Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
F O R M   10-Q
 
þ  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2017
 
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
image0a30a03.gif

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 Web site, 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, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o Emerging Growth Company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No þ
 
As of October 19, 2017, the registrant had 2,233,239,574 Class P shares outstanding.



KINDER MORGAN, INC. AND SUBSIDIARIES
TABLE OF CONTENTS

 
 
Page
Number
 
 
 
 
 
 
 
 
 
Consolidated Statements of Income - Three and Nine Months Ended September 30, 2017 and 2016
 
 
Consolidated Balance Sheets - September 30, 2017 and December 31, 2016
 
Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2017 and 2016
 
Consolidated Statements of Stockholders’ Equity - Nine Months Ended September 30, 2017 and 2016
 
 
 
 
 Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
Liquidity and Capital Resources
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1

KINDER MORGAN, INC. AND SUBSIDIARIES
GLOSSARY

Company Abbreviations

CIG
=
Colorado Interstate Gas Company, L.L.C.
KML
=
Kinder Morgan Canada Limited and its majority-
Copano
=
Copano Energy, L.L.C.
 
 
owned and/or controlled subsidiaries
Elba Express
=
Elba Express Company, L.L.C.
KMLT
=
Kinder Morgan Liquid Terminals, LLC
EPB
=
El Paso Pipeline Partners, L.P. and its majority-
KMP
=
Kinder Morgan Energy Partners, L.P. and its
 
 
owned and/or controlled subsidiaries
 
 
majority-owned and/or controlled subsidiaries
EPNG
=
El Paso Natural Gas Company, L.L.C.
KMR
=
Kinder Morgan Management, LLC
Hiland
=
Hiland Partners, LP
SFPP
=
SFPP, L.P.
KMBT
=
Kinder Morgan Bulk Terminals, Inc.
SLNG
=
Southern LNG Company, L.L.C.
KMEP
=
Kinder Morgan Energy Partners, L.P.
SNG
=
Southern Natural Gas Company, L.L.C.
KMGP
=
Kinder Morgan G.P., Inc.
TGP
=
Tennessee Gas Pipeline Company, L.L.C.
KMI
=
Kinder Morgan, Inc. and its majority-owned and/or
 
 
 
 
 
controlled subsidiaries
 
 
 
 
 
 
 
 
 
Unless the context otherwise requires, references to “we,” “us,” “our,” or “the company” are intended to mean Kinder Morgan, Inc. and its majority-owned and/or controlled subsidiaries.
 
 
 
 
 
 
Common Industry and Other Terms
/d
=
per day
EPA
=
United States Environmental Protection Agency
BBtu
=
billion British Thermal Units
FASB
=
Financial Accounting Standards Board
Bcf
=
billion cubic feet
FERC
=
Federal Energy Regulatory Commission
CERCLA
=
Comprehensive Environmental Response,
GAAP
=
United States Generally Accepted Accounting
 
 
Compensation and Liability Act
 
 
Principles
C$
=
Canadian dollars
IPO
=
Initial Public Offering
CO2
=
carbon dioxide or our CO2 business segment
LLC
=
limited liability company
DCF
=
distributable cash flow
MBbl
=
thousand barrels
DD&A
=
depreciation, depletion and amortization
MMBbl
=
million barrels
EBDA
=
earnings before depreciation, depletion and
NGL
=
natural gas liquids
 
 
amortization expenses, including amortization of
OTC
=
over-the-counter
 
 
excess cost of equity investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
When we refer to cubic feet measurements, all measurements are at a pressure of 14.73 pounds per square inch.




2

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, 2016 (2016 Form 10-K) 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.


3

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.

KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Millions, Except Per Share Amounts)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
Natural gas sales
$
714

 
$
719

 
$
2,281

 
$
1,740

Services
1,938

 
2,006

 
5,855

 
6,154

Product sales and other
629

 
605

 
1,937

 
1,775

Total Revenues
3,281

 
3,330

 
10,073

 
9,669

 
 
 
 
 
 
 
 
Operating Costs, Expenses and Other
 
 
 
 
 

 
 

Costs of sales
1,029

 
971

 
3,200

 
2,454

Operations and maintenance
587

 
576

 
1,636

 
1,744

Depreciation, depletion and amortization
562

 
549

 
1,697

 
1,652

General and administrative
164

 
171

 
498

 
550

Taxes, other than income taxes
102

 
106

 
297

 
324

Loss on impairments and divestitures, net
7

 
76

 
13

 
307

Other income, net
—

 
(1
)
 
—

 
—

Total Operating Costs, Expenses and Other
2,451

 
2,448

 
7,341

 
7,031

 
 
 
 
 
 
 
 
Operating Income
830

 
882

 
2,732

 
2,638

 
 
 
 
 
 
 
 
Other Income (Expense)
 
 
 
 
 

 
 

Earnings from equity investments
167

 
137

 
477

 
343

Loss on impairments and divestitures of equity investments, net
—

 
(350
)
 
—

 
(344
)
Amortization of excess cost of equity investments
(15
)
 
(15
)
 
(45
)
 
(45
)
Interest, net
(459
)
 
(472
)
 
(1,387
)
 
(1,384
)
Other, net
24

 
12

 
60

 
42

Total Other Expense
(283
)
 
(688
)
 
(895
)
 
(1,388
)
 
 
 
 
 
 
 
 
Income Before Income Taxes
547

 
194

 
1,837

 
1,250

 
 
 
 
 
 
 
 
Income Tax Expense
(160
)
 
(377
)
 
(622
)
 
(744
)
 
 
 
 
 
 
 
 
Net Income (Loss)
387

 
(183
)
 
1,215

 
506

 
 
 
 
 
 
 
 
Net Income Attributable to Noncontrolling Interests
(14
)
 
(5
)
 
(26
)
 
(7
)
 
 
 
 
 
 
 
 
Net Income (Loss) Attributable to Kinder Morgan, Inc.
373

 
(188
)
 
1,189

 
499

 
 
 
 
 
 
 
 
Preferred Stock Dividends
(39
)
 
(39
)
 
(117
)
 
(117
)
 


 


 
 
 
 
Net Income (Loss) Available to Common Stockholders
$
334

 
$
(227
)
 
$
1,072

 
$
382

 
 
 
 
 
 
 
 
Class P Shares
 
 
 
 
 
 
 
Basic Earnings (Loss) Per Common Share
$
0.15

 
$
(0.10
)
 
$
0.48

 
$
0.17

 
 
 
 
 
 
 
 
Basic Weighted Average Common Shares Outstanding
2,231

 
2,230

 
2,230

 
2,229

 
 
 
 
 
 
 
 
Diluted Earnings (Loss) Per Common Share
$
0.15

 
$
(0.10
)
 
$
0.48

 
$
0.17

 
 
 
 
 
 
 
 
Diluted Weighted Average Common Shares Outstanding
2,231

 
2,230

 
2,230

 
2,229

 
 
 
 
 
 
 
 
Dividends Per Common Share Declared for the Period
$
0.125

 
$
0.125

 
$
0.375

 
$
0.375


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

4

KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Millions)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net income (loss)
$
387

 
$
(183
)
 
$
1,215

 
$
506

Other comprehensive income (loss), net of tax
 

 
 

 
 
 
 
Change in fair value of hedge derivatives (net of tax (expense) benefit of $(3), $(29), $(105) and $11, respectively)
7

 
50

 
185

 
(19
)
Reclassification of change in fair value of derivatives to net income (net of tax benefit of $27, $23, $82 and $92, respectively)
(48
)
 
(39
)
 
(144
)
 
(158
)
Foreign currency translation adjustments (net of tax (expense) benefit of $(28), $11, $(45) and $(38), respectively)
78

 
(20
)
 
129

 
65

Benefit plan adjustments (net of tax expense of $(8), $(3), $(17) and $(9), respectively)
7

 
6

 
20

 
16

Total other comprehensive income (loss)
44

 
(3
)
 
190

 
(96
)
 
 
 
 
 
 
 
 
Comprehensive income (loss)
431

 
(186
)
 
1,405

 
410

Comprehensive income attributable to noncontrolling interests
(44
)
 
(5
)
 
(75
)
 
(7
)
Comprehensive income (loss) attributable to Kinder Morgan, Inc.
$
387

 
$
(191
)
 
$
1,330

 
$
403


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

5

KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Millions, Except Share and Per Share Amounts)
 
September 30, 2017
 
December 31, 2016
 
(Unaudited)
 
 
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
539

 
$
684

Restricted deposits
81

 
103

Accounts receivable, net
1,194

 
1,370

Fair value of derivative contracts
175

 
198

Inventories
428

 
357

Income tax receivable
20

 
180

Other current assets
176

 
337

Total current assets
2,613

 
3,229

 
 
 
 
Property, plant and equipment, net
39,867

 
38,705

Investments
7,484

 
7,027

Goodwill
22,164

 
22,152

Other intangibles, net
3,153

 
3,318

Deferred income taxes
3,432

 
4,352

Deferred charges and other assets
1,638

 
1,522

Total Assets
$
80,351

 
$
80,305

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current Liabilities
 

 
 

Current portion of debt
$
3,156

 
$
2,696

Accounts payable
1,358

 
1,257

Accrued interest
442

 
625

Accrued contingencies
277

 
261

Other current liabilities
941

 
1,085

Total current liabilities
6,174

 
5,924

Long-term liabilities and deferred credits
 

 
 

Long-term debt
 

 
 

Outstanding
33,969

 
36,105

Preferred interest in general partner of KMP
100

 
100

Debt fair value adjustments
1,047

 
1,149

Total long-term debt
35,116

 
37,354

Other long-term liabilities and deferred credits
2,537

 
2,225

Total long-term liabilities and deferred credits
37,653

 
39,579

Total Liabilities
43,827

 
45,503

Commitments and contingencies (Notes 3 and 9)


 


Stockholders’ Equity
 

 
 

Class P shares, $0.01 par value, 4,000,000,000 shares authorized, 2,231,147,804 and 2,230,102,384 shares, respectively, issued and outstanding
22

 
22

Preferred stock, $0.01 par value, 10,000,000 shares authorized, 9.75% Series A Mandatory Convertible, $1,000 per share liquidation preference, 1,600,000 shares issued and outstanding
—

 
—

Additional paid-in capital
42,101

 
41,739

Retained deficit
(6,429
)
 
(6,669
)
Accumulated other comprehensive loss
(469
)
 
(661
)
Total Kinder Morgan, Inc.’s stockholders’ equity
35,225

 
34,431

Noncontrolling interests
1,299

 
371

Total Stockholders’ Equity
36,524

 
34,802

Total Liabilities and Stockholders’ Equity
$
80,351

 
$
80,305


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

6

KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
 
Nine Months Ended September 30,
 
2017
 
2016
Cash Flows From Operating Activities
 
 
 
Net income
$
1,215

 
$
506

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

Depreciation, depletion and amortization
1,697

 
1,652

Deferred income taxes
624

 
767

Amortization of excess cost of equity investments
45

 
45

Change in fair market value of derivative contracts
28

 
15

Loss on impairments and divestitures, net
13

 
307

Loss on impairments and divestitures of equity investments, net
—

 
344

Earnings from equity investments
(477
)
 
(343
)
Distributions from equity investment earnings
370

 
321

Changes in components of working capital, net of the effects of acquisitions and dispositions
 
 
 
Accounts receivable, net
174

 
26

Income tax receivable
144

 
—

Inventories
(86
)
 
68

Other current assets
(2
)
 
(20
)
Accounts payable
(62
)
 
(46
)
Accrued interest, net of interest rate swaps
(158
)
 
(158
)
Accrued contingencies and other current liabilities
(23
)
 
148

Rate reparations, refunds and other litigation reserve adjustments
(100
)
 
31

Other, net
(95
)
 
(160
)
Net Cash Provided by Operating Activities
3,307

 
3,503

 
 
 
 
Cash Flows From Investing Activities
 
 
 
Acquisitions of assets and investments, net of cash acquired
(4
)
 
(333
)
Capital expenditures
(2,231
)
 
(2,109
)
Proceeds from sale of equity interests in subsidiaries, net
—

 
1,402

Sales of property, plant and equipment, and other net assets, net of removal costs
118

 
250

Contributions to investments
(631
)
 
(389
)
Distributions from equity investments in excess of cumulative earnings
252

 
158

Other, net
10

 
(26
)
Net Cash Used in Investing Activities
(2,486
)
 
(1,047
)
 
 
 
 
Cash Flows From Financing Activities
 
 
 
Issuances of debt
7,790

 
8,485

Payments of debt
(9,654
)
 
(9,135
)
Restricted cash held in escrow for debt repayment
—

 
(776
)
Debt issue costs
(69
)
 
(15
)
Cash dividends - common shares
(840
)
 
(839
)
Cash dividends - preferred shares
(117
)
 
(115
)
Contributions from investment partner
444

 
—

Contributions from noncontrolling interests - net proceeds from KML IPO
1,245

 
—

Contributions from noncontrolling interests - net proceeds from KML preferred share issuance
230

 
—

Contributions from noncontrolling interests - other
12

 
88

Distributions to noncontrolling interests
(26
)
 
(17
)
Other, net
(9
)
 
(8
)
Net Cash Used in Financing Activities
(994
)
 
(2,332
)
 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
28

 
4

 
 
 
 
Net (decrease) increase in Cash and Cash Equivalents
(145
)
 
128

Cash and Cash Equivalents, beginning of period
684

 
229

Cash and Cash Equivalents, end of period
$
539

 
$
357

 
Non-cash Investing and Financing Activities
 
 
 
Increase in property, plant and equipment from both accruals and contractor retainage
$
167

 
 
Assets acquired by the assumption or incurrence of liabilities
—

 
$
43

Net assets contributed to equity investments
—

 
37

Supplemental Disclosures of Cash Flow Information
 
 
 
Cash paid during the period for interest (net of capitalized interest)
$
1,566

 
$
1,598

Cash (refund) paid during the period for income taxes, net
(144
)
 
4


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)
 
Common stock
 
Preferred stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued shares
 
Par value
 
Issued shares
 
Par value
 
Additional
paid-in
capital
 
Retained
deficit
 
Accumulated
other
comprehensive
loss
 
Stockholders’
equity
attributable
to KMI
 
Non-controlling
interests
 
Total
Balance at December 31, 2016
2,230

 
$
22

 
2

 
$
—

 
$
41,739

 
$
(6,669
)
 
$
(661
)
 
$
34,431

 
$
371

 
$
34,802

Restricted shares
1

 
 
 
 
 
 
 
46

 
 
 
 
 
46

 
 
 
46

Net income
 
 
 
 
 
 
 
 
 
 
1,189

 
 
 
1,189

 
26

 
1,215

KML IPO
 
 
 
 
 
 
 
 
314

 
 
 
51

 
365

 
684

 
1,049

KML preferred share issuance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
230

 
230

Distributions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
(27
)
 
(27
)
Contributions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
13

 
13

Preferred stock dividends
 
 
 
 
 
 
 
 
 
 
(117
)
 
 
 
(117
)
 
 
 
(117
)
Common stock dividends
 
 
 
 
 
 
 
 
 
 
(840
)
 
 
 
(840
)
 
 
 
(840
)
Impact of adoption of ASU 2016-09 (See Note 8)
 
 
 
 
 
 
 
 
 
 
8

 
 
 
8

 
 
 
8

Sale and deconsolidation of interest in Deeprock Development, LLC
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
(30
)
 
(30
)
Other
 
 
 
 
 
 
 
 
2

 
 
 
 
 
2

 
(17
)
 
(15
)
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
141

 
141

 
49

 
190

Balance at September 30, 2017
2,231

 
$
22

 
2

 
$
—

 
$
42,101

 
$
(6,429
)
 
$
(469
)
 
$
35,225

 
$
1,299

 
$
36,524


 
Common stock
 
Preferred stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued shares
 
Par value
 
Issued shares
 
Par value
 
Additional
paid-in
capital
 
Retained
deficit
 
Accumulated
other
comprehensive
loss
 
Stockholders’
equity
attributable
to KMI
 
Non-controlling
interests
 
Total
Balance at December 31, 2015
2,229

 
$
22

 
2

 
$
—

 
$
41,661

 
$
(6,103
)
 
$
(461
)
 
$
35,119

 
$
284

 
$
35,403

Restricted shares
1

 
 
 
 
 
 
 
47

 
 
 
 
 
47

 
 
 
47

Net income
 
 
 
 
 
 
 
 
 
 
499

 
 
 
499

 
7

 
506

Distributions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
(17
)
 
(17
)
Contributions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
88

 
88

Preferred stock dividends
 
 
 
 
 
 
 
 
 
 
(117
)
 
 
 
(117
)
 
 
 
(117
)
Common stock dividends
 
 
 
 
 
 
 
 
 
 
(839
)
 
 
 
(839
)
 
 
 
(839
)
Other
 
 
 
 
 
 
 
 
(7
)
 
 
 
 
 
(7
)
 
 
 
(7
)
Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
(96
)
 
(96
)
 
 
 
(96
)
Balance at September 30, 2016
2,230

 
$
22

 
2

 
$
—

 
$
41,701

 
$
(6,560
)
 
$
(557
)
 
$
34,606

 
$
362

 
$
34,968



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

8

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

1.  General
 
Organization

We are one of the largest energy infrastructure companies in North America. We own an interest in or operate approximately 84,000 miles of pipelines and 155 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 products, including petroleum coke and steel. We are also a leading producer of CO2, which we and others utilize for enhanced oil recovery projects primarily in the Permian basin.

Basis of Presentation
 
General

Our reporting currency is U.S. dollars, and all references to dollars are U.S. dollars, unless 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.

In our opinion, all adjustments, which are of a normal and recurring nature, considered necessary for a fair statement of our financial position and operating results for the interim periods have been included in the accompanying consolidated financial statements, and certain amounts from prior periods have been reclassified to conform to the current presentation. Interim results are not necessarily indicative of results for a full year; accordingly, you should read these consolidated financial statements in conjunction with our consolidated financial statements and related notes included in our 2016 Form 10-K.

The accompanying unaudited consolidated financial statements include our accounts and the accounts of our subsidiaries over which we have control or are the primary beneficiary. We evaluate our financial interests in business enterprises to determine if they represent variable interest entities where we are the primary beneficiary.  If such criteria are met, we consolidate the financial statements of such businesses with those of our own.  
Impairments and Losses on Divestitures, net

During the three and nine months ended September 30, 2017, we recorded non-cash pre-tax losses on impairments and divestitures netting to $7 million and $13 million, respectively. The three and nine months ended September 30, 2017 included (i) a $30 million non-cash impairment loss for both periods associated with the Colden storage facility within our Natural Gas Pipelines business segment, of which $3 million is included in “Costs of Sales” on the accompanying consolidated statement of income; (ii) a $23 million gain for both periods primarily related to the sale of a 40% membership interest in the Deeprock Development joint venture within our Terminals business segment; and (iii) losses of $3 million and $9 million, respectively, related to miscellaneous asset disposals. During the three and nine months ended September 30, 2016, we recorded non-cash pre-tax losses on impairments and divestitures netting to $426 million and $683 million, respectively. The three and nine months ended September 30, 2016 included (i) losses of $350 million and $356 million, respectively, related to equity investments within our Natural Gas Pipelines business segment, related primarily to our equity investment in MEP; (ii) an $84 million loss for both periods on the sale of a 50% interest in our SNG natural gas pipeline system; (iii) losses of $1 million and $9 million, respectively, related to the sale of a Transmix facility in our Products Pipelines business segment; and (iv) a $9 million net gain and a $3 million net loss, respectively, on other asset disposals. The nine months ended September 30, 2016 also included (i) $211 million of project write-offs across our Natural Gas Pipelines, CO2, and Products Pipelines business segments, of which $20 million was related to our share of impairments recorded by our equity investees; and (ii) $20 million of impairments related to certain coal facilities in our Terminals business segment.

In addition, during the nine months ended September 30, 2016 we recognized a $12 million gain on the sale of an equity investment, which is included in “Loss on impairments and divestitures of equity investments, net” on the accompanying consolidated statements of income.


9

These impairments were driven by market conditions that then existed and required management to estimate the fair value of these assets. The impairments resulting from decisions to classify assets as held-for-sale are based on the value expected to be realized in the transaction which is generally known at the time. The estimates of fair value are based on Level 3 valuation estimates using industry standard income approach valuation methodologies which include assumptions primarily involving management’s significant judgments and estimates with respect to general economic conditions and the related demand for products handled or transported by our assets as well as assumptions regarding commodity prices, future cash flows based on rate and volume assumptions, terminal values and discount rates. In certain cases, management’s decisions to dispose of certain assets may trigger impairments. We typically use discounted cash flow analyses to determine the fair value of our assets. We may probability weight various forecasted cash flow scenarios utilized in the analysis as we consider the possible outcomes. We use discount rates representing our estimate of the risk-adjusted discount rates that would be used by market participants specific to the particular asset.

We may identify additional triggering events requiring future evaluations of the recoverability of the carrying value of our long-lived assets, investments and goodwill. Because certain assets, including some equity investments and oil and gas producing properties, have been written down to fair value, any deterioration in fair value relative to our carrying value increases the likelihood of further impairments. Such non-cash impairments could have a significant effect on our results of operations, which would be recognized in the period in which the carrying value is determined to be not fully recoverable.

Goodwill

We evaluate goodwill for impairment on May 31 of each year. For this purpose, we have seven reporting units as follows: (i) Products Pipelines (excluding associated terminals); (ii) Products Pipelines Terminals (evaluated separately from Products Pipelines for goodwill purposes); (iii) Natural Gas Pipelines Regulated; (iv) Natural Gas Pipelines - Non-Regulated; (v) CO2; (vi) Terminals; and (vii) Kinder Morgan Canada. The evaluation of goodwill for impairment involves a two-step test.

Step 1 involves comparing the estimated fair value of each respective reporting unit to its carrying value, including goodwill. If the estimated fair value exceeds the carrying value, the reporting unit’s goodwill is not considered impaired. If the carrying value exceeds the estimated fair value, step 2 must be performed to determine whether goodwill is impaired and, if so, the amount of the impairment.

The results of our May 31, 2017 annual impairment test indicated that for each of our reporting units, the reporting unit fair value exceeded the carrying value and step 2 was not required. For our Natural Gas Pipelines - Non-Regulated, the reporting unit fair value exceeded the carrying value (including approximately $4 billion of allocated goodwill) by 3%.

The fair value estimates used in the step 1 goodwill test are based on Level 3 inputs of the fair value hierarchy. The Level 3 inputs include valuation estimates using industry standard market and income approach valuation methodologies which include assumptions primarily involving management’s significant judgments and estimates with respect to market multiples, comparable sales transactions prices, weighted average costs of capital, general economic conditions and the related demand for products handled or transported by our assets as well as assumptions regarding commodity prices, future cash flows based on rate and volume assumptions, terminal values and discount rates. We use primarily a market approach and, in some instances where deemed necessary, also use discounted cash flow analyses to determine the fair value of our assets. We use discount rates representing our estimate of the risk-adjusted discount rates that would be used by market participants specific to the particular asset.

We expect that the fair value of our Natural Gas Pipelines - Non-Regulated reporting unit will continue to exceed carrying value so long as our estimate of future cash flows and the market valuation remain consistent with current levels. A continued period of volatile commodity prices could result in further deterioration of market multiples, comparable sales transactions prices, weighted average costs of capital, and our cash flow estimates. Changes to any one or combination of these factors, would result in changes to the reporting unit fair values discussed above which could lead to future impairment charges. Such potential impairment could have a material 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, which may be stock or stock units issued to management employees and include dividend equivalent payments, do not participate in excess distributions over earnings.


10

The following table sets forth the allocation of net income available to shareholders of Class P shares and participating securities (in millions):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,

2017
 
2016
 
2017
 
2016
Class P shares
$
332

 
$
(228
)
 
$
1,068

 
$
379

Participating securities:
 
 
 
 
 
 
 
   Restricted stock awards(a)
2

 
1

 
4

 
3

Net Income (Loss) Available to Common Stockholders
$
334

 
$
(227
)
 
$
1,072

 
$
382

________
(a)
As of September 30, 2017, there were approximately 11 million restricted stock awards.

On May 25, 2017, approximately 293 million of unexercised warrants expired without the issuance of Class P common stock. In addition, the following maximum number of 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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Unvested restricted stock awards
10

 
9

 
9

 
8

Convertible trust preferred securities
3

 
8

 
3

 
8

Mandatory convertible preferred stock(a)
58

 
58

 
58

 
58

_______
(a) Until our mandatory convertible preferred shares are converted to common shares, on or before the expected mandatory conversion date of October 26, 2018, the holder of each preferred share participates in our earnings by receiving preferred stock dividends.

2.  Divestitures
 
Sale of Approximate 30% Interest in Canadian Business

On May 30, 2017, our indirectly owned subsidiary, KML, completed an IPO of 102,942,000 restricted voting shares listed on the Toronto Stock Exchange at a price to the public of C$17.00 per restricted voting share for total gross proceeds of approximately C$1,750 million (USD $1,299 million). The net proceeds from the IPO were used by KML to indirectly acquire from us an approximate 30% interest in a limited partnership that holds our Canadian business with KMI retaining the remaining 70% interest. We used the proceeds from KML to pay down debt.
Subsequent to the IPO, we retained control of KML and the limited partnership, and as a result, they remain consolidated in our consolidated financial statements. The public ownership of the KML restricted voting shares is reflected within “Noncontrolling interests” in our consolidated statements of stockholders’ equity and consolidated balance sheets. Earnings attributable to the public ownership of KML are presented in “Net income attributable to noncontrolling interests” in our consolidated statements of income for the periods presented after May 30, 2017.
The net proceeds received of $1,245 million are presented as “Contributions from noncontrolling interests - net proceeds from KML IPO” on our consolidated statement of cash flows for the nine months ended September 30, 2017. Because we retained control of KML subsequent to the IPO, the $314 million adjustment made to “Additional paid-in capital” on our consolidated statement of stockholders equity for the nine months ended September 30, 2017 represents the difference between our book value prior to the sale and our share of book value in KML’s net assets after the sale. The impact of the IPO resulted in a $166 million deferred income tax adjustment. At the date of the IPO, $765 million was attributed to the KML public shareholders to reflect their proportionate ownership percentage in the net assets of KML acquired from us and is included in “Noncontrolling interests” on our consolidated statement of stockholders equity. The above amounts recorded to “Additional paid-in capital” and “Noncontrolling interests” are net of IPO fees.
The above amount recorded to “Noncontrolling interests” at the date of the IPO was reduced by $81 million primarily associated with the allocation of currency translation adjustments from “Accumulated other comprehensive loss” to “Noncontrolling interests.”
The portion of the Canadian business operations that we sold to the public on May 30, 2017 represented Canadian assets that are included in our Kinder Morgan Canada, Terminals and Product Pipelines business segments and include (i) the Trans

11

Mountain pipeline system; (ii) the Canadian Cochin pipeline system; (iii) the Puget Sound pipeline system; (iv) the Jet Fuel pipeline system; and (v) terminal facilities located in Western Canada.

In conjunction with the IPO, Kinder Morgan Canada Limited Partnership (KMC LP) and Kinder Morgan Canada GP Inc. (KMC GP) were formed to hold our Canadian business. We have determined that KMC LP is a variable interest entity because a simple majority or lower threshold of the limited partnership interests do not possess substantive “kick-out rights” (i.e., the right to remove the general partner or to dissolve (liquidate) the entity without cause) or substantive participation rights. We have also determined KMC GP is the primary beneficiary because it has the power to direct the activities that most significantly impact KMC LP’s performance, the right to receive benefits and the obligation to absorb losses, that could be significant to KMC LP. As a result, KMC GP consolidates KMC LP. KMC GP is a wholly-owned subsidiary of KML, which is indirectly controlled by us through our 100% interest in KML’s special voting shares that represent approximately 70% of KML’s total voting shares (comprised of restricted voting shares and special voting shares). Consequently, we consolidate KML and the variable interest entity, KMC LP, in our consolidated financial statements.

The following table shows the carrying amount and classification of KMC LP’s assets and liabilities in our consolidated balance sheet (in millions):
 
 
September 30, 2017
Assets
 
 
Total current assets
 
$
340

Property, plant and equipment, net
 
2,837

Total goodwill, deferred charges and other assets
 
314

         Total assets
 
$
3,491

Liabilities
 
 
Current portion of debt
 
$
132

Total other current liabilities
 
242

Long-term debt, excluding current maturities
 
—

Total other long-term liabilities and deferred credits
 
397

         Total liabilities
 
$
771


We receive distributions from KMC LP through our indirectly owned limited partnership interests in KMC LP, but otherwise the assets of KMC LP cannot be used to settle our obligations. Our subsidiaries that are the direct owners of our limited partnership interests in KMC LP have guaranteed the obligations of KMC LP’s wholly owned subsidiaries, Kinder Morgan Cochin ULC and Trans Mountain Pipeline ULC, under the Credit Facility (see Note 3), but recourse in respect of such guarantee is limited solely to the limited partnership interests of KMC LP held by such subsidiaries and any proceeds thereof.  Additionally, in connection with the Credit Facility, we entered into an Equity Nomination and Support Agreement whereby, among other things, we commit to contribute or cause to be contributed at the time of each drawdown on the construction credit facility or the contingent credit facility either equity or subordinated debt to Kinder Morgan Cochin ULC in an amount sufficient to cause the outstanding indebtedness under the credit facilities and any other funded debt for the Trans Mountain expansion project not to exceed 60% of the total project costs for the project as projected over the six month period following the date of such drawdown.  Other than such guarantees and the Equity Nomination and Support Agreement, we do not guarantee the debt, commercial paper or other similar commitments of KMC LP or any of its subsidiaries, and the obligations of KMC LP may only be settled using the assets of KMC LP. KMC LP does not guarantee the debt or other similar commitments of KMI.

Sale of Interest in Elba Liquefaction Company L.L.C. (ELC)

Effective February 28, 2017, we sold a 49% partnership interest in ELC to investment funds managed by EIG Global Energy Partners (EIG). We continue to own a 51% controlling interest in and operate ELC. Under the terms of ELC’s limited liability company agreement, we are responsible for placing in service and operating certain supply pipelines and terminal facilities that support the operations of ELC and which are wholly owned by us. In certain limited circumstances which are not expected to occur, EIG has the right to relinquish its interest in ELC and redeem its capital account.

12

As a result of these contingencies, the sale proceeds of $386 million, and subsequent EIG contributions, have been recorded as a deferred credit within “Other long-term liabilities and deferred credits” on our consolidated balance sheet as of September 30, 2017. EIG is not entitled to any specified return on its capital. Once these contingencies expire, EIG’s capital account will be reflected as noncontrolling interest on our consolidated balance sheet.
Sale of Equity Interest in SNG

On September 1, 2016, we completed the sale of a 50% interest in our SNG natural gas pipeline system to The Southern Company (Southern Company), receiving proceeds of $1.4 billion, and the formation of a joint venture, which includes our remaining 50% interest in SNG. We used the proceeds from the sale to reduce outstanding debt. We recognized a pre-tax loss of $84 million on the sale of our interest in SNG which is included within “Loss on impairments and divestitures, net” on the accompanying consolidated statements of income for the three and nine months ended September 30, 2016. As a result of this transaction, we no longer hold a controlling interest in SNG or Bear Creek Storage Company, LLC (Bear Creek) (50% of which is owned by SNG) and, as such, we now account for our remaining equity interests in SNG and Bear Creek as equity investments.

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, premiums and issuance costs (in millions):
 
September 30, 2017
 
December 31, 2016
Unsecured term loan facility, variable rate, due January 26, 2019(a)
$
—

 
$
1,000

Senior notes, floating rate, due January 15, 2023(a)
250

 
—

Senior notes, 1.50% through 8.05%, due 2017 through 2098(a)(b)
13,612

 
13,236

Credit facility due November 26, 2019
—

 
—

Commercial paper borrowings
60

 
—

KML Credit Facility(c)
132

 
—

KMP senior notes, 2.65% through 9.00%, due 2017 through 2044(d)
18,885

 
19,485

TGP senior notes, 7.00% through 8.375%, due 2017 through 2037(e)
1,240

 
1,540

EPNG senior notes, 5.95% through 8.625%, due 2017 through 2032(f)
760

 
1,115

CIG senior notes, 4.15% and 6.85%, due 2026 and 2037
475

 
475

Kinder Morgan Finance Company, LLC, senior notes, 6.00% and 6.40%, due 2018 and 2036
786

 
786

Hiland Partners Holdings LLC, senior note, 5.50%, due 2022(a)(g)
—

 
225

EPC Building, LLC, promissory note, 3.967%, due 2017 through 2035
424

 
433

Trust I preferred securities, 4.75%, due March 31, 2028(h)
221

 
221

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

 
100

Other miscellaneous debt
280

 
285

Total debt – KMI and Subsidiaries
37,225

 
38,901

Less: Current portion of debt(i)
3,156

 
2,696

Total long-term debt – KMI and Subsidiaries(j)
$
34,069

 
$
36,205

_______

(a)
On August 10, 2017, we entered into a $1 billion unsecured senior note with a fixed rate of 3.15% and a $250 million, unsecured senior note with a floating rate, both due January 2023. The net proceeds from the notes were primarily used to repay the principal amount of Hiland’s 5.50% senior notes due 2022, plus accrued interest, and to repay the $1 billion term loan facility due 2019. Interest on the 3.15% senior notes due 2023 is payable semi-annually in arrears on January 15 and July 15 of each year, beginning on January 15, 2018, and the notes will mature on January 15, 2023. Interest on the floating rate senior notes due 2023 is payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, beginning on October 15, 2017, and such notes will mature on January 15, 2023. We may redeem all or a part of the fixed rate notes at any time at the redemption prices. The floating rate notes will not be redeemable at our option. See (b) and (g) below.

13

(b)
Amounts include senior notes that are denominated in Euros and have been converted to U.S. dollars and are respectively reported above at the September 30, 2017 exchange rate of 1.1814 U.S. dollars per Euro and the December 31, 2016 exchange rate of 1.0517 U.S. dollars per Euro. For the nine months ended September 30, 2017, our debt balance increased by $162 million as a result of the change in the exchange rate of U.S. dollars per Euro. The increase in debt due to the changes in exchange rates is offset by a corresponding change in the value of cross-currency swaps reflected in “Deferred charges and other assets” and “Other long-term liabilities and deferred credits” on our consolidated balance sheets. At the time of issuance, we entered into cross-currency swap agreements associated with these senior notes, effectively converting these Euro-denominated senior notes to U.S. dollars (see Note 5 “Risk Management—Foreign Currency Risk Management”). In June 2017, we repaid $786 million of maturing 7.00% senior notes. The September 30, 2017 balance includes the $1 billion unsecured term note with a fixed rate of 3.15% due January 15, 2023 discussed in (a) above.
(c)
The KML credit facility is denominated in C$ and has been converted to U.S. dollars and reported above at the September 30, 2017 exchange rate of 0.8013 U.S. dollars per C$. See “—Credit Facilities” below.
(d)
In February 2017, we repaid $600 million of maturing 6.00% senior notes.
(e)
In April 2017, we repaid $300 million of maturing 7.50% senior notes.
(f)
In April 2017, we repaid $355 million of maturing 5.95% senior notes.
(g)
In August 2017, we repaid $225 million of the outstanding principal amount of 5.50% senior notes with a maturity date of May 15, 2022 using net proceeds from the sale of the January 2023 notes (see (a) above). We recognized a $3.8 million loss from the early extinguishment of debt, included within “Interest, net” on the accompanying consolidated statements of income for the three and nine months ended September 30, 2017 consisting of a $9.3 million premium on the debt repaid and a $5.5 million gain from the write-off of unamortized purchase accounting associated with the early extinguishment of debt.
(h)
The Trust I Preferred Securities are convertible at any time prior to the close of business on March 31, 2028, at the option of the holder. Prior to May 25, 2017, conversions of these securities were converted into the following mixed consideration: (i) 0.7197 of a share of our Class P common stock; (ii) $25.18 in cash without interest; and (iii) 1.100 warrants to purchase a share of our Class P common stock. Our warrants expired on May 25, 2017, along with conversion of 1.100 warrants to purchase a share of our Class P common mixed consideration.
(i)
Amounts include KMI and KML outstanding credit facility borrowings, commercial paper borrowings and other debt maturing within 12 months (see “—Current Portion of Debt” below).
(j)
Excludes our “Debt fair value adjustments” which, as of September 30, 2017 and December 31, 2016, increased our combined debt balances by $1,047 million and $1,149 million, respectively. In addition to all unamortized debt discount/premium amounts, debt issuance costs and purchase accounting on our debt balances, our debt fair value adjustments also include amounts associated with the offsetting entry for hedged debt and any unamortized portion of proceeds received from the early termination of interest rate swap agreements.

We and substantially all of our wholly owned domestic subsidiaries are a party to a cross guarantee agreement whereby each party to the agreement unconditionally guarantees, jointly and severally, the payment of specified indebtedness of each other party to the agreement. Also, see Note 11.

Credit Facilities

As of September 30, 2017, we and KML were in compliance with all required covenants. As of September 30, 2017, KML had $132 million outstanding on its construction facility and no amount outstanding on its working capital facility, both included in “Current portion of debt” on our consolidated balance sheet.

KMI
 
As of September 30, 2017, we had $4,830 million available under our $5.0 billion revolving credit agreement, which is net of $110 million in letters of credit and $60 million of outstanding commercial paper borrowings. 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. Borrowings under our commercial paper program reduce the borrowings allowed under our credit facility.

KML

On June 16, 2017, Kinder Morgan Cochin ULC and Trans Mountain Pipeline ULC, our indirect subsidiaries of KML, entered into a definitive credit agreement establishing (i) a C$4.0 billion revolving construction facility for the purposes of funding the development, construction and completion of the Trans Mountain expansion project, (ii) a C$1.0 billion revolving contingent credit facility for the purpose of funding, if necessary, additional Trans Mountain expansion project costs (and, subject to the need to fund such additional costs, meeting the Canadian National Energy Board-mandated liquidity requirements) and (iii) a C$500 million revolving working capital facility to be used for working capital and other general corporate purposes (collectively, the “Credit Facility”). The Credit Facility has a five year term and is with a syndicate of financial institutions with Royal Bank of Canada as the administrative agent. Any undrawn commitments under the Credit Facility will incur a standby fee of 0.30% to 0.625%, with the range dependent on the credit ratings of Kinder Morgan Cochin

14

ULC or KML. The Credit Facility is guaranteed by KML and all of the non-borrower subsidiaries of KML and are secured by a first lien security interest on all of the assets of KML and the equity and assets of the other guarantors.

Draw downs of funds on the KML Credit Facility bear interest dependent on the type of loans requested and are as follows:

•
bankers’ acceptances or London Interbank Offered Rate loans are at an annual rate of approximately CDOR or the London Interbank Offered Rate, as the case may be, plus a fixed spread ranging from 1.50% to 2.50%;
•
loans in Canadian dollars or U.S. dollars are at an annual rate of approximately the Canadian prime rate or the U.S. dollar base rate, as the case may be, plus a fixed spread ranging from 0.50% to 1.50%, in each case, with the range dependent on the credit ratings of the Company;
•
letters of credit (under working capital facility only) will have issuance fees based on an annual rate of approximately CDOR plus a fixed spread ranging from 1.50% to 2.50%, with the range dependent on the credit ratings of the Company.

The foregoing rates and fees will increase by 0.25% upon the fourth anniversary of the KML Credit Facility.

Our KML Credit Facility includes various financial and other covenants including:

•
a maximum ratio of consolidated total funded debt to consolidated capitalization of 70%;
•
restrictions on ability to incur debt;
•
restrictions on ability to make dispositions, restricted payments and investments;
•
restrictions on granting liens and on sale-leaseback transactions;
•
restrictions on ability to engage in transactions with affiliates; and
•
restrictions on ability to amend organizational documents and engage in corporate reorganization transactions.

Current Portion of Debt
Our current portion of debt as of September 30, 2017, primarily includes the following significant series of long-term notes maturing within the next 12 months:
Senior notes - $500 million 2.00% notes due December 2017
Kinder Morgan Finance Company, LLC, senior notes - $750 million 6.00% notes due January 2018
Senior notes - $82 million 7.00% notes due February 2018
KMP senior notes - $975 million 5.95% notes due February 2018
Senior notes - $477 million 7.25% notes due June 2018

4.  Stockholders’ Equity
 
Common Equity
 
As of September 30, 2017, our common equity consisted of our Class P common stock. For additional information regarding our Class P common stock, see Note 11 to our consolidated financial statements included in our 2016 Form 10-K.

KMI Common Stock Dividends

Holders of our common stock participate in any dividend declared by our board of directors, subject to the rights of the holders of any outstanding preferred stock. Our per share dividends declared for and paid in the nine month periods ended September 30, 2017 and 2016 were $0.375 per share. On October 18, 2017, our board of directors declared a cash dividend of $0.125 per common share for the quarterly period ended September 30, 2017, which is payable on November 15, 2017 to common shareholders of record as of the close of business on October 31, 2017.

Warrants

On May 25, 2017, 293 million of unexercised warrants to buy KMI common stock expired without the issuance of Class P common stock. Prior to expiration, each of the warrants entitled 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.


15

Mandatory Convertible Preferred Stock

We have issued and outstanding 1,600,000 shares of 9.750% Series A mandatory convertible preferred stock, with a liquidating preference of $1,000 per share. For additional information regarding our mandatory convertible preferred stock, see Note 11 to our consolidated financial statements included in our 2016 Form 10-K.

Preferred Stock Dividends

On July 19, 2017, our board of directors declared a cash dividend of $24.375 per share of our mandatory convertible preferred stock (equivalent of $1.21875 per depositary share) for the period from and including July 26, 2017 through and including October 25, 2017, which is payable on October 26, 2017 to mandatory convertible preferred shareholders of record as of the close of business on October 11, 2017.

Noncontrolling Interests

KML Restricted Voting Shares

As discussed in Note 2, on May 30, 2017 our indirect subsidiary, KML, issued 102,942,000 restricted voting shares in a public offering. The public ownership of the KML restricted voting shares represents an approximate 30% interest in our Canadian operations and is reflected within “Noncontrolling interests” in our consolidated financial statements as of and for the periods presented after May 30, 2017.

KML Distributions

On August 15, 2017, KML paid a dividend of C$0.0571 per restricted voting share to restricted voting shareholders of record as of the close of business on July 31, 2017 for the quarterly period ended June 30, 2017. This initial dividend was prorated from May 30, 2017, the day KML closed on its IPO, to June 30, 2017 and amounted to approximately C$6 million. KML paid approximately C$4 million of this dividend to restricted voting shareholders in cash, and, under KML’s Dividend Reinvestment Plan (DRIP), 94,003 restricted voting shares were issued in lieu of cash dividends. KML’s DRIP allows holders (excluding holders not resident in Canada) of restricted voting shares to elect to have any or all cash dividends payable to such shareholder automatically reinvested in additional restricted voting shares at a price per share calculated by reference to the volume-weighted average of the closing price of the restricted voting shares on the stock exchange on which the restricted voting shares are then listed for the five trading days immediately preceding the relevant dividend payment date, less a discount of between 0% and 5% (as determined from time to time by KML’s board of directors, in its sole discretion). The market discount for the dividend paid on August 15, 2017 was 3%.

On October 17, 2017, KML’s board of directors declared a dividend for the quarterly period ended September 30, 2017 of C$0.1625 per restricted voting share, payable on November 15, 2017, to restricted voting shareholders of record as of the close of business on October 31, 2017.

KML Preferred Share Offering

On August 15, 2017, KML completed an offering of 12,000,000 cumulative redeemable minimum rate reset preferred shares, Series 1 (Series 1 Preferred Shares) on the Toronto Stock Exchange at a price to the public of C$25.00 per Series 1 Preferred Share for total gross proceeds of C$300 million (USD $235 million). The net proceeds of C$293 million from the offering were used by KML to indirectly subscribe for preferred units in KMC LP, which in turn were used by KMC LP to repay the KML Credit Facility indebtedness recently incurred to, directly or indirectly, finance the development, construction and completion of the Trans Mountain Expansion project and Base Line Terminal project, and for its general corporate purposes.

Dividends on the Series 1 Preferred Shares are fixed, cumulative, preferential and C$1.3125 per share annually, payable quarterly on the 15th day of February, May, August and November, as and when declared by the KML’s board of directors, for the initial fixed rate period to but excluding November 15, 2022.

On October 17, 2017, KML’s board of directors declared a cash dividend of C$0.3308 per share of its Series 1 Preferred Shares for the period from and including August 15, 2017 through and including November 14, 2017, which is payable on November 15, 2017 to Series 1 Preferred Shareholders of record as of the close of business on October 31, 2017.


16

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 some of these risks. In addition, prior to May 2016, we had legacy power forward and swap contracts related to operations of acquired businesses.

Energy Commodity Price Risk Management
 
As of September 30, 2017, we had 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
(18.9
)
 
MMBbl
Crude oil basis
(5.6
)
 
MMBbl
Natural gas fixed price
(47.0
)
 
Bcf
Natural gas basis
(7.1
)
 
Bcf
Derivatives not designated as hedging contracts
 

 
 
Crude oil fixed price
(0.9
)
 
MMBbl
Crude oil basis
(0.2
)
 
MMBbl
Natural gas fixed price
(2.9
)
 
Bcf
Natural gas basis
(33.3
)
 
Bcf
NGL and other fixed price
(6.7
)
 
MMBbl

As of September 30, 2017, 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 2021.

Interest Rate Risk Management

 As of September 30, 2017 and December 31, 2016, we had a combined notional principal amount of $9,575 million and $9,775 million, respectively, of fixed-to-variable interest rate swap agreements, all of which were designated as fair value hedges. All of our swap agreements effectively convert 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 plus a spread and have termination dates that correspond to the maturity dates of the related series of senior notes. As of September 30, 2017, 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.

Foreign Currency Risk Management

As of September 30, 2017, we had a notional principal amount of $1,358 million of cross-currency swap agreements to manage the foreign currency risk related to our Euro denominated senior notes 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 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. 

17


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
 
 
 
 
September 30,
2017
 
December 31,
2016
 
September 30,
2017
 
December 31,
2016
 
 
Location
 
Fair value
 
Fair value
Derivatives designated as hedging contracts
 
 
 
 
 
 
 
 
 
 
Natural gas and crude derivative contracts
 
Fair value of derivative contracts/(Other current liabilities)
 
$
98

 
$
101

 
$
(11
)
 
$
(57
)
 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
50

 
70

 
(4
)
 
(24
)
Subtotal
 
 
 
148

 
171

 
(15
)
 
(81
)
Interest rate swap agreements
 
Fair value of derivative contracts/(Other current liabilities)
 
71

 
94

 
—

 
—

 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
191

 
206

 
(31
)
 
(57
)
Subtotal
 
 
 
262

 
300

 
(31
)
 
(57
)
Cross-currency swap agreements
 
Fair value of derivative contracts/(Other current liabilities)
 
—

 
—

 
(13
)
 
(7
)
 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
135

 
—

 
—

 
(24
)
Subtotal
 
 
 
135

 
—

 
(13
)
 
(31
)
Total
 
 
 
545

 
471

 
(59
)
 
(169
)
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging contracts
 
 
 
 

 
 
 
 

 
 
Natural gas, crude, NGL and other derivative contracts
 
Fair value of derivative contracts/(Other current liabilities)
 
6

 
3

 
(17
)
 
(29
)
 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
1

 
—

 
(1
)
 
(1
)
Subtotal
 
 
 
7

 
3

 
(18
)
 
(30
)
Total
 
 
 
7

 
3

 
(18
)
 
(30
)
Total derivatives
 
 
 
$
552

 
$
474

 
$
(77
)
 
$
(199
)



18

Effect of Derivative Contracts on the Income Statement
 
The following tables summarize the impact of our derivative contracts in our accompanying consolidated statements of income (in millions): 
Derivatives in fair value hedging relationships
 
Location
 
Gain/(loss) recognized in income
 on derivatives and related hedged item
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
Interest, net
 
$
(19
)
 
$
(84
)
 
$
(12
)
 
$
315

 
 
 
 
 
 
 
 
 
 
 
Hedged fixed rate debt
 
Interest, net
 
$
17

 
$
81

 
$
6

 
$
(323
)

Derivatives in cash flow hedging relationships
 
Gain/(loss)
recognized in OCI on derivative (effective portion)(a)
 
Location
 
Gain/(loss) reclassified from Accumulated OCI
into income (effective portion)(b)
 
Location
 
Gain/(loss)
recognized in income
on derivative
(ineffective portion
and amount
excluded from
effectiveness testing)
 
 
Three Months Ended September 30,
 
 
 
Three Months Ended September 30,
 
 
 
Three Months Ended September 30,
 
 
2017
 
2016
 
 
 
2017
 
2016
 
 
 
2017
 
2016
Energy commodity derivative contracts
 
$
(32
)
 
$
20

 
Revenues—Natural
gas sales
 
$
4

 
$
(3
)
 
Revenues—Natural
gas sales
 
$
—

 
$
—

 
 
 
 
 
 
Revenues—Product
sales and other
 
13

 
34

 
Revenues—Product
sales and other
 
4

 
(2
)
 
 
 
 
 
 
Costs of sales
 
1

 
(1
)
 
Costs of sales
 
—

 
—

Interest rate swap
agreements(c)
 
—

 
—

 
Interest, net
 
(1
)
 
(1
)
 
Interest, net
 
—

 
—

Cross-currency swap
 
39

 
30

 
Other, net
 
31

 
10

 
Other, net
 
—

 
—

Total
 
$
7

 
$
50

 
Total
 
$
48

 
$
39

 
Total
 
$
4

 
$
(2
)

Derivatives in cash flow hedging relationships
 
Gain/(loss)
recognized in OCI on derivative (effective portion)(a)
 
Location
 
Gain/(loss) reclassified from Accumulated OCI
into income (effective portion)(b)
 
Location
 
Gain/(loss)
recognized in income
on derivative
(ineffective portion
and amount
excluded from
effectiveness testing)
 
 
Nine Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
 
 
2017
 
2016
 
 
 
2017
 
2016
Energy commodity derivative contracts
 
$
88

 
$
(64
)
 
Revenues—Natural
 gas sales
 
$
5

 
$
20

 
Revenues—Natural
 gas sales
 
$
—

 
$
—

 
 
 
 
 
 
Revenues—Product
 sales and other
 
33

 
124

 
Revenues—Product
 sales and other
 
12

 
(7
)
 
 
 
 
 
 
Costs of sales
 
5

 
(13
)
 
Costs of sales
 
—

 
—

Interest rate swap
agreements(c)
 
(1
)
 
(5
)
 
Interest, net
 
(2
)
 
(2
)
 
Interest, net
 
—

 
—

Cross-currency swap
 
98

 
50

 
Other, net
 
103

 
29

 
Other, net
 
—

 
—

Total
 
$
185

 
$
(19
)
 
Total
 
$
144

 
$
158

 
Total
 
$
12

 
$
(7
)
_____
(a)
We expect to reclassify an approximate $32 million gain associated with cash flow hedge price risk management activities included in our accumulated other comprehensive loss balances as of September 30, 2017 into earnings during the next twelve months (when the associated forecasted transactions 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).
(c)
Amounts represent our share of an equity investee’s accumulated other comprehensive loss.

19

Derivatives not designated as accounting hedges
 
Location
 
Gain/(loss) recognized in income on derivatives
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
2017
 
2016
 
2017
 
2016
Energy commodity derivative contracts
 
Revenues—Natural gas sales
 
$
2

 
$
1

 
$
13

 
$
(4
)
 
 
Revenues—Product sales and other
 
(18
)
 
7

 
1

 
(7
)
 
 
Costs of sales
 
—

 
1

 
—

 
(1
)
Interest rate swap agreements
 
Interest, net
 
—

 
(14
)
 
—

 
63

Total(a)
 
 
 
$
(16
)
 
$
(5
)
 
$
14

 
$
51

_______
(a) Three and nine months ended September 30, 2017 includes approximate gains of $18 million and $47 million, respectively, associated with natural gas, crude and NGL derivative contract settlements. Three and nine months ended September 30, 2016 includes approximate gains of $20 million and $59 million, respectively, associated with natural gas, crude and NGL derivative contract settlements.

Credit Risks
In conjunction with certain derivative contracts, we are required to provide collateral to our counterparties, which may include posting letters of credit or placing cash in margin accounts.  As of September 30, 2017 and December 31, 2016, we had no outstanding letters of credit supporting our commodity price risk management program. As of September 30, 2017 and December 31, 2016, we had cash margins of $13 million and $37 million, respectively, posted by us with our counterparties as collateral and reported within “Restricted deposits” on our accompanying consolidated balance sheets. The balance at September 30, 2017, consisted of initial margin requirements of $18 million, offset by variation margin requirements of $5 million. We also use industry standard commercial agreements which allow for the netting of exposures associated with transactions executed under a single commercial agreement. Additionally, we generally utilize master netting agreements to offset credit exposure across multiple commercial agreements with a single counterparty.
 
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 September 30, 2017, based on our current mark to market positions and posted collateral, we estimate that if our credit rating were downgraded one notch we would be required to post $4 million of additional collateral and no additional collateral beyond this $4 million if we were downgraded two notches.


20

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Loss
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 loss
Balance as of December 31, 2016
$
(1
)
 
$
(288
)
 
$
(372
)
 
$
(661
)
Other comprehensive gain before reclassifications
185

 
80

 
20

 
285

Gains reclassified from accumulated other comprehensive loss
(144
)
 
—

 
—

 
(144
)
KML IPO
—

 
44

 
7

 
51

Net current-period other comprehensive income
41

 
124

 
27

 
192

Balance as of September 30, 2017
$
40

 
$
(164
)
 
$
(345
)
 
$
(469
)

 
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, 2015
$
219

 
$
(322
)
 
$
(358
)
 
$
(461
)
Other comprehensive (loss) gain before reclassifications
(19
)
 
65

 
16

 
62

Gains reclassified from accumulated other comprehensive loss
(158
)
 
—

 
—

 
(158
)
Net current-period other comprehensive (loss) income
(177
)
 
65

 
16

 
(96
)
Balance as of September 30, 2016
$
42

 
$
(257
)
 
$
(342
)
 
$
(557
)

6.  Fair Value
 
The fair values of our financial instruments are separated into three broad levels (Levels 1, 2 and 3) based on our assessment of the availability of observable market data and the significance of non-observable data used to determine fair value. Each fair value measurement must be assigned to a level corresponding to the lowest level input that is significant to the fair value measurement in its entirety.

The three broad levels of inputs defined by the fair value hierarchy are as follows:
•
Level 1 Inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;
•
Level 2 Inputs—inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability; and
•
Level 3 Inputs—unobservable inputs for the asset or liability. These unobservable inputs reflect the entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances (which might include the reporting entity’s own data).
 

21