Edgar Filing: KINDER MORGAN, INC.

KMI-06.30.2014-10Q

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 June 30, 2014

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 July 25, 2014, the registrant had 1,028,223,019 Class P shares outstanding.

KINDER MORGAN, INC. AND SUBSIDIARIES

TABLE OF CONTENTS



		Page Number

	Glossary	2
	Information Regarding Forward-Looking Statements	3

	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Income - Three and Six Months Ended June 30, 2014 and 2013	4
	Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2014 and 2013	5
	Consolidated Balance Sheets - June 30, 2014 and December 31, 2013	6
	Consolidated Statements of Cash Flows - Six Months Ended June 30, 2014 and 2013	7
	Consolidated Statements of Stockholders’ Equity - Six Months Ended June 30, 2014 and 2013	8
	Notes to Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	General and Basis of Presentation	38
	Critical Accounting Policies and Estimates	38
	Results of Operations	39
	Financial Condition	58

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	63

Item 4.	Controls and Procedures	63

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	63

Item 1A.	Risk Factors	63

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64

Item 3.	Defaults Upon Senior Securities	64

Item 4.	Mine Safety Disclosures	64

Item 5.	Other Information	64

Item 6.	Exhibits	65

	Signature	66

KINDER MORGAN, INC. AND SUBSIDIARIES GLOSSARY Company Abbreviations

APT	=	American Petroleum Tankers	KinderHawk	=	KinderHawk Field Services LLC
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 Gathering	=	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	SFPP	=	SFPP, L.P.
EPB	=	El Paso Pipeline Partners, L.P. and its majority-owned and controlled subsidiaries	SLNG	=	Southern LNG Company, L.L.C.
EPNG	=	El Paso Natural Gas Company, L.L.C.	SNG	=	Southern Natural Gas Company, L.L.C.
EPPOC	=	El Paso Pipeline Partners Operating Company, L.L.C.	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	LIBOR	=	London Interbank Offered Rate
Bcf/d	=	billion cubic feet per day	LLC	=	limited liability company
CERCLA	=	Comprehensive Environmental Response, Compensation and Liability Act	MBbl/d	=	thousands of barrels per day
CO₂	=	carbon dioxide	MMBbl/d	=	millions barrels per day
CPUC	=	California Public Utilities Commission	MLP	=	master limited partnership
DD&A	=	depreciation, depletion and amortization	NGL	=	natural gas liquids
EBDA	=	earnings before depreciation, depletion and amortization expenses	NYSE	=	New York Stock Exchange
EPA	=	United States Environmental Protection Agency	OTC	=	over-the-counter
FASB	=	Financial Accounting Standards Board	PHMSA	=	Pipeline and Hazardous Materials Safety Administration
FERC	=	Federal Energy Regulatory Commission	WTI	=	West Texas Intermediate
GAAP	=	United States Generally Accepted Accounting Principles
When we refer to cubic feet measurements, all measurements are at a pressure of 14.73 pounds per square inch.



Table of Contents		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.



Table of Contents		Kinder Morgan, Inc. Form 10-Q

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Revenues
Natural gas sales	$	1,014		$	944		$	2,111		$	1,681
Services	1,812			1,602			3,641			3,206
Product sales and other	1,111			836			2,232			1,555
Total Revenues	3,937			3,382			7,984			6,442

Operating Costs, Expenses and Other
Costs of sales	1,610			1,254			3,253			2,224
Operations and maintenance	540			643			1,023			1,062
Depreciation, depletion and amortization	502			445			998			860
General and administrative	154			183			326			323
Taxes, other than income taxes	111			102			221			200
Other expense (income), net	7			(17		)	3			(16		)
Total Operating Costs, Expenses and Other	2,924			2,610			5,824			4,653

Operating Income	1,013			772			2,160			1,789

Other Income (Expense)
Earnings from equity investments	100			93			199			194
Amortization of excess cost of equity investments	(11		)	(9		)	(21		)	(18		)
Interest, net	(440		)	(427		)	(888		)	(829		)
Gain on remeasurement of previously held equity interest in Eagle Ford Gathering to fair value (Note 2)	—			558			—			558
Gain on sale of investments in Express pipeline system (Note 2)	—			—			—			225
Other, net	13			19			26			24
Total Other (Expense) Income	(338		)	234			(684		)	154

Income from Continuing Operations Before Income Taxes	675			1,006			1,476			1,943

Income Tax Expense	(178		)	(225		)	(378		)	(504		)

Income from Continuing Operations	497			781			1,098			1,439

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

Net Income	497			781			1,098			1,437

Net Income Attributable to Noncontrolling Interests	(213		)	(504		)	(527		)	(868		)

Net Income Attributable to Kinder Morgan, Inc.	$	284		$	277		$	571		$	569

Basic and Diluted Earning Per Common Share
From Continuing Operations	$	0.27		$	0.27		$	0.55		$	0.55
From Discontinued Operations	—			—			—			—
Total Basic and Diluted Earnings Per Common Share	$	0.27		$	0.27		$	0.55		$	0.55

Basic Weighted-Average Number of Shares Outstanding	1,028			1,036			1,028			1,036
Diluted Weighted-Average Number of Shares Outstanding	1,028			1,038			1,028			1,038

Dividends Per Common Share Declared for the Period	$	0.43		$	0.40		$	0.85		$	0.78

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



Table of Contents		Kinder Morgan, Inc. Form 10-Q

KINDER MORGAN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Millions)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Kinder Morgan, Inc.
Net income	$	284		$	277		$	571		$	569
Other comprehensive income (loss), net of tax
Change in fair value of derivatives utilized for hedging purposes (net of tax benefit (expense) of $21, $(16), $32 and $(10), respectively)	(37		)	36			(56		)	20
Reclassification of change in fair value of derivatives to net income (net of tax (expense) benefit of $(4), $2, $(7) and $3, respectively)	6			(1		)	12			(5		)
Foreign currency translation adjustments (net of tax (expense) benefit of $(13), $12, $1 and $19, respectively)	23			(28		)	(2		)	(45		)
Adjustments to pension and other postretirement benefit plan liabilities (net of tax benefit (expense) of $1, $(1), $1 and $(1), respectively)	2			1			2			—
Total other comprehensive (loss) income	(6		)	8			(44		)	(30		)
Total comprehensive income	278			285			527			539

Noncontrolling Interests
Net income	213			504			527			868
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), $9, and $(2) respectively)	(59		)	26			(85		)	11
Reclassification of change in fair value of derivatives to net income (net of tax (expense) benefit of $(1), $1, $(2) and $1, respectively)	10			(2		)	18			(4		)
Foreign currency translation adjustments (net of tax (expense) benefit of $(4), $4, $- and $6, respectively)	33			(26		)	(4		)	(42		)
Adjustments to pension and other postretirement benefit plan liabilities (net of tax benefit of $-, $-, $- and $-, respectively)	—			—			(1		)	—
Total other comprehensive loss	(16		)	(2		)	(72		)	(35		)
Total comprehensive income	197			502			455			833

Total
Net income	497			781			1,098			1,437
Other comprehensive income (loss), net of tax
Change in fair value of derivatives utilized for hedging purposes (net of tax benefit (expense) of $27, $(21), $41 and $(12), respectively)	(96		)	62			(141		)	31
Reclassification of change in fair value of derivatives to net income (net of tax (expense) benefit of $(5), $3, $(9) and $4, respectively)	16			(3		)	30			(9		)
Foreign currency translation adjustments (net of tax (expense) benefit of $(17), $16, $1 and $25, respectively)	56			(54		)	(6		)	(87		)
Adjustments to pension and other postretirement benefit plan liabilities (net of tax benefit (expense) of $1, $(1), $1, and $(1), respectively)	2			1			1			—
Total other comprehensive (loss) income	(22		)	6			(116		)	(65		)
Total comprehensive income	$	475		$	787		$	982		$	1,372

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



Table of Contents		Kinder Morgan, Inc. Form 10-Q

KINDER MORGAN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Millions, Except Share and Per Share Amounts)

	June 30, 2014			December 31, 2013
	(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents – KMI (Note 12)	$	50		$	116
Cash and cash equivalents – KMP and EPB (Note 12)	313			482
Accounts receivable, net	1,633			1,721
Inventories	460			430
Deferred income taxes	329			567
Other current assets	582			552
Total current assets	3,367			3,868

Property, plant and equipment, net (Note 12)	37,607			35,847
Investments	5,862			5,951
Goodwill (Note 12)	24,653			24,504
Other intangibles, net	2,367			2,438
Deferred charges and other assets	2,508			2,577
Total Assets	$	76,364		$	75,185

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Current portion of debt – KMI (Note 12)	$	1,245		$	725
Current portion of debt – KMP and EPB (Note 12)	1,378			1,581
Accounts payable	1,501			1,676
Accrued interest	600			565
Accrued contingencies	652			584
Other current liabilities	1,111			944
Total current liabilities	6,487			6,075

Long-term liabilities and deferred credits
Long-term debt
Outstanding – KMI (Note 12)	8,088			9,221
Outstanding – KMP and EPB (Note 12)	24,360			22,589
Preferred interest in general partner of KMP	100			100
Debt fair value adjustments	1,973			1,977
Total long-term debt	34,521			33,887
Deferred income taxes	4,554			4,651
Other long-term liabilities and deferred credits	2,147			2,287
Total long-term liabilities and deferred credits	41,222			40,825
Total Liabilities	47,709			46,900

Commitments and contingencies (Notes 3 and 10)
Stockholders’ Equity
Class P shares, $0.01 par value, 2,000,000,000 shares authorized, 1,027,909,704 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	14,339			14,479
Retained deficit	(1,661		)	(1,372		)
Accumulated other comprehensive loss	(68		)	(24		)
Total Kinder Morgan, Inc.’s stockholders’ equity	12,620			13,093
Noncontrolling interests	16,035			15,192
Total Stockholders’ Equity	28,655			28,285
Total Liabilities and Stockholders’ Equity	$	76,364		$	75,185

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



Table of Contents		Kinder Morgan, Inc. Form 10-Q

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

	Six Months Ended June 30,
	2014			2013
Cash Flows From Operating Activities
Net income	$	1,098		$	1,437
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation, depletion and amortization	998			860
Deferred income taxes	208			378
Amortization of excess cost of equity investments	21			18
Gain on remeasurement of previously held equity interest in Eagle Ford Gathering to fair value (Note 2)	—			(558		)
Gain on sale of investments in Express pipeline system (Note 2)	—			(225		)
Earnings from equity investments	(199		)	(194		)
Distributions from equity investment earnings	184			199
Proceeds from termination of interest rate swap agreements	—			96
Pension contributions in excess of expense	(50		)	(59		)
Changes in components of working capital, net of the effects of acquisitions
Accounts receivable	94			7
Inventories	(24		)	(50		)
Other current assets	(36		)	(37		)
Accounts payable	(117		)	(181		)
Accrued interest	34			14
Accrued contingencies and other current liabilities	101			(78		)
Rate reparations, refunds and other litigation reserve adjustments, net	36			177
Other, net	(145		)	(70		)
Net Cash Provided by Operating Activities	2,203			1,734
Cash Flows From Investing Activities
Acquisitions of assets and investments, net of cash acquired	(993		)	(286		)
Capital expenditures	(1,717		)	(1,345		)
Proceeds from sales of investments	—			491
Contributions to investments	(103		)	(93		)
Distributions from equity investments in excess of cumulative earnings	90			78
Natural gas storage and natural gas and liquids line-fill	22			—
Sale or casualty of property, plant and equipment, investments and other net assets, net of removal costs	11			23
Other, net	(17		)	15
Net Cash Used in Investing Activities	(2,707		)	(1,117		)
Cash Flows From Financing Activities
Issuance of debt – KMI	2,565			989
Payment of debt – KMI	(3,178		)	(1,673		)
Issuance of debt – KMP and EPB	6,883			4,858
Payment of debt – KMP and EPB	(5,334		)	(3,863		)
Debt issue costs	(29		)	(12		)
Cash dividends	(860		)	(779		)
Repurchases of shares and warrants	(192		)	(131		)
Contributions from noncontrolling interests	1,395			1,077
Distributions to noncontrolling interests	(976		)	(761		)
Other, net	(1		)	1
Net Cash Provided by (Used in) Financing Activities	273			(294		)
Effect of Exchange Rate Changes on Cash and Cash Equivalents	(4		)	(20		)
Net (decrease) increase in Cash and Cash Equivalents	(235		)	303
Cash and Cash Equivalents, beginning of period	598			714
Cash and Cash Equivalents, end of period	$	363		$	1,017

Non-cash Investing and Financing Activities
Assets acquired by the assumption or incurrence of liabilities	$	73		$	1,490
Assets acquired or liabilities settled by contributions from noncontrolling interests	$	—		$	3,733

Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest (net of capitalized interest)	$	855		$	812
Cash paid during the period for income taxes, net	$	163		$	71

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

KINDER MORGAN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In Millions)

(Unaudited)



	Six Months Ended June 30, 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			(98		)							(98		)				(98		)
Amortization of restricted shares			27									27						27
Impact from equity transactions of KMP, EPB and KMR			20									20			(31		)	(11		)
Windfall tax benefit			6									6						6
Net income						571						571			527			1,098
Distributions												—			(976		)	(976		)
Contributions												—			1,395			1,395
Cash dividends						(860		)				(860		)				(860		)
Other			(1		)							(1		)				(1		)
Other comprehensive loss									(44		)	(44		)	(72		)	(116		)
Ending Balance at June 30, 2014	$	10	$	14,339		$	(1,661	)	$	(68	)	$	12,620		$	16,035		$	28,655



	Six Months Ended June 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			(131		)							(131		)				(131		)
Warrants exercised			1									1						1
EP Trust I Preferred security conversions			2									2						2
Amortization of restricted shares			10									10						10
Impact from equity transactions of KMP, EPB and KMR			146									146			(231		)	(85		)
Net income						569						569			868			1,437
Distributions												—			(761		)	(761		)
Contributions												—			4,810			4,810
Cash dividends						(779		)				(779		)				(779		)
Other comprehensive loss									(30		)	(30		)	(35		)	(65		)
Ending Balance at June 30, 2013	$	10	$	14,945		$	(1,153	)	$	(148	)	$	13,654		$	14,885		$	28,539

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



Table of Contents		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 $110 billion. We own an interest in or operate approximately 80,000 miles of pipelines and 180 terminals. Our pipelines transport natural gas, refined petroleum products, crude oil, condensate, CO₂ and other products, and our terminals transport, transload and store petroleum products, ethanol and chemicals, and handle such products as coal, petroleum coke and steel. We are also the leading producer and transporter of CO₂, for enhanced oil recovery projects in North America.

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. 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.



Table of Contents		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, 2014 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 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.

The following table sets forth the allocation of net income available to shareholders for Class P shares and for participating securities for the three and six months ended June 30, 2014 and 2013 (in millions):



	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Class P	$	281	$	276	$	565	$	567
Participating securities(a)	3		1		6		2
Net Income Attributable to Kinder Morgan, Inc.	$	284	$	277	$	571	$	569

_______


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

For the three and six months ended June 30, 2014 and 2013, the following potential common stock equivalents are antidilutive and, accordingly, are excluded from the determination of diluted earnings per share (in millions on a weighted-average basis):



	Three Months Ended June 30,		Six Months Ended June 30,
	2014	2013	2014	2013
Unvested restricted stock awards	7	2	7	2
Outstanding warrants to purchase our Class P shares	309	420	325	429
Convertible trust preferred securities	10	10	10	10

2. Acquisitions and Divestitures

Acquisitions

American Petroleum Tankers and State Class Tankers

Effective January 17, 2014, KMP acquired APT and State Class Tankers (SCT) for aggregate consideration of $961 million in cash (the APT acquisition). 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. Military Sealift Command. As of the closing date, the vessels’ time charters had an average remaining term of approximately four years, with renewal options to extend the 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 these four SCT vessels, and upon delivery, the 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 term by up to three



Table of Contents		Kinder Morgan, Inc. Form 10-Q

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.

As of June 30, 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.



Purchase Price Allocation:
Current assets	$	6
Property, plant and equipment	951
Goodwill	67
Other assets	3
Total assets acquired	1,027
Current liabilities	(5		)
Unfavorable customer contracts	(61		)
Cash consideration	$	961

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 goodwill was primarily generated by the value of the synergies created by expanding KMP’s non-pipeline liquids handling operations. Furthermore, KMP expects to fully deduct for tax purposes the entire amount of goodwill recognized. The “Unfavorable customer contracts” figure represents the amount, on a present value basis, by which the customer contracts were below market day rates at the time of acquisition. This amount is amortized as a noncash adjustment to revenue over the remaining contract period.

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). Also, due to the fact that KMP’s Copano acquisition included the remaining 50% interest in Eagle Ford Gathering that it did not already own, KMP remeasured its existing 50% equity investment in Eagle Ford Gathering to its fair value as of the acquisition date. As a result of this remeasurement, we recognized a $558 million non-cash gain, which represented the excess of the investment’s fair value ($704 million) over the carrying value as of May 1, 2013 ($146 million), and we reported this gain separately as “Gain on remeasurement of previously held equity interest in Eagle Ford Gathering to fair value” on our accompanying consolidated statements of income for the three and six months ended June 30, 2013.



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As of June 30, 2014, KMP’s purchase price allocation related to the Copano acquisition is as follows (in millions):



Purchase Price Allocation:
Current assets (including cash acquired of $30)	$	218
Property, plant and equipment	2,788
Investments	300
Goodwill	1,248
Other intangibles	1,375
Other assets	13
Total assets	5,942
Less: Fair value of previously held 50% interest in Eagle Ford Gathering	(704		)
Total assets acquired	5,238
Current liabilities	(208		)
Other liabilities	(28		)
Long-term debt	(1,252		)
Noncontrolling interests	(17		)
Common unit consideration	$	3,733

The table above reflects changes we made in the first six months of 2014 to our preliminary purchase price allocation as of December 31, 2013. Based on our final measurement of fair values for all of the identifiable tangible and intangible assets acquired and liabilities assumed on the acquisition date, we reduced the preliminary value assigned to (i) “Investments” by $87 million; (ii) “Property, plant and equipment, net” by $17 million; and (ii) combined working capital items by $3 million.

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. We believe the goodwill was primarily generated by the value of the synergies created by KMP’s expanding 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. We are currently amortizing these intangible assets over an estimated remaining useful life of 25 years.

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 $285 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.



Table of Contents		Kinder Morgan, Inc. Form 10-Q

Pro Forma Information

The following summarized unaudited pro forma consolidated income statement information for the six months ended June 30, 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
	Six Months Ended
	June 30, 2013
	(Unaudited)
Revenues	$	7,196
Income from Continuing Operations	1,401
Loss from Discontinued Operations, Net of Tax	(2		)
Net Income	1,399
Net Income Attributable to Noncontrolling Interests	(855		)
Net Income Attributable to Kinder Morgan, Inc.	544

Diluted Earnings per Class P Share	$	0.52

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 third quarter of 2013 for both a final working capital settlement and certain transaction-related selling expenses), and we reported the $403 million of proceeds received in the first half of 2013 within “Proceeds from sales of investments” within the investing section of our accompanying consolidated statement of cash flows for the six months ended June 30, 2013. Additionally, we recognized a combined $225 million pre-tax gain with respect to this sale in the first half 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 for the six months ended June 30, 2013. We also recorded an income tax expense of $84 million related to this gain on sale for the six months ended June 30, 2013, 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 sales of investments” within the investing section of our accompanying consolidated statement of cash flows for the six months ended June 30, 2013.

Drop-down of Assets to EPB

On May 2, 2014, EPB acquired from us our 50% equity interest in Ruby Pipeline Holding Company, L.L.C. (Ruby), our indirect 50% equity interest in Gulf LNG Holdings Group, L.L.C. (Gulf LNG) and our indirect 47.5% equity interest in Young Gas Storage Company, Ltd in a transaction valued at approximately $2 billion (the “May 2014 drop-down transaction”). The transaction value includes approximately $1 billion of debt as of April 30, 2014, representing 50% of total debt of Ruby and Gulf LNG as of such date and was effective as of the close of business on April 30, 2014. Following the receipt of separate fairness opinions from different investment banks, 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 a conflicts committee comprised of the independent members of EPB’s general partner’s board of directors, and following the recommendation by such conflicts committee, by its general partner’s board of directors. The aggregate consideration of $972 million paid to us in this drop-down transaction



Table of Contents		Kinder Morgan, Inc. Form 10-Q

consisted of approximately $875 million of cash and 3,059,924 newly issued EPB common units representing limited partner interest in EPB.

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 June 30, 2014 and December 31, 2013. The table amounts exclude all debt fair value adjustments, including debt discounts and premiums (in millions).



	June 30, 2014			December 31, 2013
KMI
Senior term loan facilities, variable rate, due May 24, 2015 and May 6, 2017(a)	$	650		$	1,528
Senior notes and debentures, 5.00% through 7.45%, due 2015 through 2098	1,815			1,815
Senior notes, 6.50% through 8.25%, due 2014 through 2037(b)	3,623			3,830
Preferred securities, 4.75%, due March 31, 2028(b)	280			280
Credit facility due May 6, 2019(c)	820			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
EPC Building, LLC, promissory note, 3.967%, due 2014 through 2035	457			461
Other miscellaneous debt	52			221
Total debt — KMI	9,333			9,946
Less: Current portion of debt — KMI	(1,245		)	(725		)
Total long-term debt outstanding — KMI	8,088			9,221
KMGP, $1,000 Liquidation Value Series A Fixed-to-Floating Rate Term Cumulative Preferred Stock	100			100
Total long-term debt — KMI(d)	$	8,188		$	9,321

KMP and EPB
KMP
Senior notes, 2.65% through 9.00%, due 2014 through 2044	$	17,100		$	15,600
Commercial paper borrowings(e)	513			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	20,947			19,914
Less: Current portion of debt — KMP(f)	(1,337		)	(1,504		)
Total long-term debt — KMP(d)	19,610			18,410
EPB
EPPOC
Senior notes, 4.10% through 7.50%, due 2015 through 2042	2,860			2,260
Credit facility due May 27, 2016(g)	—			—
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	181			175
Total debt — EPB	4,791			4,256
Less: Current portion of debt — EPB	(41		)	(77		)
Total long-term debt — EPB(d)	4,750			4,179
Total long-term debt outstanding — KMP and EPB	$	24,360		$	22,589

_______



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(a)	The senior secured term loan facility, due May 24, 2015, was repaid and replaced in May 2014 with a new unsecured senior term loan facility due May 6, 2017 (see “— Credit Facilities” below).

(b)

On June 30, 2014, El Paso Issuing Corporation, a wholly-owned subsidiary of El Paso Holdco LLC and the corporate co-issuer under certain guaranteed notes, merged with and into El Paso Holdco LLC, a wholly-owned subsidiary of KMI, and immediately thereafter, El Paso Holdco LLC merged with and into KMI pursuant to an internal restructuring transaction. KMI succeeded El Paso Holdco LLC as issuer with respect to these debt obligations. Consequently, El Paso Holdco LLC ceased to be an obligor with respect to approximately $3.6 billion of outstanding senior notes. Therefore, the condensed consolidating financial information that had previously been disclosed in the notes to our consolidated financial statements is no longer required as of June 30, 2014.


(c)	As of June 30, 2014 and December 31, 2013, the weighted average interest rates on KMI’s credit facility borrowings were 2.16% and 2.67%, respectively.

(d)

As of June 30, 2014 and December 31, 2013, our “Debt fair value adjustments” increased our combined debt balances by $1,973 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.”

(e)

As of both June 30, 2014 and December 31, 2013, the average interest rate on KMP’s outstanding commercial paper borrowings was 0.28%. The borrowings under KMP’s commercial paper program were used principally to finance the acquisitions and capital expansions, 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.


(f)	Amounts include outstanding commercial paper borrowings discussed above in footnote (e).


(g)	LIBOR plus 1.75%.

Credit Facilities

KMI

On May 2, 2014, KMI’s term loan facility was partially repaid using proceeds from the May 2014 drop-down transaction, resulting in a remaining outstanding balance of $650 million. On May 6, 2014, KMI replaced its previous $1.75 billion, secured revolving credit facility and its term loan facility which were scheduled to mature in December 2014 and May 2015, respectively, with a new $1.75 billion five-year, unsecured revolving credit facility due May 2019 and a new $650 million three-year, term loan facility maturing May 2017. Additionally, as a result of the new unsecured revolving credit and term loan facilities, KMI’s and its wholly-owned subsidiaries’ senior notes are now unsecured. Borrowings under the new revolving credit facility may be used for working capital and general corporate purposes. The credit facility’s financial covenants are similar to those in our previous revolving credit facility, including restrictions on indebtedness, entering into mergers, granting liens and making any dividends if an event of default exists. The covenants also include a maximum ratio of total debt (net of cash on hand) divided by Consolidated EBITDA (as defined in the credit agreement and which includes cash items from operations and distributions received from subsidiaries or investments, and excludes non-cash items) of 4.75 or 5.5 for periods following specified acquisitions. As of June 30, 2014, we were in compliance with all required financial covenants. The new revolving credit facility provides that the margin we will pay with respect to borrowings and the facility fee we will pay on the total commitment will vary based on our senior debt rating. Interest on the new revolving credit facility accrues at KMI’s option at a floating rate equal to either:


•	the administrative agent’s base rate, plus a margin, which varies depending upon the credit rating of KMI’s long-term senior unsecured debt (the administrative agent’s base rate is a rate equal to the greatest of (i) the Federal Funds Rate, plus 0.50%, (ii) the Prime Rate and (iii) one-month LIBOR plus 1.0%, plus, in each case, an applicable margin between 0.25% and 1.25% per annum); or


•	LIBOR plus an applicable margin ranging from 1.25% to 2.25% per annum.

As of June 30, 2014, we had $820 million outstanding under KMI’s $1.75 billion unsecured revolving credit facility and $58 million in letters of credit. Our availability under this facility as of June 30, 2014 was approximately $872 million.

KMP

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.



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As of both June 30, 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 June 30, 2014, KMP had (i) $513 million of commercial paper borrowings outstanding under its $2.7 billion credit facility; (ii) $205 million in letters of credit; and (iii) $175 million related to a capital contribution commitment to one of its unconsolidated subsidiaries. KMP’s availability under its credit facility as of June 30, 2014 was $1,807 million.

EPB

As of June 30, 2014, EPB had no outstanding balance under its revolving credit facility. EPB’s availability under its facility as of June 30, 2014 was $1 billion.

Long-term Debt Issuances and Repayments

Following are significant long-term debt issuances and repayments made during the six months ended June 30, 2014:




KMI
Issuances		$650 million senior term loan facility due 2017

Repayments		$1,528 million senior term loan facility due 2015

KMP
Issuances		$750 million 3.50% notes due 2021
		$750 million 5.50% notes due 2044

EPB (through EPPOC)
Issuances		$600 million 4.30% notes due 2024

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 June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Per share cash distribution declared for the period(a)	$	10.423	$	10.545	$	20.756	$	21.014
Per share cash distribution paid in the period	$	10.333	$	10.469	$	20.903	$	21.107

_______


(a)	On July 16, 2014, KMGP declared a distribution for the three months ended June 30, 2014, of $10.423 per share, which will be paid on August 18, 2014 to shareholders of record as of July 31, 2014.

4. Stockholders’ Equity

Common Equity

As of June 30, 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.



Table of Contents		Kinder Morgan, Inc. Form 10-Q

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 June 30, 2014, we had $2 million available for repurchases under the March 4, 2014 repurchase program.

The following table sets forth the changes in our outstanding shares during the six months ended June 30, 2014 and 2013.



	Six Months Ended June 30,
	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	2,820		74,134
Shares issued for exercised warrants	—		16,886
Restricted shares vested	10,145		9,814
Ending balance	1,027,909,704		1,035,769,430

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 June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Per common share cash dividend declared for the period	$	0.43	$	0.40	$	0.85	$	0.78
Per common share cash dividend paid in the period	$	0.42	$	0.38	$	0.83	$	0.75

Dividends Subsequent to June 30, 2014

On July 16, 2014, our board of directors declared a cash dividend of $0.43 per share for the quarterly period ended June 30, 2014, which is payable on August 15, 2014 to shareholders of record as of July 31, 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 six months ended June 30, 2014 and 2013.



	Six Months Ended June 30,
	2014		2013
Beginning balance	347,933,107		439,809,442
Warrants repurchased and canceled	(49,783,406	)	(25,781,031	)
Warrants issued with conversions of EP Trust I Preferred securities	4,315		113,317
Warrants exercised	—		(21,208	)
Ending balance	298,154,016		414,120,520



Table of Contents		Kinder Morgan, Inc. Form 10-Q

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):



	June 30, 2014		December 31, 2013
KMP	$	8,008	$	7,642
EPB	4,392		4,122
KMR	3,306		3,142
Other	329		286
	$	16,035	$	15,192

Contributions

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 six months ended June 30, 2014 by 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 with UBS
	2014	4,387	$	335	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 with Citigroup
	2014	2,385	$	75	General partnership purposes
Other issuances
	May 2014	7,820	$	242	Issued to pay a portion of the purchase price for the May 2014 drop-down transaction
KMR
Issued under equity distribution agreement with Credit Suisse
	2014	1,334	$	97	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 six months ended June 30, 2014 had the associated effects of increasing our (i) noncontrolling interests by $1,321 million; (ii) accumulated deferred income taxes by $11 million; and (iii) additional paid-in capital by $20 million.



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Distributions

The following table provides information about distributions from our noncontrolling interests (in millions except per unit distribution amounts):



	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
KMP
Per unit cash distribution declared for the period	$	1.39	$	1.32	$	2.77	$	2.62
Per unit cash distribution paid in the period	$	1.38	$	1.30	$	2.74	$	2.59
Cash distributions paid in the period to the public	$	412	$	307	$	807	$	606
EPB
Per unit cash distribution declared for the period	$	0.65	$	0.63	$	1.30	$	1.25
Per unit cash distribution paid in the period	$	0.65	$	0.62	$	1.30	$	1.23
Cash distributions paid in the period to the public	$	84	$	79	$	167	$	155
KMR(a)
Share distributions paid in the period to the public	2,083,523		1,502,562		4,036,493		3,072,680

_______

(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 303,291 and 587,579 of shares distributed for the three and six months ended June 30, 2014, respectively, and 224,390 and 458,868 of shares distributed in the three months and six months ended June 30, 2013, respectively, on KMR shares we directly and indirectly own. On July 16, 2014, KMR declared a share distribution of 0.017397 shares per outstanding share, or 2,283,909 shares (of which 1,996,474 shares will be payable to the public), on August 14, 2014 to shareholders of record as of July 31, 2014, based on the $1.39 per common unit distribution declared by KMP.

Distributions Subsequent to June 30, 2014

Noncontrolling Interests Distributions

On July 16, 2014, KMP declared a cash distribution of $1.39 per unit for the quarterly period ended June 30, 2014. The distribution will be paid on August 14, 2014 to KMP’s unitholders of record as of July 31, 2014.

On July 16, 2014, EPB declared a cash distribution of $0.65 per unit for the quarterly period ended June 30, 2014. The distribution will be paid on August 14, 2014 to EPB’s unitholders of record as of July 31, 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.



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Energy Commodity Price Risk Management

As of June 30, 2014, KMI and KMP had 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	(24.2	)	MMBbl
Natural gas fixed price	(26.1	)	Bcf
Natural gas basis	(26.7	)	Bcf
Derivatives not designated as hedging contracts
Crude oil fixed price	(0.4	)	MMBbl
Crude oil basis	(0.6	)	MMBbl
Natural gas fixed price	(7.7	)	Bcf
Natural gas basis	0.2		Bcf
NGL fixed price	(0.8	)	MMBbl

As of June 30, 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 June 30, 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’s and KMP’s swap agreements have termination dates that correspond to the maturity dates of the related series of senior notes and, as of June 30, 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.



Table of Contents		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 June 30, 2014 and December 31, 2013 (in millions):



Fair Value of Derivative Contracts
		Asset derivatives				Liability derivatives
		June 30, 2014		December 31, 2013		June 30, 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)	$	6	$	18	$	(97	)	$	(33	)
	Deferred charges and other assets/(Other long-term liabilities and deferred credits)	4		58		(72		)	(30		)
Subtotal		10		76		(169		)	(63		)
Interest rate swap agreements	Other current assets/(Other current liabilities)	90		87		—			—
	Deferred charges and other assets/(Other long-term liabilities and deferred credits)	211		172		(46		)	(116		)
Subtotal		301		259		(46		)	(116		)
Total		311		335		(215		)	(179		)

Derivatives not designated as hedging contracts
Natural gas, crude and NGL derivative contracts	Other current assets/(Other current liabilities)	4		4		(10		)	(5		)
Subtotal		4		4		(10		)	(5		)
Power derivative contracts	Other current assets/(Other current liabilities)	3		7		(49		)	(54		)
	Deferred charges and other assets/(Other long-term liabilities and deferred credits)	4		11		(43		)	(73		)
Subtotal		7		18		(92		)	(127		)
Total		11		22		(102		)	(132		)
Total derivatives		$	322	$	357	$	(317	)	$	(311	)

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 June 30, 2014 and December 31, 2013, these fair value adjustments to our debt balances included (i) $1,302 million and $1,379 million, respectively, associated with fair value adjustments to our debt previously recorded in purchase accounting; (ii) $255 million and $143 million, respectively, associated with the offsetting entry for hedged debt; (iii) $485 million and $517 million, respectively, associated with unamortized premium from the termination of interest rate swap agreements; and offset by (iv) $69 million and $62 million, respectively, associated with unamortized debt discount amounts. As of June 30, 2014, the weighted-average amortization period of the unamortized premium from the termination of the interest rate swaps was approximately 16 years.



Table of Contents		Kinder Morgan, Inc. Form 10-Q

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 and six months ended June 30, 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 June 30,					Six Months Ended June 30,
		2014		2013			2014		2013
Interest rate swap agreements	Interest expense	$	57	$	(219	)	$	112	$	(307	)
Total