KMI-9.30.2013-10Q

 
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, 2013
 
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.)

1001 Louisiana 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 þ Accelerated filer o Non-accelerated filer o 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 25, 2013, the registrant had 1,035,849,756 Class P shares outstanding.




KINDER MORGAN, INC. AND SUBSIDIARIES
TABLE OF CONTENTS

 
 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Kinder Morgan, Inc. and Subsidiaries


Company Abbreviations
 
 
 
 
 
 
BOSTCO
=
Battleground Oil Specialty Terminal Company LLC
KMCO2
=
Kinder Morgan CO2 Company, L.P.
Calnev
=
Calnev Pipe Line LLC
KMEP
=
Kinder Morgan Energy Partners, L.P.
Copano
=
Copano Energy, L.L.C.
KMGP
=
Kinder Morgan G.P., Inc.
Eagle Ford
=
Eagle Ford Gathering LLC
KMP
=
Kinder Morgan Energy Partners, L.P. and its consolidated subsidiaries
El Paso
=
El Paso LLC
KMR
=
Kinder Morgan Management, LLC
Elba Express
=
Elba Express Company, L.L.C.
MEP
=
Midcontinent Express Pipeline LLC
ELC
=
Elba Liquefaction Company, L.L.C.
Plantation
=
Plantation Pipe Line Company
EP
=
El Paso Corporation and its consolidated subsidiaries
SFPP
=
SFPP, L.P.
EPB
=
El Paso Pipeline Partners, L.P.
SLC
=
Southern Liquefaction Company, L.L.C.
EPNG
=
El Paso Natural Gas Company, L.L.C.
SLNG
=
Southern LNG Company, L.L.C.
EPPOC
=
El Paso Pipeline Partners Operating Company, L.L.C.
SNG
=
Southern Natural Gas Company, L.L.C.
FEP
=
Fayetteville Express Pipeline LLC
TGP
=
Tennessee Gas Pipeline Company, L.L.C.
IMT
=
International Marine Terminals
TransColorado
=
TransColorado Gas Transmission Company LLC
KinderHawk
=
KinderHawk Field Services LLC
WYCO
=
WYCO Development L.L.C.
 
 
 
 
 
 
 
 
 
 
 
 
Unless the context otherwise requires, references to “we,” “us,” “our,” or “KMI” are intended to mean Kinder Morgan, Inc. and its consolidated subsidiaries.
 
 
 
 
 
 
Common Industry and Other Terms
 
 
 
 
 
 
Bcf/d
=
billion cubic feet per day
LIBOR
=
London Interbank Offered Rate
CERCLA
=
Comprehensive Environmental Response, Compensation and Liability Act
LNG
=
liquefied natural gas
CO2
=
carbon dioxide
MLP
=
master limited partnership
CPUC
=
California Public Utilities Commission
MMcf/d
=
million cubic feet per day
EBDA
=
earnings before all non-cash depreciation, depletion and amortization expenses, including amortization of excess cost of equity investments
NEB
=
National Energy Board
DD&A
=
depreciation, depletion, amortization and amortization of excess cost of equity investments
NGL
=
natural gas liquid
DCF
=
distributable cash flow
NYMEX
=
New York Mercantile Exchange
EPA
=
United States Environmental Protection Agency
NYSE
=
New York Stock Exchange
FERC
=
Federal Energy Regulatory Commission
PHMSA
=
Pipeline and Hazardous Materials Safety Administration
FASB
=
Financial Accounting Standards Board
SEC
=
United States Securities and Exchange Commission
FTC
=
Federal Trade Commission
WTI
=
West Texas Intermediate
GAAP
=
Generally Accepted Accounting Principles in the United States of America
OTC
=
over-the-counter
 
 
 
 
 
 
 
 
 
 
 
 
When we refer to cubic feet measurements, all measurements are at a pressure of 14.73 pounds per square inch.

3
 
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,
 
2013
 
2012
 
2013
 
2012
Revenues
 
 
 
 
 
 
 
Natural gas sales
$
968

 
$
670

 
$
2,649

 
$
1,751

Services
1,675

 
1,531

 
4,881

 
3,400

Product sales and other
1,113

 
669

 
2,668

 
1,743

Total Revenues
3,756

 
2,870

 
10,198

 
6,894

 
 
 
 
 
 
 
 
Operating Costs, Expenses and Other
 
 
 
 
 

 
 

Costs of sales
1,543

 
854

 
3,767

 
2,071

Operations and maintenance
517

 
491

 
1,579

 
1,184

Depreciation, depletion and amortization
467

 
403

 
1,327

 
1,010

General and administrative
158

 
186

 
481

 
816

Taxes, other than income taxes
95

 
88

 
295

 
207

Other income, net
(65
)
 
(4
)
 
(81
)
 
(22
)
Total Operating Costs, Expenses and Other
2,715

 
2,018

 
7,368

 
5,266

Operating Income
1,041

 
852

 
2,830

 
1,628

 
 
 
 
 
 
 
 
Other Income (Expense)
 
 
 
 
 

 
 

Earnings from equity investments
100

 
101

 
294

 
238

Amortization of excess cost of equity investments
(11
)
 
(5
)
 
(29
)
 
(9
)
Interest expense, net
(418
)
 
(523
)
 
(1,247
)
 
(993
)
Gain on remeasurement of previously held equity interest in Eagle Ford to fair value (Note 2)
—

 
—

 
558

 
—

(Loss) gain on sale of investments in Express pipeline system (Note 2)
(1
)
 
—

 
224

 
—

Other, net
11

 
21

 
35

 
29

Total Other Income (Expense)
(319
)
 
(406
)
 
(165
)
 
(735
)
 
 
 
 
 
 
 
 
Income from Continuing Operations Before Income Taxes
722

 
446

 
2,665

 
893

 
 
 
 
 
 
 
 
Income Tax Expense
(171
)
 
(60
)
 
(675
)
 
(165
)
 
 
 
 
 
 
 
 
Income from Continuing Operations
551

 
386

 
1,990

 
728

 
 
 
 
 
 
 
 
Discontinued Operations (Notes 1 and 2)
 
 
 
 
 

 
 

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

 
48

 
—

 
145

Loss on sale and the remeasurement of KMP’s FTC Natural Gas Pipelines disposal group to fair value, net of tax
—

 
(179
)
 
(2
)
 
(934
)
Loss from Discontinued Operations, Net of Tax
—

 
(131
)
 
(2
)
 
(789
)
 
 
 
 
 
 
 
 
Net Income (Loss)
551

 
255

 
1,988

 
(61
)
 
 
 
 
 
 
 
 
Net (Income) Loss Attributable to Noncontrolling Interests
(265
)
 
(55
)
 
(1,133
)
 
156

 
 
 
 
 
 
 
 
Net Income Attributable to Kinder Morgan, Inc.
$
286

 
$
200

 
$
855

 
$
95

 
 
 
 
 
 
 
 

4
 
Kinder Morgan, Inc. Form 10-Q


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,
 
2013
 
2012
 
2013
 
2012
Class P Shares
 
 
 
 
 
 
 
Basic and Diluted Earnings Per Common Share From Continuing Operations
$
0.27

 
$
0.21

 
$
0.82

 
$
0.33

Basic and Diluted Loss Per Common Share From Discontinued Operations
—

 
(0.02
)
 
—

 
(0.22
)
Total Basic and Diluted Earnings Per Common Share
$
0.27

 
$
0.19

 
$
0.82

 
$
0.11

Class A Shares
 
 
 
 
 

 
 

Basic and Diluted Earnings Per Common Share From Continuing Operations
 
 
$
0.19

 
 
 
$
0.26

Basic and Diluted Loss Per Common Share From Discontinued Operations
 
 
(0.02
)
 
 
 
(0.22
)
Total Basic and Diluted Earnings Per Common Share


 
$
0.17

 


 
$
0.04

Basic Weighted-Average Number of Shares Outstanding
 
 
 
 
 

 
 

Class P Shares
1,036

 
605

 
1,036

 
366

Class A Shares
 
 
432

 
 
 
496

Diluted Weighted-Average Number of Shares Outstanding
 
 
 
 
 

 
 

Class P Shares
1,036

 
1,039

 
1,036

 
864

Class A Shares
 
 
432

 
 
 
496

Dividends Per Common Share Declared for the Period
$
0.41

 
$
0.36

 
$
1.19

 
$
1.03



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


5
 
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,
 
2013
 
2012
 
2013
 
2012
Kinder Morgan, Inc.
 
 
 
 
 
 
 
Net income
$
286

 
$
200

 
$
855

 
$
95

Other comprehensive income (loss), net of tax
 

 
 

 
 
 
 
Change in fair value of derivatives utilized for hedging purposes (net of tax benefit (expense) of $19, $19, $9, and $(15), respectively)
(42
)
 
(30
)
 
(22
)
 
25

Reclassification of change in fair value of derivatives to net income (net of tax (expense) benefit of $(5), $2, $(2), and $(1), respectively)
10

 
(5
)
 
5

 
1

Foreign currency translation adjustments (net of tax (expense) benefit of $(7), $(13), $12, and $(13), respectively)
17

 
22

 
(28
)
 
21

Adjustments to pension and other postretirement benefit plan liabilities (net of tax (expense) benefit of $(36), $1, $(37), and $(7), respectively)
66

 
(1
)
 
66

 
12

Total other comprehensive income (loss)
51

 
(14
)
 
21

 
59

Total comprehensive income
337

 
186

 
876

 
154

 
 
 
 
 
 
 
 
Noncontrolling Interests
 

 
 

 
 
 
 
Net income (loss)
265

 
55

 
1,133

 
(156
)
Other comprehensive income (loss), net of tax
 

 
 

 
 
 
 
Change in fair value of derivatives utilized for hedging purposes (net of tax benefit (expense) of $6, $5, $4, and $(5), respectively)
(38
)
 
(41
)
 
(27
)
 
46

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

 
(5
)
 
5

 
4

Foreign currency translation adjustments (net of tax (expense) benefit of $(2), $(4), $4, and $(4), respectively)
16

 
32

 
(26
)
 
31

Adjustments to pension and other postretirement benefit plan liabilities (net of tax (expense) benefit of $(2), $1, $(2), and $1, respectively)
13

 
(2
)
 
13

 
(2
)
Total other comprehensive income (loss)
—

 
(16
)
 
(35
)
 
79

Total comprehensive income (loss)
265

 
39

 
1,098

 
(77
)
 
 
 
 
 
 
 
 
Total
 

 
 

 
 
 
 
Net income (loss)
551

 
255

 
1,988

 
(61
)
Other comprehensive income (loss), net of tax
 

 
 

 
 
 
 
Change in fair value of derivatives utilized for hedging purposes (net of tax benefit (expense) of $25, $24, $13, and $(20), respectively)
(80
)
 
(71
)
 
(49
)
 
71

Reclassification of change in fair value of derivatives to net income (net of tax (expense) benefit of $(7), $2, $(3) and $(2), respectively)
19

 
(10
)
 
10

 
5

Foreign currency translation adjustments (net of tax (expense) benefit of $(9), $(17), $16, and $(17), respectively)
33

 
54

 
(54
)
 
52

Adjustments to pension and other postretirement benefit plan liabilities (net of tax (expense) benefit of $(38), $2, $(39), and $(6), respectively)
79

 
(3
)
 
79

 
10

Total other comprehensive income (loss)
51

 
(30
)
 
(14
)
 
138

Total comprehensive income
$
602

 
$
225

 
$
1,974

 
$
77


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 BALANCE SHEETS
(In Millions, Except Share and Per Share Amounts)
(Unaudited)

 
September 30, 2013
 
December 31, 2012 (a)
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents – KMI (Note 14)
$
137

 
$
71

Cash and cash equivalents – KMP and EPB (Note 14)
679

 
643

Accounts receivable, net
1,420

 
1,333

Inventories
435

 
374

Assets held for sale
—

 
298

Deferred income taxes
428

 
539

Other current assets
492

 
416

Total current assets
3,591

 
3,674

 
 
 
 
Property, plant and equipment, net (Note 14)
35,275

 
30,996

Investments
6,044

 
5,804

Goodwill (Note 14)
24,494

 
23,632

Other intangibles, net
2,474

 
1,171

Deferred charges and other assets
2,697

 
2,968

Total Assets
$
74,575

 
$
68,245

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current Liabilities
 

 
 

Current portion of debt – KMI (Note 14)
$
2,195

 
$
1,153

Current portion of debt – KMP and EPB (Note 14)
778

 
1,248

Accounts payable
1,427

 
1,248

Accrued interest
391

 
513

Accrued other current liabilities
1,624

 
1,066

Total current liabilities
6,415

 
5,228

 
 
 
 
Long-term liabilities and deferred credits
 

 
 

Long-term debt
 

 
 

Outstanding – KMI (Note 14)
7,724

 
9,148

Outstanding – KMP and EPB (Note 14)
23,090

 
20,161

Preferred interest in general partner of KMP
100

 
100

Debt fair value adjustments
2,124

 
2,591

Total long-term debt
33,038

 
32,000

Deferred income taxes
4,314

 
4,071

Other long-term liabilities and deferred credits
2,506

 
2,846

Total long-term liabilities and deferred credits
39,858

 
38,917

Total Liabilities
$
46,273

 
$
44,145

 
 
 
 
 

7
 
Kinder Morgan, Inc. Form 10-Q


KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(In Millions, Except Share and Per Share Amounts)
(Unaudited)
 
September 30, 2013
 
December 31, 2012 (a)
Commitments and contingencies (Notes 3 and 11)
 
 
 
Stockholders’ Equity
 

 
 

Class P shares, $0.01 par value, 2,000,000,000 shares authorized, 1,035,846,825 and 1,035,668,596 shares, respectively, issued and outstanding
$
10

 
$
10

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

 
—

Additional paid-in capital
14,636

 
14,917

Retained deficit
(1,284
)
 
(943
)
Accumulated other comprehensive loss
(97
)
 
(118
)
Total Kinder Morgan, Inc.’s stockholders’ equity
13,265

 
13,866

Noncontrolling interests
15,037

 
10,234

Total Stockholders’ Equity
28,302

 
24,100

Total Liabilities and Stockholders’ Equity
$
74,575

 
$
68,245

_______
(a)
Retrospectively adjusted as discussed in Note 2.

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


8
 
Kinder Morgan, Inc. Form 10-Q


KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
 
Nine Months Ended September 30,
 
2013
 
2012
Cash Flows From Operating Activities
 
 
 
Net income (loss)
$
1,988

 
$
(61
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
 

 
 

Depreciation, depletion and amortization
1,327

 
1,017

Deferred income taxes
474

 
20

Amortization of excess cost of equity investments
29

 
9

(Gain) loss from the remeasurement of net assets to fair value, net of tax (Note 2)
(558
)
 
856

Gain from the sale of investments in Express pipeline system (Note 2)
(224
)
 
—

Loss from the sale of discontinued operations (Note 2)
2

 
78

Loss on early extinguishment of debt
—

 
82

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

 
87

Earnings from equity investments
(294
)
 
(302
)
Distributions from equity investments
303
 
290
Proceeds from termination of interest rate swap agreements
96
 
53
Pension contributions in excess of expense
(59)
 
(9)
Changes in components of working capital, net of the effects of acquisitions
 
 
 
Accounts receivable
126

 
(25
)
Inventories
(57
)
 
(99
)
Other current assets
53

 
40

Accounts payable
(232
)
 
(47
)
Accrued interest
(133
)
 
(175
)
Accrued other current liabilities
20

 
79

Rate reparations, refunds and other litigation reserve adjustments
174

 
(23
)
Other, net
(258
)
 
57

Net Cash Provided by Operating Activities
2,777

 
1,927

 
 
 
 
Cash Flows From Investing Activities
 

 
 

Acquisition of EP, net of $6,581 cash acquired (Note 2)
—

 
(4,970
)
Acquisitions of other assets and investments, net of $30 cash acquired (Note 2)
(292
)
 
(72
)
Capital expenditures
(2,270
)
 
(1,399
)
Proceeds from sale of investments in Express pipeline system
402

 
—

Proceeds from sale of investments in BBPP Holdings Ltda
88

 
—

Repayments from related party
10

 
48

Contributions to investments
(171
)
 
(158
)
Distributions from equity investments in excess of cumulative earnings
117

 
159

Sale or casualty of property, plant and equipment, investments and other net assets, net of removal costs
74

 
40

Other, net
4

 
(13
)
Net Cash Used in Investing Activities
(2,038
)
 
(6,365
)
 
 
 
 
Cash Flows From Financing Activities
 

 
 

Issuance of debt - KMI
1,592

 
7,244

Payment of debt - KMI
(1,985
)
 
(4,864
)
Issuance of debt - KMP and EPB
7,915

 
8,483

Payment of debt - KMP and EPB
(6,666
)
 
(5,557
)
Debt issue costs
(23
)
 
(104
)
Cash dividends
(1,196
)
 
(810
)
Repurchase of warrants
(463
)
 
(136
)
Contributions from noncontrolling interests
1,420

 
1,404

Distributions to noncontrolling interests
(1,220
)
 
(853
)
Other, net
1

 
(18
)
Net Cash (Used in) Provided by Financing Activities
(625
)
 
4,789

 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
(12
)
 
13

 
 
 
 
Net Increase in Cash and Cash Equivalents
102

 
364

Cash and Cash Equivalents, beginning of period
714

 
411

Cash and Cash Equivalents, end of period
$
816

 
$
775

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

9
 
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,
 
2013
 
2012
 
 
 
 
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
$
1,487

 
$
—

Assets acquired or liabilities settled by contributions from noncontrolling interests
$
3,733

 
$
306

Contribution of net assets to investments
$
—

 
$
—

Increase in accrual for capital expenditures
$
240

 
$
74

Supplemental Disclosures of Cash Flow Information
 
 
 
Cash paid during the period for interest (net of capitalized interest)
$
1,362

 
$
1,051

Net cash paid during the period for income taxes
$
82

 
$
175


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





10

KINDER MORGAN, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Millions)
(Unaudited)
 
Nine Months Ended September 30, 2013
 
Par value of common shares
 
Additional
paid-in
capital
 
Retained
deficit
 
Accumulated
other
comprehensive
loss
 
Stockholders’
equity
attributable
to KMI
 
Non-controlling
interests
 
Total
Beginning Balance at
December 31, 2012
$
10

 
$
14,917

 
$
(943
)
 
$
(118
)
 
$
13,866

 
$
10,234

 
$
24,100

Warrants repurchased
 
 
(463
)
 
 
 
 
 
(463
)
 
 
 
(463
)
Warrants exercised
 
 
1

 
 
 
 
 
1

 
 
 
1

Conversions of EP Trust I Preferred securities
 
 
3

 
 
 
 
 
3

 
 
 
3

Amortization of restricted shares
 
 
24

 
 
 
 
 
24

 
 
 
24

Impact from equity transactions of KMP, EPB and KMR
 
 
154

 
 
 
 
 
154

 
(244
)
 
(90
)
Tax impact on stock based compensation
 
 
1

 
 
 
 
 
1

 
 
 
1

Net income
 
 
 
 
855

 
 
 
855

 
1,133

 
1,988

Distributions
 
 
 
 
 
 
 
 
—

 
(1,220
)
 
(1,220
)
Contributions
 
 
 
 
 
 
 
 
—

 
5,153

 
5,153

KMP’s acquisition of Copano noncontrolling interests
 
 
 
 
 
 
 
 
—

 
17

 
17

Cash dividends
 
 
 
 
(1,196
)
 
 
 
(1,196
)
 
 
 
(1,196
)
Other
 
 
(1
)
 
 
 
 
 
(1
)
 
(1
)
 
(2
)
Other comprehensive income (loss)
 
 
 
 
 
 
21

 
21

 
(35
)
 
(14
)
Ending Balance at
September 30, 2013
$
10

 
$
14,636

 
$
(1,284
)
 
$
(97
)
 
$
13,265

 
$
15,037

 
$
28,302


 
Nine Months Ended September 30, 2012
 
Par value of common shares
 
Additional
paid-in
capital
 
Retained
deficit
 
Accumulated
other
comprehensive
loss
 
Stockholders’
equity
attributable
to KMI
 
Non-controlling
interests
 
Total
Beginning Balance at
December 31, 2011
$
8

 
$
3,431

 
$
(3
)
 
$
(115
)
 
$
3,321

 
$
5,247

 
$
8,568

Issuance of shares for EP acquisition
3

 
10,598

 
 
 
 
 
10,601

 
 
 
10,601

Issuance of warrants for EP acquisition
 
 
863

 
 
 
 
 
863

 
 
 
863

Acquisition of EP noncontrolling interests
 
 
 
 
 
 
 
 
—

 
3,797

 
3,797

Warrants repurchased
 
 
(136
)
 
 
 
 
 
(136
)
 
 
 
(136
)
Conversions of EP Trust I Preferred securities
 
 
11

 
 
 
 
 
11

 
 
 
11

Cash paid for Class P Share cancellation
 
 
 
 
(15
)
 
 
 
(15
)
 
 
 
(15
)
Amortization of restricted shares
 
 
9

 
 
 
 
 
9

 
 
 
9

Impact from equity transactions of KMP, EPB and KMR
 
 
47

 
 
 
 
 
47

 
(76
)
 
(29
)
Tax impact on stock based compensation
 
 
101

 
 
 
 
 
101

 
 
 
101

Net income (loss)
 
 
 
 
95

 
 
 
95

 
(156
)
 
(61
)
Distributions
 
 
 
 
 
 
 
 
—

 
(853
)
 
(853
)
Contributions
 
 
 
 
 
 
 
 
—

 
1,710

 
1,710

Cash dividends
 
 
 
 
(810
)
 
 
 
(810
)
 
 
 
(810
)
Other
 
 
 
 

 
 
 
—

 
4

 
4

Other comprehensive income
 
 
 
 
 
 
59

 
59

 
79

 
138

Ending Balance at
September 30, 2012
$
11

 
$
14,924

 
$
(733
)
 
$
(56
)
 
$
14,146

 
$
9,752

 
$
23,898


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

11
 
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 $110 billion. We own an interest in or operate approximately 82,000 miles of pipelines and 180 terminals. Our pipelines transport natural gas, refined petroleum products, 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. We are also the leading producer and transporter of CO2 for enhanced oil recovery projects in North America.
 
Effective on May 25, 2012, we completed the acquisition of all of the outstanding shares of EP. As a result, we own a 41% limited partner interest and the 2% general partner interest in EPB, as well as certain natural gas pipeline assets.

We also own the general partner and approximately 10% of the limited partner interests of KMP, one of the largest publicly-traded pipeline limited partnerships in America.

Our common stock trades on the NYSE under the symbol “KMI.”
 
KMR is a Delaware limited liability company.  KMGP, 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 KMGP’s power and authority to manage and control the business and affairs of KMP, subject to KMGP’s right to approve certain transactions.
 
Basis of Presentation
 
General

We have prepared our accompanying unaudited consolidated financial statements under the rules and regulations of the SEC. These rules and regulations conform to the accounting principles contained in the FASB’s Accounting Standards 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 unaudited 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. In addition, certain amounts from prior periods have been reclassified to conform to the current presentation (including reclassifications between “Services” and “Product sales and other” within the “Revenues” section of our accompanying consolidated statements of income). 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, 2012 (2012 Form 10-K).

Our accounting records are maintained in United States dollars, and all references to dollars are United States dollars, except where stated otherwise.  Canadian dollars are designated as C$.  Our consolidated financial statements include our accounts and those of our majority-owned subsidiaries as well as the accounts of KMP, 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 in consolidation.
 
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 Note 11, “—Other Contingencies.”  Responsibility for payments of obligations reflected in our, KMP or EPB’s financial statements is a legal determination based on the entity that incurs the liability.
 

12
 
Kinder Morgan, Inc. Form 10-Q


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

Effective November 1, 2012, we sold KMP’s (i) Kinder Morgan Interstate Gas Transmission natural gas pipeline system; (ii) Trailblazer natural gas pipeline system; (iii) Casper and Douglas natural gas processing operations; and (iv) 50% equity investment in the Rockies Express natural gas pipeline system to Tallgrass Energy Partners, LP (now known as Tallgrass Development, LP) (Tallgrass) for approximately $1.8 billion in cash (before selling costs), or $3.3 billion including KMP’s share of joint venture debt. In this report, we refer to this combined group of assets as KMP’s FTC Natural Gas Pipelines disposal group. For more information about the presentation of KMP’s FTC Natural Gas Pipelines disposal group as discontinued operations, see Note 2 “Summary of Significant Accounting Policies—Basis of Presentation” to our consolidated financial statements included in our 2012 Form 10-K.
Goodwill

We evaluate goodwill for impairment on May 31 of each year.  For this purpose, we have seven reporting units as follows: (i) Products Pipelines—KMP (excluding associated terminals); (ii) Products Pipelines Terminals—KMP (evaluated separately from Products Pipelines—KMP for goodwill purposes); (iii) Natural Gas Pipelines Regulated; (iv) Natural Gas Pipelines Non—Regulated; (v) CO2—KMP; (vi) Terminals—KMP; and (vii) Kinder Morgan Canada—KMP.  During the quarter ended June 30, 2013, the Natural Gas Pipelines Non-Regulated reporting unit was created to include the non-regulated businesses KMP acquired from Copano on May 1, 2013 as well as other non-regulated businesses that were historically part of the former Natural Gas Pipelines reporting unit (now the Natural Gas Pipelines Regulated reporting unit). Goodwill was allocated between these two reporting units based on the relative fair values of the reporting units. There were no impairment charges resulting from our May 31, 2013 impairment testing, and no event indicating an impairment has occurred subsequent to that date.

The fair value of each reporting unit was determined based on a market approach utilizing an average dividend/distribution yield of comparable companies. The value of each reporting unit was determined on a stand-alone basis from the perspective of a market participant and represented the price estimated to be received in a sale of the unit as a whole in an orderly transaction between market participants at the measurement date.

Earnings per Share
 
For the three and nine months ended September 30, 2013, earnings per share was calculated using the two-class method.  Earnings were allocated to Class P shares of common stock and to participating securities based on the amount of dividends paid in the current period plus an allocation of the undistributed earnings or excess distributions over earnings to the extent that each security participates in earnings or excess distributions over earnings. Our unvested restricted stock awards do not participate in excess distributions over earnings. For the three and nine months ended September 30, 2013, the following potential Class P common shares are antidilutive and, accordingly, are excluded from the determination of diluted earnings per share; (i) 6 million and 3 million, respectively, related to unvested restricted stock awards; (ii) 400 million and 419 million, respectively, related to outstanding warrants to purchase our Class P shares; and (iii) 10 million for each period, related to convertible trust preferred securities.

The following table sets forth the allocation of net income for Class P shares and for participating securities for the three and nine months ended September 30, 2013 (in millions):
 
Three Months Ended September 30, 2013
 
Nine Months Ended September 30, 2013
 
 
Net Income Available to Shareholders
 
Class P
$
283

 
$
851

 
Participating securities(a)
3

 
4

 
Net Income Attributable to Kinder Morgan, Inc.
$
286

 
$
855

 
_______
(a)
Participating securities are unvested restricted stock awards issued to management employees that contain non-forfeitable rights to dividend equivalent payments.

On December 26, 2012, the remaining series of our Class A, Class B and Class C shares were fully converted and as a result, only our Class P common stock was outstanding as of December 31, 2012.

For the three and nine months ended September 30, 2012, earnings per share was calculated using the two-class method.  Earnings were allocated to each class of common stock based on the amount of dividends paid in the current period

13
 
Kinder Morgan, Inc. Form 10-Q


for each class of stock plus an allocation of the undistributed earnings or excess distributions over earnings to the extent that each security participates in earnings or excess distributions over earnings.  For the investor retained stock, the allocation of undistributed earnings or excess distributions over earnings was in direct proportion to the maximum number of Class P shares into which it could convert.

For the Class P diluted earnings per share computations, total net income attributable to Kinder Morgan, Inc. was divided by the adjusted weighted-average shares outstanding during the period, including all dilutive potential shares.  This included the Class P shares into which the investor retained stock (collectively, our Class A, Class B and Class C common stocks) was convertible.  The number of Class P shares on a fully-converted basis was the same before and after any conversion of our investor retained stock.  Each time one Class P share was issued upon conversion of investor retained stock, the number of Class P shares went up by one, and the number of Class P shares into which the investor retained stock was convertible went down by one.  Accordingly, there was 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 did not impact the number of Class P shares on a fully-converted basis.  Commencing with the acquisition of EP, dilutive potential shares also included the Class P shares issuable in connection with the warrants and the trust preferred securities (see Note 4).  As no securities were convertible into Class A shares, the basic and diluted earnings per share computations for Class A shares were the same. For the three and nine months ended September 30, 2012, the following potential Class P common shares were antidilutive and, accordingly, were excluded from the determination of diluted earnings per share; (i) 450 million and 457 million, respectively, related to outstanding warrants to purchase our Class P shares; and (ii) 11 million for each period, related to convertible trust preferred securities.


14
 
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 (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 paid in the 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 paid in the 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

 
 


15
 
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 (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 paid in the 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 paid in the 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

 
 

_______
(a)
Participating securities included Class B shares, Class C shares, and unvested restricted stock awards issued to non-senior management employees that contained rights to dividend equivalents in the case of the restricted shares.  Our Class B and Class C shares were 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 were 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 were referred to as “investor retained stock,” and were convertible into a fixed number of Class P shares.  In the aggregate, our investor retained stock was 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 did not increase our total fully-converted shares outstanding, impact the aggregate dividends we paid or the dividends we paid 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 was divided by the adjusted weighted-average shares outstanding during the period, including all dilutive potential shares.





16
 
Kinder Morgan, Inc. Form 10-Q



2.  Acquisitions and Divestitures
 
Copano Energy, L.L.C. Acquisition 

Effective May 1, 2013, KMP closed its acquisition of Copano. KMP acquired all of Copano’s outstanding units for a total purchase price of approximately $5.2 billion (including assumed debt and all other assumed liabilities).  The transaction was a 100% unit for unit transaction with an exchange ratio of 0.4563 of KMP’s common units for each Copano common unit.  KMP issued 43,371,210 of its common units valued at $3,733 million as consideration for the Copano acquisition (based on the $86.08 closing market price of a KMP common unit on the NYSE on the May 1, 2013 issuance date).

KMP accounted for its acquisition of Copano under the acquisition method of accounting, and accordingly, measured the consideration paid to Copano unitholders, the acquired identifiable tangible and intangible assets, and the assumed liabilities at their acquisition-date fair values. Also, due to the fact that KMP’s acquisition included the remaining 50% interest in Eagle Ford that it did not already own, KMP remeasured its existing 50% equity investment in Eagle Ford to its fair value as of the acquisition date, resulting in the recognition of a $558 million pre-tax non-cash gain reported separately within “Other Income (Expense)” on our accompanying consolidated statement of income for the nine months ended September 30, 2013.

As of September 30, 2013, KMP’s preliminary purchase price allocation related to the Copano acquisition, as adjusted to date, is as follows (in millions). KMP’s evaluation of the assigned fair values is ongoing and subject to adjustment:

Preliminary Purchase Price Allocation:
 
Current assets (including cash acquired of $30)
$
218

Property, plant and equipment
2,805

Investments
387

Goodwill
1,119

Other intangibles, net
1,375

Other assets
13

Total assets
5,917

Less: Fair value of previously held 50% interest in Eagle Ford
(704
)
Total assets acquired
5,213

Current liabilities
(207
)
Other liabilities
(4
)
Long-term debt
(1,252
)
Noncontrolling interests
(17
)
KMP’s common unit consideration
$
3,733


The “Goodwill” intangible asset amount represents the future economic benefits expected to be derived from this acquisition that are not assignable to other individually identifiable, separately recognizable assets acquired. KMP believes the primary items that generated the goodwill are the value of the synergies created by expanding its natural gas gathering and refined product transportation operations. This goodwill is not deductible for tax purposes and is subject to an impairment test at least annually. The “Other intangibles, net” asset amount represents the fair value of acquired customer contracts and agreements, which are currently being amortized over an estimated remaining useful life of 25 years.

Copano provides comprehensive services to natural gas producers, including natural gas gathering, processing, treating and NGL fractionation.  Copano owns an interest in or operates approximately 6,900 miles of pipelines with 2.7 Bcf/d of natural gas transportation capacity, and also owns nine natural gas processing plants with more than 1 Bcf/d of natural gas processing capacity and 315 MMcf/d of natural gas treating capacity.  Its operations are located primarily in Texas, Oklahoma and Wyoming.  Most of the acquired assets are included in the Natural Gas Pipelines business segment.

Impact of KMP’s Acquisition of Copano on KMI’s Income Taxes

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 goodwill recorded by KMP for its Copano acquisition, KMI’s deferred tax liability and goodwill were adjusted by $255 million for the portion of its outside basis difference associated with KMP’s underlying goodwill.


17
 
Kinder Morgan, Inc. Form 10-Q


KMI Acquisition of EP
      
Effective on May 25, 2012, we acquired all of the outstanding shares of EP for an aggregate consideration of approximately $23 billion (excluding assumed debt). 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.

We accounted for the EP acquisition using the acquisition method of accounting which requires, among other things, that assets acquired and liabilities assumed be recognized on the balance sheet at their acquisition date fair values. During the three months ended June 30, 2013, management completed its purchase accounting valuation estimates and, as a result, retrospectively adjusted the valuations of certain liabilities with a corresponding increase to goodwill as of the acquisition date. The retrospective adjustments amounted to approximately $60 million and primarily related to revisions of estimates related to certain environmental obligations, sales and use tax liabilities, and deferred income taxes.

Goldsmith Landreth Unit

On June 1, 2013, KMP acquired certain oil and gas properties, rights, and related assets in the Permian Basin of West Texas from Legado Resources LLC for approximately $285 million (before working capital adjustments). KMP also assumed $18 million of liabilities. The acquisition of the Goldsmith Landreth San Andres oil field unit includes more than 6,000 acres located in Ector County, Texas, and based on KMP’s measurement of fair values for all of the identifiable tangible and intangible assets acquired and liabilities assumed, KMP assigned the $285 million amount to “Property, plant and equipment, net.” The acquired oil field is in the early stages of CO2 flood development and includes a residual oil zone along with a classic San Andres waterflood. The field currently produces approximately 1,250 barrels of oil per day, and as part of the transaction, KMP obtained a long-term supply contract for up to 150 MMcf/d of CO2. The acquisition complements KMP’s existing oil and gas producing assets in the Permian Basin, and the acquired assets are included as part of the CO2—KMP business segment.

Pro Forma Information

The following summarized unaudited pro forma consolidated income statement information for the three and nine months ended September 30, 2013 and 2012, assumes that the EP, Copano and the Goldsmith Landreth Unit acquisitions had occurred as of January 1, 2012. We prepared the following summarized unaudited pro forma financial results for comparative purposes only. The summarized unaudited pro forma financial results may not be indicative of the results that would have occurred if these acquisitions had been completed as of January 1, 2012 or the results that will be attained in the future. Amounts presented below are in millions, except for the per share amounts:
 
Pro Forma
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Revenues
$
3,756

 
$
3,341

 
$
10,903

 
$
9,384

Income from Continuing Operations
$
551

 
$
379

 
$
1,952

 
$
410

(Loss) Income from Discontinued Operations, Net of Tax
$
—

 
$
(131
)
 
$
(2
)
 
$
1,279

Net Income
$
551

 
$
248

 
$
1,950

 
$
1,689

Net (Income) Loss Attributable to Noncontrolling Interests
$
(265
)
 
$
127

 
$
(1,120
)
 
$
291

Net Income Attributable to Kinder Morgan, Inc.
$
286

 
$
375

 
$
830

 
$
1,980

Diluted Earnings per Common Share


 

 

 

Class P Shares
$
0.27

 
$
0.36

 
$
0.80

 
$
1.91

Class A Shares

 
$
0.34

 

 
$
1.84



18
 
Kinder Morgan, Inc. Form 10-Q


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

We began accounting for KMP’s FTC Natural Gas Pipelines disposal group as discontinued operations in the first quarter of 2012 (prior to our sale announcement, we included the disposal group in the Natural Gas Pipelines business segment).  For the nine months ended September 30, 2012, we recognized a combined $934 million non-cash loss from both the remeasurement of the disposal group to fair value and from estimated costs to sell, and we reported this loss amount separately as “Loss on sale 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.

KMP and Tallgrass trued up the final consideration for the sale of our FTC Natural Gas Pipelines disposal group in the first quarter of 2013, and based on this true up, we recognized an additional $2 million loss. We reported this loss amount separately as “Loss on sale 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, 2013, and except for this loss amount, no other financial results from the operations of KMP’s FTC Natural Gas Pipelines disposal group were recorded in the first nine months of 2013.

Summarized financial information for KMP’s FTC Natural Gas Pipelines disposal group is as follows (in millions):
 
Three Months Ended September 30, 2012
 
Nine Months Ended September 30, 2012
Operating revenues
$
71

 
$
204

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

 
(7
)
Other expense
(1
)
 
(1
)
Earnings from equity investments
22

 
64

Interest income and Other, net
—

 
1

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

 
$
145


Express Pipeline System

Effective March 14, 2013, KMP sold both its one-third equity ownership interest in the Express pipeline system and its subordinated debenture investment in Express to Spectra Energy Corp. KMP received net cash proceeds of $402 million (after paying both a final working capital settlement and certain transaction related selling expenses in the current quarter), and we reported the net cash proceeds received from the sale separately as “Proceeds from sale of investments in Express pipeline system” within the investing section of our accompanying consolidated statement of cash flows. For the nine months ended September 30, 2013, we recognized a combined $224 million pre-tax gain with respect to this sale, and we reported this gain amount separately as “(Loss) gain on the sale of investments in Express pipeline system” on our accompanying consolidated statement of income. We also recorded an income tax expense of $84 million related to this nine month gain, and we included this expense within “Income Tax Expense” in our accompanying consolidated statement of income.

As of the date of sale, KMP’s equity investment in Express totaled $67 million and its note receivable due from Express totaled $110 million. Prior to KMP’s sale, we (i) accounted for KMP’s equity investment under the equity method of accounting; (ii) accounted for KMP’s debt investment under the historical amortized cost method of accounting; and (iii) included the financial results of the Express pipeline system within the Kinder Morgan Canada—KMP business segment.  As of December 31, 2012, KMP’s equity and debt investments in Express totaled $65 million and $114 million, respectively, and we included the combined $179 million amount within “Assets held for sale” on our accompanying consolidated balance sheet.

TGP’s Sale of Production Area Facilities

On September 1, 2013, TGP sold certain natural gas facilities located offshore in the Gulf of Mexico and onshore in the state of Louisiana for an aggregate consideration of $32 million in cash. TGP’s net assets sold in this transaction (including assets identified as “held for sale”) totaled $88 million, and as a result of the sale, TGP recognized both a $92 million increase in regulatory assets pursuant to a FERC order, and a $36 million gain from the sale of assets. We included the cash proceeds received from the sale in 2013 within “Sale or casualty of property, plant and equipment, investments and other net assets, net of removal costs” within the investing section of our accompanying consolidated statement of cash flows for the nine months

19
 
Kinder Morgan, Inc. Form 10-Q


ended September 30, 2013, and we included the gain amount within “Other Income (Expense)” on our accompanying consolidated statements of income for the three and nine months ended September 30, 2013.

BBPP Holdings Ltda

As of December 31, 2012, we owned a 2% interest in Gas Transboliviano S.A., and 33 1/3% interest in BBPP Holdings Ltda which we acquired as a part of the May 25, 2012 EP acquisition. BBPP Holdings Ltda owned a 29% interest in Transportadora Brasileira Gasoduto Bolivia-Brasil S.A. which, together with Gas Transboliviano S.A., owned the Bolivia to Brazil Pipeline. On January 18, 2013, we completed the sale of our equity interests in the Bolivia to Brazil Pipeline for $88 million. As of December 31, 2012, our $88 million equity interests in the Bolivia to Brazil Pipeline was included within “Assets held for sale” on our accompanying consolidated balance sheet.

Drop-Down of EP Assets to KMP 

August 2012
    
Effective August 1, 2012, KMP acquired a 100% ownership interest in TGP and an initial 50% ownership interest in EPNG from us for an aggregate consideration of approximately $6.2 billion (including a proportional share of assumed debt borrowings as of August 1, 2012). For additional information about this acquisition, see Note 3 “Acquisitions and Divestitures—Drop-Down of EP Assets to KMP” to our consolidated financial statements included in our 2012 Form 10-K.
 
March 2013

Effective March 1, 2013, KMP acquired from us the remaining 50% ownership interest it did not already own in both EPNG and the EP midstream assets for an aggregate consideration of approximately $1.7 billion (including a proportional 50% share of assumed debt borrowings as of March 1, 2013). The consideration that we received from KMP consisted of (i) $994 million in cash (including $6 million in the second quarter of 2013 to settle the final working capital adjustment); (ii) 1,249,452 common units (valued at $108 million based on the $86.72 closing market price of KMP’s common unit on the NYSE on the March 1, 2013 issuance date); and (iii) $557 million in assumed debt (consisting of 50% of the outstanding principal amount of EPNG’s debt borrowings as of March 1, 2013, excluding any debt fair value adjustments). We used the proceeds from the March 1, 2013 drop-down transaction to (i) pay down $947 million of our senior secured term loan facility; and (ii) reduce borrowings under our credit facility. See Note 3 “Debt” for further discussion. 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 the audit committees and the boards of directors of both KMGP, as KMP’s general partner, and KMR, in its capacity as the delegate of KMGP, following the receipt by our independent directors and by the audit committees of KMGP and KMR of separate fairness opinions from different independent financial advisors.

The drop-down transactions were accounted for as transfers of net assets between entities under common control. Specifically, we have retrospectively adjusted our consolidated financial statements to reflect the recognition by KMP of the acquired assets and assumed liabilities at our carrying value, including our EP purchase accounting adjustments as of May 25, 2012.  In this report, we refer to these acquisitions of assets by KMP from us as the drop-down transactions; the combined group of assets acquired by KMP from us as the drop-down asset groups; the El Paso Natural Gas pipeline system or El Paso Natural Gas Company, L.L.C. as EPNG; and the EP Midstream assets or Kinder Morgan Altamont LLC (formerly, El Paso Midstream Investment Company, L.L.C.) as the midstream assets.

Income Tax Impact of the Drop-Down of EP Assets to KMP

As discussed above, we accounted for the acquisition of EP as a business combination and for the subsequent March 2013 and August 2012 drop-down transactions as transfers of net assets between entities under common control. For income tax purposes, the March 2013 drop-down transaction was treated as a contribution and the August 2012 drop-down transaction was treated as a partial sale, and a 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 transactions, 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-downs were transactions between entities under common control, we recognized an offsetting deferred charge of $448 million for the August 2012 and $53 million for the March 2013 drop-down transactions. These balances 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

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Kinder Morgan, Inc. Form 10-Q


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 $20 million per year. For the three and nine months ended September 30, 2013, total income tax expense related to the amortization of the deferred charges was approximately $5 million and $15 million, respectively.







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Kinder Morgan, Inc. Form 10-Q


3. Debt

We classify our debt based on the contractual maturity dates of the underlying debt instruments.  We defer costs associated with debt issuance over the applicable term. These deferred costs are then amortized as interest expense in our accompanying consolidated statements of income. The following table provides detail on the principal amount of our outstanding debt balances, as of September 30, 2013 and December 31, 2012. The table amounts exclude all debt fair value adjustments, including debt discounts and premiums (in millions).
 
 
September 30, 2013
 
December 31, 2012
KMI
 
 
 
 
Senior term loan facility, variable rate, due 2015
 
$
1,528

 
$
2,714

Senior notes and debentures, 5.15% through 7.45%, due 2015 through 2098
 
315

 
315

Credit facility due December 31, 2014(a)
 
1,514

 
1,035

Subsidiary borrowings (as obligor)
 
 
 
 
K N Capital Trust I, deferrable interest debentures issued by subsidiary trusts, 7.63% and 8.56%, due 2027 and 2028
 
27

 
27

Kinder Morgan Finance Company, LLC, senior notes, 5.70% through 6.40%, due 2016 through 2036
 
1,636

 
1,636

El Paso, senior notes, 6.50% through 12.00%, due 2013 through 2037
 
3,860

 
3,860

EPC Building, LLC promissory note, 3.967%, due 2013 through 2035(b)
 
464

 
217

Colorado Interstate Gas Services Company, 7.76% Totem note payable, due 2018
 
1

 
1

Other credit facilities due December 20, 2013, March 20 and June 20, 2014
 
293

 
210

EP preferred securities, 4.75%, due March 31, 2028
 
281

 
286

KMGP, $1,000 Liquidation Value Series A Fixed-to-Floating Rate Term Cumulative Preferred Stock
 
100

 
100

Total debt — KMI
 
10,019

 
10,401

Less: Current portion of debt — KMI
 
(2,195
)
 
(1,153
)
Total long-term debt — KMI(c)
 
$
7,824

 
$
9,248

 
 
 
 
 
KMP and EPB
 
 
 
 
KMP
 
 
 
 
Senior notes, 2.65% through 9.00% due 2013 through 2043(d)
 
$
16,100

 
$
13,350

Commercial paper borrowings(e)
 
174

 
621

Credit facility due May 1, 2018
 
—

 
—

KMP subsidiary borrowings (as obligor)
 
 
 
 
TGP senior notes, 7.00% through 8.375%, due 2016 through 2037(f)
 
1,790

 
1,790

EPNG senior notes 5.95% through 8.625%, due 2017 through 2032(g)
 
1,115

 
1,115

Copano senior notes, 7.125%, due April 1, 2021(h)
 
332

 
—

Other miscellaneous subsidiary debt
 
101

 
186

Total debt — KMP