Table of Contents

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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549**FORM 10-Q**[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE    SECURITIES    EXCHANGE ACT OF 1934
For the quarterly period ended **June 30, 2001**or
[  ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE    SECURITIES    EXCHANGE ACT OF 1934
For the transition period from ______to______Commission File Number 1-6446

KINDER MORGAN, INC.(Exact name of registrant as specified in its charter)

Kansas
48-0290000
(State or other    jurisdiction of incorporation or organization)
(I.R.S. Employer    Identification No.)
500 Dallas, Suite 1000, Houston, Texas
77002
(Address of    principal executive offices)
(Zip Code)
Registrant's telephone number, including area code (713) 369-9000
  
(Former name, former address and former    fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X   No__ 
The number of shares outstanding for each of the registrant's classes of common stock, asof the latest practicable date was: Common Stock, $5 par value; outstanding 115,406,367shares as of July 31, 2001.

 

KINDER MORGAN, INC. AND SUBSIDIARIESFORM 10-QQUARTER ENDED JUNE 30, 2001Contents

 
PART I.FINANCIAL    INFORMATION
PageItem 1.Financial    Statements (Unaudited)
Number     Consolidated Balance Sheets
3-4   Consolidated    Statements of Income
5   Consolidated Statements of Cash Flows
6   Notes to Consolidated Financial    Statements
7-18  Item 2.Management's    Discussion and Analysis of Financial   Condition and Results of Operations
18-29  Item 3.Quantitative    and Qualitative Disclosures About Market Risk
29  PART II.OTHER INFORMATION  Item 1.Legal    Proceedings
29Item 4.Submission of Matters to a Vote    of Security Holders
29-30Item 6.Exhibits and Reports on    Form 8-K
30-31  SIGNATURE
32
2
**PART I - FINANCIAL INFORMATION
*Item 1. Financial Statements*
CONSOLIDATED BALANCE SHEETS(Unaudited)Kinder Morgan, Inc. and Subsidiaries (In Thousands)
**June 30,****December 31,****2001****2000****ASSETS:****Current Assets:**Cash and Cash Equivalents
$   15,395 
$  141,923 Restricted Deposits
    11,147 
    14,063 Accounts Receivable, Net:   Trade
    76,941 
   109,722    Related Parties
    14,764 
     2,046    Other
         - 
    56,750 Inventories
    47,812 
    19,600 Gas Imbalances
    55,122 
    40,838 Other
    28,454 
    48,700 
   249,635 
   433,642    **Investments:**Kinder Morgan Energy Partners
 2,872,573 
 1,819,281 Other
   272,132 
   200,324 
 3,144,705 
 2,019,605    **Property, Plant and Equipment**
 6,050,504 
 6,080,383 **Less Accumulated Depreciation and    Amortization**
   368,243 
   412,392 
 5,682,261 
 5,667,991    **Deferred Charges and Other Assets**
   292,447 
   265,751    **Total Assets**
$9,369,048 
$8,386,989    
========== 
========== 
The accompanying notes are an integral part ofthese statements.

3
**CONSOLIDATED BALANCE SHEETS (Unaudited)Kinder Morgan, Inc. and Subsidiaries(In Thousands)
**June 30,****December 31,**  **2001****2000****LIABILITIES AND STOCKHOLDERS' EQUITY:****Current Liabilities:**Current Maturities of Long-term Debt
$  407,167 
$  808,167 Notes Payable
   491,900 
   100,000 Accounts Payable:   Trade
    60,944 
   126,245    Related Parties
       841 
    13,556 Accrued Interest
    63,520 
    72,222 Accrued Taxes
    26,273 
    26,584 Gas Imbalances
    58,661 
    39,496 Payable for Purchase of Thermo Companies
         - 
    15,000 Reserve for Loss on Disposal of Discontinued    Operations
     5,076 
    23,694 Other
    97,704 
   129,911   
 1,212,086 
 1,354,875 **  ****Other Liabilities and Deferred Credits:**Deferred Income Taxes
 2,361,096 
 2,273,177 Other
   232,237 
   222,420   
 2,593,333 
 2,495,597   **Long-term Debt**
 2,460,089 
 2,478,983   **Kinder Morgan-Obligated Mandatorily    Redeemable Preferred****  Capital Trust Securities of    Subsidiary Trusts Holding****  Solely Debentures of Kinder    Morgan**
   275,000 
   275,000   **Minority Interests in Equity of    Subsidiaries**
   900,229 
     4,910   **Stockholders' Equity:**Common Stock-  Authorized - 150,000,000 Shares,    Par Value $5 Per Share  Outstanding - 115,369,223 and    114,578,800 Shares,    Respectively,    Before Deducting 6,760 and 96,140    Shares Held in    Treasury
   576,846 
   572,894 Additional Paid-in Capital
 1,234,825 
 1,189,270 Retained Earnings
   100,871 
    17,787 Other
    15,769 
    (2,327)Total Stockholders' Equity
 1,928,311 
 1,777,624   **Total Liabilities and Stockholders' Equity**
$9,369,048 
$8,386,989 **  **
========== 
========== 
The accompanying notes are an integral part of these statements.

4
**CONSOLIDATED STATEMENTS OF INCOME(Unaudited)Kinder Morgan, Inc. and Subsidiaries (In Thousands Except Per Share Amounts)
**Three Months Ended    June 30,**Six Months Ended    June 30,  **2001**2000**2001**2000**Operating Revenues:**Natural Gas Sales
$  41,388 
$ 387,794 
$ 169,817 
$  675,377 Natural Gas Transportation and Storage
  146,427 
  139,964 
  317,242 
   305,240 Other
   31,030 
   24,254 
   57,018 
    51,981     Total Operating    Revenues
  218,845 
  552,012 
  544,077 
 1,032,598   **Operating Costs and Expenses:**Gas Purchases and Other Costs of Sales
   59,301 
  382,531 
  192,629 
   660,547 Operations and Maintenance
   29,535 
   40,030 
   60,053 
    81,910 General and Administrative
   15,451 
   13,898 
   31,041 
    28,252 Depreciation and Amortization
   27,159 
   27,012 
   54,124 
    53,852 Taxes, Other Than Income Taxes
    6,574 
    6,879 
   12,983 
    13,686     Total Operating    Costs and Expenses
  138,020 
  470,350 
  350,830 
   838,247   **Operating Income**
   80,825 
   81,662 
  193,247 
   194,351   **Other Income and (Expenses):**  Investment in Kinder Morgan Energy    Partners:      Equity in Earnings
   67,058 
   35,142 
  122,095 
    64,725     Amortization of    Excess Investment
   (6,591)
   (6,862)
  (13,542)
   (14,439)Equity in Losses of Other Equity    Investments
     (724)
   (1,083)
   (5,603)
    (2,071)Interest Expense, Net
  (56,238)
  (62,891)
 (114,525)
  (123,475)Minority Interests 
   (8,528)
   (6,089)
  (14,173)
   (12,073)Other, Net
    9,282 
    1,202 
   12,255 
    11,275     Total Other Income    and (Expenses)
    4,259 
  (40,581)
  (13,493)
   (76,058)  **Income Before Income Taxes and    Extraordinary Item**
   85,084 
   41,081 
  179,754 
   118,293 Income Taxes
   35,184 
   16,968 
   73,052 
    47,855 **Income Before Extraordinary Item**
   49,900 
   24,113 
  106,702 
    70,438     Extraordinary Item - Loss on Early    Extinguishment    of Debt, Net of    Income Tax Benefit of $8,080        -         -   (12,119)
         - **Net Income**
$  49,900 
$  24,113 
$  94,583 
$   70,438 
========= 
========= 
========= 
==========   **Basic Earnings (Loss) Per Common Share:**Income Before Extraordinary Item
$    0.43 
$    0.21 
$    0.93 
$     0.62 Extraordinary Item - Loss on Early    Extinguishment of Debt
        - 
        - 
    (0.11)
         - Total Basic Earnings Per Common Share
$    0.43 
$    0.21 
$    0.82 
$     0.62 
========= 
========= 
========= 
========== Number of Shares Used in Computing Basic    Earnings Per Common    Share (Thousands)
  115,258 
  114,196 
  115,051 
   113,627 
========= 
========= 
========= 
==========   **Diluted Earnings (Loss) Per Common    Share:**Income Before Extraordinary Item
$    0.41 
$    0.21 
$    0.88 
$     0.62 Extraordinary Item - Loss on Early    Extinguishment of Debt
        - 
        - 
    (0.10)
         - Total Diluted Earnings Per Common Share
$    0.41 
$    0.21 
$    0.78 
$     0.62 
========= 
========= 
========= 
==========   Number of Shares Used in Computing Diluted    Earnings Per Common    Share (Thousands)
  122,359 
  114,981 
  121,845 
   114,228 
========= 
========= 
========= 
==========   **Dividends Per Common Share**
$    0.05 
$    0.05 
$    0.10 
$     0.10 
========= 
========= 
========= 
========== 
The accompanying notes are an integral part of these statements.

5
**CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)Kinder Morgan, Inc. and SubsidiariesIncrease (Decrease) in Cash and Cash Equivalents(In Thousands)
**Six Months Ended    June 30,**2001**2000  **Cash Flows From Operating Activities:**Net Income
$    94,583 
$    70,438 Adjustments to Reconcile Net Income to Net    Cash Flows from Operating Activities:    Depreciation and    Amortization
     54,124 
     53,852     Extraordinary Loss    on Early Extinguishment of Debt
     20,199 
          -     Deferred Income    Taxes
     55,254 
     42,011     Equity in Earnings    of Kinder Morgan Energy Partners
   (108,553)
    (50,286)    Distributions from    Kinder Morgan Energy Partners
    102,052 
     47,309     Deferred Purchased    Gas Costs
     18,676 
      2,988     Net Gains on Sales    of Facilities
     (6,183)
     (2,125)    Changes in Gas in    Underground Storage
    (58,206)
    (23,208)    Changes in Other    Working Capital Items
    (36,009)
    (34,323)    Other, Net
      3,525 
    (40,180)  Net Cash Flows Provided by    Continuing Operations
    139,462 
     66,476   Net Cash Flows Used in    Discontinued Operations
     (4,370)
   (109,919)**Net Cash Flows Provided by (Used in)    Operating Activities**
    135,092 
    (43,443)  **Cash Flows From Investing Activities:**Capital Expenditures
    (33,383)
    (41,874)Proceeds from Transfers to Kinder Morgan    Energy Partners
          - 
    330,000 Acquisitions
    (15,000)
    (19,412)Investment in Kinder Morgan Energy Partners
   (991,869)
          - Other Investments
    (89,165)
    (30,819)Proceeds from Sale of Tom Brown, Inc. Stock
          - 
     14,864 Proceeds from Sales of Other Assets
      5,675 
      1,550 Net Cash Flows Provided by (Used in)    Continuing Investing Activities
 (1,123,742)
    254,309 Net Cash Flows Provided by Discontinued    Investing Activities
     25,742 
    130,414 **Net Cash Flows Provided by (Used in)    Investing Activities**
 (1,098,000)
    384,723   **Cash Flows From Financing Activities:**Short-term Debt, Net
    391,900 
   (277,733)Long-term Debt - Retired
   (420,706)
       (791)Premiums Paid on Early Extinguishment of    Debt
    (28,529)
          - Premium Equity Participating Securities    Contract Fee
     (5,449)
     (5,469)Common Stock Issued
     20,440 
     12,957 Issuance of Membership Shares by Kinder    Morgan Management, LLC
    942,614 
          - Securities Issuance Costs
    (54,480)
          - Other Financing, Net
          - 
    (57,129)Treasury Stock Issued
      2,223 
         75 Treasury Stock Acquired
          - 
        (18)Cash Dividends, Common Stock
    (11,499)
    (11,354)Minority Interests, Net
       (134)
       (748)**Net Cash Flows Provided by (Used in)    Financing Activities**
    836,380 
   (340,210)  Net (Decrease) Increase in Cash and Cash    Equivalents
   (126,528)
      1,070 Cash and Cash Equivalents at Beginning of    Period
    141,923 
     26,378 Cash and Cash Equivalents at End of Period
$    15,395 
$    27,448 
=========== 
=========== 
For supplemental cash flow information, see Note 5.The accompanying notes are an integral part of these statements.

6

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

1.     General
Unless the context requires otherwise,references to "we," "us," "our," or the "Company"are intended to mean Kinder Morgan, Inc. and its consolidated subsidiaries. We haveprepared the accompanying unaudited consolidated financial statements under the rules andregulations of the Securities and Exchange Commission. Under such rules and regulations,we have condensed or omitted certain information and notes normally included in financialstatements prepared in conformity with accounting principles generally accepted in theUnited States of America. We believe, however, that our disclosures are adequate to makethe information presented not misleading. The consolidated financial statements reflectall adjustments that are, in the opinion of management, necessary for a fair presentationof our financial results for the interim periods presented. You should read theseconsolidated financial statements in conjunction with our consolidated financialstatements and related notes included in our 2000 Form 10-K. Certain prior period amountshave been reclassified to conform to the current presentation.

2.     Kinder Morgan Management, LLC
On May 18, 2001, Kinder Morgan Management,LLC, an indirect subsidiary of Kinder Morgan, Inc., issued and sold its common shares inan underwritten public offering. Upon completion of the offering, Kinder MorganManagement, LLC became a partner in Kinder Morgan Energy Partners, L.P. and assumed theresponsibility to manage and control its business and affairs. The net proceeds from theoffering were used by Kinder Morgan Management, LLC to buy i-units from Kinder MorganEnergy Partners. The i-units are a new class of Kinder Morgan Energy Partners' limitedpartner interests and will be issued only to Kinder Morgan Management, LLC. As describedin our 2000 Form 10-K, we have certain rights and obligations with respect to thesesecurities.

In the initial public offering, Kinder MorganManagement, LLC issued a total of 14,875,000 shares, of which 1,487,500 shares werepurchased by Kinder Morgan, Inc. (utilizing incremental short-term borrowings), with thebalance purchased by the public. The equity interest in Kinder Morgan Management, LLCpurchased by the public created a minority interest on our balance sheet of $892.7 millionat the time of the transaction.

On July 18, 2001, Kinder Morgan Management,LLC announced a two-for-one split of its shares. This share split will take place in theform of a one-share distribution for each share outstanding, with shares to be distributedon August 31, 2001 to holders of record as of August 17, 2001.

Also on July 18, 2001, Kinder MorganManagement, LLC announced that its board of directors had declared a share distribution of$1.05 per share payable on August 14, 2001 to its shareholders of record as of July 31,2001. This distribution will be paid in the form of additional shares based on the averagemarket price of a share determined for a ten trading day period ending on the trading dayimmediately prior to the ex-dividend date for the shares.

3.     Investments and Sales
On May 18, 2001, Kinder Morgan Management, LLCpurchased 14,875,001 i-units from Kinder Morgan Energy Partners for $991.9 million. Thei-units are a new class of Kinder Morgan Energy Partners' limited partner interests andwill be issued only to Kinder Morgan Management, LLC. These i-units are similar to KinderMorgan Energy Partners' common limited partner units, except that quarterly distributionson i-units will be paid in additional i-units rather than cash. Each time Kinder MorganEnergy Partners issues i-units to Kinder Morgan Management, LLC, Kinder Morgan Management,LLC will also distribute an equal number of 

7

shares to holders of its shares. The number ofKinder Morgan Energy Partners' i-units and Kinder Morgan Management, LLC's shares willremain equal.

After taking into account the minorityinterest in the i-units held by Kinder Morgan Management, LLC, this transaction reducedour total ownership in Kinder Morgan Energy Partners from approximately 22.7% toapproximately 20.8%. As discussed in our 2000 Form 10-K, we have elected to treattransactions such as this as "capital" transactions and, accordingly, no gain orloss was recorded. Instead, the impact of the difference between sales proceeds and ourunderlying book basis had the effect of increasing our investment in the net assets ofKinder Morgan Energy Partners by $145.1 million, associated deferred income taxes by $18.9million and paid-in capital by $28.3 million. It also had the effect of reducing ourexcess investment in Kinder Morgan Energy Partners by $97.9 million and the monthlyamortization of the excess investment by approximately $192 thousand.

On July 18, 2001, Kinder Morgan EnergyPartners announced a two-for-one split of its common units. The common unit split willtake place in the form of a one-common-unit distribution for each common unit outstanding,with units to be distributed on August 31, 2001 to holders of record as of August 17,2001. This split will result in Kinder Morgan Management, LLC receiving one additionali-unit for each i-unit currently owned.

As more fully described in our 2000 Form 10-K,we transferred approximately $300 million of assets, effective December 31, 2000, toKinder Morgan Energy Partners, L.P., a publicly traded master limited partnership,referred to in this report as "Kinder Morgan Energy Partners." The largest assetwe transferred was our wholly owned subsidiary Kinder Morgan Texas Pipeline, L.P. andcertain associated entities (a major Texas intrastate natural gas pipeline system). Thetransfer to Kinder Morgan Energy Partners also included our Douglas and Casper gasprocessing facilities and associated natural gas gathering systems, our 50 percentinterest in Coyote Gas Treating, LLC and our 25 percent interest in Thunder Creek GasServices, L.L.C.

In April 2000, Kinder Morgan Energy Partnersissued 4.5 million limited partnership units in a public offering at a price of $39.75 perunit, receiving total net proceeds (after underwriting discount) of $171.3 million. Weacquired none of these units. This transaction reduced our percentage ownership of KinderMorgan Energy Partners from approximately 19.9% to approximately 18.6% and had theassociated effects of increasing our investment in the net assets of Kinder Morgan EnergyPartners by $6.1 million and reducing (i) our excess investment in Kinder Morgan EnergyPartners by $81.1 million, (ii) associated accumulated deferred income taxes by $30.0million, (iii) paid-in capital by $45.0 million and (iv) the monthly amortization of theexcess investment by approximately $176 thousand.

4.     Earnings Per Share
Basic earnings per common share is computedbased on the monthly weighted-average number of common shares outstanding during eachperiod. Diluted earnings per common share is computed based on the monthlyweighted-average number of common shares outstanding during each period, increased by theassumed exercise or conversion of securities (stock options and Premium EquityParticipating Security Units) convertible into common stock, for which the effect ofconversion or exercise using the treasury stock method would be dilutive.

8
**Three Months Ended June 30,**Six Months Ended June 30,**2001**2000**2001**2000
(In    Thousands)
(In    Thousands)Weighted-average Common Shares Outstanding
 115,258 
 114,196 
 115,051 
 113,627 Dilutive Common Stock Options
   1,906 
     785 
   1,872 
     601 Dilutive Premium Equity Participating    Security Units
   5,195 
       - 
   4,922 
       - Shares Used to Compute Diluted Earnings Per    Common Share
 122,359 
 114,981 
 121,845 
 114,228 
======== 
======== 
======== 
======== 
All stock options outstanding during the threemonths and six months ended June 30, 2001 were dilutive. Weighted-average stock optionsoutstanding totaling 636,000 and 738,000 for the three months and six months ended June30, 2000, respectively, and all Premium Equity Participating Security Units were excludedfrom the diluted earnings per share calculation in those periods because the effect ofincluding them would have been antidilutive. Note 7 contains more information regardingPremium Equity Participating Security Units.

5.     Supplemental Cash Flow Information
We consider all highly liquid investmentspurchased with an original maturity of three months or less to be cash equivalents."Other, Net," presented as a component of "Net Cash Flows Provided byOperating Activities" in the accompanying Consolidated Statements of Cash Flowsincludes, among other things, equity in undistributed earnings or losses of unconsolidatedsubsidiaries (other than Kinder Morgan Energy Partners) and joint ventures.
**Six Months Ended    June 30,****CHANGES IN OTHER WORKING CAPITAL ITEMS,    NET OF EFFECTS****2001**2000**   OF ACQUISITIONS AND    SALES**
(In    Thousands) **INCREASE (DECREASE) IN CASH AND CASH    EQUIVALENTS**Accounts Receivable
$  29,016 
$ (23,430)Material and Supplies Inventory
   (1,240)
   (2,311)Other Current Assets
  (19,483)
  (16,876)Accounts Payable
  (54,879)
   22,099 Other Current Liabilities
   10,577 
  (13,805)
$ (36,009)
$ (34,323)
========= 
========= **SUPPLEMENTAL DISCLOSURES OF CASH FLOW    INFORMATION:****  ****Cash Paid During the Period for:**Interest, Net of Amount Capitalized
$ 118,006 
$ 126,058 
========= 
========= Distributions on Preferred Capital Trust    Securities
$  10,956 
$  10,956 
========= 
========= Income Taxes Paid
$  20,552 
$   4,690 
========= 
========= 
6.     Business Segments
In accordance with the manner in which wecurrently manage our businesses, including the allocation of capital and evaluation ofbusiness unit performance, we report our operations in the following segments: (1) NaturalGas Pipeline Company of America, our wholly owned subsidiary which, together with certainassociated entities, operates a major interstate natural gas pipeline system; (2) KinderMorgan Retail, which distributes, on a largely regulated basis, natural gas to retailcustomers and (3) Power and Other, which constructs and operates electric power generationfacilities and which includes various other activities not constituting business 

9

segments. Prior to our December 31, 2000transfer to Kinder Morgan Energy Partners (see Note 3), we also owned and operated KinderMorgan Texas Pipeline, a major Texas intrastate natural gas pipeline system.

The accounting policies we apply in thegeneration of business segment information are generally the same as those described inNote 1 of Notes to Consolidated Financial Statements included in our 2000 Form 10-K,except that certain items below the "Operating Income" line are either notallocated to business segments or are not considered by management in its evaluation ofbusiness unit performance. An exception to this is that Kinder Morgan Power, whichroutinely conducts its business activities in the form of joint operations with otherparties that are accounted for under the equity method of accounting, includes its equityin earnings of these investees in its operating results. These equity method earnings areincluded in "Other Income and (Expenses)" in our Consolidated Statements ofIncome. In addition, (i) certain items included in operating income (such as general andadministrative expenses) are not allocated to individual business segments and (ii) gainsand losses from incidental sales of assets are included in segment earnings. Withadjustment for these items, we currently evaluate business segment performance primarilybased on operating income in relation to the level of capital employed. We account forintersegment sales at market prices, while we account for asset transfers at either marketvalue or, in some instances, book value. As necessary for comparative purposes, we havereclassified prior period results and balances to conform to the current presentation.

BUSINESS SEGMENT INFORMATION
**Three Months Ended June 30,    2001**
**Income**
**Revenues    From    External         Customers    ****IntersegmentRevenues** Depreciation     And Amortization**  Capital         Expenditures**SegmentAssetsat 6/30/01  
(In    Thousands)Natural Gas Pipeline Company ofAmerica
$   80,294 
$  138,296 
$        - 
$   21,606 
$   13,531
$ 5,562,475 Kinder Morgan Retail
     4,124 
    44,288 
         - 
     3,008 
     4,153
    326,241 Power and Other
    18,775 
    36,261 
         - 
     2,545 
     2,359
  3,480,3321  Consolidated
  103,193 
$  218,845 
$        - 
$   27,159 
$   20,043
$ 9,369,048 
========== 
========== 
========== 
==========
=========== General and Administrative Expenses
   (15,451)Other Income and (Expenses)
    (2,658)Income Before Income Taxes and   Extraordinary Item
$   85,084 
==========   **Three Months Ended June 30, 2000**  Income
**Revenues    From       External        Customers    ****  Intersegment      Revenues**Depreciation    And    Amortization**  CapitalExpenditures
(In Thousands)Natural Gas Pipeline Company of America
$   79,987 
$  121,801 
$      (78)
$   21,197 
$    9,664 Kinder Morgan Retail
     6,354 
    36,163 
         - 
     2,888 
     2,959 Kinder Morgan Texas Pipeline2
     3,097 
   373,511 
         - 
       717 
     5,060 Power and Other
     8,590 
    20,537 
        48 
     2,210 
     2,872 Discontinued Operations
         - 
         - 
         - 
         - 
     4,308   Consolidated
    98,028 
$  552,012 
$      (30)
$   27,012 
$   24,863 
========== 
========== 
========== 
========== General and Administrative Expenses
   (13,898)Other Income and (Expenses)
   (43,049)Income Before Income Taxes and   Extraordinary Item
$   41,081 
========== 
      10

 **Six Months Ended June 30, 2001  
**Income**
**Revenues    From    External          Customers    **
**   Intersegment      Revenues**
**  Depreciation     And  Amortization**
** Capital      Expenditures**
(In    Thousands)Natural Gas Pipeline Company of America
$  174,176 
$  310,410 
$        - 
$   43,083 
$   19,529 Kinder Morgan Retail
    27,701 
   170,182 
        44 
     6,005 
     8,876 Power and Other
    27,634 
    63,485 
     2,032 
     5,036 
     4,978   Consolidated
   229,511 
$  544,077 
$    2,076 
$   54,124 
$   33,383 
========== 
========== 
========== 
========== General and Administrative Expenses
   (31,041)Other Income and (Expenses)
   (18,716)Income Before Income Taxes and   Extraordinary Item
$  179,754 
==========   **Six Months Ended June 30, 2000****Income**     Revenues From       External    Customers**   Intersegment       Revenues**  Depreciation      And  Amortization**CapitalExpenditures
(In Thousands)Natural Gas Pipeline Company of America
$  171,937 
$  269,900 
$      (18)
$   42,315 
$   18,589 Kinder Morgan Retail
    26,141 
   104,586 
         - 
     5,777 
     4,552 Kinder Morgan Texas Pipeline2
    14,427 
   623,430 
         - 
     1,393 
    12,885 Power and Other
    15,814 
    34,682 
        48 
     4,367 
     5,848 Discontinued Operations
         - 
         - 
         - 
         - 
     7,864   Consolidated
   228,319 
$1,032,598 
$       30 
$   53,852 
$   49,738 
========== 
========== 
========== 
========== General and Administrative Expenses
   (28,252)Other Income and (Expenses)
   (81,774)Income Before Income Taxes and   Extraordinary Item
$  118,293 
========== 
1Principally our investment in Kinder Morgan Energy Partners andcorporate cash and receivables2Kinder Morgan Texas Pipeline was transferred to Kinder Morgan Energy Partnerseffective December 31, 2000.

 

GEOGRAPHIC INFORMATION

All but an insignificant amount of our assets and operations are locatedin the continental United States.

7.     Financing
We have available a $500 million 364-daycredit facility, dated October 25, 2000, and a $400 million amended and restated five-yearrevolving credit agreement dated January 30, 1998. These bank facilities can be used forgeneral corporate purposes, including backup for our commercial paper program, and includecovenants which are common in such arrangements. Our 2000 Form 10-K contains additionalinformation concerning these bank facilities and their associated covenants. Under thesebank facilities, we are required to pay a facility fee based on the total commitment,whether used or unused, at a rate which varies based on our senior debt rating. We had noborrowings under our bank facilities at June 30, 2001.

The commercial paper we issue, which issupported by the credit facilities described above, is comprised of unsecured short-termnotes with maturities not to exceed 270 days from the date of issue. Commercial paperoutstanding at June 30, 2001 was $491.9 million. Our weighted-average interest rate onshort-term borrowings outstanding at June 30, 2001 was 4.19 percent. Average short-termborrowings outstanding during the second quarter of 2001 were $417.7 million and ourweighted-average interest rate was 4.70 percent. Average short-term borrowings outstandingduring the first six months of 2001 were $297.2 million and the weighted-average interestrate was 5.19 percent.

In March 2001, we retired (i) our $400 millionof Reset Put Securities due March 1, 2021 and (ii) our $20 million of 9.95% Series SinkingFund Debentures due 2020, utilizing a combination of cash and incremental 

11

short-term debt. In conjunction with theseearly extinguishments of debt, we recorded an extraordinary loss of $12.1 million (net ofassociated tax benefit of $8.1 million), presented as a separate line item in theaccompanying Consolidated Statement of Income for the six months ended June 30, 2001.

We currently have outstanding $460 million ofPremium Equity Participating Security Units as described in detail in Note 12(B) of theNotes to Consolidated Financial Statements included in our 2000 Form 10-K. On November 30,2001, these securities will mature, which will result in our receipt of $460 million incash and our issuance of $460 million of additional common stock. We expect to use thecash proceeds to retire the $400 million of 6.45% Series of Senior Notes due on the samedate and a portion of the short-term borrowings then outstanding.

On July 18, 2001, our Board of Directorsdeclared a common stock dividend of $0.05 per share payable on August 14, 2001 toshareholders of record as of July 31, 2001.

8.     Regulatory Matters
On July 17, 2001, Natural Gas Pipeline Companyof America and Nicor Inc. (NYSE: GAS), announced that the Federal Energy RegulatoryCommission ("FERC") had approved the Horizon natural gas pipeline project innorthern Illinois, a $79 million construction project. The Horizon Pipeline Company, ajoint venture between these two entities, will combine newly constructed and existingpipeline facilities. The Horizon Pipeline Company will construct 27 miles of 36-inchdiameter pipe and lease 46 miles of existing pipeline from Natural Gas Pipeline Company ofAmerica. The new facilities and leased capacity will allow Horizon to transport 380million cubic feet of natural gas per day from near Joliet, Illinois into McHenry County,Illinois, connecting the emerging supply hub at Joliet with the northern part of the NicorGas distribution system and an existing Natural Gas Pipeline Company of America pipeline.

On July 17, 2000, Natural Gas Pipeline Companyof America filed its Compliance Plan, including pro forma tariff sheets, pursuant to theFERC's Order Nos. 637 and 637-A. The FERC directed all interstate pipelines to file proforma tariff sheets to comply with new regulatory requirements in the Orders regardingscheduling procedures, capacity segmentation, imbalance management services and penaltycredits, or in the alternative, to explain why no changes to existing tariff provisionsare necessary. Natural Gas Pipeline Company of America's filing is currently pending FERCaction. A technical conference was held on July 10, 2001 to discuss Natural Gas PipelineCompany of America's Order 637 filing. Procedural dates were adopted under which NaturalGas Pipeline Company of America would file revisions to its Order 637 plan and partieswould comment during the fourth quarter of 2001. Numerous issues regarding Order Nos. 637and 637-A are on appeal in the Court of Appeals for the District of Columbia. Initialbriefs were filed in April 2001, and oral argument is scheduled for November 2001.

9.     Comprehensive Income
Statement of Financial Accounting Standards("SFAS") No. 130, *Reporting of Comprehensive Income*, requires thatenterprises report a total for comprehensive income. During the first quarter and firstsix months of 2001, the only difference between our "net income" and our"comprehensive income" is the unrealized gain or loss on derivatives we utilizedfor hedging purposes; see Note 10. There was no difference between our "netincome" and our "comprehensive income" during the second quarter of 2000.The only difference between our "net income" and our "comprehensiveincome" during the first six months of 2000 was the reclassification of theunrealized gain on our investment in available-for-sale securities, which were sold duringthe first quarter.

12

**      Three    Months Ended    June 30,**  **   Six Months Ended    June 30,**2001**    2000**2001**   2000
(In    Thousands)
            (In    Thousands)Net Income
$  49,900
$  24,113  
$  94,583
$  70,438Unrealized Gain on Derivatives Utilized for    Hedging   Purposes
   17,317
        -
   29,441
        -Reclassification of Unrealized Gain on    Available- for-Sale   Securities
        -
        -
        -
    1,602Comprehensive Income
$  67,217
$  24,113
$ 124,024
$  72,040
=========
=========
=========
=========
The balance of Accumulated Other ComprehensiveIncome, included in the caption "Other" under the Stockholders' Equity headingin the accompanying Consolidated Balance Sheets, is as follows:
**Accumulated Other    Comprehensive Income
(In Thousands)Balance at January 1, 2001
$    (8,658)  Change in Fair Value of    Derivatives Utilized for Hedging     Purposes,    Before Income Taxes
     30,987   Reclassification of Change in    Fair Value of Derivatives to     Net Income,    Before Income Taxes
     12,309   Income Tax Effects of Above    Activities
    (13,855)Balance at June 30, 2001
$    20,783 
=========== 
10.    Accounting for Derivative Instruments andHedging Activities
Effective January 1, 2001, we adopted SFAS No.133, *Accounting for Derivative Instruments and Hedging Activities,*as amended bySFAS No. 137, *Accounting for Derivative Instruments and Hedging Activities - Deferralof the Effective Date of FASB Statement No.133* and SFAS No. 138, *Accounting forCertain Derivative Instruments and Certain Hedging Activities*, collectively,"Statement 133."**Statement 133 established accounting and reportingstandards requiring that every derivative financial instrument (including certainderivative instruments embedded in other contracts) be recorded in the balance sheet aseither an asset or liability measured at its fair value. Statement 133 requires thatchanges in the derivative's fair value be recognized currently in earnings unless specifichedge accounting criteria are met. If the derivatives meet those criteria, Statement 133allows a derivative's gains and losses to offset related results on the hedged item in theincome statement, and requires that a company formally designate a derivative as a hedgeand document and assess the effectiveness of derivatives associated with transactions thatreceive hedge accounting.

Our normal business activities expose us torisks associated with changes in the market price of natural gas and associatedtransportation. As of January 1, 2001 and during the three months and six months endedJune 30, 2001, all of our derivative activities were designated and qualified as cash flowhedges, and the impact of hedge ineffectiveness was immaterial. As the hedged sales andpurchases take place and we record them into earnings, we also reclassify the gains andlosses included in accumulated other comprehensive income into earnings. We expect toreclassify into earnings, during the next twelve months, substantially all of theaccumulated other comprehensive income balance of $20.8 million, representing unrecognizednet gains on derivative activities at June 30, 2001. During the three months and sixmonths ended June 30, 2001, we reclassified no gains or losses into earnings as a resultof the discontinuance of cash flow hedges due to a determination that the forecastedtransactions will no longer occur by the end of the originally specified time period.

13

11.    Interest Expense, Net
"Interest Expense, Net" as presentedin the accompanying Consolidated Statements of Income is net of (i) the debt component ofthe allowance for funds used during construction ("AFUDC - Interest") and (ii)in the first six months of 2000, interest income attributable to our note receivableassociated with the transfer of certain interests to Kinder Morgan Energy Partners atDecember 31, 1999 as discussed in Note 5 of Notes to Consolidated Financial Statementsincluded in our 2000 Form 10-K.
**Three    Months Ended    June 30, **Six Months    Ended    June 30, **2001**2000**2001**2000
(In    Thousands)
(In    Thousands)AFUDC - Interest
$  1,408 
$    500 
$  2,695 
$  1,212 Interest Income
$      - 
$      - 
$      - 
$  2,647 
12.    Other, Net
"Other, Net" as presented in theaccompanying Consolidated Statements of Income consists of interest income, gains orlosses on the sale of assets and other miscellaneous items. For the three and six monthperiods ended June 30, 2001, "Other, Net" included a $6.1 million gain from thesale of certain assets. For the six months ended June 30, 2000, "Other, Net"included (i) $4.1 million due to the recovery of note receivable proceeds in excess of itscarrying value, (ii) $3.9 million attributable to the settlement of a regulatory matterfor an amount less than that previously reserved and (iii) $1.4 million attributable to again from the sale of Tom Brown, Inc. common stock.

13.    Summarized Income Statement Information forKinder Morgan Energy Partners, L.P.
Following is summarized income statementinformation for Kinder Morgan Energy Partners, a publicly traded master limitedpartnership in which Kinder Morgan, Inc. owns, through a wholly owned subsidiary, thegeneral partner interest. In addition, Kinder Morgan, Inc. owns, directly and throughconsolidated subsidiaries, a limited partner interest in the form of Kinder Morgan EnergyPartners common units, i-units and Class B limited partner units. This investment, whichis accounted for under the equity method of accounting, is described in more detail inNote 3 and in our 2000 Form 10-K. Additional information on Kinder Morgan Energy Partners'results of operations and financial position are contained in its Form 10-Q for thequarter ended June 30, 2001 and in its 2000 Form 10-K.
**Three Months Ended June 30,
**Six Months Ended June 30,****2001**2000**2001**2000
(In Thousands)
(In Thousands)Operating Revenues
$   735,755
$   193,758
$ 1,764,400
$   351,116Operating Expenses
    597,159
    113,782
  1,487,453
    208,079Operating Income
$   138,596
$    79,976
$   276,947
$   143,037
===========
===========
===========
===========Net Income
$   104,226
$    71,810
$   205,893
$   131,369
===========
===========
===========
===========
14

14.    Environmental and Legal Matters
(A)    Environmental Matters

Based on current information, we do notbelieve that compliance with federal, state and local environmental laws and regulationswill have a material adverse effect on our business, cash flows, financial position orresults of operations. In addition, the clean-up programs in which we are engaged are notexpected to interrupt or diminish our ability to operate our businesses. However, therecan be no assurances that future events, such as changes in existing laws, thepromulgation of new laws, or the development of new facts or conditions will not cause usto incur significant costs.

See Note 9(A) of Notes to ConsolidatedFinancial Statements in our 2000 Form 10-K for additional information regardingenvironmental matters.

(B)     Litigation Matters
*K N TransColorado, Inc. v. TransColorado GasTransmission Company, et. al, Case No. 00-CV-129, District Court, County of Garfield,State of Colorado. On June 15, 2000, K N TransColorado filed suit against QuestarTransColorado, its parent Questar Pipeline Company, and other affiliated Questar entities,asserting claims for breach of fiduciary duties, breach of contract, constructive trust,rescission of the partnership agreement, breach of good faith and fair dealing, tortiousconcealment, misrepresentation, aiding and abetting a breach of fiduciary duty,dissolution of the TransColorado partnership, and seeking a declaratory judgment, amongother claims. The TransColorado partnership has been made a defendant for purposes of anaccounting. The lawsuit alleges, among other things, Questar breached its fiduciary dutiesas a partner. K N TransColorado seeks to recover damages in excess of $152 million due toQuestar’s breaches and, in addition, seeks punitive damages. In response to thecomplaint, on July 28, 2000, the Questar entities filed a counterclaim and third partyclaims against Kinder Morgan and certain of its affiliates for claims arising out of theconstruction and operation of the TransColorado pipeline project. The claims allege, amongother things, that the Kinder Morgan entities interfered with and delayed construction ofthe pipeline and made misrepresentations about marketing of capacity. The Questar entitiesseek to recover damages in excess of $185 million for an alleged breach of fiduciary dutyand other claims. The parties agreed to stay the exercise of a contractual provisionpurportedly requiring K N TransColorado to purchase Questar’s interest in thepipeline and to investigate the appointment of an independent operator for the pipelineduring the litigation. The Court dismissed Questar’s counterclaims for breach of dutyof good faith and fair dealing and for indemnity and contribution and dismissedQuestar’s Third Party Complaint. Questar has filed its First Amended Answer andCounterclaim, once again naming Kinder Morgan, Inc. as a counterclaim defendant, andmaking similar allegation against us as set forth above. K N TransColorado has again movedto strike these alternative counterclaims. On July 19, 2001, the Court granted K NTransColorado’s motion for summary judgment that: a) fiduciary duties existed betweenthe partners; b) these fiduciary duties were not modified or waived; and c) the affiliatesand directors of Questar Pipeline Company and Questar TransColorado acting in their dualcapacity had fiduciary obligations which required those individuals to disclose, to thepartnership and the partners, information that affected the fundamental business purposeof the partnership. Discovery is ongoing.
*Jack J. Grynberg, individually and as generalpartner for the Greater Green River Basin Drilling Program: 72-73 v. Rocky MountainNatural Gas Company and K N Energy, Inc., Case No. 90-CV-3686. On June 5, 1990, JackJ. Grynberg filed suit, which is presently pending in Jefferson County District Court forColorado, against Rocky Mountain Natural Gas Company and us alleging breach of contractand fraud. In essence, Grynberg asserts claims that the named companies failed to payGrynberg the proper price, impeded the flow of natural gas, mismeasured natural gas,delayed his development of natural gas reserves, and other claims arising out of acontract to purchase natural gas from a field in northwest Colorado. On February 13, 1997,the trial judge 

15

entered partial summary judgment for Grynbergon his contract claim that he failed to receive the proper price for his natural gas. Thisruling followed an appellate decision that was adverse to us on the contractinterpretation of the price issue, but which did not address the question of whetherGrynberg could legally receive the price he claimed or whether he had illegally divertednatural gas from a prior purchase. Grynberg has previously claimed damages in excess of$30 million. On August 29, 1997, the trial judge stayed the summary judgment pendingresolution of a proceeding at the FERC to determine if Grynberg was entitled toadministrative relief from an earlier dedication of the same natural gas to interstatecommerce. On March 15, 1999, an Administrative Law Judge for the FERC ruled, after anevidentiary hearing, that Mr. Grynberg had illegally diverted the natural gas when heentered the contract with the named companies and was not entitled to relief. Grynbergfiled exceptions to this ruling. In late March 2000, the FERC issued an order affirming inpart and denying in part the motions for rehearing of its Initial Decision. On November21, 2000, the FERC upheld the Administrative Law Judge’s factual findings and denialof retroactive abandonment. Grynberg filed a Notice of Appeal of the FERC’s decisionto the United States Court of Appeals for the D.C. Circuit. Grynberg recently withdrewthis appeal. On June 14, 2001, Rocky Mountain Natural Gas Company filed a motion forSummary Judgment and To Vacate the February 13, 1997, Partial Summary Judgment, as aresult of the conclusion of the FERC proceedings. A status conference has been set forAugust 16, 2001 on Plaintiff’s Motion to Continue the Stay of these proceedings.
*Jack J. Grynberg v. K N Energy, Inc., RockyMountain Natural Gas Company, and GASCO, Inc., Civil Action No. 92-N-2000. On October9, 1992, Jack J. Grynberg filed suit in the United States District Court for the Districtof Colorado against us, Rocky Mountain Natural Gas Company and GASCO, Inc. alleging thatthese entities, the K N Entities, as well as K N Production Company and K N Gas Gathering,Inc., have violated federal and state antitrust laws. In essence, Grynberg asserts thatthe companies have engaged in an illegal exercise of monopoly power, have illegally deniedhim economically feasible access to essential facilities to store, transport anddistribute gas, and illegally have attempted to monopolize or to enhance or maintain anexisting monopoly. Grynberg also asserts certain state causes of action relating to a gaspurchase contract. In February 1999, the Federal District Court granted summary judgmentfor the K N Entities as to some of Grynberg’s antitrust and state law claims, whileallowing other claims to proceed to trial. Grynberg has previously claimed damages inexcess of $50 million. In addition to monetary damages, Grynberg has requested that the KN Entities be ordered to divest all interests in natural gas exploration, development andproduction properties, all interests in distribution and marketing operations, and allinterests in natural gas storage facilities, in order to separate these interests from ournatural gas gathering and transportation system in northwest Colorado. No trial date hasbeen set. Settlement conferences have occurred. The Court recently ordered a finalpretrial status conference and settlement conference for August 24, 2001.
*Quinque Operating Company, et. al. v. GasPipelines, et. al., Cause No. 99-1390-CM, United States District Court for theDistrict of Kansas. This action was originally filed in Kansas state court in StevensCounty, Kansas as a class action against approximately 245 pipeline companies and theiraffiliates, including certain Kinder Morgan entities. The plaintiffs in the case seek tohave the Court certify the case as a class action, a class of natural gas producers andfee royalty owners who allege that they have been subject to systematic mismeasurement ofnatural gas by the defendants for more than 25 years. Among other things, the plaintiffsallege a conspiracy among the pipeline industry to under-measure gas and have assertedjoint and several liability against the defendants. Subsequently, one of the defendantsremoved the action to Kansas Federal District Court. Thereafter, we filed a motion withthe Judicial Panel for Multidistrict Litigation to consolidate this action for pretrialpurposes with the Grynberg False Claim Act cases referred to above, because of commonfactual questions. On April 10, 2000, the MDL Panel ordered that this case be consolidatedwith the Grynberg federal False Claims Act cases. On January 12, 2001, the FederalDistrict Court of Wyoming issued an oral ruling remanding the case back to the State Courtin Stevens County, Kansas. A case management conference recently occurred in State Courtin Stevens County, and a briefing schedule was established for preliminary matters.Discovery has not commenced.

16
*K N Energy, Inc., et al. v. James P. Rode andPatrick R. McDonald, Case No. 99CV1239, filed in the District Court, Jefferson County,Division 8, Colorado. Defendants counterclaimed and filed third party claims againstseveral of our former officers and/or directors. Messrs. Rode and McDonald are formerprincipal shareholders of Interenergy Corporation. We acquired Interenergy on December 19,1997 pursuant to a Merger Agreement dated August 25, 1997. Rode and McDonald allege that KN Energy committed securities fraud, common law fraud and negligent misrepresentation aswell as breach in contract. Plaintiffs are seeking an unspecified amount of compensatorydamages, greater than $2 million, plus unspecified exemplary or punitive damages,attorney’s fees and their costs. We filed a motion to dismiss, and on April 21, 2000,the Jefferson County District Court Judge dismissed the case against the individuals andus with prejudice. Defendants also filed a federal securities fraud action in the UnitedStates District Court for the District of Colorado on January 27, 2000 titled: *James P.Rode and Patrick R. McDonald v. K N Energy**,**Inc.,**et al.*, CivilAction No. 00-N-190. This case initially raised the identical state law claims containedin the counterclaim and third party complaint in state court. Rode and McDonald filed anamended Complaint, which dropped the state-law claims. On February 23, 2000, the federaldistrict court dismissed this Complaint with prejudice. Recently, Rode and McDonald filednotices of appeal of both the state court and federal court dismissals. A third relatedclass action case styled, *Adams vs. Kinder Morgan, Inc., et. al.,* Civil Action No.00-M-516, in the United States District Court for the District of Colorado was served onus on April 10, 2000. As of this date no class has been certified. On February 23, 2001,the federal district court dismissed several claims raised by the plaintiff, withprejudice, and dismissed the remaining claims, without prejudice. On April 27, 2001, theAdams plaintiffs filed their second amended complaint. KMI has moved to dismiss thiscomplaint and the briefing on the motion is in progress.

We believe that we have meritorious defensesto all lawsuits and legal proceedings in which we are defendants and will vigorouslydefend against them. Based on our evaluation of the above matters, and after considerationof reserves established, we believe that the resolution of such matters will not have amaterial adverse effect on our business, cash flows, financial position or results ofoperations.

See Note 9(B) of Notes to ConsolidatedFinancial Statements of our 2000 Form 10-K for additional information regarding legalmatters.

15.    Discontinued Operations
During 1999, we adopted and implemented a planto discontinue a number of lines of business. During 2000, we essentially completed thedisposition of these discontinued operations. The cash flows attributable to discontinuedoperations included in the accompanying Statements of Consolidated Cash Flows in thecaption "Net Cash Flows Used in Discontinued Operations," for the six monthperiod ended June 30, 2001, results from cash activity attributable to the remainingreserve for disposal of discontinued operations. For the six months ended June 30, 2000,the cash outflows shown in this caption result from reduced utilization of our receivablessales facility partially offset by inflows from working capital items. The caption"Net Cash Flows Provided By Discontinued Investing Activities," for the sixmonth period ended June 30, 2001, includes cash received in this period for discontinuedoperations sold during 2000. For the six months ended June 30, 2000, the cash inflowsshown in this caption primarily result from cash received for the sale of assets to ONEOK,partially offset by cash paid for a lease buyout on assets included in discontinuedoperations prior to divestiture. Note 6 of Notes to Consolidated Financial Statements ofour 2000 Form 10-K contains additional information on these matters.

16.    Accounting Standards Issued but NotEffective
In June 2001, the Financial AccountingStandards Board ("FASB") issued SFAS No. 141, *Business Combinations*. ThisStatement addresses financial accounting and reporting for business combinations and

17

supersedes Accounting Principles Board("APB") Opinion No. 16, *Business Combinations*, and SFAS No. 38, *Accountingfor Preacquisition Contingencies of Purchased Enterprises*. All business combinationsin the scope of this Statement are to be accounted for using one method - the purchasemethod. The provisions of this Statement apply to all business combinations initiatedafter June 30, 2001 and all business combinations accounted for under the purchase methodfor which the date of acquisition is July 1, 2001, or later. We have engaged insignificant acquisition activity in the past, including business combinations, and futurebusiness combinations are likely. The provisions of this Statement would require allfuture business combinations to be accounted for using the purchase method.

In June 2001, the FASB also issued SFAS No.142, *Goodwill and Other Intangible Assets*. This Statement addresses financialaccounting and reporting for i) intangible assets acquired individually or with a group ofother assets (but not those acquired in a business combination) at acquisition and ii)goodwill and other intangible assets subsequent to their acquisition. This Statementsupersedes APB Opinion No. 17, *Intangible Assets.* Under the provisions of thisStatement, if an intangible asset is determined to have an indefinite useful life, itshall not be amortized until its useful life is determined to be no longer indefinite. Anintangible asset that is not subject to amortization shall be tested for impairmentannually, or more frequently if events or changes in circumstances indicate that the assetmight be impaired. Goodwill will not be amortized. Goodwill will be tested for impairmenton an annual basis and between annual tests in certain circumstances at a level ofreporting referred to as a reporting unit. This Statement is required to be appliedstarting with fiscal years beginning after December 15, 2001. Goodwill and intangibleassets acquired after June 30, 2001 will be subject immediately to the nonamortization andamortization provisions of this Statement. We estimate that implementation of thisStatement will result in a $0.12 per diluted common share reduction of our amortization ofintangible assets and goodwill in 2002.
***Item 2.  Management's Discussion andAnalysis of Financial Condition and Results of Operations*
General**
The following discussion should be read inconjunction with the accompanying interim Consolidated Financial Statements and relatedNotes and the Consolidated Financial Statements, related Notes and Management's Discussionand Analysis of Financial Condition and Results of Operations included in our 2000 Form10-K. Due to the seasonal variation in energy demand, among other factors, the followinginterim results may not be indicative of the results to be expected for an entire year. Asdiscussed in Note 3 of the accompanying Notes to Consolidated Financial Statements, wehave engaged in acquisition and divestiture transactions (and may engage in additionalsuch transactions), which may affect the comparison of results of operations betweenperiods.

18
**Results of Operations****Three Months Ended June 30,****Six Months Ended June 30,****2001****2000****Increase(Decrease) ****2001****2000 ****Increase (Decrease)**(In Thousands    Except Per Share Amounts)Operating Revenues
$  218,845 
$  552,012 
$ (333,167)
$  544,077 
$1,032,598 
$ (488,521)
========== 
========== 
========== 
========== 
========== 
========== Gross Margin
$  159,544 
$  169,481 
$   (9,937)
$  351,448 
$  372,051 
$  (20,603)
========== 
========== 
========== 
========== 
========== 
========== General and Administrative Expenses
$   15,451 
$   13,898 
$    1,553 
$   31,041 
$   28,252 
$    2,789 
========== 
========== 
========== 
========== 
========== 
========== Operating Income
$   80,825 
$   81,662 
$     (837)
$  193,247 
$  194,351 
$   (1,104)Other Income and (Expenses)
     4,259 
   (40,581)
    44,840 
   (13,493)
   (76,058)
    62,565 Income Taxes
   (35,184)
   (16,968)
   (18,216)
   (73,052)
   (47,855)
   (25,197)Extraordinary Item - Loss on Early    Retirement of Debt
         - 
         - 
         - 
   (12,119)
         - 
   (12,119)Net Income
$   49,900 
$   24,113 
$   25,787 
$   94,583 
$   70,438 
$   24,145 
========== 
========== 
========== 
========== 
========== 
========== Diluted Earnings (Loss) Per Common Share:Income Before Extraordinary Item
$     0.41 
$     0.21 
$     0.20 
$     0.88 
$     0.62 
$     0.26 Extraordinary Item - Loss on Early    Extinguishment of    Debt
         - 
         - 
         - 
     (0.10)
         - 
     (0.10)Total Diluted Earnings Per Common Share
$     0.41 
$     0.21 
$     0.20 
$     0.78 
$     0.62 
$     0.16 
========== 
========== 
========== 
========== 
========== 
========== 
Diluted earnings per common share beforeextraordinary item for the second quarter and first six months of 2001 was $0.41 and$0.88, respectively, in comparison to $0.21 and $0.62 reported in the correspondingperiods of 2000. In each case, a small decrease in 2001 operating income (due to theDecember 2000 transfer of Kinder Morgan Texas Pipeline) was more than offset by increased2001 equity in earnings of Kinder Morgan Energy Partners and decreased 2001 interestexpense. In addition, results for the six months ended June 30, 2001 include anextraordinary after-tax loss of $12.1 million due to the early extinguishment of debt.Shares used in the diluted earnings per share calculations were higher in the secondquarter and first six months of 2001 by 7.4 million (6.4%) and 7.6 million (6.7%),respectively, in comparison to the corresponding periods of 2000. The followingcomparative discussion of our results of operations is by business unit for factorsaffecting segment earnings, and on a consolidated basis for other factors.

We manage our various businesses by, amongother things, allocating capital and monitoring operating performance. This managementprocess includes dividing the company into business units so that performance can beeffectively monitored and reported for a limited number of discrete businesses. Currently,we manage and report our operations in the following business units:
**Business Unit****Business Conducted****Referred to As:**Natural Gas Pipeline Company of       America and certain affiliates  The operation of a major interstate natural gas pipeline and    storage systemNatural Gas Pipeline Company of AmericaRetail Natural Gas Distribution      The regulated sale of natural gas to residential, commercial    and industrial customers and the non-utility sales of natural gas to certain utility    customers under the Choice Gas ProgramKinder Morgan RetailPower Generation and OtherThe construction and operation of natural gas-fired electric    generation facilities, together with various other activities not constituting separately    managed or reportable business segmentsPower and Other
19

We also owned and operated Kinder Morgan TexasPipeline, a major intrastate natural gas pipeline system, until it was transferred (alongwith certain associated entities and other assets) to Kinder Morgan Energy Partners inDecember 2000.

The accounting policies we apply in thegeneration of business segment information are generally the same as those described inNote 1 of Notes to Consolidated Financial Statements included in our 2000 Form 10-K,except that certain items below the "Operating Income" line are either notallocated to business segments or are not considered by management in its evaluation ofbusiness unit performance. An exception to this is that Kinder Morgan Power, whichroutinely conducts its business activities in the form of joint operations with otherparties that are accounted for under the equity method of accounting, includes its equityin earnings of these investees in its operating results. These equity method earnings areincluded in "Other Income and (Expenses)" in our Consolidated Statements ofIncome. In addition, (i) certain items included in operating income (such as general andadministrative expenses) are not allocated to individual business segments and (ii) gainsand losses from incidental sales of assets are included in segment earnings. Withadjustment for these items, we currently evaluate business segment performance primarilybased on operating income in relation to the level of capital employed. We account forintersegment sales at market prices, while we account for asset transfers at either marketvalue or, in some instances, book value. As necessary for comparative purposes, we havereclassified prior period results and balances to conform to the current presentation.

Following are operating results by individualbusiness unit (before intersegment eliminations), including explanations of significantvariances between the periods presented.
**Natural Gas Pipeline Company of America****Three Months Ended June 30,**Six Months Ended June 30,**2001**2000**Increase (Decrease)**2001**2000**Increase (Decrease)
(In Thousands    Except Systems Throughput)  Operating Revenues
$138,296 
$121,723 
$ 16,573 
$310,410 
$269,882 
$ 40,528   ======== ======== ======== ======== ======== ======== Gross Margin
$118,226 
$119,577 
$ (1,351)
$254,454 
$253,831 
$       623   ======== ======== ======== ======== ======== ======== Segment Earnings
$ 80,294 
$ 79,987 
$       307 
$174,176 
$171,937 
$  2,239   ======== ======== ======== ======== ======== ========   Systems Throughput (Trillion Btus)
   308.1 
   333.7 
   (25.6)
   707.1 
   748.7 
   (41.6)  ======== ======== ======== ======== ======== ======== 
Natural Gas Pipeline Company of America'ssegment earnings increased from $80.0 million in the second quarter of 2000 to $80.3million in the second quarter of 2001, an increase of $0.3 million (0.4%). Results for thesecond quarter of 2001 included a $6.1 million gain on the sale of offshore laterals, afavorable impact largely offset by increases in operations and maintenance expenses,depreciation and amortization (reflecting increased investment) and taxes, other thanincome taxes. The decrease in second quarter 2001 gross margin is attributable to reducedtransportation revenues under certain contracts, partially offset by increasedsecond-quarter 2001 storage and other revenues.

Natural Gas Pipeline Company of America'ssegment earnings increased by $2.2 million (1.3%) for the six months ended June 30, 2001,in comparison to the corresponding period of 2000. Year-to-date earnings were affectedprincipally by the same factors affecting the second quarter, as discussed previously. Theincrease in year-to-date 2001 gross margin is attributable to increased storage and otherrevenues, partially offset by 

20

reduced transportation revenues under certaincontracts and the fact that 2000 results included a $3.3 million refund of previouslyexpensed transportation charges from an unaffiliated interstate pipeline.

In accordance with the "fee-based"aspect of our business strategy, Natural Gas Pipeline Company of America has achievedsignificant success extending existing contracts and obtaining new contracts for firmtransportation capacity on its pipeline system. In addition to extending key capacityarrangements, we have also pursued throughput growth on Natural Gas Pipeline Company ofAmerica's system through our HubAmerica program, new transportation and balancingservices, and by pursuing agreements to provide natural gas transportation and storageservices to new and existing gas-fired electric generation facilities along the system.Since the announcement of our "back-to-basics" approach to business operations,we have contracted to supply natural gas transportation services to approximately 20electric generation facilities along our system totaling approximately 11,500 megawatts ofelectric generation capacity. As these facilities are brought on line in 2001 and beyond,these contracts represent approximately $11 million in annual revenue growth to thisbusiness unit. In addition to internal growth on Natural Gas Pipeline Company of America'sexisting pipeline system, we are also pursuing opportunities to expand the system. Twomajor expansion projects under way are the Horizon Pipeline project in Northern Illinois(see Note 8 of the accompanying Notes to Consolidated Financial Statements) and theextension of our system into the metropolitan east area of St. Louis. Both the HorizonPipeline and the St. Louis extension are expected to be placed into service by mid-year2002. Please refer to our 2000 Form 10-K for additional information regarding the NaturalGas Pipeline Company of America business unit.
**Kinder Morgan Retail****Three Months Ended June 30,**Six Months Ended June 30,****2001****2000****Increase (Decrease)****2001****2000****Increase   (Decrease)  **
(In Thousands    Except Systems Throughput)  Total Operating Revenues
$ 44,288 
$ 36,163 
$  8,125 
$170,226 
$104,586 
$ 65,640 ======== ======== ======== ======== ======== ======== Gross Margin
$ 18,590 
$ 18,175 
$    415 
$ 55,928 
$ 51,292 
$  4,636 ======== ======== ======== ======== ======== ======== Segment Earnings
$  4,124 
$  6,354 
$ (2,230)
$ 27,701 
$ 26,141 
$  1,560 ======== ======== ======== ======== ======== ========   Systems Throughput (Trillion Btus)1
     5.4 
     6.9 
    (1.5)
    20.2 
    20.0 
     0.2 ======== ======== ======== ======== ======== ======== 
1 Excludes transport volumes of intrastate pipelines.

Kinder Morgan Retail's segment earningsdecreased from $6.3 million in the second quarter of 2000 to $4.1 million in the secondquarter of 2001, a decrease of $2.2 million (35.1%). Kinder Morgan Retail's operatingresults were negatively impacted in 2001, relative to 2000, by (i) reduced 2001 irrigationvolumes and the resultant decrease in operating income of approximately $1.5 million and(ii) increased operations and maintenance expenses. These negative impacts were partiallyoffset by the inclusion, in 2001 results, of income from the Wolf Creek storage system. 

Kinder Morgan Retail's segment earningsincreased from $26.1 million in the first six months of 2000 to $27.7 million in the firstsix months of 2001, an increase of $1.6 million (6.0%). Gross margin increased from $51.3million in the first six months of 2000 to $55.9 million in the first quarter of 2001, anincrease of $4.6 million (9.0%). Kinder Morgan Retail's operating results were positivelyimpacted in 2001, relative to 2000, by the inclusion, in 2001 results, of revenue from theWolf Creek storage system. This positive impact was partially offset by (i) increaseddepreciation expense resulting from asset additions, including the addition of the Wolf  

21

Creek storage system mentioned above and (ii) increased property taxexpense related to asset additions, again including the Wolf Creek storage system. 

On July 25, 2001, we announced we had signed adefinitive agreement to purchase natural gas distribution assets from CitizensCommunications Company (NYSE: CZN, CZB) for approximately $11 million. The natural gasdistribution assets serve approximately 13,400 residential, commercial and agriculturalcustomers in Bent, Crowley, Otero, Archuleta, La Plata and Mineral Counties in Colorado.The Colorado Public Utilities Commission must approve the transaction.

In an effort to reduce income volatility inthis heavily weather-dependent business unit, we have instituted a weather hedgingprogram. We believe that this weather hedging program will reduce our potential futureincome volatility caused by abnormal weather. This will allow us to concentrate on futuregrowth via system throughput expansion and other operating efficiencies. Please refer toour 2000 Form 10-K for additional information regarding the Kinder Morgan Retail businessunit.
**Power and Other****Three Months Ended June 30,**Six Months Ended June 30,**2001 **2000**Increase(Decrease)**2001**2000**Increase (Decrease)
(In    Thousands)
(In    Thousands)  Total Operating Revenues
$36,261 
$20,585 
$15,676 
$65,517 
$34,730 
$30,787   ======= ======= ======= ======= ======= ======= Gross Margin
$22,728 
$15,837 
$ 6,891 
$41,066 
$26,906 
$14,160   ======= ======= ======= ======= ======= ======= Segment Earnings
$18,775 
$ 8,590 
$10,185 
$27,634 
$15,814 
$11,820   ======= ======= ======= ======= ======= ======= 
Power and Other segment earnings, includingequity power investments, increased by $10.2 million (118.6%) from the second quarter of2000 to the second quarter of 2001. Results for 2001 were positively impacted, relative to2000, primarily by increased fee revenues for power plant development. This positiveimpact was partially offset by (i) a reduction in equity in earnings from our investmentin Thermo Cogeneration Partnership, primarily due to increased fuel costs and (ii)increased operations and maintenance expenses resulting from overall expansion in thescope of this business unit as the number of power projects has increased.  Earningsin this business unit are largely project driven and may be expected to vary from periodto period as individual projects are completed and other projects are initiated.  Asannounced in February 2001, we have entered into agreements with a unit of WilliamsCompanies, Inc. (NYSE:WMB) under which Williams will supply fuel to and market 3,300megawatts of electric generation capacity for six natural gas-fired electric generationfacilities to be developed by Kinder Morgan Power Company. These facilities are expectedto be placed into service between 2002 and 2004. Results from our international operationsand internal communications services, which activities are also included in this businessunit, had a negligible impact on the year-to-year change in operating income.

Power and Other segment earnings increased by$11.8 million (74.7%) for the six months ended June 30, 2001, over the same period in2000. Results were impacted by essentially the same factors affecting the second quarter,as discussed preceding. Please refer to our 2000 Form 10-K for additional informationregarding the Power and Other business unit.

22
**Kinder Morgan Texas Pipeline****Three Months    Ended****Six Months    Ended****June 30,    2000****June 30,    2000 **
(In Thousands Except Systems Throughput)  Total Operating Revenues
$373,511 
$623,430 
======== 
======== Gross Margin
$ 15,941 
$ 40,071 
======== 
======== Segment Earnings
$  3,097 
$ 14,427 
======== 
========     Systems Throughput (*Trillion Btus*)
   170.7 
   314.9 
======== 
======== 
Effective December 31, 2000, we completed thetransfer of several assets to Kinder Morgan Energy Partners, including Kinder Morgan TexasPipeline. Additional information on this transaction is contained in Note 3 of theaccompanying Notes to Consolidated Financial Statements.
**Other Income and (Expenses)****Three Months Ended June 30,**Six Months Ended June 30,**2001**2000**Earnings    Increase     (Decrease)**2001**2000**Earnings      Increase       (Decrease)  
(In    Thousands)
(In    Thousands)    Interest Expense, Net
$(56,238)
$(62,891)
$  6,653 
$(114,525)
$(123,475)
$   8,950 Equity in Earnings of Kinder Morgan  Energy Partners:    Equity in Earnings
  67,058 
   35,142 
  31,916 
  122,095 
   64,725 
   57,370     Amortization of    Excess        Investment
  (6,591)
  (6,862)
     271 
  (13,542)
  (14,439)
      897 Equity in Earnings (Losses) of Power  Segment
     797 
   1,634 
    (837)
     (960)
    3,545 
   (4,505)Other Equity in Losses
  (1,521)
  (2,717)
   1,196 
   (4,643)
   (5,616)
      973 Minority Interests
  (8,528)
  (6,089)
  (2,439)
  (14,173)
  (12,073)
   (2,100)Other, Net
   9,282 
   1,202 
   8,080 
   12,255 
   11,275 
      980     Total
$  4,259 
$(40,581)
$ 44,840 
$ (13,493)
$ (76,058)
$  62,565 ======== ======== ======== ========= ========= ========= 
Interest expense decreased by $6.7 million(10.6%) for the second quarter and $8.9 million (7.2%) for the six months ended June 30,2001, in comparison with the same periods in 2000. These decreases are principally due toreduced debt levels resulting from (i) increased cash distributions from Kinder MorganEnergy Partners, (ii) proceeds from the transfer of Kinder Morgan Texas Pipeline and otherassets to Kinder Morgan Energy Partners in December 2000 and (iii) proceeds from sales ofdiscontinued businesses. See Note 3 of the accompanying Notes to Consolidated FinancialStatements for information regarding the transfer to Kinder Morgan Energy Partners. SeeNote 15 of the accompanying Notes to Consolidated Financial Statements for additionalinformation regarding discontinued operations.

Our equity in earnings of Kinder Morgan EnergyPartners, net of associated amortization, increased by $32.2 million (113.8%) for thesecond quarter and $58.3 million (115.9%) for the six months ended June 30, 2001, incomparison with the same periods in 2000. These increases were the result of (i) increasedincentive distributions from Kinder Morgan Energy Partners resulting from our ownership ofthe general partner of Kinder Morgan Energy Partners and (ii) increased income from ourlimited partner interests in Kinder Morgan 

23

Energy Partners due to our and our affiliates'ownership of 11.3 million common limited partner units, 2.7 million Class B limitedpartner units and 1.5 million i-units (net of the minority interest in Kinder MorganManagement, LLC). The reader is directed to Note 13 of the accompanying Notes toConsolidated Financial Statements for additional information regarding the results ofoperations of Kinder Morgan Energy Partners. 

The deduction for "MinorityInterests" increased by $2.4 million (40.1%) for the second quarter and $2.1 million(17.4%) for the six months ended June 30, 2001, in comparison to the corresponding periodsof 2000. These increases are due principally to the inclusion, in the second quarter of2001, of the minority interest in Kinder Morgan Management, LLC (see Note 2 of theaccompanying Notes to Consolidated Financial Statements).

The change in "Other, Net" from thesecond quarter of 2000 to the second quarter of 2001 was principally due to the inclusionin 2001 results of a $6.1 million gain from the sale of certain assets. For the six monthsended June 30, 2001, "Other, Net" includes the above-mentioned gain, while thesame period in 2000 includes (i) $4.1 million due to the recovery of note receivableproceeds in excess of carrying value, (ii) $3.9 million attributable to the settlement ofa regulatory matter for an amount less than that previously reserved and (iii) $1.4million attributable to a gain from the sale of Tom Brown, Inc. common stock.
**Income Taxes****Three Months Ended June 30,**Six Months Ended June 30,**2001**2000**Increase (Decrease)**2001**2000**Increase (Decrease)
(In    Thousands)
(In    Thousands)Income Tax Provision
$  35,184 
$  16,968 
$  18,216 
$  73,052 
$  47,855 
$  25,197 
========= 
========= 
========= 
========= 
========= 
=========   Effective Tax Rate
     41.4%
     41.3%
      0.1%
     40.6%
     40.5%
      0.1%
========= 
========= 
========= 
========= 
========= 
========= 
The increase of $18.2 million in the incometax provision from the second quarter of 2000 to the second quarter of 2001 was the resultof an increase of $44.0 million in income before income taxes and extraordinary item. Theeffective tax rates for both periods were essentially the same. The increase of $25.2million in the income tax provision from the first six months of 2000 to the first sixmonths of 2001 was the result of an increase of $61.5 million in income before incometaxes and extraordinary item. The effective tax rates for both periods were essentiallythe same.
**Discontinued Operations**
During 1999, we adopted and implemented a planto discontinue a number of lines of business. During 2000, we essentially completed thedisposition of these discontinued operations. Note 15 of the accompanying Notes toConsolidated Financial Statements contains additional information on these matters. Thecash flow impacts associated with discontinued operations are discussed under "CashFlows" following.
**Liquidity and Capital Resources**
The following table illustrates the sources ofour invested capital. The balances at December 31, 1998 and thereafter reflect theincremental capital associated with our acquisition of MidCon Corp., including ourpost-acquisition refinancings completed in 1998. The balances at December 31, 1999 and2000, and June 30, 2001 also reflect the impacts associated with our acquisition of KinderMorgan Delaware and our transfer of certain assets to Kinder Morgan Energy Partners. Note3 of the accompanying Notes to Consolidated Financial 

24

Statements, and our 2000 Form 10-K, containadditional information on these transactions. The balance at June 30, 2001 also reflectsthe early retirement of two series of debt securities as described in "Net Cash Flowsfrom Financing Activities" following and in Note 7 of the accompanying Notes toConsolidated Financial Statements. Our capitalization during 2001 will be affected by,among other things, the maturity of our Premium Equity Participating Security Units, alsodescribed in Note 7 of the accompanying Notes to Consolidated Financial Statements.
**June 30,**December 31,**2001**2000**1999**1998
(Dollars In    Thousands)Long-term Debt
$ 2,460,089 
$ 2,478,983 
$ 3,293,326 
$ 3,300,025 Minority Interests
    900,229 
      4,910 
      9,523 
     63,354 Common Equity
  1,928,311 
  1,777,624 
  1,649,615 
  1,219,043 Preferred Stock
          - 
          - 
          - 
      7,000 Capital Trust Securities
    275,000 
    275,000 
    275,000 
    275,000     Capitalization
  5,563,629 
  4,536,517 
  5,227,464 
  4,864,422 Short-term Debt
    899,067 
    908,167 
    581,567 
   1,702,0131    Invested Capital
$ 6,462,696 
$ 5,444,684 
$ 5,809,031 
$ 6,566,435   =========== =========== =========== ===========   Capitalization:    Long-term Debt
44.2%
54.6%
63.0%
 67.8%    Minority Interests
16.2%
 0.1%
 0.2%
  1.3%    Common Equity
34.7%
39.2%
31.5%
 25.1%    Preferred Stock
   - 
   - 
   - 
  0.1%    Capital Trust    Securities
 4.9%
 6.1%
 5.3%
  5.7%  Invested Capital:    Total Debt
 52.0%2
62.2%
66.7%
 76.2%    Equity, Including    Capital Trust Securities
 48.0%2
37.8%
33.3%
 23.8%
1 Includes the$1,394,846 Substitute Note assumed in conjunction with the acquisition of MidCon Corp.,which note was repaid in January 1999.2 If adjusted to reflect the November2001 maturity of the Premium Equity Participating Security Units (see "Net Cash Flowsfrom Financing Activities") and the associated $460 million increase in equity anddecrease in debt, the ratios would be: Debt - 44.9%, Equity - 55.1%.
On May 18, 2001, Kinder Morgan Management,LLC, an indirect subsidiary of Kinder Morgan, Inc., issued and sold its nonvoting sharesin an underwritten public offering. Upon completion of the offering, Kinder MorganManagement, LLC became a partner in Kinder Morgan Energy Partners, L.P. and assumed theresponsibility to manage and control its business and affairs. The net proceeds from theoffering were used to buy i-units from Kinder Morgan Energy Partners. The i-units are anew class of Kinder Morgan Energy Partners' limited partner interests and will be issuedonly to Kinder Morgan Management, LLC. As described in our 2000 Form 10-K, we have certainrights and obligations with respect to these securities.

In the initial public offering, Kinder MorganManagement, LLC issued a total of 14,875,000 shares, of which 1,487,500 shares werepurchased by Kinder Morgan, Inc. (utilizing incremental short-term borrowings), with thebalance purchased by the public. The equity interest in Kinder Morgan Management, LLCpurchased by the public created a minority interest on our balance sheet of $892.7 millionat the time of the transaction.

After taking into account the minorityinterest in the i-units held by Kinder Morgan Management, LLC, this transaction reducedour total ownership in Kinder Morgan Energy Partners from approximately 22.7% toapproximately 20.8%. As discussed in our 2000 Form 10-K, we have elected to treattransactions such as this as "capital" transactions and, accordingly, no gain orloss was recorded. Instead, the impact of the difference between sales proceeds and ourunderlying book basis had the effect of increasing our investment in the net assets ofKinder Morgan Energy Partners by $145.1 million, associated deferred income taxes by $18.9million and paid-in capital by $28.3 million. It also had the effect of reducing ourexcess investment in Kinder Morgan

25

Energy Partners by $97.9 million and themonthly amortization of the excess investment by approximately $192 thousand.

Kinder Morgan Energy Partners has adopted anaggressive acquisition strategy and it is expected that future acquisitions will befinanced, in part, by issuance of additional limited partnership units. Therefore, it isexpected that future similar transactions will occur. Nevertheless, because (i) KinderMorgan Energy Partners typically requires that such acquisitions be accretive to cash flowper common unit, (ii) the general partner interest is not diluted by such transactions and(iii) for a given level of cash distribution, the incentive distribution structure resultsin relatively larger distributions to the general partner as the number of limitedpartnership units outstanding increases, it is not anticipated that additionaltransactions will collectively have an adverse effect on cash flows or earnings from thisinvestment.

CASH FLOWS

The following discussion of cash flows shouldbe read in conjunction with the accompanying interim Consolidated Statements of Cash Flowsand related supplemental disclosures, and the Statements of Consolidated Cash Flows andrelated supplemental disclosures included in our 2000 Form 10-K.

Net Cash Flows from Operating Activities

"Net Cash Flows Provided by (Used in)Operating Activities" increased from a use of $43.4 million for the six months endedJune 30, 2000 to a source of $135.1 million for the six months ended June 30, 2001, anincrease of $178.5 million. This increase is primarily due to (i) a decrease of $105.5million in cash flows used for discontinued operations, primarily attributable to thereduced utilization of our receivables sales facility as further discussed in thefollowing paragraph and (ii) a $54.7 million increase in cash inflows from our investmentin Kinder Morgan Energy Partners. Net cash flows used in discontinued operations in 2001result from cash activity attributable to the remaining reserve for disposal ofdiscontinued operations.

As more fully discussed in our 2000 Form 10-K,in September 1999, we established a receivables sales facility that provided up to $150million of additional liquidity. In accordance with this agreement, proceeds of $150million were received on September 30, 1999. In accordance with authoritative accountingguidelines, cash flows associated with this facility are included with "Cash flowsfrom Operating Activities" in the accompanying interim Consolidated Statements ofCash Flows. In February 2000, we reduced our participation in this receivables salesprogram by $124.9 million, principally as a result of our then-pending disposition of ourwholesale gas marketing business (see Note 6 of Notes to Consolidated Financial Statementsincluded in our 2000 Form 10-K). A $124.7 million reduction in the receivables salesprogram in the first quarter of 2000 is included with the caption "Net Cash FlowsProvided by (Used in) Discontinued Operations" on the accompanying interimConsolidated Statements of Cash Flows. On April 25, 2000, we repaid the residual balanceand terminated the agreement.

Net Cash Flows from Investing Activities

"Net Cash Flows Provided by (Used in)Investing Activities" decreased from a source of $384.7 million for the six monthsended June 30, 2000 to a use of $1.1 billion for the six months ended June 30, 2001, a netdecrease of $1.5 billion. This decrease was principally due to (i) an outflow of $991.9million for the six months ended June 30, 2001 for additional investment in Kinder MorganEnergy Partners, (ii) a $330 million decrease due to the fact that six months ended June30, 2000 cash flows included proceeds from our December 1999 transfer of certain assetsand interests to Kinder Morgan Energy Partners, (iii) an outflow of $83.9 million for thesix months ended June 30, 2001 for investments in power plant facilities and (iv) a $104.7million decrease in cash flows from discontinued operations as a result of (1) $25.7million received for the six months ended June 30, 

26

2001 for discontinued operations sold during2000 and (2) for the six months ended June 30, 2000, an inflow of $163.9 million receivedfor discontinued operations sold partially offset by an outflow of $59.9 million for alease buyout on assets included in discontinued operations prior to divestiture. Pleaserefer to Note 3 of the accompanying Notes to Consolidated Financial Statements and Notes 5and 6 of Notes to Consolidated Financial Statements included in our 2000 Form 10-K foradditional information regarding these transactions.

Net Cash Flows from Financing Activities

"Net Cash Flows Provided By (Used In)Financing Activities" increased from a use of $340.2 million for the six months endedJune 30, 2000 to a source of $836.4 million for the six months ended June 30, 2001, anincrease of $1.2 billion. This increase was principally due to (i) net proceeds of $888.1million for the six months ended June 30, 2001 from the issuance of membership shares byKinder Morgan Management, LLC (see Note 2 of the accompanying Notes to ConsolidatedFinancial Statements), (ii) $448.5 million of cash used in the six months ended June 30,2001 for the early extinguishment of two series of debt securities (see Note 7 of theaccompanying Notes to Consolidated Financial Statements) and (iii) a change in netshort-term borrowing of $669.6 million principally due to (1) a reduction in netshort-term borrowing in the six months ended June 30, 2000 facilitated by cash inflowsfrom investing activities (see "Net Cash Flows from Investing Activities" above)and (2) an increase in net short-term borrowing in the six months ended June 30, 2001,principally to fund a portion of the early extinguishment of long-term debt as discussedpreviously.

Our principal sources of short-term liquidityare our revolving bank facilities totaling $900 million. At June 30, 2001, we had $491.9million of commercial paper (which is backed by the bank facilities) issued andoutstanding. The corresponding amount outstanding was $469.0 million at July 31, 2001.After inclusion of applicable letters of credit, the remaining available borrowingcapacity under the bank facilities was $396.4 million and $419.3 million at June 30, 2001and July 31, 2001, respectively. As described in our 2000 Form 10-K, these bank facilitiesand certain of our operating lease arrangements contain covenants related to our ratio ofdebt to total capitalization, consolidated net worth and debt ratings. For additionalinformation on utilization of these facilities, see Note 7 of the accompanying Notes toConsolidated Financial Statements.

In March 2001, we retired (i) our $400 millionof Reset Put Securities due March 1, 2021 and (ii) our $20 million of 9.95% Series SinkingFund Debentures due 2020, utilizing a combination of cash and incremental short-term debt.In conjunction with these early extinguishments of debt, we recorded an extraordinary lossof $12.1 million (net of associated tax benefit of $8.1 million), presented as a separateline item in the accompanying interim Consolidated Statement of Income for the six monthsended June 30, 2001.

We currently have outstanding $460 million ofPremium Equity Participating Security Units as described in detail in Note 12(B) of theNotes to Consolidated Financial Statements included in our 2000 Form 10-K. On November 30,2001, these securities will mature, which will result in our receipt of $460 million incash and our issuance of $460 million of additional common stock. We expect to use thecash proceeds to retire the $400 million of 6.45% Series of Senior Notes due on the samedate and a portion of the short-term borrowings then outstanding.

On July 18, 2001, our Board of Directorsdeclared a common stock dividend of $0.05 per share payable on August 14, 2001 toshareholders of record as of July 31, 2001.
**Accounting Standards Issued but Not Effective**
In June 2001, the Financial AccountingStandards Board ("FASB") issued SFAS No. 141, *Business Combinations*. ThisStatement addresses financial accounting and reporting for business combinations andsupersedes Accounting Principles Board ("APB") Opinion No. 16, *BusinessCombinations*, and SFAS No. 38, 

27

*Accounting for Preacquisition Contingenciesof Purchased Enterprises*. All business combinations in the scope of this Statement areto be accounted for using one method - the purchase method. The provisions of thisStatement apply to all business combinations initiated after June 30, 2001 and allbusiness combinations accounted for under the purchase method for which the date ofacquisition is July 1, 2001, or later. We have engaged in significant acquisition activityin the past, including business combinations, and future business combinations are likely.The provisions of this Statement would require all future business combinations to beaccounted for using the purchase method.

In June 2001, the FASB also issued SFAS No.142, *Goodwill and Other Intangible Assets*. This Statement addresses financialaccounting and reporting for i) intangible assets acquired individually or with a group ofother assets (but not those acquired in a business combination) at acquisition and ii)goodwill and other intangible assets subsequent to their acquisition. This Statementsupersedes APB Opinion No. 17, *Intangible Assets.* Under the provisions of thisStatement, if an intangible asset is determined to have an indefinite useful life, itshall not be amortized until its useful life is determined to be no longer indefinite. Anintangible asset that is not subject to amortization shall be tested for impairmentannually, or more frequently if events or changes in circumstances indicate that the assetmight be impaired. Goodwill will not be amortized. Goodwill will be tested for impairmenton an annual basis and between annual tests in certain circumstances at a level ofreporting referred to as a reporting unit. This Statement is required to be appliedstarting with fiscal years beginning after December 15, 2001. Goodwill and intangibleassets acquired after June 30, 2001 will be subject immediately to the nonamortization andamortization provisions of this Statement. We estimate that implementation of thisStatement will result in a $0.12 per diluted common share reduction of our amortization ofintangible assets and goodwill in 2002.
**Information Regarding Forward-looking Statements**
This filing includes forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934. These forward-looking statements are identified asany statement that does not relate strictly to historical or current facts. They use wordssuch as "anticipate," "believe," "intend," "plan,""projection," "forecast," "strategy," "position,""continue," "estimate," "expect," "may,""will," or the negative of those terms or other variations of them or bycomparable terminology. In particular, statements, express or implied, concerning futureoperating results or the ability to generate sales, income or cash flow areforward-looking statements. Forward-looking statements are not guarantees of performance.They involve risks, uncertainties and assumptions. The future results of our operationsmay differ materially from those expressed in these forward-looking statements. Many ofthe factors that will determine these results are beyond our ability to control orpredict. Specific factors that could cause actual results to differ from those in theforward-looking statements include but are not limited to the following:

•
price trends, stability and overall demand    for natural gas and electricity in the United States; economic activity, weather,    alternative energy sources, conservation and technological advances that may affect price    trends and demand;
•
national, international, regional and    local economic, competitive and regulatory conditions and developments;
•
the various factors which affect Kinder    Morgan Energy Partners' ability to maintain or increase its level of earnings and    distributions;
•
our ability to integrate any acquired    operations into our existing operations;
•
changes in laws or regulations,    third-party relationships and approvals, decisions of courts, regulators and governmental    bodies that may affect our business or our ability to compete;
•
our ability to achieve cost savings and    revenue growth;
•
conditions in capital markets;
•
rates of inflation;
28
•
interest rates;
•
political and economic stability of oil    producing nations;
•
the pace of deregulation of retail natural    gas and electricity;
•
the timing and extent of changes in    commodity prices for oil, natural gas, electricity and certain agricultural products; and
•
the timing and success of business    development efforts.
You should not put an undue reliance on forward-looking statements.
***Item3.  Quantitative and Qualitative Disclosures about Market Risk***
There have been no material changes in marketrisk exposures that would affect the quantitative and qualitative disclosures presented asof December 31, 2000, in the "Risk Management" section of Management'sDiscussion and Analysis of Financial Condition and Results of Operations contained in our2000 Form 10-K. Effective January 1, 2001, we adopted SFAS No. 133, as amended by SFAS No.137 and SFAS No. 138. See Note 10 of the accompanying Notes to Consolidated FinancialStatements.
**PART II - OTHER INFORMATION
*Item 1.  LegalProceedings***
The reader is directed to Note 14 of theaccompanying Notes to Consolidated Financial Statements in Part I, Item 1, which isincorporated herein by reference.***Item4.  Submission of Matters to a Vote of Security Holders***a)
The Company held its Annual Meeting of    Shareholders on May 8, 2001 (the "Annual Meeting").b)
Proxies for the Annual Meeting were    solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934. There was no    solicitation in opposition to management's nominees for directors as listed in the Proxy    Statement and all such nominees were elected, which included Messrs. Battey, Sarofim and    True. In addition, those directors continuing in office after the meeting included Messrs.    Austin, Bliss, Gardner, Hybl, Kinder, Morgan and Randall. The number of votes for and    withheld for the nominees elected at the meeting were as follows:**For**Withheld  Charles W. Battey
100,512,952
927,168Fayez Sarofim
100,644,552
795,568H. A. True, III
100,650,304
789,816
    29
    c)
    The following matters were also voted on at the Annual Meeting:  (1)
A proposal to amend and restate our 1992    Stock Option Plan for Non-Employee Directors was approved and the number of affirmative    votes, negative votes, abstentions and broker non-votes with respect to the matter were as    follows:      For85,801,288Against15,176,832Abstain     462,000Broker Non-votes
N/A      (2)
    A proposal to ratify and approve the selection of PricewaterhouseCoopers LLP as our    auditors for 2001 was approved and the number of affirmative votes, negative votes,    abstentions and broker non-votes with respect to the matter were as follows:      For100,909,996Against         78,588Abstain       451,536Broker Non-votesN/A
*  **Item6.  Exhibits and Reports on Form 8-K***
**(A)     Exhibits**    None**(B)     Reports on Form 8-K****(1)****Current Report on Form 8-K/A dated April 4, 2001 was filed on April 5, 2001 pursuant to    Items 5. and 7. of that form.
Pursuant to Item 5. of that    form, Kinder Morgan, Inc. filed (i) financial statements as of December 31, 2000 and for    the three years then ended, (ii) quarterly unaudited financial information for 2000 and    1999, (iii) selected financial data for each of the five years in the period ended    December 31, 2000, (iv) Management's Discussion and Analysis of Financial Condition and    Results of Operations for the periods covered by the financial statements described under    (i), (v) quantitative and qualitative disclosures about market risk and (vi) Schedule II -    Valuation and Qualifying Accounts. Pursuant to Item 7. of that form, Kinder Morgan, Inc.    filed (i) as Exhibit 99.1, the Form 10-K/A of Kinder Morgan, Inc. dated April 4, 2001 and    (ii) as Exhibit 99.2, the Form 10-K/A of Kinder Morgan Energy Partners, L.P. dated April    4, 2001.**(2)****Current Report on Form 8-K dated May 2,    2001 was filed on May 2, 2001 pursuant to Item 5. and 7. of that form.
Pursuant to Item 5. of that    form, Kinder Morgan, Inc. stated that on April 18, 2001, Kinder Morgan, Inc. issued a    press release reporting its first quarter 2001 earnings. Pursuant to Item 7. of that form,    Kinder Morgan, Inc. filed, as Exhibit 99(a), its press release dated April 18, 2001.**  30
**(3)****Current Report on Form 8-K/A dated May    2, 2001 was filed on May 2, 2001 pursuant to Item 7. of that form.
Pursuant to Item 7. of that    form, Kinder Morgan, Inc. filed, as Exhibit 99(a), its press release dated April 18, 2001,    including supplemental information inadvertently omitted from the last page of the press    release included as Exhibit 99(a) of its Form 8-K dated May 2, 2001.**(4)****Current Report on Form 8-K dated June    25, 2001 was filed on June 26, 2001 pursuant to Item 9. of that form.
Pursuant to Item 9. of that    form, Kinder Morgan, Inc. announced its intention to discuss, at the Nantucket Conference    sponsored by First Union Securities on June 26, 2001 at approximately 9:30 a.m. Eastern    Time, various strategic and financial issues relating to the business plans and objectives    of Kinder Morgan, Inc., Kinder Morgan Energy Partners and Kinder Morgan Management, LLC,    and the availability of materials to be presented at the meeting on Kinder Morgan, Inc.'s    website.**(5)****Current Report on Form 8-K dated July    30, 2001 was filed on July 31, 2001 pursuant to Item 9. of that form.
Pursuant to Item 9. of that    form, Kinder Morgan, Inc. announced its intention to make several presentations beginning    on July 31, 2001 to a group of analysts and others to address various strategic and    financial issues relating to the business plans and objectives of Kinder Morgan, Inc.,    Kinder Morgan Energy Partners and Kinder Morgan Management, LLC, and the availability of    materials to be presented at the meetings on Kinder Morgan, Inc.'s website.
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**SIGNATURE**
Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.
KINDER MORGAN, INC.    (Registrant)    August 9, 2001    /s/ C.    Park Shaper                                         C. Park Shaper    Vice President and Chief Financial Officer    (Principal Financial and Accounting Officer)
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