KMI-6.30.2013-10Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
F O R M   10-Q
 
þ  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2013
 
or
 
o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____to_____
 
Commission file number: 001-35081

KINDER MORGAN, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
80-0682103
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

1001 Louisiana Street, Suite 1000, Houston, Texas 77002
(Address of principal executive offices)(zip code)
Registrant’s telephone number, including area code: 713-369-9000
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No þ
 
As of July 26, 2013, the registrant had 1,035,846,097 Class P shares outstanding.




KINDER MORGAN, INC. AND SUBSIDIARIES
TABLE OF CONTENTS

 
 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Kinder Morgan, Inc. and Subsidiaries


Company Abbreviations
 
 
 
 
 
 
BOSTCO
=
Battleground Oil Specialty Terminal Company LLC
KMGP
=
Kinder Morgan G.P., Inc.
Calnev
=
Calnev Pipe Line LLC
KMI
=
Kinder Morgan, Inc.
Copano
=
Copano Energy, L.L.C.
KMP
=
Kinder Morgan Energy Partners, L.P. and its consolidated subsidiaries
Credit Suisse
=
Credit Suisse Securities (USA) LLC
KMR
=
Kinder Morgan Management, LLC
Eagle Ford
=
Eagle Ford Gathering LLC
Plantation
=
Plantation Pipe Line Company
El Paso
=
El Paso LLC
SFPP
=
SFPP, L.P.
Elba Express
=
Elba Express Company, L.L.C.
Shell
=
Royal Dutch Shell plc
ELC
=
Elba Liquefaction Company, L.L.C.
Shell G&P
=
Shell US Gas & Power, LLC
EP
=
El Paso Corporation and its consolidated subsidiaries
SLC
=
Southern Liquefaction Company, L.L.C.
EPB
=
El Paso Pipeline Partners, L.P.
SLNG
=
Southern LNG Company, L.L.C.
EPNG
=
El Paso Natural Gas Company, L.L.C.
SNG
=
Southern Natural Gas Company, L.L.C.
EPPOC
=
El Paso Pipeline Partners Operating Company, L.L.C
Tallgrass
=
Tallgrass Development, LP (f/k/a Tallgrass Energy Partners, LP)
FEP
=
Fayetteville Express Pipeline LLC
TGP
=
Tennessee Gas Pipeline Company, L.L.C.
KinderHawk
=
KinderHawk Field Services LLC
UBS
=
UBS Securities LLC
KMEP
=
Kinder Morgan Energy Partners, L.P.
WYCO
=
WYCO Development L.L.C.
 
 
 
 
 
 
Unless the context otherwise requires, references to “we,” “us,” “our,” or “KMI” are intended to mean Kinder Morgan, Inc. and its consolidated subsidiaries.
 
 
 
 
 
 
Common Industry and Other Terms
 
 
 
 
 
 
AFUDC
=
allowance for funds used during construction
LIBOR
=
London Interbank Offered Rate
Bcf/d
=
billion cubic feet per day
LLC
=
limited liability company
CERCLA
=
Comprehensive Environmental Response, Compensation and Liability Act
LNG
=
liquefied natural gas
EBDA
=
Earnings before depreciation, depletion and amortization
MLP
=
master limited partnership
DD&A
=
Depreciation, depletion and amortization
MMcf/d
=
million cubic feet per day
DCF
=
distributable cash flow
Moody's
=
Moody's Investor Services
EPA
=
United States Environmental Protection Agency
NYMEX
=
New York Mercantile Exchange
FERC
=
Federal Energy Regulatory Commission
NYSE
=
New York Stock Exchange
FASB
=
Financial Accounting Standards Board
PRP
=
Potentially Responsible Party
Fitch
=
Fitch Ratings
S&P
=
Standard & Poor's Rating Services
FTC
=
Federal Trade Commission
SEC
=
United States Securities and Exchange Commission
GAAP
=
Generally Accepted Accounting Principles in the United States of America
WTI
=
West Texas Intermediate



OTC
=
over-the-counter
 
 
 
 
 
 
When we refer to cubic feet measurements, all measurements are at a pressure of 14.73 pounds per square inch.

3
Kinder Morgan, Inc. Form 10-Q


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.

KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Millions, Except Per Share Amounts)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Revenues
 
 
 
 
 
 
 
Natural gas sales
$
944

 
$
497

 
$
1,681

 
$
1,081

Services
1,519

 
1,033

 
3,080

 
1,794

Product sales and other
919

 
637

 
1,681

 
1,149

Total Revenues
3,382

 
2,167

 
6,442

 
4,024

 
 
 
 
 
 
 
 
Operating Costs, Expenses and Other
 
 
 
 
 

 
 

Costs of sales
1,254

 
637

 
2,224

 
1,217

Operations and maintenance
643

 
387

 
1,062

 
693

Depreciation, depletion and amortization
442

 
333

 
854

 
607

General and administrative
183

 
501

 
323

 
630

Taxes, other than income taxes
102

 
69

 
200

 
119

Other income, net
(17
)
 
(20
)
 
(16
)
 
(18
)
Total Operating Costs, Expenses and Other
2,607

 
1,907

 
4,647

 
3,248

Operating Income
775

 
260

 
1,795

 
776

 
 
 
 
 
 
 
 
Other Income (Expense)
 
 
 
 
 

 
 

Earnings from equity investments
93

 
72

 
194

 
137

Amortization of excess cost of equity investments
(9
)
 
(2
)
 
(18
)
 
(4
)
Interest expense, net
(427
)
 
(291
)
 
(829
)
 
(470
)
Gain on remeasurement of previously held equity interest in Eagle Ford to fair value (Note 2)
558

 
—

 
558

 
—

Gain on sale of investments in Express pipeline system (Note 2)
—

 
—

 
225

 
—

Other, net
16

 
7

 
18

 
8

Total Other Income (Expense)
231

 
(214
)
 
148

 
(329
)
 
 
 
 
 
 
 
 
Income from Continuing Operations Before Income Taxes
1,006

 
46

 
1,943

 
447

 
 
 
 
 
 
 
 
Income Tax Expense
(225
)
 
(9
)
 
(504
)
 
(105
)
 
 
 
 
 
 
 
 
Income from Continuing Operations
781

 
37

 
1,439

 
342

 
 
 
 
 
 
 
 
Discontinued Operations (Notes 1 and 2)
 
 
 
 
 

 
 

Income from operations of KMP’s FTC Natural Gas Pipelines disposal group, net of tax
—

 
47

 
—

 
97

Loss on sale and the remeasurement of KMP’s FTC Natural Gas Pipelines disposal group to fair value, net of tax
—

 
(327
)
 
(2
)
 
(755
)
Loss from Discontinued Operations, Net of Tax
—

 
(280
)
 
(2
)
 
(658
)
 
 
 
 
 
 
 
 
Net Income (Loss)
781

 
(243
)
 
1,437

 
(316
)
 
 
 
 
 
 
 
 
Net (Income) Loss Attributable to Noncontrolling Interests
(504
)
 
117

 
(868
)
 
211

 
 
 
 
 
 
 
 
Net Income (Loss) Attributable to Kinder Morgan, Inc.
$
277

 
$
(126
)
 
$
569

 
$
(105
)
 
 
 
 
 
 
 
 

4

KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Continued)
(In Millions, Except Per Share Amounts)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Class P Shares
 
 
 
 
 
 
 
Basic and Diluted Earnings (Loss) Per Common Share From Continuing Operations
$
0.27

 
$
(0.11
)
 
$
0.55

 
$
0.09

Basic and Diluted Loss Per Common Share From Discontinued Operations
—

 
(0.04
)
 
—

 
(0.23
)
Total Basic and Diluted Earnings (Loss) Per Common Share
$
0.27

 
$
(0.15
)
 
$
0.55

 
$
(0.14
)
Class A Shares
 
 
 
 
 

 
 

Basic and Diluted (Loss) Earnings Per Common Share From Continuing Operations
 
 
$
(0.13
)
 
 
 
$
0.05

Basic and Diluted Loss Per Common Share From Discontinued Operations
 
 
(0.04
)
 
 
 
(0.23
)
Total Basic and Diluted Loss Per Common Share


 
$
(0.17
)
 


 
$
(0.18
)
Basic Weighted-Average Number of Shares Outstanding
 
 
 
 
 

 
 

Class P Shares
1,036

 
320

 
1,036

 
245

Class A Shares
 
 
522

 
 
 
529

Diluted Weighted-Average Number of Shares Outstanding
 
 
 
 
 

 
 

Class P Shares
1,038

 
843

 
1,038

 
776

Class A Shares
 
 
522

 
 
 
529

Dividends Per Common Share Declared for the period
$
0.40

 
$
0.35

 
$
0.78

 
$
0.67



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


5
Kinder Morgan, Inc. Form 10-Q


KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Millions)
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Kinder Morgan, Inc.
 
 
 
 
 
 
 
Net income (loss)
$
277

 
$
(126
)
 
$
569

 
$
(105
)
Other comprehensive income (loss), net of tax
 

 
 

 
 
 
 
Change in fair value of derivatives utilized for hedging purposes (net of tax expense of $(16), $(56), $(10), and $(34), respectively)
36

 
89

 
20

 
55

Reclassification of change in fair value of derivatives to net income (net of tax benefit (expense) of $2, $3, $3, and $(3), respectively)
(1
)
 
(3
)
 
(5
)
 
6

Foreign currency translation adjustments (net of tax benefit of $12, $7, $19, and $-, respectively)
(28
)
 
(13
)
 
(45
)
 
(1
)
Adjustments to pension and other postretirement benefit plan liabilities (net of tax expense of $(1), $(8), $(1), and $(8), respectively)
1

 
13

 
—

 
13

Total other comprehensive income (loss)
8

 
86

 
(30
)
 
73

Total comprehensive income (loss)
285

 
(40
)
 
539

 
(32
)
 
 
 
 
 
 
 
 
Noncontrolling Interests
 

 
 

 
 
 
 
Net income (loss)
504

 
(117
)
 
868

 
(211
)
Other comprehensive income (loss), net of tax
 

 
 

 
 
 
 
Change in fair value of derivatives utilized for hedging purposes (net of tax expense of $(5), $(15), $(2), and $(10), respectively)
26

 
139

 
11

 
87

Reclassification of change in fair value of derivatives to net income (net of tax benefit (expense) of $1, $-, $1, and $(1), respectively)
(2
)
 
(5
)
 
(4
)
 
9

Foreign currency translation adjustments (net of tax benefit of $4, $2 $6, and $-, respectively)
(26
)
 
(18
)
 
(42
)
 
(1
)
Adjustments to pension and other postretirement benefit plan liabilities (net of tax benefit of $- , $-, $-, and $-, respectively)
—

 
—

 
—

 
—

Total other comprehensive (loss) income
(2
)
 
116

 
(35
)
 
95

Total comprehensive income (loss)
502

 
(1
)
 
833

 
(116
)
 
 
 
 
 
 
 
 
Total
 

 
 

 
 
 
 
Net income (loss)
781

 
(243
)
 
1,437

 
(316
)
Other comprehensive income (loss), net of tax
 

 
 

 
 
 
 
Change in fair value of derivatives utilized for hedging purposes (net of tax expense of $(21), $(71), $(12), and $(44), respectively)
62

 
228

 
31

 
142

Reclassification of change in fair value of derivatives to net income (net of tax benefit (expense) of $3, $3, $4, and $(4), respectively)
(3
)
 
(8
)
 
(9
)
 
15

Foreign currency translation adjustments (net of tax benefit of $16, $9, $25, and $-, respectively)
(54
)
 
(31
)
 
(87
)
 
(2
)
Adjustments to pension and other postretirement benefit plan liabilities (net of tax expense of $(1), $(8), $(1), and $(8), respectively)
1

 
13

 
—

 
13

Total other comprehensive income (loss )
6

 
202

 
(65
)
 
168

Total comprehensive income (loss)
$
787

 
$
(41
)
 
$
1,372

 
$
(148
)

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

6
Kinder Morgan, Inc. Form 10-Q


KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Millions, Except Share and Per Share Amounts)
(Unaudited)

 
June 30,
2013
 
December 31, 2012 (a)
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents – KMI (Note 14)
$
141

 
$
71

Cash and cash equivalents – KMP and EPB (Note 14)
876

 
643

Accounts receivable, net
1,488

 
1,333

Inventories
428

 
374

Fair value of derivative contracts
67

 
63

Assets held for sale
32

 
298

Deferred income taxes
358

 
539

Other current assets
382

 
353

Total current assets
3,772

 
3,674

 
 
 
 
Property, plant and equipment, net (Note 14)
34,599

 
30,996

Investments
6,085

 
5,804

Goodwill (Note 14)
24,493

 
23,632

Other intangibles, net
2,485

 
1,171

Fair value of derivative contracts
402

 
709

Deferred charges and other assets
2,284

 
2,259

Total Assets
$
74,120

 
$
68,245

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current Liabilities
 

 
 

Current portion of debt – KMI (Note 14)
$
1,901

 
$
1,153

Current portion of debt – KMP and EPB (Note 14)
2,063

 
1,248

Accounts payable
1,326

 
1,248

Accrued interest
539

 
513

Fair value of derivative contracts
83

 
80

Accrued other current liabilities
1,421

 
986

Total current liabilities
7,333

 
5,228

 
 
 
 
Long-term liabilities and deferred credits
 

 
 

Long-term debt
 

 
 

Outstanding – KMI (Note 14)
7,726

 
9,148

Outstanding – KMP and EPB (Note 14)
21,519

 
20,161

Preferred interest in general partner of KMP
100

 
100

Debt fair value adjustments
2,237

 
2,591

Total long-term debt
31,582

 
32,000

Deferred income taxes
4,113

 
4,071

Fair value of derivative contracts
158

 
133

Other long-term liabilities and deferred credits
2,395

 
2,713

Total long-term liabilities and deferred credits
38,248

 
38,917

Total Liabilities
$
45,581

 
$
44,145

 
 
 
 
 

7
Kinder Morgan, Inc. Form 10-Q


KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(In Millions, Except Share and Per Share Amounts)
(Unaudited)
 
June 30,
2013
 
December 31, 2012 (a)
Commitments and contingencies (Notes 3 and 11)


 


Stockholders’ Equity
 

 
 

Class P shares, $0.01 par value, 2,000,000,000 shares authorized, 1,035,769,430 and 1,035,668,596 shares, respectively, issued and outstanding
$
10

 
$
10

Preferred stock, $0.01 par value, 10,000,000 shares authorized, none outstanding
—

 
—

Additional paid-in capital
14,945

 
14,917

Retained deficit
(1,153
)
 
(943
)
Accumulated other comprehensive loss
(148
)
 
(118
)
Total Kinder Morgan, Inc.’s stockholders’ equity
13,654

 
13,866

Noncontrolling interests
14,885

 
10,234

Total Stockholders’ Equity
28,539

 
24,100

Total Liabilities and Stockholders’ Equity
$
74,120

 
$
68,245

_______
(a)
Retrospectively adjusted as discussed in Note 2.

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


8
Kinder Morgan, Inc. Form 10-Q


KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
 
Six Months Ended
June 30,
 
2013
 
2012
Cash Flows From Operating Activities
 
 
 
Net income (loss)
$
1,437

 
$
(316
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
 

 
 

Depreciation, depletion and amortization
854

 
614

Deferred income taxes
378

 
(79
)
Amortization of excess cost of equity investments
18

 
4

(Gain) loss from the remeasurement of net assets to fair value, net of tax (Note 2)
(558
)
 
755

Gain from the sale of investments in Express pipeline system (Note 2)
(225
)
 
—

Non-cash compensation expense on settlement of EP stock awards
—

 
87

Earnings from equity investments
(194
)
 
(179
)
Distributions from equity investments
199

 
168

Proceeds from termination of interest rate swap agreements
96

 
53

Pension contributions in excess of expense
(59
)
 
(13
)
Changes in components of working capital, net of the effects of acquisitions
 

 
 

Accounts receivable
7

 
(95
)
Inventories
(50
)
 
(84
)
Other current assets
(37
)
 
(5
)
Accounts payable
(181
)
 
4

Accrued interest
14

 
(22
)
Accrued other current liabilities
(78
)
 
106

Rate reparations, refunds and other litigation reserve adjustments
177

 
20

Other, net
(81
)
 
(5
)
Net Cash Provided by Operating Activities
1,717

 
1,013

 
 
 
 
Cash Flows From Investing Activities
 

 
 

Acquisition of EP, net of $6,581 cash acquired (Note 2)
—

 
(4,970
)
Acquisitions of other assets and investments, net of $29 cash acquired (Note 2)
(286
)
 
(30
)
Capital expenditures
(1,345
)
 
(817
)
Proceeds from sale of investments in Express pipeline system
403

 
—

Proceeds from sale of investments in BBPP Holdings Ltda
88

 
—

Repayments from related party
10

 
20

Contributions to investments
(93
)
 
(101
)
Sale or casualty of property, plant and equipment, investments and other net assets, net of removal costs
23

 
32

Distributions from equity investments in excess of cumulative earnings
78

 
113

Other, net
22

 
(37
)
Net Cash Used in Investing Activities
(1,100
)
 
(5,790
)
 
 
 
 
Cash Flows From Financing Activities
 

 
 

Issuance of debt - KMI
989

 
6,795

Payment of debt - KMI
(1,673
)
 
(1,112
)
Issuance of debt - KMP and EPB
4,858

 
3,438

Payment of debt - KMP and EPB
(3,863
)
 
(3,197
)
Debt issue costs
(12
)
 
(93
)
Cash dividends
(779
)
 
(446
)
Repurchase of warrants
(131
)
 
(110
)
Contributions from noncontrolling interests
1,077

 
285

Distributions to noncontrolling interests
(761
)
 
(513
)
Other, net
1

 
(4
)
Net Cash (Used in) Provided by Financing Activities
(294
)
 
5,043

 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
(20
)
 
(2
)
 
 
 
 
Net Increase in Cash and Cash Equivalents
303

 
264

Cash and Cash Equivalents, beginning of period
714

 
411

Cash and Cash Equivalents, end of period
$
1,017

 
$
675

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

9
Kinder Morgan, Inc. Form 10-Q


KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Millions)
(Unaudited)

 
Six Months Ended
June 30,
 
2013
 
2012
 
 
 
 
Noncash Investing and Financing Activities
 

 
 

Net assets and liabilities acquired by the issuance of shares and warrants
$
—

 
$
11,464

Assets acquired by the assumption or incurrence of liabilities
$
1,490

 
$
—

Assets acquired or liabilities settled by contributions from noncontrolling interests
$
3,733

 
$
296

Increase in accrual for capital expenditures
$
144

 
$
304

Supplemental Disclosures of Cash Flow Information
 
 
 
Cash paid during the period for interest (net of capitalized interest)
$
812

 
$
488

Net cash paid during the period for income taxes
$
71

 
$
189


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





10

KINDER MORGAN, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Millions)
(Unaudited)

 
Six Months Ended June 30, 2013
 
Par value of common shares
 
Additional
paid-in
capital
 
Retained
deficit
 
Accumulated
other
comprehensive
loss
 
Stockholders’
equity
attributable
to KMI
 
Non-controlling
interests
 
Total
Beginning Balance at
December 31, 2012
$
10

 
$
14,917

 
$
(943
)
 
$
(118
)
 
$
13,866

 
$
10,234

 
$
24,100

Warrants repurchased
 
 
(131
)
 
 
 
 
 
(131
)
 
 
 
(131
)
Warrants exercised
 
 
1

 
 
 
 
 
1

 
 
 
1

Conversions of EP Trust I Preferred securities
 
 
2

 
 
 
 
 
2

 
 
 
2

Amortization of restricted shares
 
 
10

 
 
 
 
 
10

 
 
 
10

Impact from equity transactions of KMP, EPB and KMR
 
 
146

 
 
 
 
 
146

 
(231
)
 
(85
)
Net income (loss)
 
 
 
 
569

 
 
 
569

 
868

 
1,437

Distributions
 
 
 
 
 
 
 
 
—

 
(761
)
 
(761
)
Contributions
 
 
 
 
 
 
 
 
—

 
4,810

 
4,810

Cash dividends
 
 
 
 
(779
)
 
 
 
(779
)
 
 
 
(779
)
Other comprehensive loss
 
 
 
 
 
 
(30
)
 
(30
)
 
(35
)
 
(65
)
Ending Balance at
June 30, 2013
$
10

 
$
14,945

 
$
(1,153
)
 
$
(148
)
 
$
13,654

 
$
14,885

 
$
28,539


 
Six Months Ended June 30, 2012
 
Par value of common shares
 
Additional
paid-in
capital
 
Retained
deficit
 
Accumulated
other
comprehensive
loss
 
Stockholders’
equity
attributable
to KMI
 
Non-controlling
interests
 
Total
Beginning Balance at
December 31, 2011
$
8

 
$
3,431

 
$
(3
)
 
$
(115
)
 
$
3,321

 
$
5,247

 
$
8,568

Issuance of shares for EP acquisition
3

 
10,598

 
 
 
 
 
10,601

 
 
 
10,601

Issuance of warrants for EP acquisition
 
 
863

 
 
 
 
 
863

 
 
 
863

Acquisition of EP non-controlling interests
 
 
 
 
 
 
 
 
—

 
3,797

 
3,797

Warrants repurchased
 
 
(110
)
 
 
 
 
 
(110
)
 
 
 
(110
)
Amortization of restricted shares
 
 
6

 
 
 
 
 
6

 
 
 
6

Impact from equity transactions of KMP
 
 
19

 
 
 
 
 
19

 
(31
)
 
(12
)
Net loss
 
 
 
 
(105
)
 
 
 
(105
)
 
(211
)
 
(316
)
Distributions
 
 
 
 
 
 
 
 
—

 
(513
)
 
(513
)
Contributions
 
 
 
 
 
 
 
 
—

 
586

 
586

Cash dividends
 
 
 
 
(446
)
 
 
 
(446
)
 
 
 
(446
)
Other
 
 
 
 
(2
)
 
 
 
(2
)
 
 
 
(2
)
Other comprehensive income
 
 
 
 
 
 
73

 
73

 
95

 
168

Ending Balance at
June 30, 2012
$
11

 
$
14,807

 
$
(556
)
 
$
(42
)
 
$
14,220

 
$
8,970

 
$
23,190




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


11
Kinder Morgan, Inc. Form 10-Q


KINDER MORGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1.  General
 
Organization

Kinder Morgan, Inc. is the largest midstream and the third largest energy company in North America with a combined enterprise value of approximately $115 billion. We own an interest in or operate approximately 82,000 miles of pipelines and 180 terminals. Our pipelines transport natural gas, refined petroleum products, crude oil, CO2 and other products, and our terminals store petroleum products and chemicals, and handle such products as ethanol, coal, petroleum coke and steel. We are also the leading producer and transporter of CO2 for enhanced oil recovery projects in North America.
 
Effective on May 25, 2012, we completed the acquisition of all of the outstanding shares of EP. As a result, we own a 41% limited partner interest and the 2% general partner interest in EPB, as well as certain natural gas pipeline assets.

We also own the general partner and approximately 10% of the limited partner interests of KMP, one of the largest publicly-traded pipeline limited partnerships in America.

Our common stock trades on the NYSE under the symbol “KMI.”
 
KMR is a Delaware limited liability company.  KMGP, the general partner of KMP and a wholly-owned subsidiary of ours, owns all of KMR’s voting shares.  KMR, pursuant to a delegation of control agreement, has been delegated, to the fullest extent permitted under Delaware law, all of KMGP’s power and authority to manage and control the business and affairs of KMP, subject to KMGP’s right to approve certain transactions.
 
Basis of Presentation
 
We have prepared our accompanying unaudited consolidated financial statements under the rules and regulations of the SEC. These rules and regulations conform to the accounting principles contained in the FASB’s Accounting Standards Codification. Under such rules and regulations, we have condensed or omitted certain information and notes normally included in financial statements prepared in conformity with the Codification.  We believe, however, that our disclosures are adequate to make the information presented not misleading.
 
Our accompanying unaudited consolidated financial statements reflect normal adjustments, and also recurring adjustments that are, in the opinion of our management, necessary for a fair statement of our financial results for the interim periods, and certain amounts from prior periods have been reclassified to conform to the current presentation. Interim results are not necessarily indicative of results for a full year; accordingly, you should read these consolidated financial statements in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2012 (2012 Form 10-K).

Our accounting records are maintained in United States dollars, and all references to dollars are United States dollars, except where stated otherwise.  Canadian dollars are designated as C$.  Our consolidated financial statements include our accounts and those of our majority-owned subsidiaries as well as the accounts of KMP, EPB and KMR.  Investments in jointly-owned operations in which we hold a 50% or less interest (other than KMP, EPB and KMR, because we have the ability to exercise significant control over their operating and financial policies) are accounted for under the equity method.  All significant intercompany transactions and balances have been eliminated.
 
Notwithstanding the consolidation of KMP and EPB, and their respective subsidiaries, into our financial statements, we are not liable for, and our assets are not available to satisfy, the obligations of KMP and EPB, and/or their respective subsidiaries, and vice versa, except as discussed in Note 11, “—Other Contingencies.”  Responsibility for payments of obligations reflected in our, KMP or EPB’s financial statements is a legal determination based on the entity that incurs the liability.
 

12
Kinder Morgan, Inc. Form 10-Q


KMP’s FTC Natural Gas Pipelines Disposal Group - Discontinued Operations

Effective November 1, 2012, we sold KMP’s (i) Kinder Morgan Interstate Gas Transmission natural gas pipeline system; (ii) Trailblazer natural gas pipeline system; (iii) Casper and Douglas natural gas processing operations; and (iv) 50% equity investment in the Rockies Express natural gas pipeline system to Tallgrass for approximately $1.8 billion in cash (before selling costs), or $3.3 billion including KMP’s share of joint venture debt. In this report, we refer to this combined group of assets as KMP’s FTC Natural Gas Pipelines disposal group. For more information about the presentation of KMP’s FTC Natural Gas Pipelines disposal group as discontinued operations, see Note 2 “Summary of Significant Accounting Policies—Basis of Presentation” to our consolidated financial statements included in our 2012 Form 10-K.
Goodwill

We evaluate goodwill for impairment on May 31 of each year.  For this purpose, we have seven reporting units as follows: (i) Products Pipelines—KMP (excluding associated terminals); (ii) Products Pipelines Terminals—KMP (evaluated separately from Products Pipelines—KMP for goodwill purposes); (iii) Natural Gas Pipelines Regulated; (iv) Natural Gas Pipelines Non—Regulated; (v) CO2—KMP; (vi) Terminals—KMP; and (vii) Kinder Morgan Canada—KMP.  During the quarter ended June 30, 2013, the Natural Gas Pipelines Non-Regulated reporting unit was created to include the non-regulated businesses KMP acquired from Copano on May 1, 2013 as well as other  non-regulated businesses that were historically part of the former Natural Gas Pipelines reporting unit (now the Natural Gas Pipelines Regulated reporting unit). Goodwill was allocated between these two reporting units based on the relative fair values of the reporting units. There were no impairment charges resulting from our May 31, 2013 impairment testing, and no event indicating an impairment has occurred subsequent to that date.

The fair value of each reporting unit was determined based on a market approach utilizing an average dividend/distribution yield of comparable companies. The value of each reporting unit was determined on a stand-alone basis from the perspective of a market participant and represented the price estimated to be received in a sale of the unit as a whole in an orderly transaction between market participants at the measurement date.

Earnings per Share
 
On June 30, 2013, basic earnings per common share is computed based on the weighted-average number of common shares outstanding during each period. Diluted earnings per common share is computed based on the weighted-average number of common shares outstanding during each period, increased by the assumed conversion of securities convertible into common stock, for which the effect of conversion would be dilutive. For the three and six months ended June 30, 2013, our warrants and convertible trust preferred securities are antidilutive and, accordingly, are excluded from the determination of diluted earnings per share.

On December 26, 2012, the remaining series of our Class A, Class B and Class C shares were fully converted and as a result, only our Class P common stock was outstanding as of December 31, 2012.

For the three and six months ended June 30, 2012, earnings per share was calculated using the two-class method.  Earnings were allocated to each class of common stock based on the amount of dividends paid in the current period for each class of stock plus an allocation of the undistributed earnings or excess distributions over earnings to the extent that each security participates in earnings or excess distributions over earnings.  For the investor retained stock, the allocation of undistributed earnings or excess distributions over earnings was in direct proportion to the maximum number of Class P shares into which it could convert.

For the Class P diluted per share computations, total net income attributable to Kinder Morgan, Inc. was divided by the adjusted weighted-average shares outstanding during the period, including all dilutive potential shares.  This included the Class P shares into which the investor retained stock was convertible.  The number of Class P shares on a fully-converted basis was the same before and after any conversion of our investor retained stock.  Each time one Class P share was issued upon conversion of investor retained stock, the number of Class P shares went up by one, and the number of Class P shares into which the investor retained stock was convertible went down by one.  Accordingly, there was no difference between Class P basic and diluted earnings per share because the conversion of Class A, Class B, and Class C shares into Class P shares did not impact the number of Class P shares on a fully-converted basis.  Commencing with the acquisition of EP, dilutive potential shares also included the Class P shares issuable in connection with the warrants and the trust preferred securities (see Note 4).  As no securities were convertible into Class A shares, the basic and diluted earnings per share computations for Class A shares were the same. For the three and six months ended June 30, 2012, our warrants and convertible trust preferred securities were antidilutive and, accordingly, were excluded from the determination of diluted earnings per share.


13
Kinder Morgan, Inc. Form 10-Q


The following tables set forth the computation of basic and diluted earnings per share from continuing operations for the three and six months ended June 30, 2012 (in millions, except per share amounts):

 
Three Months Ended June 30, 2012
 
(Loss) Income from Continuing Operations Available to Shareholders
 
Class P
 
Class A
 
Participating
Securities (a)
 
Total
Income from continuing operations
 
 
 
 
 
 
$
37

Less: income from continuing operations attributable to noncontrolling interests
 
 
 
 
 
 
(128
)
Loss from continuing operations attributable to KMI
 
 
 
 
 
 
(91
)
Dividends paid in the period
$
86

 
$
128

 
$
12

 
(226
)
Excess distributions over earnings
(121
)
 
(196
)
 
—

 
$
(317
)
(Loss) income from continuing operations attributable to shareholders
$
(35
)
 
$
(68
)
 
$
12

 
$
(91
)
Basic loss per share from continuing operations
 

 
 

 
 

 
 

Basic weighted-average number of shares outstanding
320

 
522

 
N/A

 
 

Basic loss per common share from continuing operations(b)
$
(0.11
)
 
$
(0.13
)
 
N/A

 
 

Diluted loss per share from continuing operations
 

 
 

 
 

 
 

Loss from continuing operations attributable to shareholders and assumed conversions(c)
$
(91
)
 
$
(68
)
 
N/A

 
 

Diluted weighted-average number of shares
843

 
522

 
N/A

 
 

Diluted loss per common share from continuing operations(b)
$
(0.11
)
 
$
(0.13
)
 
N/A

 
 


 
Six Months Ended June 30, 2012
 
Income from Continuing Operations Available to Shareholders
 
Class P
 
Class A
 
Participating
Securities (a)
 
Total
Income from continuing operations
 
 
 
 
 
 
$
342

Less: income from continuing operations attributable to noncontrolling interests
 
 
 
 
 
 
(272
)
Income from continuing operations attributable to KMI
 
 
 
 
 
 
70

Dividends paid in the period
$
141

 
$
280

 
$
25

 
(446
)
Excess distributions over earnings
(119
)
 
(256
)
 
(1
)
 
$
(376
)
Income from continuing operations attributable to shareholders
$
22

 
$
24

 
$
24

 
$
70

Basic earnings per share from continuing operations
 

 
 

 
 

 
 

Basic weighted-average number of shares outstanding
245

 
529

 
N/A

 
 

Basic earnings per common share from continuing operations(b)
$
0.09

 
$
0.05

 
N/A

 
 

Diluted earnings per share from continuing operations
 

 
 

 
 

 
 

Income from continuing operations attributable to shareholders and assumed conversions(c)
$
70

 
$
24

 
N/A

 
 

Diluted weighted-average number of shares
776

 
529

 
N/A

 
 

Diluted earnings per common share from continuing operations(b)
$
0.09

 
$
0.05

 
N/A

 
 


14
Kinder Morgan, Inc. Form 10-Q



The following tables set forth the computation of total basic and diluted earnings per share for the three and six months ended June 30, 2012 (in millions, except per share amounts):
 
Three Months Ended June 30, 2012
 
Net (Loss) Income Available to Shareholders
 
Class P
 
Class A
 
Participating
Securities (a)
 
Total
Net loss attributable to KMI
 
 
 
 
 
 
$
(126
)
Dividends paid in the period
$
86

 
$
128

 
$
12

 
(226
)
Excess distributions over earnings
(134
)
 
(218
)
 
—

 
$
(352
)
Net (loss) income attributable to shareholders
$
(48
)
 
$
(90
)
 
$
12

 
$
(126
)
Basic loss per share
 
 
 
 
 
 
 
Basic weighted-average number of shares outstanding
320

 
522

 
N/A

 
 
Basic loss per common share(b)
$
(0.15
)
 
$
(0.17
)
 
N/A

 
 

Diluted loss per share
 
 
 
 
 
 
 

Net loss attributable to shareholders and assumed conversions(c)
$
(126
)
 
$
(90
)
 
N/A

 
 

Diluted weighted-average number of shares
843

 
522

 
N/A

 
 

Diluted loss per common share(b)
$
(0.15
)
 
$
(0.17
)
 
N/A

 
 


 
Six Months Ended June 30, 2012
 
Net (Loss) Income Available to Shareholders
 
Class P
 
Class A
 
Participating
Securities (a)
 
Total
Net loss attributable to KMI
 
 
 
 
 
 
$
(105
)
Dividends paid in the period
$
141

 
$
280

 
$
25

 
(446
)
Excess distributions over earnings
(175
)
 
(375
)
 
(1
)
 
$
(551
)
Net (loss) income attributable to shareholders
$
(34
)
 
$
(95
)
 
$
24

 
$
(105
)
Basic loss per share
 
 
 
 
 
 
 
Basic weighted-average number of shares outstanding
245

 
529

 
N/A

 
 
Basic loss per common share(b)
$
(0.14
)
 
$
(0.18
)
 
N/A

 
 

Diluted loss per share
 
 
 
 
 
 
 

Net loss attributable to shareholders and assumed conversions(c)
$
(105
)
 
$
(95
)
 
N/A

 
 

Diluted weighted-average number of shares
776

 
529

 
N/A

 
 

Diluted loss per common share(b)
$
(0.14
)
 
$
(0.18
)
 
N/A

 
 

_______
(a)
Participating securities included Class B shares, Class C shares, and unvested restricted stock awards issued to non-senior management employees that contained rights to dividend equivalents in the case of the restricted shares.  Our Class B and Class C shares were entitled to participate in our earnings, only to the extent of cash distributions made to them. As a result, no earnings in excess of dividends received were allocated to the Class B and Class C shares in our determination of basic and diluted earnings per share.
(b)
The Class A shares earnings per share as compared to the Class P shares earnings per share were reduced due to the sharing of economic benefits (including dividends) amongst the Class A, B, and C shares.  Class A, B and C shares owned by Richard Kinder, the sponsor investors, the original shareholders, and other management were referred to as “investor retained stock,” and were convertible into a fixed number of Class P shares.  In the aggregate, our investor retained stock was entitled to receive a dividend per share on a fully-converted basis equal to the dividend per share on our common stock.  The conversion of shares of investor retained stock into Class P shares did not increase our total fully-converted shares outstanding, impact the aggregate dividends we paid or the dividends we paid per share on our Class P common stock.
(c)
For the diluted earnings per share calculation, total net income attributable to each class of common stock was divided by the adjusted weighted-average shares outstanding during the period, including all dilutive potential shares.






15
Kinder Morgan, Inc. Form 10-Q


2.  Acquisitions and Divestitures
 
Copano Energy, L.L.C. Acquisition 

Effective May 1, 2013, KMP closed its previously announced acquisition of Copano. KMP acquired all of Copano’s outstanding units for a total purchase price of approximately $5.2 billion (including assumed debt and all other assumed liabilities).  The transaction was a 100% unit for unit transaction with an exchange ratio of 0.4563 of KMP’s common units for each Copano common unit.  KMP issued 43,371,210 of its common units valued at $3,733 million as consideration for the Copano acquisition (based on the $86.08 closing market price of a KMP common unit on the NYSE on the May 1, 2013 issuance date).

KMP accounted for its acquisition of Copano under the acquisition method of accounting, and accordingly, measured the consideration paid to Copano unitholders, the acquired identifiable tangible and intangible assets, and the assumed liabilities at their acquisition date fair values. Also, due to the fact that KMP’s acquisition included the remaining 50% interest in Eagle Ford that it did not already own, KMP remeasured its existing 50% equity investment in Eagle Ford to its fair value as of the acquisition date, resulting in the recognition of a $558 million pre-tax non-cash gain reported separately within "Other Income (Expense)."
The preliminary purchase price allocation related to the Copano acquisition is as follows (in millions). KMP’s evaluation of the assigned fair values is ongoing and subject to adjustment:

Preliminary Purchase Price Allocation:
 
Current assets (including cash acquired of $29)
$
217

Property, plant and equipment
2,753

Investments
448

Goodwill
1,123

Other intangibles, net
1,350

Other assets
12

Total assets
5,903

Less: Fair value of previously held 50% interest in Eagle Ford Gathering, LLC
(704
)
Total assets acquired
5,199

Current liabilities
(207
)
Other liabilities
(7
)
Long-term debt
(1,252
)
KMP common unit consideration
$
3,733


The “Goodwill” intangible asset amount represents the future economic benefits expected to be derived from this acquisition that are not assignable to other individually identifiable, separately recognizable assets acquired. KMP believes the primary items that generated the goodwill are the value of the synergies created by expanding its natural gas gathering and refined product transportation operations. This goodwill is not deductible for tax purposes and is subject to an impairment test at least annually. The “Other intangibles, net” asset amount represents the fair value of acquired customer contracts and agreements, which are currently being amortized over an estimated remaining useful life of 25 years.

Copano provides comprehensive services to natural gas producers, including natural gas gathering, processing, treating and natural gas liquids fractionation.  Copano owns an interest in or operates approximately 6,900 miles of pipelines with 2.7 Bcf/d of natural gas transportation capacity, and also owns nine natural gas processing plants with more than 1 Bcf/d of natural gas processing capacity and 315 MMcf/d of natural gas treating capacity.  Its operations are located primarily in Texas, Oklahoma and Wyoming.  Most of the acquired assets will be included in the Natural Gas Pipelines business segment.

Impact of KMP’s Acquisition of Copano on KMI’s Income Taxes

Our accounting policy is to apply the look-through method of recording deferred taxes on the outside book tax basis differences in our investments without regard to non-tax deductible goodwill. As a result of the goodwill recorded by KMP for its Copano acquisition, KMI’s deferred tax liability must be adjusted for the portion of its outside basis difference associated with KMP’s underlying goodwill. Since the KMP acquisition of Copano was accounted for under the acquisition method of accounting, we recognized an adjustment to goodwill of $256 million related to this transaction.


16
Kinder Morgan, Inc. Form 10-Q


KMI Acquisition of EP
      
Effective on May 25, 2012, we acquired all of the outstanding shares of EP for an aggregate consideration of approximately $23 billion (excluding assumed debt). In total, EP shareholders received $11.6 billion in cash, 330 million KMI Class P shares with a fair value of $10.6 billion as of May 24, 2012 and 505 million KMI warrants with a fair value of $863 million as of May 24, 2012. The warrants have an exercise price of $40 per share and a 5-year term.

We accounted for the EP acquisition using the acquisition method of accounting which requires, among other things, that assets acquired and liabilities assumed be recognized on the balance sheet at their acquisition date fair values. During the three months ended June 30, 2013, management completed its purchase accounting valuation estimates and, as a result, retrospectively adjusted the valuations of certain liabilities with a corresponding increase to goodwill as of the acquisition date. The retrospective adjustments amounted to approximately $60 million and primarily related to revisions of estimates related to certain environmental obligations, sales and use tax liabilities, and deferred income taxes.

Goldsmith Landreth Unit

On June 1, 2013, KMP acquired certain oil and gas properties, rights, and related assets in the Permian Basin of West Texas from Legado Resources LLC for approximately $285 million (before working capital adjustments). KMP also assumed $18 million of liabilities. The acquisition of the Goldsmith Landreth San Andres oil field unit includes more than 6,000 acres located in Ector County, Texas, and based on KMP’s measurement of fair values for all of the identifiable tangible and intangible assets acquired and liabilities assumed, KMP assigned the $285 million amount to "Property, plant and equipment, net." The acquired oil field is in the early stages of CO2 flood development and includes a residual oil zone along with a classic San Andres waterflood. The field currently produces approximately 1,250 barrels of oil per day, and as part of the transaction, KMP obtained a long-term supply contract for up to 150 MMcf/d of CO2. The acquisition complements KMP’s existing oil and gas producing assets in the Permian Basin, and the acquired assets are included as part of the CO2—KMP business segment.

Pro Forma Information

The following summarized unaudited pro forma consolidated income statement information for the three and six months ended June 30, 2013 and 2012, assumes that the EP, Copano and the Goldsmith Landreth Unit acquisitions had occurred as of January 1, 2012. We prepared the following summarized unaudited pro forma financial results for comparative purposes only. The summarized unaudited pro forma financial results may not be indicative of the results that would have occurred if these acquisitions had been completed as of January 1, 2012 or the results that will be attained in the future. Amounts presented below are in millions, except for the per share amounts:

 
Pro Forma
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Revenues
$
3,569

 
$
2,995

 
$
7,147

 
$
6,043

Income (Loss) from Continuing Operations
$
755

 
$
(234
)
 
$
1,401

 
$
31

Income (Loss) from Discontinued Operations, Net of Tax
$
—

 
$
1,767

 
$
(2
)
 
$
1,410

Net Income
$
755

 
$
1,533

 
$
1,399

 
$
1,441

Net Income (Loss) Attributable to Noncontrolling Interests
$
(494
)
 
$
80

 
$
(855
)
 
$
164

Net Income Attributable to Kinder Morgan, Inc.
$
261

 
$
1,613

 
$
544

 
$
1,605

Diluted Earnings per Common Share


 

 

 

Class P Shares
$
0.25

 
$
1.55

 
$
0.52

 
$
1.55

Class A Shares

 
$
1.53

 

 
$
1.50


KMP’s FTC Natural Gas Pipelines Disposal Group – Discontinued Operations

We began accounting for KMP’s FTC Natural Gas Pipelines disposal group as discontinued operations in the first quarter of 2012 (prior to our sale announcement, we included the disposal group in the Natural Gas Pipelines business segment).  During that quarter, the disposal group’s net assets were remeasured to reflect the initial assessment of its fair value as a result of the

17
Kinder Morgan, Inc. Form 10-Q


FTC mandated sale requirement, and based on additional information gained in the sale process during the second quarter of 2012, we recognized an additional loss amount from KMP’s fair value remeasurement. For the six months ended June 30, 2012, we recognized a combined $649 million non-cash loss from remeasurement, and we reported this loss amount separately as “Loss on sale and the remeasurement of FTC Natural Gas Pipelines disposal group to fair value” within the discontinued operations section of our accompanying consolidated statement of income. As a result of our remeasurement of net assets to fair value and the sale of net assets, we recognized a combined $829 million loss for the year ended December 31, 2012.

KMP and Tallgrass trued up the final consideration for the sale of our FTC Natural Gas Pipelines disposal group in the first quarter of 2013, and based on this true up, we recognized an additional $2 million loss. We reported this loss amount separately as “Loss on sale and the remeasurement of FTC Natural Gas Pipelines disposal group to fair value” within the discontinued operations section of our accompanying consolidated statement of income for the six months ended June 30, 2013, and except for this loss amount, no other financial results from the operations of KMP’s FTC Natural Gas Pipelines disposal group were recorded in the first six months of 2013.

Summarized financial information for KMP’s FTC Natural Gas Pipelines disposal group is as follows (in millions):
 
Three Months Ended
June 30, 2012
 
Six Months Ended
June 30, 2012
Operating revenues
$
62

 
$
133

Operating expenses
(34
)
 
(71
)
Depreciation and amortization
—

 
(7
)
Earnings from equity investments
20

 
42

Interest income and Other, net
—

 
1

Income from operations of KMP’s FTC Natural Gas Pipelines disposal group, net of tax
$
48

 
$
98


Express Pipeline System

Effective March 14, 2013, KMP sold both its one-third equity ownership interest in the Express pipeline system and its subordinated debenture investment in Express to Spectra Energy Corp. for $403 million in cash.  We recorded a pre-tax gain of $225 million with respect to this transaction in the first quarter of 2013, and we reported this gain amount separately within the “Other Income (Expense)” section of our accompanying consolidated statements of income for the six months ended June 30, 2013. We also recorded an income tax expense of $84 million related to this gain amount, and we included this expense within “Income Tax Expense” in our accompanying consolidated statement of income for the six months ended June 30, 2013.  As of the date of sale, KMP’s equity investment in Express totaled $67 million and its note receivable due from Express totaled $110 million.

Prior to KMP’s sale, we (i) accounted for KMP’s equity investment under the equity method of accounting; (ii) accounted for KMP’s debt investment under the historical amortized cost method of accounting; and (iii) included the financial results of the Express pipeline system within the Kinder Morgan Canada—KMP business segment.  As of December 31, 2012, KMP’s equity and debt investments in Express totaled $65 million and $114 million, respectively, and we included the combined $179 million amount within “Assets held for sale” on our accompanying consolidated balance sheet as of that date.

BBPP Holdings Ltda

As of December 31, 2012, we owned 2% interest in Gas Transboliviano S.A., and 33 1/3% interest in BBPP Holdings Ltda which we acquired as a part of the May 25, 2012 EP acquisition. BBPP Holdings Ltda owned a 29% interest in Transportadora Brasileira Gasoduto Bolivia-Brasil S.A. which, together with Gas Transboliviano S.A., owned the Bolivia to Brazil Pipeline. On January 18, 2013, we completed the sale of our equity interests in the Bolivia to Brazil Pipeline for $88 million. As of December 31, 2012, our $88 million equity interests in the Bolivia to Brazil Pipeline was included within “Assets held for sale” on our accompanying consolidated balance sheet.







18
Kinder Morgan, Inc. Form 10-Q


Drop-Down of EP Assets to KMP 

August 2012
    
Effective August 1, 2012, KMP acquired a 100% ownership interest in the TGP and an initial 50% ownership interest in EPNG from us for an aggregate consideration of approximately $6.2 billion. For additional information about this acquisition, see Note 3 “Acquisitions and Divestitures—Drop-Down of EP Assets to KMP” to our consolidated financial statements included in our 2012 Form 10-K.
 
March 2013

Effective March 1, 2013, KMP acquired from us the remaining 50% ownership interest it did not already own in both EPNG and the EP midstream assets for an aggregate consideration of approximately $1.7 billion (including a proportional 50% share of assumed debt borrowings as of March 1, 2013). The consideration that we received from KMP consisted of (i) $994 million in cash (including $6 million in the second quarter of 2013 to settle the final working capital adjustment); (ii) 1,249,452 common units (valued at $108 million based on the $86.72 closing market price of KMP’s common unit on the NYSE on the March 1, 2013 issuance date); and (iii) $557 million in assumed debt (consisting of 50% of the outstanding principal amount of EPNG’s debt borrowings as of March 1, 2013, excluding any debt fair value adjustments). We used the proceeds from the March 1, 2013 drop-down transaction to (i) pay down $947 million of our senior secured term loan facility; and (ii) reduce borrowings under our credit facility. Also, see Note 3. The terms of the drop-down transaction were approved on our behalf by the independent members of our board of directors and on KMP’s behalf by the audit committees and the boards of directors of both KMGP, as KMP’s general partner, and KMR, in its capacity as the delegate of KMGP, following the receipt by our independent directors and by the audit committees of KMGP and KMR of separate fairness opinions from different independent financial advisors.

The drop-down transactions were accounted for as transfers of net assets between entities under common control. Specifically, we have retrospectively adjusted our consolidated financial statements to reflect the recognition by KMP of the acquired assets and assumed liabilities at our carrying value, including our EP purchase accounting adjustments as of May 25, 2012.  In this report, we refer to these acquisitions of assets by KMP from us as the drop-down transactions; the combined group of assets acquired by KMP from us as the drop-down asset groups; the El Paso Natural Gas pipeline system or El Paso Natural Gas Company, L.L.C. as EPNG; and the EP Midstream assets or Kinder Morgan Altamont LLC (formerly, El Paso Midstream Investment Company, L.L.C.) as the midstream assets.

Income Tax Impact of the Drop-Down of EP Assets to KMP

As discussed above, we accounted for the acquisition of EP as a business combination and for the subsequent March 2013 and August 2012 drop-down transactions as transfers of net assets between entities under common control. For income tax purposes, the March 2013 drop-down transaction was treated as a contribution and the August 2012 drop-down transaction was treated as a partial sale, and a partial contribution.

Our accounting policy is to apply the look-through method of recording deferred taxes on the outside book tax basis differences in our investments without regard to non tax deductible goodwill. As a result of the drop-down transactions, a deferred tax liability arose related to the portion of the outside basis difference associated with the underlying goodwill that was contributed to KMP by us. However, since the drop-downs were transactions between entities under common control, we recognized an offsetting deferred charge of $448 million for the August 2012 and $53 million for the March 2013 drop-down transactions. These balances will be amortized to income tax expense over the remaining useful lives of the transferred assets of approximately 25 years. Similar to the impact described above, KMP’s acquisition of a 50% ownership interest in the EP Midstream joint venture, also generated the recognition of a deferred charge and corresponding deferred tax liability and is included in the amount above.

The amortization of the deferred charge will result in incremental income tax expense of approximately $20 million per year. For the three and six months ended June 30, 2013, total income tax expense related to the amortization of the deferred charges was approximately $5 million and $10 million, respectively.

3. Debt
 
We classify our debt based on the contractual maturity dates of the underlying debt instruments.  We defer costs associated with debt issuance over the applicable term. These costs are then amortized as interest expense in our accompanying consolidated statements of income. The following provides detail on the principal amount of our outstanding debt balances,

19
Kinder Morgan, Inc. Form 10-Q


which excludes debt fair value adjustments (which includes discounts and premiums) as of June 30, 2013 and December 31, 2012 (in millions):
 
 
June 30, 2013
 
December 31, 2012
KMI
 
 
 
 
Senior term loan facility, variable rate, due 2015
 
$
1,528

 
$
2,714

Senior notes and debentures, 5.15% through 7.45%, due 2015 through 2098
 
315

 
315

Deferrable interest debentures issued to subsidiary trusts, 7.63% and 8.56%, due 2027 and 2028
 
27

 
27

Credit facility due December 31, 2014(a)
 
1,354

 
1,035

Subsidiary borrowings (as obligor)
 
 
 
 
Kinder Morgan Finance Company, LLC
 
 
 
 
5.70% through 6.40%, due 2016 through 2036
 
1,636

 
1,636

El Paso LLC
 
 
 
 
6.50% through 12.00%, due 2013 through 2037
 
3,860

 
3,860

EPC Building LLC promissory note, 3.967%, due 2013 through 2035(b)
 
465

 
217

Colorado Interstate Gas Services Company
 
 
 
 
7.76% Totem note payable, due 2018
 
1

 
1

Other credit facilities due March 20, 2014 and June 20, 2014
 
160

 
210

EP preferred securities, 4.75%, due March 31, 2028
 
281

 
286

Kinder Morgan G.P., Inc.
 
 
 
 
$1,000 Liquidation Value Series A Fixed-to-Floating Rate Term Cumulative Preferred Stock
 
100

 
100

Total debt — KMI
 
9,727

 
10,401

Less: Current portion of long-term debt — KMI(c)
 
(1,901
)
 
(1,153
)
Total long-term debt — KMI(d)
 
$
7,826

 
$
9,248

 
 
 
 
 
KMP and EPB
 
 
 
 
KMP
 
 
 
 
Senior notes, 3.45% through 9.00% due 2013 through 2043(e)
 
$
14,350

 
$
13,350

Commercial paper borrowings(f)
 
1,369

 
621

Credit facility due May 1, 2018
 
—

 
—

KMP Subsidiary borrowings (as obligor)
 
 
 
 
Tennessee Gas Pipeline Company, L.L.C. senior notes, 7.00% through 8.375%, due 2016 through 2037(g)
 
1,790

 
1,790

El Paso Natural Gas Company (EPNG) senior notes 5.95% through 8.625%, due 2017 through 2032(h)
 
1,115

 
1,115

Copano Energy, L.L.C. notes, 7.125%, due April 1, 2021(i)
 
510

 
—

Other miscellaneous subsidiary debt(j)
 
103

 
186

Total debt — KMP
 
19,237

 
17,062

Less: Current portion of long-term debt — KMP(k)
 
(1,899
)
 
(1,155
)
Total long-term debt — KMP(d)
 
17,338

 
15,907

EPB
 
 
 
 
El Paso Pipeline Partners Operating Company, L.L.C.
 
 
 
 
Senior notes, 4.10% through 8.00% due 2013 through 2042
 
2,348

 
2,348

Credit facility due May 27, 2016(l)
 
—

 
—

EPB Subsidiary borrowings (as obligor)
 
 
 
 
Colorado Interstate Gas Company, L.L.C senior notes, 5.95% through 6.85%, due 2015 through 2037
 
475

 
475

Southern LNG Company, L.L.C. senior notes, 9.50% through 9.75%, due 2014 through 2016
 
135

 
135

Southern Natural Gas Company, L.L.C. notes, 4.40% through 8.00%, due 2017 through 2032
 
1,211

 
1,211

Other financing obligations
 
176

 
178

Total debt — EPB
 
4,345

 
4,347

Less: Current portion of long-term debt — EPB
 
(164
)
 
(93
)
Total long-term debt — EPB(d)
 
4,181

 
4,254

Total long-term debt — KMP and EPB
 
$
21,519

 
$
20,161

_______

20
Kinder Morgan, Inc. Form 10-Q


(a)
As of June 30, 2013 and December 31, 2012, the weighted average interest rates on credit facility borrowings were 2.70% and 2.72%, respectively.
(b)
In December 2012, our subsidiary, EPC Building, LLC had issued $468 million of 3.967% amortizing promissory notes with payments due 2013 through 2035, of which $217 million was issued to third parties and the remaining $251 million was held by KMI until they were sold to third parties in April of 2013. EPC Building, LLC, as the landlord, leases the property to Kinder Morgan, Inc. as a tenant.  Proceeds from the issuance of the notes were used to reduce KMI’s credit facility borrowings.
(c)
As of June 30, 2013 and December 31, 2012, includes credit facility borrowings of $1,354 million and $1,035 million, respectively.
(d)
Excludes debt fair value adjustments. As of June 30, 2013 and December 31, 2012, our “Debt fair value adjustments” increased our debt balances by $2,237 million and $2,591 million, respectively. In addition to all unamortized debt discount/premium amounts and purchase accounting on our debt balances, our debt fair value adjustments also include (i) amounts associated with the offsetting entry for hedged debt; and (ii) any unamortized portion of proceeds received from the early termination of interest rate swap agreements. For further information about our debt fair value adjustments, see Note 5 “Risk Management—Fair Value of Derivative Contracts.”
(e)
On February 28, 2013, KMP completed a public offering of $1 billion in principal amount of senior notes in two separate series, consisting of $600 million of 3.50% notes due September 1, 2023 and $400 million of 5.00% notes due March 1, 2043. KMP received net proceeds of $991 million, and used the proceeds to pay a portion of the purchase price for the March 2013 drop-down transaction and to reduce the borrowings under its commercial paper program.
(f)
In May 2013, in association with the increase of capacity negotiated for KMP’s senior unsecured revolving bank credit facility (discussed below), KMP increased its commercial paper program by $500 million to provide for the issuance of up to $2.7 billion. As of June 30, 2013 and December 31, 2012, the average interest rates on KMP’s outstanding commercial paper borrowings were 0.33% and 0.45%, respectively. The borrowings under KMP’s commercial paper program were used principally to finance the acquisitions and capital expansions made during the first half of 2013 and during 2012, and in the near term, KMP expects that its short-term liquidity and financing needs will be met primarily through borrowings made under its commercial paper program.
(g)
Consists of six separate series of fixed-rate unsecured senior notes that KMP assumed as part of the 2012 drop-down transaction.
(h)
Consists of four separate series of fixed-rate unsecured senior notes that KMP assumed as part of the 2012 and 2013 drop-down transactions.
(i)
Consists of a single series of fixed-rate unsecured senior notes that KMP guaranteed as part of its May 1, 2013 Copano acquisition. The notes consist of an aggregate principal amount of $510 million with a fixed annual stated interest rate of 7.125%. The notes mature in full on April 1, 2021, and interest is payable semiannually on April 1 and October 1 of each year. As part of KMP’s purchase price, it valued the debt equal to $589 million as of May 1, 2013, representing the present value of amounts to be paid determined using an approximate interest rate of 4.79%.
(j)
In February 2013, prior to the close of the March 2013 drop-down transaction, we and KMP each contributed $45 million to Kinder Morgan Altamont LLC to allow it to repay the outstanding $90 million borrowings under KMP’s subsidiary Kinder Morgan Altamont LLC's revolving bank credit facility and following this repayment, Kinder Morgan Altamont LLC had no outstanding debt. In May 2013, KMP terminated the credit facility.
(k)
As of June 30, 2013 and December 31, 2012, includes commercial paper borrowings of $1,369 million and $621 million.
(l)
LIBOR plus 1.75%.

KMP’s Copano Debt Retirements

In addition to the senior notes KMP guaranteed as part of its May 1, 2013 Copano acquisition, the following Copano debt amounts were outstanding upon acquisition (i) $404 million of outstanding borrowings under Copano's revolving bank credit facility due June 10, 2016; and (ii) $249 million aggregate principal amount of Copano's 7.75% unsecured senior notes due June 1, 2018. On May 1, 2013, immediately following KMP’s acquisition, KMP repaid the outstanding $404 million of borrowings under Copano's revolving bank credit facility, and terminated the credit facility at the time of such repayment. On June 1, 2013, KMP paid $259 million (based on a price of 103.875% of the principal amount) to fully redeem and retire the 7.75% series of senior notes in accordance with the terms and conditions of the indenture governing the notes. As part of KMP’s May 1, 2013 purchase price, KMP valued the 7.75% senior notes equal to the $259 million redemption value. KMP utilized borrowings under its commercial paper program for both of these debt retirements.

Subsequent Event

On July 29, 2013, KMP priced a public offering of a combined $1,750 million of senior notes consisting of (i) $800 million of 2.65% senior notes due February 1, 2019; (ii) $650 million of 4.15% senior notes due February 1, 2024; and (iii) $300 million of 5.00% senior notes due 2043, which will constitute a further issuance of the $400 million principal amount of 5.00% senior notes that KMP issued on February 28, 2013.

21
Kinder Morgan, Inc. Form 10-Q


Credit Facilities

KMI
 
As of June 30, 2013, we had $1,354 million outstanding under KMI’s $1.75 billion senior secured credit facility and $77 million in letters of credit. Our availability under this facility as of June 30, 2013 was approximately $319 million.  

KMP

On May 1, 2013, KMP replaced its previous $2.2 billion three-year, senior unsecured revolving bank credit facility that was due July 1, 2016, with a new $2.7 billion five-year, senior unsecured revolving credit facility expiring May 1, 2018. Borrowings under the credit facility can be used for general partnership purposes and as a backup for KMP’s commercial paper program. KMP had no borrowings under the credit facility as of June 30, 2013. The credit facility’s financial covenants are substantially similar to those in the previous facility, and as of June 30, 2013, we were in compliance with all required financial covenants. The new facility provides that the margin KMP will pay with respect to borrowings and the facility fee KMP will pay on the total commitment will vary based on its senior debt credit rating. Interest on the credit facility accrues at KMP’s option at a floating rate equal to either:

▪
the administrative agent's base rate, plus a margin, which varies depending upon the credit rating of KMP’s long-term senior unsecured debt (the administrative agent's base rate is a rate equal to the greatest of (i) the Federal Funds Rate, plus 0.5%; (ii) the Prime Rate; or (iii) LIBOR for a one-month eurodollar loan, plus 1%); or

▪
LIBOR for a one-month eurodollar loan, plus a margin, which varies depending upon the credit rating of KMP’s long-term senior unsecured debt.

As of June 30, 2013, KMP had approximately $1,369 million of commercial paper borrowings outstanding under its $2.7 billion credit facility and $204 million outstanding in letters of credit. KMP’s availability under its facility as of June 30, 2013 was approximately $1,127 million.

EPB

As of June 30, 2013, EPB had no outstanding balance under its revolving credit facility and $10 million in outstanding letters of credit. EPB’s availability under this facility as of June 30, 2013 was approximately $990 million.
Kinder Morgan G.P., Inc. Preferred Shares

The following table provides information about KMGP’s distributions on 100,000 shares of its Series A Fixed-to-Floating Rate Term Cumulative Preferred Stock:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2013
 
2012
 
2013
 
2012
Per share cash distribution declared for the period(a)
 
$
10.545

 
$
20.825