We believe, however, that our disclosures are adequate to make the information presented not misleading. The consolidated financial statements reflect all adjustments which are solely normal and recurring adjustments that are, in the opinion of our management, necessary for a fair presentation of our financial results for the interim periods. You should read these 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, 2004.

Kinder Morgan, Inc. and Kinder Morgan Management, LLC

Kinder Morgan, Inc., a Kansas corporation, is the sole stockholder of Kinder Morgan (Delaware), Inc. Kinder Morgan (Delaware), Inc., a Delaware corporation, is the sole stockholder of our general partner, Kinder Morgan G.P., Inc. Kinder Morgan, Inc. is referred to as "KMI" in this report.

Kinder Morgan Management, LLC, a Delaware limited liability company, was formed on February 14, 2001. Our general partner owns all of Kinder Morgan Management, LLC's voting securities and, pursuant to a delegation of control agreement, our general partner delegated to Kinder Morgan Management, LLC, to the fullest extent permitted under Delaware law and our partnership agreement, all of its power and authority to manage and control our business and affairs, except that Kinder Morgan Management, LLC cannot take certain specified actions without the approval of our general partner. Under the delegation of control agreement, Kinder Morgan Management, LLC manages and controls our business and affairs and the business and affairs of our operating limited partnerships and their subsidiaries. Furthermore, in accordance with its limited liability company agreement, Kinder Morgan Management, LLC's activities are limited to being a limited partner in, and managing and controlling the business and affairs of us, our operating limited partnerships and their subsidiaries. Kinder Morgan Management, LLC is referred to as "KMR" in this report.

Basis of Presentation

Our consolidated financial statements include our accounts and those of our majority-owned and controlled subsidiaries and our operating partnerships. All significant intercompany items have been eliminated in consolidation. Certain amounts from prior periods have been reclassified to conform to the current presentation.

Net Income Per Unit

We compute Basic Limited Partners' Net Income per Unit by dividing our limited partners' interest in net income by the weighted average number of units outstanding during the period. Diluted Limited Partners' Net Income per Unit reflects the potential dilution, by application of the treasury stock method, that could occur if options to issue units were exercised, which would result in the issuance of additional units that would then share in our net income.

2. Acquisitions and Joint Ventures

During the first three months of 2005, we completed or made adjustments for the following acquisitions. Each of the acquisitions was accounted for under the purchase method and the assets acquired and liabilities assumed were recorded at their estimated fair market values as of the acquisition date. The preliminary allocation of assets and liabilities may be adjusted to reflect the final determined amounts during a short period of time following the acquisition. The results of operations from these acquisitions are included in our consolidated financial statements from the acquisition date.

                                                                            Allocation of Purchase Price
                                                         -------------------------------------------------------------------
                                                                                   (in millions)
                                                         -------------------------------------------------------------------
                                                                                 Property    Deferred
                                                          Purchase    Current     Plant &     Charges             Minority
Ref.   Date                  Acquisition                    Price      Assets    Equipment    & Other   Goodwill  Interest
----- --------------------------------------------------  ----------  --------   ---------   ---------  --------  ---------
(1)     1/02  Kinder Morgan Materials Services LLC......    $   14.4      $0.9       $13.5       $   -      $   -    $   -
(2)     8/04  Kinder Morgan Wink Pipeline, L.P..........       100.3       0.1        76.4        23.8          -        -
(3)    11/04  Charter Products Terminals................        75.2       3.7        56.5         3.0       13.1     (1.1)
(4)     1/05  Claytonville Oil Field Unit ..............    $    6.5      $  -       $ 6.5       $   -      $   -    $   -

(1) Kinder Morgan Materials Services LLC

Effective January 1, 2002, we acquired all of the equity interests of Kinder Morgan Materials Services LLC, formerly Laser Materials Services LLC, for an aggregate consideration of $14.4 million, consisting of approximately $11.1 million in cash and the assumption of approximately $3.3 million of liabilities, including long-term debt of $0.4 million. In the first quarter of 2005, we paid $0.3 million to the previous owners for final earn-out provisions pursuant to the purchase and sale agreement. Kinder Morgan Materials Services LLC currently operates approximately 60 transload facilities in 20 states. The facilities handle dry-bulk products, including aggregates, plastics and liquid chemicals. The acquisition of Kinder Morgan Materials Services LLC expanded our growing terminal operations and is part of our Terminals business segment.

(2) Kinder Morgan Wink Pipeline, L.P.

Effective August 31, 2004, we acquired all of the partnership interests in Kaston Pipeline Company, L.P. from KPL Pipeline Company, LLC and RHC Holdings, L.P. for a purchase price of approximately $100.3 million, consisting of $89.9 million in cash and the assumption of approximately $10.4 million of liabilities, including debt of $9.5 million. In September 2004, we paid the $9.5 million outstanding debt balance. We renamed the limited partnership Kinder Morgan Wink Pipeline, L.P., and since August 31, 2004, we have included its results as part of our CO2 business segment. The acquisition included a 450-mile crude oil pipeline system, consisting of four mainline sections, numerous gathering systems and truck off-loading stations. The mainline sections, all in Texas, have a total capacity of 115,000 barrels of crude oil per day. As part of the transaction, we entered into a long-term throughput agreement with Western Refining Company, L.P. to transport crude oil into Western's 107,000 barrel per day refinery in El Paso, Texas. As of April 30, 2005, we expected to invest approximately $13.7 million over the next two years to upgrade the assets. The acquisition allows us to better manage crude oil deliveries from our oil field interests in West Texas. Our allocation of the purchase price to assets acquired and liabilities assumed was based on an independent appraisal of fair market values. The $23.8 million of deferred charges and other assets in the table above represents the fair value of the intangible long-term throughput agreement.

(3) Charter Products Terminals

Effective November 5, 2004, we acquired ownership interests in nine refined petroleum products terminals in the southeastern United States from Charter Terminal Company and Charter-Triad Terminals, LLC for approximately $75.2 million, consisting of $72.4 million in cash and $2.8 million of assumed liabilities. Three terminals are located in Selma, North Carolina, and the remaining facilities are located in Greensboro and Charlotte, North Carolina; Chesapeake and Richmond, Virginia; Athens, Georgia; and North Augusta, South Carolina. We fully own seven of the terminals and jointly own the remaining two. The nine facilities have a combined 3.2 million barrels of storage. As of our acquisition date, we expected to invest an additional $2 million over the next two years to upgrade the facilities. All of the terminals are connected to products pipelines owned by either Plantation Pipe Line Company or Colonial Pipeline Company. The acquisition complements the existing terminals we own in the Southeast and increased our southeast terminal storage

capacity 76% (to 7.7 million barrels) and terminal throughput capacity 62% (to over 340,000 barrels per day). The acquired terminals are included as part of our Products Pipelines business segment. Our allocation of the purchase price to assets acquired and liabilities assumed is preliminary, pending final purchase price adjustments that may be necessary following an independent appraisal of fair market values. We expect the appraisal to be completed by the end of the second quarter of 2005.

(4) Claytonville Oil Field Unit

Effective January 31, 2005, we acquired an approximate 64.5% gross working interest in the Claytonville oil field unit located in Fisher County, Texas from Aethon I L.P. The field is located nearly 30 miles east of the SACROC unit in the Permian Basin of West Texas. Our purchase price was approximately $6.5 million, consisting of $6.2 million in cash and the assumption of $0.3 million of liabilities. Following our acquisition, we became the operator of the field, which at the time of acquisition was producing approximately 200 barrels of oil per day. The acquisition of this ownership interest complemented our existing carbon dioxide assets in the Permian Basin, and as of our acquisition date and pending further studies as to the technical and economic feasibility of carbon dioxide injection, we may invest an additional $30 million in the field in order to increase production to as high as 4,000 barrels of oil per day. The acquired operations are included as part of our CO2 business segment.

Pro Forma Information

The following summarized unaudited pro forma consolidated income statement information for the three months ended March 31, 2005 and 2004, assumes that all of the acquisitions we have made and joint ventures we have entered into since January 1, 2004, including the ones listed above, had occurred as of the beginning of the period presented. We have prepared these unaudited pro forma financial results for comparative purposes only. These unaudited pro forma financial results may not be indicative of the results that would have occurred if we had completed these acquisitions and joint ventures as of the beginning of the period presented or the results that will be attained in the future. Amounts presented below are in thousands, except for the per unit amounts:

                                                       Pro Forma
                                              Three Months Ended March 31,
                                              ----------------------------
                                                 2005            2004
                                              ----------      ----------
                                                      (Unaudited)
Revenues.................................     $1,972,169      $1,861,651
Operating Income.........................        269,094         238,227
Net Income...............................     $  223,724      $  203,882
Basic and Diluted Limited Partners'
      Net Income per unit:...............     $     0.54      $     0.57

3. Litigation and Other Contingencies

SFPP, L.P.

Federal Energy Regulatory Commission Proceedings

SFPP, L.P., referred to in this report as SFPP, is the subsidiary limited partnership that owns our Pacific operations, excluding CALNEV Pipe Line LLC and related terminals acquired from GATX Corporation. Tariffs charged by SFPP are subject to certain proceedings at the FERC involving shippers' complaints regarding the interstate rates, as well as practices and the jurisdictional nature of certain facilities and services, on our Pacific operations' pipeline systems.

OR92-8, et al. proceedings. FERC Docket No. OR92-8-000 et al., is a consolidated proceeding that began in September 1992 and includes a number of shipper complaints against certain rates and practices on SFPP's East Line (from El Paso, Texas to Phoenix, Arizona) and West Line (from Los Angeles, California to Tucson, Arizona), as well as SFPP's gathering enhancement fee at Watson Station in Carson, California. The complainants in the case are El Paso Refinery, L.P. (which settled with SFPP in 1996), Chevron Products Company, Navajo Refining Company (now Navajo Refining Company, L.P.), ARCO Products Company (now part of BP West Coast Products, LLC), Texaco Refining and Marketing Inc., Refinery Holding Company LP (now named Western Refining Company, L.P.), Mobil Oil Corporation (now part of ExxonMobil Oil Corporation) and Tosco Corporation (now part of ConocoPhillips Company). The FERC

has ruled that the complainants have the burden of proof in this proceeding.

A FERC administrative law judge held hearings in 1996, and issued an initial decision in September 1997. The initial decision held that all but one of SFPP's West Line rates were "grandfathered" under the Energy Policy Act of 1992 and therefore deemed to be just and reasonable; it further held that complainants had failed to prove "substantially changed circumstances" with respect to those rates and that they therefore could not be challenged in the Docket No. OR92-8 et al. proceedings, either for the past or prospectively. However, the initial decision also made rulings generally adverse to SFPP on certain cost of service issues relating to the evaluation of East Line rates, which are not "grandfathered" under the Energy Policy Act. Those issues included the capital structure to be used in computing SFPP's "starting rate base," the level of income tax allowance SFPP may include in rates and the recovery of civil and regulatory litigation expenses and certain pipeline reconditioning costs incurred by SFPP. The initial decision also held SFPP's Watson Station gathering enhancement service was subject to FERC jurisdiction and ordered SFPP to file a tariff for that service.

The FERC subsequently reviewed the initial decision, and issued a series of orders in which it adopted certain rulings made by the administrative law judge, changed others and modified a number of its own rulings on rehearing. Those orders began in January 1999, with FERC Opinion No. 435, and continued through June 2003.

The FERC affirmed that all but one of SFPP's West Line rates are "grandfathered" and that complainants had failed to satisfy the threshold burden of demonstrating "substantially changed circumstances" necessary to challenge those rates. The FERC further held that the one West Line rate that was not grandfathered did not need to be reduced. The FERC consequently dismissed all complaints against the West Line rates in Docket Nos. OR92-8 et al. without any requirement that SFPP reduce, or pay any reparations for, any West Line rate.

The FERC initially modified the initial decision's ruling regarding the capital structure to be used in computing SFPP's "starting rate base" to be more favorable to SFPP, but later reversed that ruling. The FERC also made certain modifications to the calculation of the income tax allowance and other cost of service components, generally to SFPP's disadvantage.

On multiple occasions, the FERC required SFPP to file revised East Line rates based on rulings made in the FERC's various orders. SFPP was also directed to submit compliance filings showing the calculation of the revised rates, the potential reparations for each complainant and in some cases potential refunds to shippers. SFPP filed such revised East Line rates and compliance filings in March 1999, July 2000, November 2001 (revised December 2001), October 2002 and February 2003 (revised March 2003). Most of those filings were protested by particular SFPP shippers. The FERC has held that certain of the rates SFPP filed at the FERC's directive should be reduced retroactively and/or be subject to refund; SFPP has challenged the FERC's authority to impose such requirements in this context.

While the FERC initially permitted SFPP to recover certain of its litigation, pipeline reconditioning and environmental costs, either through a surcharge on prospective rates or as an offset to potential reparations, it ultimately limited recovery in such a way that SFPP was not able to make any such surcharge or take any such offset. Similarly, the FERC initially ruled that SFPP would not owe reparations to any complainant for any period prior to the date on which that party's complaint was filed, but ultimately held that each complainant could recover reparations for a period extending two years prior to the filing of its complaint (except for Navajo, which was limited to one month of pre-complaint reparations under a settlement agreement with SFPP's predecessor). The FERC also ultimately held that SFPP was not required to pay reparations or refunds for Watson Station gathering enhancement fees charged prior to filing a FERC tariff for that service.

In April 2003, SFPP paid complainants and other shippers reparations and/or refunds as required by FERC's orders. In August 2003, SFPP paid shippers an additional refund as required by FERC's most recent order in the Docket No. OR92-8 et al. proceedings. We made aggregate payments of $44.9 million in 2003 for reparations and refunds pursuant to a FERC order.

Beginning in 1999, SFPP, the complainants and intervenor Ultramar Diamond Shamrock Corporation (now part of Valero Energy Corporation) filed petitions for review of FERC's Docket OR92-8 et al. orders in the United States Court of Appeals for the District of Columbia Circuit. Certain of those petitions were dismissed by the Court of Appeals as premature, and the remaining petitions were held in abeyance pending completion of agency action. However, in

December 2002, the Court of Appeals returned to its active docket all petitions to review the FERC's orders in the case through November 2001 and severed petitions regarding later FERC orders. The severed orders were held in abeyance for later consideration.

Briefing in the Court of Appeals was completed in August 2003, and oral argument took place on November 12, 2003. On July 20, 2004, the U.S. Court of Appeals for the District of Columbia Circuit issued an opinion affirming the FERC orders under review on most issues, vacating the tax provision that the FERC had allowed SFPP to include under the FERC's "Lakehead" policy giving a tax allowance to partnership pipelines and remanding for further FERC proceedings on other issues.

The court held that, in the context of the Docket No. OR92-8, et al. proceedings, all of SFPP's West Line rates were grandfathered other than the charge for use of SFPP's Watson Station gathering enhancement facility and the rate for turbine fuel movements to Tucson under SFPP Tariff No. 18. It concluded that the FERC had a reasonable basis for concluding that the addition of a West Line origin point at East Hynes, California did not involve a new "rate" for purposes of the Energy Policy Act. It rejected arguments from West Line Shippers that certain protests and complaints had challenged West Line rates prior to the enactment of the Energy Policy Act.

The court also held that complainants had failed to satisfy their burden of demonstrating substantially changed circumstances, and therefore could not challenge grandfathered West Line rates in the Docket No. OR92-8 et al. proceedings. It specifically rejected arguments that other shippers could "piggyback" on the special Energy Policy Act exception permitting Navajo to challenge grandfathered West Line rates, which Navajo had withdrawn under a settlement with SFPP. The court remanded the changed circumstances issue "for further consideration" by the FERC in light of the court's decision, described below, regarding SFPP's tax allowance. The FERC had previously held in the OR96-2 proceeding that the tax allowance policy should not be used as a stand-alone factor in determining when there have been substantially changed circumstances. The FERC's May 4, 2005 income tax allowance policy statement, discussed below, may affect how the FERC addresses the changed circumstances and other issues remanded by the court.

The court upheld the FERC's rulings on most East Line rate issues. However, it found the FERC's reasoning inadequate on some issues, including the tax allowance.

The court held the FERC had sufficient evidence to use SFPP's December 1988 stand-alone capital structure to calculate its starting rate base as of June 1985. It rejected SFPP arguments that would have resulted in a higher starting rate base.

The court analyzed at length the tax allowance for pipelines that are organized as partnerships. It concluded that the FERC had provided "no rational basis" on the record before it for giving SFPP a tax allowance, and denied recovery by SFPP of "income taxes not incurred and not paid."

The court accepted the FERC's treatment of regulatory litigation costs, including the limitation of recoverable costs and their offset against "unclaimed reparations" - that is, reparations that could have been awarded to parties that did not seek them. The court also accepted the FERC's denial of any recovery for the costs of civil litigation by East Line shippers against SFPP based on the 1992 re-reversal of the six-inch line between Tucson and Phoenix. However, the court did not find adequate support for the FERC's decision to allocate the limited litigation costs that SFPP was allowed to recover in its rates equally between the East Line and the West Line, and ordered the FERC to explain that decision further on remand.

The court held the FERC had failed to justify its decision to deny SFPP any recovery of funds spent to recondition pipe on the East Line, for which SFPP had spent nearly $6 million between 1995 and 1998. It concluded that the Commission's reasoning was inconsistent and incomplete, and remanded for further explanation, noting that "SFPP's shippers are presently enjoying the benefits of what appears to be an expensive pipeline reconditioning program without sharing in any of its costs."

The court affirmed the FERC's rulings on reparations in all respects. It held the Arizona Grocery doctrine did not apply to orders requiring SFPP to file "interim" rates, and that "FERC only established a final rate at the completion of the OR92-8 proceedings." It held that the Energy Policy Act did not limit complainants' ability to seek reparations for up to two years prior to the filing of complaints against rates that are not grandfathered. It rejected SFPP's arguments that the FERC should not have used a "test period" to compute reparations, that it should have offset years in which there

were underrecoveries against those in which there were overrecoveries, and that it should have exercised its discretion against awarding any reparations in this case.

The court also rejected:

- Navajo's argument that its prior settlement with SFPP's predecessor did not limit its right to seek reparations;

- Valero's argument that it should have been permitted to recover reparations in the Docket No. OR92-8 et al. proceedings rather than waiting to seek them, as appropriate, in the Docket No. OR96-2 et al. proceedings;

- arguments that the former ARCO and Texaco had challenged East Line rates when they filed a complaint in January 1994 and should therefore be entitled to recover East Line reparations; and

- Chevron's argument that its reparations period should begin two years before its September 1992 protest regarding the six-inch line reversal rather than its August 1993 complaint against East Line rates.

On September 2, 2004, BP West Coast Products, ChevronTexaco, ConocoPhillips and ExxonMobil filed a petition for rehearing and rehearing en banc asking the Court of Appeals to reconsider its ruling that West Line rates were not subject to investigation at the time the Energy Policy Act was enacted. On September 3, 2004, SFPP filed a petition for rehearing asking the Court to confirm that the FERC has the same discretion to address the income tax allowance issue on remand that administrative agencies normally have when their decisions are set aside by reviewing courts because they have failed to provide a reasoned basis for their conclusions. On October 4, 2004, the Court of Appeals denied both petitions without further comment.

On November 2, 2004, the Court of Appeals issued its mandate remanding the proceedings to the FERC. SFPP and shipper parties subsequently filed various pleadings with the FERC regarding the proper nature and scope of the remand proceedings. The FERC has not yet issued an order regarding the Docket No. OR92-8 remand proceedings, but on December 2, 2004, it issued a Notice of Inquiry and opened a new proceeding (Docket No. PL05-5) to consider how broadly the court's ruling on the tax allowance issue should affect the range of entities the FERC regulates. A number of parties filed comments in response to that notice on January 21, 2005.

On December 17, 2004, the Court of Appeals issued orders directing that the petitions for review relating to FERC orders issued after November 2001, which had previously been severed from the main Court of Appeals docket, should continue to be held in abeyance pending completion of the remand proceedings before the FERC.

On January 3, 2005, SFPP filed a petition for a writ of certiorari asking the United States Supreme Court to review the Court of Appeals' ruling that the Arizona Grocery doctrine does not apply to "interim" rates, and that "FERC only established a final rate at the completion of the OR92-8 proceedings." BP West Coast Products and ExxonMobil also filed a petition for certiorari, on December 30, 2004, seeking review of the Court of Appeals' ruling that there was no pending investigation of West Line rates at the time of enactment of the Energy Policy Act (and thus that those rates remained grandfathered). On April 6, 2005, the Solicitor General filed a brief in opposition to both petitions on behalf of the FERC and United States, and Navajo, ConocoPhillips, Ultramar, Valero and Western Refining filed an opposition to SFPP's petition. SFPP filed a reply to those briefs on April 18, 2005.

Sepulveda proceedings. In December 1995, Texaco filed a complaint at FERC (Docket No. OR96-2) alleging that movements on SFPP's Sepulveda pipelines (Line Sections 109 and 110) to Watson Station, in the Los Angeles basin, were subject to FERC's jurisdiction under the Interstate Commerce Act, and claimed that the rate for that service was unlawful. Several other West Line shippers filed similar complaints and/or motions to intervene.

Following a hearing in March 1997, a FERC administrative law judge issued an initial decision holding that the movements on the Sepulveda pipelines were not subject to FERC jurisdiction. On August 5, 1997, the FERC reversed that decision. On October 6, 1997, SFPP filed a tariff establishing the initial interstate rate for movements on the Sepulveda pipelines at the pre-existing rate of five cents per barrel. Several shippers protested that rate. In December 1997, SFPP filed an application for authority to charge a market-based rate for the Sepulveda service, which application was protested by several parties. On September 30, 1998, the FERC issued an order finding that SFPP lacks market power in the Watson Station destination market and set a hearing to determine whether SFPP possessed market power in the origin market.

Following a hearing, on December 21, 2000, an administrative law judge found that SFPP possessed market power over the Sepulveda origin market. On February 28, 2003, the FERC issued an order upholding that decision. SFPP filed a request for rehearing of that order on March 31, 2003. The FERC denied SFPP's request for rehearing on July 9, 2003.

As part of its February 28, 2003 order denying SFPP's application for market-based ratemaking authority, the FERC remanded to the ongoing litigation in Docket No. OR96-2, et al. the question of whether SFPP's current rate for service on the Sepulveda line is just and reasonable. A hearing in this proceeding was held in February and March 2005. The matter is now being briefed to the administrative law judge in this proceeding.

OR96-2; OR97-2; OR98-1. et al. proceedings. In October 1996, Ultramar Diamond Shamrock Corporation filed a complaint at FERC (Docket No. OR97-2) challenging SFPP's West Line rates, claiming they were unjust and unreasonable and no longer subject to grandfathering. In October 1997, ARCO, Mobil and Texaco filed a complaint at the FERC (Docket No. OR98-1) challenging the justness and reasonableness of all of SFPP's interstate rates, raising claims against SFPP's East and West Line rates similar to those that have been at issue in Docket Nos. OR92-8, et al. discussed above, but expanding them to include challenges to SFPP's grandfathered interstate rates from the San Francisco Bay area to Reno, Nevada and from Portland to Eugene, Oregon - the North Line and Oregon Line. In November 1997, Ultramar filed a similar, expanded complaint (Docket No. OR98-2). Tosco Corporation filed a similar complaint in April 1998. The shippers seek both reparations and prospective rate reductions for movements on all of SFPP's lines. The FERC accepted the complaints and consolidated them into one proceeding (Docket No. OR96-2, et al.), but held them in abeyance pending a FERC decision on review of the initial decision in Docket Nos. OR92-8, et al.

In a companion order to Opinion No. 435, the FERC gave the complainants an opportunity to amend their complaints in light of Opinion No. 435, which the complainants did in January 2000. In August 2000, Navajo and Western filed complaints against SFPP's East Line rates and Ultramar filed an additional complaint updating its pre-existing challenges to SFPP's interstate pipeline rates. These complaints were consolidated with the ongoing proceeding in Docket No. OR96-2, et al.

A hearing in this consolidated proceeding was held from October 2001 to March 2002. A FERC administrative law judge issued his initial decision on June 24, 2003. The initial decision found that, for the years at issue, the complainants had shown substantially changed circumstances for rates on SFPP's West, North and Oregon Lines and for SFPP's fee for gathering enhancement service at Watson Station and thus found that those rates should not be "grandfathered" under the Energy Policy Act of 1992. The initial decision also found that most of SFPP's rates at issue were unjust and unreasonable.

On March 26, 2004, the FERC issued an order on the phase one initial decision. The FERC's phase one order reversed the initial decision by finding that SFPP's rates for its North and Oregon Lines should remain "grandfathered" and amended the initial decision by finding that SFPP's West Line rates (i) to Yuma, Tucson and CalNev, as of 1995, and (ii) to Phoenix, as of 1997, should no longer be "grandfathered" and are not just and reasonable. The FERC's phase one order did not address prospective West Line rates and whether reparations are necessary. As discussed below, those issues have been addressed in the non-binding phase two initial decision recently issued by the presiding administrative law judge. The FERC's phase one order also did not address the "grandfathered" status of the Watson Station fee, noting that it would address that issue once it was ruled on by the United States Court of Appeals for the District of Columbia Circuit in its review of the FERC's Opinion No. 435 orders. Several of the participants in the proceeding requested rehearing of the FERC's phase one order. FERC action on those requests is pending. In addition, several participants, including SFPP, filed petitions with the United States Court of Appeals for the District of Columbia Circuit for review of the FERC's phase one order. On August 13, 2004, the FERC filed a motion to dismiss the pending petitions for review of the phase one order, which Petitioners, including SFPP, answered on August 30, 2004. On December 20, 2004, the Court referred the FERC's motion to the merits panel and directed the parties to address the issues in that motion on brief, thus effectively dismissing the FERC's motion. In the same order, the Court granted a motion to hold the petitions for review of the FERC's phase one order in abeyance and directed the parties to file motions to govern future proceeding 30 days after FERC disposition of the pending rehearing requests.

The FERC's phase one order also held that SFPP failed to seek authorization for the accounting entries necessary to reflect in SFPP's books, and thus in its annual report to FERC ("FERC Form 6"), the purchase price adjustment ("PPA") arising from SFPP's 1998 acquisition by us. The phase one order directed SFPP to file for permission to reflect the PPA in its FERC Form 6 for the calendar year 1998 and each subsequent year. In its April 26, 2004 compliance filing, SFPP noted that it had previously requested such permission and that the FERC's regulations require an oil pipeline to include a PPA in its Form 6 without first seeking FERC permission to do so. Several parties protested SFPP's compliance filing. SFPP answered those protests, and FERC action on this matter is pending.

On September 9, 2004, the presiding administrative law judge issued his non-binding initial decision in the phase two portion of this proceeding. If affirmed by the FERC, the phase two initial decision would establish the basis for prospective rates and the calculation of reparations for complaining shippers with respect to the West Line and East Line. However, as with the phase one initial decision, the phase two initial decision must be fully reviewed by the FERC, which may accept, reject or modify the decision. A FERC order on phase two of the case is expected during the second or third quarter of 2005. Any such order may be subject to further FERC review, review by the United States Court of Appeals for the District of Columbia Circuit, or both.

We are not able to predict with certainty the final outcome of the pending FERC proceedings involving SFPP, should they be carried through to their conclusion, or whether we can reach a settlement with some or all of the complainants. The final outcome will depend, in part, on the outcomes of the appeals of these proceedings and the OR92-8, et al. proceedings taken by SFPP, complaining shippers, and an intervenor.

We estimated, as of December 31, 2003, that shippers' claims for reparations totaled approximately $154 million and that prospective rate reductions would have an aggregate average annual impact of approximately $45 million. As the timing for implementation of rate reductions and the payment of reparations is extended, total estimated reparations and the interest accruing on the reparations increase. For each calendar quarter of delay in the implementation of rate reductions sought, we estimate that reparations and accrued interest accumulates by approximately $9 million. We now assume that any potential rate reductions will be implemented no earlier than the third quarter of 2005 and that reparations and accrued interest thereon will be paid no earlier than the third quarter of 2006; however, the timing, and nature, of any rate reductions and reparations that may be ordered will likely be affected by the FERC's income tax allowance inquiry in Docket No. PL05-5 and the FERC's disposition of issues remanded by the D.C. Circuit in the BP West Coast decision. If the phase two initial decision were to be largely adopted by the FERC, the estimated reparations and rate reductions would be larger than noted above; however, we continue to estimate the combined annual impact of the rate reductions and the capital costs associated with financing the payment of reparations sought by shippers and accrued interest thereon to be approximately 15 cents of distributable cash flow per unit. We believe, however, that the ultimate resolution of these complaints will be for amounts substantially less than the amounts sought.

Chevron complaint OR02-4 proceedings. On February 11, 2002, Chevron, an intervenor in the Docket No. OR96-2, et al. proceeding, filed a complaint against SFPP in Docket No. OR02-4 along with a motion to consolidate the complaint with the Docket No. OR96-2, et al. proceeding. On May 21, 2002, the FERC dismissed Chevron's complaint and motion to consolidate. Chevron filed a request for rehearing, which the FERC dismissed on September 25, 2002. In October 2002, Chevron filed a request for rehearing of the FERC's September 25, 2002 Order, which the FERC denied on May 23, 2003. On July 1, 2003, Chevron filed a petition for review of this denial at the U.S. Court of Appeals for the District of Columbia Circuit. On August 18, 2003, SFPP filed a motion to dismiss Chevron's petition on the basis that Chevron lacks standing to bring its appeal and that the case is not ripe for review. Chevron answered on September 10, 2003. SFPP's motion was pending, when the Court of Appeals, on December 8, 2003, granted Chevron's motion to hold the case in abeyance pending the outcome of the appeal of the Docket No. OR92-8, et al. proceeding. On January 8, 2004, the Court of Appeals granted Chevron's motion to have its appeal of the FERC's decision in Docket No. OR03-5 (see below) consolidated with Chevron's appeal of the FERC's decision in the Docket No. OR02-4 proceeding. On December 10, 2004, the Court dismissed Chevron's petition for review in Docket No. OR03-5 and set Chevron's appeal of the FERC's orders in OR02-4 for briefing. On January 4, 2005, the Court granted Chevron's request to hold such briefing in abeyance until after final disposition of the OR96-2 proceeding. Chevron continues to participate in the Docket No. OR96-2 et al. proceeding as an intervenor.

Chevron OR03-5 proceedings. On June 30, 2003, Chevron filed another complaint against SFPP - substantially similar to its previous complaint - and moved to consolidate the complaint with the Docket No. OR96-2, et al. proceeding. This complaint was docketed as Docket No. OR03-5. Chevron requested that this new complaint be treated as if it were an amendment to its complaint in Docket No. OR02-4, which was previously dismissed by the FERC. By this request, Chevron sought to, in effect, back-date its complaint, and claim for reparations, to February 2002. SFPP answered Chevron's complaint on July 22, 2003, opposing Chevron's requests for consolidation and for the back-dating of its complaint. On October 28, 2003, the FERC accepted Chevron's complaint, but held it in abeyance pending the outcome of the Docket No. OR96-2, et al. proceeding. The FERC denied Chevron's request for consolidation and for back-dating.

On November 21, 2003, Chevron filed a petition for review of the FERC's October 28, 2003 Order at the Court of Appeals for the District of Columbia Circuit. On January 8, 2004, the Court of Appeals granted Chevron's motion to have its appeal consolidated with Chevron's appeal of the FERC's decision in the Docket No. OR02-4 proceeding and to have the two appeals held in abeyance pending the outcome of the appeal of the Docket No. OR92-8, et al. proceeding. On August 13, 2004, the FERC filed a motion to dismiss the pending petitions for review of the FERC's orders in the OR02-4 and OR03-5 proceedings. SFPP filed a motion to dismiss Chevron's petitions for review on August 18, 2004. On December 10, 2004, the Court granted the motions to dismiss.

Airlines OR04-3 proceeding. On September 21, 2004, America West Airlines, Inc., Southwest Airlines, Co., Northwest Airlines, Inc. and Continental Airlines, Inc. (collectively "Airlines") filed a complaint against SFPP at the FERC. The Airlines' complaint alleges that the rates on SFPP's West Line and SFPP's charge for its gathering enhancement service at Watson Station are not just and reasonable. The Airlines seek rate reductions and reparations for two years prior to the filing of their complaint. BP West Coast Products LLC and ExxonMobil Oil Corporation, ConocoPhillips Company, Navajo Refining Company, L.P., and ChevronTexaco Products Company all filed timely motions to intervene in this proceeding. Valero Marketing and Supply Company filed a motion to intervene one day after the deadline. SFPP answered the Airlines' complaint on October 12, 2004. On October 29, 2004, the Airlines filed a response to SFPP's answer and on November 12, 2004, SFPP replied to the Airlines' response. On March 24, 2005, the Airlines filed a motion seeking expedited action by the FERC on their complaint. FERC action on the motion and the complaint is pending.

BP/ExxonMobil OR05-4 proceeding. On December 22, 2004, BP West Coast Products LLC and ExxonMobil Oil Corporation filed a complaint against SFPP at the FERC. The complaint alleges that SFPP's interstate rates are not just and reasonable, that certain rates found grandfathered by the FERC are not entitled to such status, and, if so entitled, that "substantially changed circumstances" have occurred, removing such protection. The complainants seek rate reductions and reparations for two years prior to the filing of their complaint and ask that the complaint be consolidated with the Airlines' complaint in the OR04-3 proceeding. ConocoPhillips Company, Navajo Refining Company, L.P., and Western Refining Company, L.P. all filed timely motions to intervene in this proceeding. SFPP answered the complaint on January 24, 2005. On February 25, 2005, the FERC consolidated this docket with the OR05-5 proceeding and held both in abeyance until after the conclusion of the various pending SFPP proceedings, deferring any ruling on the validity of the complaints.

ConocoPhillips OR05-5 proceeding. On December 29, 2004, ConocoPhillips filed a complaint against SFPP at the FERC. The complaint alleges that SFPP's interstate rates are not just and reasonable, that certain rates found grandfathered by the FERC are not entitled to such status, and, if so entitled, that "substantially changed circumstances" have occurred, removing such protection. ConocoPhillips seeks rate reductions and reparations for two years prior to the filing of their complaint. BP West Coast Products LLC and ExxonMobil Oil Corporation, Navajo Refining Company, L.P., and Western Refining Company, L.P. all filed timely motions to intervene in this proceeding. SFPP answered the complaint on January 28, 2005. On February 25, 2005, the FERC consolidated this docket with the OR05-4 proceeding and held both in abeyance until after the conclusion of the various pending SFPP proceedings, deferring any ruling on the validity of the complaints.

California Public Utilities Commission Proceeding

ARCO, Mobil and Texaco filed a complaint against SFPP with the California Public Utilities Commission on April 7, 1997. The complaint challenges rates charged by SFPP for intrastate transportation of refined petroleum

products through its pipeline system in the State of California and requests prospective rate adjustments. On October 1, 1997, the complainants filed testimony seeking prospective rate reductions aggregating approximately $15 million per year.

On August 6, 1998, the CPUC issued its decision dismissing the complainants' challenge to SFPP's intrastate rates. On June 24, 1999, the CPUC granted limited rehearing of its August 1998 decision for the purpose of addressing the proper ratemaking treatment for partnership tax expenses, the calculation of environmental costs and the public utility status of SFPP's Sepulveda Line and its Watson Station gathering enhancement facilities. In pursuing these rehearing issues, complainants sought prospective rate reductions aggregating approximately $10 million per year.

On March 16, 2000, SFPP filed an application with the CPUC seeking authority to justify its rates for intrastate transportation of refined petroleum products on competitive, market-based conditions rather than on traditional, cost-of-service analysis.

On April 10, 2000, ARCO and Mobil filed a new complaint with the CPUC asserting that SFPP's California intrastate rates are not just and reasonable based on a 1998 test year and requesting the CPUC to reduce SFPP's rates prospectively. The amount of the reduction in SFPP rates sought by the complainants is not discernible from the complaint.

The rehearing complaint was heard by the CPUC in October 2000 and the April 2000 complaint and SFPP's market-based application were heard by the CPUC in February 2001. All three matters stand submitted as of April 13, 2001, and resolution of these submitted matters may occur within the second or third quarter of 2005.

The CPUC subsequently issued a resolution approving a 2001 request by SFPP to raise its California rates to reflect increased power costs. The resolution approving the requested rate increase also required SFPP to submit cost data for 2001, 2002, and 2003, and to assist the CPUC in determining whether SFPP's overall rates for California intrastate transportation services are reasonable. The resolution reserves the right to require refunds, from the date of issuance of the resolution, to the extent the CPUC's analysis of cost data to be submitted by SFPP demonstrates that SFPP's California jurisdictional rates are unreasonable in any fashion. On February 21, 2003, SFPP submitted the cost data required by the CPUC, which submittal was protested by Valero Marketing and Supply Company, Ultramar Inc., BP West Coast Products LLC, Exxon Mobil Oil Corporation and Chevron Products Company. Issues raised by the protest, including the reasonableness of SFPP's existing intrastate transportation rates, were the subject of evidentiary hearings conducted in December 2003 and may be resolved by the CPUC in the second or third quarter of 2005.

On November 22, 2004, SFPP filed an application with the CPUC requesting a $9 million increase in existing intrastate rates to reflect the in-service date of SFPP's replacement and expansion of its Concord-to-Sacramento pipeline. The requested rate increase, which automatically became effective as of December 22, 2004 pursuant to California Public Utilities Code Section 455.3, is being collected subject to refund, pending resolution of protests to the application by Valero Marketing and Supply Company, Ultramar Inc., BP West Coast Products LLC, Exxon Mobil Oil Corporation and ChevronTexaco Products Company. The CPUC is expected to resolve the matter by the fourth quarter of 2005.

We currently believe the CPUC complaints seek approximately $15 million in tariff reparations and prospective annual tariff reductions, the aggregate average annual impact of which would be approximately $31 million. There is no way to quantify the potential extent to which the CPUC could determine that SFPP's existing California rates are unreasonable. With regard to the amount of dollars potentially subject to refund as a consequence of the CPUC resolution requiring the provision by SFPP of cost-of-service data, referred to above, such refunds could total about $6 million per year from October 2002 to the anticipated date of a CPUC decision.

SFPP believes the submission of the required, representative cost data required by the CPUC indicates that SFPP's existing rates for California intrastate services remain reasonable and that no refunds are justified.

We believe that the resolution of such matters will not have a material adverse effect on our business, financial position, results of operations or cash flows.

Union Pacific Railroad Company Easements

SFPP, L.P. and Union Pacific Railroad Company (the successor to Southern Pacific Transportation Company) are engaged in two proceedings to determine the extent, if any, to which the rent payable by SFPP for the use of pipeline easements on rights-of-way held by UPRR should be adjusted pursuant to existing contractual arrangements for each of the ten year periods beginning January 1, 1994 and January 1, 2004 (Southern Pacific Transportation Company vs. Santa Fe Pacific Corporation, SFP Properties, Inc., Santa Fe Pacific Pipelines, Inc., SFPP, L.P., et al., Superior Court of the State of California for the County of San Francisco, filed August 31, 1994; and Union Pacific Railroad Company vs. Santa Fe Pacific Pipelines, Inc., SFPP, L.P., Kinder Morgan Operating L.P. "D", Kinder Morgan G.P., Inc., et al., Superior Court of the State of California for the County of Los Angeles, filed July 28, 2004). In the second quarter of 2003, the trial court set the rent for years 1994 - 2003 at approximately $5.0 million per year as of January 1, 1994, subject to annual inflation increases throughout the ten year period. On February 23, 2005, the California Court of Appeals affirmed the trial court's ruling, except that it reversed a small portion of the decision and remanded it back to the trial court for determination. We do not expect this portion of the decision to have a material impact on the rent.

On August 17, 2004, SFPP was served with a lawsuit seeking to determine the rent for the ten year period commencing January 1, 2004. A trial date has not been set.

ARB, Inc. Dispute

ARB, Inc, a general contractor engaged by SFPP, L.P. to build a 20-inch 70-mile pipeline from Concord to Sacramento, California is seeking additional payments based on alleged scope changes and delays on the project. After deducting for payments made by SFPP to date, ARB asserts that it is owed between $13.1 million and $16.8 million on the project. ARB has indicated that its calculation of outstanding amounts may be increased in the future pending further analysis. SFPP has engaged construction claims specialists and auditors to review the project records and determine what additional payments, if any, should be made to ARB. Numerous third party subcontractors have filed liens against ARB and SFPP. SFPP has requested that ARB honor its contractual obligation to avoid and discharge any liens arising on the project.

Standards of Conduct Rulemaking

FERC Order No. 2004

On November 25, 2003, the FERC issued Order No. 2004, adopting new Standards of Conduct to become effective February 9, 2004. Every interstate natural gas pipeline was required to file a compliance plan by that date and was required to be in full compliance with the Standards of Conduct by June 1, 2004. The primary change from existing regulation is to make such standards applicable to an interstate natural gas pipeline's interaction with many more affiliates (referred to as "energy affiliates"), including intrastate/Hinshaw natural gas pipelines (in general, a Hinshaw pipeline is a pipeline that receives gas at or within a state boundary, is regulated by an agency of that state, and all the gas it transports is consumed within that state), processors and gatherers and any company involved in natural gas or electric markets (including natural gas marketers) even if they do not ship on the affiliated interstate natural gas pipeline. Local distribution companies are excluded, however, if they do not make sales to customers not physically attached to their system. The Standards of Conduct require, among other things, separate staffing of interstate pipelines and their energy affiliates (but support functions and senior management at the central corporate level may be shared) and strict limitations on communications from an interstate pipeline to an energy affiliate.

Kinder Morgan Interstate Gas Transmission LLC filed for clarification and rehearing of Order No. 2004 on December 29, 2003. In the request for rehearing, Kinder Morgan Interstate Gas Transmission LLC asked that intrastate/Hinshaw pipeline affiliates not be included in the definition of energy affiliates. On February 19, 2004, Kinder Morgan Interstate Gas Transmission LLC and Trailblazer Pipeline Company filed exemption requests with the FERC. The pipelines seek a limited exemption from the requirements of Order No. 2004 for the purpose of allowing their affiliated Hinshaw and intrastate pipelines, which are subject to state regulation and do not make any sales to customers not physically attached to their system, to be excluded from the rule's definition of energy affiliate. Separation from these entities would be the most burdensome requirement of the new rules for us.

On April 16, 2004, the FERC issued Order No. 2004-A. The FERC extended the effective date of the new Standards of Conduct from June 1, 2004, to September 1, 2004. Otherwise, the FERC largely denied rehearing of Order No. 2004, but provided further clarification or adjustment in several areas. The FERC continued the exemption for local distribution companies which do not make off-system sales, but clarified that the local distribution company exemption still applies if the local distribution company is also a Hinshaw pipeline. The FERC also clarified that a local distribution company can engage in certain sales and other energy affiliate activities to the limited extent necessary to support sales to customers located on its distribution system, and sales necessary to remain in balance under pipeline tariffs, without becoming an energy affiliate. The FERC declined to exempt natural gas producers. The FERC also declined to exempt natural gas intrastate and Hinshaw pipelines, processors and gatherers, but did clarify that such entities will not be energy affiliates if they do not participate in gas or electric commodity markets, interstate capacity markets (as capacity holder, agent or manager), or in financial transactions related to such markets.

The FERC also clarified further the personnel and functions which can be shared by interstate natural gas pipelines and their energy affiliates, including senior officers and risk management personnel, and the permissible role of holding or parent companies and service companies. The FERC also clarified that day-to-day operating information can be shared by interconnecting entities. Finally, the FERC clarified that an interstate natural gas pipeline and its energy affiliate can discuss potential new interconnects to serve the energy affiliate, but subject to very onerous posting and record-keeping requirements.

On July 21, 2004, Kinder Morgan Interstate Gas Transmission LLC and Trailblazer Pipeline Company filed additional joint requests with the interstate natural gas pipelines owned by KMI asking for limited exemptions from certain requirements of FERC Order 2004 and asking for an extension of the deadline for full compliance with Order 2004 until 90 days after the FERC has completed action on the pipelines' various rehearing and exemption requests. These exemptions request relief from the independent functioning and information disclosure requirements of Order 2004. The exemption requests propose to treat as energy affiliates, within the meaning of Order 2004, two groups of employees:

- individuals in the Choice Gas Commodity Group within KMI's retail operations; and

- commodity sales and purchase personnel within our Texas intrastate natural gas operations.

Order 2004 regulations governing relationships between interstate pipelines and their energy affiliates would apply to relationships with these two groups. Under these proposals, certain critical operating functions could continue to be shared.

On August 2, 2004, the FERC issued Order No. 2004-B. In this order, the FERC extended the effective date of the new Standards of Conduct from September 1, 2004 to September 22, 2004. Also in this order, among other actions, the FERC denied the request for rehearing made by the interstate pipelines of KMI and us to clarify the applicability of the local distribution company and parent company exemptions to them. In addition, the FERC denied the interstate pipelines' request for a 90 day extension of time to comply with Order 2004.

On September 20, 2004, the FERC issued an order which conditionally granted the July 21, 2004 joint requests for limited exemptions from the requirements of the Standards of Conduct described above. In that order, FERC directed Kinder Morgan Interstate Gas Transmission LLC, Trailblazer Pipeline Company and the affiliated interstate pipelines owned by KMI to submit compliance plans regarding these exemptions within 30 days. These compliance plans were filed on October 19, 2004, and set out certain steps taken by us to assure that employees in the Choice Gas Commodity Group of KMI and the commodity sales and purchase personnel of our Texas intrastate organizations do not have access to restricted interstate natural gas pipeline information or receive preferential treatment as to interstate natural gas pipeline services. The FERC will not enforce compliance with the independent functioning requirement of the Standards of Conduct as to these employees until 30 days after it acts on these compliance filings. In all other respects, we were required to comply with the Standards of Conduct as of September 22, 2004.

We have implemented compliance with the Standards of Conduct as of September 22, 2004, subject to the exemptions described in the prior paragraph. Compliance includes, among other things, the posting of compliance procedures and organizational information for each interstate pipeline on its Internet website, the posting of discount and tariff discretion information and the implementation of independent functioning for energy affiliates not covered by the prior paragraph (electric and gas gathering, processing or production affiliates).

On December 21, 2004, the FERC issued Order No. 2004-C. In this order, the FERC granted rehearing on certain issues and also clarified certain provisions in the previous FERC 2004 orders. The primary impact on us from Order 2004-C is the granting of rehearing and allowing local distribution companies to participate in hedging activity related to on-system sales and still qualify for exemption from being an energy affiliate.

By an order issued on April 19, 2005, the FERC accepted the compliance plans filed by us without modification, but subject to further amplification and clarification as to the intrastate group in three areas:

- further description and explanation of the information or events relating to intrastate pipeline business that the shared transmission function personnel may discuss with our commodity sales and purchase personnel within our Texas intrastate natural gas operations;

- additional posting of organizational information about the commodity sales and purchase personnel within our Texas intrastate natural gas operations; and

- clarification that the president of our intrastate natural gas pipeline group has received proper training and will not be a conduit for improperly sharing transmission or customer information with our commodity sales and purchase personnel within our Texas intrastate natural gas operations.

FERC Policy statement re: Use of Gas Basis Differentials for Pricing

On July 25, 2003, the FERC issued a Modification to Policy Statement stating that FERC regulated natural gas pipelines will, on a prospective basis, no longer be permitted to use gas basis differentials to price negotiated rate transactions. Effectively, we will no longer be permitted to use commodity price indices to structure transactions on our FERC regulated natural gas pipelines. Negotiated rates based on commodity price indices in existing contracts will be permitted to remain in effect until the end of the contract period for which such rates were negotiated. Moreover, in subsequent orders in individual pipeline cases, the FERC has allowed negotiated rate transactions using pricing indices so long as revenue is capped by the applicable maximum rate(s). Rehearing on this aspect of the Modification to Policy Statement has been sought by several pipelines, but the FERC has not yet acted on rehearing. Price indexed contracts currently constitute an insignificant portion of our contracts on our FERC regulated natural gas pipelines; consequently, we do not believe that this Modification to Policy Statement will have a material impact on our operations, financial results or cash flows.

Accounting for Integrity Testing Costs

On November 5, 2004, the FERC issued a Notice of Proposed Accounting Release that would require FERC jurisdictional entities to recognize costs incurred in performing pipeline assessments that are a part of a pipeline integrity management program as maintenance expense in the period incurred. The proposed accounting ruling was in response to the FERC's finding of diverse practices within the pipeline industry in accounting for pipeline assessment activities. The proposed ruling would standardize these practices. Specifically, the proposed ruling clarifies the distinction between costs for a "one-time rehabilitation project to extend the useful life of the system," which could be capitalized, and costs for an "on-going inspection and testing or maintenance program," which would be accounted for as maintenance and charged to expense in the period incurred. Comments, along with responses to specific questions posed by FERC concerning the Notice of Proposed Accounting Release, were due January 19, 2005. We filed our comments on January 19, 2005, asking the FERC to modify the accounting release to allow capitalization of pipeline assessment costs associated with projects involving 100 feet or more of pipeline being replaced or recoated (including discontinuous sections) and to adopt an effective date for the final rule which is no earlier than January 1, 2006.

Selective Discounting

On November 22, 2004, the FERC issued a notice of inquiry seeking comments on its policy of selective discounting. Specifically, the FERC is asking parties to submit comments and respond to inquiries regarding the FERC's practice of permitting pipelines to adjust their ratemaking throughput downward in rate cases to reflect discounts given by pipelines for competitive reasons - when the discount is given to meet competition from another gas pipeline. Comments were filed by numerous entities, including Natural Gas Pipeline Company of America (a Kinder Morgan, Inc. affiliate), on March 2, 2005. Several reply comments have subsequently been filed.

On February 20, 2004, the D.C. Circuit Court of Appeals for the District of Columbia remanded back to the FERC a Williston Basin Interstate Pipeline proceeding in which the court ruled that the FERC did not explain how the selective discounting policy adopted by the FERC in the Colorado Interstate Gas Co. and Granite State Gas Transmission cases would not compromise the pipelines' ability to target discounts at particular receipt/delivery points, subsystems or other defined geographic areas. On June 1, 2004, the FERC issued a Notice of Request for Comments in the Williston Basin Interstate Pipeline proceeding, on issues pertaining to the discounting policy adopted in the Colorado Interstate Gas Co. and Granite State Gas Transmission cases. Comments were due on August 9, 2004. Numerous parties filed comments, including our three interstate natural gas pipelines: Kinder Morgan Interstate Gas Transmission LLC, Trailblazer Pipeline Company and TransColorado Gas Transmission Company. On March 3, 2005, the FERC issued an Order on Remand in the Williston Basin Interstate Pipeline, Co. proceeding (RP00-463). The FERC has concluded that it cannot, at the present time, satisfy its burden under Section 5 of the Natural Gas Act to require Williston or other pipelines to modify their tariffs to incorporate the CIG/Granite State policy. The FERC will return to its pre-existing policy of permitting pipelines to limit the selective discounts they offer shippers to particular points. Pipelines who implemented the CIG/Granite State policy pursuant to orders that are now final may file pursuant to Section 4 of the Natural Gas Act to remove their tariff provisions implementing that policy. Our interstate natural gas pipelines have filed to remove these tariff provisions.

Other Regulatory

SFPP, L.P.

As discussed above, under "SFPP, L.P. - Federal Regulatory Commission Proceedings," on July 20, 2004, the United States Court of Appeals for the District of Columbia Circuit issued its opinion in BP West Coast Products, LLC
v. Federal Energy Regulatory Commission, No. 99-1020, On Petitions for Review of Orders of the Federal Energy Regulatory Commission (Circuit opinion), addressing in part the tariffs of SFPP, L.P. Among other things, the Circuit Court opinion vacated the income tax allowance portion of the FERC opinion and order allowing recovery in SFPP's rates for income taxes and remanded this and other matters for further proceedings consistent with the Circuit Court opinion. By its terms, the opinion only pertains to SFPP, L.P. and it is based on the record in that case.

However, on December 2, 2004, the FERC issued a Notice of Inquiry seeking comments on the implications of the July 20, 2004 opinion of the Court of Appeals for the District of Columbia Circuit in BP West Coast Producers, LLC, v. FERC. In reviewing a series of orders involving SFPP, L.P., the court held, among other things, that the FERC had not adequately justified its policy of providing an oil pipeline limited partnership with an income tax allowance equal to the proportion of its limited partnership interests owned by corporate partners. The FERC is seeking comments on whether the court's ruling applies only to the specific facts of the SFPP, L.P. proceeding, or also extends to other capital structures involving partnerships and other forms of ownership. Comments were filed by numerous parties, including our Rocky Mountain natural gas pipelines, in the first quarter of 2005.

On May 4, 2005, the FERC adopted a policy statement in Docket No. PL05-5, providing that all entities owning public utility assets - oil and gas pipelines and electric utilities - would be permitted to include an income tax allowance in their cost-of-service rates to reflect the actual or potential income tax liability attributable to their public utility income, regardless of the form of ownership. Any tax pass-through entity seeking an income tax allowance would have to establish that its partners or members have an actual or potential income tax obligation on the entity's public utility income. The FERC expressed the intent to implement its policy in individual cases as they arise. Subject to that case-specific implementation, the policy appears to provide an opportunity for partnership-

owned pipelines to seek allowances based upon their entire income paid to partners, rather than the partial allowance provided under the prior Lakehead approach. We expect the final adoption and implementation by the FERC of the policy statement in individual cases will be subject to review of the United States Court of Appeals for the District of Columbia Circuit. Evaluation of the impact of this policy statement will have to await further developments in SFPP's pending cases.

Trailblazer Pipeline Company

On March 22, 2005, Marathon Oil Company filed a formal complaint with FERC alleging that Trailblazer Pipeline Company violated the FERC's Negotiated Rate Policy Statement and the Natural Gas Act by failing to offer a recourse rate option for its Expansion 2002 capacity and by charging negotiated rates higher than the applicable recourse rates. Marathon is requesting that the FERC require Trailblazer to refund all amounts paid by Marathon above Trailblazer's Expansion 2002 recourse rate since the facilities went into service in May 2002, with interest. In addition, Marathon is asking the FERC to require Trailblazer to bill Marathon the Expansion 2002 recourse rate for future billings. Marathon estimates the amount of Trailblazer's refund to date is over $15 million. Trailblazer filed its response to Marathon's complaint in April 2005 and the matter is currently before the FERC for review.

Other

In addition to the matters described above, we may face additional challenges to our rates in the future. Shippers on our pipelines do have rights to challenge the rates we charge under certain circumstances prescribed by applicable regulations. There can be no assurance that we will not face challenges to the rates we receive for services on our pipeline systems in the future. In addition, since many of our assets are subject to regulation, we are subject to potential future changes in applicable rules and regulations that may have an adverse effect on our business, financial position, results of operations or cash flows.

Carbon Dioxide Litigation

Kinder Morgan CO2 Company, L.P., Kinder Morgan G.P., Inc., and Cortez Pipeline Company are among the named defendants in Shores, et al. v. Mobil Oil Corp., et al., No. GC-99-01184 (Statutory Probate Court, Denton County, Texas filed December 22, 1999) and First State Bank of Denton, et al. v. Mobil Oil Corp., et al., No. 8552-01 (Statutory Probate Court, Denton County, Texas filed March 29, 2001). These cases were originally filed as class actions on behalf of classes of overriding royalty interest owners (Shores) and royalty interest owners (Bank of Denton) for damages relating to alleged underpayment of royalties on carbon dioxide produced from the McElmo Dome Unit. Although classes were initially certified at the trial court level, appeals resulted in the decertification and/or abandonment of the class claims. On February 22, 2005, the trial judge dismissed both cases for lack of jurisdiction. Counsel for some of the individual plaintiffs in these cases has indicated that those plaintiffs may refile their claims.

On May 13, 2004, William Armor, one of the former plaintiffs in the Shores matter whose claims were dismissed for improper venue by the Court of Appeals, filed a new case alleging the same claims (in summary, seeking damages for underpayment of royalties based on alleged breaches of contractual duties and covenants, agency duties, civil conspiracy, and related claims) against the same defendants previously sued in the Shores case, including Kinder Morgan CO2 Company, L.P. and Kinder Morgan Energy Partners, L.P. Armor v. Shell Oil Company, et al, No. 04-03559 (14th Judicial District, Dallas County Court filed May 13, 2004). Defendants filed their answers and special exceptions on June 4, 2004. Trial, if necessary, has been scheduled for July 25, 2005.

Shell CO2 Company, Ltd., predecessor in interest to Kinder Morgan CO2 Company, L.P., is among the named counter-claim defendants in Shell Western E&P Inc. v. Gerald O. Bailey and Bridwell Oil Company; No. 98-28630 (215th Judicial District Court, Harris County, Texas filed June 17, 1998) (the "SWEPI Action"). The counter-claim plaintiffs are overriding royalty interest owners in the McElmo Dome Unit and have sued seeking damages for underpayment of royalties on carbon dioxide produced from the McElmo Dome Unit. The counter-claim plaintiffs have asserted claims for fraud/fraudulent inducement, real estate fraud, negligent misrepresentation, breach of fiduciary duty, breach of contract, negligence, negligence per se, unjust enrichment, violation of the Texas Securities Act, and open account. Counter-claim plaintiffs seek actual damages, punitive damages, an accounting, and

declaratory relief. The trial court granted a series of summary judgment motions filed by counter-claim defendants on all of counter-plaintiffs' counter-claims except for the fraud-based claims. In 2004, one of the counter-plaintiffs (Gerald Bailey) amended his counter-suit to allege purported claims as a private relator under the False Claims Act and antitrust claims. The federal government elected to not intervene in the False Claims Act counter-suit. On March 24, 2005, Bailey filed a notice of removal, and the case was transferred to federal court. Shell Western E&P Inc. v. Gerald O. Bailey and Bridwell Oil Company, No. H-05-1029 (S.D. Tex., Houston Division removed March 24, 2005). Also on March 24, 2005, Bailey filed an instrument under seal in the federal court that, based on recent filings in the federal court discussing the sealed instrument, appears to be a motion to transfer venue of the removed Bailey federal court action to the federal district court of Colorado, in which Bailey has filed another suit against Kinder Morgan CO2 Company, L.P. asserting claims under the False Claims Act. The Houston federal district judge has ordered that Bailey take steps to have the False Claims Act case pending in Colorado transferred to Houston, and has also suggested that the claims of other plaintiffs in other carbon dioxide litigation pending in Texas should be transferred to the Bailey federal court action pending in Houston. Bailey has filed a brief requesting that the Bailey federal court action pending in Houston be transferred to Colorado. Kinder Morgan CO2 Company, L.P. intends to seek dismissal of all of the counter-claim plaintiffs' claims through appropriate motions. No current trial date is set.

On March 1, 2004, Bridwell Oil Company, one of the named defendants/counter-claim plaintiffs in the SWEPI Action, filed a new matter in which it asserts claims which are virtually identical to the counter-claims it asserts against Shell CO2 Company, Ltd. in the SWEPI Action. Bridwell Oil Co. v. Shell Oil Co. et al, No. 160,199-B (78th Judicial District, Wichita County Court filed March 1, 2004). The defendants in this action include Kinder Morgan CO2 Company, L.P., Kinder Morgan Energy Partners, L.P., various Shell entities, ExxonMobil entities, and Cortez Pipeline Company. On June 25, 2004, defendants filed answers, special exceptions, pleas in abatement, and motions to transfer venue back to the Harris County District Court. On January 31, 2005, the Wichita County judge abated the case pending resolution of the Bailey action.

Kinder Morgan CO2 Company, L.P. and Cortez Pipeline Company are among the named defendants in Celeste C. Grynberg, et al. v. Shell Oil Company, et al., No. 98-CV-43 (Colo. Dist. Ct., Montezuma County filed March 2, 1998). This case involves claims by overriding royalty interest owners in the McElmo Dome and Doe Canyon Units seeking damages for underpayment of royalties on carbon dioxide produced from the McElmo Dome Unit, failure to develop carbon dioxide reserves at the Doe Canyon Unit, and failure to develop hydrocarbons at both McElmo Dome and Doe Canyon. The plaintiffs also possess a small working interest at Doe Canyon. Plaintiffs claim breaches of contractual and potential fiduciary duties owed by the defendants and also allege other theories of liability including breach of covenants, civil theft, conversion, fraud/fraudulent concealment, violation of the Colorado Organized Crime Control Act, deceptive trade practices, and violation of the Colorado Antitrust Act. In addition to actual or compensatory damages, plaintiffs seek treble damages, punitive damages, and declaratory relief relating to the Cortez Pipeline tariff and the method of calculating and paying royalties on McElmo Dome carbon dioxide. Plaintiffs' motion for summary judgment concerning alleged underpayment of McElmo Dome overriding royalties is currently pending before the Court. The parties are continuing to engage in discovery. No trial date is currently set.

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

This case involves a purported class action against Kinder Morgan CO2 Company, L.P. alleging that defendant has failed to pay the full royalty and overriding royalty ("royalty interests") on the true and proper settlement value of compressed carbon dioxide produced from the Bravo Dome Unit in the period beginning January 1, 2000. The complaint purports to assert claims for violation of the New Mexico Unfair Practices Act, constructive fraud, breach of contract and of the covenant of good faith and fair dealing, breach of the implied covenant to market, and claims for an accounting, unjust enrichment, and injunctive relief. The purported class is comprised of current and former owners, during the period January 2000 to the present, who have private property royalty interests burdening the oil and gas leases held by the defendant, excluding the Commissioner of Public Lands, the United States of America, and those private royalty interests that are not unitized as part of the Bravo Dome Unit. The plaintiffs allege that they were members of a class previously certified as a class action by the United States District Court for the District

of New Mexico in the matter Doris Feerer, et al. v. Amoco Production Company, et al., USDC N.M. Civ. No. 95-0012 (the "Feerer Class Action"). Plaintiffs allege that defendant's method of paying royalty interests is contrary to the settlement of the Feerer Class Action. Defendant has filed a Motion to Compel Arbitration of this matter pursuant to the arbitration provisions contained in the Feerer Class Action Settlement Agreement, which motion was denied by the trial court. An appeal of that ruling has been filed and is pending before the New Mexico Court of Appeals. No date for arbitration or trial is currently set.

In addition to the matters listed above, various audits and administrative inquiries concerning Kinder Morgan CO2 Company L.P.'s royalty and tax payments on carbon dioxide produced from the McElmo Dome Unit are currently ongoing. These audits and inquiries involve various federal agencies, the State of Colorado, the Colorado oil and gas commission, and Colorado county taxing authorities.

RSM Production Company, et al. v. Kinder Morgan Energy Partners, L.P., et al. (Cause No. 4519, in the District Court, Zapata County Texas, 49th Judicial District).

On October 15, 2001, Kinder Morgan Energy Partners, L.P. was served with the First Supplemental Petition filed by RSM Production Corporation on behalf of the County of Zapata, State of Texas and Zapata County Independent School District as plaintiffs. Kinder Morgan Energy Partners, L.P. was sued in addition to 15 other defendants, including two other Kinder Morgan affiliates. Certain entities we acquired in the Kinder Morgan Tejas acquisition are also defendants in this matter. The Petition alleges that these taxing units relied on the reported volume and analyzed heating content of natural gas produced from the wells located within the appropriate taxing jurisdiction in order to properly assess the value of mineral interests in place. The suit further alleges that the defendants undermeasured the volume and heating content of that natural gas produced from privately owned wells in Zapata County, Texas. The Petition further alleges that the County and School District were deprived of ad valorem tax revenues as a result of the alleged undermeasurement of the natural gas by the defendants. On December 15, 2001, the defendants filed motions to transfer venue on jurisdictional grounds. On June 12, 2003, plaintiff served discovery requests on certain defendants. On July 11, 2003, defendants moved to stay any responses to such discovery.

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

This action was filed on June 9, 1997 pursuant to the federal False Claims Act and involves allegations of mismeasurement of natural gas produced from federal and Indian lands. The Department of Justice has decided not to intervene in support of the action. The complaint is part of a larger series of similar complaints filed by Mr. Grynberg against 77 natural gas pipelines (approximately 330 other defendants). Certain entities we acquired in the Kinder Morgan Tejas acquisition are also defendants in this matter. An earlier single action making substantially similar allegations against the pipeline industry was dismissed by Judge Hogan of the U.S. District Court for the District of Columbia on grounds of improper joinder and lack of jurisdiction. As a result, Mr. Grynberg filed individual complaints in various courts throughout the country. In 1999, these cases were consolidated by the Judicial Panel for Multidistrict Litigation, and transferred to the District of Wyoming. The multidistrict litigation matter is called In Re Natural Gas Royalties Qui Tam Litigation, Docket No. 1293. Motions to dismiss were filed and an oral argument on the motion to dismiss occurred on March 17, 2000. On July 20, 2000, the United States of America filed a motion to dismiss those claims by Grynberg that deal with the manner in which defendants valued gas produced from federal leases, referred to as valuation claims. Judge Downes denied the defendant's motion to dismiss on May 18, 2001. The United States' motion to dismiss most of plaintiff's valuation claims has been granted by the court. Grynberg has appealed that dismissal to the 10th Circuit, which has requested briefing regarding its jurisdiction over that appeal. Subsequently, Grynberg's appeal was dismissed for lack of appellate jurisdiction. Discovery to determine issues related to the Court's subject matter jurisdiction arising out of the False Claims Act is complete. Briefing has been completed and oral arguments on jurisdiction were held before the Special Master on March 17 and 18, 2005. On May 7, 2003, Grynberg sought leave to file a Third Amended Complaint, which adds allegations of undermeasurement related to carbon dioxide production. Defendants have filed briefs opposing leave to amend. Neither the Court nor the Special Master has ruled on Grynberg's Motion to Amend.

Mel R. Sweatman and Paz Gas Corporation v. Gulf Energy Marketing, LLC, et al.

On July 25, 2002, we were served with this suit for breach of contract, tortious interference with existing contractual relationships, conspiracy to commit tortious interference and interference with prospective business relationship. Mr. Sweatman and Paz Gas Corporation claim that, in connection with our acquisition of Tejas Gas, LLC, we wrongfully caused gas volumes to be shipped on our Kinder Morgan Texas Pipeline system instead of our Kinder Morgan Tejas system. Mr. Sweatman and Paz Gas Corporation allege that this action eliminated profit on Kinder Morgan Tejas, a portion of which Mr. Sweatman and Paz Gas Corporation claim they are entitled to receive under an agreement with a subsidiary of ours acquired in the Tejas Gas acquisition. We filed a motion to remove the case from venue in Dewitt County, Texas to Harris County, Texas, and our motion was denied in a venue hearing in November 2002.

In a Second Amended Original Petition, Sweatman and Paz assert new and distinct allegations against us, principally that we were a party to an alleged commercial bribery committed by us, Gulf Energy Marketing, and Intergen inasmuch as we, in our role as acquirer of Kinder Morgan Tejas, allegedly paid Intergen to not renew the underlying Entex contracts belonging to the Tejas/Paz joint venture. Moreover, new and distinct allegations of breach of fiduciary and bribery of a fiduciary are also raised in this amended petition for the first time.

The parties have engaged in some discovery and depositions. At this stage of discovery, we believe that our actions were justified and defensible under applicable Texas law and that the decision not to renew the underlying gas sales agreements was made unilaterally by persons acting on behalf of Entex. The plaintiffs have moved for summary judgment asking the court to declare that a fiduciary relationship existed for purposes of Sweatman's claims. We have moved for summary judgment on the grounds that:

- there is no cause-in-fact of the gas sales nonrenewals attributable to us; and

- the defense of legal justification applies to the claims for tortuous interference.

In September 2003 and then again in November 2003, Sweatman and Paz filed their third and fourth amended petitions, respectively, asserting all of the claims for relief described above. In addition, the plaintiffs asked that the court impose a constructive trust on (i) the proceeds of the sale of Tejas and
(ii) any monies received by any Kinder Morgan entity for sales of gas to any Entex/Reliant entity following June 30, 2002 that replaced volumes of gas previously sold under contracts to which Sweatman and Paz had a participating interest pursuant to the joint venture agreement between Tejas, Sweatman and Paz. In October 2003, the court granted, and then rescinded its order after a motion to reconsider heard on February 13, 2004, a motion for partial summary judgment on the issue of the existence of a fiduciary duty.

On October 27, 2004, the court granted a motion for partial summary judgment in the defendants' favor, finding that, as a matter of law, Sweatman's interests in four of the five gas sales contracts at issue terminated in 1992 after those contracts were amended in their material terms, and thus falling outside the joint venture itself. In various forms, the plaintiffs have amended their petition to allege various oral and implied joint venture agreements as well as an oral partnership agreement. The claimants are asking for the imposition of a constructive trust on the proceeds of gas sales contracts with Entex and its affiliates that were entered into after the gas sales at issue were unilaterally terminated by Entex on March 28, 2002, for which Sweatman blames us and our agents and representatives.

We moved for partial summary judgment on all of Sweatman's claims, asserting that even in the light most favorable to Sweatman's assertions, there is no issue of material fact on whether Sweatman even owned an interest in the underlying gas sales agreements in dispute. That motion was heard on August 13, 2004, and was granted on October 26, 2004 as to four of the five gas sales contracts at issue, leaving for further determination at a later time any remaining claims based upon other theories of recovery not dependent upon the four gas sales agreements being joint venture property. We also filed a no-evidence motion for summary judgment on the plaintiffs' defamation claims.

On March 24, 2005, we announced a settlement of this case. Under the terms of the settlement, we agreed to pay $25 million to the defendants in full settlement of any possible claims related to this case. We included this amount as general and administrative expense in March 2005, and we made payment in April 2005.

Maher et ux. v. Centerpoint Energy, Inc., Centerpoint Energy Resources Corp., Entex Gas Marketing Company, Kinder Morgan Texas Pipeline, L.P., Kinder Morgan Energy Partners, L.P., Kinder Morgan G.P., Inc., Kinder Morgan Tejas Pipeline, L.P., Kinder Morgan Tejas Pipeline, GP, Inc., Kinder Morgan Texas Pipeline GP, Inc., Tejas Gas, LLC, Midcon Corp., Gulf Energy Marketing, LLC, Houston Pipeline Company, L.P, HPL GP, LLC, and AEP Gas Marketing, L.P., No. 30875 (District Court, Wharton County Texas).

On October 21, 2002, Kinder Morgan Texas Pipeline, L.P. and Kinder Morgan Energy Partners, L.P. were served with the above-entitled Complaint. A First Amended Complaint was served on October 23, 2002, adding additional defendants Kinder Morgan G.P., Inc., Kinder Morgan Tejas Pipeline GP, Inc., Kinder Morgan Texas Pipeline GP, Inc., Tejas Gas, LLC and HPL GP, LLC. A Second Amended Complaint was filed on January 6, 2003, which added additional proposed plaintiff class representatives. A Third Amended Complaint was filed on February 4, 2005, which dropped the purported class action allegations and added additional defendants, Midcon Corp. and Gulf Energy Marketing, LLC. The Complaint purports to bring an action on behalf of three plaintiffs who purchased natural gas for residential purposes from the so-called "Centerpoint defendants" in Texas at any time during the period encompassing "at least the last ten years."

The Complaint alleges that Centerpoint Energy Resources Corp., by and through its affiliates, has artificially inflated the price charged to residential consumers for natural gas that it allegedly purchased from the non-Centerpoint defendants, including the above-listed Kinder Morgan entities. The Complaint further alleges that in exchange for Centerpoint Energy Resources Corp.'s purchase of natural gas at above market prices, the non-Centerpoint defendants, including the above-listed Kinder Morgan entities, sell natural gas to Entex Gas Marketing Company at prices substantially below market, which in turn sells such natural gas to commercial and industrial consumers and gas marketers at market price. The Complaint purports to assert claims for fraud, violations of the Texas Deceptive Trade Practices Act, and violations of the Texas Utility Code against some or all of the defendants, and civil conspiracy against all of the defendants, and seeks relief in the form of, among other things, actual, exemplary and statutory damages, civil penalties, interest, attorneys' fees and a constructive trust ab initio on any and all sums which allegedly represent overcharges by Centerpoint and Centerpoint Energy Resources Corp.

On November 18, 2002, the Kinder Morgan defendants filed a Motion to Transfer Venue and, Subject Thereto, Original Answer to the original Complaint. On February 10, 2005, the Centerpoint defendants removed the case to the United States District Court for the Southern District of Texas, Houston Division. On March 2, 2005, the Centerpoint defendants filed a motion to dismiss the Third Amended Complaint. On March 16, 2005, all parties stipulated to the dismissal of the case without prejudice

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

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

The Complaint alleges that Centerpoint Energy, Inc., by and through its affiliates, has artificially inflated the price charged to residential consumers for natural gas that it allegedly purchased from the non-Centerpoint defendants, including the above-listed Kinder Morgan entities. The Complaint further alleges that in exchange for Centerpoint's purchase of such natural gas at above market prices, the non-Centerpoint defendants, including the above-listed Kinder Morgan entities, sell natural gas to Centerpoint's non-regulated affiliates at prices substantially below market, which in turn sells such natural gas to commercial and industrial consumers and gas marketers at market price. The Complaint purports to assert claims for fraud, unlawful enrichment and civil conspiracy against all of the defendants, and seeks relief in the form of actual, exemplary and punitive damages, interest, and attorneys' fees. The Complaint was served on the Kinder Morgan Defendants on October 21, 2004. On November 18, 2004, the Centerpoint Defendants removed the case to the United States District Court, Western District of Arkansas, Texarkana Division, Civ. Action No. 04-4154. On January 26, 2005, the Plaintiffs moved to remand the case back

to state court, which motion is currently pending. On December 17, 2004, the Kinder Morgan Defendants filed a Motion to Dismiss the Complaint, which motion is also currently pending. Based on the information available to date and our preliminary investigation, the Kinder Morgan Defendants believe that the claims against them are without merit and intend to defend against them vigorously.

Marie Snyder, et al v. City of Fallon, United States Department of the Navy, Exxon Mobil Corporation, Kinder Morgan Energy Partners, L.P., Speedway Gas Station and John Does I-X, No. cv-N-02-0251-ECR-RAM (United States District Court, District of Nevada)("Snyder"); Frankie Sue Galaz, et al v. United States of America, City of Fallon, Exxon Mobil Corporation, Kinder Morgan Energy Partners, L.P., Berry Hinckley, Inc., and John Does I-X, No. cv-N-02-0630-DWH-RAM (United States District Court, District of Nevada)("Galaz I"); Frankie Sue Galaz, et al v. City of Fallon, Exxon Mobil Corporation, Kinder Morgan Energy Partners, L.P., Kinder Morgan G.P., Inc., Kinder Morgan Las Vegas, LLC, Kinder Morgan Operating Limited Partnership "D", Kinder Morgan Services LLC, Berry Hinkley and Does I-X, No. CV03-03613 (Second Judicial District Court, State of Nevada, County of Washoe) ("Galaz II); Frankie Sue Galaz, et al v. The United States of America, the City of Fallon, Exxon Mobil Corporation, Kinder Morgan Energy Partners, L.P., Kinder Morgan G.P., Inc., Kinder Morgan Las Vegas, LLC, Kinder Morgan Operating Limited Partnership "D", Kinder Morgan Services LLC, Berry Hinkley and Does I-X, No.CVN03-0298-DWH-VPC (United States District Court, District of Nevada)("Galaz III)

On July 9, 2002, we were served with a purported Complaint for Class Action in the Snyder case, in which the plaintiffs, on behalf of themselves and others similarly situated, assert that a leukemia cluster has developed in the City of Fallon, Nevada. The Complaint alleges that the plaintiffs have been exposed to unspecified "environmental carcinogens" at unspecified times in an unspecified manner and are therefore "suffering a significantly increased fear of serious disease." The plaintiffs seek a certification of a class of all persons in Nevada who have lived for at least three months of their first ten years of life in the City of Fallon between the years 1992 and the present who have not been diagnosed with leukemia.

The Complaint purports to assert causes of action for nuisance and "knowing concealment, suppression, or omission of material facts" against all defendants, and seeks relief in the form of "a court-supervised trust fund, paid for by defendants, jointly and severally, to finance a medical monitoring program to deliver services to members of the purported class that include, but are not limited to, testing, preventative screening and surveillance for conditions resulting from, or which can potentially result from exposure to environmental carcinogens," incidental damages, and attorneys' fees and costs.

The defendants responded to the Complaint by filing Motions to Dismiss on the grounds that it fails to state a claim upon which relief can be granted. On November 7, 2002, the United States District Court granted the Motion to Dismiss filed by the United States, and further dismissed all claims against the remaining defendants for lack of Federal subject matter jurisdiction. Plaintiffs filed a Motion for Reconsideration and Leave to Amend, which was denied by the Court on December 30, 2002. Plaintiffs filed a Notice of Appeal to the United States Court of Appeals for the 9th Circuit. On March 15, 2004, the 9th Circuit affirmed the dismissal of this case.

On December 3, 2002, plaintiffs filed an additional Complaint for Class Action in the Galaz I matter asserting the same claims in the same court on behalf of the same purported class against virtually the same defendants, including us. On February 10, 2003, the defendants filed Motions to Dismiss the Galaz I Complaint on the grounds that it also fails to state a claim upon which relief can be granted. This motion to dismiss was granted as to all defendants on April 3, 2003. Plaintiffs have filed a Notice of Appeal to the United States Court of Appeals for the 9th Circuit. On November 17, 2003, the 9th Circuit dismissed the appeal, upholding the District Court's dismissal of the case.

On June 20, 2003, plaintiffs filed an additional Complaint for Class Action (the "Galaz II" matter) asserting the same claims in Nevada State trial court on behalf of the same purported class against virtually the same defendants, including us (and excluding the United States Department of the Navy). On September 30, 2003, the Kinder Morgan defendants filed a Motion to Dismiss the Galaz II Complaint along with a Motion for Sanctions. On April 13, 2004, plaintiffs' counsel voluntarily stipulated to a dismissal with prejudice of the entire case in State Court. The court has accepted the stipulation and the parties are awaiting a final order from the court dismissing the case with prejudice.

Also on June 20, 2003, the plaintiffs in the previously filed Galaz matters (now dismissed) filed yet another Complaint for Class Action in the United States District Court for the District of Nevada (the "Galaz III" matter) asserting the same claims in United States District Court for the District of Nevada on behalf of the same purported class against virtually the same defendants, including us. The Kinder Morgan defendants filed a Motion to Dismiss the Galaz III matter on August 15, 2003. On October 3, 2003, the plaintiffs filed a Motion for Withdrawal of Class Action, which voluntarily drops the class action allegations from the matter and seeks to have the case proceed on behalf of the Galaz family only. On December 5, 2003, the District Court granted the Kinder Morgan defendants' Motion to Dismiss, but granted plaintiff leave to file a second Amended Complaint. Plaintiff filed a Second Amended Complaint on December 13, 2003, and a Third Amended Complaint on January 5, 2004. The Kinder Morgan defendants filed a Motion to Dismiss the Third Amended Complaint on January 13, 2004. The Motion to Dismiss was granted with prejudice on April 30, 2004. On May 7, 2004, Plaintiff filed a Notice of Appeal in the United States Court of Appeals for the 9th Circuit, which appeal is currently pending.

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

On May 30, 2003, a separate group of plaintiffs, individually and on behalf of Adam Jernee, filed a civil action in the Nevada State trial court against us and several Kinder Morgan related entities and individuals and additional unrelated defendants ("Jernee"). Plaintiffs in the Jernee matter claim that defendants negligently and intentionally failed to inspect, repair and replace unidentified segments of their pipeline and facilities, allowing "harmful substances and emissions and gases" to damage "the environment and health of human beings." Plaintiffs claim that "Adam Jernee's death was caused by leukemia that, in turn, is believed to be due to exposure to industrial chemicals and toxins." Plaintiffs purport to assert claims for wrongful death, premises liability, negligence, negligence per se, intentional infliction of emotional distress, negligent infliction of emotional distress, assault and battery, nuisance, fraud, strict liability, and aiding and abetting, and seek unspecified special, general and punitive damages. The Kinder Morgan defendants filed Motions to Dismiss the complaint on November 20, 2003, which Motions are currently pending. In addition, plaintiffs and the defendant City of Fallon have appealed the Trial Court's ruling on initial procedural matters concerning proper venue. On March 29, 2004, the Nevada Supreme Court stayed the action pending resolution of these procedural matters on appeal. This appeal is currently pending.

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

On August 28, 2003, a separate group of plaintiffs, represented by the counsel for the plaintiffs in the Jernee matter, individually and on behalf of Stephanie Suzanne Sands, filed a civil action in the Nevada State trial court against us and several Kinder Morgan related entities and individuals and additional unrelated defendants ("Sands"). Plaintiffs in the Sands matter claim that defendants negligently and intentionally failed to inspect, repair and replace unidentified segments of their pipeline and facilities, allowing "harmful substances and emissions and gases" to damage "the environment and health of human beings." Plaintiffs claim that Stephanie Suzanne Sands' death was caused by leukemia that, in turn, is believed to be due to exposure to industrial chemicals and toxins. Plaintiffs purport to assert claims for wrongful death, premises liability, negligence, negligence per se, intentional infliction of emotional distress, negligent infliction of emotional distress, assault and battery, nuisance, fraud, strict liability, and aiding and abetting, and seek unspecified special, general and punitive damages. The Kinder Morgan defendants were served with the Complaint on January 10, 2004. On February 26, 2004, the Kinder Morgan defendants filed a Motion to Dismiss and a Motion to Strike, which motions are currently pending. In addition, plaintiffs and the defendant City of Fallon have appealed the Trial Court's ruling on initial procedural matters concerning proper venue and a peremptory challenge of the trial judge by the plaintiffs. On April 27, 2004, the Nevada Supreme Court stayed the action pending resolution of these procedural matters on appeal. This appeal is currently pending.

Based on the information available to date, our own preliminary investigation, and the positive results of investigations conducted by State and Federal agencies, we believe that the claims against us in these matters are without merit and intend to defend against them vigorously.

Meritage Homes Corp., Monterey Homes Construction, Inc., and Monterey Homes Arizona, Inc. v. Kinder Morgan Energy Partners, L.P. and SFPP Limited Partnership, No. CIV 05 021 TUCCKJ, United States District Court, Arizona.

On January 28, 2005, Meritage Homes Corp. and its above-named affiliates filed a Complaint in the above-entitled action against us and SFPP, LP. The Plaintiffs are homebuilders who constructed a subdivision known as Silver Creek II located in Tucson, Arizona. Plaintiffs allege that, as a result of a July 30, 2003 pipeline rupture and accompanying release of petroleum products, soil and groundwater adjacent to, on and underlying portions of Silver Creek II became contaminated. Plaintiffs allege that they have incurred and continue to incur costs, damages and expenses associated with the delay of closings of home sales within Silver Creek II and damage to their reputation and goodwill as a result of the rupture and release. Plaintiffs' complaint purports to assert claims for negligence, breach of contract, trespass, nuisance, strict liability, subrogation and indemnity, and negligence per se. Plaintiffs seek "no less than $1,500,000 in compensatory damages and necessary response costs," a declaratory judgment, interest, punitive damages and attorneys' fees and costs. The parties have agreed to submit the claims to arbitration and are currently negotiating an arbitration schedule. We dispute the legal and factual bases for many of Plaintiffs' claimed compensatory damages, deny that punitive damages are appropriate under the facts, and intend to vigorously defend this action.

Walnut Creek, California Pipeline Rupture

On November 9, 2004, Mountain Cascade, Inc., a third-party contractor on a water main replacement project hired by East Bay Municipal Utility District, struck and ruptured an underground petroleum pipeline owned and operated by SFPP, LP in Walnut Creek, California. An explosion occurred immediately following the rupture that resulted in five fatalities and several injuries to employees or contractors of Mountain Cascade.

On May 5, 2005, the California Division of Occupational Safety and Health ("CalOSHA") issued two citations against us relating to this incident assessing fines of $140,000 based upon our alleged failure to mark the location of the pipeline properly prior to the excavation of the site by the contractor. The location of the incident was not our work site, not did we have any direct involvement in the project. We believe that SFPP acted in accordance with applicable California law, and further that according to California law, excavators, such as the contractor on the project, must take the necessary steps (including excavating with hand tools) to confirm the exact location of a pipeline before using any power operated or power driven excavation equipment. Accordingly, we disagree with the findings of CalOSHA and plan to appeal the citations.

Juana Lilian Arias, et. al v. Kinder Morgan, Inc., Kinder Morgan Energy Partners, L.P., Mountain Cascade, Inc., and Does 1-30, No. RG05195567 (Superior Court, Alameda County, California).

The above-referenced complaint for personal injuries and wrongful death was filed on January 26, 2005. Plaintiffs allege that Victor Javier Rodriguez was killed as a result of the rupture by Mountain Cascade, Inc. of SFPP, LP's petroleum pipeline in Walnut Creek, California and the resulting explosion and fire. Plaintiffs allege that defendants failed to properly locate and mark the location of the petroleum pipeline. The complaint purports to assert claims for negligence, unfair competition, strict liability and intentional misrepresentation. Plaintiffs seek unspecified general damages, incidental damages, economic damages, disgorgement of profits, exemplary damages, interest, attorneys' fees and costs.

Marilu Angeles, et. al v. Kinder Morgan, Inc., Kinder Morgan Energy Partners, L.P., Mountain Cascade, Inc., Does 1-30 and Mariel Hernandez, No. RG05195680 (Superior Court, Alameda County, California).

The above-referenced complaint for personal injuries and wrongful death was filed on January 26, 2005. Plaintiffs allege that Israel Hernandez was killed as a result of the rupture by Mountain Cascade, Inc. of SFPP, LP's petroleum pipeline in Walnut Creek, California and the resulting explosion and fire. Plaintiffs allege that defendants failed to properly locate and mark the location of the petroleum pipeline. The complaint purports to assert claims for negligence, unfair competition, strict liability and intentional misrepresentation. Plaintiffs seek unspecified general damages, incidental damages, economic damages, disgorgement of profits, exemplary damages, interest, attorneys' fees and costs.

Jeremy and Johanna Knox v. Mountain Cascade, Inc, Kinder Morgan Energy Partners of Houston, Inc., and Does 1 to 50, No. C 05-00281 (Superior Court, Contra Costa County, California).

The above-referenced complaint for personal injuries was filed on February 2, 2005. Plaintiffs allege that Jeremy Knox was injured as a result of the rupture by Mountain Cascade, Inc. of SFPP, LP's petroleum pipeline in Walnut Creek, California and the resulting explosion and fire. Plaintiffs allege that defendants failed to properly locate and mark the location of the petroleum pipeline. Plaintiffs assert claims for negligence, loss of consortium, and exemplary damages in an unspecified amount.

Laura Reyes et. al. v. East Bay Municipal Utility District, Mountain Cascade, Inc. and Kinder Morgan Energy Partners, L.P.

We understand that the above-referenced complaint was filed on or about April 14, 2005. As of April 30, 2005, we had not yet been served with a copy of the complaint. We understand that the suit was filed on behalf of Laura Reyes, wife of deceased welder Miguel Reyes, and their three minor children, and that the complaint includes claims of wrongful death and negligence, and seeks unspecified compensatory and punitive damages.

Based upon our initial investigation of the cause of the rupture of SFPP, LP's petroleum pipeline by Mountain Cascade, Inc. and the resulting explosion and fire, we intend to deny liability for the resulting deaths, injuries and damages, to vigorously defend against such claims, and to seek contribution and indemnity from the responsible parties.

Marion County, Mississippi Litigation

In 1968, Plantation Pipe Line Company discovered a release from its 12-inch pipeline in Marion County, Mississippi. The pipeline was immediately repaired. In 1998 and 1999, 62 lawsuits were filed on behalf of 263 plaintiffs in the Circuit Court of Marion County, Mississippi. The majority of the claims are based on alleged exposure from the 1968 release, including claims for property damage and personal injury. During the first quarter of 2005, settlements and/or dismissals were completed with all of the plaintiffs.

Exxon Mobil Corporation v. GATX Corporation, Kinder Morgan Liquids Terminals, Inc. and ST Services, Inc.

On April 23, 2003, Exxon Mobil Corporation filed the Complaint in the Superior Court of New Jersey, Gloucester County. We filed our answer to the Complaint on June 27, 2003, in which we denied ExxonMobil's claims and allegations as well as included counterclaims against ExxonMobil. The lawsuit relates to environmental remediation obligations at a Paulsboro, New Jersey liquids terminal owned by ExxonMobil from the mid-1950s through November 1989, by GATX Terminals Corp. from 1989 through September 2000, and owned currently by ST Services, Inc. Prior to selling the terminal to GATX Terminals, ExxonMobil performed an environmental site assessment of the terminal required prior to sale pursuant to state law. During the site assessment, ExxonMobil discovered items that required remediation and the New Jersey Department of Environmental Protection issued an order that required ExxonMobil to perform various remediation activities to remove hydrocarbon contamination at the terminal. ExxonMobil, we understand, is still remediating the site and has not been removed as a responsible party from the state's cleanup order; however, ExxonMobil claims that the remediation continues because of GATX Terminals' storage of a fuel additive, MTBE, at the terminal during GATX Terminals' ownership of the terminal. When GATX Terminals sold the terminal to ST Services, the parties indemnified one another for certain environmental matters. When GATX Terminals was sold to us, GATX Terminals' indemnification obligations, if any, to ST Services may have passed to us. Consequently, at issue is any indemnification obligations we may owe to ST Services in respect to environmental remediation of MTBE at the terminal. The Complaint seeks any and all damages related to remediating MTBE at the terminal, and, according to the New Jersey Spill Compensation and Control Act, treble damages may be available for actual dollars incorrectly spent by the successful party in the lawsuit for remediating MTBE at the terminal. The parties have recently completed discovery. In October 2004, the judge assigned to the case dismissed himself from the case based on a conflict, and the new judge has ordered the parties to participate in mandatory mediation. The mediation is currently scheduled for May 2005.

Exxon Mobil Corporation v. Enron Gas Processing Co., Enron Corp., as party in interest for Enron Helium Company, a division of Enron Corp., Enron Liquids Pipeline Co., Enron Liquids Pipeline Operating Limited Partnership, Kinder Morgan Operating L.P. "A," and Kinder Morgan, Inc., No. 2000-45252 (189th Judicial District Court, Harris County, Texas)

On September 1, 2000, Plaintiff Exxon Mobil Corporation filed its Original Petition and Application for Declaratory Relief against Kinder Morgan Operating L.P. "A," Enron Liquids Pipeline Operating Limited Partnership n/k/a Kinder Morgan Operating L.P. "A," Enron Liquids Pipeline Co. n/k/a Kinder Morgan G.P., Inc.,

Enron Gas Processing Co. n/k/a ONEOK Bushton Processing, Inc., and Enron Helium Company. Plaintiff added Enron Corp. as party in interest for Enron Helium Company in its First Amended Petition and added Kinder Morgan, Inc. as a Defendant. The claims against Enron Corp. were severed into a separate cause of action. Plaintiff's claims are based on a Gas Processing Agreement entered into on September 23, 1987 between Mobil Oil Corp. and Enron Gas Processing Company relating to gas produced in the Hugoton Field in Kansas and processed at the Bushton Plant, a natural gas processing facility located in Kansas. Plaintiff also asserts claims relating to the Helium Extraction Agreement entered between Enron Helium Company (a division of Enron Corp.) and Mobil Oil Corporation dated March 14, 1988. Plaintiff alleges that Defendants failed to deliver propane and to allocate plant products to Plaintiff as required by the Gas Processing Agreement and originally sought damages of approximately $5.9 million.

Plaintiff filed its Third Amended Petition on February 25, 2003. In its Third Amended Petition, Plaintiff alleges claims for breach of the Gas Processing Agreement and the Helium Extraction Agreement, requests a declaratory judgment and asserts claims for fraud by silence/bad faith, fraudulent inducement of the 1997 Amendment to the Gas Processing Agreement, civil conspiracy, fraud, breach of a duty of good faith and fair dealing, negligent misrepresentation and conversion. As of April 7, 2003, Plaintiff alleged economic damages for the period from November 1987 through March 1997 in the amount of $30.7 million. On May 2, 2003, Plaintiff added claims for the period from April 1997 through February 2003 in the amount of $12.9 million. On June 23, 2003, Plaintiff filed a Fourth Amended Petition that reduced its total claim for economic damages to $30.0 million. On October 5, 2003, Plaintiff filed a Fifth Amended Petition that purported to add a cause of action for embezzlement. On February 10, 2004, Plaintiff filed its Eleventh Supplemental Responses to Requests for Disclosure that restated its alleged economic damages for the period of November 1987 through December 2003 as approximately $37.4 million. The matter went to trial on June 21, 2004. On June 30, 2004, the jury returned a unanimous verdict in favor of all defendants as to all counts. Final Judgment was entered in favor of the defendants on August 19, 2004. Plaintiff has appealed the jury's verdict to the 14th Court of Appeals for the State of Texas. Briefing on the appeal is scheduled to be completed in September 2005.

Although no assurances can be given, we believe that we have meritorious defenses to all of these actions, that, to the extent an assessment of the matter is possible, we have established an adequate reserve to cover potential liability, and that these matters will not have a material adverse effect on our business, financial position, results of operations or cash flows.

Proposed Office of Pipeline Safety Civil Penalty and Compliance Order

On July 15, 2004, the U.S. Department of Transportation's Office of Pipeline Safety ("OPS") issued a Proposed Civil Penalty and Proposed Compliance Order (the "Proposed Order") concerning alleged violations of certain federal regulations concerning our pipeline Integrity Management Program. The violations alleged in the Proposed Order are based upon the results of inspections of our Integrity Management Program at our products pipelines facilities in Orange, California and Doraville, Georgia conducted in April and June of 2003, respectively. As a result of the alleged violations, the OPS seeks to have us implement a number of changes to our Integrity Management Program and also seeks to impose a proposed civil penalty of approximately $0.3 million. We have already addressed a number of the concerns identified by the OPS and intend to continue to work with the OPS to ensure that our Integrity Management Program satisfies all applicable regulations. However, we dispute some of the OPS findings and disagree that civil penalties are appropriate, and therefore have requested an administrative hearing on these matters according to the U.S. Department of Transportation regulations. An administrative hearing was held on April 11 and 12, 2005. Supplemental information will be provided to the hearing officer within thirty days by both the OPS and us. It is anticipated that the decision in this matter and potential administrative order will be issued late in the second quarter of 2005 or in the third quarter of 2005.

Environmental Matters

We are subject to environmental cleanup and enforcement actions from time to time. In particular, the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) generally imposes joint and several liability for cleanup and enforcement costs on current or predecessor owners and operators of a site, among others, without regard to fault or the legality of the original conduct. Our operations are also subject to federal, state and local laws and regulations relating to protection of the environment. Although we believe our operations are in

substantial compliance with applicable environmental law and regulations, risks of additional costs and liabilities are inherent in pipeline, terminal and carbon dioxide field and oil field operations, and there can be no assurance that we will not incur significant costs and liabilities. Moreover, it is possible that other developments, such as increasingly stringent environmental laws, regulations and enforcement policies thereunder, and claims for damages to property or persons resulting from our operations, could result in substantial costs and liabilities to us.

We are currently involved in the following governmental proceedings related to compliance with environmental regulations associated with our assets and have established a reserve to address the costs associated with the cleanup:

- several groundwater and soil remediation efforts under administrative orders or related state remediation programs issued by the California Regional Water Quality Control Board and several other state agencies for assets associated with SFPP, L.P.;

- groundwater and soil remediation efforts under administrative orders issued by various regulatory agencies on those assets purchased from GATX Corporation, comprising Kinder Morgan Liquids Terminals LLC, KM Liquids Terminals L.P., CALNEV Pipe Line LLC and Central Florida Pipeline LLC;

- groundwater and soil remediation efforts under administrative orders or related state remediation programs issued by various regulatory agencies on those assets purchased from ExxonMobil; ConocoPhillips; and Charter Triad, comprising Kinder Morgan Southeast Terminals, LLC.; and

- groundwater and soil remediation efforts under administrative orders or related state remediation programs issued by various regulatory agencies on those assets comprising Plantation Pipe Line Company, including a ground water remediation effort taking place between Chevron, Plantation Pipe Line Company and the Alabama Department of Environmental Management.

Tucson, Arizona

On July 30, 2003, SFPP, L.P. suffered a sudden and accidental rupture of one of its liquid products pipelines in the vicinity of Tucson, Arizona. The rupture resulted in the release of petroleum product into the soil and groundwater in the immediate vicinity of the rupture.

On September 11, 2003, the Arizona Department of Environmental Quality ("ADEQ") issued a Notice of Violation indicating that ADEQ "has reason to believe" that SFPP violated certain Arizona statutes and rules due to the discharge of petroleum product to the environment as a result of the pipeline rupture. ADEQ asserted that such alleged violations could result in the imposition of civil penalties against SFPP. SFPP timely responded to the Notice of Violation, disputed its validity, and provided the information requested in the Notice of Violation. According to ADEQ written policy, a Notice of Violation is not an enforcement action, and is instead "an enforcement compliance assurance tool used by ADEQ." ADEQ's policy also states that although ADEQ has the "authority to issue appealable administrative orders compelling compliance, a Notice of Violation has no such force or effect."

On November 13, 2003, ADEQ sent a second Notice of Violation with respect to the pipeline rupture and release, stating that ADEQ had reason to believe that a violation of additional Arizona regulations had resulted from the discharge of petroleum, because the petroleum had reached groundwater. ADEQ asserted that such alleged violations could result in the imposition of civil penalties against SFPP. SFPP timely responded to this second Notice of Violation, disputed its validity, and provided the information requested in the second Notice of Violation.

On January 19, 2005, SFPP, L.P. and ADEQ announced a settlement with the terms of the settlement set forth in a consent judgment filed with the Maricopa County Superior Court. Under the terms of the settlement, we paid $500,000 to the State of Arizona in full settlement of any possible claims by the state arising out of the release. The settlement expressly provides that we do not admit any wrongdoing or violation of environmental law. On April 12, 2005, the ADEQ filed a Satisfaction of Judgment with the Maricopa County Superior Court acknowledging full satisfaction of the Consent Judgment and terminating the Consent Judgment. We are currently evaluating the long term costs of the cleanup. A substantial portion of those costs are recoverable through insurance.

Cordelia, California

On April 28, 2004, we discovered a spill of diesel fuel into a marsh near Cordelia, California from a section of our Pacific operations' 14-inch Concord to Sacramento, California products pipeline. Estimates indicated that the size of the spill was approximately 2,450 barrels. Upon discovery of the spill and notification to regulatory agencies, a unified response was implemented with the United States Coast Guard, the California Department of Fish and Game, the Office of Spill Prevention and Response and us. The damaged section of the pipeline was removed and replaced, and the pipeline resumed operations on May 2, 2004. We have completed recovery of free flowing diesel from the marsh and have completed an enhanced biodegradation program for removal of the remaining constituents bound up in soils. The property has been turned back to the owners for its stated purpose. There will be ongoing monitoring under the oversight of the California Regional Water Quality Control Board until the site conditions demonstrate there are no further actions required. We are currently in negotiations with the United States Environmental Protection Agency, the United States Fish & Wildlife Service, the California Department of Fish & Game and the San Francisco Regional Water Quality Control Board regarding potential civil penalties and natural resource damages assessments.

In April 2005, we were informed by the office of the Attorney General of California that the office was contemplating filing criminal charges against us claiming discharge of diesel fuel arising from the April 2004 rupture from a section of our Pacific operations' 14-inch Concord to Sacramento, California products pipeline and the failure to make timely notice of the discharge to appropriate state agencies. In addition, we were told that the California Attorney General was also contemplating filing charges alleging other releases and failures to provide timely notice regarding certain environmental incidents at certain of our facilities in California.

On April 26, 2005, we announced that we had entered into an agreement with the Attorney General of the State of California and the District Attorney of Solano County, California, to settle misdemeanor charges of the unintentional, non-negligent discharge of diesel fuel resulting from this release and the failure to provide timely notice of a threatened discharge to appropriate state agencies as well as other potential claims in California regarding alleged notice and discharge incidents. In addition to the charges settled by this agreement, we entered into an agreement in principle to settle similar additional misdemeanor charges in Los Angeles County, California, in connection with the unintentional, non-negligent release of approximately five gallons of diesel fuel at our Carson refined petroleum products terminal in Los Angeles Harbor in May 2004.

Under the settlement agreement related to the Cordelia, California incident, SFPP, L.P. agreed to plead guilty to four misdemeanors and to pay approximately $5.2 million in fines, penalties, restitution, environmental improvement project funding, and enforcement training in the State of California, and agreed to be placed on informal, unsupervised probation for a term of three years. Under the settlement agreement related to the Carson terminal incident, Kinder Morgan Liquids Terminals LLC agreed to plead guilty to two additional misdemeanors and to pay approximately $0.2 million in fines and penalties. We included the combined $5.4 million as general and administrative expense in March 2005, and we have made payments in the amount of $0.3 million as of March 31, 2005. We expect to pay the remaining $5.1 million in the second quarter of 2005. Since the April 2004 release in the Suisun Marsh area near Cordelia, California, we have cooperated fully with federal and state agencies and have worked diligently to remediate the affected areas. As of April 30, 2005, the remediation is substantially complete.

San Diego, California

In June 2004, we entered into discussions with the City of San Diego with respect to impacted groundwater beneath the City's stadium property in San Diego resulting from operations at the Mission Valley terminal facility. The City has requested that SFPP work with the City as they seek to re-develop options for the stadium area including future use of both groundwater aquifer and real estate development. The City of San Diego and SFPP are working cooperatively towards a settlement and a long-term plan as SFPP continues to remediate the impacted groundwater. We do not expect the cost of any settlement and remediation plan to be material. This site has been, and currently is, under the regulatory oversight and order of the California Regional Water Quality Control Board.

Baker, California

In November 2004, our CALNEV pipeline, which transports refined petroleum products from Colton, California to Las Vegas, Nevada, experienced a failure in the line from external damage, resulting in a release of gasoline that affected approximately two acres of land in the high desert administered by The Bureau of Land Management, an agency within the U.S. Department of the Interior. Remediation has been conducted and continues for product in the soils. All agency requirements have been met and the site will be closed upon completion of the soil remediation.

Oakland, California

In February 2005, we were contacted by the U.S. Coast Guard regarding a potential release of jet fuel in the Oakland, California area. Our northern California team responded and discovered that one of our product pipelines had been damaged by a third party, which resulted in a release of jet fuel which migrated to the storm drain system. We have coordinated the remediation of the impacts from this release.

Donner Summit, California

In April 2005, our SFPP pipeline in Northern California, which transports refined petroleum products to Reno, Nevada, experienced a failure in the line from external damage, resulting in a release of product that affected a limited area adjacent to the pipeline near the summit of Donner Pass. The release was located on land administered by the Forest Service, an agency within the U.S. Department of Agriculture. Initial remediation has been conducted in the immediate vicinity of the pipeline. All agency requirements have been met and the site will be closed upon completion of the remediation.

Other Environmental

On March 30, 2004, the Texas Commission on Environmental Quality (TCEQ) issued a Notice of Enforcement Action related to our CO2 segment's Snyder Gas Plant. We are currently in final settlement discussions with TCEQ regarding this issue and do not expect the cost of any settlement to be material. In addition, we are from time to time involved in civil proceedings relating to damages alleged to have occurred as a result of accidental leaks or spills of refined petroleum products, natural gas liquids, natural gas and carbon dioxide.

Our review of assets related to Kinder Morgan Interstate Gas Transmission LLC indicates possible environmental impacts from petroleum and used oil releases into the soil and groundwater at nine sites. Additionally, our review of assets related to Kinder Morgan Texas Pipeline and Kinder Morgan Tejas indicates possible environmental impacts from petroleum releases into the soil and groundwater at nine sites. Further delineation and remediation of any environmental impacts from these matters will be conducted. Reserves have been established to address these issues.

We are also involved with and have been identified as a potentially responsible party in several federal and state superfund sites. Environmental reserves have been established for those sites where our contribution is probable and reasonably estimable.

Although no assurance can be given, we believe that the ultimate resolution of the environmental matters set forth in this note will not have a material adverse effect on our business, financial position, results of operations or cash flows. However, we are not able to reasonably estimate when the eventual settlements of these claims will occur. Many factors may change in the future affecting our reserve estimates, such as regulatory changes, groundwater and land use near our sites, and changes in cleanup technology. As of March 31, 2005, we have accrued an environmental reserve of $36.6 million.

Other

We are a defendant in various lawsuits arising from the day-to-day operations of our businesses. Although no assurance can be given, we believe, based on our experiences to date, that the ultimate resolution of such items will not have a material adverse impact on our business, financial position, results of operations or cash flows.

4. Asset Retirement Obligations

We account for our legal obligations associated with the retirement of long-lived assets pursuant to Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 provides accounting and reporting guidance for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction or normal operation of a long-lived asset.

SFAS No. 143 requires companies to record a liability relating to the retirement and removal of assets used in their businesses. Under SFAS No. 143, the fair value of asset retirement obligations are recorded as liabilities on a discounted basis when they are incurred, which is typically at the time the assets are installed or acquired. Amounts recorded for the related assets are increased by the amount of these obligations. Over time, the liabilities will be accreted for the change in their present value and the initial capitalized costs will be depreciated over the useful lives of the related assets. The liabilities are eventually extinguished when the asset is taken out of service.

In our CO2 business segment, we are required to plug and abandon oil and gas wells that have been removed from service and to remove our surface wellhead equipment and compressors. As of March 31, 2005, we have recognized asset retirement obligations in the aggregate amounts of $35.3 million relating to these requirements at existing sites within our CO2 business segment.

In our Natural Gas Pipelines business segment, if we were to cease providing utility services, we would be required to remove surface facilities from land belonging to our customers and others. Our Texas intrastate natural gas pipeline group has various condensate drip tanks and separators located throughout its natural gas pipeline systems, as well as inactive gas processing plants, laterals and gathering systems which are no longer integral to the overall mainline transmission systems, and asbestos-coated underground pipe which is being abandoned and retired. Our Kinder Morgan Interstate Gas Transmission system has compressor stations which are no longer active and other miscellaneous facilities, all of which have been officially abandoned. We believe we can reasonably estimate both the time and costs associated with the retirement of these facilities. As of March 31, 2005, we have recognized asset retirement obligations in the aggregate amounts of $3.0 million relating to the businesses within our Natural Gas Pipelines business segment.

We have included $0.8 million of our total asset retirement obligations as of March 31, 2005 with "Accrued other current liabilities" in our accompanying consolidated balance sheet. The remaining $37.5 million obligation is reported separately as a non-current liability. No assets are legally restricted for purposes of settling our asset retirement obligations. A reconciliation of the beginning and ending aggregate carrying amount of our asset retirement obligations for each of the three months ended March 31, 2005 and 2004 is as follows (in thousands):

                                           Three Months Ended March 31,
                                           ----------------------------
                                             2005               2004
                                           ---------        -----------
Balance at beginning of period...........  $  38,274        $    35,708
Liabilities incurred.....................       (238)                 -
Liabilities settled......................       (233)              (230)
Accretion expense........................        520                519
Revisions in estimated cash flows........          -                  -
                                           ---------        -----------
Balance at end of period.................  $  38,323        $    35,997
                                           =========        ===========

5. Distributions

On February 14, 2005, we paid a cash distribution of $0.74 per unit to our common unitholders and our Class B unitholders for the quarterly period ended December 31, 2004. KMR, our sole i-unitholder, received 955,936 additional i-units based on the $0.74 cash distribution per common unit. The distributions were declared on January 18, 2005, payable to unitholders of record as of January 31, 2005.

On April 20, 2005, we declared a cash distribution of $0.76 per unit for the quarterly period ended March 31, 2005. The distribution will be paid on May 13, 2005, to unitholders of record as of April 29, 2005. Our common

unitholders and Class B unitholders will receive cash. KMR will receive a distribution in the form of additional i-units based on the $0.76 distribution per common unit. The number of i-units distributed will be 963,496. For each outstanding i-unit that KMR holds, a fraction of an i-unit (0.017482) will be issued. The fraction was determined by dividing:

- $0.76, the cash amount distributed per common unit

by

- $43.473, the average of KMR's limited liability shares' closing market prices from April 13-26, 2005, the ten consecutive trading days preceding the date on which the shares began to trade ex-dividend under the rules of the New York Stock Exchange.

6. Intangibles

Our intangible assets include goodwill, lease value, contracts and agreements. All of our intangible assets having definite lives are being amortized on a straight-line basis over their estimated useful lives. Following is information related to our intangible assets still subject to amortization and our goodwill (in thousands):

                                 March 31,       December 31,
                                   2005              2004
                               -----------       -----------
Goodwill
Gross carrying amount......    $   760,068       $   746,980
Accumulated amortization...        (14,142)          (14,142)
                               -----------       -----------
Net carrying amount........        745,926           732,838
                               -----------       -----------

Lease value
Gross carrying amount......          6,592             6,592
Accumulated amortization...         (1,064)           (1,028)
                               -----------       -----------
Net carrying amount........          5,528             5,564
                               -----------       -----------

Contracts and other
Gross carrying amount......         35,167            10,775
Accumulated amortization...         (1,385)           (1,055)
                               -----------       -----------
Net carrying amount........         33,782             9,720
                               -----------       -----------

Total intangibles, net.....    $   785,236       $   748,122
                               ===========       ===========

Changes in the carrying amount of goodwill for the three months ended March 31, 2005 are summarized as follows (in thousands):

                                        Products     Natural Gas
                                        Pipelines     Pipelines        CO2        Terminals        Total
                                       -----------   ------------   -----------   -----------   -----------
Balance as of December 31, 2004....    $   263,182    $   250,318   $    46,101   $   173,237   $   732,838
  Acquisitions.....................         13,088              -             -             -        13,088
  Disposals - purchase price adjs..              -              -             -             -             -
  Impairments......................              -              -             -             -             -
                                       -----------   ------------   -----------   -----------   -----------
Balance as of March 31, 2005.......    $   276,270    $   250,318   $    46,101   $   173,237   $   745,926
                                       ===========    ===========   ===========   ===========   ===========

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

                           Three Months Ended March 31,
                          ------------------------------
                               2005              2004
                          ------------      ------------
Lease value............   $         36      $         36
Contracts and other....            330               125
                          ------------      ------------
Total amortization.....    $       366       $       161
                           ===========       ===========

As of March 31, 2005, our weighted average amortization period for our intangible assets was approximately 26.9 years. Our estimated amortization expense for these assets for each of the next two fiscal years is approximately $1.3 million, and for each of the following three fiscal years, approximately $1.0 million.

In addition, pursuant to ABP No. 18, any premium paid by an investor, which is analogous to goodwill, must be identified. The premium, representing excess cost over underlying fair value of net assets accounted for under the equity method of accounting, is referred to as equity method goodwill, and is not subject to amortization but rather to impairment testing. The impairment test under APB No. 18 considers whether the fair value of the equity investment as a whole, not the underlying net assets, has declined and whether that decline is other than temporary. This test requires equity method investors to continue to assess impairment of investments in investees by considering whether declines in the fair values of those investments, versus carrying values, may be other than temporary in nature. As of both March 31, 2005 and December 31, 2004, we have reported $150.3 million in equity method goodwill within the caption "Investments" in our accompanying consolidated balance sheets.

7. Debt

Our outstanding short-term debt as of March 31, 2005 was $267.2 million. The balance consisted of:

- $263.4 million of commercial paper borrowings;

- $5 million of 7.84% Senior Notes (our subsidiary, Central Florida Pipe Line LLC, is the obligor on the notes); and

- an offset of $1.2 million (which represents the net of other borrowings and the accretion of discounts on our senior note issuances).

As of March 31, 2005, we intended and had the ability to refinance all of our short-term debt on a long-term basis under our unsecured long-term credit facility. Accordingly, such amounts have been classified as long-term debt in our accompanying consolidated balance sheet.

The weighted average interest rate on all of our borrowings was approximately 4.901% during the first quarter of 2005 and 4.385% during the first quarter of 2004.

Credit Facility

As of March 31, 2005, we had a $1.25 billion five-year, unsecured revolving credit facility due August 18, 2009. Similar to our previous credit facilities, our current credit facility is with a syndicate of financial institutions and Wachovia Bank, National Association is the administrative agent. There were no borrowings under our five-year credit facility as of March 31, 2005 or as of December 31, 2004.

The amount available for borrowing under our credit facility as of March 31, 2005 was reduced by:

- our outstanding commercial paper borrowings ($263.4 million as of March 31, 2005);

- a combined $248 million in two letters of credit that support our hedging of commodity price risks involved from the sale of natural gas, natural gas liquids, oil and carbon dioxide;

- a combined $50 million in two letters of credit that support tax-exempt bonds; and

- $1.5 million of other letters of credit supporting other obligations of us and our subsidiaries.

Interest Rate Swaps

Information on our interest rate swaps is contained in Note 10.

Commercial Paper Program

As of both March 31, 2005 and December 31, 2004, our commercial paper program provided for the issuance of up to $1.25 billion of commercial paper. As of March 31, 2005, we had $263.4 million of commercial paper outstanding with an average interest rate of 2.6798%. Borrowings under our commercial paper program reduce the borrowings allowed under our credit facility.

Senior Notes

On March 15, 2005, we paid $200 million to retire the principal amount of our 8.0% senior notes that matured on that date. We borrowed the necessary funds under our commercial paper program.

On March 15, 2005, we closed a public offering of $500 million in principal amount of 5.80% senior notes due March 15, 2035 at a price to the public of 99.746% per note. In the offering, we received proceeds, net of underwriting discounts and commissions, of approximately $494.4 million. We used the proceeds to reduce the outstanding balance on our commercial paper borrowings.

International Marine Terminals Debt

Since February 1, 2002, we have owned a 66 2/3% interest in International Marine Terminals partnership. The principal assets owned by IMT are dock and wharf facilities financed by the Plaquemines Port, Harbor and Terminal District (Louisiana) $40,000,000 Adjustable Rate Annual Tender Port Facilities Revenue Refunding Bonds (International Marine Terminals Project) Series 1984A and 1984B.

On March 15, 2005, these bonds were refunded and the maturity date was extended from March 15, 2006 to March 15, 2025. No other changes were made under the bond provisions. The bonds are backed by two letters of credit issued by KBC Bank N.V. On March 19, 2002, an Amended and Restated Letter of Credit Reimbursement Agreement relating to the letters of credit in the amount of $45.5 million was entered into by IMT and KBC Bank. In connection with that agreement, we agreed to guarantee the obligations of IMT in proportion to our ownership interest. Our obligation is approximately $30.3 million for principal, plus interest and other fees.

Contingent Debt

We apply the provisions of Financial Accounting Standards Board Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" to our agreements that contain guarantee or indemnification clauses. These disclosure provisions expand those required by SFAS No. 5, "Accounting for Contingencies," by requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantor's performance is remote. The following is a description of our contingent debt agreements.

Cortez Pipeline Company Debt

Pursuant to a certain Throughput and Deficiency Agreement, the partners of Cortez Pipeline Company (Kinder Morgan CO2 Company, L.P. - 50% partner; a subsidiary of Exxon Mobil Corporation - 37% partner; and Cortez Vickers Pipeline Company - 13% partner) are required, on a several, percentage ownership basis, to contribute capital to Cortez Pipeline Company in the event of a cash deficiency. The Throughput and Deficiency Agreement contractually supports the borrowings of Cortez Capital Corporation, a wholly-owned subsidiary of Cortez Pipeline Company, by obligating the partners of Cortez Pipeline Company to fund cash deficiencies at Cortez Pipeline Company, including cash deficiencies relating to the repayment of principal and interest on borrowings by Cortez Capital Corporation. Parent companies of the respective Cortez Pipeline Company partners further severally guarantee, on a percentage basis, the obligations of the Cortez Pipeline Company partners under the Throughput and Deficiency Agreement.

Due to our indirect ownership of Cortez Pipeline Company through Kinder Morgan CO2 Company, L.P., we severally guarantee 50% of the debt of Cortez Capital Corporation. Shell Oil Company shares our several guaranty obligations jointly and severally; however, we are obligated to indemnify Shell for liabilities it incurs in connection

with such guaranty. With respect to Cortez's long-term revolving credit facility, Shell is released of its guaranty obligations on December 31, 2006. Furthermore, with respect to Cortez's short-term commercial paper program and Series D notes, we must use commercially reasonable efforts to have Shell released of its guaranty obligations by December 31, 2006. If we are unable to obtain Shell's release in respect of the Series D Notes by that date, we are required to provide Shell with collateral (a letter of credit, for example) to secure our indemnification obligations to Shell.

As of March 31, 2005, the debt facilities of Cortez Capital Corporation consisted of:

- $85 million of Series D notes due May 15, 2013;

- a $125 million short-term commercial paper program; and

- a $125 million five-year committed revolving credit facility due December 22, 2009 (to support the above-mentioned $125 million commercial paper program).

As of March 31, 2005, Cortez Capital Corporation had $105.4 million of commercial paper outstanding with an average interest rate of 2.6868%, the average interest rate on the Series D notes was 7.0835%, and there were no borrowings under the credit facility.

Red Cedar Gas Gathering Company Debt

In October 1998, Red Cedar Gas Gathering Company sold $55 million in aggregate principal amount of Senior Notes due October 31, 2010. The $55 million was sold in 10 different notes in varying amounts with identical terms.

The Senior Notes are collateralized by a first priority lien on the ownership interests, including our 49% ownership interest, in Red Cedar Gas Gathering Company. The Senior Notes are also guaranteed by us and the other owner of Red Cedar Gas Gathering Company jointly and severally. The principal is to be repaid in seven equal installments beginning on October 31, 2004 and ending on October 31, 2010. As of March 31, 2005, $47.1 million in principal amount of notes were outstanding.

Nassau County, Florida Ocean Highway and Port Authority Debt

Nassau County, Florida Ocean Highway and Port Authority is a political subdivision of the State of Florida. During 1990, Ocean Highway and Port Authority issued its Adjustable Demand Revenue Bonds in the aggregate principal amount of $38.5 million for the purpose of constructing certain port improvements located in Fernandino Beach, Nassau County, Florida. A letter of credit was issued as security for the Adjustable Demand Revenue Bonds and was guaranteed by the parent company of Nassau Terminals LLC, the operator of the port facilities. In July 2002, we acquired Nassau Terminals LLC and became guarantor under the letter of credit agreement. In December 2002, we issued a $28 million letter of credit under our credit facilities and the former letter of credit guarantee was terminated. Principal payments on the bonds are made on the first of December each year and reductions are made to the letter of credit. As of March 31, 2005, the value of this letter of credit outstanding under our credit facility was $25.9 million.

Certain Relationships and Related Transactions

In conjunction with our acquisition of Natural Gas Pipelines assets from KMI on December 31, 1999, December 31, 2000, and November 1, 2004, KMI became a guarantor of approximately $733.5 million of our debt. KMI would be obligated to perform under this guarantee only if we and/or our assets were unable to satisfy our obligations.

For additional information regarding our debt facilities, see Note 9 to our consolidated financial statements included in our Form 10-K for the year ended December 31, 2004.

8. Partners' Capital

As of March 31, 2005 and December 31, 2004, our partners' capital consisted of the following limited partner units:

                                     March 31,        December 31,
                                       2005               2004
                                   -----------        ------------
Common units..................     147,605,158         147,537,908
Class B units.................       5,313,400           5,313,400
i-units.......................      55,113,577          54,157,641
                                   -----------        ------------
  Total limited partner units.     208,032,135         207,008,949
                                   ===========        ============

The total limited partner units represent our limited partners' interest and an effective 98% economic interest in us, exclusive of our general partner's incentive distribution rights. Our general partner has an effective 2% interest in us, excluding its incentive distribution rights.

As of March 31, 2005, our common unit totals consisted of 133,249,423 units held by third parties, 12,631,735 units held by KMI and its consolidated affiliates (excluding our general partner), and 1,724,000 units held by our general partner. As of December 31, 2004, our common unit total consisted of 133,182,173 units held by third parties, 12,631,735 units held by KMI and its consolidated affiliates (excluding our general partner) and 1,724,000 units held by our general partner.

On both March 31, 2005 and December 31, 2004, our Class B units were held entirely by KMI and our i-units were held entirely by KMR. All of our Class B units were issued to KMI in December 2000. The Class B units are similar to our common units except that they are not eligible for trading on the New York Stock Exchange.

Our i-units are a separate class of limited partner interests in us. All of our i-units are owned by KMR and are not publicly traded. In accordance with its limited liability company agreement, KMR's activities are restricted to being a limited partner in us, and controlling and managing our business and affairs and the business and affairs of our operating limited partnerships and their subsidiaries. Through the combined effect of the provisions in our partnership agreement and the provisions of KMR's limited liability company agreement, the number of outstanding KMR shares and the number of i-units will at all times be equal.

Furthermore, under the terms of our partnership agreement, we agreed that we will not, except in liquidation, make a distribution on an i-unit other than in additional i-units or a security that has in all material respects the same rights and privileges as our i-units. The number of i-units we distribute to KMR is based upon the amount of cash we distribute to the owners of our common units. When cash is paid to the holders of our common units, we will issue additional i-units to KMR. The fraction of an i-unit paid per i-unit owned by KMR will have a value based on the cash payment on the common unit.

The cash equivalent of distributions of i-units will be treated as if it had actually been distributed for purposes of determining the distributions to our general partner. We will not distribute the cash to the holders of our i-units but will retain the cash for use in our business. If additional units are distributed to the holders of our common units, we will issue an equivalent amount of i-units to KMR based on the number of i-units it owns. Based on the preceding, KMR received a distribution of 955,936 i-units on February 14, 2005. These additional i-units distributed were based on the $0.74 per unit distributed to our common unitholders on that date.

For the purposes of maintaining partner capital accounts, our partnership agreement specifies that items of income and loss shall be allocated among the partners, other than owners of i-units, in accordance with their percentage interests. Normal allocations according to percentage interests are made, however, only after giving effect to any priority income allocations in an amount equal to the incentive distributions that are allocated 100% to our general partner. Incentive distributions are generally defined as all cash distributions paid to our general partner that are in excess of 2% of the aggregate value of cash and i-units being distributed.

Incentive distributions allocated to our general partner are determined by the amount quarterly distributions to unitholders exceed certain specified target levels. Our distribution of $0.74 per unit paid on February 14, 2005 for the fourth quarter of 2004 required an incentive distribution to our general partner of $106.0 million. Our distribution of $0.68 per unit paid on February 13, 2004 for the fourth quarter of 2003 required an incentive

distribution to our general partner of $85.8 million. Our declared distribution for the first quarter of 2005 of $0.76 per unit will result in an incentive distribution to our general partner of approximately $111.1 million. This compares to our distribution of $0.69 per unit and incentive distribution to our general partner of approximately $90.7 million for the first quarter of 2004.

9. Comprehensive Income

SFAS No. 130, "Accounting for Comprehensive Income," requires that enterprises report a total for comprehensive income. For the three months ended March 31, 2005, the difference between our net income and our comprehensive income resulted from unrealized gains or losses on derivatives utilized for hedging purposes and from foreign currency translation adjustments. For the three months ended March 31, 2004, the only difference between our net income and our comprehensive income was the unrealized gain or loss on derivatives utilized for hedging purposes. For more information on our hedging activities, see Note 10. Our total comprehensive income is as follows (in thousands):

                                                   Three Months Ended March 31,
                                                   ----------------------------
                                                       2005              2004
                                                   -----------        ---------
Net income......................................   $   223,621        $ 191,754
Foreign currency translation adjustments........          (227)               -
Change in fair value of derivatives used
 for hedging purposes...........................      (556,835)        (100,010)
Reclassification of change in fair value
 of derivatives to net income...................        60,920           26,116
                                                   -----------        ---------
  Comprehensive income/(loss)...................   $  (272,521)       $ 117,860
                                                   ===========        =========


10.  Risk Management

Hedging Activities

Certain of our business activities expose us to risks associated with changes in the market price of natural gas, natural gas liquids, crude oil and carbon dioxide. We use energy financial instruments to reduce our risk of changes in the prices of natural gas, natural gas liquids and crude oil markets (and carbon dioxide to the extent contracts are tied to crude oil prices) as discussed below. These risk management instruments are also called derivatives, which are defined as financial instruments or contracts whose value is derived from the worth and characteristics of some other financial measure called the underlying, and includes payment provisions called the notional amount. The value of a derivative (for example, options, swaps, futures contracts, etc.) is a function of the underlying (for example, a specified interest rate, commodity price, foreign exchange rate, or other variable) and the notional amount (for example, payment in cash, commodities, or other units specified in a derivative instrument), and while the underlying changes due to changes in market conditions, the notional amount remains constant throughout the life of the derivative contract.

Current accounting standards require derivatives to be reflected as assets or liabilities at their fair market values and the fair value of our risk management instruments reflects the estimated amounts that we would receive or pay to terminate the contracts at the reporting date, thereby taking into account the current unrealized gains or losses on open contracts. We have available market quotes for substantially all of the financial instruments that we use, including: commodity futures and options contracts, fixed-price swaps, and basis swaps.

Pursuant to our management's approved policy, we are to engage in these activities as a hedging mechanism against price volatility associated with:

- pre-existing or anticipated physical natural gas, natural gas liquids and crude oil sales;

- pre-existing or anticipated physical carbon dioxide sales that have pricing tied to crude oil prices;

- natural gas purchases; and

- system use and storage.

Our risk management activities are primarily used in order to protect our profit margins and our risk management policies prohibit us from engaging in speculative trading. Commodity-related activities of our risk management group are monitored by our risk management committee, which is charged with the review and enforcement of our management's risk management policy.

Specifically, our risk management committee is a separately designated standing committee comprised of eleven executive-level employees of KMI or KMGP Services Company, Inc. whose job responsibilities involve operations exposed to commodity market risk and other external risks in the ordinary course of business. Our risk management committee is chaired by our Chief Financial Officer and is charged with the following three responsibilities:

- establish and review risk limits consistent with our risk tolerance philosophy;

- recommend to the audit committee of our general partner's delegate any changes, modifications, or amendments to our trading policy; and

- address and resolve any other high-level risk management issues.

Our derivatives hedge the commodity price risks derived from our normal business activities, which include the sale of natural gas, natural gas liquids, oil and carbon dioxide, and these derivatives have been designated by us as cash flow hedges as defined by SFAS No. 133. SFAS No. 133 designates derivatives that hedge exposure to variable cash flows of forecasted transactions as cash flow hedges and the effective portion of the derivative's gain or loss is initially reported as a component of other comprehensive income (outside earnings) and subsequently is reclassified into earnings when the forecasted transaction affects earnings. If the transaction results in an asset or liability, amounts in accumulated other comprehensive income should be reclassified into earnings when the asset or liability affects earnings through cost of sales, depreciation, interest expense, etc. To be considered effective, changes in the value of the derivative or its resulting cash flows must substantially offset changes in the value or cash flows of the item being hedged. The ineffective portion of the gain or loss and any component excluded from the computation of the effectiveness of the derivative instrument is reported in earnings immediately.

The gains and losses included in "Accumulated other comprehensive loss" in our accompanying consolidated balance sheets are reclassified into earnings as the hedged sales and purchases take place. Approximately $345.6 million of the Accumulated other comprehensive loss balance of $953.5 million representing unrecognized net losses on derivative activities as of March 31, 2005 is expected to be reclassified into earnings during the next twelve months.

During the three months ended March 31, 2005 and 2004, we reclassified $60.9 million and $26.1 million, respectively, of accumulated other comprehensive income into earnings. The reclassification of accumulated other comprehensive income into earnings during the three months ended March 31, 2005 reduced the accumulated other comprehensive loss balance of $457.3 million, primarily representing unrecognized net losses on derivative activities as of December 31, 2004. None of this reclassification into earnings during the first three months of 2005, or any reclassification of accumulated other comprehensive income into earnings during the first three months of 2004, resulted from the discontinuance of cash flow hedges due to a determination that the forecasted transactions would no longer occur by the end of the originally specified time period.

We recognized a loss of $0.2 million during the first quarter of 2005 as a result of ineffective hedges, and we recognized no gain or loss during the first quarter of 2004 as a result of ineffective hedges. All gains and losses recognized as a result of ineffective hedges are reported within the captions "Natural gas sales" and "Gas purchases and other costs of sales" in our accompanying consolidated statements of income. For each of the three months ended March 31, 2005 and 2004, we did not exclude any component of the derivative instruments' gain or loss from the assessment of hedge effectiveness.

The differences between the current market value and the original physical contracts value associated with our hedging activities are included within "Other current assets", "Accrued other current liabilities", "Deferred charges and other assets" and "Other long-term liabilities and deferred credits" in our accompanying consolidated balance sheets. The following table summarizes the net fair value of our energy financial instruments associated with our risk management activities and included on our accompanying consolidated balance sheets as of March 31, 2005 and

                                                    March 31,       December 31,
                                                      2005             2004
                                                 -------------    -------------
Derivatives-net asset/(liability)
  Other current assets......................     $    91,037      $    41,010
  Deferred charges and other assets.........          50,471           17,408
  Accrued other current liabilities.........        (444,178)        (218,967)
  Other long-term liabilities and deferred
   credits..................................     $  (666,867)     $  (309,035)

As of March 31, 2005, we had two outstanding letters of credit totaling $248 million in support of our hedging activities.

Our over-the-counter swaps and options are with a number of parties, who principally have investment grade credit ratings. We both owe money and are owed money under these financial instruments; however, as of both March 31, 2005 and December 31, 2004, we were essentially in a net payable position and had virtually no amounts owed to us from other parties. In addition, defaults by counterparties under over-the-counter swaps and options could expose us to additional commodity price risks in the event that we are unable to enter into replacement contracts for such swaps and options on substantially the same terms. Alternatively, we may need to pay significant amounts to the new counterparties to induce them to enter into replacement swaps and options on substantially the same terms. While we enter into derivative transactions principally with investment grade counterparties and actively monitor their credit ratings, it is nevertheless possible that from time to time losses will result from counterparty credit risk in the future.

Certain of our business activities expose us to foreign currency fluctuations. However, due to the limited size of this exposure, we do not believe the risks associated with changes in foreign currency will have a material adverse effect on our business, financial position, results of operations or cash flows.

Interest Rate Swaps

In order to maintain a cost effective capital structure, it is our policy to borrow funds using a mix of fixed rate debt and variable rate debt. As of March 31, 2005 and December 31, 2004, we were a party to interest rate swap agreements with notional principal amounts of $2.2 billion and $2.3 billion, respectively. We entered into these agreements for the purpose of hedging the interest rate risk associated with our fixed and variable rate debt obligations.

As of March 31, 2005, a notional principal amount of $2.1 billion of these agreements effectively converts the interest expense associated with the following series of our senior notes from fixed rates to variable rates based on an interest rate of LIBOR plus a spread:

- $200 million principal amount of our 5.35% senior notes due August 15, 2007;

- $250 million principal amount of our 6.30% senior notes due February 1, 2009;

- $200 million principal amount of our 7.125% senior notes due March 15, 2012;

- $250 million principal amount of our 5.0% senior notes due December 15, 2013;

- $200 million principal amount of our 5.125% senior notes due November 15, 2014;

- $300 million principal amount of our 7.40% senior notes due March 15, 2031;

- $200 million principal amount of our 7.75% senior notes due March 15, 2032;

- $400 million principal amount of our 7.30% senior notes due August 15, 2033; and

- $100 million principal amount of our 5.80% senior notes due March 15, 2035.

These swap agreements have termination dates that correspond to the maturity dates of the related series of senior notes, therefore, as of March 31, 2005, the maximum length of time over which we have hedged a portion of our exposure to the variability in the value of this debt due to interest rate risk is through March 15, 2035. These interest rate swaps have been designated as fair value hedges as defined by SFAS No. 133. SFAS No. 133 designates derivatives that hedge a recognized asset or liability's exposure to changes in their fair value as fair value hedges and the gain or loss on fair value hedges are to be recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. The effect of that accounting is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value.

The swap agreements related to our 7.40% senior notes contain mutual cash-out provisions at the then-current economic value every seven years. The swap agreements related to our 7.125% senior notes contain cash-out provisions at the then-current economic value in March 2009. The swap agreements related to our 7.75% senior notes and our 7.30% senior notes contain mutual cash-out provisions at the then-current economic value every five or seven years.

As of both March 31, 2005 and December 31, 2004, we also had swap agreements that effectively convert the interest expense associated with $100 million of our variable rate debt to fixed rate debt. Half of these agreements, converting $50 million of our variable rate debt to fixed rate debt, mature on August 1, 2005, and the remaining half mature on September 1, 2005. These swaps are designated as a cash flow hedge of the risk associated with changes in the designated benchmark interest rate (in this case, one-month LIBOR) related to forecasted payments associated with interest on an aggregate of $100 million of our portfolio of commercial paper.

Our interest rate swaps meet the conditions required to assume no ineffectiveness under SFAS No. 133 and, therefore, we have accounted for them using the "shortcut" method prescribed for fair value hedges by SFAS No. 133. Accordingly, we adjust the carrying value of each swap to its fair value each quarter, with an offsetting entry to adjust the carrying value of the debt securities whose fair value is being hedged. We record interest expense equal to the variable rate payments or fixed rate payments under the swaps. Interest expense is accrued monthly and paid semi-annually.

The differences between fair value and the original carrying value associated with our interest rate swap agreements are included within "Deferred charges and other assets" and "Other long-term liabilities and deferred credits" in our accompanying consolidated balance sheets. The offsetting entry to adjust the carrying value of the debt securities whose fair value was being hedged is recognized as "Market value of interest rate swaps" on our accompanying consolidated balance sheets.

The following table summarizes the net fair value of our interest rate swap agreements associated with our interest rate risk management activities and included on our accompanying consolidated balance sheets as of March 31, 2005 and December 31, 2004 (in thousands):

                                                    March 31,      December 31,
                                                      2005            2004
                                                ---------------  -------------
Derivatives-net asset/(liability)
  Deferred charges and other assets.........       $  89,981        $ 132,210
  Other long-term liabilities and deferred
   credits..................................         (12,825)          (2,057)
                                                   ---------        ---------
    Market value of interest rate swaps.....       $  77,156        $ 130,153
                                                   =========        =========

We are exposed to credit related losses in the event of nonperformance by counterparties to these interest rate swap agreements. While we enter into derivative transactions primarily with investment grade counterparties and actively monitor their credit ratings, it is nevertheless possible that from time to time losses will result from counterparty credit risk.

11. Reportable Segments

We divide our operations into four reportable business segments:

- Products Pipelines;

- Natural Gas Pipelines;

- CO2; and

- Terminals.

We evaluate performance principally based on each segments' earnings before depreciation, depletion and amortization, which exclude general and administrative expenses, third-party debt costs and interest expense, unallocable interest income and minority interest. Our reportable segments are strategic business units that offer different products and services. Each segment is managed separately because each segment involves different products and marketing strategies.

Our Products Pipelines segment derives its revenues primarily from the transportation and terminaling of refined petroleum products, including gasoline, diesel fuel, jet fuel and natural gas liquids. Our Natural Gas Pipelines segment derives its revenues primarily from the transmission, storage, gathering and sale of natural gas. Our CO2 segment derives its revenues primarily from the transportation and marketing of carbon dioxide used as a flooding medium for recovering crude oil from mature oil fields and from the production and sale of crude oil from fields in the Permian Basin of West Texas. Our Terminals segment derives its revenues primarily from the transloading and storing of refined petroleum products and dry and liquid bulk products, including coal, petroleum coke, cement, alumina, salt, and chemicals.

Financial information by segment follows (in thousands):

                                                           Three Months Ended
                                                                March 31,
                                                           2005          2004
                                                     -------------   -------------
Revenues
  Products Pipelines............................     $     171,283   $     154,856
  Natural Gas Pipelines.........................         1,472,892       1,437,908
  CO2...........................................           163,163         105,586
  Terminals.....................................           164,594         123,906
                                                     -------------   -------------
  Total consolidated revenues...................     $   1,971,932   $   1,822,256
                                                     =============   =============

Operating expenses(a)
  Products Pipelines............................     $      52,056    $     42,878
  Natural Gas Pipelines.........................         1,357,095       1,339,960
  CO2...........................................            49,509          38,385
  Terminals.....................................            85,416          60,106
                                                     -------------   -------------
  Total consolidated operating expenses.........     $   1,544,076   $   1,481,329
                                                     =============   =============

Depreciation, depletion and amortization
  Products Pipelines............................     $      19,394   $      17,416
  Natural Gas Pipelines.........................            14,758          12,842
  CO2...........................................            38,702          26,988
  Terminals.....................................            12,173          10,285
                                                     -------------   -------------
  Total consol. depreciation, depletion and
    amortiz.....................................     $      85,027   $      67,531
                                                     =============   =============


Earnings from equity investments
  Products Pipelines............................     $       8,385   $       5,019
  Natural Gas Pipelines.........................             8,430           4,967
  CO2...........................................             9,248          10,479
  Terminals.....................................                 9               4
                                                     -------------   -------------
  Total consolidated equity earnings............     $      26,072   $      20,469
                                                     =============   =============

                                                           Three Months Ended
                                                               March  31,
                                                          2005            2004
                                                     -------------   -------------
Amortization of excess cost of equity investments
   Products Pipelines...........................     $         844   $         821
  Natural Gas Pipelines.........................                69              69
  CO2...........................................               504             504
  Terminals.....................................                --              --
                                                     -------------   -------------
  Total consol. amortization of excess cost of
   invests......................................     $       1,417   $       1,394
                                                     =============   =============

Interest income
  Products Pipelines.............................    $       1,149   $          --
  Natural Gas Pipelines..........................              171              --
  CO2............................................               --              --
  Terminals......................................               --              --
                                                     -------------   -------------
  Total segment interest income..................            1,320              --
  Unallocated interest income....................              172             276
                                                     -------------   -------------
  Total consolidated interest income.............    $       1,492   $         276
                                                     =============   =============

Other, net-income (expense)
  Products Pipelines............................     $         142   $        (362)
  Natural Gas Pipelines.........................              (254)          1,130
  CO2...........................................                 1               9
  Terminals.....................................            (1,210)            (34)
                                                     -------------   -------------
  Total consolidated Other, net-income (expense)     $      (1,321)  $         743
                                                     =============   =============

Income tax benefit (expense)
  Products Pipelines.............................    $      (3,301)  $      (2,381)
  Natural Gas Pipelines..........................             (457)           (940)
  CO2............................................              (45)             14
  Terminals......................................           (3,772)           (597)
                                                     -------------   -------------
  Total consolidated income tax benefit (expense)    $      (7,575)  $      (3,904)
                                                     =============   =============

Segment earnings
  Products Pipelines.............................    $     105,364   $      96,017
  Natural Gas Pipelines..........................          108,860          90,194
  CO2............................................           83,652          50,211
  Terminals......................................           62,032          52,888
                                                     -------------   -------------
  Total segment earnings(b)......................          359,908         289,310
  Interest and corporate administrative
   expenses(c)...................................         (136,287)        (97,556)
                                                     -------------   -------------

  Total consolidated net income..................    $     223,621   $     191,754
                                                     =============   =============

Segment earnings before depreciation, depletion,
  amortization and amortization of excess cost of
  equity investments(d)
  Products Pipelines.............................    $     125,602   $     114,254
  Natural Gas Pipelines..........................          123,687         103,105
  CO2............................................          122,858          77,703
  Terminals......................................           74,205          63,173
                                                     -------------   -------------
  Total segment earnings before DD&A.............          446,352         358,235
  Consolidated depreciation and amortization.....          (85,027)        (67,531)
  Consolidated amortization of excess cost of
   invests.......................................           (1,417)         (1,394)
  Interest and corporate administrative expenses.         (136,287)        (97,556)
                                                     -------------   -------------
  Total consolidated net income..................    $     223,621   $     191,754
                                                     =============   =============

Capital expenditures
  Products Pipelines...........................      $      41,070   $      31,011
  Natural Gas Pipelines........................              9,659          17,822
  CO2..........................................             52,557          76,715
  Terminals....................................             40,522          24,170
                                                     -------------   -------------
  Total consolidated capital expenditures(e)...      $     143,808   $     149,718
                                                     =============   =============

                                                    March 31,       December 31,
                                                      2005              2004
                                                  -------------    -------------
Assets
  Products Pipelines...........................   $   3,666,831    $   3,651,657
  Natural Gas Pipelines........................       3,618,936        3,691,457
  CO2..........................................       1,635,712        1,527,810
  Terminals....................................       1,623,717        1,576,333
                                                  -------------    -------------
  Total segment assets.........................      10,545,196       10,447,257
  Corporate assets(f)..........................          82,525          105,685
                                                  -------------    -------------
  Total consolidated assets....................   $  10,627,721    $  10,552,942
                                                  =============    =============

(a) Includes natural gas purchases and other costs of sales, operations and maintenance expenses, fuel and power expenses and taxes, other than income taxes.

(b) Includes revenues, earnings from equity investments, income taxes, allocable interest income and other, net, less operating expenses, depreciation, depletion and amortization, and amortization of excess cost of equity investments.

(c) Includes unallocated interest income, interest and debt expense, general and administrative expenses and minority interest expense.

(d) Includes revenues, earnings from equity investments, income taxes, allocable interest income and other, net, less operating expenses.

(e) Includes sustaining capital expenditures of $24,209 and $20,155 for the three months ended March 31, 2005 and 2004, respectively. Sustaining capital expenditures are defined as capital expenditures which do not increase the capacity of an asset.

(f) Includes cash, cash equivalents and certain unallocable deferred charges.

We do not attribute interest and debt expense to any of our reportable business segments. For the three months ended March 31, 2005 and 2004, we reported (in thousands) total consolidated interest expense of $60,219 and $47,497, respectively.

12. Pensions and Other Post-retirement Benefits

In connection with our acquisition of SFPP, L.P. and Kinder Morgan Bulk Terminals, Inc. in 1998, we acquired certain liabilities for pension and post-retirement benefits. We provide medical and life insurance benefits to current employees, their covered dependents and beneficiaries of SFPP and Kinder Morgan Bulk Terminals. We also provide the same benefits to former salaried employees of SFPP. Additionally, we will continue to fund these costs for those employees currently in the plan during their retirement years. SFPP's post-retirement benefit plan is frozen and no additional participants may join the plan.

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

Net periodic benefit costs for these plans include the following components (in thousands):

                                         Other Post-retirement Benefits
                                         ------------------------------
                                          Three Months Ended March 31,
                                         ------------------------------
                                            2005              2004
                                         -----------       ---------
Net periodic benefit cost
Service cost......................         $    2            $   28
Interest cost.....................             77                97
Expected return on plan assets....             --                --
Amortization of prior service cost            (29)              (31)
Actuarial gain....................           (127)             (244)
                                           ------            ------
Net periodic benefit cost.........         $  (77)           $ (150)
                                           ======            ======

Our net periodic benefit cost for the first quarter of 2005 was a credit of $77,000, which resulted in increases to income, largely due to amortizations of an actuarial gain and a negative prior service cost, primarily related to the following:

- there have been changes to the plan for both 2004 and 2005 which reduced liabilities, creating a negative prior service cost that is being amortized each year; and

- there was a significant drop in 2004 in the number of retired participants reported as pipeline retirees by Burlington Northern Santa Fe, which holds a 0.5% special limited partner interest in SFPP, L.P.

As of March 31, 2005, we estimate our overall net periodic post-retirement benefit cost for the year 2005 will be an annual credit of approximately $0.3 million. This amount could change in the remaining months of 2005 if there is a significant event, such as a plan amendment or a plan curtailment, which would require a remeasurement of liabilities.

13. Related Party Transactions

Plantation Pipe Line Company

We own a 51.17% equity interest in Plantation Pipe Line Company. An affiliate of ExxonMobil owns the remaining 48.83% interest. In July 2004, Plantation repaid a $10 million note outstanding and $175 million in outstanding commercial paper borrowings with funds of $190 million borrowed from its owners. We loaned Plantation $97.2 million, which corresponds to our 51.17% ownership interest, in exchange for a seven year note receivable bearing interest at the rate of 4.72% per annum. As of both December 31, 2004 and March 31, 2005, the principal amount receivable from this note was $96.3 million. We have included $2.2 million of this balance within "Accounts, notes and interest receivable-Related Parties" on our consolidated balance sheets. The remaining $94.1 million receivable is included within "Notes receivable-Related Parties" on our consolidated balance sheets.

Coyote Gas Treating, LLC

We own a 50% equity interest in Coyote Gas Treating, LLC, referred to in this report as Coyote Gulch. Coyote Gulch is a joint venture, and Enterprise Field Services LLC owns the remaining 50% equity interest. We are the managing partner of Coyote Gulch. In June 2001, Coyote repaid the $34.2 million in outstanding borrowings under its 364-day credit facility with funds borrowed from its owners. We loaned Coyote $17.1 million, which corresponds to our 50% ownership interest, in exchange for a one-year note receivable bearing interest payable monthly at LIBOR plus a margin of 0.875%. On June 30, 2002 and June 30, 2003, the note was extended for one year. On June 30, 2004, the term of the note was made month-to-month. As of both December 31, 2004 and March 31, 2005, we included the principal amount of $17.1 million related to this note within "Notes Receivable-Related Parties" on our consolidated balance sheets.

Red Cedar Gas Gathering Company

We own a 49% equity interest in the Red Cedar Gas Gathering Company. Red Cedar is a joint venture and the Southern Ute Indian Tribe owns the remaining 51% equity interest. On December 22, 2004, we entered into a $10 million unsecured revolving credit facility due July 1, 2005, with the Southern Ute Indian Tribe and us, as lenders, and Red Cedar, as borrower. Subject to the terms of the agreement, the lenders may severally, but not jointly, make advances to Red Cedar up to a maximum outstanding principal amount of $10 million. However, as of April 1, 2005, through July 1, 2005, the maximum outstanding principal amount will be automatically reduced to $5 million. In January 2005, Red Cedar borrowed funds of $4 million from its owners pursuant to this credit agreement, and we loaned Red Cedar approximately $2.0 million, which corresponds to our 49% ownership interest. The interest on all advances made under this credit facility were calculated as simple interest on the combined outstanding balance of the credit agreement at 6% per annum based upon a 360 day year. In March 2005, Red Cedar paid the $4 million outstanding balance under this revolving credit facility.

14. Recent Accounting Pronouncements

SFAS No. 123R

In December 2004, the FASB issued SFAS No. 123R (revised 2004), "Share-Based Payment." This Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," and requires companies to expense the value of employee stock options and similar awards. Significant provisions of SFAS No. 123R include the following:

- share-based payment awards result in a cost that will be measured at fair value on the awards' grant date, based on the estimated number of awards that are expected to vest. Compensation cost for awards that vest would not be reversed if the awards expire without being exercised;

- when measuring fair value, companies can choose an option-pricing model that appropriately reflects their specific circumstances and the economics of their transactions;

- companies will recognize compensation cost for share-based payment awards as they vest, including the related tax effects. Upon settlement of share-based payment awards, the tax effects will be recognized in the income statement or additional paid-in capital; and

- public companies are allowed to select from three alternative transition methods - each having different reporting implications.

In April 2005, the FASB decided to delay the effective date for public companies to implement SFAS No. 123R (revised 2004). The new Statement is now effective for public companies for annual periods beginning after June 15, 2005 (January 1, 2006, for us). We are currently reviewing the effects of this accounting Statement; however, we have not granted common unit options since May 2000 and we do not expect the adoption of this Statement to have any immediate effect on our consolidated financial statements.

FASB Staff Position Nos. FAS 109-1 and FAS 109-2

In December 2004, the FASB issued FASB Staff Position FAS 109-1, "Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004," which was effective upon issuance. This Staff Position provides guidance on the application of FASB Statement No. 109, "Accounting for Income Taxes," to the provision within the American Jobs Creation Act of 2004 that provides a tax deduction on qualified production activities. We do not expect this Staff Position to have a material effect on our financial statements.

In December 2004, the FASB issued FASB Staff Position FAS 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004," which was effective upon issuance. The American Jobs Creation Act of 2004 introduces a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer ("repatriation provision"), provided certain criteria are met. The Staff Position provides accounting and disclosure guidance for the repatriation provision. We do not expect this Staff Position to have a material effect on our financial statements.

FIN 47

In March 2005, the Financial Accounting Standards Board issued Interpretation (FIN) No. 47, "Accounting for Conditional Asset Retirement Obligations--an interpretation of FASB Statement No. 143". This interpretation clarifies that the term "conditional asset retirement obligation" as used in SFAS No. 143, "Accounting for Asset Retirement Obligations," refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and
(or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event.

Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred-generally upon acquisition, construction, or development and (or) through the normal operation of the asset. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation.

This Interpretation is effective no later than the end of fiscal years ending after December 15 2005 (December 31, 2005, for us). We are currently reviewing the effects of this Interpretation.

15. Subsequent Events

TGS Bulk Terminals

Effective April 29, 2005, we acquired seven bulk terminal operations from Trans-Global Solutions, Inc. for an

aggregate consideration of approximately $245 million, consisting of $183.7 million in cash, $46.3 million in common units, and an obligation to pay an additional $15 million on April 29, 2007. We will settle the $15 million liability due two years from closing by issuing additional common units. All of the acquired assets are located in the State of Texas, and include facilities at the Port of Houston, the Port of Beaumont and the TGS Deepwater Terminal located on the Houston Ship Channel. Certain of the terminals have contracts in place to provide petroleum coke handling services for major Texas oil refineries. The acquisition enlarges our Gulf Coast terminal region and expands our pre-existing petroleum coke handling operations. We will include the acquired operations in our Terminals business segment.

Environmental Settlements

In April 2005, we were informed by the office of the Attorney General of California that the office was contemplating filing criminal charges against us claiming discharge of diesel fuel arising from the April 2004 rupture from a section of our Pacific operations' 14-inch Concord to Sacramento, California products pipeline, and the failure to make timely notice of the discharge to appropriate state agencies. For additional information on this issue, see Note 3 "Litigation and Other Contingencies--Environmental Matters--Cordelia, California". In addition, we were told that the California Attorney General was also contemplating filing charges alleging other releases and failures to provide timely notice regarding certain environmental incidents at certain of our facilities in California.

On April 26, 2005, we announced that we had entered into an agreement with the Attorney General of the State of California and the District Attorney of Solano County, California, to settle misdemeanor charges of the unintentional, non-negligent discharge of diesel fuel resulting from this release and the failure to provide timely notice of a threatened discharge to appropriate state agencies as well as other potential claims in California regarding alleged notice and discharge incidents. In addition to the charges settled by this agreement, we entered into an agreement in principle to settle similar additional misdemeanor charges in Los Angeles County, California, in connection with the unintentional, non-negligent release of approximately five gallons of diesel fuel at our Carson refined petroleum products terminal in Los Angeles Harbor in May 2004.

Under the settlement agreement related to the Cordelia, California incident, SFPP, L.P. agreed to plead guilty to four misdemeanors and to pay approximately $5.2 million in fines, penalties, restitution, environmental improvement project funding, and enforcement training in the State of California, and agreed to be placed on informal, unsupervised probation for a term of three years. Under the settlement agreement related to the Carson terminal incident, we agreed to plead guilty to two additional misdemeanors and to pay approximately $0.2 million in fines and penalties. In addition, we are currently in negotiations with the United States Environmental Protection Agency, the United States Fish & Wildlife Service, the California Department of Fish & Game and the San Francisco Regional Water Quality Control Board regarding potential civil penalties and natural resource damages assessments. We included the combined $5.4 million as general and administrative expense in March 2005, and we have made payments in the amount of $0.3 million as of March 31, 2005. We expect to pay the remaining $5.1 million in the second quarter of 2005. Since the April 2004 release in the Suisun Marsh area near Cordelia, California, we have cooperated fully with federal and state agencies and have worked diligently to remediate the affected areas. As of April 30, 2005, the remediation is substantially complete.

As of March 31, 2005, we had not yet reached a settlement agreement with the Office of the Attorney General of the State of California and the probable impact of the issue was indeterminable. Due to the fact that the events that gave rise to the settlement payments described above took place prior to March 31, 2005, we have included the effects of these settlement agreements in the accompanying financial statements as required by generally accepted accounting principles, resulting in general and administrative expenses of $73.9 million, minority interest of $2.4 million, net income of $223.6 million, and basic and diluted limited partners' net income per unit of $0.54, respectively, for the quarter ended March 31, 2005.

Management Changes

On May 4, 2005, we announced that C. Park Shaper, formerly our Chief Financial Officer, had been promoted and named our President, remaining a member of the Office of the Chairman, and that Steve Kean, formerly our President - Texas Intrastate Pipelines, had been promoted and named our Executive Vice President - Operations, becoming a member of the Office of the Chairman. In addition, we announced, that Kim Allen, had been promoted and named our Chief Financial Officer, retaining her role in charge of investor relations, and that David Kinder, our Vice President - Corporate Development, would also assume the role of Treasurer, formerly held by Ms. Allen. We also announced that (i) Deb Macdonald, our President - Natural Gas Pipeline would resign from that position effective October 2005; (ii) Scott Parker, President of KMI's Natural Gas Pipeline Company of America ("NGPL") would be promoted effective October 2005 to our President - Natural Gas Pipelines; (iii) David Devine would become President of NGPL effective October 2005; and (iv) Tom Martin had been promoted to President - Texas Intrastate Pipelines.