KMI-2012.6.30-10Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
F O R M   10-Q
 
þ  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012
 
or
 
o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____to_____
 
Commission file number: 001-35081
KINDER MORGAN, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
80-0682103
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

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 August 3, 2012, the registrant had the following number of shares of common stock outstanding:

Class A common stock
470,043,494

Class B common stock
93,579,094

Class C common stock
2,317,228

Class P common stock
567,156,489



KINDER MORGAN, INC. AND SUBSIDIARIES
TABLE OF CONTENTS

 
 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2
Kinder Morgan, Inc. Form 10-Q


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.

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

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Revenues
 
 
 
 
 
 
 
Natural gas sales
$
497

 
$
847

 
$
1,081

 
$
1,650

Services
1,033

 
712

 
1,794

 
1,453

Product sales and other
637

 
393

 
1,149

 
781

Total Revenues
2,167

 
1,952

 
4,024

 
3,884

 
 
 
 
 
 
 
 
Operating Costs, Expenses and Other
 

 
 

 
 
 
 
Gas purchases and other costs of sales
637

 
843

 
1,217

 
1,636

Operations and maintenance
387

 
467

 
693

 
765

Depreciation, depletion and amortization
333

 
258

 
607

 
508

General and administrative
501

 
110

 
630

 
290

Taxes, other than income taxes
69

 
51

 
119

 
97

Other income
(20
)
 
(13
)
 
(18
)
 
(13
)
Total Operating Costs, Expenses and Other
1,907

 
1,716

 
3,248

 
3,283

Operating Income
260

 
236

 
776

 
601

 
 
 
 
 
 
 
 
Other Income (Expense)
 

 
 

 
 
 
 
Earnings from equity investments
72

 
56

 
137

 
106

Amortization of excess cost of equity investments
(2
)
 
(2
)
 
(4
)
 
(3
)
Interest expense
(297
)
 
(174
)
 
(481
)
 
(348
)
Interest income
6

 
6

 
11

 
11

Other, net
7

 
7

 
8

 
8

Total Other Income (Expense)
(214
)
 
(107
)
 
(329
)
 
(226
)
 
 
 
 
 
 
 
 
Income from Continuing Operations Before Income Taxes
46

 
129

 
447

 
375

 
 
 
 
 
 
 
 
Income Tax Expense
(9
)
 
(87
)
 
(105
)
 
(183
)
 
 
 
 
 
 
 
 
Income from Continuing Operations
37

 
42

 
342

 
192

 
 
 
 
 
 
 
 
Discontinued Operations (Note 2)
 

 
 

 
 
 
 
Income from operations of KMP’s FTC Natural Gas Pipelines disposal group and other, net of tax
47

 
40

 
97

 
91

Loss on remeasurement of KMP’s FTC Natural Gas Pipelines disposal group to fair value, net of tax
(327
)
 
—

 
(755
)
 
—

(Loss) Income from Discontinued Operations, net of tax
(280
)
 
40

 
(658
)
 
91

 
 
 
 
 
 
 
 
Net (Loss) Income
(243
)
 
82

 
(316
)
 
283

 
 
 
 
 
 
 
 
Net Loss Attributable to Noncontrolling Interests
117

 
50

 
211

 
4

 
 
 
 
 
 
 
 
Net (Loss) Income Attributable to Kinder Morgan, Inc.
$
(126
)
 
$
132

 
$
(105
)
 
$
287

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (continued)
(In Millions, Except Per Share Amounts)
(Unaudited)
 
 
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Class P Shares
 
 
 
 
 
 
 
Basic (Loss) Earnings Per Common Share From Continuing Operations
$
(0.11
)
 
$
0.18

 
$
0.09

 
$
0.29

Basic  (Loss) Earnings Per Common Share From Discontinued Operations
(0.04
)
 
0.01

 
(0.23
)
 
0.02

Total Basic (Loss) Earnings Per Common Share
$
(0.15
)
 
$
0.19

 
$
(0.14
)
 
$
0.31

Class A Shares
 

 
 

 
 
 
 
Basic (Loss) Earnings Per Common Share From Continuing Operations
$
(0.13
)
 
$
0.16

 
$
0.05

 
$
0.27

Basic (Loss) Earnings Per Common Share From Discontinued Operations
(0.04
)
 
0.01

 
(0.23
)
 
0.02

Total Basic (Loss) Earnings Per Common Share
$
(0.17
)
 
$
0.17

 
$
(0.18
)
 
$
0.29

Basic Weighted-Average Number of Shares Outstanding
 

 
 

 
 
 
 
Class P Shares
320

 
111

 
245

 
111

Class A Shares
522

 
596

 
529

 
596

Class P Shares
 
 
 
 
 
 
 
Diluted (Loss) Earnings Per Common Share From Continuing Operations
$
(0.11
)
 
$
0.18

 
$
0.09

 
$
0.29

Diluted (Loss) Earnings Per Common Share From Discontinued Operations
(0.04
)
 
0.01

 
(0.23
)
 
0.02

Total Diluted (Loss) Earnings Per Common Share
$
(0.15
)
 
$
0.19

 
$
(0.14
)
 
$
0.31

Class A Shares
 

 
 

 
 
 
 
Diluted (Loss) Earnings Per Common Share From Continuing Operations
$
(0.13
)
 
$
0.16

 
$
0.05

 
$
0.27

Diluted (Loss) Earnings Per Common Share From Discontinued Operations
(0.04
)
 
0.01

 
(0.23
)
 
0.02

Total Diluted (Loss) Earnings Per Common Share
$
(0.17
)
 
$
0.17

 
$
(0.18
)
 
$
0.29

Diluted Weighted-Average Number of Shares Outstanding
 

 
 

 
 
 
 
Class P Shares
843

 
707

 
776

 
707

Class A Shares
522

 
596

 
529

 
596

Dividends Per Common Share Declared
$
0.35

 
$
0.30

 
$
0.67

 
$
0.44


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


3
Kinder Morgan, Inc. Form 10-Q


KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Millions)
(Unaudited)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Kinder Morgan, Inc.
 
 
 
 
 
 
 
Net (loss) income
$
(126
)
 
$
132

 
$
(105
)
 
$
287

Other comprehensive income, net of tax
 

 
 

 
 
 
 
Change in fair value of derivatives utilized for hedging purposes (net of tax (expense) benefit of $(56), $(31), $(34) and $17, respectively)
89

 
51

 
55

 
(30
)
Reclassification of change in fair value of derivatives to net income (net of tax benefit (expense) of $3, $(14), $(3) and $(22), respectively)
(3
)
 
25

 
6

 
38

Foreign currency translation adjustments (net of tax benefit (expense) of $7, $(2), $- and $(11), respectively)
(13
)
 
3

 
(1
)
 
19

Adjustments to pension and other postretirement benefit plan liabilities (net of tax (expense) benefit of $(8), $-, $(8) and $2, respectively)
13

 
—

 
13

 
(4
)
Total other comprehensive income
86

 
79

 
73

 
23

Total comprehensive (loss) income
(40
)
 
211

 
(32
)
 
310

 
 
 
 
 
 
 
 
Noncontrolling Interests
 

 
 

 
 
 
 
Net loss
(117
)
 
(50
)
 
(211
)
 
(4
)
Other comprehensive income, net of tax
 

 
 

 
 
 
 
Change in fair value of derivatives utilized for hedging purposes (net of tax (expense) benefit of $(15), $(9), $(10) and $5, respectively)
139

 
75

 
87

 
(45
)
Reclassification of change in fair value of derivatives to net income (net of tax benefit (expense) of $-, $(4), $(1) and $(7), respectively)
(5
)
 
39

 
9

 
64

Foreign currency translation adjustments (net of tax benefit (expense) of $2, $-, $- and $(3), respectively)
(18
)
 
5

 
(1
)
 
28

Adjustments to pension and other postretirement benefit plan liabilities (net of tax benefit of $-, $-, $- and $1, respectively)
—

 
—

 
—

 
(6
)
Total other comprehensive income
116

 
119

 
95

 
41

Total comprehensive (loss) income
(1
)
 
69

 
(116
)
 
37

 
 
 
 
 
 
 
 
Total
 

 
 

 
 
 
 
Net (loss) income
(243
)
 
82

 
(316
)
 
283

Other comprehensive income, net of tax
 

 
 

 
 
 
 
Change in fair value of derivatives utilized for hedging purposes (net of tax (expense) benefit of $(71), $(40), $(44) and $22, respectively)
228

 
126

 
142

 
(75
)
Reclassification of change in fair value of derivatives to net income (net of tax benefit (expense) of $3, $(18), $(4) and $(29), respectively)
(8
)
 
64

 
15

 
102

Foreign currency translation adjustments (net of tax benefit (expense) of $9, $(2), $- and $(14), respectively)
(31
)
 
8

 
(2
)
 
47

Adjustments to pension and other postretirement benefit plan liabilities (net of tax (expense) benefit of $(8), $-, $(8) and $3, respectively)
13

 
—

 
13

 
(10
)
Total other comprehensive income
202

 
198

 
168

 
64

Total comprehensive (loss) income
$
(41
)
 
$
280

 
$
(148
)
 
$
347


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


4
Kinder Morgan, Inc. Form 10-Q


KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions, Except Share and Per Share Amounts)
 
June 30, 2012
 
December 31, 2011
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents – KMI (Note 13)
$
106

 
$
2

Cash and cash equivalents – KMP and EPB (Note 13)
569

 
409

Restricted deposits
53

 
34

Accounts, notes and interest receivable, net
1,275

 
914

Inventories
313

 
110

Gas in underground storage
48

 
62

Fair value of derivative contracts
161

 
72

Assets held for sale
2,019

 
—

Other current assets
787

 
60

Total current assets
5,331

 
1,663

 
 
 
 
Property, plant and equipment, net (Note 13)
30,613

 
17,926

Investments (Note 13)
6,114

 
3,744

Notes receivable
187

 
165

Goodwill (Note 13)
23,453

 
5,074

Other intangibles, net
1,142

 
1,185

Fair value of derivative contracts
793

 
698

Deferred charges and other assets
1,942

 
262

Total Assets
$
69,575

 
$
30,717

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities
 

 
 

Current portion of debt – KMI (Note 13)
$
2,209

 
$
1,261

Current portion of debt – KMP and EPB (Note 13)
1,062

 
1,638

Cash book overdrafts
28

 
23

Accounts payable
947

 
728

Accrued interest
516

 
330

Accrued taxes
182

 
38

Deferred revenues
109

 
100

Fair value of derivative contracts
178

 
121

Accrued other current liabilities
901

 
290

Total current liabilities
6,132

 
4,529

 
 
 
 
Long-term liabilities and deferred credits
 

 
 

Long-term debt
 

 
 

Outstanding – KMI (Note 13)
14,262

 
1,978

Outstanding – KMP and EPB (Note 13)
16,691

 
11,159

Preferred interest in general partner of KMP
100

 
100

Debt fair value adjustments
2,780

 
1,119

Total long-term debt
33,833

 
14,356

Deferred income taxes
3,627

 
2,199

Fair value of derivative contracts
201

 
39

Other long-term liabilities and deferred credits
2,592

 
1,026

   Total long-term liabilities and deferred credits
40,253

 
17,620

Total Liabilities
$
46,385

 
$
22,149

 
 
 
 

5
Kinder Morgan, Inc. Form 10-Q


KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Dollars in Millions, Except Share and Per Share Amounts)
 
 
 
 
 
June 30, 2012
 
December 31, 2011
 
(Unaudited)
 
 
Commitments and contingencies (Notes 3 and 10)


 


Stockholders’ Equity
 

 
 

Class P shares, $0.01 par value, 2,000,000,000 shares authorized, 566,930,953 and 170,921,140 shares, respectively, issued and outstanding
$
5

 
$
2

Class A shares, $0.01 par value, 707,000,000 shares authorized, 470,043,494 and 535,972,387 shares, respectively, issued and outstanding
5

 
5

Class B shares, $0.01 par value, 100,000,000 shares authorized, 93,579,094 and 94,132,596 shares, respectively, issued and outstanding
1

 
1

Class C shares, $0.01 par value, 2,462,927 shares authorized, 2,317,228 and 2,318,258 shares, respectively, issued and outstanding
—

 
—

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

 
—

Additional paid-in capital
14,807

 
3,431

Retained deficit
(556
)
 
(3
)
Accumulated other comprehensive loss
(42
)
 
(115
)
Total Kinder Morgan, Inc.’s stockholders’ equity
14,220

 
3,321

Noncontrolling interests
8,970

 
5,247

      Total Stockholders’ Equity
23,190

 
8,568

Total Liabilities and Stockholders’ Equity
$
69,575

 
$
30,717


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


6
Kinder Morgan, Inc. Form 10-Q


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

 
Six Months Ended
June 30,
 
2012
 
2011
Cash Flows From Operating Activities
 
 
 
Net (loss) income
$
(316
)
 
$
283

Adjustments to reconcile net (loss) 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
755

 
—

Non-cash compensation expense on settlement of EP stock awards
87

 
—

Depreciation, depletion and amortization
614

 
520

Deferred income taxes
(79
)
 
24

Amortization of excess cost of equity investments
4

 
3

Earnings from equity investments
(179
)
 
(144
)
Distributions from equity investments
168

 
136

Proceeds from termination of interest rate swap agreements
53

 
—

Pension contributions in excess of expense
(13
)
 
—

Changes in components of working capital, net of effects of acquisition
 

 
 

Accounts receivable
(95
)
 
56

Inventories
(91
)
 
12

Other current assets
2

 
(80
)
Accounts payable
(1
)
 
10

Cash book overdrafts
5

 
(14
)
Accrued interest
(22
)
 
8

Accrued taxes
24

 
10

Accrued liabilities
82

 
3

Rate reparations, refunds and other litigation reserve adjustments
20

 
102

Other, net
(5
)
 
25

Net Cash Provided by Operating Activities
1,013

 
954

 
 
 
 
Cash Flows From Investing Activities
 

 
 

Acquisition of El Paso (net of $6,581 cash acquired)
(4,970
)
 
—

Acquisitions of assets and investments
(30
)
 
(110
)
Repayments from related party
20

 
—

Capital expenditures
(817
)
 
(540
)
Sale or casualty of property, plant and equipment, and other net assets, net of removal costs
32

 
17

(Investments in) proceeds from margin and restricted deposits
(16
)
 
43

Contributions to investments
(101
)
 
(60
)
Distributions from equity investments in excess of cumulative earnings
113

 
131

Refined products, natural gas liquids and transmix line-fill
(21
)
 
—

Net Cash Used in Investing Activities
$
(5,790
)
 
$
(519
)
 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 

7
Kinder Morgan, Inc. Form 10-Q


KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In Millions)
(Unaudited)
 
 
 
 
 
Six Months Ended
June 30,
 
2012
 
2011
Cash Flows From Financing Activities
 

 
 

Issuance of debt - KMI
$
6,795

 
$
1,461

Payment of debt - KMI
(1,112
)
 
(1,815
)
Issuance of debt - KMP and EPB
3,438

 
3,515

Payment of debt - KMP and EPB
(3,197
)
 
(3,641
)
Debt issue costs
(93
)
 
(9
)
Cash dividends
(446
)
 
(345
)
Repurchase of warrants
(110
)
 
—

Contributions from noncontrolling interests
285

 
709

Distributions to noncontrolling interests
(513
)
 
(462
)
Other, net
(4
)
 
1

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

 
(586
)
 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
(2
)
 
3

 
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents
264

 
(148
)
Cash and Cash Equivalents, beginning of period
411

 
502

Cash and Cash Equivalents, end of period
$
675

 
$
354

 
 
 
 
Noncash Investing and Financing Activities
 

 
 

Net assets and liabilities acquired by the issuance of shares and warrants
$
11,464

 
$
—

Assets acquired by the assumption or incurrence of liabilities
$
—

 
$
10

Assets acquired or liabilities settled by contributions from noncontrolling interests
$
296

 
$
24

Contribution of net assets to investments
$
—

 
$
8

Sale of investment ownership interest in exchange for note
$
—

 
$
4

Supplemental Disclosures of Cash Flow Information
 

 
 

Cash paid during the period for interest (net of capitalized interest)
$
488

 
$
340

Net cash paid during the period for income taxes
$
189

 
$
161


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


8
Kinder Morgan, Inc. Form 10-Q


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

1.  General
 
Organization

Kinder Morgan, Inc. is the largest midstream and the third largest energy company in North America with a combined enterprise value of approximately $100 billion and unless the context requires otherwise, references to “we,” “us,” “our,” or “KMI” are intended to mean Kinder Morgan, Inc. and its consolidated subsidiaries. We own an interest in or operate approximately 75,000 miles of pipelines and 180 terminals. Our pipelines transport natural gas, gasoline, crude oil, CO2 and other products, and our terminals store petroleum products and chemicals and handle such products as ethanol, coal, petroleum coke and steel.
 
Effective on May 25, 2012, we completed the acquisition of all of the outstanding shares of El Paso Corporation, referred to as "EP." As a result, we own a 43.5% limited partner interest and the 2% general partner interest in El Paso Pipeline Partners, L.P., referred to as "EPB," as well as certain natural gas pipeline assets.

In connection with our acquisition of EP, we issued approximately 330 million shares of common stock and approximately 505 million warrants to purchase our common stock and paid approximately $11.6 billion in cash to former EP stockholders and equity award holders. Each warrant entitles the holder to purchase one share of our common stock for an exercise price of $40 per share, payable in cash or by cashless exercise, at any time until May 25, 2017 (see Notes 2 and 4).

We also own the general partner and approximately 11% of the limited partner interests of Kinder Morgan Energy Partners, L.P., referred to as "KMP," one of the largest publicly-traded pipeline limited partnerships in America.

On February 10, 2011, we converted from a Delaware limited liability company to a Delaware corporation and 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, 2011, 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 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.
 
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 (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 (Form 10-K) and in our Current Report on Form 8-K filed May 4, 2012.

Our accounting records are maintained in United States dollars, and all references to dollars are United States dollars, except where stated otherwise.  Canadian dollars are designated as C$.  Our consolidated financial statements include our accounts and those of our majority-owned subsidiaries as well as the accounts of KMP, EPB and KMR.  Investments in jointly-owned operations in which we hold a 50% or less

9
Kinder Morgan, Inc. Form 10-Q


interest (other than KMP, EPB and KMR, because we have the ability to exercise significant control over their operating and financial policies) are accounted for under the equity method.  All significant intercompany transactions and balances have been eliminated.
 
Notwithstanding the consolidation of KMP and EPB, and their subsidiaries, into our financial statements, we are not liable for, and our assets are not available to satisfy, the obligations of KMP and EPB, and/or their subsidiaries, and vice versa, except as discussed in the following paragraph.  Responsibility for payments of obligations reflected in our or KMP’s, or EPB'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. In conjunction with our EP acquisition, we have agreed to indemnify EPB with respect to $470 million of its debt. We would be obligated to perform under these indemnities only if KMP’s or EPB'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 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 operations of KMP’s FTC Natural Gas Pipelines disposal group and other, 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 statements of income for the three and six months ended June 30, 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 June 30, 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 June 30, 2012.  In addition, we did not elect to present separately the operating, investing and financing cash flows related to the disposal group in our accompanying consolidated statements of cash flows. For more information about the discontinued operations of KMP's FTC Natural Gas Pipelines disposal group, see Note 2.

We evaluate goodwill for impairment on May 31 of each year. For this purpose, on May 31, 2012, we had six reporting units as follows: (i) Products Pipelines-KMP (excluding associated terminals); (ii) Products Pipelines Terminals-KMP (evaluated separately from Products Pipelines for goodwill purposes); (iii) CO2; (iv) Terminals-KMP; (v) Kinder Morgan Canada-KMP; and (vi) Natural Gas Pipelines. There were no impairment charges resulting from our May 31, 2012 impairment testing, and no event indicating an impairment has occurred subsequent to that date.
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.  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.  Commencing with the acquisition of EP, dilutive potential shares also include the Class P shares issuable in connection with the warrants (see Note 4) and the trust preferred securities (see Note 3).  For the three and six months ended June 30, 2012, our warrants and convertible trust preferred securities were antidilutive and, accordingly, were excluded from the determination of diluted earnings per share.

As no securities are convertible into Class A shares, the basic and diluted earnings per share computations for Class A shares are the same.

The following tables set forth the computation of basic and diluted earnings per share from continuing operations for the three and six months ended June 30, 2012, three months ended June 30, 2011 and the period February 11, 2011 (the date of our initial public offering) through June 30, 2011 (in millions, except per share amounts):

10
Kinder Morgan, Inc. Form 10-Q



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

 

 

 
$
37

Less: income from continuing operations attributable to noncontrolling interests


 


 


 
(128
)
Loss from continuing operations attributable to KMI


 


 


 
(91
)
Dividends declared during period
$
86

 
$
128

 
$
12

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

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

 
$
(91
)
Basic loss per share from continuing operations
 

 
 

 
 

 
 

Basic weighted-average number of shares outstanding
320

 
522

 
N/A

 
 

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

 
 

Diluted loss per share from continuing operations
 

 
 

 
 

 
 

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

 
 

Diluted weighted-average number of shares
843

 
522

 
N/A

 
 

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

 
 


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

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

Dividends declared during period
$
141

 
$
280

 
$
25

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

 
$
24

 
$
24

 
$
70

Basic earnings per share from continuing operations
 

 
 

 
 

 
 

Basic weighted-average number of shares outstanding
245

 
529

 
N/A

 
 

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

 
$
0.05

 
N/A

 
 

Diluted earnings per share from continuing operations
 

 
 

 
 

 
 

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

 
$
24

 
N/A

 
 

Diluted weighted-average number of shares
776

 
529

 
N/A

 
 

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

 
$
0.05

 
N/A

 
 




11
Kinder Morgan, Inc. Form 10-Q


 
Three Months Ended June 30, 2011
 
Income from Continuing Operations Available to Shareholders
 
Class P
 
Class A
 
Participating
Securities (a)
 
Total
Income from continuing operations
 
 
 
 
 
 
$
42

Less: loss from continuing operations attributable to noncontrolling interests
 
 
 
 
 
 
85

Income from continuing operations attributable to KMI
 
 
 
 
 
 
127

Dividends declared during period
$
16

 
$
71

 
$
12

 
(99
)
Remaining undistributed earnings
4

 
24

 
—

 
$
28

Income from continuing operations attributable to shareholders
$
20

 
$
95

 
$
12

 
$
127

Basic earnings per share from continuing operations
 
 
 
 
 
 
 
Basic weighted-average number of shares outstanding
111

 
596

 
N/A

 
 
Basic earnings per common share from continuing operations(b)
$
0.18

 
$
0.16

 
N/A

 
 
Diluted earnings per share from continuing operations
 
 
 
 
 
 
 
Income from continuing operations attributable to shareholders and assumed conversions(c)
$
127

 
$
95

 
N/A

 
 
Diluted weighted-average number of shares
707

 
596

 
N/A

 
 
Diluted earnings per common share from continuing operations(b)
$
0.18

 
$
0.16

 
N/A

 
 

 
February 11. 2011 through June 30, 2011
 
Income from Continuing Operations Available to Shareholders
 
Class P
 
Class A
 
Participating
Securities (a)
 
Total
Income from continuing operations for the six months ended June 30, 2011
 
 
 
 
 
 
$
192

Less: loss from continuing operations attributable to noncontrolling interests for the six months ended June 30, 2011
 
 
 
 
 
 
83

Income from continuing operations attributable to KMI
 
 
 
 
 
 
275

Less: income from continuing operations attributable to KMI members prior to incorporation
 
 
 
 
 
 
(67
)
Income from continuing operations attributable to shareholders
 
 
 
 
 
 
208

Dividends declared during period
$
16

 
$
71

 
$
12

 
(99
)
Remaining undistributed earnings
17

 
92

 
—

 
$
109

Income from continuing operations attributable to shareholders
$
33

 
$
163

 
$
12

 
$
208

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(b)
$
0.29

 
$
0.27

 
N/A

 
 
Diluted earnings per share from continuing operations
 
 
 
 
 
 
 
Income from continuing operations attributable to shareholders and assumed conversions(c)
$
208

 
$
163

 
N/A

 
 
Diluted weighted-average number of shares(d)
707

 
596

 
N/A

 
 
Diluted earnings per common share from continuing operations(b)
$
0.29

 
$
0.27

 
N/A

 
 



12
Kinder Morgan, Inc. Form 10-Q



The following tables set forth the computation of total basic and diluted earnings per share for the three and six months ended June 30, 2012, three months ended June 30, 2011 and the period February 11, 2011 (the date of our initial public offering) through June 30, 2011 (in millions, except per share amounts):
 
Three Months Ended June 30, 2012
 
Net (Loss) Income Available to Shareholders
 
Class P
 
Class A
 
Participating
Securities (a)
 
Total
Net loss attributable to KMI
 
 
 
 
 
 
$
(126
)
Dividends declared during period
$
86

 
$
128

 
$
12

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

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

 
$
(126
)
Basic earnings per share
 

 
 

 
 

 
 

Basic weighted-average number of shares outstanding
320

 
522

 
N/A

 
 

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

 
 

Diluted loss per share
 

 
 

 
 

 
 

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

 
 

Diluted weighted-average number of shares
843

 
522

 
N/A

 
 

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

 
 



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

 
$
280

 
$
25

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

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

 
529

 
N/A

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

 
 

Diluted earnings per share
 
 
 
 
 
 
 

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

 
 

Diluted weighted-average number of shares
776

 
529

 
N/A

 
 

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

 
 















13
Kinder Morgan, Inc. Form 10-Q



 
Three Months Ended June 30, 2011
 
Net Income Available to Shareholders
 
Class P
 
Class A
 
Participating
Securities (a)
 
Total
Net income attributable to KMI
 
 
 
 
 
 
$
132

Dividends declared during period
$
16

 
$
71

 
$
12

 
(99
)
Remaining undistributed earnings
5

 
28

 
—

 
$
33

Net income attributable to shareholders
$
21

 
$
99

 
$
12

 
$
132

Basic earnings per share
 
 
 
 
 
 
 

Basic weighted-average number of shares outstanding
111

 
596

 
N/A

 
 

Basic earnings per common share(b)
$
0.19

 
$
0.17

 
N/A

 
 

Diluted earnings per share
 
 
 
 
 
 
 

Net income attributable to shareholders and assumed conversions(c)
$
132

 
$
99

 
N/A

 
 

Diluted weighted-average number of shares
707

 
596

 
N/A

 
 

Diluted earnings per common share(b)
$
0.19

 
$
0.17

 
N/A

 
 



 
February 11, 2011 through June 30, 2011
 
Net Income Available to Shareholders
 
Class P
 
Class A
 
Participating
Securities (a)
 
Total
Net income attributable to KMI for the six months ended June 30, 2011
 
 
 
 
 
 
$
287

Less: income attributable to KMI members prior to incorporation
 
 
 
 
 
 
(71
)
Net income attributable to shareholders
 
 
 
 
 
 
216

Dividends declared during period
$
16

 
$
71

 
$
12

 
(99
)
Remaining undistributed earnings
18

 
99

 
—

 
$
117

Net income attributable to shareholders
$
34

 
$
170

 
$
12

 
$
216

Basic earnings per share
 
 
 
 
 
 
 

Basic weighted-average number of shares outstanding(d)
111

 
596

 
N/A

 
 

Basic earnings per common share(b)
0.31

 
0.29

 
N/A

 
 

Diluted earnings per share
 

 
 

 
 

 
 

Net income attributable to shareholders and assumed conversions(c)
$
216

 
$
170

 
N/A

 
 

Diluted weighted-average number of shares(d)
707

 
596

 
N/A

 


Diluted earnings per common share(b)
$
0.31

 
$
0.29

 
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 June 30, 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 in excess of dividends received were allocated to the Class B and Class C shares in our determination of basic and diluted earnings per share for the period February 11, 2011 through June 30, 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 increase our total fully-converted shares outstanding, impact the aggregate dividends we pay or the dividends

14
Kinder Morgan, Inc. Form 10-Q


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 June 30, 2011.

2.  Acquisitions and Divestiture
 
KMI Acquisition of El Paso Corporation
      
Effective on May 25, 2012, we acquired all of the outstanding shares of EP for an aggregate consideration of approximately $23 billion. In total, EP shareholders received $11.6 billion in cash, 330 million KMI Class P shares with a fair value of $10.6 billion as of May 24, 2012 and 505 million KMI warrants with a fair value of $863 million as of May 24, 2012. The warrants have an exercise price of $40 per share and a 5-year term.
Together EP and EPB (EPC) offer natural gas transmission services to a range of customers, including natural gas producers, marketers and end-users, as well as other natural gas transmission, distribution and electric generation companies. The pipelines group of EP and EPB is the nation's largest interstate natural gas pipeline franchise, transporting natural gas through interstate natural gas pipelines that connect the nation's principal supply regions to its major consuming regions (the Gulf Coast, California, the northeast, the southwest and the southeast). The pipelines business also includes storage and liquefied natural gas terminalling facilities. EPC owns and operates approximately 44,000 miles of natural gas pipelines that connect the nation's principal natural gas supply regions to five major consuming regions in the United States (the Gulf Coast, California, the northeast, the southwest and the southeast). EPC also has access to systems in Canada and Mexico. EPC owns three underground natural gas storage facilities and two LNG receiving terminals, which provide approximately 240 Bcf of storage capacity and 3.3 Bcf/d of peak send out capacity, respectively.
We accounted for the EP Merger using the acquisition method of accounting. The acquisition method of accounting requires, among other things, that assets acquired and liabilities assumed be recognized on the balance sheet at their fair values as of the acquisition date. Our consolidated balance sheet presented as of June 30, 2012 reflects the preliminary purchase price allocations based on available information. Management is reviewing the valuation and confirming results to determine the final purchase price allocation, which is expected to be completed in the fourth quarter of 2012. On May 24, 2012, EP sold its subsidiary, EP Energy, which consisted of EP's exploration and production business for $7.2 billion. Accordingly, the assets and liabilities of EP Energy are not included in the purchase price allocation table below and the net sale proceeds were used to pay off the holders of EP Energy's $961 million long-term debt, and the remaining $6.2 billion (included in “Current assets” in the table below) was used to pay for a portion of the $11.6 billion cash portion of the purchase price. EP's net operating loss carryforwards are expected to significantly offset the cash taxes associated with the sale of EP Energy.
The following is the purchase price for EP (in millions, except per share and per warrant amounts):
Cash portion of purchase price
$
11,551

 
 
Total KMI Class P shares issued
330

KMI Class P share price as of May 24, 2012
$
32.11

Fair value of KMI Class P shares portion of purchase price
$
10,601

 
 
Total KMI warrants issued
505

KMI warrant fair value per warrant as of May 24, 2012
$
1.71

Fair value of KMI warrants portion of purchase price
$
863

Total consideration paid (excluding debt assumed)
23,015

Less: EP share based awards expensed in the 37 day period after May 25, 2012
(87
)
 
 
Total Purchase Price
$
22,928






15
Kinder Morgan, Inc. Form 10-Q



The preliminary allocation of the purchase price is as follows (in millions):
Purchase Price Allocation:
 
 
 
Current assets
$
7,175

 
Goodwill (a)
 
18,382

 
Investments (b)
 
4,201

 
Property, plant and equipment, net (c)
 
12,931

 
Deferred charges and other assets (d)
 
1,506

 
Current liabilities
 
(1,426
)
 
Deferred income taxes (e)
 
(869
)
 
Other deferred credits
 
(1,716
)
 
Long-term debt (f)
 
(13,459
)
 
  Net assets acquired
 
26,725

 
Less: Fair value of noncontrolling interests (g)
 
(3,797
)
 
Total Purchase Price
$
22,928

 

(a) Goodwill includes a purchase price allocation adjustment of $18.4 billion, which represents the excess of the consideration transferred over the fair value of the assets acquired and liabilities assumed. Goodwill was recognized in the Natural Gas Pipelines reporting segment. Goodwill is not amortized and is not deductible for tax purposes, but is subject to an impairment test annually and when other impairment conditions arise.
(b) Investments were recorded at their estimated fair market value, which resulted in a purchase price allocation adjustment of $1.8 billion primarily associated with EP's equity investments in Citrus, El Paso Midstream Investment Company, LLC, Ruby Pipeline Holding Company, LLC and Gulf LNG Holdings Group, LLC.
(c) Property, plant and equipment includes a $2.1 billion reduction to record EP's regulated businesses at their regulatory value in conformity with our accounting policy.
(d) Deferred charges and other assets include a purchase price allocation adjustment of $1.0 billion to record a regulatory offset to the fair value of debt purchase price allocation adjustment described in footnote (f) below.
(e) Deferred income taxes include a purchase price allocation reduction adjustment of $211 million (net) which primarily consisted of an adjustments to reduce deferred tax liabilities associated with the tax effects of purchase price allocation adjustments described herein, partially offset by adjustments to EP's equity investment in Citrus using our statutory federal and state tax rate of 37%.
(f) EP's debt assumed in the acquisition was recorded at its fair market value resulting in a $1.7 billion purchase price allocation adjustment.
(g) Represents the fair value of noncontrolling interests associated with EP's investment in EPB. The amount assigned in the purchase price allocation process was based on the 117 million EPB common units outstanding to the public as of May 24, 2012 and valued at EPB's May 24, 2012 closing price of $32.37 per common unit.
 
Pro Forma Statements of Income
The following unaudited pro forma condensed consolidated statements of income for the three and six months ended June 30, 2012 and 2011 are presented as if the EP acquisition had been completed on January 1, 2011. The pro forma condensed consolidated statements of income are not necessarily indicative of what the actual results of operations or financial position of KMI would have been if the transactions had in fact occurred on the dates or for the periods indicated, nor do they purport to project the results of operations or financial position of KMI for any future periods or as of any date. The pro forma condensed consolidated statements of income do not give effect to any cost savings, operating synergies, or revenue enhancements expected to result from the transactions or the costs to achieve these cost savings, operating synergies, and revenue enhancements. The following pro forma information is in millions, except per share amounts.


16
Kinder Morgan, Inc. Form 10-Q


 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Revenues
$
2,575

 
$
2,646

 
$
5,200

 
$
5,309

(Loss) income from continuing operations
$
(245
)
 
$
208

 
$
179

 
$
518

Income from discontinued operations
$
1,767

 
$
215

 
$
1,410

 
$
238

Net income attributable to Kinder Morgan, Inc.
$
1,606

 
$
396

 
$
1,701

 
$
606

Class P shares
 
 
 
 
 
 
 
Basic earnings per common share
$
1.55

 
$
0.38

 
$
1.64

 
$
0.58

Diluted earnings per common share
$
1.55

 
$
0.38

 
$
1.64

 
$
0.58

Class A shares
 
 
 
 
 
 
 
Basic earnings per common share
$
1.52

 
$
0.36

 
$
1.59

 
$
0.56

Diluted earnings per common share
$
1.52

 
$
0.36

 
$
1.59

 
$
0.56

__________
The pro forma condensed statements of income include adjustments to:
•
include the results of EP for all periods presented;
•
include the results of discontinued operations from (i) EP Energy and (ii) KMP’s FTC Natural Gas Pipelines disposal group (see below) including (i) a $2 billion gain (net of income taxes) on the sale of EP Energy for the three and six months ended June 30, 2012 and (ii) $327 million and $755 million of losses (net of income taxes) on the remeasurement of the FTC Natural Gas Pipelines disposal group for the three and six months ended June 30, 2012, respectively;
•
include incremental interest expense related to financing the transactions;
•
include incremental depreciation and amortization expense on assets and liabilities that were revalued as part of the purchase price allocation;
•
reflect income taxes for the above adjustments at our effective income tax rate; and
•
reflect the increase in KMI Class P shares outstanding.

During the 37-day period from May 25, 2012 to June 30, 2012, EP and its subsidiaries contributed revenues of $295 million and loss from continuing operations before income taxes of $120 million, which included $217 million of pre-tax expenses associated with the EP acquisition, and EP Energy sale (further described below), to our consolidated results for the three and six months ended June 30, 2012.

Expenses Related to the EP Acquisition
    
During the six months ended June 30, 2012, we incurred $394 million of pre-tax expenses associated with the EP acquisition, and EP Energy sale, including (i) $149 million in employee severance, retention and bonus costs; (ii) $87 million of accelerated EP stock based compensation allocated to the post-combination period under applicable GAAP rules; (iii) $37 million in advisory fees; and (iv) $90 million for legal fees and reserves.
 
KMP’s FTC Natural Gas Pipelines Disposal Group – Discontinued Operations

As described above in Note 1 “General-Basis of Presentation,” in March 2012, we began accounting for KMP's FTC Natural Gas Pipelines disposal group as discontinued operations. We had previously remeasured the disposal group in the first quarter of 2012 to reflect our initial assessment of its fair value as a result of the FTC mandated sale requirement. Based on additional information gained in the sale process, we have recognized an additional adjustment in the current quarter for a combined $755 million non-cash loss. 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 six months ended June 30, 2012. We also reclassified the fair value of the disposal group's assets as “assets held for sale” in our accompanying consolidated balance sheet as of June 30, 2012 (because the disposal group's combined liabilities were not material to our consolidated balance sheet as of June 30, 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. However, the terms upon which we will sell these assets

17
Kinder Morgan, Inc. Form 10-Q


are subject to negotiation and agreement with an as-yet undetermined third party.  As a result, our estimate of the fair value of the disposal group’s net assets may not reflect the price at which we ultimately agree to sell them.
Summarized financial information for KMP’s FTC Natural Gas Pipelines disposal group, before loss on remeasurement, is as follows (in millions):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Operating revenues
$
62

 
$
82

 
$
133

 
$
158

Operating expenses
(34
)
 
(56
)
 
(71
)
 
(94
)
Depreciation and amortization
—

 
(6
)
 
(7
)
 
(12
)
Earnings from equity investments
20

 
20

 
42

 
38

Interest income and other, net
—

 
—

 
1

 
1

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

 
$
40

 
$
98

 
$
91

Drop-Down of EP Assets to KMP 

On August 6, 2012, we announced that KMP had agreed to acquire from us (i) 100% of the outstanding equity interests in Tennessee Gas Pipeline Company, L.L.C. (TGP), which owns a 13,900-mile pipeline system that transports natural gas from Louisiana, the Gulf of Mexico and south Texas to the northeastern United States, and (ii) 50% of the outstanding equity interests in El Paso Natural Gas Company (EPNG), which owns a 10,200-mile pipeline system that transports natural gas from the San Juan, Permian and Anadarko basins to California, other western states, Texas and northern Mexico, in a transaction valued at approximately $6.22 billion (Drop-Down Transaction). The consideration includes cash of approximately $3.49 billion and the issuance to us of KMP's common units representing limited partner interests having an aggregate value of $387 million. KMP will also assume approximately $1.8 billion of debt at TGP and approximately $560 million of debt at EPNG, which represents 50% of the total debt of EPNG. The Drop-Down closed on August 13, 2012 and is effective August 1, 2012. Also, see Note 3, "Debt—Subsequent Events—Financing of the Drop-Down Transaction."

KMP Investment in El Paso Midstream Investment Company, LLC
Effective June 1, 2012, KMP acquired from an investment vehicle affiliated with Kohlberg Kravis Roberts & Co. L.P. (together with its affiliates, referred to as KKR) a 50% ownership interest in El Paso Midstream Investment Company, LLC (EP Midstream), a 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 and oil gathering system located in the Eagle Ford shale formation in South Texas. KMP acquired its equity interest for an aggregate consideration of $289 million in common units (KMP issued 3,792,461 common units and determined each unit's value based on the $76.23 closing market price of the common units on the New York Stock Exchange on the June 4, 2012 issuance date).
We, through our EP acquisition, own the remaining 50% interest, and as a result we consolidate EP Midstream in the accompanying unaudited consolidated balance sheet as of June 30, 2012. For the period after the May 25, 2012 EP acquisition, EP Midstream's operating results are included in the Natural Gas Pipelines business segment.

3. Debt
 
The following table summarizes the net carrying value of our outstanding debt, excluding debt fair value adjustments (in millions):
 
June 30, 2012
 
December 31, 2011
Current portion of debt(a)
$
3,271

 
$
2,899

Long-term portion of debt
31,053

 
13,237

Total debt outstanding(b)(c)
$
34,324

 
$
16,136

(a)
As of June 30, 2012 and December 31, 2011, includes (i) KMI credit facility borrowings of $920 million and $421 million, respectively,

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Kinder Morgan, Inc. Form 10-Q


and (ii) KMP commercial paper borrowings of $446 million and $645 million, respectively. The June 30, 2012 amount also includes (i) $360 million outstanding under the 364-day bridge facility and (ii) $839 million in principal amount of KMI's 6.50% senior notes due September 1, 2012 and $500 million in principal amount of KMP’s 5.85% senior notes that mature September 15, 2012.
(b)
Excludes debt fair value adjustments of $2,780 million and $1,119 million as of June 30, 2012 and December 31, 2011, respectively. which are included in the caption "Debt fair value adjustments" on the accompanying consolidated balance sheets.
(c)
See Note 13 for a reconciliation of KMI's, KMP's and EPB's short-term and long-term debt balances.

During the six months ended June 30, 2012, we had the following changes in our financing obligations (in millions):
Debt Borrowings
 
Interest rate
 
Increase / (decrease)
 
Cash
received / (paid)
Issuances and discount amortization
 
 
 
 
 
 
KMI:
 
 
 
 
 
 
  EP Acquisition Debt:
 
 
 
 
 
 
Senior secured term loan credit facility, due May 24, 2015
 
variable
 
$
5,000

 
$
5,000

Secured term loan credit facility, due May 24, 2013
 
variable
 
375

 
375

  Credit facility
 
variable
 
1,420

 
1,420

KMP and subsidiaries:
 
 
 
 
 
 
Senior notes due September 1, 2022
 
3.95%
 
998

 
998

Commercial paper
 
variable
 
2,440

 
2,440

Credit facility
 
variable
 
—

 
—

Discount amortization
 
various
 
1

 
—

EP and subsidiaries:
 
 
 
 
 
 
Debt assumed as of May 25, 2012 (see below)
 
various
 
12,178

 
—

El Paso Midstream Investment Company, LLC revolving credit facility
 
various
 
95

 
—

Total
 
 
 
$
22,507

 
$
10,233

 
 
 
 
 
 
 
Repayments and other
 
 
 
 
 
 
KMI:
 
 
 
 
 
 
Credit facility
 
variable
 
$
(920
)
 
$
(920
)
Secured term loan credit facility, due May 24, 2013
 
variable
 
(15
)
 
(15
)
KMP and subsidiaries:
 
 
 
 
 
 
Senior notes due March 15, 2012
 
7.125%
 
(450
)
 
(450
)
Commercial paper
 
variable
 
(2,638
)
 
(2,638
)
Other KMP Notes, due 2012 through 2014
 
various
 
(15
)
 
(5
)
EP and subsidiaries (after May 25, 2012):