Edgar Filing: KINDER MORGAN, INC.

kmi10q3_2011.htm

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, 2011

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.)

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 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 o Accelerated filer o Non-accelerated filer þ (Do not check if a smaller reporting company) 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 October 31, 2011, the registrant had the following number of shares of common stock outstanding:

Class A common stock	596,102,672
Class B common stock	100,000,000
Class C common stock	2,462,927
Class P common stock	110,898,898

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, 2011 and 2010	3
	Consolidated Balance Sheets – September 30, 2011 and December 31, 2010	4
	Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2011 and 2010	5
	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	50
	General and Basis of Presentation	50
	Critical Accounting Policies and Estimates	56
	Results of Operations	57
	Financial Condition	74
	Recent Accounting Pronouncements	80
	Information Regarding Forward-Looking Statements	80

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	82

Item 4.	Controls and Procedures	82



	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	82

Item 1A.	Risk Factors	82

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	84

Item 3.	Defaults Upon Senior Securities	84

Item 4.	(Removed and Reserved)	84

Item 5.	Other Information	84

Item 6.	Exhibits	84

	Signature	85

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 September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Revenues
Natural gas sales	$	938.9		$	965.7		$	2,594.9		$	2,831.3
Services		780.1			758.7			2,317.6			2,248.9
Product sales and other		487.0			363.8			1,335.1			1,156.5
Total Revenues		2,206.0			2,088.2			6,247.6			6,236.7

Operating Costs, Expenses and Other
Gas purchases and other costs of sales		942.5			964.7			2,641.5			2,829.2
Operations and maintenance		411.9			330.2			1,201.1			1,103.9
Depreciation, depletion and amortization		287.8			261.7			807.6			813.7
General and administrative		109.1			308.2			399.2			528.7
Taxes, other than income taxes		39.0			41.9			141.4			128.1
Other expense (income)		0.2			0.4			(12.3	)		2.2
Total Operating Costs, Expenses and Other		1,790.5			1,907.1			5,178.5			5,405.8

Operating Income		415.5			181.1			1,069.1			830.9

Other Income (Expense)
Earnings (loss) from equity investments		71.0			57.2			214.7			(256.1	)
Amortization of excess cost of equity investments		(1.8	)		(1.4	)		(4.9	)		(4.3	)
Interest expense		(177.4	)		(173.9	)		(524.2	)		(493.8	)
Interest income		8.0			5.0			19.1			17.9
Loss on remeasurement of previously held equity interest in KinderHawk (Note 2)		(167.2	)		-			(167.2	)		-
Other, net		3.0			5.4			11.0			9.7
Total Other Income (Expense)		(264.4	)		(107.7	)		(451.5	)		(726.6	)

Income from Continuing Operations Before Income Taxes		151.1			73.4			617.6			104.3

Income Tax (Expense) Benefit		(66.5	)		(20.6	)		(250.2	)		29.1

Income from Continuing Operations		84.6			52.8			367.4			133.4

Loss from Discontinued Operations, Net of Tax		(0.4	)		(0.2	)		(0.5	)		(0.4	)

Net Income		84.2			52.6			366.9			133.0

Net Loss (Income) Attributable to Noncontrolling Interests		67.3			(42.0	)		71.7			(237.3	)

Net Income (Loss) Attributable to Kinder Morgan, Inc.	$	151.5		$	10.6		$	438.6		$	(104.3	)

Basic Earnings Per Common Share
Class P Shares	$	0.21					$	0.52
Class A Shares	$	0.19					$	0.48
Basic Weighted Average Number of Shares Outstanding
Class P Shares		110.9						110.8
Class A Shares		596.1						596.2
Diluted Earnings Per Common Share
Class P Shares	$	0.21					$	0.52
Class A Shares	$	0.19					$	0.48
Diluted Weighted Average Number of Shares
Class P Shares		707.9						707.4
Class A Shares		596.1						596.2
Dividends Per Common Share Declared	$	0.30					$	0.74

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

KINDER MORGAN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Millions, Except Share and Per Share Amounts)

	September 30, 2011			December 31, 2010
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents – KMI	$	2.9		$	373.3
Cash and cash equivalents – KMP		271.0			129.1
Restricted deposits		41.8			90.5
Accounts, notes and interest receivable, net		830.2			971.4
Inventories		101.3			92.0
Gas in underground storage		27.2			2.2
Fair value of derivative contracts		135.2			24.0
Other current assets		68.6			104.4
Total current assets		1,478.2			1,786.9

Property, plant and equipment, net		17,715.9			17,070.7
Investments		3,668.7			4,291.1
Notes receivable		164.0			115.0
Goodwill		4,940.6			4,830.9
Other intangibles, net		1,201.3			339.2
Fair value of derivative contracts		771.5			301.7
Deferred charges and other assets		217.2			172.6
Total Assets	$	30,157.4		$	28,908.1

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of debt – KMI	$	1,216.6		$	750.9
Current portion of debt – KMP		1,844.4			1,262.4
Cash book overdrafts		41.9			34.3
Accounts payable		640.4			647.5
Accrued interest		126.8			310.4
Accrued taxes		102.0			44.7
Deferred revenues		92.1			96.7
Fair value of derivative contracts		71.9			281.5
Accrued other current liabilities		258.9			215.7
Total current liabilities		4,395.0			3,644.1

Long-term liabilities and deferred credits
Long-term debt
Outstanding – KMI		1,942.5			2,779.2
Outstanding – KMP		10,662.2			10,277.4
Preferred interest in general partner of KMP		100.0			100.0
Value of interest rate swaps		1,146.8			656.3
Total long-term debt		13,851.5			13,812.9
Deferred income taxes		2,226.3			2,092.7
Fair value of derivative contracts		21.4			172.2
Other long-term liabilities and deferred credits		915.7			647.2
Total long-term liabilities and deferred credits		17,014.9			16,725.0

Total Liabilities		21,409.9			20,369.1

Commitments and contingencies (Notes 4 and 11)
Stockholders’ Equity
Class P shares, $0.01 par value, 2,000,000,000 shares authorized, 110,898,898 shares issued and outstanding		1.1			-
Class A shares, $0.01 par value, 707,000,000 shares authorized, 596,102,672 shares issued and outstanding		6.0			-
Class B shares, $0.01 par value, 100,000,000 shares authorized, 100,000,000 shares issued and outstanding		1.0			-
Class C shares, $0.01 par value, 2,462,927 shares authorized, 2,462,927 shares issued and outstanding		-			-
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none outstanding		-			-
Additional paid-in capital		3,423.3			-
Retained earnings		56.5			-
Members’ capital (Note 5)		-			3,575.6
Accumulated other comprehensive loss		(32.4	)		(136.5	)
Total Kinder Morgan, Inc.’s stockholders’ equity		3,455.5			3,439.1
Noncontrolling interests		5,292.0			5,099.9
Total Stockholders’ Equity		8,747.5			8,539.0
Total Liabilities and Stockholders’ Equity	$	30,157.4		$	28,908.1

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

KINDER MORGAN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Millions)

(Unaudited)

	Nine Months Ended September 30,
	2011			2010
Cash Flows From Operating Activities
Net Income	$	366.9		$	133.0
Adjustments to reconcile net income to net cash provided by operating activities
Loss from discontinued operations, net of tax		0.5			0.4
Depreciation, depletion and amortization		807.6			813.7
Deferred income taxes		77.6			(204.7	)
Amortization of excess cost of equity investments		4.9			4.3
Loss on remeasurement of previously held equity interest in KinderHawk (Note 2)		167.2			-
(Earnings) loss from equity investments		(214.7	)		256.1
Distributions from equity investments		200.9			154.9
Proceeds from termination of interest rate swap agreements		73.0			-
Pension contributions in excess of expense		(9.7	)		(8.5	)
Changes in components of working capital
Accounts receivable		34.9			105.1
Inventories		9.3			(12.8	)
Other current assets		(1.8	)		23.1
Accounts payable		(7.3	)		(20.5	)
Accrued interest		(183.7	)		(165.6	)
Accrued taxes		36.4			57.7
Accrued liabilities		(1.5	)		(44.8	)
Going Private transaction litigation reserve adjustment		-			200.0
Rate reparations, refunds and other litigation reserve adjustments		160.4			(48.3	)
Other, net		67.6			(24.0	)
Cash Flows Provided By Continuing Operations		1,588.5			1,219.1
Net Cash Flows Used in Discontinued Operations		(0.8	)		(0.6	)
Net Cash Provided by Operating Activities		1,587.7			1,218.5

Cash Flows From Investing Activities
Acquisitions of investments		(901.0	)		(929.7	)
Acquisitions of assets		(44.0	)		(243.1	)
Capital expenditures		(845.0	)		(726.8	)
Deconsolidation of variable interest entity		-			(17.5	)
Sale or casualty of property, plant and equipment, and other net assets net of removal costs		29.0			21.5
Net proceeds from margin and restricted deposits		55.1			19.2
Contributions to investments		(297.0	)		(210.3	)
Distributions from equity investments in excess of cumulative earnings		185.0			187.9
Other, net		3.0			-
Net Cash Used in Investing Activities		(1,814.9	)		(1,898.8	)

Cash Flows From Financing Activities
Issuance of debt – KMI		1,749.6			994.2
Payment of debt – KMI		(2,124.6	)		(873.0	)
Issuance of debt – KMP		6,356.4			5,704.2
Payment of debt – KMP		(5,538.1	)		(4,601.0	)
Repayments from related party		29.3			1.3
Debt issue costs		(19.4	)		(24.4	)
Increase (decrease) in cash book overdrafts		7.6			(5.2	)
Cash dividends		(557.3	)		(500.0	)
Contributions from noncontrolling interests		816.9			636.6
Distributions to noncontrolling interests		(706.6	)		(622.4	)
Other, net		(0.3	)		-
Net Cash Provided by Financing Activities		13.5			710.3

Effect of Exchange Rate Changes on Cash and Cash Equivalents		(14.8	)		1.0

Net (decrease) increase in Cash and Cash Equivalents		(228.5	)		31.0
Cash and Cash Equivalents, beginning of period		502.4			165.6
Cash and Cash Equivalents, end of period	$	273.9		$	196.6

Noncash Investing and Financing Activities
Assets acquired by the assumption or incurrence of liabilities	$	179.5		$	12.5
Assets acquired by contributions from noncontrolling interests	$	23.7		$	81.7
Contribution of net assets to investments	$	7.9		$	-
Sale of investment ownership interest in exchange for note	$	4.1		$	-
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest (net of capitalized interest)	$	668.6		$	607.1
Net cash paid during the period for income taxes	$	177.3		$	143.2

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

On February 10, 2011, we converted from a Delaware limited liability company to a Delaware corporation and we changed our name from Kinder Morgan Holdco LLC to Kinder Morgan, Inc. Our subsidiary formerly known as Kinder Morgan, Inc. was renamed Kinder Morgan Kansas, Inc., and is referred to in these financial statements for all periods as Kinder Morgan Kansas, Inc. On February 16, 2011, we completed the initial public offering of our common stock (the offering). All of the common stock that was sold in the offering was sold by our existing investors consisting of funds advised by or affiliated with Goldman Sachs & Co., Highstar Capital LP, The Carlyle Group and Riverstone Holdings LLC. No members of management sold shares in the offering and we did not receive any proceeds from the offering. Our common stock trades on the New York Stock Exchange under the symbol “KMI.” For additional information on the offering, see Note 5 “Stockholders’ Equity—Initial Public Offering.”

On October 16, 2011, KMI and El Paso Corporation announced a definitive agreement whereby KMI will acquire all of the outstanding shares of El Paso in a transaction that will create an enterprise valued at approximately $94 billion (sum of market equity value and debt outstanding) which owns and/or operates 80,000 miles of pipelines. The total purchase price, including the assumption of debt outstanding at both El Paso Corporation and El Paso Pipeline Partners, L.P., is approximately $38 billion. See Note 2—“Investments, Acquisitions and Divestitures—Subsequent Events.”

We own the general partner and approximately 11% of the limited partner interests of Kinder Morgan Energy Partners, L.P., referred to in this report as “KMP”. KMP is a publicly traded pipeline limited partnership whose limited partner units are traded on the New York Stock Exchange under the ticker symbol “KMP.” Primarily through KMP, we operate or own an interest in approximately 37,000 miles of pipelines and approximately 180 terminals. These pipelines transport natural gas, refined petroleum products, crude oil, carbon dioxide and other products, and these terminals store petroleum products and chemicals, and handle such products as ethanol, coal, petroleum coke and steel. Unless the context requires otherwise, references to “we,” “us,” “our,” “KMI,” or the “Company” are intended to mean Kinder Morgan, Inc. and our consolidated subsidiaries including Kinder Morgan Kansas, Inc. and KMP.

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 and KMP’s partnership agreement, 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.

On May 30, 2007, we acquired Kinder Morgan Kansas, Inc. through a wholly owned subsidiary. See Note 2 of our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2010 (2010 Form 10-K). 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 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 2010 Form 10-K.

Kinder Morgan, Inc. Form 10-Q

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 and KMR. 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.

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.

Earnings per Share

Earnings per share is calculated using the two-class method. Earnings are allocated to each class of common stock based on the amount of dividends declared 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 shares in earnings or excess distributions over earnings. For the investor retained stock the allocation of undistributed earnings or excess distributions over earnings is in direct proportion to the maximum number of Class P shares into which it can convert.

For the Class P diluted per share computations, total net income attributable to Kinder Morgan, Inc. is divided by the adjusted weighted average shares outstanding during the period, including all dilutive potential shares. This includes the Class P shares into which the investor retained stock is convertible. Investor retained stock is convertible into 596,102,672 Class P shares. Thus, the number of Class P shares on a fully-converted basis is the same before and after any conversion of our investor retained stock. Each time one Class P share is issued upon conversion of investor retained stock, the number of Class P shares goes up by one, and the number of Class P shares into which the investor retained stock is convertible goes down by one. Accordingly, there is 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 does not impact the number of Class P shares on a fully-converted basis. As no securities are convertible into Class A shares, the basic and diluted earnings per share computations for Class A shares are the same.

Kinder Morgan, Inc. Form 10-Q

The following tables set forth the computation of basic and diluted earnings per share for the three months ended September 30, 2011 and the period February 11, 2011 (the date of our initial public offering) through September 30, 2011 (in millions, except per share amounts):

	Three Months Ended September 30, 2011
	Net Income Available to Shareholders
	Class P			Class A			Participating Securities (a)		Total
Net income attributable to KMI for the three months ended September 30, 2011									$	151.5
Dividends declared during period	$	33.3		$	166.3		$	12.9		(212.5	)
Excess distributions over earnings		(9.6	)		(51.4	)		-	$	(61.0	)

Total net income attributable to shareholders	$	23.7		$	114.9		$	12.9	$	151.5

Basic Earnings Per Share

Basic Weighted Average Number of Shares Outstanding		110.9			596.1			N/A

Basic Earnings per Common Share(b)	$	0.21		$	0.19			N/A

Diluted Earnings Per Share

Total net income attributable to shareholders and assumed conversions(c)	$	151.5		$	114.9			N/A

Diluted Weighted Average Number of Shares		707.9			596.1			N/A

Diluted Earnings per Common Share(b)	$	0.21		$	0.19			N/A

	February 11, 2011 through September 30, 2011
	Net Income Available to Shareholders
	Class P		Class A		Participating Securities (a)		Total
Net income attributable to KMI for the nine months ended September 30, 2011							$	438.6
Less: net income attributable to KMI members prior to incorporation								(70.6	)
Net income attributable to shareholders								368.0
Dividends declared during period	$	48.8	$	237.3	$	25.4		(311.5	)
Remaining undistributed earnings		8.9		47.6		-	$	56.5

Total net income attributable to shareholders	$	57.7	$	284.9	$	25.4	$	368.0

Basic Earnings Per Share

Basic Weighted Average Number of Shares Outstanding(d)		110.8		596.2		N/A

Basic Earnings per Common Share(b)	$	0.52	$	0.48		N/A

Diluted Earnings per Share

Total net Income attributable to shareholders and assumed conversions(c)	$	368.0	$	284.9		N/A

Diluted Weighted Average Number of Shares(d)		707.4		596.2		N/A

Diluted Earnings per Common Share(b)	$	0.52	$	0.48		N/A

____________

(a)	Participating securities include Class B shares, Class C shares, and 1,193,891 unvested restricted stock awards issued to non-senior management employees that contain rights to dividends.

(b)	The Class A shares earnings per share as compared to the Class P shares earnings per share has been 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 are referred to as “investor retained stock,” and are convertible into a fixed number of Class P shares. In the aggregate, our investor retained stock is 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 will not increase our total fully-converted shares outstanding, impact the aggregate dividends we pay or the dividends we pay 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 is divided by the adjusted weighted average shares outstanding during the period, including all dilutive potential shares.
(d)	The weighted average shares outstanding calculation is based on the actual days in which the shares were outstanding for the period from February 11, 2011 to September 30, 2011.

2. Investments, Acquisitions and Divestitures

Investments

NGPL PipeCo LLC Investment Impairment Charge

On November 19, 2009, the Federal Energy Regulatory Commission (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.” NGPL reached a settlement in principal with the FERC on April 22, 2010. On June 11, 2010, NGPL 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 provided that NGPL reduce its fuel and gas lost and unaccounted for, (GL&U), retention factors as of July 1, 2010. The settlement further provided 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 result of our analysis showed that the fair value of our investment in NGPL PipeCo LLC was less than our carrying value. For the nine months ended September 30, 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

Watco Companies, LLC

On January 3, 2011, KMP purchased 50,000 Class A preferred shares of Watco Companies, LLC for $50.0 million in cash in a private transaction. In connection with its purchase of these preferred shares, the most senior equity security of Watco, KMP entered into a limited liability company agreement with Watco that provides KMP certain priority and participating cash distribution and liquidation rights. Pursuant to the agreement, KMP receives priority, cumulative cash distributions from the preferred shares at a rate of 3.25% per quarter, and it participates partially in additional profit distributions at a rate equal to 0.5%. The preferred shares have no conversion features and hold no voting powers, but do provide KMP certain approval rights, including the right to appoint one of the members to Watco’s Board of Managers. As of December 31, 2010, KMP placed its $50.0 million investment in a cash escrow account and this amount was included within “Restricted deposits” on our accompanying consolidated balance sheet. As of September 30, 2011, KMP’s net equity investment in Watco totaled $51.6 million and is included within “Investments” on our accompanying consolidated balance sheet. We account for this investment under the equity method of accounting, and we include it in the Terminals–KMP business segment.

Watco Companies, LLC is a privately owned, Pittsburg, Kansas based transportation company that was formed in

Kinder Morgan, Inc. Form 10-Q

1983. It is the largest privately held short line railroad company in the United States, operating 22 short line railroads on approximately 3,500 miles of leased and owned track. It also operates transload/intermodal and mechanical services divisions. KMP’s investment provides capital to Watco for further expansion of specific projects, complements KMP’s existing terminal network, provides its customers more transportation services for many of the commodities that it currently handles, and offers it the opportunity to share in additional growth opportunities through new projects.

Deeprock North, LLC

On February 17, 2011, Deeprock Energy Resources, LLC, Mecuria Energy Trading, Inc., and KMP’s subsidiary Kinder Morgan Cushing LLC entered into formal agreements for a crude oil storage joint venture located in Cushing, Oklahoma. On this date, KMP contributed $15.9 million for a 50% ownership interest in an existing crude oil tank farm that has storage capacity of one million barrels, and it expects to invest an additional $8.8 million for the construction of three new storage tanks that will provide incremental storage capacity of 750,000 barrels. The new tanks are expected to be placed in service during the fourth quarter of 2011. The joint venture is named Deeprock North, LLC. Deeprock Energy owns a 12.02% member interest in Deeprock North, LLC and will remain construction manager and operator of the joint venture. Mecuria owns the remaining 37.98% member interest and will remain the anchor tenant for the joint venture’s crude oil capacity for the next five years with an option to extend. In addition, KMP entered into a development agreement with Deeprock Energy that gives it an option to participate in future expansions on Deeprock’s remaining 254 acres of undeveloped land.

We account for this investment under the equity method of accounting, and this investment and KMP’s pro rata share of Deeprock North LLC’s operating results are included as part of the Terminals–KMP business segment. As of September 30, 2011, KMP’s net equity investment in Deeprock North, LLC totaled $22.3 million and is included within “Investments” on our accompanying consolidated balance sheet.

TGS Development, L.P. Terminal Acquisition

On June 10, 2011, KMP acquired a newly constructed petroleum coke terminal located in Port Arthur, Texas from TGS Development, L.P. (TGSD) for an aggregate consideration of $74.1 million, consisting of $42.9 million in cash, $23.7 million in common units, and an obligation to pay additional consideration of $7.5 million. KMP estimates the remaining $7.5 million obligation will be paid to TGSD approximately one year from the closing (in May or June 2012), and will be settled in a combination of cash and common units, depending on TGSD’s election.

All of the acquired assets are located in Port Arthur, Texas, and include long-term contracts to provide petroleum coke handling and cutting services to improve the refining of heavy crude oil at Total Petrochemicals USA Inc.’s recently expanded Port Arthur refinery. The refinery is expected to produce more than one million tons of petroleum coke annually. Based on the measurement of fair values for all of the identifiable tangible and intangible assets acquired, we assigned $42.6 million of the combined purchase price to “Property, plant and equipment, net,” and the remaining $31.5 million to “Other intangibles, net,” representing the combined fair values of two separate intangible customer contracts with Total. The acquisition complements KMP’s existing Gulf Coast bulk terminal facilities and expands its pre-existing petroleum coke handling operations. All of the acquired assets are included as part of the Terminals-KMP business segment.

KinderHawk Field Services LLC and EagleHawk Field Services LLC

Effective July 1, 2011, KMP acquired from Petrohawk Energy Corporation both the remaining 50% equity ownership interest in KinderHawk Field Services LLC that it did not already own and a 25% equity ownership interest in Petrohawk’s natural gas gathering and treating business located in the Eagle Ford shale formation in South Texas for an aggregate consideration of $912.1 million, consisting of $835.1 million in cash and assumed debt of $77.0 million (representing 50% of KinderHawk’s borrowings under its bank credit facility as of July 1, 2011). KMP then repaid the outstanding $154.0 million of borrowings and following this repayment, KinderHawk had no outstanding debt.

Following KMP’s acquisition of the remaining ownership interest on July 1, 2011, KMP changed its method of accounting from the equity method to full consolidation, and due to the fact that KMP acquired a controlling financial interest in KinderHawk, KMP remeasured its previous 50% equity investment in KinderHawk to its fair value. KMP recognized a $167.2 million non-cash loss as a result of this remeasurement. The loss amount represents the excess of the carrying value of the investment ($910.2 million as of July 1, 2011) over its fair value ($743.0 million), and we reported this loss separately within the “Other Income (Expense)” section in our accompanying consolidated statements of income for the three and nine months ended September 30, 2011.

Kinder Morgan, Inc. Form 10-Q

KMP then measured the fair values of the acquired identifiable tangible and intangible assets and the assumed liabilities on the acquisition date, and assigned the following amounts:

▪

$35.5 million to current assets, primarily consisting of trade receivables and materials and supplies inventory;

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$641.6 million to property, plant and equipment;

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$93.4 million to KMP’s 25% investment in EagleHawk;

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$883.2 million to a long-term intangible customer contract, representing the contract value of natural gas gathering services to be performed for Petrohawk over an approximate 20-year period; less

▪

$92.8 million assigned to assumed liabilities, not including $77.0 million for the 50% of KinderHawk’s borrowings under its bank credit facility that KMP was previously responsible for.

Based on the excess of (i) the consideration we transferred ($912.1 million) and the fair value of our previously held interest ($743.0 million); over (ii) the combined fair value of net assets acquired ($1,560.9 million), we recognized $94.2 million of “Goodwill.” This goodwill intangible asset represents the future economic benefits expected to be derived from this strategic 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 operations, and furthermore, we expect this entire amount of goodwill to be deductible for tax purposes.

KinderHawk Field Services LLC owns and operates the largest natural gas gathering and midstream business in the Haynesville shale formation located in northwest Louisiana, consisting of more than 400 miles of pipeline with over 2.0 billion cubic feet per day of pipeline capacity. Currently, it gathers approximately 1.0 billion cubic feet of natural gas per day. KMP operates KinderHawk Field Services LLC, and acquired its original 50% ownership interest in KinderHawk Field Services LLC from Petrohawk on May 21, 2010.

The Eagle Ford natural gas gathering joint venture is named EagleHawk Field Services LLC, and we account for the 25% investment under the equity method of accounting. Petrohawk operates EagleHawk Field Services LLC and owns the remaining 75% ownership interest. The joint venture owns two midstream gathering systems in and around Petrohawk’s Hawkville and Black Hawk areas of Eagle Ford and combined, the joint venture’s assets will consist of more than 280 miles of gas gathering pipelines and approximately 140 miles of condensate lines to be in service by the end of 2011. It also has a life of lease dedication of Petrohawk’s Eagle Ford reserves that provides Petrohawk and other Eagle Ford producers with gas and condensate gathering, treating and condensate stabilization services.

The acquisition of the remaining ownership interest in KinderHawk and the equity ownership interest in EagleHawk complemented and expanded KMP’s existing natural gas gathering operations, and all of the acquired assets are included in the Natural Gas Pipelines-KMP business segment. Additionally, on August 25, 2011, mining and oil company BHP Billiton completed its previously announced acquisition of Petrohawk Energy Corporation through a short-form merger under Delaware law. The merger was closed with Petrohawk being the surviving corporation as a wholly owned subsidiary of BHP Billiton. The acquisition will not affect the terms of KMP’s contracts with Petrohawk.

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, 2010 as if they had occurred as of January 1, 2010 is not presented because it would not be materially different from the information presented in our accompanying consolidated statements of income.

Divestitures

Megafleet Towing Co., Inc. Assets

On February 9, 2011, KMP sold a marine vessel to Kirby Inland Marine, L.P., and additionally, KMP and Kirby formed a joint venture named Greens Bayou Fleeting, LLC. Pursuant to the joint venture agreement, KMP sold its ownership interest in the boat fleeting business it acquired from Megafleet Towing Co., Inc. in April 2009 to the joint venture for $4.1 million in cash and a 49% ownership interest in the joint venture. Kirby then made cash contributions to the joint venture in exchange for the remaining 51% ownership interest. Related to the above transactions, we recorded a loss of $5.5 million ($4.1 million after tax) in the fourth quarter of 2010 to write down the carrying value of the net assets

Kinder Morgan, Inc. Form 10-Q

to be sold to their estimated fair values as of December 31, 2010.

In the first quarter of 2011, after final reconciliation and measurement of all of the net assets sold, we recognized a combined $2.2 million increase in income from the sale of these net assets, primarily consisting of a $1.9 million reduction in income tax expense, which is included within the caption “Income Tax (Expense) Benefit” in the accompanying consolidated statement of income for the nine months ended September 30, 2011. Additionally, the sale of KMP’s ownership interest resulted in a $10.6 million non-cash reduction in goodwill (see Note 3), and was a transaction with a related party (see Note 9). Information about KMP’s acquisition of assets from Megafleet Towing Co., Inc. is described more fully in Note 3 to our consolidated financial statements included in our 2010 Form 10-K.

River Consulting, LLC and Devco USA L.L.C.

Effective April 1, 2011, KMP sold 51% ownership interests in two separate wholly-owned subsidiaries to two separate buyers, for an aggregate consideration of $8.1 million, consisting of a $4.1 million note receivable, $1.0 million in cash and a $3.0 million receivable for the settlement of working capital items. Following the sale, KMP continues to own 49% membership interests in both River Consulting LLC, a company engaged in the business of providing engineering, consulting and management services, and Devco USA, L.L.C., a company engaged in the business of processing, handling and marketing sulfur, and selling related pouring equipment. At the time of the sale, the combined carrying value of the net assets (and members’ capital on a 100% basis) of both entities totaled approximately $8.8 million and consisted mostly of technology-based assets and trade receivables. We now account for these retained investments under the equity method of accounting.

In the second quarter of 2011, we recognized a $3.6 million pre-tax gain from the sale of these ownership interests (including a $2.1 million gain related to the remeasurement of the retained investment to fair value) and included this gain within the caption “Other, net” in our accompanying consolidated statement of income for the nine months ended September 30, 2011. We also recognized a $1.4 million increase in income tax expense related to this gain, which is included within the caption “Income Tax (Expense) Benefit” in our accompanying consolidated statement of income for the nine months ended September 30, 2011.

Arrow Terminals B.V.

Effective August 31, 2011, KMP sold the outstanding share capital of its wholly-owned subsidiary Arrow Terminals B.V. to Pacorini Metals Europe B.V. for an aggregate consideration of $13.3 million in cash. Arrow Terminals B.V. owns and operates a bulk terminal facility located in the seaport area of Vlissingen, Netherlands. The terminal is primarily engaged in the business of storing, handling and distributing bulk ferro alloys and general commodities. Including the removal of the cumulative translation adjustments balance and the estimated costs to sell, we recognized a $1.3 million pre-tax gain from the sale of Arrow Terminals B.V. and included this gain within the caption “Other expense (income)” in our accompanying consolidated statements of income for the three and nine months ended September 30, 2011.

Subsequent Events

KMI’s Acquisition of El Paso Corporation

On October 16, 2011, we and El Paso Corporation (NYSE: EP) announced a definitive agreement whereby we will acquire all of the outstanding shares of El Paso Corporation. EP owns North America’s largest interstate natural gas pipeline system, one of North America’s largest independent exploration and production companies and an emerging midstream business. EP also owns a 42 percent limited partner interest and the 2 percent general partner interest in El Paso Pipeline Partners, L.P.( NYSE:EPB). The combined enterprise, including the associated master limited partnerships, KMP and EPB, will represent the largest natural gas pipeline network in the United States, the largest independent transporter of petroleum products in the United States, the largest transporter of CO2 in the United States, the second largest oil producer in Texas and the largest independent terminal owner/operator in the United States.

The total purchase price, including the assumption of debt outstanding at EP and the debt outstanding at El Paso Partners, L.P., is expected to be approximately $38 billion. Under the terms of the transaction, the consideration to be received by the EP shareholders is valued at $26.87 per EP share based on KMI’s closing price as of October 14, 2011, representing a 47 percent premium to the 20-day average closing price of EP common shares and a 37 percent premium over the closing price of EP common shares on October 14, 2011. The offer is comprised of $14.65 in cash, 0.4187 KMI Class P shares (valued at $11.26 per EP share) and 0.640 KMI warrants (valued at $0.96 per EP share) based on KMI’s closing price on October 14, 2011. The warrants will have an exercise price of $40 and a five-year term. EP shareholders

Kinder Morgan, Inc. Form 10-Q

will be able to elect, for each EP share held, either (i) $25.91 in cash, (ii) 0.9635 KMI Class P shares, or (iii) $14.65 in cash plus 0.4187 KMI Class P shares. All elections will be subject to proration and in all cases EP shareholders will receive 0.640 KMI warrants per share of EP common stock.

The transaction has been approved by each company’s board of directors. We have firm commitments for the full amount of cash required for the transaction from a syndicate of banks. Prior to closing, the transaction will require approval of both KMI and EP shareholders. The transaction is expected to close in the second quarter of 2012 and is subject to customary regulatory approvals.

KMP Acquisition of SouthTex Treaters

On October 24, 2011, KMP announced that it had signed a definitive purchase and sale agreement to acquire the natural gas treating assets of SouthTex Treaters for approximately $155.0 million in cash. SouthTex Treaters is a leading manufacturer, designer and fabricator of natural gas treating plants that are used to remove impurities (carbon dioxide and hydrogen sulfide) from natural gas before it is delivered into gathering systems and transmission pipelines to ensure that it meets pipeline quality specifications. The acquisition complements and expands KMP’s existing natural gas treating business, and all of the acquired operations will be included in the Natural Gas Pipelines - KMP business segment. The transaction is expected to close in the fourth quarter of 2011, and KMP will then also assign the total purchase price to assets acquired and liabilities assumed.

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, but combined with Products Pipelines–KMP for presentation in the table below); (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, 2011 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 8.0%. 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, 2011 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	$	1,488.6		$	626.5		$	9,241.3
Accumulated impairment losses.		(1,266.5	)		(2,090.2	)		-		(676.6	)		(377.1	)		(4,410.4	)
Balance as of December 31, 2010		850.0			1,397.8			1,521.7		812.0			249.4			4,830.9
Other adjustments(a)		11.4			15.3			6.2		7.1			-			40.0
Acquisitions(b)		-			94.2			-		-			-			94.2
Disposals(c)		-			-			-		(11.8	)		-			(11.8	)
Currency translation adjustments		-			-			-		-			(12.7	)		(12.7	)
Balance as of September 30, 2011	$	861.4		$	1,507.3		$	1,527.9	$	807.3		$	236.7		$	4,940.6

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(a)	Tax adjustments related to our investment in KMP.
(b)	2011 acquisition amount relates to KMP’s July 2011 purchase of the remaining 50% ownership interest in KinderHawk Field Services LLC that it did not already own (discussed further in Note 2).
(c)	2011 disposal amount consists of (i) $10.6 million related to the sale of KMP’s ownership interest in the boat fleeting business it acquired from Megafleet Towing Co., Inc. in April 2009; and (ii) $1.2 million related to the sale of KMP’s subsidiary Arrow Terminals B.V. (both discussed further in Note 2).

In addition, we identify any premium or excess cost we pay over our proportionate share of the underlying fair value

Kinder Morgan, Inc. Form 10-Q

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 2011.

As of September 30, 2011 and December 31, 2010, we reported $138.2 million and $283.0 million, respectively, in equity method goodwill within the caption “Investments” in our accompanying consolidated balance sheets. The decrease in our equity method goodwill since December 31, 2010 was due to KMP’s July 2011 purchase of the remaining 50% ownership interest in KinderHawk Field Services LLC that it did not already own (discussed further in Note 2). Effective July 1, 2011, KMP exchanged its status as an owner of an equity investment in KinderHawk for a full controlling financial interest, and we began accounting for the investment under the full consolidation method.

Other Intangibles

Excluding goodwill, our other intangible assets include customer relationships, contracts and agreements, lease value, and technology-based assets. 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, 2011			December 31, 2010
Customer relationships, contracts and agreements
Gross carrying amount	$	1,337.6		$	424.7
Accumulated amortization		(143.1	)		(99.9	)
Net carrying amount		1,194.5			324.8

Technology-based assets, lease value and other
Gross carrying amount		9.0			16.3
Accumulated amortization		(2.2	)		(1.9	)
Net carrying amount		6.8			14.4

Total other intangibles, net	$	1,201.3		$	339.2

The increase in the carrying amount of the customer relationships, contacts and agreements since December 31, 2010 was mainly due to the acquisition of (i) a natural gas gathering customer contract in July 2011, associated with KMP’s purchase of the remaining 50% ownership interest in KinderHawk Field Services LLC that it did not already own; and (ii) two separate petroleum coke handling customer contracts in June 2011, associated with KMP’s purchase of terminal assets from TGS Development, L.P. Both acquisitions are described further 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, 2011 and 2010, the amortization expense on our intangibles totaled $21.9 million and $12.5 million, respectively. For the nine months ended September 30, 2011 and 2010, the amortization expense on our intangibles totaled $43.5 million and $37.0 million, respectively. As of September 30, 2011, the weighted average amortization period for our intangible assets was approximately 17.9 years, and our estimated amortization expense for these assets for each of the next five fiscal years (2012 – 2016) is approximately $81.4 million, $77.5 million, $74.4 million, $71.6 million and $68.9 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 consolidated statements of income.

KMI’s debt balances included in our accompanying consolidated balance sheets (including both short-term and long-term amounts, the preferred interest in the general partner of KMP and purchase accounting adjustments on the carrying value of KMI’s debt and KMP’s debt, but excluding the value of interest rate swap agreements) as of September 30, 2011 and December 31, 2010 was $3,259.1 million and $3,630.1 million (including the $750.0 million of 5.35% Kinder Morgan Finance Company LLC’s senior notes paid on January 5, 2011), respectively. These balances included net unamortized purchase accounting adjustments, decreasing the debt balances by $34.2 million and $37.5 million at

Kinder Morgan, Inc. Form 10-Q

September 30, 2011 and December 31, 2010, respectively. The weighted average interest rate on all of KMI and its subsidiaries’ borrowings (both short-term and long-term but excluding KMP and its subsidiaries) was approximately 4.72% during the third quarter of 2011 and 4.75% during the third quarter of 2010. For the first nine months of 2011 and 2010, the weighted average rate on all of KMI’s borrowings was approximately 4.86% and 4.89%, respectively. KMP’s debt balances included in our accompanying consolidated balance sheets (including both short-term and long-term amounts and excluding the value of interest rate swap agreements) as of September 30, 2011 and December 31, 2010 was $12,506.6 million and $11,539.8 million, respectively. The weighted average interest rate on all of KMP’s and its subsidiaries’ borrowings (both short-term and long-term) was approximately 4.12% during the third quarter of 2011 and approximately 4.42% during the third quarter of 2010. For the first nine months of 2011 and 2010, the weighted average interest rate on all of KMP’s borrowings was approximately 4.28% and 4.34%, respectively.

As of September 30, 2011, KMI’s short-term debt was $1,216.6 million, which consisted of (i) $375.0 million of borrowings under KMI’s credit facility; (ii) $839.3 million remaining principal amount of KMI’s 6.50% senior notes due September 1, 2012 (including purchase accounting adjustments, KMI’s carrying amount of the notes was $840.0 million as of September 30, 2011); and (iii) a $1.6 million current portion of purchase accounting adjustments on our carrying value of KMP’s debt. As of September 30, 2011, KMP’s short-term debt balance included in our accompanying consolidated balance sheet was $1,844.4 million, which consisted of (i) $500.0 million in principal amount of KMP’s 9.00% senior notes due February 1, 2019, that may be repurchased by KMP at the option of the holder on February 1, 2012 pursuant to certain repurchase provisions contained in the bond indenture; (ii) $450.0 million in principal amount of KMP’s 7.125% senior notes due March 15, 2012 (including discount, KMP’s notes had a carrying amount of $449.9 million as of September 30, 2011); (iii) $500.0 million in principal amount of KMP’s 5.850% senior notes due September 15, 2012 (including discount, KMP’s notes had a carrying amount of $499.9 million as of September 30, 2011); (iv) $353.0 million of KMP’s commercial paper borrowings; (v) $23.7 million in principal amount of tax-exempt bonds that mature on April 1, 2024, that 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); (vi) a $9.7 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); (vii) a $7.5 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 (viii) a $0.7 million portion of 6.00% long-term note payable (KMP’s subsidiary Kinder Morgan Arrow Terminals, L.P. is the obligor on the note).

Credit Facilities

	September 30, 2011					December 31, 2010
	Short-term notes payable		Weighted average interest rate			Short-term notes payable		Weighted average interest rate
	(Dollars in millions)
KMI – Secured debt(a)	$	375.0		1.36	%	$	-		-
KMP – Commercial paper(b)	$	353.0		0.35	%	$	522.1		0.67	%

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(a)	The average short-term debt outstanding (and related weighted average interest rate) was $423.3 million (1.48%) and $386.3 million (1.55%) during the three and nine months ended September 30, 2011, respectively.
(b)	The average short-term debt outstanding (and related weighted average interest rate) was $699.4 million (0.37%) and $499.3 million (0.42%) during the three and nine months ended September 30, 2011, respectively.

As of September 30, 2011, the amount available for borrowing under the KMI $1.0 billion six-year senior secured credit facility was reduced by a combined amount of $423.7 million consisting of $375.0 million in borrowings under the credit facility and $48.7 million in four letters of credit required under provisions of our property and casualty, workers’ compensation and general liability insurance policies.

On July 1, 2011, KMP amended its $2.0 billion three-year, senior unsecured revolving credit facility to, among other things, (i) allow for borrowings of up to $2.2 billion; (ii) extend the maturity of the credit facility from June 23, 2013 to July 1, 2016; (iii) permit an amendment to allow for borrowings of up to $2.5 billion; and (iv) decrease the interest rates and commitment fees for borrowings under this facility. The 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 KMP’s general partnership purposes and as a backup for its commercial paper program. There were no borrowings under the credit facility as of September 30, 2011 or as of December 31, 2010.

Kinder Morgan, Inc. Form 10-Q

Additionally, as of September 30, 2011, the amount available for borrowing under KMP’s credit facility was reduced by a combined amount of $584.8 million, consisting of $353.0 million of commercial paper borrowings and $231.8 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 $87.9 million in three letters of credit that support tax-exempt bonds; (iii) a $16.2 million letter of credit that supports debt securities issued by the Express pipeline system; (iv) a $10.7 million letter of credit that supports KMP’s indemnification obligations on the Series D note borrowings of Cortez Capital Corporation; and (v) a combined $17.0 million in other letters of credit supporting other obligations of KMP and its subsidiaries.

KMP’s Commercial Paper Program

In July 2011, in conjunction with the amendment to its revolving credit facility, KMP increased its commercial paper program to provide for the issuance of up to $2.2 billion of commercial paper (up from $2.0 billion). KMP’s unsecured revolving credit facility supports its commercial paper program, and borrowings under KMP’s commercial paper program reduce the borrowings allowed under its credit facility. The borrowings under KMP’s commercial paper program were used principally to finance the acquisitions and capital expansions it made during 2011 and 2010. 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.

Long-term Debt

Kinder Morgan Finance Company LLC

In January 2011, Kinder Morgan Finance Company LLC, a wholly owned subsidiary of KMI, retired the principal amount of its 5.35% senior notes that matured on January 5, 2011 using proceeds from the December 2010 issuance of $750 million in principal amount of 6.00% senior notes due January 15, 2018.

KMP - Senior Notes

On March 4, 2011, KMP completed a public offering of $1.1 billion in principal amount of senior notes in two separate series, consisting of $500 million of 3.500% notes due March 1, 2016, and $600 million of 6.375% notes due March 1, 2041. KMP received proceeds from the issuance of the notes, after deducting the underwriting discount, of $1,092.7 million, and it used the proceeds to reduce the borrowings under its commercial paper program.

On March 15, 2011, KMP paid $700 million to retire the principal amount of its 6.75% senior notes that matured on that date. KMP used both cash on hand and borrowings under its commercial paper program to repay the maturing senior notes.

In addition, on August 17, 2011, KMP completed a public offering of $750 million in principal amount of senior notes in two separate series, consisting of $375 million of 4.150% notes due March 1, 2022, and $375 million of 5.625% notes due September 1, 2041. KMP received proceeds from the issuance of the notes, after deducting the underwriting discount, of $743.3 million, and it used the proceeds to reduce the borrowings under its commercial paper program.

KMP’s Subsidiary Debt

Kinder Morgan Operating L.P. “A” Debt

Effective January 1, 2007, KMP acquired the remaining approximately 50.2% interest in the Cochin pipeline system that it did not already own. As part of the purchase price consideration, two of KMP’s subsidiaries issued a long-term note payable to the seller having a fair value of $42.3 million. KMP valued the debt equal to the present value of amounts to be paid, determined using an annual interest rate of 5.40%. KMP’s subsidiaries Kinder Morgan Operating L.P. “A” and Kinder Morgan Canada Company are the obligors on the note, and the principal amount of the note, along with interest, is due in five annual installments of $10.0 million beginning March 31, 2008. KMP paid the fourth installment on March 31, 2011, and as of September 30, 2011, the net present value of the note (representing the outstanding balance included as debt on our accompanying consolidated balance sheet) was $9.7 million. As of December 31, 2010, the net present value of the note was $19.2 million.

Kinder Morgan Texas Pipeline, L.P. Debt

KMP’s subsidiary, Kinder Morgan Texas Pipeline, L.P. is the obligor on a series of unsecured senior notes, which

Kinder Morgan, Inc. Form 10-Q

were assumed on August 1, 2005 when it acquired a natural gas storage facility located in Liberty County, Texas from a third party. The notes have a fixed annual stated interest rate of 8.85%; however, KMP valued the debt equal to the present value of amounts to be paid determined using an approximate interest rate of 5.23%. The assumed principal amount, along with interest, is due in monthly installments of approximately $0.7 million, and the final payment is due January 2, 2014. During the first nine months of 2011, KMP paid a combined principal amount of $5.4 million, and as of September 30, 2011, Kinder Morgan Texas Pipeline L.P.’s outstanding balance under the senior notes was $18.2 million. Additionally, the unsecured senior notes may be prepaid at any time in amounts of at least $1.0 million and at a price equal to the higher of par value or the present value of the remaining scheduled payments of principal and interest on the portion being prepaid. As of December 31, 2010, the outstanding balance under the notes was $23.6 million.

Kinder Morgan Arrow Terminals, L.P. Debt

On April 4, 2011, KMP’s subsidiary Kinder Morgan Arrow Terminals, L.P. acquired a parcel of land and a terminal warehouse located in Industry, Pennsylvania from a third party for an aggregate consideration of $3.3 million, consisting of $1.2 million in cash and a $2.1 million promissory note payable. The note principal is payable in three annual payments beginning in March 2012. The note bears interest at 6% per annum, and accrued interest on the unpaid principal amount is due and payable on the due date of each principal installment.

KinderHawk Field Services LLC Credit Facility

On July 1, 2011, immediately following its acquisition of KinderHawk Field Services LLC (discussed in Note 2), KMP repaid the outstanding $154.0 million of borrowings under KinderHawk’s revolving bank credit facility and following this repayment, KinderHawk had no outstanding debt. The revolving bank credit facility was terminated at the time of such repayment.

Interest Rate Swaps

Information on interest rate swaps is contained in Note 6 “Risk Management¾Interest Rate Risk Management.”

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. As of September 30, 2011, KMP’s contingent debt obligations, as well as its obligations with respect to related letters of credit, consisted of the following two items:

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an aggregate $80.7 million for KMP’s contingent share (50%) of Cortez Pipeline Company’s debt obligations, consisting of (i) $70.0 million for its contingent share of outstanding borrowings under Cortez’s debt facilities (described below); and (ii) $10.7 million for a letter of credit issued on its behalf to secure its indemnification obligations to Shell for 50% of the $21.4 million in principal amount of Cortez’s Series D notes outstanding as of that date. Cortez Pipeline Company is a Texas general partnership that owns and operates a common carrier carbon dioxide pipeline system.

KMP is severally liable for its percentage ownership share (50%) of Cortez’s debt, and as of September 30, 2011, Cortez’s debt facilities consisted of (i) $21.4 million aggregate principal amount of Series D notes due May 15, 2013 (interest on the Series D notes is paid annually and based on a fixed interest rate of 7.14% per annum); (ii) $100.0 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) $18.5 million of outstanding borrowings under a $40.0 million committed revolving bank credit facility that is also due December 11, 2012. Accordingly, as of September 30, 2011, KMP’s contingent share of Cortez’s debt was $70.0 million (50% of total borrowings).

With respect to the Series D notes, Shell Oil Company shares KMP’s several guaranty obligations jointly and severally; however, KMP is obligated to indemnify Shell for the liabilities it incurs in connection with such guaranty. Accordingly, as of September 30, 2011, KMP has a letter of credit in the amount of $10.7 million issued by JP Morgan Chase Bank, in order to secure its indemnification obligations to Shell for 50% of the $21.4 million in principal amount of Series D notes outstanding as of that date.

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

Kinder Morgan, Inc. Form 10-Q

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; and

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an $18.3 million letter of credit posted 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, 2011, this letter of credit had a face amount of $18.3 million.

On February 25, 2011, Midcontinent Express Pipeline LLC entered into a three-year $75.0 million unsecured revolving bank credit facility that is due February 25, 2014. This credit facility replaced Midcontinent Express’ previous $175.4 million credit facility that was terminated on February 28, 2011, and on this same date, each of its two member owners, including KMP, were released from their respective debt obligations under the previous guaranty agreements. Accordingly, KMP no longer has a contingent debt obligation with respect to Midcontinent Express Pipeline LLC.

On July 28, 2011, Fayetteville Express Pipeline LLC entered into (i) a new unsecured $600.0 million term loan that is due on July 28, 2012, with the ability to extend one additional year and (ii) a $50.0 million unsecured revolving bank credit facility that is due on July 28, 2015. These debt instruments replaced Fayetteville Express’ $1.1 billion credit facility that was terminated on July 28, 2011, and on this same date, each of its two member owners, including KMP, were released from their respective debt obligations under the previous guaranty agreements. Accordingly, KMP no longer has a contingent debt obligation with respect to Fayetteville Express Pipeline LLC.

For additional information regarding KMI’s and KMP’s debt facilities and contingent debt agreements, see Note 8 “Debt” and Note 12 “Commitments and Contingent Liabilities” to our consolidated financial statements included in our 2010 Form 10-K.

Kinder Morgan G.P., Inc. Preferred Shares

On October 16, 2011, 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, 2011 to shareholders of record as of October 31, 2011. On August 18, 2011, Kinder Morgan G.P., Inc.’s board of directors paid a quarterly cash distribution on its Series A Fixed-to-Floating Rate Term Cumulative Preferred Stock of $20.825 per share to shareholders of record as of August 1, 2011. On May 18, 2011, Kinder Morgan G.P., Inc. paid a quarterly cash distribution on its Series A Fixed-to-Floating Rate Term Cumulative Preferred Stock of $20.825 per share to shareholders of record as of April 29, 2011. On February 18, 2011, Kinder Morgan G.P., Inc. paid a quarterly cash dividend on its Series A Fixed-to-Floating Rate Term Cumulative Preferred Stock of $20.825 per share to shareholders of record as of January 31, 2011.

5. Stockholders’ Equity

Common Equity

As of September 30, 2011, our stockholders’ equity included the following outstanding shares:

	September 30, 2011
Class P shares(a)	110,898,898
Class A shares	596,102,672
Class B shares	100,000,000
Class C shares	2,462,927

____________

(a)	Includes 1,570 common shares resulting from restricted common shares issued to an independent director that vested in the third quarter of 2011.

For accounting purposes, both our Class P and our Class A shares are considered common stock, and our Class B and Class C shares are considered participating securities.

Kinder Morgan, Inc. Form 10-Q

Initial Public Offering

In the following discussion, the Investors refer to: (i) Richard D. Kinder, our Chairman and Chief Executive Officer; (ii) investment funds advised by, or affiliated with, Goldman, Sachs & Co., Highstar Capital LP, The Carlyle Group and Riverstone Holdings LLC, which we refer to collectively as the ‘‘Sponsor Investors;’’ (iii) Fayez Sarofim, one of our directors, and investment entities affiliated with him, and an investment entity affiliated with Michael C. Morgan, another of our directors, and William V. Morgan, one of our founders; and (iv) a number of other members of our management.

On February 16, 2011, we completed an initial public offering of our common stock (the offering). In connection with the offering, we converted from a Delaware limited liability company to a Delaware corporation. Our outstanding Class A units, Class B units and Class A-1 units were converted to Class A shares, Class B shares and Class C shares, respectively. Upon this conversion, the Sponsor Investors then converted some of their Class A shares on a one-for-one basis into our common stock sold in the offering. No shares were sold by members of Kinder Morgan management in the offering. All of the common stock that was sold in the offering was sold by existing investors, consisting of investment funds advised by, or affiliated with, Goldman, Sachs & Co., Highstar Capital LP, The Carlyle Group and Riverstone Holdings LLC, and we did not receive any proceeds from the offering. The class of common stock sold in the offering was our Class P common stock, which is sometimes referred to herein as our “common stock.” Our then existing investors prior to the initial public offering hold our Class A, Class B and Class C common stock, which is sometimes collectively referred to herein as our “investor retained stock.”

In the offering, the selling stockholders sold 109,786,590 shares, or approximately 15.5% of our outstanding shares. Upon the closing of the offering, our investor retained stock was convertible into a fixed aggregate of 597,213,410 shares of common stock, which represented 84.5% of our outstanding shares of common stock on a fully-converted basis. The number of shares of common stock into which Class A shares, Class B shares and Class C shares will convert will be determined in accordance with our certificate of incorporation. The conversion of investor retained stock into shares of our common stock will not increase our total fully converted shares outstanding. Initially, our Class A shares will be convertible into shares of common stock on a one-for-one basis and our Class B shares and Class C shares will not be convertible into any shares of our common stock. Any conversion of Class B shares and Class C shares will decrease on a share for share basis the number of shares of our common stock into which our Class A shares would be able to convert. The terms of the Class A shares, Class B shares and Class C shares are intended to preserve substantially the same relative rights to share in the value of Kinder Morgan, Inc.’s equity that the Class A units, Class B units and Class A-1 units, respectively, had with respect to Kinder Morgan Holdco LLC’s equity. Subsequent to the offering and through September 30, 2011, 1,110,738 Class A shares have converted to the same number of Class P shares.

Kinder Morgan, Inc. Dividends

On February 11, 2011, our Board of Directors declared and paid a dividend to our then existing investors of $245.8 million with respect to the period for which we were not public. This consisted of $205.0 million for the fourth quarter of 2010 and $104.8 million for the first 46 days of 2011, representing the portion of the first quarter of 2011 that we were not public, less a one time adjustment of $64.0 million in available earnings and profits reserved for the after tax cost of special cash bonuses (and premium pay) in an aggregate amount of approximately $100 million that was paid in May of 2011 to certain of our non-senior employees. No holders of our Class B shares or Class C shares received such bonuses.

On May 16, 2011, we paid a prorated dividend of $0.14 per share for the first quarter of 2011, to shareholders of record as of May 2, 2011. The initial dividend was prorated from February 16, 2011, the day that we closed the offering, to March 31, 2011. Based on a full quarter, the dividend amounts to $0.29 per share ($1.16 annualized).

On August 15, 2011, we paid a dividend of $0.30 per share for the second quarter of 2011, to shareholders of record as of August 1, 2011.

On October 16, 2011, our Board of Directors declared a dividend of $0.30 per share for the third quarter of 2011, payable on November 15, 2011, to shareholders of record as of October 31, 2011.

Kinder Morgan, Inc. Form 10-Q

Changes in Equity

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, 2011
	Common Shares(a)		Additional paid-in capital		Retained earnings			Accumulated other comprehensive loss			Stockholders’ equity attributable to KMI			Noncontrolling interests			Total
Beginning Balance	$	8.1	$	3,416.0	$	117.5		$	(113.8	)	$	3,427.8		$	5,375.6		$	8,803.4
Amortization of restricted shares				4.5								4.5						4.5
Impact from equity transactions of KMP				2.8								2.8			(4.6	)		(1.8	)
Distributions												-			(244.9	)		(244.9	)
Contributions												-			107.5			107.5
Cash dividends						(212.5	)					(212.5	)					(212.5	)
Other												-			0.6			0.6
Comprehensive income
Net Income (loss)						151.5						151.5			(67.3	)		84.2
Other comprehensive income, net of tax
Change in fair value of derivatives utilized for hedging purposes									120.0			120.0			177.1			297.1
Reclassification of change in fair value of derivatives to net income									11.7			11.7			22.8			34.5
Foreign currency translation adjustments									(50.4	)		(50.4	)		(74.8	)		(125.2	)
Adjustments to pension and other postretirement benefit plan liabilities									0.1			0.1			-			0.1
Total other comprehensive income									81.4			81.4			125.1			206.5
Total comprehensive income												232.9			57.8			290.7
Ending Balance	$	8.1	$	3,423.3	$	56.5		$	(32.4	)	$	3,455.5		$	5,292.0		$	8,747.5

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(a)	Common shares include $1.1 million, $6.0 million and $1.0 million of Class P, Class A and Class B shares, respectively.

	Nine Months Ended September 30, 2011
	KMI Members			Common Shares(a)		Additional paid-in capital			Retained earnings			Accumulated other comprehensive loss			Stockholders’ equity attributable to KMI			Noncontrolling interests			Total
Beginning Balance	$	3,575.6		$	-	$	-		$	-		$	(136.5	)	$	3,439.1		$	5,099.9		$	8,539.0
Reclassification of Equity upon the offering		(3,404.0	)		8.1		3,395.9									-						-
Amortization of restricted shares							4.5									4.5						4.5
Impact from equity transactions of KMP							23.7									23.7			(37.2	)		(13.5	)
A-1 and B unit amortization		3.6														3.6						3.6
Distributions																-			(706.6	)		(706.6	)
Contributions																-			840.6			840.6
Cash dividends		(245.8	)							(311.5	)					(557.3	)					(557.3	)
Other							(0.8	)								(0.8	)		0.6			(0.2	)
Comprehensive income
Net Income (loss)		70.6								368.0						438.6			(71.7	)		366.9
Other comprehensive income, net of tax
Change in fair value of derivatives utilized for hedging purposes													89.8			89.8			132.5			222.3
Reclassification of change in fair value of derivatives to net income													49.5			49.5			86.6			136.1
Foreign currency translation adjustments													(31.2	)		(31.2	)		(46.7	)		(77.9	)
Adjustments to pension and other postretirement benefit plan liabilities													(4.0	)		(4.0	)		(6.0	)		(10.0	)
Total other comprehensive income													104.1			104.1			166.4			270.5
Total comprehensive income																542.7			94.7			637.4
Ending Balance	$	-		$	8.1	$	3,423.3		$	56.5		$	(32.4	)	$	3,455.5		$	5,292.0		$	8,747.5

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(a)	Common shares include $1.1 million, $6.0 million and $1.0 million of Class P, Class A and Class B shares, respectively.

Kinder Morgan, Inc. Form 10-Q

	Three Months Ended September 30, 2011									Nine Months Ended September 30, 2011
	Kinder Morgan, Inc.			Noncontrolling interests			Total			Kinder Morgan, Inc.			Noncontrolling interests			Total
(Tax Expense) Tax Benefit Included in Other Comprehensive Income
Change in fair value of derivatives utilized for hedging purposes	$	(72.6	)	$	(19.5	)	$	(92.1	)	$	(55.0	)	$	(14.6	)	$	(69.6	)
Reclassification of change in fair value of derivatives to net income		(7.4	)		(2.5	)		(9.9	)		(29.8	)		(9.5	)		(39.3	)
Foreign currency translation adjustments		30.1			8.2			38.3			18.8			5.1			23.9
Adjustments to pension and other postretirement benefit plan liabilities		-			-			-			2.4			0.7			3.1
Tax included in total other comprehensive income	$	(49.9	)	$	(13.8	)	$	(63.7	)	$	(63.6	)	$	(18.3	)	$	(81.9	)

	Three Months Ended September 30, 2010									Nine Months Ended September 30, 2010
	Kinder Morgan, Inc.			Noncontrolling interests			Total			Kinder Morgan, Inc.			Noncontrolling interests			Total
Beginning Balance	$	3,812.4		$	5,014.7		$	8,827.1		$	4,171.5		$	4,674.6		$	8,846.1
Impact from equity transactions of KMP		(45.2	)		70.7			25.5			(31.2	)		48.7			17.5
A-1 and B unit amortization		1.3			-			1.3			4.8			-			4.8
Distributions to noncontrolling interests		-			(217.2	)		(217.2	)		-			(622.4	)		(622.4	)
Contributions from noncontrolling interests		-			203.4			203.4			-			718.3			718.3
Deconsolidation of variable interest entity (a)		-			-			-			-			(45.9	)		(45.9	)
Cash dividends		(175.0	)		-			(175.0	)		(500.0	)		-			(500.0	)
Other		-			-			-			-			0.2			0.2
Comprehensive income
Net income (loss)		10.6			42.0			52.6			(104.3	)		237.3			133.0
Other comprehensive income, net of tax
Change in fair value of derivatives utilized for hedging purposes		(25.1	)		(38.0	)		(63.1	)		33.5			38.4			71.9
Reclassification of change in fair value of derivatives to net income		5.0			21.8			26.8			13.0			61.4			74.4
Foreign currency translation adjustments		20.1			28.6			48.7			17.6			16.5			34.1
Adjustments to pension and other postretirement benefit plan liabilities		0.1			0.1			0.2			(0.7	)		(1.0	)		(1.7	)
Total other comprehensive income		0.1			12.5			12.6			63.4			115.3			178.7
Total comprehensive income		10.7			54.5			65.2			(40.9	)		352.6			311.7
Ending Balance	$	3,604.2		$	5,126.1		$	8,730.3		$	3,604.2		$	5,126.1		$	8,730.3