Edgar Filing: KINDER MORGAN, INC.

kmi10q3_2010.htm

Table of Contents

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 September 30, 2010

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: 1-06446

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 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 o No þ

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 Securities Exchange Act of 1934. Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No þ

Number of outstanding shares of Common stock, $0.01 par value, as of October 29, 2010 was 100 shares.

Kinder Morgan, Inc. Form 10-Q

KINDER MORGAN, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page Number
	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3
	Consolidated Statements of Income – Three and Nine months ended September 30, 2010 and 2009	3
	Consolidated Balance Sheets – September 30, 2010 and December 31, 2009	4
	Consolidated Statements of Cash Flows – Nine months ended September 30, 2010 and 2009	5
	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44
	General and Basis of Presentation	44
	Critical Accounting Policies and Estimates	45
	Results of Operations	46
	Financial Condition	63
	Recent Accounting Pronouncements	67
	Information Regarding Forward-Looking Statements	67

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	69

Item 4.	Controls and Procedures	69



	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	70

Item 1A.	Risk Factors	70

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71

Item 3.	Defaults Upon Senior Securities	71

Item 4.	(Removed and Reserved)	71

Item 5.	Other Information	71

Item 6.	Exhibits	72

	Signature	73

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)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Revenues
Natural gas sales	$	965.7		$	686.2		$	2,831.3		$	2,291.8
Services		758.7			690.2			2,248.9			2,003.7
Product sales and other		363.8			335.9			1,156.5			939.0
Total Revenues		2,088.2			1,712.3			6,236.7			5,234.5

Operating Costs, Expenses and Other
Gas purchases and other costs of sales		964.7			665.2			2,829.2			2,240.3
Operations and maintenance		330.2			286.0			1,103.9			815.4
Depreciation, depletion and amortization		261.7			255.5			813.7			777.1
General and administrative		308.2			92.2			528.7			269.2
Taxes, other than income taxes		41.9			36.4			128.1			98.8
Other expense (income)		0.4			(14.2	)		2.2			(14.1	)
Total Operating Costs, Expenses and Other		1,907.1			1,321.1			5,405.8			4,186.7

Operating Income		181.1			391.2			830.9			1,047.8

Other Income (Expense)
Earnings (loss) from equity investments		57.2			66.4			(256.1	)		164.2
Amortization of excess cost of equity investments		(1.4	)		(1.4	)		(4.3	)		(4.3	)
Interest, net		(168.9	)		(140.1	)		(475.9	)		(421.4	)
Other, net		5.4			13.0			9.7			43.9
Total Other Income (Expense)		(107.7	)		(62.1	)		(726.6	)		(217.6	)

Income from Continuing Operations Before Income Taxes		73.4			329.1			104.3			830.2

Income Tax Benefit (Expense)		(20.6	)		(99.6	)		29.1			(247.2	)

Income from Continuing Operations		52.8			229.5			133.4			583.0

Income (Loss) from Discontinued Operations, Net of Tax		(0.2	)		(0.1	)		(0.4	)		0.4

Net Income		52.6			229.4			133.0			583.4

Net Income Attributable to Noncontrolling Interests		(42.0	)		(106.6	)		(237.3	)		(215.5	)

Net Income (Loss) Attributable to Kinder Morgan, Inc.	$	10.6		$	122.8		$	(104.3	)	$	367.9

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

Kinder Morgan, Inc. Form 10-Q

KINDER MORGAN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Millions, Except Share and Per Share Amounts)

	September 30, 2010			December 31, 2009
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	196.6		$	165.6
Restricted deposits		39.8			52.5
Accounts, notes and interest receivable, net		784.8			921.6
Inventories		84.0			71.9
Gas in underground storage		46.2			43.5
Fair value of derivative contracts		50.0			20.8
Other current assets		65.8			109.7
Total current assets		1,267.2			1,385.6

Property, plant and equipment, net		16,947.9			16,803.5
Investments		4,223.8			3,695.6
Notes receivable		192.1			190.6
Goodwill		4,821.2			4,744.3
Other intangibles, net		347.1			259.8
Fair value of derivative contracts		780.8			293.3
Deferred charges and other assets		174.0			213.6
Total Assets	$	28,754.1		$	27,586.3

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of debt	$	2,454.0		$	768.7
Cash book overdrafts		31.4			36.6
Accounts payable		599.9			620.8
Accrued interest		126.4			292.1
Accrued taxes		92.8			58.6
Deferred revenues		86.5			76.1
Fair value of derivative contracts		213.1			272.0
Accrued other current liabilities		409.1			194.6
Total current liabilities		4,013.2			2,319.5

Long-term liabilities and deferred credits
Long-term debt
Outstanding		12,306.2			12,779.7
Preferred interest in general partner of Kinder Morgan Energy Partners, L.P.		100.0			100.0
Value of interest rate swaps		1,029.3			361.0
Total long-term debt		13,435.5			13,240.7
Deferred income taxes		1,867.9			2,039.9
Fair value of derivative contracts		125.1			469.6
Other long-term liabilities and deferred credits		582.1			670.5
Total long-term liabilities and deferred credits		16,010.6			16,420.7

Total Liabilities		20,023.8			18,740.2

Commitments and contingencies (Notes 4 and 11)
Stockholders’ Equity
Common stock – authorized and outstanding – 100 shares, par value $0.01 per share		-			-
Additional paid-in capital		7,819.3			7,845.7
Retained deficit		(4,110.6	)		(3,506.3	)
Accumulated other comprehensive loss		(104.5	)		(167.9	)
Total Kinder Morgan, Inc. stockholder’s equity		3,604.2			4,171.5
Noncontrolling interests		5,126.1			4,674.6
Total Stockholders’ Equity		8,730.3			8,846.1
Total Liabilities and Stockholders’ Equity	$	28,754.1		$	27,586.3

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

Kinder Morgan, Inc. Form 10-Q

KINDER MORGAN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Millions)

(Unaudited)

	Nine Months Ended September 30,
	2010			2009
Cash Flows From Operating Activities
Net Income	$	133.0		$	583.4
Adjustments to reconcile net income to net cash provided by operating activities
Loss (income) from discontinued operations, net of tax		0.4			(0.4	)
Depreciation, depletion and amortization		813.7			777.1
Deferred income taxes		(204.7	)		51.3
Amortization of excess cost of equity investments		4.3			4.3
Income from the allowance for equity funds used during construction		(0.7	)		(22.6	)
Loss (income) from the sale or casualty of property, plant and equipment and other net assets		2.3			(14.1	)
Loss (earnings) from equity investments		256.1			(164.2	)
Distributions from equity investments		154.9			184.5
Proceeds from termination of interest rate swap agreements		-			146.0
Pension contributions in excess of expense		(15.9	)		(11.1	)
Changes in components of working capital
Accounts receivable		105.1			215.5
Inventories		(12.8	)		(11.8	)
Other current assets		23.1			(73.4	)
Accounts payable		(20.5	)		(342.5	)
Accrued interest		(165.6	)		(121.3	)
Accrued taxes		57.7			(77.8	)
Accrued liabilities		(44.8	)		(143.1	)
Going Private transaction litigation reserve adjustment		200.0			-
Rate reparations, refunds and other litigation reserve adjustments		(48.3	)		(15.5	)
Other, net		(18.2	)		(45.6	)
Cash Flows Provided by Continuing Operations		1,219.1			918.7
Net Cash Flows (Used in) Provided by Discontinued Operations		(0.6	)		0.1
Net Cash Provided by Operating Activities		1,218.5			918.8

Cash Flows From Investing Activities
Acquisitions of investments		(929.7	)		-
Acquisitions of assets		(243.1	)		(27.5	)
Repayments from customers		-			109.6
Capital expenditures		(726.8	)		(1,076.4	)
Deconsolidation of variable interest entity due to the implementation of ASU 2009-17 (Note 13)		(17.5	)		-
Sale or casualty of property, plant and equipment, and other net assets net of removal costs		21.5			9.8
Net proceeds from (investments in) margin deposits		21.7			(13.2	)
Investments in restricted deposits		(2.5	)		(39.9	)
Contributions to investments		(210.3	)		(1,619.6	)
Distributions from equity investments in excess of cumulative earnings		187.9			15.9
Net Cash Used in Investing Activities		(1,898.8	)		(2,641.3	)

Cash Flows From Financing Activities
Issuance of debt		6,698.4			6,617.7
Payment of debt		(5,474.0	)		(4,735.0	)
Repayments from related party		1.3			2.5
Debt issue costs		(24.4	)		(14.8	)
Decrease in cash book overdrafts		(5.2	)		(10.4	)
Cash dividends		(500.0	)		(300.0	)
Contributions from noncontrolling interests		636.6			815.5
Distributions to noncontrolling interests		(622.4	)		(550.2	)
Other, net		-			(0.3	)
Net Cash Provided by Financing Activities		710.3			1,825.0

Effect of Exchange Rate Changes on Cash and Cash Equivalents		1.0			5.0

Net Increase in Cash and Cash Equivalents		31.0			107.5
Cash and Cash Equivalents, beginning of period		165.6			118.6
Cash and Cash Equivalents, end of period	$	196.6		$	226.1

Noncash Investing and Financing Activities
Assets acquired by the assumption or incurrence of liabilities	$	12.5		$	3.7
Assets acquired by contributions from noncontrolling interests	$	81.7		$	5.0
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest (net of capitalized interest)	$	607.1		$	555.9
Cash paid during the period for income taxes (net of refunds)	$	143.2		$	317.2

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

Kinder Morgan, Inc. Form 10-Q

KINDER MORGAN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. General

Organization

We are a large energy transportation and storage company, operating or owning an interest in approximately 37,000 miles of pipelines and approximately 180 terminals. We have both regulated and nonregulated operations. We also own all the common equity of the general partner of, and a significant limited partner interest in, Kinder Morgan Energy Partners, L.P., a publicly traded pipeline limited partnership. We are a wholly owned subsidiary of Kinder Morgan Holdco LLC, a private company. Unless the context requires otherwise, references to “we,” “us,” “our,” or the “Company” are intended to mean Kinder Morgan, Inc. and its consolidated subsidiaries. Unless the context requires otherwise, references to “KMP” are intended to mean Kinder Morgan Energy Partners, L.P. and its consolidated subsidiaries.

Kinder Morgan Management, LLC, referred to in this report as “KMR,” is a publicly traded Delaware limited liability company. Kinder Morgan G.P., Inc., 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 Kinder Morgan G.P., Inc.’s power and authority to manage and control the business and affairs of KMP, subject to Kinder Morgan G.P., Inc.’s right to approve certain transactions.

As further disclosed in Note 2 of our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2009 (2009 Form 10-K), on May 30, 2007, Kinder Morgan, Inc. merged with a wholly owned subsidiary of Kinder Morgan Holdco LLC, with Kinder Morgan, Inc. continuing as the surviving legal entity. This transaction is referred to in this report as “the Going Private transaction.” Effective with the closing of the Going Private transaction, all of our assets and liabilities were recorded at their estimated fair market values based on an allocation of the aggregate purchase price paid in the Going Private transaction.

Basis of Presentation

We have prepared our accompanying unaudited consolidated financial statements under the rules and regulations of the United States Securities and Exchange Commission. These rules and regulations conform to the accounting principles contained in the Financial Accounting Standards Board’s Accounting Standards Codification, the single source of generally accepted accounting principles in the United States of America and referred to in this report as the 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.

In addition, our consolidated financial statements reflect normal adjustments, and also recurring adjustments that are, in the opinion of our management, necessary for a fair presentation 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 2009 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 the accounts of Kinder Morgan, Inc. and our majority-owned subsidiaries, as well as those of KMP and KMR, and prior to January 1, 2010 Triton Power Company LLC, see Note 8 “Reportable Segments” and Note 13 “Recent Accounting Pronouncements.” Investments in jointly owned operations in which we hold a 50% or less interest (other than KMP 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 its subsidiaries into our financial statements, we are not liable for, and our assets are not available to satisfy, the obligations of KMP and/or its subsidiaries and vice versa, except as discussed in the following paragraph. Responsibility for payments of obligations reflected in our or KMP’s financial statements is a legal determination based on the entity that incurs the liability.

Kinder Morgan, Inc. Form 10-Q

In conjunction with KMP’s acquisition of certain natural gas pipelines from us, we agreed to indemnify KMP with respect to approximately $733.5 million of its debt. We would be obligated to perform under this indemnity only if KMP’s assets were unable to satisfy its obligations.

2. Investments, Acquisitions, Joint Ventures and Divestitures

Investments

NGPL PipeCo LLC Investment Impairment Charge

On November 19, 2009, the FERC initiated an investigation, pursuant to Section 5 of the Natural Gas Act, into the justness and reasonableness of the transportation and storage rates as well as the fuel and natural gas lost percentages of NGPL PipeCo LLC’s subsidiary, Natural Gas Pipeline Company of America LLC, referred to as “NGPL LLC.” NGPL LLC reached a settlement in principal with the FERC on April 22, 2010. On June 11, 2010, NGPL LLC filed an offer of settlement, which was approved without modification by the FERC on July 29, 2010. The order approving the settlement has become final and nonappealable. The settlement resolved all issues in the proceeding. The settlement provides that NGPL LLC will reduce its fuel and gas lost and unaccounted for, or “GL&U,” retention factors as of July 1, 2010. The settlement further provides a timeline for additional prospective fuel and GL&U reductions and prospective reductions in the maximum recourse reservation rates that it bills firm transportation and storage shippers.

The events discussed above caused us to reconsider the carrying value of our investment in NGPL PipeCo LLC as of March 31, 2010. A current fair value of an investment that is less than its carrying amount may indicate a loss in value of the investment. The fair value represents the price that would be received to sell the investment in an orderly transaction between market participants. We determined the fair value of our investment in NGPL PipeCo LLC by taking the total fair value of NGPL PipeCo LLC (calculated as discussed below) deducting the fair value of the joint venture debt and multiplying by our 20% ownership interest. We calculated the total fair value of NGPL PipeCo LLC from the present value of the expected future after-tax cash flows of the reporting unit, inclusive of a terminal value, which implies a market multiple of approximately 9.5 times EBITDA (earnings before interest, income taxes, depreciation and amortization) discounted at a rate of 7.4%. The expected future pre-interest, after-tax cash flows are lower than our pre-rate case expectations by approximately $25.0 million to $70.0 million per year. The result of our analysis showed that the fair value of our investment in NGPL PipeCo LLC was less than our carrying value. For the quarter ended March 31, 2010, we recognized a $430.0 million, pre-tax, non-cash impairment charge included in the caption “Earnings (loss) from equity investments” in our accompanying consolidated statement of income.

Acquisitions

USD Terminal Acquisition

On January 15, 2010, KMP acquired three ethanol handling train terminals from US Development Group LLC for an aggregate consideration of $201.1 million, consisting of $114.3 million in cash, $81.7 million in common units, and $5.1 million in assumed liabilities. The three train terminals are located in Linden, New Jersey; Baltimore, Maryland and Dallas, Texas. As part of the transaction, KMP announced the formation of a joint venture with US Development Group LLC to optimize and coordinate customer access to the three acquired terminals, other ethanol terminal assets it already owns and operates, and other terminal projects currently under development by both parties. The acquisition complemented and expanded the ethanol and rail terminal operations KMP previously owned, and all of the acquired assets are included in the Terminals–KMP business segment.

Based on the measurement of fair market values for all of the identifiable tangible and intangible assets acquired and liabilities assumed on the acquisition date, KMP assigned $94.6 million of the combined purchase price to “Other intangibles, net,” (representing customer relationships) $43.1 million to “Property, Plant and Equipment, net” and a combined $5.4 million to “Other current assets” and “Deferred charges and other assets.” The remaining $58.0 million of the purchase price represented the future economic benefits expected to be derived from the acquisition that was not assigned to other identifiable, separately recognizable assets acquired, and KMP recorded this amount as “Goodwill.” KMP believes the primary items that generated the goodwill are the value of the synergies created between the acquired assets and its pre-existing ethanol handling assets, and its expected ability to grow the business by leveraging its pre-existing experience in ethanol handling operations. KMP expects that the entire amount of goodwill will be deductible for tax purposes.

Kinder Morgan, Inc. Form 10-Q

Mission Valley Terminal Acquisition

On March 1, 2010, KMP acquired the refined products terminal assets at Mission Valley, California from Equilon Enterprises LLC (d/b/a Shell Oil Products US) for $13.5 million in cash. The acquired assets include buildings, equipment, delivery facilities (including two truck loading racks), and storage tanks with a total capacity of approximately 170,000 barrels for gasoline, diesel fuel and jet fuel. The terminal operates under a long-term terminaling agreement with Tesoro Refining and Marketing Company. KMP assigned the entire purchase price to “Property, Plant and Equipment, net.” The acquisition enhanced KMP’s Pacific operations and complemented its existing West Coast terminal operations, and the acquired assets are included in the Products Pipelines–KMP business segment.

Slay Industries Terminal Acquisition

On March 5, 2010, KMP acquired certain bulk and liquids terminal assets from Slay Industries for an aggregate consideration of $101.6 million, consisting of $97.0 million in cash, assumed liabilities of $1.6 million, and an obligation to pay additional cash consideration of $3.0 million in years 2013 through 2019, contingent upon the purchased assets providing KMP an agreed-upon amount of earnings during the three years following the acquisition. Including accrued interest, KMP expects to pay approximately $2.0 million of this contingent consideration in the first half of 2013.

The acquired assets include (i) a marine terminal located in Sauget, Illinois, (ii) a transload liquid operation located in Muscatine, Iowa, (iii) a liquid bulk terminal located in St. Louis, Missouri and (iv) a warehousing distribution center located in St. Louis. All of the acquired terminals have long-term contracts with large creditworthy shippers. As part of the transaction, KMP and Slay Industries entered into joint venture agreements at both the Kellogg Dock coal bulk terminal, located in Modoc, Illinois, and at the newly created North Cahokia terminal, located in Sauget and which has approximately 175 acres of land ready for development. All of the assets located in Sauget have access to the Mississippi River and are served by five rail carriers. The acquisition complemented and expanded KMP’s pre-existing Midwest terminal operations by adding a diverse mix of liquid and bulk capabilities, and all of the acquired assets are included in the Terminals–KMP business segment.

Based on the measurement of fair market values for all of the identifiable tangible and intangible assets acquired and liabilities assumed, KMP assigned $67.9 million of the purchase price to “Property, Plant and Equipment, net,” $24.6 million to “Other intangibles, net” (representing customer contracts) and a combined $8.2 million to “Investments.” KMP recorded the remaining $0.9 million of the combined purchase price as “Goodwill,” representing certain advantageous factors that contributed to the acquisition price exceeding the fair value of acquired identifiable net assets—in the aggregate, these factors represented goodwill, and KMP expects that the entire amount of goodwill will be deductible for tax purposes.

KinderHawk Field Services LLC Acquisition

On May 21, 2010, KMP completed its previously announced agreement to purchase a 50% ownership interest in Petrohawk Energy Corporation’s natural gas gathering and treating business in the Haynesville shale gas formation located in northwest Louisiana. On that date, KMP paid an aggregate consideration of $921.4 million in cash for its 50% equity ownership interest, and pursuant to the provisions of the joint venture formation and contribution agreement, KMP’s payment included approximately $46.4 million for both estimated capital expenditures and estimated net cash outflows from operating activities for the period January 1, 2010 through May 21, 2010. In the fourth quarter of 2010, KMP received net proceeds of $3.9 million for the final settlement of these estimated amounts.

During a short transition period, Petrohawk continued to operate the business, and effective October 1, 2010, a newly formed company named KinderHawk Field Services LLC, owned 50% by KMP and 50% by Petrohawk, assumed the joint venture operations. The acquisition complemented and expanded KMP’s existing natural gas gathering and treating businesses, and KMP assigned the entire purchase price to “Investments” on our accompanying consolidated balance sheet as of September 30, 2010 (including $144.8 million of equity method goodwill, representing the excess of KMP’s investment cost over its proportionate share of the fair value of the joint venture’s identifiable net assets). KMP’s investment and pro rata share of the joint venture’s operating results are included as part of the Natural Gas Pipelines–KMP business segment.

Kinder Morgan, Inc. Form 10-Q

Direct Fuels Terminal Acquisition

On July 22, 2010, KMP acquired a terminal with ethanol tanks, a truck rack and additional acreage in Dallas, Texas, from Direct Fuels Partners, L.P. for an aggregate consideration of $16 million, consisting of $15.9 million in cash and an assumed property tax liability of $0.1 million. The acquired terminal facility is connected to and complements the Dallas, Texas unit train terminal KMP acquired from USD Development Group LLC in January 2010 (described above in “—USD Terminal Acquisition). All of the acquired assets are included in the Terminals - KMP business segment, and based on KMP’s measurement of fair market values for all of the identifiable tangible and intangible assets acquired and liabilities assumed on the acquisition date, KMP assigned $5.3 million of the combined purchase price to “Property, Plant and Equipment, net.” The remaining $10.7 million of the purchase price represented the future economic benefits expected to be derived from the acquisition that was not assigned to other identifiable, separately recognizable assets acquired, and KMP recorded this amount as “Goodwill.” KMP believes the primary items that generated the goodwill are the value of the synergies created between the acquired assets and its pre-existing ethanol handling assets, and its expected ability to grow the business by leveraging its pre-existing experience in ethanol handling operations. KMP expects that the entire amount of goodwill will be deductible for tax purposes.

Gas-Chill, Inc. Asset Acquisition

On September 1, 2010, KMP acquired the natural gas treating assets of Gas-Chill, Inc. for an aggregate consideration of $13.1 million in cash, consisting of $10.5 million in cash paid on closing, and an obligation to pay a holdback amount of $2.6 million within eighteen months from closing. The acquired assets primarily consist of more than 100 mechanical refrigeration natural gas hydrocarbon dew point control units that are used to remove hydrocarbon liquids from natural gas streams prior to entering transmission pipelines. The refrigeration control units are designed to extract natural gas liquids from the inlet gas stream and retain the liquids if there are significant enough quantities to economically justify recovery. The units are constructed on a modular basis for ease of transport and installation requirements and are located in 12 different states. The acquisition complemented and expanded the existing natural gas treating operations offered by KMP’s Texas intrastate natural gas pipeline group, and all of the acquired assets are included in the Natural Gas Pipelines–KMP business segment. KMP assigned $8.0 million of the purchase price to “Property, Plant and Equipment, net” and the remaining $5.1 million to “Other intangibles, net” (representing both a technology-based asset and customer-related contract values).

Pro Forma Information

Pro forma consolidated income statement information that gives effect to all of the acquisitions we have made and all of the joint ventures we have entered into since January 1, 2009 as if they had occurred as of January 1, 2009 is not presented because it would not be materially different from the information presented in our accompanying consolidated statements of income.

Acquisitions Subsequent to September 30, 2010

Allied Concrete Bulk Terminal Assets

On October 1, 2010, KMP acquired certain bulk terminal assets and real property located in Chesapeake, Virginia, from Allied Concrete Products, LLC and Southern Concrete Products, LLC for an aggregate consideration of $8.6 million, consisting of $8.1 million in cash and an assumed environmental liability of $0.5 million. The acquired terminal facility is situated on 42 acres of land and can handle approximately 250,000 tons of material annually, including pumice, aggregates and sand. The acquisition complements the bulk commodity handling operations at KMP’s nearby Elizabeth River terminal, also located in Chesapeake, and all of the acquired assets will be included in the Terminals–KMP business segment.

Chevron Refined Products Terminal Assets

On October 8, 2010, KMP acquired four separate refined petroleum products terminals from Chevron U.S.A. Inc. for an aggregate consideration of approximately $40 million, including inclusion capital. Combined, the terminals have storage capacity of approximately 650,000 barrels for gasoline, diesel fuel and jet fuel. Chevron has entered into long-term contracts with KMP to terminal product at the terminals. The acquisition complements and expands KMP’s existing refined petroleum products assets, and all of the acquired assets will be included in the Products Pipelines - KMP business segment. KMP’s subsidiary Kinder Morgan Southeast Terminals LLC acquired terminal facilities located in Chattanooga, Tennessee and Columbus, Georgia, and both of these terminals will be included in the Southeast terminal operations. KMP’s subsidiary SFPP, L.P. acquired terminals located in Tucson

Kinder Morgan, Inc. Form 10-Q

and Phoenix, Arizona, and each of these two terminals will be included in the Pacific operations. In the fourth quarter of 2010, KMP expects to measure the identifiable tangible assets acquired and liabilities assumed at fair value on the acquisition date.

Joint Ventures

Eagle Ford Gathering LLC

On May 14, 2010, KMP and Copano Energy, L.L.C. entered into formal agreements for a joint venture to provide natural gas gathering, transportation and processing services to natural gas producers in the Eagle Ford Shale formation in south Texas. The joint venture is named Eagle Ford Gathering LLC, and KMP owns 50% of the equity in the project (a 50% member interest in Eagle Ford Gathering LLC), and Copano owns the remaining 50% interest. Copano serves as operator and managing member of Eagle Ford Gathering LLC. KMP and Copano have committed approximately 375 million cubic feet per day of natural gas capacity to the joint venture through 2024 for both transportation on KMP’s natural gas pipeline that extends from Laredo to Katy, Texas, and for processing at Copano’s natural gas processing plant located in Colorado County, Texas.

On July 6, 2010, Eagle Ford Gathering LLC announced the execution of a definitive long-term, fee-based gas services agreement with SM Energy Company. According to the provisions of the agreement, SM Energy will commit Eagle Ford production from its assets located in LaSalle, Dimmitt, and Webb Counties, Texas up to a maximum level of 200 million cubic feet per day over a ten year term. In addition, Eagle Ford Gathering LLC will construct approximately 85 miles of 24-inch and 30-inch diameter pipeline to serve SM Energy’s acreage in the western Eagle Ford Shale formation and to connect it to KMP’s Freer compressor station located in Duval County, Texas, and will construct 25 miles of 24-inch and 30-inch diameter pipeline to access additional acreage. The pipeline is expected to begin service during the summer of 2011.

Combined, KMP and Copano will invest approximately $175 million for the expanded project. Eagle Ford Gathering LLC is evaluating several opportunities to expand its ability to offer producers in the Eagle Ford Shale play additional midstream services. As of September 30, 2010, KMP’s capital contributions (and net equity investment) in Eagle Ford Gathering LLC totaled $9.5 million.

Midcontinent Express Pipeline LLC

On May 26, 2010, Energy Transfer Partners, L.P. transferred to Regency Energy Partners LP (i) a 49.9% ownership interest in Midcontinent Express Pipeline LLC and (ii) a one-time right to purchase its remaining 0.1% ownership interest in Midcontinent Express Pipeline LLC on May 26, 2011. As a result of this transfer, Energy Transfer Partners, L.P. now owns a 0.1% ownership interest in Midcontinent Express Pipeline LLC. KMP’s subsidiary, Kinder Morgan Operating L.P. “A,” continues to own the remaining 50% ownership interest in Midcontinent Express Pipeline LLC, and since there was no change in KMP’s ownership interest, it did not record any equity method adjustments as a result of the ownership change between Regency Energy Partners LP and Energy Transfer Partners, L.P.

Divestitures Subsequent to September 30, 2010

Triton Power

Effective October 22, 2010, we sold our ownership interest in Triton Power, a 550-megawatt natural gas-fired electricity generation facility in Michigan, for approximately $14.8 million in cash.

Cypress Pipeline

Effective October 1, 2010, Westlake Petrochemicals LLC, a wholly-owned subsidiary of Westlake Chemical Corporation, exercised an option it held to purchase a 50% ownership interest in KMP’s Cypress Pipeline. Accordingly, KMP sold a 50% interest in its subsidiary, Cypress Interstate Pipeline LLC, to Westlake and KMP received proceeds of $10.2 million. At the time of the sale, the carrying value of the net assets of Cypress Interstate Pipeline LLC totaled $20.4 million and consisted mostly of property, plant and equipment. In the fourth quarter of 2010, KMP expects to recognize an approximate $8.5 million gain from this sale, with the entire amount related to the remeasurement of KMP’s retained investment to its fair value. Due to the loss of control of Cypress Interstate Pipeline LLC, KMP now accounts for its retained investment under the equity method of accounting and recognizes the retained investment at its fair value. KMP’s gain amount represents the excess of the fair value of its retained investment ($18.7 million) over its carrying value ($10.2 million).

Kinder Morgan, Inc. Form 10-Q

3. Intangibles

Goodwill

We evaluate goodwill for impairment on May 31 of each year. For this purpose, we have six 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–KMP, (iv) CO2–KMP, (v) Terminals–KMP and (vi) Kinder Morgan Canada–KMP.

There were no impairment charges resulting from our May 31, 2010 impairment testing, and no event indicating an impairment has occurred subsequent to that date. The fair value of each reporting unit was determined from the present value of the expected future cash flows from the applicable reporting unit (inclusive of a terminal value calculated using market multiples between six and ten times cash flows) discounted at a rate of 9.0%. The value of each reporting unit was determined on a stand-alone basis from the perspective of a market participant and represented the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date.

Changes in the gross amounts of our goodwill and accumulated impairment losses for the nine months ended September 30, 2010 are summarized as follows (in millions):

	Products Pipelines– KMP			Natural Gas Pipelines– KMP			CO2–KMP		Terminals– KMP			Kinder Morgan Canada– KMP			Total
Historical Goodwill	$	2,116.5		$	3,488.0		$	1,521.7	$	1,415.4		$	613.1		$	9,154.7
Accumulated impairment losses.		(1,266.5	)		(2,090.2	)		-		(676.6	)		(377.1	)		(4,410.4	)
Balance as of December 31, 2009		850.0			1,397.8			1,521.7		738.8			236.0			4,744.3
Acquisitions		-			-			-		71.9			-			71.9
Disposals		-			-			-		-			-			-
Currency translation adjustments		-			-			-		-			5.0			5.0
Balance as of September 30, 2010	$	850.0		$	1,397.8		$	1,521.7	$	810.7		$	241.0		$	4,821.2

In addition, we identify any premium or excess cost we pay over our proportionate share of the underlying fair value of net assets acquired and accounted for as investments under the equity method of accounting. This premium or excess cost is referred to as equity method goodwill and is also not subject to amortization but rather to impairment testing. For all investments we own containing equity method goodwill, no event or change in circumstances that may have a significant adverse effect on the fair value of our equity investments has occurred during the first nine months of 2010, and as of September 30, 2010 and December 31, 2009, we reported $283.0 million and $138.2 million, respectively, in equity method goodwill within the caption “Investments” in our accompanying consolidated balance sheets. The increase in our equity method goodwill since December 31, 2009 was due to the goodwill included in the purchase of KMP’s 50% ownership interest in KinderHawk Field Services, LLC, discussed in Note 2.

Kinder Morgan, Inc. Form 10-Q

Other Intangibles

Excluding goodwill, our other intangible assets include customer relationships, contracts and agreements, technology-based assets and lease value. These intangible assets have definite lives and are reported separately as “Other intangibles, net” in our accompanying consolidated balance sheets. Following is information related to our intangible assets subject to amortization (in millions):

	September 30, 2010			December 31, 2009
Customer relationships, contracts and agreements
Gross carrying amount	$	420.0		$	297.9
Accumulated amortization		(87.4	)		(50.9	)
Net carrying amount		332.6			247.0

Technology-based assets, lease value and other
Gross carrying amount		16.3			14.1
Accumulated amortization		(1.8	)		(1.3	)
Net carrying amount		14.5			12.8

Total other intangibles, net	$	347.1		$	259.8

The increase in the carrying amount of the customer relationships, contracts and agreements since December 31, 2009 was mainly due to the acquisition of intangibles included in KMP’s purchase of terminal assets from US Development Group LLC and Slay Industries, discussed in Note 2.

We amortize the costs of our intangible assets to expense in a systematic and rational manner over their estimated useful lives. Among the factors we weigh, depending on the nature of the asset, are the effects of obsolescence, new technology, and competition. For the three months ended September 30, 2010 and 2009, the amortization expense on our intangibles totaled $12.5 million and $4.6 million, respectively. For the nine months ended September 30, 2010 and 2009, the amortization expense on our intangibles totaled $37.0 million and $14.1 million, respectively. As of September 30, 2010, the weighted average amortization period for our intangible assets was approximately 12 years, and our estimated amortization expense for these assets for each of the next five fiscal years (2011 – 2015) is approximately $43.3 million, $37.9 million, $34.0 million, $30.7 million and $27.8 million, respectively.

4. 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 net carrying amount of our debt (including both short-term and long-term amounts and excluding the value of interest rate swap agreements and the preferred interest in the general partner of KMP) as of September 30, 2010 and December 31, 2009 was $14,760.2 million and $13,548.4 million, respectively.

Our outstanding short-term debt as of September 30, 2010 was $2,454.0 million. The balance consisted of (i) $293.3 million in outstanding borrowings under Kinder Morgan, Inc.’s senior secured credit facility, (ii) $750.0 million in principal amount of Kinder Morgan, Inc.’s 5.35% series senior notes due January 5, 2011 (including discount and purchase accounting adjustments, the notes had a carrying amount of $749.0 million as of September 30, 2010), (iii) $700.0 million in principal amount of KMP’s 6.75% senior notes due March 15, 2011 (including discount and purchase accounting adjustments, the notes had a carrying amount of $701.6 million as of September 30, 2010), (iv) $414.8 million of KMP’s commercial paper borrowings, (v) $250.0 million in principal amount of KMP’s 7.50% senior notes due November 1, 2010 (including discount and purchase accounting adjustments, the notes had a carrying amount of $250.2 million as of September 30, 2010), (vi) $23.7 million in principal amount of tax-exempt bonds that mature on April 1, 2024, but are due on demand pursuant to certain standby purchase agreement provisions contained in the bond indenture (KMP’s subsidiary Kinder Morgan Operating L.P. “B” is the obligor on the bonds), (vii) a $9.2 million portion of a 5.40% long-term note payable (KMP’s subsidiaries Kinder Morgan Operating L.P. “A” and Kinder Morgan Canada Company are the obligors on the note), (viii) a $7.2 million portion of 5.23% long-term senior notes (KMP’s subsidiary Kinder Morgan Texas Pipeline, L.P. is the obligor on the notes) and (ix) $5.0 million in principal amount of 6.00% Development Revenue Bonds due January 1, 2011 and

Kinder Morgan, Inc. Form 10-Q

issued by the Louisiana Community Development Authority, a political subdivision of the state of Louisiana (KMP’s subsidiary Kinder Morgan Louisiana Pipeline LLC is the obligor on the bonds).

Credit Facilities

	September 30, 2010
	Short-term notes payable			Weighted average interest rate
	(Dollars in millions)
Kinder Morgan, Inc. – Secured debt(a)		$	293.3		1.51	%
KMP – Unsecured debt(b)
Commercial paper		$	414.8		0.66	%

____________

(a)	The average short-term debt outstanding (and related weighted average interest rate) was $250.3 million (1.71%) and $188.5 million (1.77%) during the three and nine months ended September 30, 2010, respectively.
(b)	The average short-term debt outstanding (and related weighted average interest rate) was $469.8 million (0.86%) and $527.7 million (0.76%) during the three and nine months ended September 30, 2010, respectively.

As of September 30, 2010, the amount available for borrowing under the Kinder Morgan, Inc. $1.0 billion six-year senior secured credit facility was reduced by a combined amount of $370.7 million consisting of $293.3 million in borrowings under the credit facility and $77.4 million of letters of credit consisting of: (i) a combined $40.8 million in four letters of credit required under provisions of our property and casualty, workers’ compensation and general liability insurance policies, (ii) a combined total of $20.4 million in two letters of credit supporting the operation and lease payments of the Jackson, Michigan power generation facility (this facility was sold on October 22, 2010; see Note 2) and (iii) a $16.2 million letter of credit to fund the debt service reserve account required under KMP’s Express pipeline system’s trust indenture.

As of December 31, 2009, there were $171.0 million in borrowings under Kinder Morgan, Inc.’s credit facility and the weighted average interest on these borrowings was 1.61%. Our credit facility matures on May 30, 2013 and includes a sublimit of $300 million for the issuance of letters of credit and a sublimit of $50 million for swingline loans. We do not have a commercial paper program.

On June 23, 2010, KMP successfully renegotiated its previous $1.79 billion five-year unsecured revolving bank credit facility that was due August 18, 2010, replacing it with a new $2.0 billion three-year, senior unsecured revolving credit facility that expires June 23, 2013. Similar to its previous facility, KMP’s $2.0 billion credit facility is with a syndicate of financial institutions, and the facility permits KMP to obtain bids for fixed rate loans from members of the lending syndicate. Wells Fargo Bank, National Association is the administrative agent, and borrowings under the credit facility can be used for general partnership purposes and as a backup for KMP’s commercial paper program.

The covenants of this credit facility are substantially similar to the covenants of KMP’s previous facility. Interest on KMP’s credit facility accrues at its option at a floating rate equal to either (i) the administrative agent’s base rate (but not less than the Federal Funds Rate, plus 0.5%), or (ii) LIBOR, plus a margin, which varies depending upon the credit rating of its long-term senior unsecured debt. The credit facility can be amended to allow for borrowings of up to $2.3 billion.

KMP had no borrowings under its $2.0 billion, senior unsecured revolving credit facility as of September 30, 2010, although the amount available for borrowing under its credit facility was reduced as further discussed below. As of December 31, 2009, the outstanding balance under KMP’s previous $1.79 billion credit facility was $300 million, and the weighted average interest rate on those borrowings was 0.59%.

As of September 30, 2010, the amount available for borrowing under KMP’s credit facility was reduced by a combined amount of $636.9 million, consisting of $414.8 million of commercial paper borrowings and $222.1 million of letters of credit, consisting of: (i) a $100.0 million letter of credit that supports certain proceedings with the California Public Utilities Commission involving refined products tariff charges on the intrastate common carrier operations of KMP’s Pacific operations’ pipelines in the state of California, (ii) a combined $89.4 million in three letters of credit that support tax-exempt bonds, (iii) a $16.1 million letter of credit that supports KMP’s indemnification obligations on the Series D note borrowings of Cortez Capital Corporation and (iv) a combined $16.6 million in other letters of credit supporting other obligations of KMP and its subsidiaries.

Kinder Morgan, Inc. Form 10-Q

KMP’s Commercial Paper Program

KMP’s commercial paper program provides for the issuance of $2 billion of commercial paper. On October 13, 2008, Standard & Poor’s Ratings Services lowered KMP’s short-term credit rating to A-3 from A-2, and on May 6, 2009, Moody’s Investors Service, Inc. downgraded KMP’s commercial paper rating to Prime-3 from Prime-2 and assigned a negative outlook to KMP’s long-term credit rating. As a result of these revisions and the commercial paper market conditions, KMP was unable to access commercial paper borrowings throughout 2009.

However, on February 25, 2010, Standard & Poor’s revised its outlook on KMP’s long-term credit rating to stable from negative, affirmed KMP’s long-term credit rating at BBB, and raised KMP’s short-term credit rating to A-2 from A-3. The rating agency’s revisions reflected its expectations that KMP’s financial profile will improve due to lower guaranteed debt obligations and higher expected cash flows associated with the completion and start-up of KMP’s 50%-owned Rockies Express and Midcontinent Express natural gas pipeline systems and its fully-owned Kinder Morgan Louisiana natural gas pipeline system. Due to this favorable change in KMP’s short-term credit rating it resumed issuing commercial paper in March 2010. In the near term, KMP expects that its short-term liquidity and financing needs will be met through a combination of borrowings made under its bank credit facility and commercial paper program.

Long-term Debt

Senior Notes

On May 19, 2010, KMP completed a public offering of senior notes. KMP issued a total of $1 billion in principal amount of senior notes in two separate series, consisting of $600 million of 5.30% notes due September 15, 2020, and $400 million of 6.55% notes due September 15, 2040. KMP received proceeds from the issuance of the notes, after underwriting discounts and commissions, of $993.1 million, and it used the proceeds to reduce the borrowings under its commercial paper program and its bank credit facility.

K N Capital Trust I and K N Capital Trust III

As a result of the implementation of Accounting Standards Update (ASU) No. 2009-17, effective January 1, 2010, we (i) include the transactions and balances of our business trusts, K N Capital Trust I and K N Capital Trust III, including $27.1 million of long-term debt at September 30, 2010 in our accompanying consolidated financial statements and (ii) no longer include our Junior Subordinated Deferrable Interest Debentures issued to the Capital Trusts, which balance was $35.7 million reported under the heading “Long-term Debt―Outstanding” in our accompanying consolidated balance sheet at December 31, 2009. Also, see Note 13 “Recent Accounting Pronouncements—Accounting Standards Updates.”

Interest Rate Swaps

Information on interest rate swaps is contained in Note 6, “Risk Management – Interest Rate Risk Management.”

Kinder Morgan, Inc. Form 10-Q

Contingent Debt

The following contingent debt disclosures pertain to certain types of guarantees or indemnifications KMP has made and cover certain types of guarantees included within debt agreements, even if the likelihood of requiring its performance under such guarantee is remote. Most of these agreements are with entities that are not consolidated in our financial statements; however, KMP has invested in and holds equity ownership interests in these entities.

As of September 30, 2010, KMP’s contingent debt obligations with respect to these investments, as well as its obligations with respect to related letters of credit, are summarized below (dollars in millions):

Entity	KMP’s Ownership Interest	Investment Type	Total Entity Debt			KMP’s Contingent Share of Entity Debt(a)
Fayetteville Express Pipeline LLC(b)	50%	Limited Liability	$	847.0	(c)	$	423.5

Cortez Pipeline Company(d)	50%	General Partner	$	141.1	(e)	$	86.7	(f)

Midcontinent Express Pipeline LLC(g)	50%	Limited Liability	$	881.2	(h)	$	41.1	(i)

Nassau County, Florida Ocean Highway and Port Authority(j)	N/A	N/A		N/A		$	19.8	(k)

_________

(a)	Represents the portion of the entity’s debt that KMP may be responsible for if the entity cannot satisfy its obligations.
(b)	Fayetteville Express Pipeline LLC is a limited liability company and the owner of the Fayetteville Express natural gas pipeline system. The remaining limited liability company member interest in Fayetteville Express Pipeline LLC is owned by Energy Transfer Partners, L.P.
(c)	Amount represents borrowings under a $1.1 billion, unsecured revolving bank credit facility that is due May 11, 2012.
(d)	Cortez Pipeline Company is a Texas general partnership that owns and operates a common carrier carbon dioxide pipeline system. The remaining general partner interests are owned by ExxonMobil Cortez Pipeline, Inc., an indirect wholly-owned subsidiary of Exxon Mobil Corporation and Cortez Vickers Pipeline Company, an indirect subsidiary of M.E. Zuckerman Energy Investors Incorporated.
(e)	Amount consists of (i) $32.1 million of fixed rate Series D notes due May 15, 2013 (interest on the Series D notes is paid annually and based on an average interest rate of 7.14% per annum), (ii) $100 million of variable rate Series E notes due December 11, 2012 (interest on the Series E notes is paid quarterly and based on an interest rate of three-month LIBOR plus a spread) and (iii) $9.0 million of outstanding borrowings under a $40 million committed revolving bank credit facility that is also due December 11, 2012.
(f)	KMP is severally liable for its percentage ownership share (50%) of the Cortez Pipeline Company debt ($70.6 million). In addition, as of September 30, 2010, Shell Oil Company shares KMP’s several guaranty obligations jointly and severally for $32.1 million of Cortez’s debt balance related to the Series D notes; however, KMP is obligated to indemnify Shell for the liabilities it incurs in connection with such guaranty. Accordingly, as of September 30, 2010, KMP has a letter of credit in the amount of $16.1 million issued by JP Morgan Chase, in order to secure KMP’s indemnification obligations to Shell for 50% of the Cortez debt balance of $32.1 million related to the Series D notes. Further, pursuant to a Throughput and Deficiency Agreement, the partners of Cortez Pipeline Company are required to contribute capital to Cortez in the event of a cash deficiency. The agreement contractually supports the financings of Cortez Capital Corporation, a wholly-owned subsidiary of Cortez Pipeline Company, by obligating the partners of Cortez Pipeline to fund cash deficiencies at Cortez Pipeline, including anticipated deficiencies and cash deficiencies relating to the repayment of principal and interest on the debt of Cortez Capital Corporation. The partners’ respective parent or other companies further severally guarantee the obligations of the Cortez Pipeline owners under this agreement.
(g)	Midcontinent Express Pipeline LLC is a limited liability company and the owner of the Midcontinent Express natural gas pipeline system. The remaining limited liability company member interests in Midcontinent Express Pipeline LLC are owned by Regency Energy Partners, L.P. and Energy Transfer Partners, L.P.
(h)	Amount consists of (i) outstanding borrowings of $82.2 million under a $175.4 million, unsecured revolving bank credit facility that is due February 28, 2011 and (ii) an aggregate carrying value of $799.0 million in fixed rate senior notes issued by Midcontinent Express Pipeline LLC in a private offering in September 2009. All payments of principal and interest in respect of these senior notes are the sole obligation of Midcontinent Express. Noteholders have no recourse against KMP or the other member owners of Midcontinent Express Pipeline LLC for any failure by Midcontinent Express to perform or comply with its obligations pursuant to the notes or the indenture.

Kinder Morgan, Inc. Form 10-Q

(i)	In addition to KMP’s contingent share of entity debt ($41.1 million), there is a letter of credit outstanding to support the construction of the Midcontinent Express natural gas pipeline system. As of September 30, 2010, this letter of credit, issued by the Bank of Tokyo-Mitsubishi UFJ, Ltd., had a face amount of $33.3 million. KMP’s contingent responsibility with regard to this outstanding letter of credit was $16.7 million (50% of total face amount).
(j)	Arose from KMP’s Vopak terminal acquisition in July 2001. Nassau County, Florida Ocean Highway and Port Authority is a political subdivision of the state of Florida.
(k)	KMP has posted a letter of credit as security for borrowings under Adjustable Demand Revenue Bonds issued by the Nassau County, Florida Ocean Highway and Port Authority. The bonds were issued for the purpose of constructing certain port improvements located in Fernandino Beach, Nassau County, Florida. KMP’s subsidiary, Nassau Terminals LLC is the operator of the marine port facilities. The bond indenture is for 30 years and allows the bonds to remain outstanding until December 1, 2020. Principal payments on the bonds are made on the first of December each year, and corresponding reductions are made to the letter of credit. As of September 30, 2010, this letter of credit had a face amount of $19.8 million.

KMP also holds a 50% equity ownership interest in Rockies Express Pipeline LLC, a limited liability company and the owner of the Rockies Express natural gas pipeline system. Subsidiaries of Sempra Energy and ConocoPhillips own the remaining member interests, and pursuant to certain guaranty agreements remaining in effect on December 31, 2009, all three member owners of Rockies Express Pipeline LLC had agreed to guarantee, severally in the same proportion as their percentage ownership of the member interests in Rockies Express Pipeline LLC, borrowings under its $2.0 billion five-year, unsecured revolving bank credit facility that is due April 28, 2011. On April 8, 2010, Rockies Express Pipeline LLC amended its bank credit facility to allow for borrowings up to $200 million (a reduction from $2.0 billion), and on this same date, each of its three member owners were released from their respective debt obligations under the previous guaranty agreements. Accordingly, KMP no longer has a contingent debt obligation with respect to Rockies Express Pipeline LLC.

For additional information regarding ours, and our subsidiary, KMP’s, debt facilities and contingent debt agreements, see Note 8 “Debt” and Note 12 “Commitments and Contingent Liabilities” in our consolidated financial statements included in our 2009 Form 10-K.

Kinder Morgan G.P., Inc. Preferred Shares

On October 20, 2010, Kinder Morgan G.P., Inc.’s board of directors declared a quarterly cash distribution on its Series A Fixed-to-Floating Rate Term Cumulative Preferred Stock of $20.825 per share payable on November 18, 2010 to shareholders of record as of October 29, 2010. On July 21, 2010, Kinder Morgan G.P., Inc.’s board of directors declared a quarterly cash distribution on its Series A Fixed-to-Floating Rate Term Cumulative Preferred Stock of $20.825 per share paid on August 18, 2010 to shareholders of record as of July 30, 2010. On April 21, 2010, Kinder Morgan G.P., Inc.’s board of directors declared a quarterly cash distribution on its Series A Fixed-to-Floating Rate Term Cumulative Preferred Stock of $20.825 per share paid on May 18, 2010 to shareholders of record as of April 30, 2010.

5. Stockholders’ Equity

During the first nine months of both 2010 and 2009, there were no material changes in our ownership interests in subsidiaries, in which we retained a controlling financial interest.

Our Board of Directors declared a dividend of $200.0 million on October 20, 2010 that will be paid on November 15, 2010. On August 16, 2010, May 17, 2010 and February 16, 2010, we paid cash dividends on our common stock of $175.0 million, $175.0 million and $150.0 million, respectively, to our sole stockholder, which then made distributions to Kinder Morgan Holdco LLC.

Kinder Morgan, Inc. Form 10-Q

The following tables set forth for the respective periods (i) changes in the carrying amounts of our Stockholders’ Equity attributable to both us and our noncontrolling interests, including our comprehensive income (loss) and (ii) associated tax amounts included in the respective components of other comprehensive income (loss) (in millions):

	Three Months Ended September 30,
	2010									2009
	Kinder Morgan, Inc.			Noncontrolling interests			Total			Kinder Morgan, Inc.			Noncontrolling interests			Total
Beginning Balance	$	3,812.4		$	5,014.7		$	8,827.1		$	4,398.0		$	4,375.7		$	8,773.7
Impact from equity transactions of KMP		(45.2	)		70.7			25.5			3.5			(5.6	)		(2.1	)
A-1 and B unit amortization		1.3			-			1.3			1.9			-			1.9
Distributions to noncontrolling interests		-			(217.2	)		(217.2	)		-			(191.4	)		(191.4	)
Contributions from noncontrolling interests		-			203.4			203.4			-			146.0			146.0
Cash dividends		(175.0	)		-			(175.0	)		(150.0	)		-			(150.0	)
Comprehensive income
Net income		10.6			42.0			52.6			122.8			106.6			229.4
Other comprehensive income (loss), net of tax
Change in fair value of derivatives utilized for hedging purposes		(25.1	)		(38.0	)		(63.1	)		19.1			25.6			44.7
Reclassification of change in fair value of derivatives to net income		5.0			21.8			26.8			(7.1	)		8.2			1.1
Foreign currency translation adjustments		20.1			28.6			48.7			31.1			56.9			88.0
Adjustments to pension and other postretirement benefit plan liabilities		0.1			0.1			0.2			0.1			0.2			0.3
Total other comprehensive income		0.1			12.5			12.6			43.2			90.9			134.1
Total comprehensive income (loss)		10.7			54.5			65.2			166.0			197.5			363.5
Ending Balance	$	3,604.2		$	5,126.1		$	8,730.3		$	4,419.4		$	4,522.2		$	8,941.6

Tax (Expense) Benefit Included in Other Comprehensive Income:
Change in fair value of derivatives utilized for hedging purposes	$	18.9		$	4.1		$	23.0		$	(8.4	)	$	(3.9	)	$	(12.3	)
Reclassification of change in fair value of derivatives to net income		(4.4	)		(2.4	)		(6.8	)		7.2			(0.8	)		6.4
Foreign currency translation adjustments		(15.2	)		(3.1	)		(18.3	)		(26.1	)		(5.6	)		(31.7	)
Adjustments to pension and other postretirement benefit plan liabilities		(0.1	)		-			(0.1	)		(0.1	)		-			(0.1	)
Tax included in total other comprehensive income	$	(0.8	)	$	(1.4	)	$	(2.2	)	$	(27.4	)	$	(10.3	)	$	(37.7	)

Kinder Morgan, Inc. Form 10-Q

	Nine Months Ended September 30,
	2010									2009
	Kinder Morgan, Inc.			Noncontrolling interests			Total			Kinder Morgan, Inc.			Noncontrolling interests			Total
Beginning Balance	$	4,171.5		$	4,674.6		$	8,846.1		$	4,404.3		$	4,072.6		$	8,476.9
Impact from equity transactions of KMP		(31.2	)		48.7			17.5			19.3			(30.2	)		(10.9	)
A-1 and B unit amortization		4.8			-			4.8			5.7			-			5.7
Distributions to noncontrolling interests		-			(622.4	)		(622.4	)		-			(550.8	)		(550.8	)
Contributions from noncontrolling interests		-			718.3			718.3			-			820.2			820.2
Implementation of Accounting Standards Update 2009-17(a)		-			(45.9	)		(45.9	)		-			-			-
Cash dividends		(500.0	)		-			(500.0	)		(300.0	)		-			(300.0	)
Other		-			0.2			0.2			-			2.6			2.6
Comprehensive income
Net income (loss)		(104.3	)		237.3			133.0			367.9			215.5			583.4
Other comprehensive income (loss), net of tax
Change in fair value of derivatives utilized for hedging purposes		33.5			38.4			71.9			(76.3	)		(110.7	)		(187.0	)
Reclassification of change in fair value of derivatives to net income		13.0			61.4			74.4			(42.0	)		14.2			(27.8	)
Foreign currency translation adjustments		17.6			16.5			34.1			41.3			89.9			131.2
Adjustments to pension and other postretirement benefit plan liabilities		(0.7	)		(1.0	)		(1.7	)		(0.8	)		(1.1	)		(1.9	)
Total other comprehensive income (loss)		63.4			115.3			178.7			(77.8	)		(7.7	)		(85.5	)
Total comprehensive income (loss)		(40.9	)		352.6			311.7			290.1			207.8			497.9
Ending Balance	$	3,604.2		$	5,126.1		$	8,730.3		$	4,419.4		$	4,522.2		$	8,941.6

Tax (Expense) Benefit Included in Other Comprehensive Income (Loss):
Change in fair value of derivatives utilized for hedging purposes	$	(25.4	)	$	(4.2	)	$	(29.6	)	$	47.2		$	11.5		$	58.7
Reclassification of change in fair value of derivatives to net income		(10.9	)		(6.7	)		(17.6	)		26.2			(1.5	)		24.7
Foreign currency translation adjustments		(12.2	)		(1.8	)		(14.0	)		(40.4	)		(9.3	)		(49.7	)
Adjustments to pension and other postretirement benefit plan liabilities		0.5			0.1			0.6			0.5			0.1			0.6
Tax included in total other comprehensive income (loss)	$	(48.0	)	$	(12.6	)	$	(60.6	)	$	33.5		$	0.8		$	34.3

____________

(a)

Upon the adoption of Accounting Standards Update No. 2009-17, which amended the codification’s “Consolidation” topic, on January 1, 2010, Triton Power Company LLC is no longer consolidated into our financial statements, but is treated as an equity investment (see Note 13). On October 22, 2010, we sold Triton Power (see Note 2).

Noncontrolling Interests

The caption “Noncontrolling interests” in our accompanying consolidated balance sheets consists of interests in the following subsidiaries (in millions):

	September 30, 2010		December 31, 2009
KMP	$	3,176.7	$	2,746.4
KMR		1,939.9		1,870.7
Triton Power Company LLC(a)		-		45.9
Other		9.5		11.6
	$	5,126.1	$	4,674.6

____________

(a)

KMP’s Common Units

On January 15, 2010, KMP issued 1,287,287 common units as part of its purchase price for the ethanol handling terminal assets it acquired from US Development Group LLC. KMP valued the common units at $81.7 million, determining the units’ value based on the $63.45 closing market price of the common units on the New York Stock

Kinder Morgan, Inc. Form 10-Q

Exchange on the January 15, 2010 acquisition date. For more information on this acquisition, see Note 2 “Investments, Acquisitions, Joint Ventures and Divestitures—Acquisitions—USD Terminal Acquisition.”

On May 7, 2010, KMP issued, in a public offering, 6,500,000 of its common units at a price of $66.25 per unit, less commissions and underwriting expenses. After commissions and underwriting expenses, KMP received net proceeds of $417.4 million for the issuance of these 6,500,000 common units, and KMP used the proceeds to reduce the borrowings under its commercial paper program and its bank credit facility.

On July 2, 2010, KMP completed an offering of 1,167,315 of its common units at a price of $64.25 per unit in a privately negotiated transaction. KMP received net proceeds of $75.0 million for the issuance of these 1,167,315 common units, and used the proceeds to reduce the borrowings under its commercial paper program and its bank credit facility.

During the three and nine months ended September 30, 2010, KMP issued 1,899,008 and 2,142,050, respectively, of its common units pursuant to its equity distribution agreement with UBS Securities LLC (UBS). After commissions of $1.0 million and $1.1 million, respectively, for the three and nine month periods, KMP received net proceeds from the issuance of these common units of $128.4 million and $144.2 million, respectively. KMP used the proceeds to reduce the borrowings under its commercial paper program and its bank credit facility. For additional information regarding KMP’s equity distribution agreement, see Note 10 to our consolidated financial statements included in our 2009 Form 10-K.

The above equity issuances during the nine months ended September 30, 2010 had the associated effects of increasing our (i) noncontrolling interests associated with KMP by $688.1 million, (ii) accumulated deferred income taxes by $10.9 million and (iii) additional paid-in capital by $19.3 million.

KMP Equity Issuances Subsequent to September 30, 2010

In October 2010, KMP issued 178,654 of its common units for the settlement of sales made on or before September 30, 2010 pursuant to its equity distribution agreement. After commissions of $0.1 million, KMP received net proceeds of $12.1 million for the issuance of these 178,654 common units, and used the proceeds to reduce the borrowings under its commercial paper program and its bank credit facility.

KMP Distributions

Contributions to our noncontrolling interests consist primarily of distributions by KMP to its common unit holders. On February 12, 2010, KMP paid a quarterly distribution of $1.05 per common unit for the fourth quarter of 2009, of which $200.5 million was paid to the public holders of KMP’s common units. On May 14, 2010, KMP paid a quarterly distribution of $1.07 per common unit for the first quarter of 2010, of which $204.3 million was paid to the public holders of KMP’s common units. On August 13, 2010, KMP paid a quarterly distribution of $1.09 per common unit for the second quarter of 2010, of which $216.8 million was paid to the public holders of KMP’s common units.

KMP Declared Distributions Subsequent to September 30, 2010

On October 20, 2010, KMP declared a cash distribution of $1.11 per unit for the quarterly period ended September 30, 2010. The distribution will be paid on November 12, 2010, to unitholders of record as of October 29, 2010.

KMR’s Share Distributions

Under the terms of KMR’s limited liability company agreement, except in connection with its liquidation, KMR does not pay distributions on its shares in cash but instead makes distributions on its shares in additional shares or fractions of shares. At the same time KMP makes a distribution on its common units and i-units, KMR distributes on each of its shares that fraction of a share determined by dividing the amount of the cash distribution to be made by KMP on each common unit by the average closing market price of a share determined for the ten-trading day period ending on the trading day immediately prior to the ex-dividend date for KMR’s shares. The following table presents share distributions KMR has paid in 2010.

Kinder Morgan, Inc. Form 10-Q

	Share Distributions
	Shares Distributed Per Outstanding Share	Equivalent Distribution Value Per Share(a)		Total Number of Additional Shares Distributed
	2010	2010		2010
Distribution Date
February 12, 2010	0.018430	$	1.05	1,576,470
May 14, 2010	0.017863	$	1.07	1,556,130
August 13, 2010	0.018336	$	1.09	1,625,869

__________

(a)

The cash distribution paid to each common unit of KMP during the quarter indicated and is used to calculate KMR’s distribution of shares as discussed above. Because of this calculation, the market value of the shares distributed on the date of distribution may be less or more than the cash distribution per common unit of KMP.

On November 12, 2010, KMR will pay a share distribution of 0.017844 shares per outstanding share (1,611,255 total shares) to shareholders of record as of October 29, 2010. This distribution was determined by dividing:

▪

$1.11, the cash amount distributed per KMP common unit

▪

$62.207, the average of KMR’s shares’ closing market prices from October 13-26, 2010, the ten consecutive trading days preceding the date on which KMR’s shares began to trade ex-dividend under the rules of the New York Stock Exchange.

6. Risk Management

Certain of our business activities expose us to risks associated with unfavorable changes in the market price of natural gas, natural gas liquids and crude oil. We also have exposure to interest rate risk as a result of the issuance of our debt obligations. Pursuant to our management’s approved risk management policy, we use derivative contracts to hedge or reduce our exposure to certain of these risks.

Energy Commodity Price Risk Management

We are exposed to risks associated with changes in the market price of natural gas, natural gas liquids and crude oil as a result of the forecasted purchase or sale of these products. Specifically, these risks are primarily associated with price volatility related to (i) pre-existing or anticipated physical natural gas, natural gas liquids and crude oil sales, (ii) natural gas purchases and (iii) natural gas system use and storage. Price changes are often caused by shifts in the supply and demand for these commodities, as well as their locations.

Our principal use of energy commodity derivative contracts is to mitigate the risk associated with unfavorable market movements in the price of energy commodities. Our energy commodity derivative contracts act as a hedging (offset) mechanism against the volatility of energy commodity prices by allowing us to transfer this price risk to counterparties who are able and willing to bear it.

For derivative contracts that are designated and qualify as cash flow hedges pursuant to generally accepted accounting principles, the portion of the gain or loss on the derivative contract that is effective in offsetting the variable cash flows associated with the hedged forecasted transaction is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings (e.g., in “revenues” when the hedged transactions are commodity sales). The remaining gain or loss on the derivative contract in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffective portion), is recognized in earnings during the current period. The effectiveness of hedges using an option contract may be assessed based on changes in the option’s intrinsic value with the change in the time value of the contract being excluded from the assessment of hedge effectiveness. Changes in the excluded component of the change in an option’s time value are included currently in earnings. During the three and nine months ended September 30, 2010, we recognized net losses of $9.5 million and net gains of $4.6 million, respectively, related to crude oil and natural gas hedges and resulting from both hedge ineffectiveness and amounts excluded from effectiveness testing. During

Kinder Morgan, Inc. Form 10-Q

the three and nine months ended September 30, 2009, we recognized a net hedging loss of $5.4 million from crude oil hedges that resulted from hedge ineffectiveness and amounts excluded from effectiveness testing.

Additionally, during the three and nine months ended September 30, 2010, we reclassified losses of $5.0 million and $13.0 million, respectively, from “Accumulated other comprehensive loss” into earnings, and for the same comparable periods last year, we reclassified gains of $7.1 million and $42.0 million, respectively, of “Accumulated other comprehensive loss” into earnings. No material amounts were reclassified into earnings as a result of the discontinuance of cash flow hedges because it was probable that the original forecasted transactions would no longer occur by the end of the originally specified time period or within an additional two-month period of time thereafter, but rather, were reclassified as a result of the hedged forecasted transactions actually affecting earnings (i.e. when the forecasted sales and purchase actually occurred). The proceeds or payments resulting from the settlement of cash flow hedges are reflected in the operating section of our accompanying consolidated statements of cash flows as changes to net income and working capital.

The “Accumulated other comprehensive loss” balance included in our Stockholders’ Equity was $104.5 million as of September 30, 2010, and $167.9 million as of December 31, 2009. These totals included “Accumulated other comprehensive loss” amounts of $49.2 million and $95.7 million of losses as of September 30, 2010 and December 31, 2009, respectively, associated with energy commodity price risk management activities. Approximately $30.7 million of the total loss amount associated with energy commodity price risk management activities and included in our Stockholder’s Equity as of September 30, 2010 is expected to be reclassified into earnings during the next twelve months (when the associated forecasted sales and purchases are also expected to occur), and as of September 30, 2010, the maximum length of time over which we have hedged our exposure to the variability in future cash flows associated with energy commodity price risk is through December 2014.

As of September 30, 2010, KMP had entered into the following outstanding commodity forward contracts to hedge its forecasted energy commodity purchases and sales:

	Net open position long/(short)
Derivatives designated as hedging contracts
Crude oil	(22.0) million barrels
Natural gas fixed price	(32.7) billion cubic feet
Natural gas basis	(22.3) billion cubic feet
Derivatives not designated as hedging contracts
Natural gas basis	(0.2) billion cubic feet

For derivative contracts that are not designated as a hedge for accounting purposes, all realized and unrealized gains and losses are recognized in the statement of income during the current period. These types of transactions include basis spreads, basis-only positions and gas daily swap positions. KMP primarily enters into these positions to economically hedge an exposure through a relationship that does not qualify for hedge accounting. Until settlement occurs, this will result in non-cash gains or losses being reported in our operating results.

Interest Rate Risk Management

In order to maintain a cost effective capital structure, it is our policy to borrow funds using a mix of fixed rate debt and variable rate debt. We use interest rate swap agreements to manage the interest rate risk associated with the fair value of our fixed rate borrowings and to effectively convert a portion of the underlying cash flows related to our long-term fixed rate debt securities into variable rate cash flows in order to achieve our desired mix of fixed and variable rate debt.

Since the fair value of fixed rate debt varies inversely with changes in the market rate of interest, we enter into swap agreements to receive a fixed and pay a variable rate of interest in order to convert the interest expense associated with certain of our senior notes from fixed rates to variable rates, resulting in future cash flows that vary with the market rate of interest. These swaps, therefore, hedge against changes in the fair value of our fixed rate debt that result from market interest rate changes. For derivative contracts that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings.

As of December 31, 2009, we were a party to interest rate swap agreements with a total notional principal amount of $725.0 million, and our subsidiary, KMP, had a combined notional principal amount of $5.2 billion of fixed-to-variable interest rate swap agreements effectively converting the interest expense associated with certain

Kinder Morgan, Inc. Form 10-Q

series of our and KMP’s senior notes from fixed rates to variable rates based on an interest rate of LIBOR plus a spread. In the second quarter of 2010, KMP entered into three additional fixed-to-variable interest rate swap agreements having a combined notional principal amount of $400 million. Each agreement effectively converts a portion of the interest expense associated with KMP’s 5.30% senior notes due September 15, 2020 from a fixed rate to a variable rate based on an interest rate of LIBOR plus a spread.

Accordingly, as of September 30, 2010, we were a party to interest rate swap agreements with a total notional principal amount of $725.0 million and our subsidiary, KMP, had a combined notional principal amount of $5.6 billion of fixed-to-variable interest rate swap agreements. All of our and KMP’s swap agreements have termination dates that correspond to the maturity dates of the related series of senior notes and, as of September 30, 2010, the maximum length of time over which we or KMP have hedged a portion of our exposure to the variability in the value of this debt due to interest rate risk is through January 15, 2038.

Fair Value of Derivative Contracts

The fair values of our current and non-current asset and liability derivative contracts are each reported separately as “Fair value of derivative contracts” on our accompanying consolidated balance sheets. The following table summarizes the fair values of our derivative contracts included on our accompanying consolidated balance sheets as of September 30, 2010 and December 31, 2009 (in millions):

Fair Value of Derivative Contracts

		Asset derivatives				Liability derivatives
		September 30, 2010		December 31, 2009		September 30, 2010			December 31, 2009
	Balance sheet location	Fair value				Fair value
Derivatives designated as hedging contracts
Energy commodity derivative contracts	Current	$	41.2	$	19.1	$	(202.5	)	$	(270.8	)
	Non-current		60.9		57.3		(108.2	)		(241.5	)
Subtotal			102.1		76.4		(310.7	)		(512.3	)

Interest rate swap agreements	Non-current		719.9		236.0		(16.9	)		(218.5	)
Cross-currency swap agreements	Non-current		-		-		-			(9.6	)
Total			822.0		312.4		(327.6	)		(740.4	)

Derivatives not designated as hedging contracts
Energy commodity derivative contracts	Current	$	8.8	$	1.7	$	(10.6	)	$	(1.2	)
			8.8		1.7		(10.6	)		(1.2	)
Total		$	830.8	$	314.1	$	(338.2	)	$	(741.6	)

The offsetting entry to adjust the carrying value of the debt securities whose fair value was being hedged is included within “Value of interest rate swaps” on our accompanying consolidated balance sheets, which also includes any unamortized portion of proceeds received from the early termination of interest rate swap agreements. As of September 30, 2010 and December 31, 2009, this unamortized premium totaled $321.1 million and $337.5 million, respectively.

Effect of Derivative Contracts on the Income Statement

The following four tables summarize the impact of our derivative contracts on our accompanying consolidated statements of income for each of the three and nine months ended September 30, 2010 and 2009 (in millions):

Derivatives in fair value hedging relationships	Location of gain/(loss) recognized in income on derivative	Amount of gain/(loss) recognized in income on derivative(a)
		Three Months Ended September 30,				Nine Months Ended September 30,
		2010		2009		2010		2009
Interest rate swap agreements	Interest, net - income/(expense)	$	241.3	$	127.4	$	685.5	$	(339.9	)
Total		$	241.3	$	127.4	$	685.5	$	(339.9	)

Kinder Morgan, Inc. Form 10-Q

Hedged items in fair value hedging relationships	Location of gain/(loss) recognized in income on related hedged item	Amount of gain/(loss) recognized in income on related hedged item(a)
		Three Months Ended September 30,						Nine Months Ended September 30,
		2010			2009			2010			2009
Fixed rate debt	Interest, net - income/(expense)	$	(241.3	)	$	(127.4	)	$	(685.5	)	$	339.9
Total		$	(241.3	)	$	(127.4	)	$	(685.5	)	$	339.9

____________

(a)

Amounts reflect the change in the fair value of interest rate swap agreements and the change in the fair value of the associated fixed rate debt which exactly offset each other as a result of no hedge ineffectiveness. Amounts do not reflect the impact on interest expense from the interest rate swap agreements under which we pay variable rate interest and receive fixed rate interest.

Derivatives in cash flow hedging relationships	Amount of gain/(loss) recognized in OCI on derivative (effective portion)				Location of gain/(loss) reclassified from Accumulated OCI into income (effective portion)	Amount of gain/(loss) reclassified from Accumulated OCI into income (effective portion)				Location of gain/(loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)	Amount of gain/(loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)
	Three Months Ended September 30,					Three Months Ended September 30,					Three Months Ended September 30,
	2010		2009			2010		2009			2010		2009
Energy commodity derivative contracts	$	(25.1)	$	19.1	Revenues-natural gas sales	$	0.4	$	4.1	Revenues-natural gas sales	$	-	$	-
					Revenues-product sales and other		(4.8)		4.1	Revenues-product sales and other		(7.9)		(5.4)
					Gas purchases and other costs of sales		(0.6)		(1.1)	Gas purchases and other costs of sales		(1.6)		-
Total	$	(25.1)	$	19.1	Total	$	(5.0)	$	7.1	Total	$	(9.5)	$	(5.4)

	Nine Months Ended September 30,					Nine Months Ended September 30,					Nine Months Ended September 30,
	2010		2009			2010		2009			2010		2009
Energy commodity derivative contracts	$	33.5	$	(76.3)	Revenues-natural gas sales	$	0.5	$	8.5	Revenues-natural gas sales	$	-	$	-
					Revenues-product sales and other		(13.6)		33.8	Revenues-product sales and other		5.4		(5.4)
					Gas purchases and other costs of sales		0.1		(0.3)	Gas purchases and other costs of sales		(0.8)		-
Total	$	33.5	$	(76.3)	Total	$	(13.0)	$	42.0	Total	$	4.6	$	(5.4)

____________

Derivatives not designated as hedging contracts	Location of gain/(loss) recognized in income on derivative	Amount of gain/(loss) recognized in income on derivative
		Three Months Ended September 30,					Nine Months Ended September 30,
		2010		2009			2010		2009
Energy commodity derivative contracts	Gas purchases and other costs of sales	$	0.2	$	(0.8	)	$	1.0	$	(3.1	)
Total		$	0.2	$	(0.8	)	$	1.0	$	(3.1	)

____________

Kinder Morgan, Inc. Form 10-Q

Derivatives in net investment hedging relationships	Amount of gain/(loss) recognized in OCI on derivative (effective portion)				Location of gain/(loss) reclassified from Accumulated OCI into income (effective portion)	Amount of gain/(loss) reclassified from Accumulated OCI into income (effective portion)				Location of gain/(loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)	Amount of gain/(loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing
	Three Months Ended September 30,					Three Months Ended September 30,					Three Months Ended September 30,
	2010		2009			2010		2009			2010		2009
Cross-currency swap agreements	$	-	$	(9.5)	Other, net	$	-	$	-	Revenues	$	-	$	-
Total	$	-	$	(9.5)	Total	$	-	$	-	Total	$	-	$	-

	Nine Months Ended September 30,					Nine Months Ended September 30,					Nine Months Ended September 30,
	2010		2009			2010		2009			2010		2009
Cross-currency swap agreements	$	9.6	$	(35.6)	Other, net	$	-	$	-	Revenues	$	-	$	-
Total	$	9.6	$	(35.6)	Total	$	-	$	-	Total	$	-	$	-

____________

Net Investment Hedges

We are exposed to foreign currency risk from our investments in businesses owned and operated outside the United States. In 2005 and 2006, we entered into various cross-currency interest rate swap transactions, which were designated as net investment hedges, in order to hedge the value of our investment in Canadian operations. Over time, as our exposure to foreign currency risk through our Canadian operations was reduced through dispositions, we began to terminate cross-currency swap agreements. In June 2009, we terminated cross-currency interest rate swaps with a notional value of C$29.2 million. In connection with this termination, we received $0.5 million in July 2009. Additionally in July 2009, we received $1.0 million for the termination of another portion of our cross-currency interest rate swaps with a notional value of C$29.2 million. The final cross-currency swap agreements with a notional value of C$96.3 million were terminated during the third quarter of 2010 and there were no outstanding cross-currency interest rate swaps at September 30, 2010. No payment was made or received in connection with the final termination. In the periods that we had outstanding cross-currency swap agreements, the effective portion of the changes in fair value of these swap transactions was reported as a cumulative translation adjustment included in the balance sheet caption “Accumulated other comprehensive loss.”

Credit Risks

We and our subsidiary, KMP, have counterparty credit risk as a result of our use of financial derivative contracts. Our counterparties consist primarily of financial institutions, major energy companies and local distribution companies. This concentration of counterparties may impact our overall exposure to credit risk, either positively or negatively, in that the counterparties may be similarly affected by changes in economic, regulatory or other conditions.

We maintain credit policies with regard to our counterparties that we believe minimize our overall credit risk. These policies include (i) an evaluation of potential counterparties’ financial condition (including credit ratings), (ii) collateral requirements under certain circumstances and (iii) the use of standardized agreements which allow for netting of positive and negative exposure associated with a single counterparty. Based on our policies, exposure, credit and other reserves, our management does not anticipate a material adverse effect on our financial position, results of operations, or cash flows as a result of counterparty performance.

Our over-the-counter swaps and options are entered into with counterparties outside central trading organizations such as futures, options or stock exchanges. These contracts are with a number of parties, all of which have investment grade credit ratings. While we enter into derivative transactions principally with investment grade counterparties and actively monitor their ratings, it is nevertheless possible that from time to time losses will result from counterparty credit risk in the future.

Kinder Morgan, Inc. Form 10-Q

The maximum potential exposure to credit losses on derivative contracts as of September 30, 2010 was (in millions):

	Asset position
Interest rate swap agreements	$	719.9
Energy commodity derivative contracts		110.9
Gross exposure		830.8
Netting agreement impact		(79.9	)
Net exposure	$	750.9

In conjunction with the purchase of exchange-traded derivative contracts or when the market value of our derivative contracts with specific counterparties exceeds established limits, we are required to provide collateral to our counterparties, which may include posting letters of credit or placing cash in margin accounts. As of September 30, 2010, KMP had no outstanding letters of credit supporting its hedging activities; however, as of December 31, 2009, KMP had outstanding letters of credit totaling $55.0 million in support of its hedging of energy commodity price risks associated with the sale of natural gas, natural gas liquids and crude oil.

Additionally, as of September 30, 2010, KMP’s counterparties associated with its energy commodity contract positions and over-the–counter swap agreements had margin deposits with KMP totaling $6.3 million, and we reported this amount within “Accrued other liabilities” in our accompanying consolidated balance sheet. As of December 31, 2009, KMP had cash margin deposits associated with its energy commodity contract positions and over-the-counter swap partners totaling $15.2 million, and we reported this amount as “Restricted deposits” in our accompanying consolidated balance sheet.

KMP also has agreements with certain counterparties to its derivative contracts that contain provisions requiring it to post additional collateral upon a decrease in its credit rating. Based on contractual provisions as of September 30, 2010, we estimate that if KMP’s credit rating was downgraded, KMP would have the following additional collateral obligations (in millions):

Credit ratings downgraded(a)	Incremental obligations		Cumulative obligations(b)
One notch to BBB-/Baa3	$	-	$	-