KMI-03.31.2015-10Q
Table of Contents



 
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, 2015
 
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 24, 2015, the registrant had 2,168,154,800 Class P shares outstanding.




KINDER MORGAN, INC. AND SUBSIDIARIES
TABLE OF CONTENTS

 
 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1

KINDER MORGAN, INC. AND SUBSIDIARIES
GLOSSARY

Company Abbreviations

CIG
=
Colorado Interstate Gas Company, L.L.C.
KMGP
=
Kinder Morgan G.P., Inc.
Copano
=
Copano Energy, L.L.C.
KMI
=
Kinder Morgan Inc. and its majority-owned and/or
CPG
=
Cheyenne Plains Gas Pipeline Company, L.L.C.
 
 
controlled subsidiaries
Elba Express
=
Elba Express Company, L.L.C.
KMP
=
Kinder Morgan Energy Partners, L.P. and its
EPB
=
El Paso Pipeline Partners, L.P. and its majority-
 
 
majority-owned and controlled subsidiaries
 
 
owned and controlled subsidiaries
KMR
=
Kinder Morgan Management, LLC
EPNG
=
El Paso Natural Gas Company, L.L.C.
SFPP
=
SFPP, L.P.
EPPOC
=
El Paso Pipeline Partners Operating Company,
SLNG
=
Southern LNG Company, L.L.C.
 
 
L.L.C.
SNG
=
Southern Natural Gas Company, L.L.C.
KMEP
=
Kinder Morgan Energy Partners, L.P.
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 its majority-owned and/or controlled subsidiaries.
 
 
 
 
 
 
Common Industry and Other Terms
/d
=
per day
FASB
=
Financial Accounting Standards Board
AFUDC
=
allowance for funds used during construction
FERC
=
Federal Energy Regulatory Commission
BBtu
=
billion British Thermal Units
GAAP
=
United States Generally Accepted Accounting
Bcf
=
billion cubic feet
 
 
Principles
CERCLA
=
Comprehensive Environmental Response,
LLC
=
limited liability company
 
 
Compensation and Liability Act
MBbl
=
thousand barrels
CO2
=
carbon dioxide or our CO2 business segment
MMBbl
=
million barrels
CPUC
=
California Public Utilities Commission
NGL
=
natural gas liquids
DCF
=
distributable cash flow
NYSE
=
New York Stock Exchange
DD&A
=
depreciation, depletion and amortization
OTC
=
over-the-counter
EBDA
=
earnings before depreciation, depletion and
PHMSA
=
United States Department of Transportation
 
 
amortization expenses, including amortization of
 
 
Pipeline and Hazardous Materials Safety
 
 
excess cost of equity investments
 
 
Administration
EPA
=
United States Environmental Protection Agency
 
 
 
 
 
 
 
 
 
When we refer to cubic feet measurements, all measurements are at a pressure of 14.73 pounds per square inch.




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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, 2014 (2014 Form 10-K) and Item 1A “Risk Factors” included elsewhere in this report for a more detailed description of factors that may affect the forward-looking statements. You should keep these risk factors in mind when considering forward-looking statements. These 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.


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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,
 
2015
 
2014
Revenues
 
 
 
Natural gas sales
$
785

 
$
1,097

Services
1,970

 
1,829

Product sales and other
842

 
1,121

Total Revenues
3,597

 
4,047

 
 
 
 
Operating Costs, Expenses and Other
 
 
 
Costs of sales
1,090

 
1,643

Operations and maintenance
505

 
483

Depreciation, depletion and amortization
538

 
496

General and administrative
216

 
172

Taxes, other than income taxes
115

 
110

Loss on impairments of long-lived assets
51

 
—

Other expense (income), net
4

 
(4
)
Total Operating Costs, Expenses and Other
2,519

 
2,900

 
 
 
 
Operating Income
1,078

 
1,147

 
 
 
 
Other Income (Expense)
 
 
 
Earnings from equity investments
102

 
99

Loss on impairments of equity investments
(26
)
 
—

Amortization of excess cost of equity investments
(12
)
 
(10
)
Interest, net
(512
)
 
(448
)
Other, net
13

 
13

Total Other Expense
(435
)
 
(346
)
 
 
 
 
Income Before Income Taxes
643

 
801

 
 
 
 
Income Tax Expense
(224
)
 
(200
)
 
 
 
 
Net Income
419

 
601

 
 
 
 
Net Loss (Income) Attributable to Noncontrolling Interests
10

 
(314
)
 
 
 
 
Net Income Attributable to Kinder Morgan, Inc.
$
429

 
$
287

 
 
 
 
Class P Shares
 
 
 
Basic Earnings Per Common Share
$
0.20

 
$
0.28

 
 
 
 
Basic Weighted-Average Number of Shares Outstanding
2,141

 
1,029

 
 
 
 
Diluted Earnings Per Common Share
$
0.20

 
$
0.28

 
 
 
 
Diluted Weighted-Average Number of Shares Outstanding
2,151

 
1,029

 
 
 
 
Dividends Per Common Share Declared for the Period
$
0.48

 
$
0.42


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

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KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Millions)
(Unaudited)
 
Three Months Ended March 31,
 
2015
 
2014
 
 
 
 
Net income
$
419

 
$
601

Other comprehensive income (loss), net of tax
 

 
 

Change in fair value of derivatives utilized for hedging purposes (net of tax benefit of $1 and $14, respectively)
(2
)
 
(45
)
Reclassification of change in fair value of derivatives to net income (net of tax benefit (expense) of $41 and $(4), respectively)
(72
)
 
14

Foreign currency translation adjustments (net of tax benefit of $62 and $18, respectively)
(108
)
 
(62
)
Benefit plan adjustments (net of tax (expense) benefit of $(3) and $-, respectively)
6

 
(1
)
Total other comprehensive loss
(176
)
 
(94
)
 
 
 
 
Comprehensive income
243

 
507

Comprehensive loss (income) attributable to noncontrolling interests
10

 
(258
)
Comprehensive income attributable to KMI
$
253

 
$
249


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

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KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Millions, Except Share and Per Share Amounts)
 
March 31, 2015
 
December 31, 2014
 
(Unaudited)
 
 
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
259

 
$
315

Accounts receivable, net
1,420

 
1,641

Inventories
453

 
459

Fair value of derivative contracts
561

 
535

Deferred income taxes
56

 
56

Other current assets
540

 
746

Total current assets
3,289

 
3,752

 
 
 
 
Property, plant and equipment, net
40,289

 
38,564

Investments
6,011

 
6,036

Goodwill
24,907

 
24,654

Other intangibles, net
3,762

 
2,302

Deferred income taxes
5,545

 
5,651

Deferred charges and other assets
2,361

 
2,239

Total Assets
$
86,164

 
$
83,198

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current Liabilities
 

 
 

Current portion of debt
$
3,435

 
$
2,717

Accounts payable
1,393

 
1,588

Accrued interest
538

 
637

Accrued contingencies
399

 
383

Other current liabilities
1,019

 
1,037

Total current liabilities
6,784

 
6,362

 
 
 
 
Long-term liabilities and deferred credits
 

 
 

Long-term debt
 

 
 

Outstanding
39,633

 
38,212

Preferred interest in general partner of KMP
100

 
100

Debt fair value adjustments
2,091

 
1,934

Total long-term debt
41,824

 
40,246

Other long-term liabilities and deferred credits
2,197

 
2,164

Total long-term liabilities and deferred credits
44,021

 
42,410

Total Liabilities
50,805

 
48,772

 
 
 
 
Commitments and contingencies (Notes 3 and 10)
 
 
 
Stockholders’ Equity
 

 
 

Class P shares, $0.01 par value, 4,000,000,000 shares authorized, 2,165,283,234 and 2,125,147,116 shares, respectively, issued and outstanding
22

 
21

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

 
—

Additional paid-in capital
37,839

 
36,178

Retained deficit
(2,639
)
 
(2,106
)
Accumulated other comprehensive loss
(193
)
 
(17
)
Total Kinder Morgan, Inc.’s stockholders’ equity
35,029

 
34,076

Noncontrolling interests
330

 
350

Total Stockholders’ Equity
35,359

 
34,426

Total Liabilities and Stockholders’ Equity
$
86,164

 
$
83,198


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

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KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
 
Three Months Ended March 31,
 
2015
 
2014
Cash Flows From Operating Activities
 
 
 
Net income
$
419

 
$
601

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

Depreciation, depletion and amortization
538

 
496

Deferred income taxes
221

 
111

Amortization of excess cost of equity investments
12

 
10

Loss on impairments of long-lived assets and equity investments
77

 
—

Earnings from equity investments
(102
)
 
(99
)
Distributions from equity investment earnings
92

 
77

Pension contributions and noncash pension benefit credits
(12
)
 
(59
)
Changes in components of working capital, net of the effects of acquisitions
 
 
 
Accounts receivable
216

 
178

Income tax receivable
195

 
—

Inventories
6

 
10

Other current assets
25

 
19

Accounts payable
(241
)
 
(140
)
Accrued interest
(114
)
 
(154
)
Accrued contingencies and other current liabilities
(12
)
 
95

Rate reparations, refunds and other litigation reserve adjustments
60

 
—

Other, net
(124
)
 
(27
)
Net Cash Provided by Operating Activities
1,256

 
1,118

 
 
 
 
Cash Flows From Investing Activities
 
 
 
Business acquisitions, net of cash acquired (Note 2)
(1,859
)
 
(960
)
Acquisitions of other assets and investments
(5
)
 
(30
)
Capital expenditures
(897
)
 
(845
)
Contributions to investments
(30
)
 
(36
)
Distributions from equity investments in excess of cumulative earnings
50

 
38

Other, net
(34
)
 
14

Net Cash Used in Investing Activities
(2,775
)
 
(1,819
)
 
 
 
 
Cash Flows From Financing Activities
 
 
 
Issuance of debt
7,136

 
5,191

Payment of debt
(6,305
)
 
(4,184
)
Debt issue costs
(16
)
 
(12
)
Issuances of shares
1,626

 
—

Cash dividends
(962
)
 
(425
)
Repurchases of shares and warrants
—

 
(149
)
Contributions from noncontrolling interests
—

 
684

Distributions to noncontrolling interests
(10
)
 
(479
)
Other, net
(1
)
 
—

Net Cash Provided by Financing Activities
1,468

 
626

 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
(5
)
 
(10
)
 
 
 
 
Net decrease in Cash and Cash Equivalents
(56
)
 
(85
)
Cash and Cash Equivalents, beginning of period
315

 
598

Cash and Cash Equivalents, end of period
$
259

 
$
513

 
Non-cash Investing and Financing Activities
 
 
 
Assets acquired by the assumption or incurrence of liabilities
$
1,606

 
$
—

Net assets contributed to equity investment
$
27

 
$
—

 
 
 
 
Supplemental Disclosures of Cash Flow Information
 
 
 
Cash paid during the period for interest (net of capitalized interest)
$
592

 
$
566

Cash refunded during the period for income taxes, net
$
(196
)
 
$
(2
)

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

7

                    KINDER MORGAN, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Millions)
(Unaudited)
 
Three Months Ended March 31, 2015
 
Outstanding shares
 
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, 2014
2,125

 
$
21

 
$
36,178

 
$
(2,106
)
 
$
(17
)
 
$
34,076

 
$
350

 
$
34,426

Issuances of shares
39

 
1

 
1,625

 
 
 
 
 
1,626

 
 
 
1,626

EP Trust I Preferred security conversions
1

 
 
 
19

 
 
 
 
 
19

 
 
 
19

Warrants exercised
 
 
 
 
1

 
 
 
 
 
1

 
 
 
1

Amortization of restricted shares
 
 
 
 
16

 
 
 
 
 
16

 
 
 
16

Net income
 
 
 
 
 
 
429

 
 
 
429

 
(10
)
 
419

Distributions
 
 
 
 
 
 
 
 
 
 
—

 
(10
)
 
(10
)
Cash dividends
 
 
 
 
 
 
(962
)
 
 
 
(962
)
 
 
 
(962
)
Other comprehensive loss
 
 
 
 
 
 
 
 
(176
)
 
(176
)
 
—

 
(176
)
Ending Balance at
 March 31, 2015
2,165

 
$
22

 
$
37,839

 
$
(2,639
)
 
$
(193
)
 
$
35,029

 
$
330

 
$
35,359


 
Three Months Ended March 31, 2014
 
Outstanding shares
 
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
1,031

 
$
10

 
$
14,479

 
$
(1,372
)
 
$
(24
)
 
$
13,093

 
$
15,192

 
$
28,285

Shares repurchased
(3
)
 

 
(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
)
Net income
 
 
 
 


 
287

 
 
 
287

 
314

 
601

Distributions
 
 
 
 
 

 
 
 
 
 
—

 
(479
)
 
(479
)
Contributions
 
 
 
 
 

 
 
 
 
 
—

 
684

 
684

Cash dividends
 
 
 
 
 
 
(425
)
 
 
 
(425
)
 
 
 
(425
)
Other
 
 
 
 
5

 
 
 
 
 
5

 

 
5

Other comprehensive loss
 
 
 
 
 
 
 
 
(38
)
 
(38
)
 
(56
)
 
(94
)
Ending Balance at
 March 31, 2014
1,028

 
$
10

 
$
14,362

 
$
(1,510
)
 
$
(62
)
 
$
12,800

 
$
15,634

 
$
28,434



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

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

1.  General
 
Organization

We are the largest energy infrastructure and the third largest energy company in North America with an enterprise value of more than $130 billion. We own an interest in or operate approximately 84,000 miles of pipelines and 180 terminals. Our pipelines transport natural gas, refined petroleum products, crude oil, condensate, CO2 and other products, and our terminals 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, which is utilized for enhanced oil recovery projects in North America.

On November 26, 2014, we completed our acquisition, pursuant to three separate merger agreements, of all of the outstanding common units of Kinder Morgan Energy Partners, L.P. and El Paso Pipeline Partners, L.P. and all of the outstanding shares of Kinder Morgan Management, LLC that we did not already own. The transactions, valued at approximately $77 billion, are referred to collectively as the “Merger Transactions.” On January 1, 2015, EPB and its subsidiary, EPPOC merged with and into KMP. References to EPB refer to EPB for periods prior to its merger into KMP.
 
Prior to November 26, 2014, we owned an approximate 10% limited partner interest (including our interest in KMR) and the 2% general partner interest including incentive distribution rights in KMP, and an approximate 39% limited partner interest and the 2% general partner interest and incentive distribution rights in EPB. Effective with the Merger Transactions, the incentive distribution rights held by the general partner of KMP were eliminated.

The earnings recorded by KMP, EPB and KMR that are attributed to their units and shares, respectively, held by the public prior to November 26, 2014 are reported as “Net loss (income) attributable to noncontrolling interests” in our accompanying consolidated statements of income.

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 (SEC). 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, certain amounts from prior years have been reclassified to conform to the current presentation.  

Interim results are not necessarily indicative of results for a full year; accordingly, you should read these consolidated financial statements in conjunction with our consolidated financial statements and related notes included in our 2014 Form 10-K.

Impairments

Due to the continued low commodity price environment and certain actions of our customers during the first quarter of 2015, we recorded a non-cash pre-tax impairment charge of $77 million related to certain of our gas gathering and processing assets in our Natural Gas Pipelines segment. The impairment comprised $51 million of long-lived assets and $26 million related to our investments in Fort Union Gas Gathering L.L.C. and Bighorn Gas Gathering L.L.C.

As conditions warrant, management routinely evaluates its assets for potential triggering events that could impact the fair value of certain assets or our ability to recover the carrying value of long-lived assets. Such assets include accounts receivable, property plant and equipment, including oil and gas properties and in-process construction, equity investments, goodwill and other intangibles. Depending on the nature of the asset, these evaluations require the use of significant judgments including but not limited to customer credit worthiness, future cash flow estimates, future volume expectations, current and future commodity prices, as well as general economic conditions and the related demand for products handled or transported by our assets. In the current commodity price environment and to the extent conditions further deteriorate, we may identify additional

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triggering events that may necessitate further impairments to the carrying value of our assets. Such non-cash impairments could have a significant effect on our results of operations.

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 tables set forth the allocation of net income available to shareholders for Class P shares and for participating securities and the reconciliation of Basic Weighted-Average Number of Shares Outstanding to Diluted Weighted-Average Number of Shares Outstanding (in millions):
 
Three Months Ended March 31,

2015
 
2014
Class P
$
426

 
$
284

Participating securities(a)
3

 
3

Net Income Attributable to Kinder Morgan, Inc.
$
429

 
$
287


 
Three Months Ended March 31,
 
2015
 
2014
Basic Weighted-Average Number of Shares Outstanding
2,141

 
1,029

Effect of dilutive securities:
 
 
 
   Warrants(b)
10

 
—

Diluted Weighted-Average Number of Shares Outstanding
2,151

 
1,029

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

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 March 31,
 
2015
 
2014
Unvested restricted stock awards
7

 
7

Warrants to purchase our Class P shares
289

 
341

Convertible trust preferred securities
9

 
10

_______


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2.  Acquisitions
 
Hiland Partners, LP

On February 13, 2015, we acquired Hiland Partners, LP, a privately held Delaware limited partnership (Hiland) for an aggregate consideration of $3,120 million, including assumed debt and other assumed liabilities. Approximately $368 million of the debt assumed was immediately paid down after closing. Hiland’s assets consist primarily of crude oil gathering and transportation pipelines and gas gathering and processing systems, primarily serving production from the Bakken Formation in North Dakota and Montana. The acquired gathering and processing assets are included in our Natural Gas Pipelines business segment while the acquired crude transport pipeline is included in our Products Pipelines business segment.

Vopak Terminal Assets

On February 27, 2015, we acquired three U.S. terminals and one undeveloped site from Royal Vopak (Vopak) for approximately $158 million. The acquisition covers (i) a 36-acre, 1,069,500-barrel storage facility at Galena Park, Texas that handles base oils, biodiesel and crude oil and is immediately adjacent to our Galena Park terminal facility; (ii) two terminals in North Carolina: one in North Wilmington that handles chemicals and black oil and the other in South Wilmington that is not currently operating; and (iii) an undeveloped site in Perth Amboy, New Jersey, with waterfront access that can be developed. We include the acquired assets as part of the Terminals business segment.

Our preliminary allocation of the purchase price for each of our significant acquisitions during the three months ended March 31, 2015 (in millions) is detailed below. The evaluation of the assigned fair values is ongoing and subject to adjustment.
 
Acquisitions
 
Hiland
 
Vopak Terminal Assets
Purchase Price Allocation:
 
 
 
Current assets
$
44

 
$
3

Property, plant and equipment
1,521

 
131

Goodwill
238

 
29

Other intangibles(a)
1,507

 
—

Total assets acquired
3,310

 
163

Current liabilities
(187
)
 
(2
)
Debt
(1,411
)
 
—

Other liabilities
(3
)
 
(3
)
Cash consideration
$
1,709

 
$
158

_______
(a)
Relates to customer contracts and relationships with a weighted average amortization period of 16.4 years.

After measuring all of the identifiable tangible and intangible assets acquired and liabilities assumed at fair value on the acquisition date, goodwill is an intangible asset representing the future economic benefits expected to be derived from an acquisition that are not assigned to other identifiable, separately recognizable assets.  We believe the primary items that generated our goodwill are both the value of the synergies created between the acquired assets and our pre-existing assets, and our expected ability to grow the business we acquired by leveraging our pre-existing business experience. We expect our recorded goodwill associated with the above acquisitions to be deductible for tax purposes.


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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. The following table provides detail on the principal amount of our outstanding debt balances. The table amounts exclude all debt fair value adjustments, including debt discounts and premiums (in millions):
 
 
March 31, 2015
 
December 31, 2014
KMI and Subsidiaries
 
 
 
 
Senior notes, 1.50% through 8.25%, due 2015 through 2098(a)
 
$
13,330

 
$
11,438

Credit facility due November 26, 2019(b)
 
600

 
850

Commercial paper borrowings(b)
 
296

 
386

KMP
 
 
 
 
Senior notes, 2.65% through 9.00%, due 2015 through 2044(c)
 
20,360

 
20,660

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

CIG senior notes, 5.95% through 6.85%, due 2015 through 2037
 
440

 
475

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

 
1,211

Other Subsidiary Borrowings (as obligor)
 
 
 
 
Kinder Morgan Finance Company, LLC, senior notes, 5.70% through 6.40%, due 2016 through 2036
 
1,636

 
1,636

Hiland Partners Holdings LLC, senior notes, 5.50% and 7.25%, due 2020 and 2022(d)
 
975

 
—

EPC Building, LLC, promissory note, 3.967%, due 2015 through 2035
 
450

 
453

Preferred securities, 4.75%, due March 31, 2028
 
232

 
280

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

 
100

Other miscellaneous debt
 
301

 
303

Total debt – KMI and Subsidiaries
 
43,168

 
41,029

Less: Current portion of debt(e)
 
3,435

 
2,717

Total long-term debt – KMI and Subsidiaries(f)
 
$
39,733

 
$
38,312

_______
(a)
March 31, 2015 amount includes senior notes that are denominated in Euros and have been converted and are reported at the March 31, 2015 exchange rate of 1.0731 U.S. dollars per Euro. We also entered into cross-currency swap agreements associated with these senior notes (see Note 5).
(b)
As of March 31, 2015 and December 31, 2014, the weighted average interest rates on our credit facility borrowings, including commercial paper borrowings, were 1.56% and 1.54%, respectively.
(c)
On January 1, 2015, EPB and EPPOC merged with and into KMP. On that date, KMP succeeded EPPOC as the issuer of approximately $2.9 billion of EPPOC’s senior notes, which were guaranteed by EPB, and EPB and EPPOC ceased to be obligors for those senior notes.
(d)
Represents the principal amount of senior notes assumed in the Hiland acquisition.
(e)
Amounts include outstanding credit facility and commercial paper borrowings.
(f)
As of March 31, 2015 and December 31, 2014, our “Debt fair value adjustments” increased our combined debt balances by $2,091 million and $1,934 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.

Credit Facilities
 
As of March 31, 2015, we had $600 million outstanding under our five-year $4.0 billion revolving credit facility, $296 million outstanding under our $4.0 billion commercial paper program and $128 million in letters of credit. Our availability under this facility as of March 31, 2015 was $2,976 million. Borrowings under our revolving credit facility can be used for working capital and other general corporate purposes and as a backup to our commercial paper program. Similarly, borrowings under our commercial paper program reduce the borrowings allowed under our credit facility.

On February 13, 2015, in connection with the Hiland acquisition, we entered into and made borrowings of $1,641 million under a new six-month bridge credit facility with UBS AG, Stamford Branch. Interest under this bridge credit facility was

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charged at the same rate as our $4.0 billion revolving credit facility. Prior to March 31, 2015, we repaid outstanding borrowings and the facility was terminated on April 6, 2015.

Hiland Debt Acquired

As of the February 13, 2015 Hiland acquisition date, we assumed (i) $975 million in principal amount of senior notes (which were valued at $1,043 million as of the acquisition date) and (ii) $368 million of other borrowings that were immediately repaid after closing, primarily consisting of borrowings outstanding under a revolving credit facility. The senior notes are subject to our cross guarantee agreement discussed in Note 12.

Long-term Debt Issuances and Repayments
Apart from the assumption of the Hiland debt discussed above, following are significant long-term debt issuances and repayments made during the three months ended March 31, 2015:
 
 
 
  Issuances
 
$800 million 5.05% notes due 2046
 
 
$815 million 1.50% notes due 2022(a)
 
 
$543 million 2.25% notes due 2027(a)
 
 
 
  Repayments
 
$300 million 5.625% notes due 2015
 
 
$250 million 5.15% notes due 2015
_______
(a)
Senior notes are denominated in Euros and are presented above in U.S. dollars at the exchange rate on the issuance date of 1.086 U.S. dollars per Euro. We also entered into cross-currency swap agreements associated with these senior notes (see Note 5).

4.  Stockholders’ Equity
 
Common Equity
 
As of March 31, 2015, our common equity consisted of our Class P common stock. For additional information regarding our Class P common stock, see Note 10 to our consolidated financial statements included in our 2014 Form 10-K.

On December 19, 2014, we entered into an equity distribution agreement authorizing us to issue and sell through or to the managers party thereto, as sales agents and/or principals, shares of our Class P common stock having an aggregate offering price of up to $5,000 million from time to time during the term of this agreement. During the three months ended March 31, 2015, we issued and sold 39,398,245 shares of our Class P common stock pursuant to the equity distribution agreement, and issued an additional 2,692,672 shares after March 31, 2015 to settle sales made on or before March 31, 2015, resulting in net proceeds of $1,738 million.

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,
 
2015
 
2014
Per common share cash dividend declared for the period
$
0.48

 
$
0.42

Per common share cash dividend paid in the period
$
0.45

 
$
0.41

_______

On April 15, 2015, our board of directors declared a cash dividend of $0.48 per share for the quarterly period ended March 31, 2015, which is payable on May 15, 2015 to shareholders of record as of April 30, 2015.


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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 and foreign currency 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. In addition, we have legacy power forward and swap contracts for which we entered into offsetting positions that eliminate the price risks associated with these power contracts.

As of December 31, 2014, we had discontinued hedge accounting on certain of our crude derivative contracts as we did not expect them to be highly effective, for accounting purposes, in offsetting the variability in cash flows. This was caused primarily by volatility in basis differentials. As the forecasted transactions are still probable, accumulated gains and losses remain in other comprehensive income until earnings are impacted by the forecasted transactions. Future changes in the derivative contracts’ fair value subsequent to the discontinuance of hedge accounting will be reported in earnings. We may re-designate certain of these hedging relationships if their expected effectiveness improves.
Energy Commodity Price Risk Management
 
As of March 31, 2015, we had entered into the following outstanding commodity forward contracts to hedge our forecasted energy commodity purchases and sales: 
 
Net open position long/(short)
Derivatives designated as hedging contracts
 
 
 
Crude oil fixed price
(12.8
)
 
MMBbl
Crude oil basis
(12.1
)
 
MMBbl
Natural gas fixed price
(50.7
)
 
Bcf
Natural gas basis
(25.9
)
 
Bcf
Derivatives not designated as hedging contracts
 

 
 
Crude oil fixed price
(14.2
)
 
MMBbl
Crude oil basis
(0.3
)
 
MMBbl
Natural gas fixed price
(17.9
)
 
Bcf
Natural gas basis
(16.5
)
 
Bcf
NGL fixed price
(52.7
)
 
MMBbl
_______

As of March 31, 2015, the maximum length of time over which we have hedged, for accounting purposes, our exposure to the variability in future cash flows associated with energy commodity price risk is through December 2017. We have additional economic hedge contracts not designated as accounting hedges through December 2019.

Interest Rate Risk Management
 
As of March 31, 2015 and December 31, 2014, we had a combined notional principal amount of $9,700 million and $9,200 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 London Interbank Offered Rate (LIBOR) plus a spread.  All of our swap agreements have termination dates that correspond to the maturity dates of the related series of senior notes and, as of March 31, 2015, 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.

In March 2015, we entered into four separate fixed-to-variable interest rate swap agreements having a combined notional principal amount of $600 million. These agreements effectively convert a portion of the interest expense associated with our 5.625% senior notes due November 15, 2023, from a fixed rate to a variable rate based on an interest rate of LIBOR plus a spread.

Foreign Currency Risk Management

In connection with the issuance of our Euro denominated senior notes in March 2015 (see Note 3), we entered into cross-currency swap agreements to manage the related foreign currency risk by effectively converting all of the fixed-rate Euro denominated debt, including annual interest payments and the payment of principal at maturity, to U.S. dollar denominated debt

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at fixed rates equivalent to approximately 3.79% and 4.67% for the 7-year and 12-year senior notes, respectively. These cross-currency swaps are accounted for as cash flow hedges. The terms of the cross-currency swap agreements correspond to the related hedged senior notes, and such agreements have the same maturities as the hedged senior notes.
 
Fair Value of Derivative Contracts
 
The following table summarizes the fair values of our derivative contracts included in our accompanying consolidated balance sheets (in millions):
Fair Value of Derivative Contracts
 
 
 
 
Asset derivatives
 
Liability derivatives
 
 
 
 
March 31,
2015
 
December 31,
2014
 
March 31,
2015
 
December 31,
2014
 
 
Balance sheet location
 
Fair value
 
Fair value
Derivatives designated as hedging contracts
 
 
 
 
 
 
 
 
 
 
Natural gas and crude derivative contracts
 
Fair value of derivative contracts/(Other current liabilities)
 
$
318

 
$
309

 
$
(63
)
 
$
(34
)
 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
44

 
6

 
(2
)
 
—

Subtotal
 
 
 
362

 
315

 
(65
)
 
(34
)
Interest rate swap agreements
 
Fair value of derivative contracts/(Other current liabilities)
 
171

 
143

 
—

 
—

 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
329

 
260

 
(5
)
 
(53
)
Subtotal
 
 
 
500

 
403

 
(5
)
 
(53
)
Cross-currency swap agreements
 
Fair value of derivative contracts/(Other current liabilities)
 
—

 
—

 
(31
)
 
—

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

 
—

 
(23
)
 
—

Subtotal
 
 
 
—

 
—

 
(54
)
 
—

Total
 
 
 
862

 
718

 
(124
)
 
(87
)
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging contracts
 
 
 
 

 
 
 
 

 
 
Natural gas, crude and NGL derivative contracts
 
Fair value of derivative contracts/(Other current liabilities)
 
62

 
73

 
(1
)
 
(2
)
 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
174

 
196

 
(1
)
 
—

Subtotal
 
 
 
236

 
269

 
(2
)
 
(2
)
Power derivative contracts
 
Fair value of derivative contracts/(Other current liabilities)
 
10

 
10

 
(56
)
 
(57
)
 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
1

 
—

 
(4
)
 
(16
)
Subtotal
 
 
 
11

 
10

 
(60
)
 
(73
)
Total
 
 
 
247

 
279

 
(62
)
 
(75
)
Total derivatives
 
 
 
$
1,109

 
$
997

 
$
(186
)
 
$
(162
)
_______


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Effect of Derivative Contracts on the Income Statement
 
The following tables summarize the impact of our derivative contracts on our accompanying consolidated statements of income (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
 
 
 
 
Three Months Ended March 31,
 
 
 
 
2015
 
2014
 
 
 
 
 
 
 
Interest rate swap agreements
 
Interest expense
 
$
145

 
$
55

 
 
 
 
 
 
 
Hedged fixed rate debt
 
Interest expense
 
$
(139
)
 
$
(55
)
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,
 
 
2015
 
2014
 
 
 
2015
 
2014
 
 
 
2015
 
2014
Energy commodity
 derivative contracts
 
$
35

 
$
(43
)
 
Revenues—Natural
 gas sales
 
$
24

 
$
(9
)
 
Revenues—Natural
 gas sales
 
$
—

 
$
—

 
 

 
 
 
Revenues—Product
 sales and other
 
64

 
(6
)
 
Revenues—Product
 sales and other
 
7

 
(5
)
 
 


 
 
 
Costs of sales
 
(5
)
 
1

 
Costs of sales
 
—

 
—

Interest rate swap
 agreements
 
(3
)
 
(2
)
 
Interest expense
 
(1
)
 
—

 
Interest expense
 
—

 
—

Cross-currency swap
 
(34
)
 
—

 
Other, net
 
(10
)
 
—

 
 
 
 
 
 
Total
 
$
(2
)
 
$
(45
)
 
Total
 
$
72

 
$
(14
)
 
Total
 
$
7

 
$
(5
)
_______
(a)
We expect to reclassify an approximate $175 million gain associated with cash flow hedge price risk management activities included in our accumulated other comprehensive loss balances as of March 31, 2015 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,
 
 
 
 
2015
 
2014
Energy commodity derivative contracts
 
Revenues—Natural gas sales
 
$
4

 
$
(7
)
 
 
Revenues—Product sales and other
 
45

 
(1
)
 
 
Costs of sales
 
(3
)
 
10

 
 
Other expense (income)
 
—

 
(2
)
Total(a)
 
 
 
$
46

 
$
—

_______
(a) As of March 31, 2015, includes an approximate $5 million loss associated with natural gas, crude and NGL derivative contract settlements.


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Credit Risks
  
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, 2015 and December 31, 2014, we had $20 million of outstanding letters of credit supporting our commodity price risk management program in addition to $44 million and $47 million, respectively, of cash margin on deposit posted as collateral.
 
We also have agreements with certain counterparties to our derivative contracts that contain provisions requiring the posting of additional collateral upon a decrease in our credit rating.  As of March 31, 2015, we estimate that if our credit rating was downgraded one notch, we would be required to post $1 million of additional collateral to our counterparties. If we were downgraded two notches, we would be required to post no additional collateral from the one notch downgrade.

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” not including non-controlling interests 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 income/(loss)
Balance as of December 31, 2014
$
327

 
$
(108
)
 
$
(236
)
 
$
(17
)
Other comprehensive loss before reclassifications
(2
)
 
(108
)
 
6

 
(104
)
Amounts reclassified from accumulated other comprehensive loss
(72
)
 
—

 
—

 
(72
)
Net current-period other comprehensive loss
(74
)
 
(108
)
 
6

 
(176
)
Balance as of March 31, 2015
$
253

 
$
(216
)
 
$
(230
)
 
$
(193
)
 
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
)

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

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•
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; (ii) interest rate swap agreements; and (iii) cross-currency swap agreements, based on the three levels established by the Codification (in millions). The tables also identify the impact of derivative contracts which we have elected to present on our accompanying consolidated balance sheets on a gross basis that are eligible for netting under master netting agreements. 
 
Balance sheet asset
fair value measurements by level
 
 
 
Net amount
 
Level 1
 
Level 2
 
Level 3
 
Gross amount
 
Contracts available for netting
 
Cash collateral held(b)
As of March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts(a)
$
39

 
$
559

 
$
11

 
$
609

 
$
(70
)
 
$
—

 
$
539

Interest rate swap agreements
$
—

 
$
500

 
$
—

 
$
500

 
$
(3
)
 
$
—

 
$
497

As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts(a)
$
49

 
$
533

 
$
12

 
$
594

 
$
(46
)
 
$
(13
)
 
$
535

Interest rate swap agreements
$
—

 
$
403

 
$
—

 
$
403

 
$
(44
)
 
$
—

 
$
359

 
Balance sheet liability
fair value measurements by level
 
 
 
Net amount
 
Level 1
 
Level 2
 
Level 3
 
Gross amount
 
Contracts available for netting
 
Collateral posted(c)
As of March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts(a)
$
(26
)
 
$
(41
)
 
$
(60
)
 
$
(127
)
 
$
70

 
$
44

 
$
(13
)
Interest rate swap agreements
$
—

 
$
(5
)
 
$
—

 
$
(5
)
 
$
3

 
$
—

 
$
(2
)
Cross-currency swap agreements
$
—

 
$
(54
)
 
$
—

 
$
(54
)
 
$
—

 
$
—

 
$
(54
)
As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts(a)
$
(25
)
 
$
(11
)
 
$
(73
)
 
$
(109
)
 
$
46

 
$
47

 
$
(16
)
Interest rate swap agreements
$
—

 
$
(53
)
 
$
—

 
$
(53
)
 
$
44

 
$
—

 
$
(9
)
_______
(a)
Level 1 consists primarily of New York Mercantile Exchange (NYMEX) natural gas futures.  Level 2 consists primarily of OTC West Texas Intermediate (WTI) swaps and options.  Level 3 consists primarily of power derivative contracts.
(b)
Cash margin deposits held by us associated with our energy commodity contract positions and OTC swap agreements and reported within “Other current liabilities” on our accompanying consolidated balance sheets.
(c)
Cash margin deposits posted by us associated with our energy commodity contract positions and OTC swap agreements and reported within “Other current assets” on our accompanying consolidated balance sheets.


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The table below provides a summary of changes in the fair value of our Level 3 energy commodity derivative contracts (in millions): 
Significant unobservable inputs (Level 3)
 
Three Months Ended March 31,
 
2015
 
2014
Derivatives-net asset (liability)
 
 
 
Beginning of Period
$
(61
)
 
$
(110
)
Total gains or (losses)
 
 
 
Included in earnings
—

 
7

Included in other comprehensive loss
—

 
(1
)
Settlements
12

 
4

End of Period
$
(49
)

$
(100
)
The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or (losses) relating to assets held at the reporting date
$
1

 
$
3

_______

As of March 31, 2015, our Level 3 derivative assets and liabilities consisted primarily of power derivative contracts, where a significant portion of fair value is calculated from underlying market data that is not readily observable. The derived values use industry standard methodologies that may consider the historical relationships among various commodities, modeled market prices, time value, volatility factors and other relevant economic measures. The use of these inputs results in management’s best estimate of fair value.

Fair Value of Financial Instruments
 
The estimated fair value of our outstanding debt balances (the carrying amounts below include both short-term and long-term and debt fair value adjustments), is disclosed below (in millions): 
 
March 31, 2015
 
December 31, 2014
 
Carrying
value
 
Estimated
fair value
 
Carrying
value
 
Estimated
fair value
Total debt
$
45,259

 
$
46,480

 
$
42,963

 
$
43,582

_______
 
We used Level 2 input values to measure the estimated fair value of our outstanding debt balances as of both March 31, 2015 and December 31, 2014.


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7.  Reportable Segments
 
Financial information by segment follows (in millions):
 
Three Months Ended March 31,
 
2015
 
2014
Revenues
 
 
 
Natural Gas Pipelines
 
 
 
    Revenues from external customers
$
2,177

 
$
2,557

    Intersegment revenues
3

 
4

CO2
446

 
483

Terminals
457

 
391

Products Pipelines
444

 
534

Kinder Morgan Canada
60

 
69

Other
4

 
4

Total segment revenues
3,591

 
4,042

Other revenues
9

 
9

Less: Total intersegment revenues
(3
)
 
(4
)
Total consolidated revenues
$
3,597

 
$
4,047

 
Three Months Ended March 30,
 
2015
 
2014
Segment Earnings Before DD&A(a)
 
 
 
Natural Gas Pipelines
$
1,015

 
$
1,070

CO2
336

 
363

Terminals
270

 
210

Products Pipelines
246

 
208

Kinder Morgan Canada
41

 
48

Other
(6
)
 
7

Total segment earnings before DD&A
1,902

 
1,906

DD&A expense
(538
)
 
(496
)
Amortization of excess cost of investments
(12
)
 
(10
)
Other revenues
9

 
9

General and administrative expense
(216
)
 
(172
)
Interest expense, net of unallocable interest income
(514
)
 
(450
)
Unallocable income tax expense
(212
)
 
(186
)
Total consolidated net income
$
419

 
$
601

 
March 31,
2015
 
December 31,
2014
Assets
 
 
 
Natural Gas Pipelines
$
54,539

 
$
52,523

CO2
5,318

 
5,227

Terminals
9,071

 
8,850

Products Pipelines
8,364

 
7,179

Kinder Morgan Canada
1,480

 
1,593

Other
443

 
459

Total segment assets
79,215

 
75,831

Corporate assets(b)
6,920

 
7,311

Assets held for sale
29

 
56

Total consolidated assets
$
86,164

 
$
83,198

_______
(a)
We evaluate performance based on each segment’s earnings before DD&A. Amounts include revenues, earnings from equity investments, allocable interest income, and other, net, less operating expenses, allocable income taxes, and other expense (income), net, and losses on impairments of long-lived assets and equity investments. Operating expenses include natural gas purchases and other costs of sales, operations and maintenance expenses, and taxes, other than income taxes.
(b)
Includes cash and cash equivalents, margin and restricted deposits, unallocable interest receivable, prepaid assets and deferred charges, risk management assets related to debt fair value adjustments and miscellaneous corporate assets (such as information technology and telecommunications equipment) not allocated to individual segments. 

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8. Pension and Other Postretirement Benefit Plans
 
The components of net benefit plan (credit) expense for our pension and other postretirement benefit (OPEB) plans are as follows (in millions):
 
Pension Benefits
 
OPEB
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2015
 
2014
 
2015
 
2014
Service cost
$
6

 
$
7

 
$
—

 
$
—

Interest cost
24

 
27

 
6

 
7

Expected return on assets
(43
)
 
(43
)
 
(6
)
 
(6
)
Amortization of prior service credits
—

 
—

 
(1
)
 
(1
)
Amortization of net actuarial loss
1

 
—

 
—

 
—

Net benefit plan credit
$
(12
)
 
$
(9
)
 
$
(1
)
 
$
—


9.  Income Taxes
 
Income tax expense included in our accompanying consolidated statements of income were as follows (in millions, except percentages): 
 
Three Months Ended March 31,
 
2015
 
2014
Income tax expense
$
224

 
$
200

Effective tax rate
34.8
%
 
25.0
%

Income tax expense for the three months ended March 31, 2015 is approximately $224 million resulting in an effective tax rate of 34.8%, as compared with $200 million income tax expense and an effective tax rate of 25.0%, for the same period of 2014. The effective tax rate for the three months ended March 31, 2015 is slightly lower than the statutory federal rate of 35% primarily due to (i) dividend-received deductions from our 50% interest in Florida Gas Transmission Company, L.L.C. (Florida Gas) (through our investment in Citrus Corporation) and Plantation Pipe Line Company and (ii) a change in our effective tax rate as a result of the Hiland acquisition, partially offset by state income taxes.

The effective tax rate for the three months ended March 31, 2014 is lower than the statutory federal rate of 35% primarily due to (i) the net effect of consolidating KMP and EPB’s income tax provisions; and (ii) dividend-received deductions from our 50% investment in Florida Gas (through our investment in Citrus Corporation). These decreases are partially offset by (i) state income taxes; (ii) a decrease in our share of non-tax deductible goodwill associated with our investments in KMP; (iii) adjustments to our income tax reserve for uncertain tax positions; and (iv) the amortization of the deferred charge recorded as a result of the August 2012 and March 2013 drop-down transactions to KMP.

10.  Litigation, Environmental and Other Contingencies
 
We and our subsidiaries are parties to various legal, regulatory and other matters arising from the day-to-day operations of our businesses that may result in claims against the Company. Although no assurance can be given, we believe, based on our experiences to date and taking into account established reserves, that the ultimate resolution of such items will not have a material adverse impact on our business, financial position, results of operations or dividends to our shareholders. We believe we have meritorious defenses to the matters to which we are a party and intend to vigorously defend the Company. When we determine a loss is probable of occurring and is reasonably estimable, we accrue an undiscounted liability for such contingencies based on our best estimate using information available at that time. If the estimated loss is a range of potential outcomes and there is no better estimate within the range, we accrue the amount at the low end of the range. We disclose contingencies where an adverse outcome may be material, or in the judgment of management, we conclude the matter should otherwise be disclosed.


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Federal Energy Regulatory Commission Proceedings
 
SFPP

The tariffs and rates charged by SFPP are subject to a number of ongoing proceedings at the FERC, including the complaints and protests of various shippers. In general, these complaints and protests allege the rates and tariffs charged by SFPP are not just and reasonable under the Interstate Commerce Act (ICA). In late June of 2014, certain shippers filed additional complaints with the FERC (docketed at OR14-35 and OR14-36) challenging SFPP’s adjustments to its rates in 2012 and 2013 for inflation under the FERC’s indexing regulations. If the shippers are successful in proving these claims or other of their claims, they are entitled to seek reparations (which may reach back up to two years prior to the filing of their complaints) or refunds of any excess rates paid, and SFPP may be required to reduce its rates going forward. These proceedings tend to be protracted, with decisions of the FERC often appealed to the federal courts. The issues involved in these proceedings include, among others, whether indexed rate increases are justified, and the appropriate level of return and income tax allowance we may include in our rates. With respect to all of the SFPP proceedings at the FERC, we estimate that the shippers are seeking approximately $20 million in annual rate reductions and approximately $110 million in refunds. However, applying the principles of several recent FERC decisions in SFPP cases, as applicable, to pending cases would result in substantially lower rate reductions and refunds than those sought by the shippers. We do not expect refunds in these cases to have an impact on our dividends to our shareholders.

EPNG

The tariffs and rates charged by EPNG are subject to two ongoing FERC proceedings (the “2008 rate case” and the “2010 rate case”). With respect to the 2008 rate case, the FERC issued its decision (Opinion 517) in May 2012. EPNG implemented certain aspects of that decision and believes it has an appropriate reserve related to the findings in Opinion 517. EPNG has sought rehearing on Opinion 517. With respect to the 2010 rate case, the FERC issued its decision (Opinion 528) on October 17, 2013. EPNG sought rehearing on certain issues in Opinion 528. As required by Opinion 528, EPNG filed revised pro forma recalculated rates consistent with the terms of Opinion 528. The FERC also required an Administrative Law Judge (ALJ) to conduct an additional hearing concerning one of the issues in Opinion 528. On September 17, 2014, the ALJ issued an initial decision finding certain shippers qualify for lower rates under a prior settlement. EPNG has sought FERC review of the ALJ decision and believes it has an appropriate reserve related to the findings in Opinion 528.

California Public Utilities Commission Proceedings
 
We have previously reported ratemaking and complaint proceedings against SFPP pending with the CPUC. The ratemaking and complaint cases generally involve challenges to rates charged by SFPP for intrastate transportation of refined petroleum products through its pipeline system in the state of California and request prospective rate adjustments and refunds with respect to tariffed and previously untariffed charges for certain pipeline transportation and related services.

On October 3, 2014, SFPP and its shippers executed a global settlement resolving all pending CPUC proceedings and submitted the proposed settlement to the CPUC for its consideration and approval. The settlement included refunds in the amount of $319 million which was consistent with our established reserve amounts. It also included a three year moratorium on new rate filings or complaints and established current rates consistent with the revenues recognized by SFPP in 2014. On December 18, 2014, the CPUC issued its Decision No. 14-12-057 approving and adopting the global settlement, thereby resolving and closing all previously pending SFPP rate proceedings. On December 29, 2014, SFPP certified to the CPUC that it made all required settlement payments. On March 16, 2015, the CPUC issued its decision eliminating its previously imposed CPUC requirement that SFPP maintain a letter of credit in the amount of $100 million to secure SFPP’s payment obligation for refunds related to the now-resolved CPUC rate proceedings.

Other Commercial Matters
 
Union Pacific Railroad Company Easements & Related Litigation
 
SFPP and Union Pacific Railroad Company (UPRR) are engaged in a proceeding to determine the extent, if any, to which the rent payable by SFPP for the use of pipeline easements on rights-of-way held by UPRR should be adjusted pursuant to existing contractual arrangements for the ten-year period beginning January 1, 2004 (Union Pacific Railroad Company v. Santa Fe Pacific Pipelines, Inc., SFPP, L.P., Kinder Morgan Operating L.P. “D”, Kinder Morgan G.P., Inc., et al., Superior Court of the State of California for the County of Los Angeles, filed July 28, 2004). In September 2011, the trial judge determined that the annual rent payable as of January 1, 2004 was $14 million, subject to annual consumer price index increases. Judgment was entered by the Superior Court on May 29, 2012 and SFPP appealed the judgment.

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On November 5, 2014, the Court of Appeals issued an opinion which reversed the judgment, including the award of prejudgment interest, and remanded the matter to the trial court for a determination of UPRR’s property interest in its right-of-way, including whether UPRR has sufficient interest to grant SFPP’s easements. UPRR filed a petition for rehearing with the Court of Appeals, which was denied on December 5, 2014. UPRR filed a petition for review to the California Supreme Court, which was denied on January 21, 2015.

By notice dated October 25, 2013, UPRR demanded the payment of $22.3 million in rent for the first year of the next ten-year period beginning January 1, 2014. SFPP rejected the demand and the parties are pursuing the dispute resolution procedure in their contract to determine the rental adjustment, if any, for such period.

On April 23, 2015, a purported class action suit was filed in the U.S. District Court for the Northern District of California (Case No. 01842) by private landowners in California who claim to be the lawful owners of subsurface real property allegedly used or occupied by UPRR or SFPP. The suit, which is brought purportedly as a class action on behalf of all landowners who own land in fee adjacent to and underlying the railroad easement under which the SFPP pipeline is located within the State of California, asserts claims against UPRR, SFPP, KMGP, and Kinder Morgan Operating L.P. “D” for declaratory judgment, trespass, ejectment, quiet title, unjust enrichment, accounting, and alleged unlawful business acts and practices under California law arising from defendants’ alleged improper use or occupation of subsurface real property.

SFPP and UPRR are also engaged in multiple disputes over the circumstances under which SFPP must pay for a relocation of its pipeline within the UPRR right-of-way and the safety standards that govern relocations. In July 2006, a trial before a judge regarding the circumstances under which SFPP must pay for relocations concluded, and the judge determined that SFPP must pay for any relocations resulting from any legitimate business purpose of the UPRR. SFPP appealed this decision, and in December 2008, the appellate court affirmed the decision. In addition, UPRR contends that SFPP must comply with the more expensive Ame