KMI-03.31.2014-10Q

 
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 March 31, 2014
 
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 April 28, 2014, the registrant had 1,027,906,018 Class P shares outstanding.




KINDER MORGAN, INC. AND SUBSIDIARIES
TABLE OF CONTENTS

 
 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

KINDER MORGAN, INC. AND SUBSIDIARIES
GLOSSARY

Company Abbreviations

BOSTCO
=
Battleground Oil Specialty Terminal Company LLC
KMEP
=
Kinder Morgan Energy Partners, L.P.
Calnev
=
Calnev Pipe Line LLC
KMGP
=
Kinder Morgan G.P., Inc.
Copano
=
Copano Energy, L.L.C.
KMI
=
Kinder Morgan Inc. and its majority-owned and/or controlled subsidiaries, excluding KMP and EPB
Eagle Ford
=
Eagle Ford Gathering LLC
KMP
=
Kinder Morgan Energy Partners, L.P. and its majority-owned and controlled subsidiaries
El Paso
=
El Paso Holdco LLC
KMR
=
Kinder Morgan Management, LLC
EP
=
El Paso Corporation and its its majority-owned and controlled subsidiaries
NGPL
=
Natural Gas Pipeline Company of America LLC
EPB
=
El Paso Pipeline Partners, L.P. and its majority-owned and controlled subsidiaries
SFPP
=
SFPP, L.P.
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.
KinderHawk
=
KinderHawk Field Services LLC
TGP
=
Tennessee Gas Pipeline Company, L.L.C.
 
 
 
 
 
 
Unless the context otherwise requires, references to “we,” “us,” or “our,” are intended to mean Kinder Morgan, Inc. and/or its majority-owned and controlled subsidiaries.
 
 
 
 
 
 
Common Industry and Other Terms
BBtu/d
=
billion British Thermal Units per day
FTC
=
Federal Trade Commission
Bcf/d
=
billion cubic feet per day
GAAP
=
United States Generally Accepted Accounting Principles
CERCLA
=
Comprehensive Environmental Response, Compensation and Liability Act
LIBOR
=
London Interbank Offered Rate
CO2
=
carbon dioxide
LLC
=
limited liability company
CPUC
=
California Public Utilities Commission
MBbl/d
=
thousands of barrels per day
DD&A
=
depreciation, depletion and amortization
MLP
=
master limited partnership
EBDA
=
earnings before depreciation, depletion and amortization expenses
NGL
=
natural gas liquids
EPA
=
United States Environmental Protection Agency
NYSE
=
New York Stock Exchange
FASB
=
Financial Accounting Standards Board
OTC
=
over-the-counter
FERC
=
Federal Energy Regulatory Commission
WTI
=
West Texas Intermediate
 
 
 
 
 
 
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


Information Regarding Forward-Looking Statements

This report includes forward-looking statements. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. They use words such as “anticipate,” “believe,” “intend,” “plan,” “projection,” “forecast,” “strategy,” “position,” “continue,” “estimate,” “expect,” “may,” or the negative of those terms or other variations of them or comparable terminology. In particular, expressed or implied statements concerning future actions, conditions or events, future operating results or the ability to generate sales, income or cash flow or to pay dividends are forward-looking statements. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Future actions, conditions or events and future results of operations may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results are beyond our ability to control or predict.

See “Information Regarding Forward-Looking Statements” and Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 (2013 Form 10-K) for a more detailed description of factors that may affect the forward-looking statements. When considering forward-looking statements, one should keep in mind the risk factors described in our 2013 Form 10-K. The risk factors could cause our actual results to differ materially from those contained in any forward-looking statement. Because of these risks and uncertainties, you should not place undue reliance on any forward-looking statement. We plan to provide updates to projections included in this report when we believe previously disclosed projections no longer have a reasonable basis.


4
 
Kinder Morgan, Inc. Form 10-Q


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.

KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Millions, Except Per Share Amounts)
(Unaudited)
 
Three Months Ended March 31,
 
2014
 
2013
Revenues
 
 
 
Natural gas sales
$
1,097

 
$
737

Services
1,829

 
1,604

Product sales and other
1,121

 
719

Total Revenues
4,047

 
3,060

 
 
 
 
Operating Costs, Expenses and Other
 
 
 
Costs of sales
1,643

 
970

Operations and maintenance
483

 
419

Depreciation, depletion and amortization
496

 
415

General and administrative
172

 
140

Taxes, other than income taxes
110

 
98

Other (income) expense, net
(4
)
 
1

Total Operating Costs, Expenses and Other
2,900

 
2,043

 
 
 
 
Operating Income
1,147

 
1,017

 
 
 
 
Other Income (Expense)
 
 
 
Earnings from equity investments
99

 
101

Amortization of excess cost of equity investments
(10
)
 
(9
)
Interest, net
(448
)
 
(402
)
Gain on sale of investments in Express pipeline system (Note 2)
—

 
225

Other, net
13

 
5

Total Other Income (Expense)
(346
)
 
(80
)
 
 
 
 
Income from Continuing Operations Before Income Taxes
801

 
937

 
 
 
 
Income Tax Expense
(200
)
 
(279
)
 
 
 
 
Income from Continuing Operations
601

 
658

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

 
(2
)
 
 
 
 
Net Income
601

 
656

 
 
 
 
Net Income Attributable to Noncontrolling Interests
(314
)
 
(364
)
 
 
 
 
Net Income Attributable to Kinder Morgan, Inc.
$
287

 
$
292

 
 
 
 
Basic and Diluted Earning Per Common Share
 
 
 
From Continuing Operations
$
0.28

 
$
0.28

From Discontinued Operations
—

 
—

Total Basic and Diluted Earnings Per Common Share
$
0.28

 
$
0.28

 
 
 
 
Basic Weighted-Average Number of Shares Outstanding
1,029

 
1,036

Diluted Weighted-Average Number of Shares Outstanding
1,029

 
1,038

 
 
 
 
Dividends Per Common Share Declared for the Period
$
0.42

 
$
0.38



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 March 31,
 
2014
 
2013
Kinder Morgan, Inc.
 
 
 
Net income
$
287

 
$
292

Other comprehensive income (loss), net of tax
 

 
 

Change in fair value of derivatives utilized for hedging purposes (net of tax benefit of $11 and $6, respectively)
(19
)
 
(16
)
Reclassification of change in fair value of derivatives to net income (net of tax (expense) benefit of $(3) and $1, respectively)
6

 
(4
)
Foreign currency translation adjustments (net of tax benefit of $14 and $7, respectively)
(25
)
 
(17
)
Adjustments to pension and other postretirement benefit plan liabilities (net of tax benefit of $- and $-, respectively)
—

 
(1
)
Total other comprehensive loss
(38
)
 
(38
)
Total comprehensive income
249

 
254

 
 
 
 
Noncontrolling Interests
 

 
 

Net income
314

 
364

Other comprehensive income (loss), net of tax
 

 
 

Change in fair value of derivatives utilized for hedging purposes (net of tax benefit of $3 and $3, respectively)
(26
)
 
(15
)
Reclassification of change in fair value of derivatives to net income (net of tax (expense) benefit of $(1) and $-, respectively)
8

 
(2
)
Foreign currency translation adjustments (net of tax benefit of $4 and $2, respectively)
(37
)
 
(16
)
Adjustments to pension and other postretirement benefit plan liabilities (net of tax benefit of $- and $-, respectively)
(1
)
 
—

Total other comprehensive loss
(56
)
 
(33
)
Total comprehensive income
258

 
331

 
 
 
 
Total
 

 
 

Net income
601

 
656

Other comprehensive income (loss), net of tax
 

 
 

Change in fair value of derivatives utilized for hedging purposes (net of tax benefit of $14 and $9, respectively)
(45
)
 
(31
)
Reclassification of change in fair value of derivatives to net income (net of tax (expense) benefit of $(4) and $1, respectively)
14

 
(6
)
Foreign currency translation adjustments (net of tax benefit of $18 and $9, respectively)
(62
)
 
(33
)
Adjustments to pension and other postretirement benefit plan liabilities (net of tax benefit of $- and $-, respectively)
(1
)
 
(1
)
 
(94
)
 
(71
)
Total comprehensive income
$
507

 
$
585


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)


 
March 31,
 2014
 
December 31, 2013
 
(Unaudited)
 
 
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents – KMI (Note 12)
$
85

 
$
116

Cash and cash equivalents – KMP and EPB (Note 12)
428

 
482

Accounts receivable, net
1,645

 
1,721

Inventories
417

 
430

Natural gas imbalance receivables
193

 
83

Deferred income taxes
448

 
567

Other current assets
446

 
469

Total current assets
3,662

 
3,868

 
 
 
 
Property, plant and equipment, net (Note 12)
36,952

 
35,847

Investments
5,962

 
5,951

Goodwill (Note 12)
24,563

 
24,504

Other intangibles, net
2,403

 
2,438

Deferred charges and other assets
2,512

 
2,577

Total Assets
$
76,054

 
$
75,185

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current Liabilities
 

 
 

Current portion of debt – KMI (Note 12)
$
1,128

 
$
725

Current portion of debt – KMP and EPB (Note 12)
1,284

 
1,581

Accounts payable
1,575

 
1,676

Accrued interest
411

 
565

Accrued contingencies
633

 
584

Other current liabilities
1,037

 
944

Total current liabilities
6,068

 
6,075

 
 
 
 
Long-term liabilities and deferred credits
 

 
 

Long-term debt
 

 
 

Outstanding – KMI (Note 12)
8,968

 
9,221

Outstanding – KMP and EPB (Note 12)
23,762

 
22,589

Preferred interest in general partner of KMP
100

 
100

Debt fair value adjustments
1,969

 
1,977

Total long-term debt
34,799

 
33,887

Deferred income taxes
4,599

 
4,651

Other long-term liabilities and deferred credits
2,154

 
2,287

Total long-term liabilities and deferred credits
41,552

 
40,825

Total Liabilities
$
47,620

 
$
46,900

 
 
 
 

7
 
Kinder Morgan, Inc. Form 10-Q


KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(In Millions, Except Share and Per Share Amounts)
 
March 31,
 2014
 
December 31, 2013
 
(Unaudited)
 
 
Commitments and contingencies (Notes 3 and 10)
 
 
 
Stockholders’ Equity
 

 
 

Class P shares, $0.01 par value, 2,000,000,000 shares authorized, 1,027,904,172 and 1,030,677,076 shares, respectively, issued and outstanding
$
10

 
$
10

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

 
—

Additional paid-in capital
14,362

 
14,479

Retained deficit
(1,510
)
 
(1,372
)
Accumulated other comprehensive loss
(62
)
 
(24
)
Total Kinder Morgan, Inc.’s stockholders’ equity
12,800

 
13,093

Noncontrolling interests
15,634

 
15,192

Total Stockholders’ Equity
28,434

 
28,285

Total Liabilities and Stockholders’ Equity
$
76,054

 
$
75,185


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)
 
Three Months Ended March 31,
 
2014
 
2013
Cash Flows From Operating Activities
 
 
 
Net income
$
601

 
$
656

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 

Depreciation, depletion and amortization
496

 
415

Deferred income taxes
111

 
172

Amortization of excess cost of equity investments
10

 
9

Gain on sale of investments in Express pipeline system (Note 2)
—

 
(225
)
Earnings from equity investments
(99
)
 
(101
)
Distributions from equity investment earnings
77

 
101

Pension contributions in excess of expense
(50
)
 
(59
)
Changes in components of working capital, net of the effects of acquisitions
 
 
 
Accounts receivable
178

 
7

Inventories
10

 
(13
)
Other current assets
19

 
33

Accounts payable
(140
)
 
(152
)
Accrued interest
(154
)
 
(136
)
Accrued contingencies and other current liabilities
95

 
192

Other, net
(36
)
 
(132
)
Net Cash Provided by Operating Activities
1,118

 
767

 
 
 
 
Cash Flows From Investing Activities
 
 
 
Business acquisitions (Note 2)
(960
)
 
—

Acquisitions of other assets and investments
(30
)
 
(4
)
Capital expenditures
(845
)
 
(598
)
Proceeds from sales of investments
—

 
491

(Loans to) repayments from related party
(17
)
 
10

Contributions to investments
(36
)
 
(40
)
Distributions from equity investments in excess of cumulative earnings
38

 
37

Natural gas storage and natural gas and liquids line-fill
21

 
10

Sale or casualty of property, plant and equipment, investments and other net assets, net of removal costs
19

 
(3
)
Other, net
(9
)
 
(19
)
Net Cash Used in Investing Activities
(1,819
)
 
(116
)
 
 
 
 
Cash Flows From Financing Activities
 
 
 
Issuance of debt – KMI
643

 
520

Payment of debt – KMI
(493
)
 
(1,281
)
Issuance of debt – KMP and EPB
4,548

 
2,699

Payment of debt – KMP and EPB
(3,691
)
 
(1,810
)
Debt issue costs
(12
)
 
(7
)
Cash dividends
(425
)
 
(384
)
Repurchases of shares and warrants
(149
)
 
(80
)
Contributions from noncontrolling interests
684

 
465

Distributions to noncontrolling interests
(479
)
 
(375
)
Net Cash Provided by (Used in) Financing Activities
626

 
(253
)
 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
(10
)
 
(6
)
 
 
 
 
Net (decrease) increase in Cash and Cash Equivalents
(85
)
 
392

Cash and Cash Equivalents, beginning of period
598

 
714

Cash and Cash Equivalents, end of period
$
513

 
$
1,106

 
 
 
 
Supplemental Disclosures of Cash Flow Information
 
 
 
Cash paid during the period for interest (net of capitalized interest)
$
566

 
$
513

Cash refund during the period for income taxes, net
$
(2
)
 
$
(7
)

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

9

KINDER MORGAN, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Millions)
(Unaudited)
 
Three Months Ended March 31, 2014
 
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, 2013
$
10

 
$
14,479

 
$
(1,372
)
 
$
(24
)
 
$
13,093

 
$
15,192

 
$
28,285

Shares repurchased
 
 
(94
)
 
 
 
 
 
(94
)
 
 
 
(94
)
Warrants repurchased
 
 
(55
)
 
 
 
 
 
(55
)
 
 
 
(55
)
Amortization of restricted shares
 
 
14

 
 
 
 
 
14

 
 
 
14

Impact from equity transactions of KMP, EPB and KMR
 
 
13

 
 
 
 
 
13

 
(21
)
 
(8
)
Windfall tax profit
 
 
5

 
 
 
 
 
5

 
 
 
5

Net income
 
 
 
 
287

 
 
 
287

 
314

 
601

Distributions
 
 
 
 
 
 
 
 
—

 
(479
)
 
(479
)
Contributions
 
 
 
 
 
 
 
 
—

 
684

 
684

Cash dividends
 
 
 
 
(425
)
 
 
 
(425
)
 
 
 
(425
)
Other comprehensive loss
 
 
 
 
 
 
(38
)
 
(38
)
 
(56
)
 
(94
)
Ending Balance at
March 31, 2014
$
10

 
$
14,362

 
$
(1,510
)
 
$
(62
)
 
$
12,800

 
$
15,634

 
$
28,434


 
Three Months Ended March 31, 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

 
(80
)
 

 

 
(80
)
 

 
(80
)
EP Trust I Preferred security conversions

 
1

 

 

 
1

 

 
1

Amortization of restricted shares
 
 
5

 
 
 
 
 
5

 
 
 
5

Impact from equity transactions of KMP and EPB
 
 
14

 
 
 
 
 
14

 
(22
)
 
(8
)
Net income
 
 


 
292

 
 
 
292

 
364

 
656

Distributions
 
 
 

 
 
 
 
 
—

 
(375
)
 
(375
)
Contributions
 
 
 

 
 
 
 
 
—

 
465

 
465

Cash dividends
 
 
 
 
(384
)
 
 
 
(384
)
 
 
 
(384
)
Other comprehensive loss
 
 
 
 
 
 
(38
)
 
(38
)
 
(33
)
 
(71
)
Ending Balance at
March 31, 2013
$
10

 
$
14,857

 
$
(1,035
)
 
$
(156
)
 
$
13,676

 
$
10,633

 
$
24,309



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

10
 
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 fourth largest energy company in North America with a combined enterprise value of approximately $105 billion. We own an interest in or operate approximately 80,000 miles of pipelines and 180 terminals. Our pipelines transport natural gas, gasoline, crude oil, CO2 and other products, and our terminals store petroleum products, ethanol and chemicals, and handle such products as coal, petroleum coke and steel.
 
We own an approximate 10% limited partner interest and the 2% general partner interest in KMP, a leading pipeline transportation and energy storage company and one of the largest publicly-traded pipeline limited partnerships in America. KMP’s limited partner units are traded on the NYSE under the ticker symbol “KMP.” 

We also own an approximate 40% limited partner interest and the 2% general partner interest in EPB, as well as certain natural gas pipeline assets. EPB’s limited partner units are traded on the NYSE under the ticker symbol “EPB.”

Our common stock trades on the NYSE under the symbol “KMI.”
 
KMR is a publicly traded Delaware LLC.  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

Our reporting currency is U.S. dollars, and all references to dollars are U.S. dollars, except where stated otherwise. Canadian dollars are designated as C$.
 
Our accompanying unaudited consolidated financial statements have been prepared 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 FASB’s Accounting Standards Codification, the single source of GAAP. Under such rules and regulations, all significant intercompany items have been eliminated in consolidation. Additionally, 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 2013 Form 10-K.

Our consolidated financial statements include our accounts and those of our majority-owned and controlled subsidiaries including 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.
 
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 10, “Litigation, Environmental and Other Contingencies — 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.

11
 
Kinder Morgan, Inc. Form 10-Q


 Goodwill

We evaluate goodwill for impairment on May 31 of each year. 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.

Earnings per Share
 
We calculate earnings per share 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 months ended March 31, 2014 and 2013, the following potential weighted-average Class P common shares are antidilutive and, accordingly, are excluded from the determination of diluted earnings per share; (i) 7 million and 2 million, respectively, related to unvested restricted stock awards; (ii) 341 million and 439 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 available to shareholders for Class P shares and for participating securities for the three months ended March 31, 2014 and 2013 (in millions):
 
Three Months Ended
March 31,
 
2014
 
2013
 
Net Income Available to Shareholders
Class P
$
284

 
$
291

Participating securities(a)
3

 
1

Net Income Attributable to Kinder Morgan, Inc.
$
287

 
$
292


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

2.  Acquisitions and Divestitures
 
Acquisitions

American Petroleum Tankers and State Class Tankers

Effective January 17, 2014, KMP acquired American Petroleum Tankers (APT) and State Class Tankers (SCT) for aggregate consideration of $960 million in cash, subject to purchase price adjustments (the APT acquisition). KMGP, as KMP’s general partner, has agreed to waive incentive distribution amounts of $13 million for 2014, $19 million for 2015 and $6 million for 2016 to facilitate the transaction.

APT is engaged in the marine transportation of crude oil, condensate and refined products in the U.S. domestic trade, commonly referred to as the Jones Act trade. APT’s primary assets consist of a fleet of five medium range Jones Act qualified product tankers, each with 330 MBbl of cargo capacity, and each operating pursuant to long-term time charters with high quality counterparties, including major integrated oil companies, major refiners and the U.S. Navy. The vessels’ time charters have an average remaining term of approximately four years, with renewal options to extend the initial terms by an average of two years. APT’s vessels are operated by Crowley Maritime Corporation.

SCT has commissioned the construction of four medium range Jones Act qualified product tankers, each with 330 MBbl of cargo capacity. The SCT vessels are scheduled to be delivered in 2015 and 2016 and are being constructed by General Dynamics’ NASSCO shipyard. KMP expects to invest approximately $214 million to complete the construction of the vessels. Upon delivery, the SCT vessels will be operated pursuant to long-term time charters with a major integrated oil company. Each of the time charters has an initial term of five years, with renewal options to extend the initial term by up to three years. The APT acquisition complements and extends KMP’s existing crude oil and refined products transportation business, and all of the acquired assets are included in the Terminals—KMP business segment.


12
 
Kinder Morgan, Inc. Form 10-Q


As of March 31, 2014 , KMP’s preliminary purchase price allocation related to the APT acquisition, as adjusted to date, is as follows (in millions). The evaluation of the assigned fair values is ongoing and subject to adjustment.
Preliminary Purchase Price Allocation:
 
Current assets
$
2

Property, plant and equipment
887

Goodwill
68

Other assets
3

Total assets acquired
960

Cash consideration
$
960


The “Goodwill” intangible asset amount represents the future economic benefits expected to be derived from KMP’s acquisition that are not assignable to other individually identifiable, separately recognizable assets acquired. We believe the primary items that generated the goodwill are the value of the synergies created by expanding KMP’s non-pipeline liquids handling operations, and we expect the entire amount to be deductible for tax purposes.

Other

Effective May 1, 2013, 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 common unit on the NYSE on the May 1, 2013 issuance date).

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 decreased by $260 million for the portion of its outside basis difference associated with KMP’s underlying goodwill.

Effective June 1, 2013, KMP acquired certain oil and gas properties, rights, and related assets located in the Goldsmith Landreth San Andres oil field unit in the Permian Basin of West Texas from Legado Resources LLC for an aggregate consideration of $298 million, consisting of $280 million in cash and assumed liabilities of $18 million (including $12 million of long-term asset retirement obligations).

For additional information about KMP’s Copano and Goldsmith Landreth acquisitions (including our preliminary purchase price allocations as of December 31, 2013), see Note 3 “Acquisitions and Divestitures—Business Combinations and Acquisitions of Investments” to our consolidated financial statements included in our 2013 Form 10-K.
     

13
 
Kinder Morgan, Inc. Form 10-Q


Pro Forma Information

The following summarized unaudited pro forma consolidated income statement information for the three months ended March 31, 2013, assumes that KMP’s acquisitions of (i) APT, (ii) Copano and (iii) the Goldsmith Landreth oil field unit had occurred as of January 1, 2013. 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, 2013, 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 March 31, 2013
 
(Unaudited)
Revenues
 
$
3,610

Income from Continuing Operations
 
630

Loss from Discontinued Operations, Net of Tax
 
(2
)
Net Income
 
628

Net Income Attributable to Noncontrolling Interests
 
(356
)
Net Income Attributable to Kinder Morgan, Inc.
 
272

 
 
 
Diluted Earnings per Class P Share
 
$
0.26


Divestitures

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 $1 million in the second quarter of 2013 for both a final working capital settlement and certain transaction related selling expenses), and we reported the $403 million in proceeds received in the first quarter of 2013 within “Proceeds from sales of investments” within the investing section of our accompanying consolidated statement of cash flows. Additionally, we recognized a combined $225 million pre-tax gain with respect to this sale in the first quarter of 2013, and we reported this gain amount separately as “Gain on 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 gain on sale for the three month period, and we included this expense within “Income Tax Expense.” 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.

BBPP Holdings Ltda

On January 18, 2013, we completed the sale of our equity interests in the Bolivia to Brazil Pipeline for $88 million, which amount is included in “Proceeds from sale of investments” within the investing section of our accompanying consolidated statement of cash flows.

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

As discussed in our 2013 Form 10-K, we sold KMP’s FTC Natural Gas Pipelines disposal group to Tallgrass Energy Partners, LP (now known as Tallgrass Development, LP) (Tallgrass) effective November 1, 2012. KMP and Tallgrass trued up the final consideration for the sale of KMP’s 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.

Subsequent Event—Drop-down of Assets to EPB

On April 28, 2014, EPB announced that it will acquire from us our 50% interest in Ruby Pipeline, our 50% interest in Gulf LNG and our 47.5% interest in Young Gas Storage in May 2014. The terms of this drop-down transaction were approved on our behalf by the independent members of our board of directors and on EPB’s behalf by its general partner's board of directors following the receipt of separate fairness opinions from different investment banks.

14
 
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 costs are then amortized as interest expense in our accompanying consolidated statements of income using the effective interest rate method. The following table provides detail on the principal amount of our outstanding debt balances as of March 31, 2014 and December 31, 2013. The table amounts exclude all debt fair value adjustments, including debt discounts and premiums (in millions).
 
 
March 31, 2014
 
December 31, 2013
KMI
 
 
 
 
Senior term loan facility, variable rate, due May 24, 2015
 
$
1,528

 
$
1,528

Senior notes and debentures, 5.00% through 7.45%, due 2015 through 2098
 
1,815

 
1,815

Credit facility due December 31, 2014(a)
 
410

 
175

Subsidiary borrowings (as obligor)
 
 
 
 
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 8.25%, due 2014 through 2037
 
3,830

 
3,830

EPC Building, LLC, promissory note, 3.967%, due 2014 through 2035
 
459

 
461

EP preferred securities, 4.75%, due March 31, 2028
 
280

 
280

Other miscellaneous subsidiary debt
 
138

 
221

Total debt — KMI
 
10,096

 
9,946

Less: Current portion of debt — KMI
 
(1,128
)
 
(725
)
Total long-term debt outstanding — KMI
 
8,968

 
9,221

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

 
100

Total long-term debt — KMI(b)
 
$
9,068

 
$
9,321

 
 
 
 
 
KMP and EPB
 
 
 
 
KMP
 
 
 
 
Senior notes, 2.65% through 9.00%, due 2014 through 2044
 
$
17,100

 
$
15,600

Commercial paper borrowings(c)
 
419

 
979

Credit facility due May 1, 2018
 
—

 
—

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

 
1,790

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

 
1,115

Copano senior notes, 7.125%, due April 1, 2021
 
332

 
332

Other miscellaneous subsidiary debt
 
97

 
98

Total debt — KMP
 
20,853

 
19,914

Less: Current portion of debt — KMP(d)
 
(1,243
)
 
(1,504
)
Total long-term debt — KMP(b)
 
19,610

 
18,410

EPB
 
 
 
 
EPPOC
 
 
 
 
Senior notes, 4.10% through 7.50%, due 2015 through 2042
 
2,260

 
2,260

Credit facility due May 27, 2016(e)
 
—

 
—

EPB subsidiary borrowings (as obligor)
 
 
 
 
Colorado Interstate Gas Company, L.L.C. (CIG), senior notes, 5.95% through 6.85%, due 2015 through 2037
 
475

 
475

SLNG senior notes, 9.50% through 9.75%, due 2014 through 2016
 
64

 
135

SNG notes, 4.40% through 8.00%, due 2017 through 2032
 
1,211

 
1,211

Other financing obligations
 
183

 
175

Total debt — EPB
 
4,193

 
4,256

Less: Current portion of debt — EPB
 
(41
)
 
(77
)
Total long-term debt — EPB(b)
 
4,152

 
4,179

Total long-term debt outstanding — KMP and EPB
 
$
23,762

 
$
22,589

_______
(a)
As of March 31, 2014 and December 31, 2013, the weighted average interest rates on KMI’s credit facility borrowings were 2.66% and 2.67%, respectively.


15
 
Kinder Morgan, Inc. Form 10-Q


(b)
Excludes debt fair value adjustments. As of March 31, 2014 and December 31, 2013, our “Debt fair value adjustments” increased our combined debt balances by $1,969 million and $1,977 million, respectively. In addition to all unamortized debt discount/premium amounts and purchase accounting on our debt balances, our debt fair value adjustments also include (i) amounts associated with the offsetting entry for hedged debt; and (ii) any unamortized portion of proceeds received from the early termination of interest rate swap agreements. For further information about our debt fair value adjustments, see Note 5 “Risk Management—Debt Fair Value Adjustments.”
(c)
As of March 31, 2014 and December 31, 2013, the average interest rates on KMP’s outstanding commercial paper borrowings were 0.26% and 0.28%, respectively. The borrowings under KMP’s commercial paper program were used principally to finance the acquisitions and capital expansions made during the first three months of 2014, and in the near term, KMP expects that its short-term liquidity and financing needs will be met primarily through borrowings made under its commercial paper program.
(d)
Amounts include outstanding commercial paper borrowings discussed above in footnote (c).
(e)
LIBOR plus 1.75%.

Credit Facilities

KMI
 
As of March 31, 2014, we had $410 million outstanding under KMI’s $1.75 billion senior secured credit facility and $75 million in letters of credit. Our availability under this facility as of March 31, 2014 was approximately $1,265 million.  

KMP

As of both March 31, 2014 and December 31, 2013, KMP had no borrowings under its $2.7 billion five-year senior unsecured revolving credit facility maturing May 1, 2018. Borrowings under KMP’s revolving credit facility can be used for general partnership purposes and as a backup for KMP’s commercial paper program. Similarly, KMP’s borrowings under its commercial paper program reduce the borrowings allowed under its credit facility.

As of March 31, 2014, KMP had $419 million of commercial paper borrowings outstanding under its $2.7 billion credit facility and $202 million in letters of credit. KMP’s availability under its credit facility as of March 31, 2014 was $2,079 million.

EPB

As of March 31, 2014, EPB had no outstanding balance under its revolving credit facility. EPB’s availability under its facility as of March 31, 2014 was approximately $1 billion.
Changes in Debt

On January 15, 2014, in anticipation of the APT acquisition, KMP entered into a short-term unsecured liquidity facility with KMP as borrower, and UBS as administrative agent. This liquidity facility provided for borrowings of up to $1.0 billion from a syndicate of financial institutions and was scheduled to mature on July 15, 2014. Additionally, in conjunction with the establishment of this liquidity facility, KMP increased its commercial paper program to provide for the issuance of up to $3.7 billion (up from $2.7 billion). KMP made no borrowings under this liquidity facility, and after receiving the cash proceeds from both its February 2014 public offering of senior notes (described following) and its February 2014 public offering of common units (described in Note 4 “Stockholder’s Equity—Noncontrolling Interests—Contributions”), KMP terminated the liquidity facility and decreased its commercial paper program to again provide for the issuance of up to $2.7 billion.

On February 24, 2014, KMP completed a public offering of a total $1.5 billion in principal amount of senior notes in two separate series. KMP received net proceeds of $743 million from the offering of $750 million in principal amount of 3.50% senior notes due March 1, 2021, and $739 million from the offering of $750 million in principal amount of 5.50% senior notes due March 1, 2044. KMP used the proceeds from its February 2014 debt offering to reduce the borrowings under its commercial paper program (by reducing the incremental commercial paper borrowings KMP made in January 2014 to fund its APT acquisition).

In February 2014, SLNG repaid $71 million of 9.50% senior notes.


16
 
Kinder Morgan, Inc. Form 10-Q


Kinder Morgan G.P., Inc. Preferred Shares

The following table provides information about KMGP’s per share distributions on 100,000 shares of its Series A Fixed-to-Floating Rate Term Cumulative Preferred Stock:
 
 
Three Months Ended March 31,
 
 
2014
 
2013
Per share cash distribution declared for the period(a)
 
$
10.333

 
$
10.469

Per share cash distribution paid in the period
 
$
10.570

 
$
10.638

_______
(a)
On April 16, 2014, KMGP declared a distribution for the three months ended March 31, 2014, of $10.333 per share, which will be paid on May 19, 2014 to shareholders of record as of April 30, 2014.

Subsequent Events

On April 29, 2014, EPB priced in a public offering $600 million of 4.30% senior notes due May 1, 2024.
4.  Stockholders’ Equity
 
Common Equity
 
As of March 31, 2014, our common equity consisted of our Class P common stock. For additional information regarding our common stock, see Note 10 “Stockholders’ Equity” to our consolidated financial statements included in our 2013
Form 10-K.

On October 16, 2013, we announced that our board of directors had approved a share and warrant repurchase program authorizing us to repurchase in the aggregate up to $250 million of additional shares or warrants, which purchase was completed as of March 2014. On March 4, 2014 we announced that our board of directors had approved an additional share and warrant repurchase program authorizing us to repurchase in the aggregate up to $100 million of additional shares or warrants. As of March 31, 2014, we had $45 million of repurchases remaining.

The following tables set forth the changes in our outstanding shares during the three months ended March 31, 2014 and 2013.
 
Three Months Ended March 31,
 
2014
 
2013
Beginning balance
1,030,677,076

 
1,035,668,596

   Shares repurchased and canceled
(2,780,337
)
 
—

   Shares issued with conversions of EP Trust I Preferred securities
933

 
55,319

   Restricted shares vested
6,500

 
7,905

Ending balance
1,027,904,172

 
1,035,731,820

Dividends
 
Holders of our common stock share equally in any dividend declared by our board of directors, subject to the rights of the holders of any outstanding preferred stock. The following table provides information about our per share dividends.
 
Three Months Ended March 31,
 
2014
 
2013
Per common share cash dividend declared for the period
$
0.42

 
$
0.38

Per common share cash dividend paid in the period
$
0.41

 
$
0.37



17
 
Kinder Morgan, Inc. Form 10-Q


Dividends Subsequent to March 31, 2014

On April 16, 2014, our board of directors declared a cash dividend of $0.42 per share for the quarterly period ended March 31, 2014, which is payable on May 16, 2014 to shareholders of record as of April 30, 2014.

Warrants

Each of our warrants 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. For additional information regarding our warrants, see Note 10 “Stockholders’ Equity” to our consolidated financial statements included in our 2013 Form 10-K.

The table below sets forth the changes in our outstanding warrants during the three months ended March 31, 2014 and 2013.
 
Three Months Ended March 31,
 
2014
 
2013
Beginning balance
347,933,107

 
439,809,442

Warrants repurchased and canceled
(31,045,227
)
 
(16,969,361
)
Warrants issued with conversions of EP Trust I Preferred securities
1,430

 
84,556

Ending balance
316,889,310

 
422,924,637


Noncontrolling Interests
 
The caption “Noncontrolling interests” in our accompanying consolidated balance sheets consists of interests that we do not own in the following subsidiaries (in millions):
 
 
March 31,
2014
 
December 31,
2013
KMP
$
7,995

 
$
7,642

EPB
4,147

 
4,122

KMR
3,183

 
3,142

Other
309

 
286

 
$
15,634

 
$
15,192


Contributions
 
Contributions from our noncontrolling interests consist primarily of equity issuances by KMP, EPB and KMR. As of March 31, 2014, each of these subsidiaries has an equity distribution agreement in place which allows the subsidiary to sell its equity interests from time to time through a designated sales agent. The terms of each agreement are substantially similar. Sales of the subsidiary’s equity interests will be made by means of ordinary brokers’ transactions on the NYSE at market prices, in block transactions or as otherwise agreed between the subsidiary equity issuer and its sales agent. The subsidiary equity issuer may also sell its equity interests to its sales agent as principal for the sales agent’s own account at a price agreed upon at the time of the sale.  Any sale of the subsidiary’s equity interests to the sales agent as principal would be pursuant to the terms of a separate agreement between the subsidiary equity issuer and its sales agent. The equity distribution agreement provides the subsidiary with the right, but not the obligation to offer and sell its equity units or shares, at prices to be determined by market conditions. The subsidiary retains at all times complete control over the amount and the timing of sales under its respective equity distribution agreement, and it will designate the maximum number of equity units or shares to be sold through its sales agent, on a daily basis or otherwise as the subsidiary equity issuer and its sales agent agree.


18
 
Kinder Morgan, Inc. Form 10-Q


The table below shows significant issuances to the public of common units or shares, the net proceeds from the issuances and the use of the proceeds during the three months ended March 31, 2014 for KMP, EPB and KMR (dollars in millions and units and shares in thousands).
 
Issuances
 
Common units/shares
 
Net proceeds
 
Use of proceeds
 
 
 
(in thousands)
 
(in millions)
 
 
KMP
 
 
 
 
 
 
 
Issued under equity distribution agreement
 
2014
 
198

 
$
16

 
Reduced borrowings under KMP's commercial paper program
Other issuances
 
 
 
 
 
 
 
February 2014
 
7,935

 
$
603

 
Reduced borrowings under KMP's commercial paper program that were used to fund KMP's APT acquisition in January 2014
EPB
 
 
 
 
 
 
 
Issued under equity distribution agreement
 
2014
 
1,166

 
$
35

 
General partnership purposes
KMR
 
 
 
 
 
 
 
Issued under equity distribution agreement
 
2014
 
76

 
$
6

 
Purchased additional KMP i-units; KMP then used proceeds to reduce borrowings under its commercial paper program

The above equity issuances by KMP, EPB and KMR during the three months ended March 31, 2014 had the associated effects of increasing our (i) noncontrolling interests by $639 million; (ii) accumulated deferred income taxes by $8 million; and (iii) additional paid-in capital by $13 million.

Noncontrolling Interests Contributions Subsequent to March 31, 2014

In connection with EPB’s announced agreement to acquire certain assets from us, on April 29, 2014, EPB priced in a public offering, 7,820,000 of its common units, including the exercise of an underwriters’ overallotment option, at a price of $30.99 per unit, net of commissions and underwriting expenses. See Note 2 “Acquisitions and Divestitures—Subsequent Event—Drop-down of Assets to EPB” for additional information on the drop-down transaction.

19
 
Kinder Morgan, Inc. Form 10-Q


Distributions

The following table provides information about distributions from our noncontrolling interests (in millions except per unit distribution amounts):
 
Three Months Ended March 31,
 
2014
 
2013
KMP
 
 
 
Per unit cash distribution declared for the period
$
1.38

 
$
1.30

Per unit cash distribution paid in the period
$
1.36

 
$
1.29

Cash distributions paid in the period to the public
$
395

 
$
299

EPB
 
 
 
Per unit cash distribution declared for the period
$
0.65

 
$
0.62

Per unit cash distribution paid in the period
$
0.65

 
$
0.61

Cash distributions paid in the period to the public
$
83

 
$
76

KMR(a)
 
 
 
Share distributions paid in the period to the public
$
1,952,970

 
$
1,570,118

_______
(a)
KMR’s distributions are paid in the form of additional shares or fractions thereof calculated by dividing the KMP cash distribution per common unit by the average of the market closing prices of a KMR share determined for a ten-trading day period ending on the trading day immediately prior to the ex-dividend date for the shares.  Represents share distributions made in the period to noncontrolling interests and excludes 284,288 and 234,478 of shares distributed in the three months ended March 31, 2014 and 2013, respectively, on KMR shares we directly and indirectly own. On April 16, 2014, KMR declared a share distribution of 0.018700 shares per outstanding share (2,386,814 total shares) payable on May 15, 2014 to shareholders of record as of April 30, 2014, based on the $1.38 per common unit distribution declared by KMP.

Distributions Subsequent to March 31, 2014

Noncontrolling Interests Distributions

On April 16, 2014, KMP declared a cash distribution of $1.38 per unit for the quarterly period ended March 31, 2014. The distribution will be paid on May 15, 2014 to KMP’s unitholders of record as of April 30, 2014.
  
On April 16, 2014, EPB declared a cash distribution of $0.65 per unit for the quarterly period ended March 31, 2014. The distribution will be paid on May 15, 2014 to EPB’s unitholders of record as of April 30, 2014.

5.  Risk Management
 
Certain of our business activities expose us to risks associated with unfavorable changes in the market price of natural gas, NGL and crude oil.  We also have exposure to interest rate risk as a result of the issuance of our debt obligations.  Pursuant to our management’s approved risk management policy, we use derivative contracts to hedge or reduce our exposure to certain of these risks.

As part of the EP acquisition, we acquired power forward and swap contracts. We have entered into offsetting positions that eliminate the price risks associated with our power contracts. As part of the May 1, 2013 Copano acquisition, KMP acquired derivative contracts related to natural gas, NGL and crude oil. None of these derivatives are designated as accounting hedges.


20
 
Kinder Morgan, Inc. Form 10-Q


Energy Commodity Price Risk Management
 
As of March 31, 2014, KMI and KMP had entered into the following outstanding commodity forward contracts to hedge their forecasted energy commodity purchases and sales:
 
Net open position long/(short)
Derivatives designated as hedging contracts
 
 
 
Crude oil fixed price
(24.0)
 
MMBbl
Natural gas fixed price
(23.0)
 
Bcf
Natural gas basis
(23.0)
 
Bcf
Derivatives not designated as hedging contracts
 
 
 
Crude oil fixed price
(0.7)
 
MMBbl
Crude oil basis
(0.7)
 
MMBbl
Natural gas fixed price
(13.1)
 
Bcf
Natural gas basis
(8.3)
 
Bcf
NGL fixed price
(1.0)
 
MMBbl

As of March 31, 2014, the maximum length of time over which we have hedged our exposure to the variability in future cash flows associated with energy commodity price risk is through December 2018.

Interest Rate Risk Management
 
As of March 31, 2014, KMI and KMP had a combined notional principal amount of $725 million and $5,175 million, respectively, of fixed-to-variable interest rate swap agreements, effectively converting the interest expense associated with certain series of senior notes from fixed rates to variable rates based on an interest rate of LIBOR plus a spread.  All of KMI and KMP’s swap agreements have termination dates that correspond to the maturity dates of the related series of senior notes and, as of March 31, 2014, the maximum length of time over which we have hedged a portion of our exposure to the variability in the value of this debt due to interest rate risk is through March 15, 2035.

 As of December 31, 2013, KMI and KMP had a combined notional principal amount of $725 million and $4,675 million, respectively, of fixed-to-variable interest rate swap agreements. In February 2014, KMP entered into four separate fixed-to-variable interest rate swap agreements having a combined notional principal amount of $500 million. These agreements effectively convert a portion of the interest expense associated with KMP’s 3.50% senior notes due March 1, 2021, from a fixed rate to a variable rate based on an interest rate of LIBOR plus a spread.
 

21
 
Kinder Morgan, Inc. Form 10-Q


Fair Value of Derivative Contracts
 
The following table summarizes the fair values of our derivative contracts included in our accompanying consolidated balance sheets as of March 31, 2014 and December 31, 2013 (in millions):
Fair Value of Derivative Contracts
 
 
 
 
Asset derivatives
 
Liability derivatives
 
 
 
 
March 31,
2014
 
December 31,
2013
 
March 31,
2014
 
December 31,
2013
 
 
Balance sheet location
 
Fair value
 
Fair value
 
Fair value
 
Fair value
Derivatives designated as hedging contracts
 
 
 
 
 
 
 
 
 
 
Natural gas and crude derivative contracts
 
Other current assets/(Other current liabilities)
 
$
13

 
$
18

 
$
(51
)
 
$
(33
)
 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
22

 
58

 
(13
)
 
(30
)
Subtotal
 
 
 
35

 
76

 
(64
)
 
(63
)
Interest rate swap agreements
 
Other current assets/(Other current liabilities)
 
122

 
87

 
—

 
—

 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
170

 
172

 
(94
)
 
(116
)
Subtotal
 
 
 
292

 
259

 
(94
)
 
(116
)
Total
 
 
 
327

 
335

 
(158
)
 
(179
)
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging contracts
 
 
 
 

 
 
 
 

 
 
Natural gas, crude and NGL derivative contracts
 
Other current assets/(Other current liabilities)
 
6

 
4

 
(9
)
 
(5
)
Subtotal
 
 
 
6

 
4

 
(9
)
 
(5
)
Power derivative contracts
 
Other current assets/(Other current liabilities)
 
2

 
7

 
(49
)
 
(54
)
 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
8

 
11

 
(58
)
 
(73
)
Subtotal
 
 
 
10

 
18

 
(107
)
 
(127
)
Total
 
 
 
16

 
22

 
(116
)
 
(132
)
Total derivatives
 
 
 
$
343

 
$
357

 
$
(274
)
 
$
(311
)


22
 
Kinder Morgan, Inc. Form 10-Q


Debt Fair Value Adjustments

The offsetting entry to adjust the carrying value of the debt securities whose fair value was being hedged is included within “Debt fair value adjustments” on our accompanying consolidated balance sheets. Our “Debt fair value adjustments” also include all unamortized debt discount/premium amounts, purchase accounting on our debt balances, and any unamortized portion of proceeds received from the early termination of interest rate swap agreements. As of March 31, 2014 and December 31, 2013, these fair value adjustments to our debt balances included (i) $1,340 million and $1,379 million, respectively, associated with fair value adjustments to our debt previously recorded in purchase accounting; (ii) $198 million and $143 million, respectively, associated with the offsetting entry for hedged debt; (iii) $501 million and $517 million, respectively, associated with unamortized premium from the termination of interest rate swap agreements; and offset by (iv) $70 million and $62 million, respectively, associated with unamortized debt discount amounts. As of March 31, 2014, the weighted-average amortization period of the unamortized premium from the termination of the interest rate swaps was approximately 16 years.

Effect of Derivative Contracts on the Income Statement
 
The following three tables summarize the impact of our derivative contracts on our accompanying consolidated statements of income for each of the three months ended March 31, 2014 and 2013 (in millions): 
Derivatives in fair value hedging relationships
 
Location of gain/(loss) recognized in income on derivatives
 
Amount of gain/(loss) recognized in income
 on derivatives and related hedged item(a)
 
 
 
 
Three Months Ended March 31,
 
 
 
 
2014
 
2013
Interest rate swap agreements
 
Interest expense
 
$
55

 
$
(88
)
Total
 
 
 
$
55

 
$
(88
)
 
 
 
 
 
 
 
Fixed rate debt
 
Interest expense
 
$
(55
)
 
$
88

Total
 
 
 
$
(55
)
 
$
88

_______
(a)
Amounts reflect the change in the fair value of interest rate swap agreements and the change in the fair value of the associated fixed rate debt which exactly offset each other as a result of no hedge ineffectiveness.
Derivatives
 in cash flow 
hedging
relationships
 
Amount of gain/(loss)
recognized in OCI 
on derivative(effective portion)(a)
 
Location of
gain/(loss)
reclassified from
Accumulated OCI
into income
(effective
 portion)
 
Amount of gain/(loss) reclassified from
Accumulated OCI
into income
(effective portion)(b)
 
Location of
gain/(loss)
recognized in
income on
derivative
(ineffective
 portion
and amount
excluded from
effectiveness
testing)
 
Amount of gain/(loss)
recognized in income
on derivative
(ineffective portion
and amount
excluded from
effectiveness testing)
 
 
Three Months Ended March 31,
 
 
 
Three Months Ended March 31,
 
 
 
Three Months Ended March 31,
 
 
2014
 
2013
 
 
 
2014
 
2013
 
 
 
2014
 
2013
Energy commodity
 derivative contracts
 
$
(43
)
 
$
(32
)
 
Revenues—Natural
 gas sales
 
$
(9
)
 
$
—

 
Revenues—Natural
 gas sales
 
$
—

 
$
—

 
 

 
 
 
Revenues—Product
 sales and other
 
(6
)
 
5

 
Revenues—Product
 sales and other
 
(5
)
 
(3
)
 
 


 
 
 
Costs of sales
 
1

 
—

 
Costs of sales
 
—

 
—

Interest rate swap
 agreements
 
(2
)
 
1

 
Interest expense
 
—

 
1

 
Interest expense
 
—

 
—

Total
 
$
(45
)
 
$
(31
)
 
Total
 
$
(14
)
 
$
6

 
Total
 
$
(5
)
 
$
(3
)
_______


23
 
Kinder Morgan, Inc. Form 10-Q


(a)
We expect to reclassify an approximate $15 million loss associated with energy commodity price risk management activities and included in our accumulated other comprehensive loss and noncontrolling interest balances as of March 31, 2014 into earnings during the next twelve months (when the associated forecasted sales and purchases are also expected to occur), however, actual amounts reclassified into earnings could vary materially as a result of changes in market prices. 
(b)
Amounts reclassified were the result of the hedged forecasted transactions actually affecting earnings (i.e., when the forecasted sales and purchases actually occurred).
Derivatives not designated as accounting hedges
Location of gain/(loss) recognized in income on derivatives
Amount of gain/(loss) recognized in income on derivatives
 
 
Three Months Ended March 31,
 
 
2014
 
2013
Energy commodity derivative contracts
Revenues—Natural gas sales
$
(7
)
 
$
1

 
Revenues—Product sales and other
(1
)
 
2

 
Costs of sales
10

 
—

 
Other expense(income)
(2
)
 
—

Total
 
$
—

 
$
3


Credit Risks
 
We and our subsidiary, KMP, have counterparty credit risk as a result of our use of financial derivative contracts.  Our counterparties consist primarily of financial institutions, major energy companies, natural gas and electric utilities, and local distribution companies.  This concentration of counterparties may impact our overall exposure to credit risk, either positively or negatively, in that the counterparties may be similarly affected by changes in economic, regulatory or other conditions.
 
We maintain credit policies with regard to our counterparties that we believe minimize our overall credit risk.  These policies include (i) an evaluation of potential counterparties’ financial condition (including credit ratings); (ii) collateral requirements under certain circumstances; and (iii) the use of standardized agreements which allow for netting of positive and negative exposure associated with a single counterparty.  Based on our policies, exposure, credit and other reserves, our management does not anticipate a material adverse effect on our financial position, results of operations, or cash flows as a result of counterparty performance.
 
Our OTC swaps and options are entered into with counterparties outside central trading organizations such as futures, options or stock exchanges.  These contracts are with a number of parties, all of which have investment grade credit ratings.  While we enter into derivative transactions with investment grade counterparties and actively monitor their ratings, it is nevertheless possible that from time to time losses will result from counterparty credit risk in the future.
 
In conjunction with the purchase of exchange-traded derivative contracts or when the market value of our derivative contracts with specific counterparties exceeds established limits, we are required to provide collateral to our counterparties, which may include posting letters of credit or placing cash in margin accounts.  As of both March 31, 2014 and December 31, 2013, KMP had no outstanding letters of credit supporting its hedging of energy commodity price risks associated with the sale of natural gas, NGL and crude oil. As of both March 31, 2014 and December 31, 2013, KMI had $167 million of outstanding letters of credit supporting its commodity price risks associated with the sale of natural gas and power.  
 
KMP and KMI also have agreements with certain counterparties to their derivative contracts that contain provisions requiring us to post additional collateral upon a decrease in their credit rating. As of March 31, 2014, we estimate that if KMP’s credit rating was downgraded one notch, KMP would be required to post no additional collateral to its counterparties.  If KMP was downgraded two notches (that is, below investment grade), KMP would be required to post $25 million of incremental collateral. As of March 31, 2014, we estimate that if KMI’s credit rating was downgraded one or two notches, KMI would be required to post no additional collateral to its counterparties.


24
 
Kinder Morgan, Inc. Form 10-Q


Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
Cumulative revenues, expenses, gains and losses that under GAAP are included within our comprehensive income but excluded from our earnings are reported as “Accumulated other comprehensive loss” within “Stockholders’ Equity” in our consolidated balance sheets. Changes in the components of our “Accumulated other comprehensive loss” for the three months ended March 31, 2014 and 2013 are summarized as follows (in millions):
 
Net unrealized
gains/(losses)
on cash flow
hedge derivatives
 
Foreign
currency
translation
adjustments
 
Pension and
other
postretirement
liability adjustments
 
Total
accumulated other
comprehensive loss
Balance as of December 31, 2013
$
(3
)
 
$
2

 
$
(23
)
 
$
(24
)
Other comprehensive loss before reclassifications
(19
)
 
(25
)
 
—

 
(44
)
Amounts reclassified from accumulated other comprehensive loss
6

 
—

 
—

 
6

Net current-period other comprehensive loss
(13
)
 
(25
)
 
—

 
(38
)
Balance as of March 31, 2014
$
(16
)
 
$
(23
)
 
$
(23
)
 
$
(62
)
 
Net unrealized
gains/(losses)
on cash flow
hedge derivatives
 
Foreign
currency
translation
adjustments
 
Pension and
other
postretirement
liability adjustments
 
Total
accumulated other
comprehensive
loss
Balance as of December 31, 2012
$
7

 
$
51

 
$
(176
)
 
$
(118
)
Other comprehensive loss before reclassifications
(16
)
 
(17
)
 
(1
)
 
(34
)
Amounts reclassified from accumulated other comprehensive loss
(4
)
 
—

 
—

 
(4
)
Net current-period other comprehensive loss
(20
)
 
(17
)
 
(1
)
 
(38
)
Balance as of March 31, 2013
$
(13
)
 
$
34

 
$
(177
)
 
$
(156
)

6.  Fair Value
 
The fair values of our financial instruments are separated into three broad levels (Levels 1, 2 and 3) based on our assessment of the availability of observable market data and the significance of non-observable data used to determine fair value.  Each fair value measurement must be assigned to a level corresponding to the lowest level input that is significant to the fair value measurement in its entirety.
 
The three broad levels of inputs defined by the fair value hierarchy are as follows:
•
Level 1 Inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;
•
Level 2 Inputs—inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.  If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability; and
•
Level 3 Inputs—unobservable inputs for the asset or liability.  These unobservable inputs reflect the entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances (which might include the reporting entity’s own data).
 
Fair Value of Derivative Contracts
 
The following two tables summarize the fair value measurements of our (i) energy commodity derivative contracts; and (ii) interest rate swap agreements as of March 31, 2014 and December 31, 2013, based on the three levels established by the Codification.  Also, certain of our derivative contracts are subject to master netting agreements. The following tables present our derivative contracts subject to such netting agreements as of March 31, 2014 and December 31, 2013 (in millions):

25
 
Kinder Morgan, Inc. Form 10-Q


 
Balance Sheet asset
fair value measurements using
 
Amounts not offset in the Balance Sheet
 
Net Amount
 
Level 1
 
Level 2
 
Level 3
 
Gross Amount
 
Financial Instruments
 
Cash Collateral Held(b)
As of March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts(a)
$
6

 
$
29

 
$
16

 
$
51

 
$
(40
)
 
$
—

 
$
11

Interest rate swap agreements
$
—

 
$
292

 
$
—

 
$
292

 
$
(44
)
 
$
—

 
$
248

As of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts(a)
$
4

 
$
46

 
$
48

 
$
98

 
$
(62
)
 
$
—

 
$
36

Interest rate swap agreements
$
—

 
$
259

 
$
—

 
$
259

 
$
(28
)
 
$
—

 
$
231


 
Balance Sheet liability
fair value measurements using
 
Amounts not offset in the Balance Sheet
 
Net Amount
 
Level 1
 
Level 2
 
Level 3
 
Gross Amount
 
Financial Instruments
 
Cash Collateral Held(c)
As of March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts(a)
$
(14
)
 
$
(50
)
 
$
(116
)
 
$
(180
)
 
$
40

 
$
22

 
$
(118
)
Interest rate swap agreements
$
—

 
$
(94
)
 
$
—

 
$
(94
)
 
$
44

 
$
—

 
$
(50
)
As of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts(a)
$
(6
)
 
$