| KINDER MORGAN INC Item 1A Risk Factors |
| You should carefully consider the risks described below, in addition to the other information contained in this document |
| Realization of any of the following risks could have a material adverse effect on our business, financial condition, cash flows and results of operations |
| Our substantially increased debt as a result of the Terasen acquisition could adversely affect our financial health and make us more vulnerable to adverse economic conditions |
| As a result of our acquisition of Terasen, we have significantly more debt outstanding and significantly higher debt service requirements than in the recent past |
| As of December 31, 2005, we had outstanding approximately dlra7dtta7 billion of consolidated debt, of which approximately dlra4dtta8 billion was debt of our subsidiaries |
| As of December 31, 2005, we had the ability to borrow up to approximately dlra1dtta0 billion under our revolving credit facilities |
| Our increased level of debt could have important consequences, such as: limiting our ability to obtain additional financing to fund our working capital, capital expenditures, debt service requirements, potential growth or other purposes; limiting our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to make payments on our debt; placing us at a competitive disadvantage compared to competitors with less debt; and increasing our vulnerability to adverse economic and industry conditions |
| Each of these factors is to a large extent dependent on economic, financial, competitive and other factors beyond our control |
| Business and Properties |
| Our large amount of floating rate debt makes us vulnerable to increases in interest rates |
| As of December 31, 2005, we had outstanding approximately dlra7dtta7 billion of consolidated debt |
| Of this amount, excluding debt related to assets for which interest expense is passed through in our tariffs and rates, approximately 50prca was subject to floating interest rates, either as short-term commercial paper or as long-term fixed-rate debt converted to floating rates through the use of interest rate swaps |
| Should interest rates increase significantly, our cash available to service our debt would be adversely affected |
| We are dependent upon the earnings and distributions of Kinder Morgan Energy Partners |
| For the year ended December 31, 2005, approximately 50prca of our total segment earnings plus earnings attributable to our investment in Kinder Morgan Energy Partners was attributable to our general and limited partner interests in Kinder Morgan Energy Partners |
| A significant decline in Kinder Morgan Energy Partners’ earnings and/or cash distributions would have a corresponding negative impact on us |
| Kinder Morgan Energy Partners could be treated as a corporation for United States income tax purposes |
| Kinder Morgan Energy Partners &apos treatment as a corporation would substantially reduce the cash distributions on the common units that it distributes quarterly |
| The anticipated benefit of our investment in Kinder Morgan Energy Partners depends largely on its treatment as a partnership for federal income tax purposes |
| Kinder Morgan Energy Partners has not requested, and does not plan to request, a ruling from the Internal Revenue Service on this or any other matter affecting Kinder Morgan Energy Partners |
| Current law requires Kinder Morgan Energy Partners to derive at least 90prca of its annual gross income from specific activities to continue to be treated as a partnership for federal income tax purposes |
| Kinder Morgan Energy Partners may not find it possible, regardless of its efforts, to meet this income requirement or may inadvertently fail to meet this income requirement |
| Current law may change so as to cause Kinder Morgan Energy Partners to be treated as a corporation for federal income tax purposes without regard to its sources of income or otherwise subject it to entity-level taxation |
| If Kinder Morgan Energy Partners was to be treated as a corporation for federal income tax purposes, it would pay federal income tax on its income at the corporate tax rate, which is currently a maximum of 35prca and would pay state income taxes at varying rates |
| Under current law, distributions to unitholders, including us, would generally be taxed as a corporate distribution |
| Because a tax would be imposed upon Kinder Morgan Energy Partners as a corporation, the cash available for distribution to its unitholders, including us, would be substantially reduced |
| In addition, because of widespread state budget deficits, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise or other forms of taxation |
| If any state were to impose a tax upon Kinder Morgan Energy Partners as an entity, the cash available for distribution to its unitholders would be reduced |
| Competition could ultimately lead to lower levels of profits and adversely impact our ability to recontract for expiring transportation capacity at favorable rates |
| For the year ended December 31, 2005, NGPL’s segment earnings represented approximately 38prca of our total segment earnings plus earnings attributable to our investment in Kinder Morgan Energy Partners |
| NGPL is an interstate natural gas pipeline that is a major supplier to the Chicago, Illinois area |
| In the past, interstate pipeline competitors of NGPL have constructed or expanded pipeline capacity into the Chicago area |
| To the extent that an excess of supply into this market area is created and persists, NGPL’s ability to recontract for expiring transportation capacity at favorable rates could be impaired |
| Contracts representing approximately 2dtta5prca of NGPL’s total 32 _________________________________________________________________ Items 1 |
| (continued) KMI Form 10-K long-haul, contracted firm transport capacity as of January 31, 2006 have not been renewed and are scheduled to expire before the end of 2006 |
| Trans Mountain’s pipeline to the West Coast of North America and the Express System, in which we own an interest, to the US Rocky Mountains and Midwest are two of several pipeline alternatives for Western Canadian petroleum production |
| Throughput on these pipelines may decline if tolls become uncompetitive compared to alternatives |
| Our oil transportation business competes against other pipeline companies who could be in a position to offer different tolling structures, which may provide them with a competitive advantage in new pipeline development |
| Because electricity prices in British Columbia continue to be set based on the historical average cost of production, rather than based on market forces, they have remained artificially low compared to market-priced electricity and, as a result, only marginally higher than comparable, market-based natural gas costs |
| A sustained increase in natural gas commodity prices could cause natural gas in British Columbia to be uncompetitive with electricity, thereby decreasing the use of natural gas by Terasen Gas’ customers |
| Trans Mountain’s tolling arrangement with shippers is expiring and must be extended or renewed |
| In November 2000, Trans Mountain and shipper representatives reached a negotiated Incentive Toll Settlement to determine Trans Mountain’s tolls for the period 2001-2005 for use of the Trans Mountain pipeline network |
| This agreement was approved by the Canadian National Energy Board on March 22, 2001 to take effect as of January 1, 2001 |
| In January 2006, Trans Mountain and CAPP, representing shippers, entered into a memorandum of understanding for a new Incentive Toll Settlement effective January 1, 2006 through December 31, 2010 |
| The new Incentive Toll Settlement is subject to NEB approval, and Kinder Morgan Canada and CAPP have agreed to work towards a final agreement by the end of June 2006 |
| There is no certainty as to whether final negotiations will be successful, whether a final settlement will be approved by the NEB, or what the terms of a new toll settlement might be |
| Our earnings could be negatively impacted in 2006 depending on the final tolling arrangements with shippers |
| The rates (which include reservation, commodity, surcharges, fuel and gas lost and unaccounted for) we charge shippers on our pipeline systems and the rates our natural gas distribution operations can charge are subject to regulatory approval and oversight |
| While there are currently no material proceedings challenging the rates on any of our natural gas pipeline systems, regulators and shippers on these pipelines do have rights to challenge the rates they are charged under certain circumstances prescribed by applicable regulations |
| We can provide no assurance that we will not face challenges to the rates we receive on our pipeline systems in the future |
| Any successful challenge could materially adversely affect our future earnings and cash flows |
| As part of the establishment of the rates which gas distribution operations can charge their customers, utility regulators, including the British Columbia Utilities Commission, or BCUC, generally establish a rate base and a reasonable and fair return for the utility upon that rate base |
| The allowed rates of return on our gas distribution operations are calculated differently and vary in amount in different jurisdictions |
| In British Columbia, the allowed rates of return on equity are determined annually by the BCUC based on a formula that applies a risk premium to a forecast of long-term Government of Canada bond yields |
| The allowed returns on equity for Terasen Gas Inc |
| and TGVI are determined by formulae that result in lower allowed returns on equity if long-term Government of Canada bond yields decline |
| Most rates in British Columbia are established using a future test year which has forecasts o f the volume of gas that will be sold and transported and the costs, including the rate of return, that the utility will incur with cost and revenue tracking and sharing mechanisms that result in annual rate adjustments |
| Terasen Gas Inc |
| There can be no assurance that new rate agreements will be entered into or that the regulatory process in which rates are determined will always produce rates that will result in full recovery of our British Columbia gas distribution operation’s costs |
| Sustained periods of weather inconsistent with normal in areas served by our natural gas distribution operations can create volatility in our earnings |
| Our operating results may fluctuate on a seasonal basis |
| Weather-related factors such as temperature and rainfall at certain times of the year affect our earnings, principally in our retail natural gas distribution business |
| Sustained periods of temperatures and rainfall that differ from normal can create volatility in our earnings |
| In many areas, natural gas consumption patterns peak in the winter, especially for our retail natural gas distribution operations |
| Those operations normally generate higher net earnings in the first and fourth quarters, which are offset to some extent by lower earnings or net losses in the second and third quarters |
| Proposed rulemaking by the FERC, the BCUC, the NEB or other regulatory agencies having jurisdiction could adversely impact our income and operations |
| Generally speaking, new laws or regulations or different interpretations of existing laws or regulations applicable to our assets could have a negative impact on our business, financial condition and results of operations |
| Environmental regulation and liabilities could result in increased operating and capital costs |
| Our business operations are subject to federal, state, provincial and local laws and regulations relating to environmental protection, pollution and human health and safety in the United States and Canada |
| For example, if an accidental leak or spill occurs at or from our pipelines, or at or from our storage or other facilities, we may experience significant operational disruptions and we may have to pay a significant amount to clean up the leak or spill, pay for government penalties, address natural resource damages, compensate for human exposure, install costly pollution control equipment, or a combination of these and other measures |
| The resulting costs and liabilities could negatively affect our level of earnings and cash flow |
| In addition, emission controls required under federal, state and provincial environmental laws could require significant capital expenditures at our facilities |
| The impact of environmental standards or future environmental measures could increase our costs significantly |
| Since the costs of environmental regulation are already significant, additional or stricter regulation or enforcement could negatively affect our business |
| We own or operate numerous properties that have been used for many years in connection with our business activities |
| While we have utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons or other hazardous substances may have been released at or from properties owned, operated or used by us or our predecessors, or at or from properties where such wastes have been taken for disposal |
| In addition, many of these properties have been owned and/or operated by third parties whose management, use and disposal of hydrocarbons or other hazardous substances were not under our control |
| These properties and the hazardous substances released and wastes disposed thereon may be subject to laws in the United States such as the Comprehensive Environmental Response, Compensation, and Liability Act, also known as CERCLA or the Superfund law, which impose joint and sever al liability without regard to fault or the legality of the original conduct |
| Under the regulatory schemes of the various provinces, such as British Columbia’s Environmental Management Act, Canada has similar laws with respect to properties owned, operated or used by us or our predecessors |
| Under such laws and implementing regulations, we could be required to remove or remediate previously disposed wastes or property contamination, including groundwater contamination 34 _________________________________________________________________ Items 1 |
| (continued) KMI Form 10-K caused by prior owners or operators |
| Imposition of such liability schemes could have a material adverse impact on our operations and financial position |
| Current or future distressed financial condition of customers could have an adverse impact on our operations in the event these customers are unable to pay us for the products or services we provide |
| Some of our customers are experiencing severe financial problems, and other customers may experience severe financial problems in the future |
| The bankruptcy of one or more of them, or some other similar proceeding or liquidity constraint, might make it unlikely that we would be able to collect all or a significant portion of amounts owed by the distressed entity or entities |
| In addition, such events might force such customers to reduce or curtail their future use of our products and services, which could have a material adverse effect on our operations and financial condition |
| Increased regulatory requirements relating to the integrity of our pipelines will require us to spend additional money to comply with these requirements |
| Through its regulated pipeline subsidiaries, we are subject to extensive laws and regulations related to pipeline integrity |
| There are, for example, federal guidelines for the US Department of Transportation and pipeline companies in the areas of testing, education, training and communication |
| We have increased and expect to significantly increase our capital expenditures to address these matters |
| Additional laws and regulations that may be enacted in the future could significantly increase the amount of these expenditures |
| The failure to successfully integrate Terasen’s operations with those of ours could adversely impact our results of operations |
| This would also be true for any other significant acquisition |
| The integration of Terasen and other companies that have previously operated separately involves a number of risks, including: demands on management related to the increase in size after the acquisition, the diversion of management’s attention from the management of daily operations, difficulties in implementing or unanticipated costs of accounting, estimating, reporting and other systems, difficulties in the assimilation and retention of necessary employees, and potential adverse effects on results of operations |
| We regularly consider and enter into discussions regarding potential acquisitions and are currently contemplating potential acquisitions |
| While there are currently no unannounced purchase agreements for the acquisition of any material business or assets, such transactions can be effected quickly, may occur at any time and may be significant in size relative to our existing assets or operations |
| Future business development of our products pipelines is dependent on the supply of, and demand for, crude oil and other liquid hydrocarbons, particularly from the Alberta oilsands |
| Our pipelines depend on production of natural gas, oil and other products in the areas serviced by its pipelines |
| Without reserve additions, production will decline over time as reserves are depleted and production costs may rise |
| Producers may shut down production at lower product prices or higher production costs, especially where the existing cost of production exceeds other extraction methodologies, such as at the Alberta oilsands |
| Producers in areas serviced by us may not be successful in exploring for and developing additional reserves, and the gas plants and the pipelines may not be able to maintain existing volumes of throughput |
| (continued) KMI Form 10-K Commodity prices may not remain at a level which encourages producers to explore for and develop additional reserves, produce existing marginal reserves or renew transportation contracts as they expire |
| Changes in the business environment, such as a decline in crude oil prices, an increase in production costs from higher feedstock prices, supply disruptions, or higher development costs, could result in a slowing of supply from the Alberta oilsands |
| In addition, changes in the regulatory environment or governmental policies may have an impact on the supply of crude oil |
| Each of these factors impact our customers shipping through our pipelines, which in turn could impact the prospects of new transportation contracts or renewals of existing contracts |
| Throughput on our products pipelines may also decline as a result of changes in business conditions |
| Over the long term, business will depend, in part, on the level of demand for oil and natural gas in the geographic areas in which deliveries are made by pipelines and the ability and willingness of shippers having access or rights to utilize the pipelines to supply such demand |
| The implementation of new regulations or the modification of existing regulations affecting the oil and gas industry could reduce demand for natural gas and crude oil, increase our costs and may have a material adverse effect on our results of operations and financial condition |
| We cannot predict the impact of future economic conditions, fuel conservation measures, alternative fuel requirements, governmental regulation or technological advances in fuel economy and energy generation devices, all of which could reduce the dem and for natural gas and oil |
| We are subject to US dollar/Canadian dollar exchange rate fluctuations |
| As a result of our acquisition of Terasen, a significant portion of our assets, liabilities, revenues and expenses will be denominated in Canadian dollars |
| Fluctuations in the exchange rate between United States and Canadian dollars could expose us to reductions in the US dollar value of our earnings and cash flows and a reduction in our stockholders’ equity under applicable accounting rules |
| The accounting standards regarding hedge accounting are very complex, and even when we engage in hedging transactions (for example, to mitigate our exposure to fluctuations in commodity prices or currency exchange rates or to balance our exposure to fixed and floating interest rates) that are effective economically, these transactions may not be considered effective for accounting purposes |
| Accordingly, our financial statements may reflect some volatility due to these hedges, even when there is no underlying economic impact at that point |
| In addition, it is not always possible for us to engage in a hedging transaction that completely mitigates our exposure to commodity prices |
| Our financial statements may reflect a gain or loss arising from an exposure to commodity prices for which we are unable to enter into a completely effective hedge |