Edgar Filing: KINDER MORGAN, INC.

kmi10q1_2012.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 March 31, 2012

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 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 April 27, 2012, the registrant had the following number of shares of common stock outstanding:

Class A common stock	535,972,387
Class B common stock	94,132,596
Class C common stock	2,318,258
Class P common stock	170,922,605

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 Months Ended March 31, 2012 and 2011	3
	Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2012 and 2011	4
	Consolidated Balance Sheets – March 31, 2012 and December 31, 2011	5
	Consolidated Statements of Cash Flows – Three Months Ended March 31, 2012 and 2011	6
	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
	General and Basis of Presentation	35
	Critical Accounting Policies and Estimates	42
	Results of Operations	43
	Financial Condition	52
	Recent Accounting Pronouncements	58
	Information Regarding Forward-Looking Statements	57

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	60

Item 4.	Controls and Procedures	60



	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	60

Item 1A.	Risk Factors	60

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60

Item 3.	Defaults Upon Senior Securities	61

Item 4.	Mine Safety Disclosures	61

Item 5.	Other Information	61

Item 6.	Exhibits	61

	Signature	62

Kinder Morgan, Inc. Form 10-Q

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

KINDER MORGAN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In Millions, Except Per Share Amounts)

(Unaudited)

	Three Months Ended March 31,
	2012			2011
Revenues
Natural gas sales	$	584		$	803
Services		761			741
Product sales and other		512			388
Total Revenues		1,857			1,932

Operating Costs, Expenses and Other
Gas purchases and other costs of sales		580			793
Operations and maintenance		306			298
Depreciation, depletion and amortization		274			250
General and administrative		129			180
Taxes, other than income taxes		50			46
Other expense		2			-
Total Operating Costs, Expenses and Other		1,341			1,567

Operating Income		516			365

Other Income (Expense)
Earnings from equity investments		65			50
Amortization of excess cost of equity investments		(2	)		(1	)
Interest expense		(184	)		(174	)
Interest income		5			5
Other, net		1			1
Total Other Income (Expense)		(115	)		(119	)

Income from Continuing Operations Before Income Taxes		401			246

Income Tax Expense		(96	)		(96	)

Income from Continuing Operations		305			150

Discontinued operations (Note 2)
Income from operations of KMP’s FTC Natural Gas Pipelines disposal group, net of tax		50			51
Loss on remeasurement of KMP’s FTC Natural Gas Pipelines disposal group to fair value, net of tax		(428	)		-
(Loss) Income from Discontinued Operations, net of tax		(378	)		51

Net (Loss) Income		(73	)		201

Net Loss (Income) Attributable to Noncontrolling Interests		94			(46	)

Net Income Attributable to Kinder Morgan, Inc.	$	21		$	155

Class P Shares
Basic Earnings Per Common Share From Continuing Operations	$	0.23		$	0.11
Basic (Loss) Earnings Per Common Share From Discontinued Operations		(0.20	)		0.01
Total Basic Earnings Per Common Share	$	0.03		$	0.12
Class A Shares
Basic Earnings Per Common Share From Continuing Operations	$	0.21		$	0.11
Basic (Loss) Earnings Per Common Share From Discontinued Operations		(0.20	)		0.01
Total Basic Earnings Per Common Share	$	0.01		$	0.12
Basic Weighted-Average Number of Share Outstanding
Class P Shares		171			111
Class A Shares		536			596
Class P Shares
Diluted Earnings Per Common Share From Continuing Operations	$	0.23		$	0.11
Diluted (Loss) Earnings Per Common Share From Discontinued Operations		(0.20	)		0.01
Total Diluted Earnings Per Common Share	$	0.03		$	0.12
Class A Shares
Diluted Earnings Per Common Share From Continuing Operations	$	0.21		$	0.11
Diluted (Loss) Earnings Per Common Share From Discontinued Operations		(0.20	)		0.01
Total Diluted Earnings Per Common Share	$	0.01		$	0.12
Diluted Weighted-Average Number of Shares
Class P Shares		708			707
Class A Shares		536			596
Dividends Per Common Share Declared	$	0.32		$	0.14

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 COMPREHENSIVE INCOME

(In Millions)

(Unaudited)

	Three Months Ended March 31,
	2012			2011

Kinder Morgan, Inc.
Net income	$	21		$	155
Other comprehensive loss, net of tax
Change in fair value of derivatives utilized for hedging purposes (net of tax benefit of $22 and $48, respectively)		(34	)		(81	)
Reclassification of change in fair value of derivatives to net income (net of tax expense of $6 and $8, respectively)		9			13
Foreign currency translation adjustments (net of tax expense of $7 and $9, respectively)		12			16
Adjustments to pension and other postretirement benefit plan liabilities (net of tax benefit of $- and $2, respectively)		-			(4	)
Total other comprehensive loss		(13	)		(56	)
Total comprehensive income		8			99

Noncontrolling Interests
Net (loss) income		(94	)		46
Other comprehensive loss, net of tax
Change in fair value of derivatives utilized for hedging purposes (net of tax benefit of $5 and $14, respectively)		(52	)		(120	)
Reclassification of change in fair value of derivatives to net income (net of tax expense of $1 and $3, respectively)		14			25
Foreign currency translation adjustments (net of tax expense of $2 and $3, respectively)		17			23
Adjustments to pension and other postretirement benefit plan liabilities (net of tax benefit of $- and $1, respectively)		-			(6	)
Total other comprehensive loss		(21	)		(78	)
Total comprehensive loss		(115	)		(32	)

Total
Net (loss) income		(73	)		201
Other comprehensive loss, net of tax
Change in fair value of derivatives utilized for hedging purposes (net of tax benefit of $27 and $62, respectively)		(86	)		(201	)
Reclassification of change in fair value of derivatives to net income (net of tax expense of $7 and $11, respectively)		23			38
Foreign currency translation adjustments (net of tax expense of $9 and $12, respectively)		29			39
Adjustments to pension and other postretirement benefit plan liabilities (net of tax benefit of $- and $3, respectively)		-			(10	)
Total other comprehensive loss		(34	)		(134	)
Total comprehensive (loss) income	$	(107	)	$	67

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

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

	March 31, 2012			December 31, 2011
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents – KMI	$	3		$	2
Cash and cash equivalents – KMP		491			409
Restricted deposits		31			34
Accounts, notes and interest receivable, net		761			914
Inventories		177			110
Gas in underground storage		58			62
Fair value of derivative contracts		67			72
Assets held for sale		2,287			-
Other current assets		27			60
Total current assets		3,902			1,663

Property, plant and equipment, net		17,304			17,926
Investments		2,180			3,744
Notes receivable		167			165
Goodwill		4,829			5,074
Other intangibles, net		1,164			1,185
Fair value of derivative contracts		580			698
Deferred charges and other assets		244			262
Total Assets	$	30,370		$	30,717

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of debt – KMI	$	1,235		$	1,261
Current portion of debt – KMP		891			1,638
Cash book overdrafts		64			23
Accounts payable		629			728
Accrued interest		126			330
Accrued taxes		132			38
Deferred revenues		108			100
Fair value of derivative contracts		146			121
Accrued other current liabilities		377			290
Total current liabilities		3,708			4,529

Long-term liabilities and deferred credits
Long-term debt
Outstanding – KMI		1,948			1,946
Outstanding – KMP		12,156			11,159
Preferred interest in general partner of KMP		100			100
Value of interest rate swaps		1,026			1,151
Total long-term debt		15,230			14,356
Deferred income taxes		2,239			2,199
Fair value of derivative contracts		83			39
Other long-term liabilities and deferred credits		988			1,026
Total long-term liabilities and deferred credits		18,540			17,620

Total Liabilities		22,248			22,149

Commitments and contingencies (Notes 4 and 11)
Stockholders’ Equity
Class P shares, $0.01 par value, 2,000,000,000 shares authorized, 170,922,605 and 170,921,140 shares, respectively, issued and outstanding		2			2
Class A shares, $0.01 par value, 707,000,000 shares authorized, 535,972,387 shares issued and outstanding		5			5
Class B shares, $0.01 par value, 100,000,000 shares authorized, 94,132,596 shares issued and outstanding		1			1
Class C shares, $0.01 par value, 2,462,927 shares authorized, 2,318,258 shares issued and outstanding		-			-
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none outstanding		-			-
Additional paid-in capital		3,438			3,431
Retained deficit		(202	)		(3	)
Accumulated other comprehensive loss		(128	)		(115	)
Total Kinder Morgan, Inc.’s stockholders’ equity		3,116			3,321
Noncontrolling interests		5,006			5,247
Total Stockholders’ Equity		8,122			8,568
Total Liabilities and Stockholders’ Equity	$	30,370		$	30,717

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)

	Three Months Ended March 31,
	2012			2011
Cash Flows From Operating Activities
Net (loss) income	$	(73	)	$	201
Adjustments to reconcile net income to net cash provided by operating activities
Loss on remeasurement of KMP’s FTC Natural Gas Pipelines disposal group to fair value, net of tax		428			-
Depreciation, depletion and amortization		281			256
Deferred income taxes		9			3
Amortization of excess cost of equity investments		2			1
Earnings from equity investments		(87	)		(68	)
Distributions from equity investments		80			65
Pension contributions in excess of expense		(17	)		-
Changes in components of working capital
Accounts receivable		89			100
Inventories		(73	)		-
Other current assets		44			50
Accounts payable		(96	)		(40	)
Cash book overdrafts		42			3
Accrued interest		(203	)		(186	)
Accrued taxes		109			93
Accrued liabilities		64			77
Rate reparations, refunds and other litigation reserve adjustments		-			(63	)
Other, net		(39	)		(9	)
Net Cash Provided by Operating Activities		560			483

Cash Flows From Investing Activities
Acquisitions of assets and investments		(30	)		(66	)
Capital expenditures		(354	)		(270	)
Sale or casualty of property, plant and equipment, and other net assets, net of removal costs		-			1
Net proceeds from margin and restricted deposits		20			47
Contributions to investments		(49	)		(23	)
Distributions from equity investments in excess of cumulative earnings		48			84
Net Cash Used in Investing Activities		(365	)		(227	)

Cash Flows From Financing Activities
Issuance of debt–KMI		252			802
Payment of debt–KMI		(278	)		(1,187	)
Issuance of debt–KMP		2,420			2,523
Payment of debt–KMP		(2,160	)		(2,305	)
Debt issue costs		(6	)		(8	)
Cash dividends		(220	)		(246	)
Contributions from noncontrolling interests		124			81
Distributions to noncontrolling interests		(251	)		(229	)
Other, net		-			(1	)
Net Cash Used in Financing Activities		(119	)		(570	)

Effect of Exchange Rate Changes on Cash and Cash Equivalents		7			2

Net increase (decrease) in Cash and Cash Equivalents		83			(312	)
Cash and Cash Equivalents, beginning of period		411			502
Cash and Cash Equivalents, end of period	$	494		$	190

Noncash Investing and Financing Activities
Liabilities settled by the issuance of common units	$	7		$	-
Contribution of net assets to investments	$	-		$	8
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest (net of capitalized interest)	$	349		$	325
Net cash paid during the period for income taxes	$	6		$	1

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 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 38,000 miles of pipelines and approximately 180 terminals. These pipelines transport natural gas, refined petroleum products, crude oil, carbon dioxide and other products, and our terminals store petroleum products and chemicals, and handle such products as ethanol, coal, petroleum coke and steel.

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. (KMK). On February 29, 2012, KMK was merged into KMI. 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.”

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.

On October 16, 2011, KMI and El Paso Corporation (EP) announced a definitive agreement whereby KMI will acquire all of the outstanding shares of EP in a transaction that would create one of the largest energy companies in the U.S. (See Note 2).

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 (U.S. GAAP) 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.

Our accompanying consolidated financial statements reflect normal adjustments, and also recurring adjustments that are, in the opinion of our management, necessary for a fair statement of our financial results for the interim periods, and certain amounts from prior periods have been reclassified to conform to the current presentation. Interim results are not necessarily indicative of results for a full year; accordingly, you should read these consolidated financial statements in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2011, which we refer to in this report as our 2011 Form 10-K.

Our accounting records are maintained in United States dollars, and all references to dollars are United States dollars, except where stated otherwise. Canadian dollars are designated as C$. Our consolidated financial statements include our accounts and those of our majority-owned subsidiaries as well as the accounts of KMP 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.

Effective with the May 30, 2007 closing of a 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. See Note 2 of our consolidated financial statements in our 2011 Form 10-K.

Kinder Morgan, Inc. Form 10-Q

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 $734 million of its debt. We would be obligated to perform under this indemnity only if KMP’s assets were unable to satisfy its obligations.

Following our March 15, 2012 announcement of our intention to sell the assets that comprise KMP’s FTC Natural Gas Pipelines disposal group (described in Note 2) in order to receive regulatory approval for our proposed EP acquisition, we accounted for the disposal group as discontinued operations in accordance with the provisions of the “Presentation of Financial Statements—Discontinued Operations” Topic of the Codification. Accordingly, we (i) reclassified and excluded KMP’s FTC Natural Gas Pipelines disposal group’s results of operations from our results of continuing operations and reported the disposal group’s results of operations separately as “Income from KMP’s FTC Natural Gas Pipelines disposal group, net of tax” within the discontinued operations section of our accompanying consolidated statements of income for all periods presented; (ii) separately reported a “Loss on remeasurement of KMP’s FTC Natural Gas Pipelines disposal group to fair value, net of tax” within the discontinued operations section of our accompanying consolidated statement of income for the three months ended March 31, 2012; and (iii) reclassified and reported the disposal group’s combined assets separately as “Assets held for sale” in our accompanying consolidated balance sheet as of March 31, 2012. Because the disposal group’s combined liabilities were not material to our consolidated balance sheet, we included the disposal group’s liabilities within “Accrued other current liabilities” in our accompanying consolidated balance sheet as of March 31, 2012. In addition, we did not elect to present separately the operating and investing cash flows related to the disposal group in our accompanying consolidated statements of cash flows.

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. 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 total basic and diluted earnings per share for the three months ended March 31, 2012 and the period February 11, 2011 (the date of our initial public offering) through March 31, 2011 (in millions, except per share amounts):

	Three Months Ended March 31, 2012
	Net Income Available to Shareholders
	Class P			Class A			Participating Securities (a)		Total
Net income attributable to KMI									$	21
Dividends declared during period	$	54		$	154		$	12		(220	)
Excess distributions over earnings		(48	)		(151	)		-	$	(199	)
Total net income attributable to shareholders	$	6		$	3		$	12	$	21

Total Basic Earnings Per Share
Basic Weighted-Average Number of Shares Outstanding		171			536			N/A
Total Basic Earnings per Common Share(b)	$	0.03		$	0.01			N/A

Total Diluted Earnings Per Share
Total net income attributable to shareholders and assumed conversions(c)	$	21		$	3			N/A
Diluted Weighted-Average Number of Shares		708			536			N/A
Total Diluted Earnings per Common Share(b)	$	0.03		$	0.01			N/A

	February 11, 2011 through March 31, 2011
	Net Income Available to Shareholders
	Class P		Class A		Participating Securities (a)		Total
Net income attributable to KMI for the three months ended March 31, 2011							$	155
Less: net income attributable to KMI members prior to incorporation								(71	)
Net income attributable to shareholders								84
Dividends declared during period	$	-	$	-	$	-		-
Remaining undistributed earnings		13		71		-	$	84
Total net income attributable to shareholders	$	13	$	71	$	-	$	84

Total Basic Earnings per Share
Basic Weighted-Average Number of Shares Outstanding(d)		111		596		N/A
Total Basic Earnings per Common Share	$	0.12	$	0.12		N/A

Total Diluted Earnings Per Share
Total net income attributable to shareholders and assumed conversions(c)	$	84	$	71		N/A
Diluted Weighted-Average Number of Shares(d)		707		596		N/A
Total Diluted Earnings per Common Share	$	0.12	$	0.12		N/A

Kinder Morgan, Inc. Form 10-Q

The following tables set forth the computation of basic and diluted earnings per share from continuing operations for the three months ended March 31, 2012 and the period February 11, 2011 (the date of our initial public offering) through March 31, 2011 (in millions, except per share amounts):

	Three Months Ended March 31, 2012
	Income from Continuing Operations Available to Shareholders
	Class P			Class A			Participating Securities (a)		Total
Income from continuing operations									$	305
Less: income from continuing operations attributable to noncontrolling interests										(144	)
Income from continuing operations attributable to KMI										161
Dividends declared during period	$	54		$	154		$	12		(220	)
Excess distributions over earnings		(14	)		(45	)		-	$	(59	)
Income from continuing operations attributable to shareholders	$	40		$	109		$	12	$	161

Basic Earnings Per Share from Continuing Operations
Basic Weighted-Average Number of Shares Outstanding		171			536			N/A
Basic Earnings per Common Share from Continuing Operations(b)	$	0.23		$	0.21			N/A

Diluted Earnings Per Share from Continuing Operations
Income from continuing operations attributable to shareholders and assumed conversions(c)	$	161		$	109			N/A
Diluted Weighted-Average Number of Shares		708			536			N/A
Diluted Earnings per Common Share from Continuing Operations(b)	$	0.23		$	0.21			N/A

	February 11, 2011 through March 31, 2011
	Income from Continuing Operations Available to Shareholders
	Class P		Class A		Participating Securities (a)		Total
Income from continuing operations for the three months ended March 31, 2011							$	150
Less: income from continuing operations attributable to noncontrolling interests for the three months ended March 31, 2011								(2	)
Income from continuing operations attributable to KMI for the three months ended March 31, 2011								148
Less: income from continuing operations attributable to KMI members prior to incorporation								(67	)
Income from continuing operations attributable to shareholders							$	81
Dividends declared during period	$	-	$	-	$	-		-
Remaining undistributed earnings		13		68		-	$	81
Income from continuing operations attributable to shareholders	$	13	$	68	$	-	$	81

Basic Earnings per Share from Continuing Operations
Basic Weighted-Average Number of Shares Outstanding(d)		111		596		N/A
Basic Earnings per Common Share from Continuing Operations	$	0.11	$	0.11		N/A

Diluted Earnings Per Share from Continuing Operations
Income from continuing operations attributable to shareholders and assumed conversions(c)	$	81	$	68		N/A
Diluted Weighted-Average Number of Shares(d)		707		596		N/A
Diluted Earnings per Common Share from Continuing Operations	$	0.11	$	0.11		N/A

___________

(a)

Participating securities include Class B shares, Class C shares, and unvested restricted stock awards issued to non-senior management employees that contain rights to dividends. As of March 31, 2011, our Class B and Class C shares were not entitled to participate in our earnings, losses or distributions in accordance with the terms of our shareholder agreement as necessary performance conditions had not been satisfied. As a result, no earnings were allocated to the Class B and Class C shares in our determination of basic and diluted earnings per share for the period February 11, 2011 through March 31, 2011.

(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

Kinder Morgan, Inc. Form 10-Q

	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 March 31, 2011.

2. Pending Acquisition of El Paso Corporation

On October 16, 2011, KMI and EP announced a definitive agreement whereby KMI will acquire all of the outstanding shares of EP in a transaction that would create one of the largest energy companies in the U.S. Also, see Note 3 in our 2011 Form 10-K for further discussion regarding the pending EP acquisition.

Shareholders’ Approvals and Pending Elections

On March 2, 2012, 100% of our voting shareholders approved the proposed EP acquisition, and on March 9, 2012, more than 95% of voting EP shareholders approved the acquisition.

A tentative deadline for EP shareholders to elect the form of consideration that they wish to receive has been set for May 23, 2012. The election deadline may be extended. The close of the merger is expected to occur by the end of May 2012.

KMI’s Financing for the El Paso Corporation Acquisition

On February 10, 2012, we entered into (i) an amendment to our existing $1.0 billion senior secured revolving credit facility to permit, among other things, the transactions contemplated by the EP merger agreement, and to fund, in part, the transactions and related costs and expenses; (ii) an incremental joinder agreement which provides for $750 million in additional commitments under our existing revolving credit facility; and (iii) an acquisition debt facilities credit agreement containing a $6.8 billion 364-day facility and a $5.0 billion 3-year term loan facility, which will be used to finance a portion of the cash consideration and related fees and expenses to be paid in connection with the EP acquisition. All of the foregoing will be effective upon completion of the EP acquisition.

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

On May 1, 2012, the Federal Trade Commission (FTC) voted to accept a proposed settlement order regarding our pending acquisition of EP. The FTC also granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, allowing the companies to close the transaction. The settlement order requires us to divest certain assets currently held by KMP to an FTC-approved buyer within 180 days from the date that we consummate the EP acquisition. As previously announced, the assets included in this disposal group are KMP’s (i) Kinder Morgan Interstate Gas Transmission natural gas pipeline system; (ii) Trailblazer natural gas pipeline system; (iii) Casper and Douglas natural gas processing operations; and (iv) 50% equity investment in the Rockies Express natural gas pipeline system. In this report, we refer to this combined group of assets as KMP’s FTC Natural Gas Pipelines disposal group. Under the settlement order, the assets of KMP’s FTC Natural Gas Pipelines disposal group will be held separate from our and KMP’s other businesses until the divestiture is completed. Prior to our announcement, we included each of the assets in the Natural Gas Pipelines—KMP business segment. Because this combined group of assets, including KMP’s equity investment in Rockies Express, has its own operations and cash flows, we now report KMP’s FTC Natural Gas Pipelines disposal group as a business held for sale.

As described above in Note 1 “General –Basis of Presentation,” we began accounting for KMP’s FTC Natural Gas Pipelines disposal group as discontinued operations in the first quarter of 2012. We recognized a $428 million loss on remeasurement to fair value. We reported this loss amount separately as “Loss on remeasurement of KMP’s FTC Natural Gas Pipelines disposal group to fair value, net of tax” within the discontinued operations section of our accompanying consolidated statement of income for the three months ended March 31, 2012. We also reclassified the fair value of the disposal group’s assets as “held for sale” assets in our accompanying consolidated balance sheet as of March 31, 2012 (because the disposal group’s combined liabilities were not material to our consolidated balance sheet as of March 31, 2012, we included the disposal group’s liabilities within “Accrued other current liabilities”). “Assets held for sale” are primarily comprised of property, plant and equipment, and KMP’s investment in the Rockies Express natural gas pipeline system.

Kinder Morgan, Inc. Form 10-Q

Summarized financial information for the disposal group is as follows (in millions):

	Three Months Ended March 31,
	2012			2011

Operating revenues	$	71		$	76
Operating expenses		(37	)		(38	)
Depreciation and amortization		(7	)		(6	)
Earnings from equity investments		22			18
Interest income and Other, net		1			1
Earnings from KMP’s FTC Natural Gas Pipelines disposal group	$	50		$	51

We expect to complete the sale of KMP’s FTC Natural Gas Pipelines disposal group in the third quarter of 2012. Furthermore, we expect to offer to sell (drop-down) all of EP’s Tennessee Gas Pipeline system and a portion of its El Paso Natural Gas pipeline system to KMP in order to replace the assets that it will divest, and we expect that these drop-downs will occur contemporaneously with the closing of KMP’s divestiture.

3. Goodwill and Other Intangibles

Goodwill and Excess Investment Cost

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 three months ended March 31, 2012 are summarized as follows (in millions):

	Products Pipelines– KMP			Natural Gas Pipelines– KMP			CO2–KMP		Terminals– KMP			Kinder Morgan Canada– KMP			Total
Historical Goodwill	$	2,128		$	3,723		$	1,528	$	1,484		$	621		$	9,484
Accumulated impairment losses.		(1,266	)		(2,090	)		-		(677	)		(377	)		(4,410	)
Balance as of December 31, 2011		862			1,633			1,528		807			244			5,074
Acquisitions		-			-			-		-			-			-
Disposals (a)		-			(250	)		-		-			-			(250	)
Currency translation adjustments		-			-			-		-			5			5
Balance as of March 31, 2012	$	862		$	1,383		$	1,528	$	807		$	249		$	4,829

__________

(a)

Amount represents reclassification of KMP’s FTC Natural Gas Pipelines disposal group’s goodwill to “Assets held for sale.” Since KMP’s FTC Natural Gas Pipelines disposal group represents a significant portion of the Natural Gas Pipelines–KMP business segment, we allocated the goodwill of the segment based on the relative fair value of the portion being disposed of and the portion of the segment remaining.

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 three months of 2012. As of both March 31, 2012 and December 31, 2011, we included $138 million in equity method goodwill within the

Kinder Morgan, Inc. Form 10-Q

caption “Investments” in our accompanying consolidated balance sheets.

Other Intangibles

Excluding goodwill, our other intangible assets include customer contracts, relationships 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):

	March 31, 2012			December 31, 2011
Customer contracts, relationships and agreements
Gross carrying amount	$	1,343		$	1,343
Accumulated amortization		(186	)		(165	)
Net carrying amount		1,157			1,178

Lease value, technology-based assets and other
Gross carrying amount		9			9
Accumulated amortization		(2	)		(2	)
Net carrying amount		7			7

Total Other intangibles, net	$	1,164		$	1,185

The net carrying amount of the intangible assets decreased $21 million during the first three months of 2012 due to amortization. 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 March 31, 2012 and 2011, the amortization expense on our intangibles totaled $21 million and $11 million, respectively. As of March 31, 2012, the weighted-average amortization period for our intangible assets was approximately 17 years, and our estimated amortization expense for these assets for each of the next five fiscal years (2013 – 2017) is approximately $84 million, $84 million, $80 million, $65 million and $64 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 March 31, 2012 and December 31, 2011 was $3,283 million and $3,307 million, respectively. These balances included net unamortized purchase accounting adjustments, decreasing the debt balances by $30 million and $32 million at March 31, 2012 and December 31, 2011, respectively. The weighted-average interest rate on all of KMI and its subsidiaries’ borrowings (including both short-term and long-term but excluding KMP and its subsidiaries) was approximately 4.75% and 4.91% during the first quarter of 2012 and 2011, 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 March 31, 2012 and December 31, 2011 was $13,047 million and $12,797 million, respectively. The weighted-average interest rate on all of KMP’s borrowings was approximately 4.23% during the first quarter of 2012, and approximately 4.44% during the first quarter of 2011.

KMI’s outstanding short-term debt as of March 31, 2012 was $1,235 million, which consisted of (i) $395 million of borrowings under KMI’s credit facility; and (ii) $840 million of KMI’s 6.50% senior notes due September 1, 2012. As of March 31, 2012, KMP’s short-term debt balance included in our accompanying consolidated balance sheet was $891 million. The balance consisted of (i) $500 million in principal amount of KMP’s 5.85% senior notes due September 15, 2012; (ii) $358 million of KMP’s commercial paper borrowings; (iii) $24 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); (iv) an $8 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 (v) a $1 million 7.17% note payable (KMP’s subsidiary Globalplex Partners, a Louisiana joint

Kinder Morgan, Inc. Form 10-Q

venture owned 50% and controlled by Kinder Morgan Bulk Terminals, Inc. is the obligor on the note, and KMP expects the joint venture will terminate during 2012).

Credit Facilities

KMI’s $1.0 billion six-year senior secured revolving 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. As of March 31, 2012, the amount available for borrowing under the KMI’s $1.0 billion senior secured credit facility was reduced by a combined amount of $444 million consisting of (i) $395 million in borrowings outstanding under its credit facility with an average interest rate of 1.38%; and (ii) $49 million in four letters of credit required under provisions of our property and casualty, workers’ compensation and general liability insurance policies. As of December 31, 2011, KMI had $421 million of borrowings outstanding under its credit facility with an average interest rate of 1.51%.

KMP’s $2.2 billion senior unsecured revolving credit facility matures July 1, 2016 and can be amended to allow for borrowings of up to $2.5 billion. Borrowings under its credit facility can be used for general partnership purposes and as a backup for its commercial paper program. There were no borrowings under KMP’s credit facility as of March 31, 2012 or as of December 31, 2011.

As of March 31, 2012, the amount available for borrowing under KMP’s credit facility was reduced by a combined amount of $584 million, consisting of $358 million of commercial paper borrowings and $226 million of letters of credit, consisting of (i) a $100 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 $86 million in three letters of credit that support tax-exempt bonds; (iii) a $12 million letter of credit that supports debt securities issued by the Express pipeline system; (iv) an $11 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 million in other letters of credit supporting other obligations of KMP and its subsidiaries.

KMP’s Commercial Paper Program

KMP’s commercial paper program provides for the issuance of up to $2.2 billion of commercial paper. KMP’s $2.2 billion senior unsecured revolving credit facility supports its commercial paper program, and borrowings under its commercial paper program reduce the borrowings allowed under its credit facility. As of March 31, 2012, KMP had $358 million of commercial paper outstanding with an average interest rate of 0.45%. As of December 31, 2011, KMP had $645 million of commercial paper outstanding with an average interest rate of 0.53%. The borrowings under KMP’s commercial paper program were used principally to finance the acquisitions and capital expansions it made during 2012 and 2011, and in the near term, KMP expects that its short-term liquidity and financing needs will be met primarily through borrowings made under its commercial paper program.

Long-term Debt

KMP - Senior Notes

On March 14, 2012, KMP completed a public offering of $1.0 billion in principal amount of 3.95% senior notes due September 1, 2022. KMP received proceeds from the issuance of the notes, after deducting the underwriting discount, of $994 million, and used the proceeds to both repay its $450 million 7.125% senior notes that matured on March 15, 2012 and reduce the borrowings under its commercial paper program.

Interest Rate Swaps

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

Contingent Debt

KMP has made certain types of guarantees or indemnifications and covers certain types of guarantees included within debt agreements, even if the likelihood of requiring its performance under such guarantee is remote. During the three months ended March 31, 2012, there have been no material changes with respect to these guarantees or indemnifications.

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

Kinder Morgan, Inc. Form 10-Q

2011 Form 10-K.

Kinder Morgan G.P., Inc. Preferred Shares

On February 20, 2012, 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 January 31, 2012. On April 18, 2012, 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 May 18, 2012 to shareholders of record as of April 30, 2012.

5. Stockholders’ Equity

Common Equity

On February 16, 2011, we completed an initial public offering of our common stock (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 offering hold our Class A, Class B and Class C common stock, which is sometimes collectively referred to herein as our “investor retained stock.” The number of shares of common stock into which Class A shares, Class B shares and Class C shares will convert is 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. The relative portion of the total number of our common shares issuable upon conversion to the holders of the Class A shares, the Class B shares and the Class C shares, respectively, will depend on the total value that has been received by such holders in connection with dividends and conversions of those shares into shares of our common stock. The conversion of Class B shares and Class C shares into our common stock will result in a corresponding decrease in the number of shares of our common stock into which our Class A shares will be able to convert because the Class A shares, Class B shares and Class C shares are convertible into a fixed aggregate number of shares of our common stock. 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. During the three months ended March 31, 2012, there were no conversions of our Class A, Class B or Class C shares into our Class P shares. Additionally, 1,465 restricted shares vested during the three months ended March 31, 2012.

Dividends

On February 15, 2012, our Board of Directors paid a dividend of $0.31 per share for the fourth quarter of 2011 to shareholders of record as of January 31, 2012. On April 18, 2012, our Board of Directors declared a dividend of $0.32 per share for the first quarter of 2012 payable on May 16, 2012 to shareholders of record as of April 30, 2012.

Changes in Equity

For each of the three month periods ended March 31, 2012 and 2011, changes in the carrying amounts of our Stockholders’ Equity attributable to both us and our noncontrolling interests, including our comprehensive loss are summarized as follows (in millions):

	Three Months Ended March 31, 2012
	Common Shares		Additional paid-in capital		Retained deficit			Accumulated other comprehensive loss			Stockholders’ equity attributable to KMI			Noncontrolling interests			Total
Beginning Balance	$	8	$	3,431	$	(3	)	$	(115	)	$	3,321		$	5,247		$	8,568
Amortization of restricted shares				3								3						3
Impact from equity transactions of KMP				4								4			(7	)		(3	)
Net Income (Loss)						21						21			(94	)		(73	)
Distributions												-			(251	)		(251	)
Contributions												-			132			132
Cash dividends						(220	)					(220	)					(220	)
Other comprehensive loss									(13	)		(13	)		(21	)		(34	)
Ending Balance	$	8	$	3,438	$	(202	)	$	(128	)	$	3,116		$	5,006		$	8,122

Kinder Morgan, Inc. Form 10-Q

	Three Months Ended March 31, 2011
	KMI Members Equity			Common shares		Additional paid-in capital			Retained earnings		Accumulated other comprehensive loss			Stockholders’ equity attributable to KMI			Noncontrolling interests			Total
Beginning Balance	$	3,575		$	-	$	-		$	-	$	(136	)	$	3,439		$	5,100		$	8,539
Reclassification of equity upon the offering		(3,404	)		8		3,396								-						-
Impact from equity transactions of KMP							3								3			(4	)		(1	)
A-1 and B unit amortization		4													4						4
Net Income		71								84					155			46			201
Distributions															-			(229	)		(229	)
Contributions															-			81			81
Cash dividends		(246	)												(246	)					(246	)
Other							(1	)							(1	)		-			(1	)
Other comprehensive loss												(56	)		(56	)		(78	)		(134	)
Ending Balance	$	-		$	8	$	3,398		$	84	$	(192	)	$	3,298		$	4,916		$	8,214

Noncontrolling Interests

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

	March 31, 2012		December 31, 2011
KMP	$	3,023	$	3,239
KMR		1,962		1,988
Other		21		20
	$	5,006	$	5,247

KMP

Noncontrolling interests in KMP represent the economic interests in this subsidiary that we do not own. At March 31, 2012, we owned, directly, and indirectly in the form of i-units corresponding to the number of shares of KMR we owned, approximately 36 million limited partner units of KMP. These units, which consist of approximately 17 million common units, 5 million Class B units and 14 million i-units, represent approximately 11% of the total outstanding limited partner interests of KMP. In addition, we indirectly own all the common equity of the general partner of KMP, which holds an effective 2% combined interest in KMP and its operating partnerships. Together, at March 31, 2012, our limited partner and general partner interests represented approximately 12% of KMP’s total equity interests and represented an approximate 50% economic interest in KMP. This difference results from the existence of incentive distribution rights held by Kinder Morgan G.P., Inc., the general partner of KMP.

Contributions

On February 27, 2012, KMP entered into a third amended and restated equity distribution agreement with UBS Securities LLC (UBS) to provide for the offer and sale of common units having an aggregate offering price of up to $1.9 billion (up from an aggregate offering price of up to $1.2 billion under KMP’s second amended and restated agreement) from time to time through UBS, as KMP’s sales agent. Sales of the units will be made by means of ordinary brokers’ transactions on the New York Stock Exchange at market prices, in block transactions or as otherwise agreed between KMP and UBS. Under the terms of this agreement, KMP also may sell common units to UBS as principal for its own account at a price agreed upon at the time of the sale. Any sale of KMP’s common units to UBS as principal would be pursuant to the terms of a separate agreement between KMP and UBS.

During the three months ended March 31, 2012, KMP issued 1,461,072 of its common units pursuant to its equity distribution agreement with UBS. KMP received net proceeds of $124 million from the issuance of these common units. KMP used the proceeds to reduce the borrowings under its commercial paper program. For additional information regarding KMP’s equity distribution agreement, see Note 10 to our consolidated financial statements included in our 2011 Form 10-K.

On March 14, 2012, KMP issued 87,162 common units as part of its purchase price for the petroleum coke terminal assets it acquired from TGS Development, L.P. KMP valued the common units at approximately $7 million, determining the units’ value based on the $83.87 closing market price of KMP’s common units on the New York Stock Exchange on March 14, 2012.

Kinder Morgan, Inc. Form 10-Q

The above equity issuances during the three months ended March 31, 2012 had the associated effects of increasing our (i) noncontrolling interests associated with KMP by $124 million; (ii) accumulated deferred income taxes by $3 million; and (iii) additional paid-in capital by $4 million.

Noncontrolling Interests Contributions Subsequent to March 31, 2012

In early April 2012, KMP issued 157,559 of its common units for the settlement of sales made on or before March 31, 2012 pursuant to its equity distribution agreement. KMP received net proceeds of $13 million from the issuance of these 157,559 common units, and used the proceeds to reduce the borrowings under its commercial paper program.

Distributions

Distributions to our noncontrolling interests consist primarily of distributions by KMP to its common unit holders. On February 14, 2012, KMP paid a quarterly distribution of $1.16 per common unit for the quarterly period ended December 31, 2011, of which $251 million was paid to the public holders of KMP’s common units. The distribution was declared on January 18, 2012 and payable to KMP’s unitholders of record as of January 31, 2012.

Noncontrolling Interests Distributions Subsequent to March 31, 2012

On April 18, 2012, KMP declared a cash distribution of $1.20 per unit for the quarterly period ended March 31, 2012. The distribution will be paid on May 15, 2012 to KMP’s unitholders of record as of April 30, 2012.

On April 25, 2012, KMP announced that it had signed a definitive agreement with an investment vehicle affiliated with Kohlberg Kravis Roberts & Co. L.P. (together with its affiliates, referred to as KKR) to purchase from KKR its 50% ownership interest in the joint venture that owns (i) the Altamont natural gas gathering, processing and treating assets located in the Uinta Basin in Utah; and (ii) the Camino Real natural gas gathering system located in the Eagle Ford shale formation in South Texas. KMP will acquire its equity interest for an aggregate consideration of $300 million in KMP common units. KMP expects this transaction will close subsequent to the completion of our acquisition of EP, which is expected to close at the end of May 2012. EP owns the remaining 50% interest in the joint venture.

KMR

KMR’s distributions are included in noncontrolling interests and are paid in the form of additional shares or fractions thereof calculated by dividing the KMP cash distribution per common unit by the average of the market closing prices of a KMR share determined for a ten-trading day period ending on the trading day immediately prior to the ex-dividend date for the shares. KMR has made share distributions totaling 1,464,145 shares in the three months ended March 31, 2012.

KMR Distributions Subsequent to March 31, 2012

On April 18, 2012, KMR declared a share distribution of 0.016044 shares per outstanding share (1,603,975 total shares) payable on May 15, 2012 to shareholders of record as of April 30, 2012, based on the $1.20 per common unit distribution declared by KMP.

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.

Kinder Morgan, Inc. Form 10-Q

Energy Commodity Price Risk Management

As of March 31, 2012, KMP had entered into the following outstanding commodity forward contracts to hedge its forecast energy commodity purchases and sales:

	Net open position long/(short)
Derivatives designated as hedging contracts
Crude oil		(22.3	)	million barrels
Natural gas fixed price		(32.9	)	billion cubic feet
Natural gas basis		(36.1	)	billion cubic feet
Derivatives not designated as hedging contracts
Natural gas fixed price		(1.8	)	billion cubic feet
Natural gas basis		20.1		billion cubic feet

As of March 31, 2012, 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 2016.

Interest Rate Risk Management

As of March 31, 2012, KMI and KMP had combined notional principal amounts of $725 million and $5,625 million, respectively, of fixed-to-variable interest rate swap agreements, effectively converting the interest expense associated with certain series of senior notes from fixed rates to variable rates based on an interest rate of LIBOR plus a spread. All of KMI’s and KMP’s swap agreements have termination dates that correspond to the maturity dates of the related series of senior notes and, as of March 31, 2012, the maximum length of time over which we have hedged a portion of our exposure to the variability in the value of this debt due to interest rate risk is through March 15, 2035.

As of December 31, 2011, KMI and KMP had combined notional principal amounts of $725 million and $5,325 million, respectively, of fixed-to-variable interest rate swap agreements. In March 2012, (i) KMP entered into four additional fixed-to-variable interest rate swap agreements having a combined notional principal amount of $500 million, effectively converting a portion of the interest expense associated with KMP’s 3.95% senior notes due September 1, 2022 from a fixed rate to a variable rate based on an interest rate of LIBOR plus a spread; and (ii) two separate fixed-to-variable interest rate swap agreements having a combined notional principal amount of $200 million and converting a portion of the interest expense associated with KMP’s 7.125% senior notes, terminated upon the maturity of the associated notes.

Fair Value of Derivative Contracts

The fair values of the current and non-current asset and liability derivative contracts are each reported (i) separately as “Fair value of derivative contracts” or (ii) included within “Assets held for sale” and “Accrued other current liabilities” in the respective sections of 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 March 31, 2012 and December 31, 2011 (in millions):

Kinder Morgan, Inc. Form 10-Q

Fair Value of Derivative Contracts

		Asset derivatives				Liability derivatives
		March 31,		December 31,		March 31,			December 31,
		2012		2011		2012			2011
	Balance sheet location	Fair value		Fair value		Fair value			Fair value
Derivatives designated as hedging contracts
Energy commodity derivative contracts	Current-Fair value of derivative contracts	$	63	$	66	$	(143	)	$	(116	)
	Current-Assets held for Sale/ Accrued other current liabilities		6		-		(1	)		-
	Non-current-Fair value of derivative contracts		17		39		(66	)		(39	)
Subtotal			86		105		(210	)		(155	)

Interest rate swap agreements	Current-Fair value of derivative contracts		1		3		-			-
	Non-current-Fair value of derivative contracts		563		659		(17	)		-
Subtotal			564		662		(17	)		-

Total			650		767		(227	)		(155	)

Derivatives not designated as hedging contracts
Energy commodity derivative contracts	Current-Fair value of derivative contracts		3		3		(3	)		(5	)

Total			3		3		(3	)		(5	)

Total derivatives		$	653	$	770	$	(230	)	$	(160	)

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 March 31, 2012 and December 31, 2011, this unamortized premium totaled $474 million and $486 million, respectively, and as of March 31, 2012, the weighted-average amortization period for this premium was approximately 18 years.

Effect of Derivative Contracts on the Income Statement

The following two tables summarize the impact of KMP’s derivative contracts on our accompanying consolidated statements of income for each of the three months ended March 31, 2012 and 2011 (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)						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 items(a)
		Three Months Ended March 31,								Three Months Ended March 31,
		2012			2011					2012		2011
Interest rate swap agreements	Interest expense	$	(115	)	$	(71	)	Fixed rate debt	Interest expense	$	115	$	71
Total		$	(115	)	$	(71	)	Total		$	115	$	71

__________

(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.

Kinder Morgan, Inc. Form 10-Q

Derivatives in cash flow hedging relationships	Amount of gain/(loss) recognized in OCI on derivative (effective portion)(a)								Location of gain/(loss) reclassified from Accumulated OCI into income (effective portion)	Amount of gain/(loss) reclassified from Accumulated OCI into income (effective portion)(b)								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 March 31,									Three Months Ended March 31,									Three Months Ended March 31,
	2012				2011					2012				2011					2012				2011
Energy commodity derivative contracts		$	(34	)		$	(81	)	Revenues-Product sales and other		$	(8	)		$	(16	)	Revenues-Product sales and other		$	(3	)		$	4
									Gas purchases and other costs of sales			(1	)			3		Gas purchases and other costs of sales			-				-
Total		$	(34	)		$	(81	)	Total		$	(9	)		$	(13	)	Total		$	(3	)		$	4

____________

(a)

We expect to reclassify an approximate $25 million loss associated with energy commodity price risk management activities and included in our Stockholders’ Equity as of March 31, 2012 into earnings during the next twelve months (when the associated forecast sales and purchases are also expected to occur), however, actual amounts reclassified into earnings could vary materially as a result of changes in market prices.

(b)

No material amounts were reclassified into earnings as a result of the discontinuance of cash flow hedges because it was probable that the original forecast 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, the amounts reclassified were the result of the hedged forecast transactions actually affecting earnings (i.e., when the forecast sales and purchase actually occurred).

For each of the three months ended March 31, 2012 and 2011, we recognized no material gain or loss in income from derivative contracts not designated as hedging contracts.

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.

The maximum potential exposure to credit losses on derivative contracts as of March 31, 2012 was (in millions):

	Asset position
Interest rate swap agreements	$	564
Energy commodity derivative contracts		89
Gross exposure		653
Netting agreement impact		(44	)
Cash collateral held		(26	)
Net exposure	$	583

Kinder Morgan, Inc. Form 10-Q

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 both March 31, 2012 and December 31, 2011, KMP had no outstanding letters of credit supporting its hedging of energy commodity price risks associated with the sale of natural gas, natural gas liquids and crude oil. As of March 31, 2012 and December 31, 2011, KMP’s counterparties associated with its energy commodity contract positions and over-the-counter swap agreements had margin deposits with KMP totaling $26 million and $10 million, respectively, and we reported these amounts within “Accrued other current liabilities” in our accompanying consolidated balance sheets.

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. As of March 31, 2012, we estimate that if KMP’s credit rating was downgraded one notch, KMP would be required to post no additional collateral to its counterparties. If KMP was downgraded two notches (that is, below investment grade), it would be required to post $53 million of additional collateral.

7. Fair Value

The fair values of our financial instruments are separated into three broad levels (Levels 1, 2 and 3) based on our assessment of the availability of observable market data and the significance of non-observable data used to determine fair value. Each fair value measurement must be assigned to a level corresponding to the lowest level input that is significant to the fair value measurement in its entirety.

The three broad levels of inputs defined by the fair value hierarchy are as follows:

▪

Level 1 Inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;

▪

Level 2 Inputs—inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability; and

▪

Level 3 Inputs—unobservable inputs for the asset or liability. These unobservable inputs reflect the entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances (which might include the reporting entity’s own data).

Fair Value of Derivative Contracts

The following two tables summarize the fair value measurements of our (i) energy commodity derivative contracts and (ii) interest rate swap agreements as of March 31, 2012 and December 31, 2011, based on the three levels established by the Codification (in millions). The fair value measurements in the tables below do not include cash margin deposits made by KMP or its counterparties, which would be reported within “Restricted deposits” and “Accrued other current liabilities,” respectively, in our accompanying consolidated balance sheets.

	Asset fair value measurements using
	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
As of March 31, 2012
Energy commodity derivative contracts(a)	$	89	$	48	$	25	$	16
Interest rate swap agreements	$	564	$	-	$	564	$	-

As of December 31, 2011
Energy commodity derivative contracts(a)	$	108	$	34	$	47	$	27
Interest rate swap agreements	$	662	$	-	$	662	$	-