KMI-2012.9.30-10Q

 
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 September 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 October 28, 2012, the registrant had the following number of shares of common stock outstanding:

Class A common stock
298,653,287

Class B common stock
46,592,538

Class C common stock
1,147,540

Class P common stock
738,058,572



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
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Revenues
 
 
 
 
 
 
 
Natural gas sales
$
670

 
$
925

 
$
1,751

 
$
2,575

Services
1,489

 
737

 
3,283

 
2,190

Product sales and other
711

 
460

 
1,860

 
1,241

Total Revenues
2,870

 
2,122

 
6,894

 
6,006

 
 
 
 
 
 
 
 
Operating Costs, Expenses and Other
 

 
 

 
 
 
 
Gas purchases and other costs of sales
854

 
914

 
2,071

 
2,550

Operations and maintenance
491

 
399

 
1,184

 
1,164

Depreciation, depletion and amortization
403

 
281

 
1,010

 
789

General and administrative
186

 
109

 
816

 
399

Taxes, other than income taxes
88

 
37

 
207

 
134

Other (expense) income
(4
)
 
1

 
(22
)
 
(12
)
Total Operating Costs, Expenses and Other
2,018

 
1,741

 
5,266

 
5,024

Operating Income
852

 
381

 
1,628

 
982

 
 
 
 
 
 
 
 
Other Income (Expense)
 

 
 

 
 
 
 
Earnings from equity investments
101

 
50

 
238

 
156

Amortization of excess cost of equity investments
(5
)
 
(2
)
 
(9
)
 
(5
)
Interest expense
(532
)
 
(176
)
 
(1,013
)
 
(524
)
Interest income
9

 
6

 
20

 
17

Loss on remeasurement of previously held equity interest in KinderHawk to fair value (Note 2)
—

 
(167
)
 
—

 
(167
)
Other, net
21

 
3

 
29

 
11

Total Other Income (Expense)
(406
)
 
(286
)
 
(735
)
 
(512
)
 
 
 
 
 
 
 
 
Income from Continuing Operations Before Income Taxes
446

 
95

 
893

 
470

 
 
 
 
 
 
 
 
Income Tax Expense
(60
)
 
(66
)
 
(165
)
 
(249
)
 
 
 
 
 
 
 
 
Income from Continuing Operations
386

 
29

 
728

 
221

 
 
 
 
 
 
 
 
Discontinued Operations (Note 2)
 

 
 

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

 
55

 
145

 
146

Loss from costs to sell and the remeasurement of KMP’s FTC Natural Gas Pipelines disposal group to fair value, net of tax
(179
)
 
—

 
(934
)
 
—

(Loss) Income from Discontinued Operations, net of tax
(131
)
 
55

 
(789
)
 
146

 
 
 
 
 
 
 
 
Net Income (Loss)
255

 
84

 
(61
)
 
367

 
 
 
 
 
 
 
 
Net (Income) Loss Attributable to Noncontrolling Interests
(55
)
 
68

 
156

 
72

 
 
 
 
 
 
 
 
Net Income Attributable to Kinder Morgan, Inc.
$
200

 
$
152

 
$
95

 
$
439

 
 
 
 
 
 
 
 
KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (continued)
(In Millions, Except Per Share Amounts)
(Unaudited)
 
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Class P Shares
 
 
 
 
 
 
 
Basic Earnings Per Common Share From Continuing Operations
$
0.21

 
$
0.20

 
$
0.33

 
$
0.50

Basic  (Loss) Earnings Per Common Share From Discontinued Operations
(0.02
)
 
0.01

 
(0.22
)
 
0.02

Total Basic Earnings Per Common Share
$
0.19

 
$
0.21

 
$
0.11

 
$
0.52

Class A Shares
 

 
 

 
 
 
 
Basic Earnings Per Common Share From Continuing Operations
$
0.19

 
$
0.18

 
$
0.26

 
$
0.46

Basic (Loss) Earnings Per Common Share From Discontinued Operations
(0.02
)
 
0.01

 
(0.22
)
 
0.02

Total Basic Earnings Per Common Share
$
0.17

 
$
0.19

 
$
0.04

 
$
0.48

Basic Weighted-Average Number of Shares Outstanding
 

 
 

 
 
 
 
Class P Shares
605

 
111

 
366

 
111

Class A Shares
432

 
596

 
496

 
596

Class P Shares
 
 
 
 
 
 
 
Diluted Earnings Per Common Share From Continuing Operations
$
0.21

 
$
0.20

 
$
0.33

 
$
0.50

Diluted (Loss) Earnings Per Common Share From Discontinued Operations
(0.02
)
 
0.01

 
(0.22
)
 
0.02

Total Diluted Earnings Per Common Share
$
0.19

 
$
0.21

 
$
0.11

 
$
0.52

Class A Shares
 

 
 

 
 
 
 
Diluted Earnings Per Common Share From Continuing Operations
$
0.19

 
$
0.18

 
$
0.26

 
$
0.46

Diluted (Loss) Earnings Per Common Share From Discontinued Operations
(0.02
)
 
0.01

 
(0.22
)
 
0.02

Total Diluted Earnings Per Common Share
$
0.17

 
$
0.19

 
$
0.04

 
$
0.48

Diluted Weighted-Average Number of Shares Outstanding
 

 
 

 
 
 
 
Class P Shares
1,039

 
708

 
864

 
707

Class A Shares
432

 
596

 
496

 
596

Dividends Per Common Share Declared
$
0.36

 
$
0.30

 
$
1.03

 
$
0.74


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
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Kinder Morgan, Inc.
 
 
 
 
 
 
 
Net income
$
200

 
$
152

 
$
95

 
$
439

Other comprehensive income, net of tax
 

 
 

 
 
 
 
Change in fair value of derivatives utilized for hedging purposes (net of tax benefit (expense) of $19, $(72), $(15) and $(55), respectively)
(30
)
 
120

 
25

 
90

Reclassification of change in fair value of derivatives to net income (net of tax benefit (expense) of $2, $(8), $(1) and $(30), respectively)
(5
)
 
11

 
1

 
49

Foreign currency translation adjustments (net of tax (expense) benefit of $(13), $30, $(13) and $19, respectively)
22

 
(50
)
 
21

 
(31
)
Adjustments to pension and other postretirement benefit plan liabilities (net of tax benefit (expense) of $1, $-, $(7) and $2, respectively)
(1
)
 
—

 
12

 
(4
)
Total other comprehensive (loss) income
(14
)
 
81

 
59

 
104

Total comprehensive income
186

 
233

 
154

 
543

 
 
 
 
 
 
 
 
Noncontrolling Interests
 

 
 

 
 
 
 
Net income (loss)
55

 
(68
)
 
(156
)
 
(72
)
Other comprehensive income, net of tax
 

 
 

 
 
 
 
Change in fair value of derivatives utilized for hedging purposes (net of tax benefit (expense) of $5, $(20), $(5) and $(15) respectively)
(41
)
 
177

 
46

 
132

Reclassification of change in fair value of derivatives to net income (net of tax benefit (expense) of $-, $(2), $(1) and $(9), respectively)
(5
)
 
23

 
4

 
87

Foreign currency translation adjustments (net of tax (expense) benefit of $(4), $8, $(4) and $5, respectively)
32

 
(75
)
 
31

 
(47
)
Adjustments to pension and other postretirement benefit plan liabilities (net of tax benefit of $1, $-, $1 and $1, respectively)
(2
)
 
—

 
(2
)
 
(6
)
Total other comprehensive (loss) income
(16
)
 
125

 
79

 
166

Total comprehensive income (loss)
39

 
57

 
(77
)
 
94

 
 
 
 
 
 
 
 
Total
 

 
 

 
 
 
 
Net income (loss)
255

 
84

 
(61
)
 
367

Other comprehensive income (loss), net of tax
 

 
 

 
 
 
 
Change in fair value of derivatives utilized for hedging purposes (net of tax benefit (expense) of $24, $(92), $(20) and $(70), respectively)
(71
)
 
297

 
71

 
222

Reclassification of change in fair value of derivatives to net income (net of tax benefit (expense) of $2, $(10), $(1) and $(39), respectively)
(10
)
 
34

 
5

 
136

Foreign currency translation adjustments (net of tax (expense) benefit of $(17), $38, $(17) and $24, respectively)
54

 
(125
)
 
52

 
(78
)
Adjustments to pension and other postretirement benefit plan liabilities (net of tax benefit (expense) of $2, $-, $(6) and $3, respectively)
(3
)
 
—

 
10

 
(10
)
Total other comprehensive (loss) income
(30
)
 
206

 
138

 
270

Total comprehensive income
$
225

 
$
290

 
$
77

 
$
637


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
(In Millions, Except Share and Per Share Amounts)
 
September 30, 2012
 
December 31, 2011
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents – KMI (Note 13)
$
175

 
$
2

Cash and cash equivalents – KMP and EPB (Note 13)
600

 
409

Restricted deposits
56

 
34

Accounts, notes and interest receivable, net
1,296

 
914

Inventories
322

 
110

Gas in underground storage
57

 
62

Fair value of derivative contracts
82

 
72

Assets held for sale
1,909

 
—

Other current assets
625

 
60

Total current assets
5,122

 
1,663

 
 
 
 
Property, plant and equipment, net (Note 13)
30,881

 
17,926

Investments
6,135

 
3,744

Notes receivable
192

 
165

Goodwill (Note 13)
23,557

 
5,074

Other intangibles, net
1,192

 
1,185

Fair value of derivative contracts
784

 
698

Deferred charges and other assets
2,190

 
262

Total Assets
$
70,053

 
$
30,717

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities
 

 
 

Current portion of debt – KMI (Note 13)
$
1,159

 
$
1,261

Current portion of debt – KMP and EPB (Note 13)
2,790

 
1,638

Cash book overdrafts
66

 
23

Accounts payable
1,066

 
728

Accrued interest
363

 
330

Accrued taxes
240

 
38

Deferred revenues
98

 
100

Fair value of derivative contracts
144

 
121

Accrued other current liabilities
934

 
290

Total current liabilities
6,860

 
4,529

 
 
 
 
Long-term liabilities and deferred credits
 

 
 

Long-term debt
 

 
 

Outstanding – KMI (Note 13)
10,213

 
1,978

Outstanding – KMP and EPB (Note 13)
19,467

 
11,183

Preferred interest in general partner of KMP
100

 
100

Debt fair value adjustments
2,695

 
1,095

Total long-term debt
32,475

 
14,356

Deferred income taxes
3,920

 
2,199

Fair value of derivative contracts
182

 
39

Other long-term liabilities and deferred credits
2,718

 
1,026

   Total long-term liabilities and deferred credits
39,295

 
17,620

Total Liabilities
$
46,155

 
$
22,149

 
 
 
 

5
Kinder Morgan, Inc. Form 10-Q


KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(In Millions, Except Share and Per Share Amounts)
 
 
 
 
 
September 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, 648,416,623 and 170,921,140 shares, respectively, issued and outstanding
$
6

 
$
2

Class A shares, $0.01 par value, 707,000,000 shares authorized, 388,717,261 and 535,972,387 shares, respectively, issued and outstanding
4

 
5

Class B shares, $0.01 par value, 100,000,000 shares authorized, 89,304,799 and 94,132,596 shares, respectively, issued and outstanding
1

 
1

Class C shares, $0.01 par value, 2,462,927 shares authorized, 2,315,497 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
14,924

 
3,431

Retained deficit
(733
)
 
(3
)
Accumulated other comprehensive loss
(56
)
 
(115
)
Total Kinder Morgan, Inc.’s stockholders’ equity
14,146

 
3,321

Noncontrolling interests
9,752

 
5,247

      Total Stockholders’ Equity
23,898

 
8,568

Total Liabilities and Stockholders’ Equity
$
70,053

 
$
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)

 
Nine Months Ended
September 30,
 
2012
 
2011
Cash Flows From Operating Activities
 
 
 
Net (loss) income
$
(61
)
 
$
367

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

 
 

Depreciation, depletion and amortization
1,017

 
807

Deferred income taxes
20

 
78

Amortization of excess cost of equity investments
9

 
5

Loss from costs to sell and the remeasurement of net assets to fair value (Note 2)
934

 
167

Loss on early extinguishment of debt
82

 
—

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

 
—

Earnings from equity investments
(302
)
 
(215
)
Distributions from equity investments
290

 
201

Proceeds from termination of interest rate swap agreements
53

 
73

Pension contributions in excess of expense
(9
)
 
(10
)
Changes in components of working capital, net of effects of acquisition
 

 
 

Accounts receivable
(25
)
 
35

Inventories
(100
)
 
9

Other current assets
41

 
(2
)
Accounts payable
(91
)
 
(7
)
Cash book overdrafts
44

 
8

Accrued interest
(175
)
 
(184
)
Accrued taxes
64

 
36

Accrued liabilities
50

 
(1
)
Rate reparations, refunds and other litigation reserve adjustments
(23
)
 
160

Other, net
22

 
69

Net Cash Provided by Operating Activities
1,927

 
1,596

 
 
 
 
Cash Flows From Investing Activities
 

 
 

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

Acquisitions of assets and investments
(72
)
 
(945
)
Repayments from related party
48

 
29

Capital expenditures
(1,399
)
 
(845
)
Sale or casualty of property, plant and equipment, and other net assets, net of removal costs
40

 
29

(Investments in) proceeds from margin and restricted deposits
(27
)
 
55

Contributions to investments
(158
)
 
(297
)
Distributions from equity investments in excess of cumulative earnings
159

 
185

Refined products, natural gas liquids and transmix line-fill
14

 
—

Other, net
—

 
3

Net Cash Used in Investing Activities
$
(6,365
)
 
$
(1,786
)
 
 
 
 
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)
 
 
 
 
 
Nine Months Ended
September 30,
 
2012
 
2011
Cash Flows From Financing Activities
 

 
 

Issuance of debt - KMI
$
7,244

 
$
1,750

Payment of debt - KMI
(4,864
)
 
(2,125
)
Issuance of debt - KMP and EPB
8,483

 
6,356

Payment of debt - KMP and EPB
(5,557
)
 
(5,538
)
Debt issue costs
(104
)
 
(19
)
Cash dividends
(810
)
 
(557
)
Repurchase of warrants
(136
)
 
—

Contributions from noncontrolling interests
1,404

 
817

Distributions to noncontrolling interests
(853
)
 
(707
)
Other, net
(18
)
 
—

Net Cash Provided by (Used in) Financing Activities
4,789

 
(23
)
 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
13

 
(15
)
 
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents
364

 
(228
)
Cash and Cash Equivalents, beginning of period
411

 
502

Cash and Cash Equivalents, end of period
$
775

 
$
274

 
 
 
 
Noncash Investing and Financing Activities
 

 
 

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

 
$
—

Liabilities settled by the issuance of shares and warrants
$
12

 
$
—

Assets acquired by the assumption or incurrence of liabilities
$
—

 
$
180

Assets acquired or liabilities settled by contributions from noncontrolling interests
$
306

 
$
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)
$
1,051

 
$
669

Net cash paid during the period for income taxes
$
175

 
$
177


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 41% 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-

9
Kinder Morgan, Inc. Form 10-Q


owned subsidiaries as well as the accounts of KMP, EPB and KMR.  Investments in jointly-owned operations in which we hold a 50% or less interest (other than KMP, EPB and KMR, because we have the ability to exercise significant control over their operating and financial policies) are accounted for under the equity method.  All significant intercompany transactions and balances have been eliminated.
 
Notwithstanding the consolidation of KMP and EPB, and their respective subsidiaries, into our financial statements, we are not liable for, and our assets are not available to satisfy, the obligations of KMP and EPB, and/or their respective subsidiaries, and vice versa, except as discussed in the following paragraph.  Responsibility for payments of obligations reflected in our, 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 $4.3 billion of its debt. This includes $3.6 billion associated with KMP's August 2012 purchase of Tennessee Gas Pipeline L.L.C. and 50% of El Paso Natural Gas Company, L.L.C. 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, as applicable, 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 from costs to sell and the 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 nine months ended September 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 September 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 September 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-KMP; (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 nine months ended September 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.


10
Kinder Morgan, Inc. Form 10-Q


The following tables set forth the computation of basic and diluted earnings per share from continuing operations for the three and nine months ended September 30, 2012, three months ended September 30, 2011 and the period February 11, 2011 (the date of our initial public offering) through September 30, 2011 (in millions, except per share amounts):
 
Three Months Ended September 30, 2012
 
Income from Continuing Operations Available to Shareholders
 
Class P
 
Class A
 
Participating
Securities (a)
 
Total
Income from continuing operations

 

 

 
$
386

Less: income from continuing operations attributable to noncontrolling interests


 


 


 
(171
)
Income from continuing operations attributable to KMI


 


 


 
215

Dividends declared during period
$
212

 
$
142

 
$
10

 
(364
)
Excess distributions over earnings
(87
)
 
(62
)
 
—

 
$
(149
)
Income from continuing operations attributable to shareholders
$
125

 
$
80

 
$
10

 
$
215

Basic earnings per share from continuing operations
 

 
 

 
 

 
 

Basic weighted-average number of shares outstanding
605

 
432

 
N/A

 
 

Basic earnings per common share from continuing operations(b)
$
0.21

 
$
0.19

 
N/A

 
 

Diluted earnings per share from continuing operations
 

 
 

 
 

 
 

Income from continuing operations attributable to shareholders and assumed conversions(c)
$
215

 
$
80

 
N/A

 
 

Diluted weighted-average number of shares
1,039

 
432

 
N/A

 
 

Diluted earnings per common share from continuing operations(b)
$
0.21

 
$
0.19

 
N/A

 
 


 
Nine Months Ended September 30, 2012
 
Income from Continuing Operations Available to Shareholders
 
Class P
 
Class A
 
Participating
Securities (a)
 
Total
Income from continuing operations
 
 
 
 
 
 
$
728

Less: income from continuing operations attributable to noncontrolling interests
 
 
 
 
 
 
(441
)
Income from continuing operations attributable to KMI
 
 
 
 
 
 
287

Dividends declared during period
$
343

 
$
432

 
$
35

 
(810
)
Excess distributions over earnings
(221
)
 
(301
)
 
(1
)
 
$
(523
)
Income from continuing operations attributable to shareholders
$
122

 
$
131

 
$
34

 
$
287

Basic earnings per share from continuing operations
 

 
 

 
 

 
 

Basic weighted-average number of shares outstanding
366

 
496

 
N/A

 
 

Basic earnings per common share from continuing operations(b)
$
0.33

 
$
0.26

 
N/A

 
 

Diluted earnings per share from continuing operations
 

 
 

 
 

 
 

Income from continuing operations attributable to shareholders and assumed conversions(c)
$
287

 
$
131

 
N/A

 
 

Diluted weighted-average number of shares
864

 
496

 
N/A

 
 

Diluted earnings per common share from continuing operations(b)
$
0.33

 
$
0.26

 
N/A

 
 




11
Kinder Morgan, Inc. Form 10-Q


 
Three Months Ended September 30, 2011
 
Income from Continuing Operations Available to Shareholders
 
Class P
 
Class A
 
Participating
Securities (a)
 
Total
Income from continuing operations
 
 
 
 
 
 
$
29

Less: loss from continuing operations attributable to noncontrolling interests
 
 
 
 
 
 
116

Income from continuing operations attributable to KMI
 
 
 
 
 
 
145

Dividends declared during period
$
34

 
$
166

 
$
13

 
(213
)
Excess distributions over earnings
(11
)
 
(57
)
 
—

 
$
(68
)
Income from continuing operations attributable to shareholders
$
23

 
$
109

 
$
13

 
$
145

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)
$
0.20

 
$
0.18

 
N/A

 
 
Diluted earnings per share from continuing operations
 
 
 
 
 
 
 
Income from continuing operations attributable to shareholders and assumed conversions(c)
$
145

 
$
109

 
N/A

 
 
Diluted weighted-average number of shares
708

 
596

 
N/A

 
 
Diluted earnings per common share from continuing operations(b)
$
0.20

 
$
0.18

 
N/A

 
 

 
February 11. 2011 through September 30, 2011
 
Income from Continuing Operations Available to Shareholders
 
Class P
 
Class A
 
Participating
Securities (a)
 
Total
Income from continuing operations for the nine months ended September 30, 2011
 
 
 
 
 
 
$
221

Less: loss from continuing operations attributable to noncontrolling interests for the nine months ended September 30, 2011
 
 
 
 
 
 
199

Income from continuing operations attributable to KMI
 
 
 
 
 
 
420

Less: income from continuing operations attributable to KMI members prior to incorporation
 
 
 
 
 
 
(67
)
Income from continuing operations attributable to shareholders
 
 
 
 
 
 
353

Dividends declared during the period
$
49

 
$
237

 
$
26

 
(312
)
Remaining undistributed earnings
6

 
35

 
—

 
$
41

Income from continuing operations attributable to shareholders
$
55

 
$
272

 
$
26

 
$
353

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)
$
0.50

 
$
0.46

 
N/A

 
 
Diluted earnings per share from continuing operations
 
 
 
 
 
 
 
Income from continuing operations attributable to shareholders and assumed conversions(c)
$
353

 
$
272

 
N/A

 
 
Diluted weighted-average number of shares(d)
707

 
596

 
N/A

 
 
Diluted earnings per common share from continuing operations(b)
$
0.50

 
$
0.46

 
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 nine months ended September 30, 2012, three months ended September 30, 2011 and the period February 11, 2011 (the date of our initial public offering) through September 30, 2011 (in millions, except per share amounts):
 
Three Months Ended September 30, 2012
 
Net Income Available to Shareholders
 
Class P
 
Class A
 
Participating
Securities (a)
 
Total
Net income attributable to KMI
 
 
 
 
 
 
$
200

Dividends declared during period
$
212

 
$
142

 
$
10

 
(364
)
Excess distributions over earnings
(96
)
 
(68
)
 
—

 
$
(164
)
Net income attributable to shareholders
$
116

 
$
74

 
$
10

 
$
200

Basic earnings per share
 

 
 

 
 

 
 

Basic weighted-average number of shares outstanding
605

 
432

 
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)
$
200

 
$
74

 
N/A

 
 

Diluted weighted-average number of shares
1,039

 
432

 
N/A

 
 

Diluted earnings per common share(b)
$
0.19

 
$
0.17

 
N/A

 
 


 
Nine Months Ended September 30, 2012
 
Net Income Available to Shareholders
 
Class P
 
Class A
 
Participating
Securities (a)
 
Total
Net income attributable to KMI
 
 
 
 
 
 
$
95

Dividends declared during period
$
343

 
$
432

 
$
35

 
(810
)
Excess distributions over earnings
(303
)
 
(410
)
 
(2
)
 
$
(715
)
Net income attributable to shareholders
$
40

 
$
22

 
$
33

 
$
95

Basic earnings per share
 
 
 
 
 
 
 
Basic weighted-average number of shares outstanding
366

 
496

 
N/A

 
 
Basic earnings per common share(b)
$
0.11

 
$
0.04

 
N/A

 
 

Diluted earnings per share
 
 
 
 
 
 
 

Net income attributable to shareholders and assumed conversions(c)
$
95

 
$
22

 
N/A

 
 

Diluted weighted-average number of shares
864

 
496

 
N/A

 
 

Diluted earnings per common share(b)
$
0.11

 
$
0.04

 
N/A

 
 
















13
Kinder Morgan, Inc. Form 10-Q


 
Three Months Ended September 30, 2011
 
Net Income Available to Shareholders
 
Class P
 
Class A
 
Participating
Securities (a)
 
Total
Net income attributable to KMI
 
 
 
 
 
 
$
152

Dividends declared during period
$
34

 
$
166

 
$
13

 
(213
)
Excess distributions over earnings
(10
)
 
(51
)
 
—

 
$
(61
)
Net income attributable to shareholders
$
24

 
$
115

 
$
13

 
$
152

Basic earnings per share
 
 
 
 
 
 
 

Basic weighted-average number of shares outstanding
111

 
596

 
N/A

 
 

Basic earnings per common share(b)
$
0.21

 
$
0.19

 
N/A

 
 

Diluted earnings per share
 
 
 
 
 
 
 

Net income attributable to shareholders and assumed conversions(c)
$
152

 
$
115

 
N/A

 
 

Diluted weighted-average number of shares
708

 
596

 
N/A

 
 

Diluted earnings per common share(b)
$
0.21

 
$
0.19

 
N/A

 
 


 
February 11, 2011 through September 30, 2011
 
Net Income Available to Shareholders
 
Class P
 
Class A
 
Participating
Securities (a)
 
Total
Net income attributable to KMI for the nine months ended September 30, 2011
 
 
 
 
 
 
$
439

Less: income attributable to KMI members prior to incorporation
 
 
 
 
 
 
(71
)
Net income attributable to shareholders
 
 
 
 
 
 
368

Dividends declared during period
$
49

 
$
237

 
$
26

 
(312
)
Remaining undistributed earnings
8

 
48

 
—

 
$
56

Net income attributable to shareholders
$
57

 
$
285

 
$
26

 
$
368

Basic earnings per share
 
 
 
 
 
 
 

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

 
596

 
N/A

 
 

Basic earnings per common share(b)
0.52

 
0.48

 
N/A

 
 

Diluted earnings per share
 

 
 

 
 

 
 

Net income attributable to shareholders and assumed conversions(c)
$
368

 
$
285

 
N/A

 
 

Diluted weighted-average number of shares(d)
707

 
596

 
N/A

 


Diluted earnings per common share(b)
$
0.52

 
$
0.48

 
N/A

 


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

14
Kinder Morgan, Inc. Form 10-Q


from February 11, 2011 to September 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 its subsidiary EPB, offered 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 were 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 included storage and liquefied natural gas terminaling facilities.
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 September 30, 2012 reflects 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 LLC, which consisted of EP's exploration and production business for $7.2 billion. Accordingly, the assets and liabilities of EP Energy LLC 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 LLC'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 LLC.

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):
Preliminary Purchase Price Allocation:
 
 
 
Current assets
$
7,175

 
Goodwill (a)
 
18,476

 
Investments (b)
 
4,202

 
Property, plant and equipment, net (c)
 
12,932

 
Deferred charges and other assets (d)
 
1,511

 
Current liabilities
 
(1,441
)
 
Deferred income taxes (e)
 
(900
)
 
Other deferred credits
 
(1,813
)
 
Long-term debt (f)
 
(13,417
)
 
  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 $18.5 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 (increase) 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, net 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 $158 million (net) which primarily consisted of an adjustment 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 (increase).
(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 nine months ended September 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 date or for the period 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.






16
Kinder Morgan, Inc. Form 10-Q



The following pro forma information is in millions, except per share amounts.
 
 
Nine Months Ended
September 30,
 
 
2012
 
2011
Revenues
 
$
8,059

 
$
8,173

Income from continuing operations
 
$
540

 
$
135

Income from discontinued operations
 
$
1,279

 
$
388

Net income attributable to Kinder Morgan, Inc.
 
$
2,071

 
$
372

Class P shares
 
 
 
 
Basic earnings per common share
 
$
1.99

 
$
0.29

Diluted earnings per common share
 
$
1.99

 
$
0.29

Class A shares
 
 
 
 
Basic earnings per common share
 
$
1.93

 
$
0.25

Diluted earnings per common share
 
$
1.93

 
$
0.25

__________
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 nine months ended September 30, 2012 and (ii) $934 million of losses (net of income taxes) on selling costs and the remeasurement of the asset disposal group for the nine months ended September 30, 2012;
•
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.

Expenses Related to the EP Acquisition
    
During the nine months ended September 30, 2012, we incurred $468 million of pre-tax expenses associated with the EP acquisition, and EP Energy sale, including (i) $157 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; (iv) $96 million for legal fees and reserves; and (v) a $106 million write-off (due to debt repayments) or amortization of capitalized financing fees associated with the EP acquisition financing; less (vi) a $38 million benefit associated with pension income and legal recoveries.
 
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 half of 2012 to reflect our initial assessment of its fair value as a result of the FTC mandated sale requirement and based on additional information gained in the sale process during the current quarter, we recognized additional loss amounts from fair value measurement and sales liability adjustments. For the nine months ended September 30, 2012, we recognized a combined $934 million non-cash loss from both remeasurement and estimated costs to sell and we reported this amount separately as “Loss from costs to sell and the 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 nine months ended September 30, 2012.
We also reclassified the fair value of the disposal group's assets as “Assets held for sale” in our accompanying

17
Kinder Morgan, Inc. Form 10-Q


consolidated balance sheet as of September 30, 2012 (because the disposal group's combined liabilities were not material to our consolidated balance sheet as of September 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 our investment in the Rockies Express natural gas pipeline system.
Summarized financial information for KMP’s FTC Natural Gas Pipelines disposal group is as follows (in millions):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Operating revenues
$
71

 
$
83

 
$
204

 
$
241

Operating expenses
(45
)
 
(42
)
 
(116
)
 
(136
)
Depreciation and amortization
—

 
(6
)
 
(7
)
 
(18
)
Other expense
(1
)
 
—

 
(1
)
 
—

Earnings from equity investments
22

 
21

 
64

 
59

Interest income and Other, net
—

 
1

 
1

 
2

Income tax expense
—

 
(2
)
 
—

 
(2
)
Income from operations of KMP’s FTC Natural Gas Pipelines disposal group
$
47

 
$
55

 
$
145

 
$
146

On November 13, 2012, we completed the sale of KMP’s FTC Natural Gas Pipelines disposal group to Tallgrass Energy Partners, LP and received approximately $1.76 billion in cash from the transaction (net of selling costs), which KMP will use to pay off and terminate its $2.0 billion short-term bridge loan credit facility, which had an outstanding balance of $1.685 billion, with the remaining portion from the sale used to pay down commercial paper borrowings.

Drop-Down of EP Assets to KMP 

Effective August 1, 2012, KMP acquired from us (i) 100% of the outstanding equity interests in the Tennessee Gas natural gas pipeline system (Tennessee Gas Pipeline L.L.C. or TGP), and a 50% ownership interest in the El Paso Natural Gas pipeline system (El Paso Natural Gas Company, L.L.C. or EPNG) for an aggregate consideration (including debt assumed) of $6.2 billion, referred to herein as the drop-down transaction. The drop-down transaction was completed by KMI to allow KMP to replace the cash flows associated with KMP's FTC Natural Gas Pipelines disposal group discussed above. The drop-down transaction was accounted for as a transfer of net assets between entities under common control. Specifically, KMP recognized the acquired assets and assumed liabilities at our carrying value, including our purchase accounting adjustments, as of May 25, 2012.

The consideration that we received from KMP consisted of (i) $3.5 billion in cash; (ii) 4,667,575 of KMP's common units (valued at $0.4 billion based on KMP's $81.52 closing market price of the common units on the New York Stock Exchange on the August 13, 2012 issuance date); and (iii) $2.3 billion in assumed debt (consisting of the combined carrying value of 100% of TGP's debt borrowings and 50% of EPNG's debt borrowings as of August 1, 2012, excluding any debt fair value adjustments).
The terms of the drop-down transaction were approved on our behalf by the independent members of our board of directors and on KMP's behalf by its audit committees and the boards of directors of both its general partner and KMR, in its capacity as the delegate of KMP's general partner, following the receipt by the independent directors of our and the audit committees of KMP's general partner and KMR of separate fairness opinions from different independent financial advisors.
We used the proceeds from the drop-down transaction to (i) pay down $2.3 billion on our 3-year term loan facility; (ii) pay off and terminate our 364-day bridge facility; and (iii) pay off an $839 million senior note which matured on September 1, 2012. Also, see Note 3.

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

18
Kinder Morgan, Inc. Form 10-Q


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 KMP's $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%, and as a result we consolidate EP Midstream in the accompanying unaudited consolidated balance sheet effective June 1, 2012. No gain or loss on the previously held equity investment was recognized as the fair value of the equity investment acquired through our EP acquisition was determined to equal the $289 million purchase price paid by KMP for their 50% interest. As such, the fair value of 100% of EP Midstream was determined to be $578 million. EP Midstream's operating results are included in the Natural Gas Pipelines business unit.
We measured the identifiable intangible assets acquired at fair value on the acquisition date, and as a result, we recognized $50 million in “Deferred charges and other assets,” representing the fair value of separate and identifiable relationships with existing customers.  We estimate the remaining useful life of these existing customer relationships to be approximately ten years.  After measuring all of the identifiable tangible and intangible assets acquired and liabilities assumed at fair value on the acquisition date, we recognized $248 million of “Goodwill,” an intangible asset representing the future economic benefits expected to be derived from this acquisition that are not assigned to other identifiable, separately recognizable assets acquired.  We believe the primary item that generated the goodwill is our ability to grow the business by leveraging our pre-existing natural gas operations, and we believe that this value contributed to our acquisition price exceeding the fair value of acquired identifiable net assets and liabilities. This goodwill is not deductible for tax purposes.
Income Tax Impact on the Drop-Down of EP Assets to KMP and KMP Investment in EP Midstream

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

Our accounting policy is to apply the look-through method of recording deferred taxes on the outside book tax basis differences in our investments without regard to non tax deductible goodwill. As a result of the drop-down transaction, a deferred tax liability arose related to the portion of the outside basis difference associated with the underlying goodwill that was contributed to KMP by us. However, since the drop-down was a transaction between entities under common control, we recognized an offsetting deferred charge of $451 million, which will be amortized to income tax expense over the remaining useful lives of the transferred assets of approximately 25 years. Similar to the impact described above, KMP's acquisition of a 50% ownership interest in the EP Midstream joint venture, also generated the recognition of a deferred charge and corresponding deferred tax liability and is included in the amount above.

The amortization of the deferred charge will result in incremental income tax expense of approximately $18 million per year. For the nine months ended September 30, 2012, total income tax expense related to the amortization of the deferred charge was approximately $3 million.

KinderHawk Field Services LLC

Effective July 1, 2011, KMP acquired from Petrohawk Energy Corporation the remaining 50% equity ownership interest in KinderHawk Field Services LLC (KinderHawk) that it did not already own. Following KMP's acquisition of the remaining ownership interest, it changed its method of accounting from the equity method to full consolidation, and due to KMP acquiring a controlling financial interest in KinderHawk, it remeasured its previous 50% equity investment in KinderHawk to its fair value. KMP recognized a $167 million non-cash loss as a result of this remeasurement, and we reported this loss separately within the “Other Income (Expense)” section in our accompanying consolidated statements of income for the three and nine months ended September 30, 2011. For additional information regarding KMP's July 2011 KinderHawk acquisition, see Note 3 “Acquisitions and Divestitures” to our consolidated financial statements included in our 2011 Form 10-K and in our Current Report on Form 8-K filed May 4, 2012.

3. Debt
 
The following table summarizes the net carrying value of our outstanding debt, excluding debt fair value adjustments (in millions):

19
Kinder Morgan, Inc. Form 10-Q


 
September 30, 2012
 
December 31, 2011
Current portion of debt
$
3,949

 
$
2,899

Long-term portion of debt
29,780

 
13,261

Total debt outstanding(a)(b)
$
33,729

 
$
16,160

(a)
Excludes debt fair value adjustments of $2,695 million and $1,095 million as of September 30, 2012 and December 31, 2011, respectively, which are included in the caption “Debt fair value adjustments” on the accompanying consolidated balance sheets.
(b)
See Note 13 for a reconciliation of KMI's, KMP's and EPB's short-term and long-term debt balances.

During the nine months ended September 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

  KMI credit facility
 
variable
 
1,807

 
1,807

  EP Holdco Credit Facility
 
variable
 
62

 
62

EP Midstream Investment Company, LLC credit facility
 
variable
 
95

 
—

  Debt assumed as of May 25, 2012(see below)(a)
 
various
 
12,178

 
—

KMP and subsidiaries:
 
 
 
 
 
 
Senior notes due 2022 - 2042
 
various
 
2,250

 
2,241

Commercial paper
 
variable
 
5,561

 
5,561

Bridge loan credit facility due February 6, 2013
 
variable
 
576

 
576

TGP unsecured senior notes (a)
 
 
 
1,790

 
—

EPB and subsidiaries:
 
 
 
 
 
 
EPB credit facility
 
various
 
105

 
105

Other
 
 
 
6

 
—

Total
 
 
 
$
29,805

 
$
15,727

 
 
 
 
 
 
 
Repayments and other
 
 
 
 
 
 
KMI:
 
 
 
 
 
 
  EP Acquisition Debt:
 
 
 
 
 
 
    Senior secured term loan credit facility, due May 24, 2015
 
variable
 
$
(2,286
)
 
$
(2,286
)
    Secured term loan credit facility, due May 24, 2013
 
variable
 
(375
)
 
(375
)
Senior notes due September 1, 2012
 
6.50%
 
(839
)
 
(839
)
KMI credit facility
 
variable
 
(1,167
)
 
(1,167