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 June 30, 2018
 
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 July 19, 2018, the registrant had 2,206,828,970 Class P shares outstanding.



KINDER MORGAN, INC. AND SUBSIDIARIES
TABLE OF CONTENTS

 
 
Page
Number
 
 
 
 
 
 
 
 
 
Consolidated Statements of Income - Three and Six Months Ended June 30, 2018 and 2017
 
Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2018 and 2017
 
Consolidated Balance Sheets - June 30, 2018 and December 31, 2017
 
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2018 and 2017
 
Consolidated Statements of Stockholders’ Equity - Six Months Ended June 30, 2018 and 2017
 
 
 
 
 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-
EIG
=
EIG Global Energy Partners
 
 
owned and/or controlled subsidiaries
ELC
=
Elba Liquefaction 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.
SFPP
=
SFPP, L.P.
Hiland
=
Hiland Partners, LP
SNG
=
Southern Natural Gas Company, L.L.C.
KMBT
=
Kinder Morgan Bulk Terminals, Inc.
TGP
=
Tennessee Gas Pipeline Company, L.L.C.
KMEP
=
Kinder Morgan Energy Partners, L.P.
TMEP
=
Trans Mountain Expansion Project
KMGP
=
Kinder Morgan G.P., Inc.
TMPL
=
Trans Mountain Pipeline System
KMI
=
Kinder Morgan, Inc. and its majority-owned and/or controlled subsidiaries
Trans Mountain
=
Trans Mountain Pipeline ULC
 
 
 
 
 
 
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
2017 Tax
 
 
EPA
=
United States Environmental Protection Agency
Reform
=
The Tax Cuts & Jobs Act of 2017
FASB
=
Financial Accounting Standards Board
/d
=
per day
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,
IPO
=
Initial Public Offering
 
 
Compensation and Liability Act
LLC
=
limited liability company
C$
=
Canadian dollars
MBbl
=
thousand barrels
CO2
=
carbon dioxide or our CO2 business segment
MMBbl
=
million barrels
DCF
=
distributable cash flow
NGL
=
natural gas liquids
DD&A
=
depreciation, depletion and amortization
U.S.
=
United States of America
EBDA
=
earnings before depreciation, depletion and
 
 
 
 
 
amortization expenses, including amortization of
 
 
 
 
 
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, 2017 (2017 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 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
Natural gas sales
$
727

 
$
758

 
$
1,554

 
$
1,567

Services
1,984

 
1,940

 
3,951

 
3,917

Product sales and other
717

 
670

 
1,341

 
1,308

Total Revenues
3,428

 
3,368

 
6,846

 
6,792

 
 
 
 
 
 
 
 
Operating Costs, Expenses and Other
 
 
 
 
 
 
 

Costs of sales
1,068

 
1,070

 
2,087

 
2,131

Operations and maintenance
617

 
556

 
1,236

 
1,089

Depreciation, depletion and amortization
571

 
577

 
1,141

 
1,135

General and administrative
164

 
157

 
337

 
341

Taxes, other than income taxes
85

 
91

 
173

 
195

Loss on impairments and divestitures, net
653

 
—

 
653

 
6

Other income, net
(2
)
 
(1
)
 
(2
)
 
—

Total Operating Costs, Expenses and Other
3,156

 
2,450

 
5,625

 
4,897

 
 
 
 
 
 
 
 
Operating Income
272

 
918

 
1,221

 
1,895

 
 
 
 
 
 
 
 
Other Income (Expense)
 
 
 
 
 
 
 

Earnings from equity investments
328

 
135

 
548

 
310

Loss on impairment of equity investment
(270
)
 
—

 
(270
)
 
—

Amortization of excess cost of equity investments
(24
)
 
(15
)
 
(56
)
 
(30
)
Interest, net
(516
)
 
(463
)
 
(983
)
 
(928
)
Other, net
34

 
24

 
70

 
43

Total Other Expense
(448
)
 
(319
)
 
(691
)
 
(605
)
 
 
 
 
 
 
 
 
(Loss) Income Before Income Taxes
(176
)
 
599

 
530

 
1,290

 
 
 
 
 
 
 
 
Income Tax Benefit (Expense)
46

 
(216
)
 
(118
)
 
(462
)
 
 
 
 
 
 
 
 
Net (Loss) Income
(130
)
 
383

 
412

 
828

 
 
 
 
 
 
 
 
Net Income Attributable to Noncontrolling Interests
(11
)
 
(7
)
 
(29
)
 
(12
)
 
 
 
 
 
 
 
 
Net (Loss) Income Attributable to Kinder Morgan, Inc.
(141
)
 
376

 
383

 
816

 
 
 
 
 
 
 
 
Preferred Stock Dividends
(39
)
 
(39
)
 
(78
)
 
(78
)
 


 


 
 
 
 
Net (Loss) Income Available to Common Stockholders
$
(180
)
 
$
337

 
$
305

 
$
738

 
 
 
 
 
 
 
 
Class P Shares
 
 
 
 
 
 
 
Basic and Diluted (Loss) Earnings Per Common Share
$
(0.08
)
 
$
0.15

 
$
0.14

 
$
0.33

 
 
 
 
 
 
 
 
Basic and Diluted Weighted Average Common Shares Outstanding
2,204

 
2,230

 
2,206

 
2,230

 
 
 
 
 
 
 
 
Dividends Per Common Share Declared for the Period
$
0.20

 
$
0.125

 
$
0.40

 
$
0.25


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

4

KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In Millions)
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net (loss) income
$
(130
)
 
$
383

 
$
412

 
$
828

Other comprehensive (loss) income, net of tax
 

 
 

 
 
 
 
Change in fair value of hedge derivatives (net of tax benefit (expense) of $24, $(63), $13 and $(102), respectively)
(80
)
 
108

 
(46
)
 
178

Reclassification of change in fair value of derivatives to net income (net of tax (expense) benefit of $(24), $43, $(19) and $55, respectively)
83

 
(75
)
 
67

 
(96
)
Foreign currency translation adjustments (net of tax benefit (expense) of $9, $(10), $21 and $(17), respectively)
(48
)
 
38

 
(113
)
 
51

Benefit plan adjustments (net of tax expense of $2, $4, $4 and $9, respectively)
6

 
7

 
12

 
13

Total other comprehensive (loss) income
(39
)
 
78

 
(80
)
 
146

 
 
 
 
 
 
 
 
Comprehensive (loss) income
(169
)
 
461

 
332

 
974

Comprehensive loss (income) attributable to noncontrolling interests
5

 
(26
)
 
11

 
(31
)
Comprehensive (loss) income attributable to Kinder Morgan, Inc.
$
(164
)
 
$
435

 
$
343

 
$
943


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)
 
June 30, 2018
 
December 31, 2017
 
(Unaudited)
 
 
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
271

 
$
264

Restricted deposits
76

 
62

Accounts receivable, net
1,357

 
1,448

Fair value of derivative contracts
93

 
114

Inventories
420

 
424

Income tax receivable
163

 
165

Other current assets
254

 
238

Total current assets
2,634

 
2,715

 
 
 
 
Property, plant and equipment, net
39,905

 
40,155

Investments
7,293

 
7,298

Goodwill
22,153

 
22,162

Other intangibles, net
2,989

 
3,099

Deferred income taxes
1,953

 
2,044

Deferred charges and other assets
1,388

 
1,582

Total Assets
$
78,315

 
$
79,055

 
 
 
 
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
 

 
 

Current Liabilities
 

 
 

Current portion of debt
$
2,132

 
$
2,828

Accounts payable
1,269

 
1,340

Accrued interest
584

 
621

Accrued contingencies
306

 
291

Other current liabilities
1,088

 
1,101

Total current liabilities
5,379

 
6,181

Long-term liabilities and deferred credits
 

 
 

Long-term debt
 

 
 

Outstanding
34,640

 
33,988

Preferred interest in general partner of KMP
100

 
100

Debt fair value adjustments
626

 
927

Total long-term debt
35,366

 
35,015

Other long-term liabilities and deferred credits
2,495

 
2,735

Total long-term liabilities and deferred credits
37,861

 
37,750

Total Liabilities
43,240

 
43,931

Commitments and contingencies (Notes 4 and 11)


 


Redeemable Noncontrolling Interest
581

 
—

Stockholders’ Equity
 

 
 

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
—

 
—

Class P shares, $0.01 par value, 4,000,000,000 shares authorized, 2,203,969,844 and 2,217,110,072 shares, respectively, issued and outstanding
22

 
22

Additional paid-in capital
41,696

 
41,909

Retained deficit
(7,993
)
 
(7,754
)
Accumulated other comprehensive loss
(690
)
 
(541
)
Total Kinder Morgan, Inc.’s stockholders’ equity
33,035

 
33,636

Noncontrolling interests
1,459

 
1,488

Total Stockholders’ Equity
34,494

 
35,124

Total Liabilities, Redeemable Noncontrolling Interest and Stockholders’ Equity
$
78,315

 
$
79,055


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)
 
Six Months Ended June 30,
 
2018
 
2017
Cash Flows From Operating Activities
 
 
 
Net income
$
412

 
$
828

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

Depreciation, depletion and amortization
1,141

 
1,135

Deferred income taxes
102

 
454

Amortization of excess cost of equity investments
56

 
30

Change in fair market value of derivative contracts
139

 
(5
)
Loss on impairments and divestitures, net
653

 
6

Loss on impairment of equity investment
270

 
—

Earnings from equity investments
(548
)
 
(310
)
Distributions from equity investment earnings
237

 
208

Changes in components of working capital
 
 
 
Accounts receivable, net
116

 
185

Inventories
6

 
(93
)
Other current assets
(21
)
 
—

Accounts payable
(77
)
 
(59
)
Accrued interest, net of interest rate swaps
(26
)
 
(44
)
Accrued contingencies and other current liabilities
(112
)
 
(96
)
Rate reparations, refunds and other litigation reserve adjustments
31

 
(35
)
Other, net
89

 
(38
)
Net Cash Provided by Operating Activities
2,468

 
2,166

 
 
 
 
Cash Flows From Investing Activities
 
 
 
Acquisitions of assets and investments
(20
)
 
(4
)
Capital expenditures
(1,473
)
 
(1,336
)
Proceeds from sales of equity investments
33

 
—

Sales of property, plant and equipment, and other net assets, net of removal costs
6

 
71

Contributions to investments
(111
)
 
(548
)
Distributions from equity investments in excess of cumulative earnings
149

 
214

Loans to related party
(16
)
 
(7
)
Net Cash Used in Investing Activities
(1,432
)
 
(1,610
)
 
 
 
 
Cash Flows From Financing Activities
 
 
 
Issuances of debt
8,565

 
4,330

Payments of debt
(8,575
)
 
(6,124
)
Debt issue costs
(31
)
 
(60
)
Cash dividends - common shares
(719
)
 
(560
)
Cash dividends - preferred shares
(78
)
 
(78
)
Repurchases of common shares
(250
)
 
—

Contributions from investment partner
97

 
415

Contributions from noncontrolling interests - net proceeds from KML IPO
—

 
1,247

Contributions from noncontrolling interests - other
17

 
11

Distributions to noncontrolling interests
(35
)
 
(15
)
Other, net
(1
)
 
(1
)
Net Cash Used in Financing Activities
(1,010
)
 
(835
)
 
 
 
 
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Deposits
(5
)
 
10

 
 
 
 
Net increase (decrease) in Cash, Cash Equivalents and Restricted Deposits
21

 
(269
)
Cash, Cash Equivalents, and Restricted Deposits, beginning of period
326

 
787

Cash, Cash Equivalents, and Restricted Deposits, end of period
$
347

 
$
518

 
Cash and Cash Equivalents, beginning of period
$
264

 
$
684

Restricted Deposits, beginning of period
62

 
103

Cash, Cash Equivalents, and Restricted Deposits, beginning of period
326

 
787

 
 
 
 
Cash and Cash Equivalents, end of period
271

 
452

Restricted Deposits, end of period
76

 
66

Cash, Cash Equivalents, and Restricted Deposits, end of period
347

 
518

 
 
 
 
Net increase (decrease) in Cash, Cash Equivalents and Restricted Deposits
$
21

 
$
(269
)
 
 
 
 

7

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

 
Six Months Ended June 30,
 
2018
 
2017
Non-cash Investing and Financing Activities
 
 
 
Increase in property, plant and equipment from both accruals and contractor retainage
$
33

 
$
159

Supplemental Disclosures of Cash Flow Information
 
 
 
Cash paid during the period for interest (net of capitalized interest)
$
954

 
$
995

Cash paid during the period for income taxes, net
18

 
1

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

8

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, 2017
2,217

 
$
22

 
2

 
$
—

 
$
41,909

 
$
(7,754
)
 
$
(541
)
 
$
33,636

 
$
1,488

 
$
35,124

Impact of adoption of ASUs (Note 1)
 
 
 
 
 
 
 
 
 
 
175

 
(109
)
 
66

 
 
 
66

Balance at January 1, 2018
2,217

 
22

 
2

 
—

 
41,909

 
(7,579
)
 
(650
)
 
33,702

 
1,488

 
35,190

Repurchase of shares
(13
)
 
 
 
 
 
 
 
(250
)
 
 
 
 
 
(250
)
 
 
 
(250
)
Restricted shares
 
 
 
 
 
 
 
 
37

 
 
 
 
 
37

 
 
 
37

Net income
 
 
 
 
 
 
 
 
 
 
383

 
 
 
383

 
29

 
412

Distributions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
(44
)
 
(44
)
Contributions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
26

 
26

Preferred stock dividends
 
 
 
 
 
 
 
 
 
 
(78
)
 
 
 
(78
)
 
 
 
(78
)
Common stock dividends
 
 
 
 
 
 
 
 
 
 
(719
)
 
 
 
(719
)
 
 
 
(719
)
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
(40
)
 
(40
)
 
(40
)
 
(80
)
Balance at June 30, 2018
2,204

 
$
22

 
2

 
$
—

 
$
41,696

 
$
(7,993
)
 
$
(690
)
 
$
33,035

 
$
1,459

 
$
34,494


 
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
 
 
 
 
 
 
 
 
37

 
 
 
 
 
37

 
 
 
37

Net income
 
 
 
 
 
 
 
 
 
 
816

 
 
 
816

 
12

 
828

KML IPO
 
 
 
 
 
 
 
 
316

 
 
 
51

 
367

 
683

 
1,050

Distributions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
(15
)
 
(15
)
Contributions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
11

 
11

Preferred stock dividends
 
 
 
 
 
 
 
 
 
 
(78
)
 
 
 
(78
)
 
 
 
(78
)
Common stock dividends
 
 
 
 
 
 
 
 
 
 
(560
)
 
 
 
(560
)
 
 
 
(560
)
Impact of adoption of ASU 2016-09
 
 
 
 
 
 
 
 
 
 
9

 
 
 
9

 
 
 
9

Other
 
 
 
 
 
 
 
 

 
 
 
 
 
—

 
(16
)
 
(16
)
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
127

 
127

 
19

 
146

Balance at June 30, 2017
2,230

 
$
22

 
2

 
$
—

 
$
42,092

 
$
(6,482
)
 
$
(483
)
 
$
35,149

 
$
1,065

 
$
36,214



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

9

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 85,000 miles of pipelines and 152 terminals. Our pipelines transport natural gas, refined petroleum products, crude oil, condensate, CO2 and other products, and our terminals transload and store liquid commodities including petroleum products, ethanol and chemicals, and bulk products, including petroleum coke, metals and ores.

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 2017 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.

Accounting Policy Changes

Adoption of New Accounting Pronouncements

On January 1, 2018, we adopted Accounting Standards Updates (ASU) No. 2014-09, “Revenue from Contracts with Customers” and a series of related accounting standard updates designed to create improved revenue recognition and disclosure comparability in financial statements.  For more information, see Note 8.

On January 1, 2018, we retroactively adopted ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).” This ASU requires the statements of cash flows to present the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents are now included with cash and cash equivalents when reconciling the beginning of period and end of period amounts presented on the statements of cash flows. The retrospective application of this new accounting guidance resulted in a decrease of $37 million in “Other, net” in Cash Flows from Investing Activities, an increase of $103 million in “Cash, Cash Equivalents, and Restricted Deposits, beginning of the period,” and an increase of $66 million in “Cash, Cash Equivalents, and Restricted Deposits, end of period” in our accompanying consolidated statement of cash flows for the six months ended June 30, 2017 from what was previously presented in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017.
Amounts included in the restricted deposits in the accompanying consolidated financial statements represent a combination of restricted cash amounts required to be set aside by regulatory agencies to cover obligations for our captive and other insurance subsidiaries, and cash margin deposits posted by us with our counterparties associated with certain energy commodity contract positions.


10

On January 1, 2018, we adopted ASU No. 2017-05, “Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.”  This ASU clarifies the scope and application of ASC 610-20 on contracts for the sale or transfer of  nonfinancial assets and in substance nonfinancial assets to noncustomers, including partial sales. This ASU also clarifies that the derecognition of all businesses is in the scope of ASC 810 and defines an “in substance nonfinancial asset.” We utilized the modified retrospective method to adopt the provisions of this ASU, which required us to apply the new standard to (i) all new contracts entered into after January 1, 2018, and (ii) to contracts that were not completed contracts as of January 1, 2018 through a cumulative adjustment to our “Retained deficit” balance. The cumulative effect of the adoption of this ASU was a $66 million, net of income taxes, adjustment to our “Retained deficit” balance as presented in our consolidated statement of stockholders’ equity for the six months ended June 30, 2018.  This ASU also requires us to classify EIG’s cumulative contribution to ELC as mezzanine equity, which we have included as “Redeemable noncontrolling interest” on our consolidated balance sheet as of June 30, 2018, as EIG has the right under certain conditions to redeem their interests for cash. The December 31, 2017 balance of $485 million is included in “Other long-term liabilities and deferred credits” on our consolidated balance sheet as of December 31, 2017.

On January 1, 2018, we adopted ASU No. 2017-07, “Compensation - Retirement Benefits (Topic 715).” This ASU requires an employer to disaggregate the service cost component from the other components of net benefit cost, allows only the service cost component of net benefit cost to be eligible for capitalization and establishes how to present the service cost component and the other components of net benefit cost in the income statement. Topic 715 required us to retrospectively reclassify $4 million and $7 million of other components of net benefit credits (excluding the service cost component) from “General and administrative” to “Other, net” in our accompanying consolidated statement of income for the three and six months ended June 30, 2017, respectively. We prospectively applied Topic 715 related to net benefit costs eligible for capitalization.

On January 1, 2018, we adopted ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”  Our accounting policy for the release of stranded tax effects in accumulated other comprehensive income is on an aggregate portfolio basis. This ASU permits companies to reclassify the income tax effects of the 2017 Tax Reform on items within accumulated other comprehensive income to retained earnings.  The FASB refers to these amounts as “stranded tax effects.”  Only the stranded tax effects resulting from the 2017 Tax Reform are eligible for reclassification.  The adoption of this ASU resulted in a $109 million reclassification adjustment of stranded income effects from “Accumulated other comprehensive loss” to “Retained deficit” on our consolidated statement of stockholders’ equity for the six months ended June 30, 2018.

Impairments and Losses on Divestitures, net

During the three and six months ended June 30, 2018, we recognized (i) a $600 million non-cash impairment loss associated with certain gathering and processing assets in Oklahoma within our Natural Gas Pipelines business segment; (ii) a $60 million non-cash impairment related to certain Terminal business segment assets; (iii) a non-cash impairment of $270 million of our equity investment in Gulf LNG Holdings Group, LLC (Gulf LNG); and (iv) a gain of $7 million related to miscellaneous asset disposals.

During the six months ended June 30, 2017, we recorded losses on impairments and divestitures netting to $6 million related to miscellaneous asset disposals.

The $600 million non-cash impairment was driven by reduced cash flow estimates for some of our gathering and processing assets in Oklahoma during the period as a result of our decision to redirect our focus to other areas of our portfolio. These reduced estimates triggered an impairment analysis as we determined that our carrying value may no longer be recoverable. The impairment analysis for long-lived assets was based upon a two-step process as prescribed in the accounting standards. Step 1 involved comparing the undiscounted future cash flows to be derived from the asset group to the carrying value of the asset group. Based on the results of our step 1 test, we determined that the undiscounted future cash flows were less than the carrying value of the asset group. Step 2 involved using the income approach to calculate the fair value of the asset group and comparing it to the carrying value. The impairment that we recorded represented the difference between the fair and carrying values.

The $270 million non-cash impairment in our equity investment in Gulf LNG was driven by a ruling by an arbitration panel affecting a customer contract. Our share of earnings recognized by Gulf LNG on the respective customer contract is included in “Earnings from equity investments” in the accompanying consolidated statements of income for three and six months ended June 30, 2018.

The estimate of fair value is 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

11

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. 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 and investments have been written down to fair value in the last few years, 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

In addition to periodically evaluating long-lived assets for impairment based on changes in market conditions as discussed above, 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.

The results of our May 31, 2018 annual step 1 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. A new period of volatile commodity prices could result in a 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 a change 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.
    
The fair value estimates used in step 1 of the 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 reporting unit.

Earnings per Share
 
We calculate earnings per share using the two-class method. Earnings were allocated to Class P shares 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 restricted stock or restricted stock units issued to employees and non-employee directors and include dividend equivalent payments, do not participate in excess distributions over earnings.


12

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 June 30,
 
Six Months Ended June 30,

2018
 
2017
 
2018
 
2017
Net (Loss) Income Available to Common Stockholders
$
(180
)
 
$
337

 
$
305

 
$
738

Participating securities:
 
 
 
 
 
 
 
   Less: Net Income Allocated to Restricted stock awards(a)
(2
)
 
(1
)
 
(3
)
 
(3
)
Net (Loss) Income Allocated to Class P Stockholders
$
(182
)
 
$
336

 
$
302

 
$
735

 
 
 
 
 
 
 
 
Basic Weighted Average Common Shares Outstanding
2,204

 
2,230

 
2,206

 
2,230

Basic (Loss) Earnings Per Common Share
$
(0.08
)
 
$
0.15

 
$
0.14

 
$
0.33

________
(a)
As of June 30, 2018, there were approximately 10 million restricted stock awards outstanding.

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 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Unvested restricted stock awards
10

 
9

 
10

 
9

Warrants to purchase our Class P shares(a)
—

 
—

 
—

 
233

Convertible trust preferred securities
3

 
3

 
3

 
3

Mandatory convertible preferred stock(b)
58

 
58

 
58

 
58

_______
(a)
On May 25, 2017, approximately 293 million unexercised warrants expired without the issuance of Class P common stock. Prior to expiration, each warrant entitled the holder to purchase one share of our common stock for an exercise price of $40 per share. The potential dilutive effect of the warrants did not consider the assumed proceeds to KMI upon exercise.
(b)
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

Pending Sale of Trans Mountain Pipeline System and Its Expansion Project

On May 29, 2018, KML announced that the Government of Canada has agreed to purchase from KML the TMPL, the TMEP, Puget Sound pipeline system and Kinder Morgan Canada Inc., the Canadian employer of our staff that operate the business and assets to be sold, for C$4.5 billion (the “Transaction”), subject to certain adjustments as provided in the share and unit purchase agreement (the “Purchase Agreement”).

As part of the Purchase Agreement, the Government of Canada has agreed to fund the resumption of the TMEP planning and construction work by guaranteeing TMEP's borrowings under a separately created temporary credit facility for such expenditures until the Transaction closes. (See Note 4 for information on KML’s temporary credit facilities).

The Transaction is expected to close late in the third quarter or early in the fourth quarter of 2018, subject to KML’s shareholder and applicable regulatory approvals. The assets to be sold will be classified as assets held for sale upon KML shareholder approval, and the Transaction is expected to result in a gain. The use of proceeds from the sale of the TMPL and the TMEP is a KML board decision. We intend to use any proceeds we receive in respect of our interest in KML to pay down debt.

May 2017 Sale of Approximate 30% Interest in Canadian Business

On May 30, 2017, 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 (US$1,299 million). The net proceeds from the IPO were used by KML to indirectly acquire from us an approximate 30% interest

13

in a limited partnership that holds our Canadian business while we retained the remaining 70% interest. We used the proceeds from KML’s IPO to pay down debt.

February 2017 Sale of Noncontrolling Interest in 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 that are wholly owned by us. In certain limited circumstances that are not expected to occur, EIG has the right to relinquish its interest in ELC and redeem its capital account. The sale proceeds of $386 million, and subsequent EIG contributions, have been reflected as of June 30, 2018 within “Redeemable Noncontrolling Interest” and as of December 31, 2017 as a deferred credit within “Other long-term liabilities and deferred credits”, respectively, on our consolidated balance sheets. Once these contingencies expire, EIG’s capital account will be reflected in “Noncontrolling interests” on our consolidated balance sheet.

3. Investments

Our investments primarily consist of equity investments where we hold significant influence over investee actions and for which we apply the equity method of accounting. Summarized combined financial information for our single significant equity investment is reported below (in millions; amounts represent 100% of investee financial information):

 
 
Six Months Ended June 30,
Income Statement
 
2018
 
2017
Revenues
 
$
456

 
$
93

Costs and expenses
 
53

 
46

Net Income
 
$
403

 
$
47

 
 
 
 
 
Our share of net income
 
$
202

 
$
23


For additional information regarding our equity investments, see Note 7 to our consolidated financial statements included in our 2017 Form 10-K.

4. 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.

14


The following table provides additional information 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):
 
June 30, 2018
 
December 31, 2017
Current portion of debt
 
 
 
Credit facility due November 26, 2019, 3.37% and 2.83%, respectively(a)
$
350

 
$
125

Commercial paper notes, 2.59% and 1.95%, respectively(a)
140

 
240

KML 2018 Credit Facility, 2.86%(a)(b)(c)
101

 
—

TMPL Non-recourse Credit Agreement, 1.98%(a)(b)
87

 
—

Current portion of senior notes
 
 
 
6.00%, due January 2018
—

 
750

7.00%, due February 2018
—

 
82

5.95%, due February 2018
—

 
975

7.25%, due June 2018
—

 
477

9.00%, due February 2019
500

 
—

2.65%, due February 2019
800

 
—

Trust I preferred securities, 4.75%, due March 2028
111

 
111

Current portion - Other debt
43

 
68

  Total current portion of debt
2,132

 
2,828

 
 
 
 
Long-term debt (excluding current portion)
 
 
 
Senior notes
33,907

 
33,248

EPC Building, LLC, promissory note, 3.967%, due 2017 through 2035
402

 
409

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

 
100

Trust I preferred securities, 4.75%, due March 2028
110

 
110

Other
221

 
221

Total long-term debt
34,740

 
34,088

Total debt(d)
$
36,872

 
$
36,916

_______
(a)
Interest rates are weighted average rates.
(b)
Balances outstanding under the KML 2018 Credit Facility are denominated in C$ and have been converted to U.S. dollars and reported above at the June 30, 2018 exchange rate of 0.7594 U.S. dollars per C$. See “—Credit Facilities” below.
(c)
Weighted average interest rates are based on interest expense denominated in C$.
(d)
Excludes our “Debt fair value adjustments” which, as of June 30, 2018 and December 31, 2017, increased our combined debt balances by $626 million and $927 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 13.

Credit Facilities

KMI
 
As of June 30, 2018, we had $350 million outstanding under our credit facility, $140 million outstanding under our commercial paper program and $99 million in letters of credit. Our availability under our $5 billion credit facility as of June 30, 2018 was $4,411 million. As of June 30, 2018, we were in compliance with all required covenants.

KML

Pursuant to the Transaction described in Note 2, on May 30, 2018, approximately C$100 million of borrowings outstanding under KML’s June 16, 2017 revolving credit facilities (the “KML 2017 Credit Facility”) were repaid, the underlying credit

15

facilities were terminated, and we wrote off approximately $46 million of deferred costs associated with the KML 2017 Credit Facility that were being amortized as interest expense over its term.

On May 30, 2018 and concurrently with the termination of the KML 2017 Credit Facility, KML completed a credit agreement with Royal Bank of Canada, as administrative agent, and the lenders party thereto (the “KML 2018 Credit Agreement”) establishing a C$500 million revolving credit facility (the “KML 2018 Credit Facility”), for general corporate purposes, including working capital. The approximate C$100 million of borrowings outstanding under the terminated KML 2017 Credit Facility were repaid pursuant to an initial drawdown under the KML 2018 Credit Facility.
    
The KML 2018 Credit Facility will mature on the earlier of (i) the date of the closing of the Transaction or (ii) May 29, 2020. Depending on the type of loan requested by us, interest on loans outstanding will be calculated based on (i) a Canadian prime rate of interest plus 0.20% per annum; (ii) a U.S. base rate of interest plus 0.20% per annum; (iii) London Interbank Offered Rate (LIBOR) plus 1.20% per annum; or (iv) bankers’ acceptance fees and 1.20% per annum. Standby fees for the unused portion of the KML 2018 Credit Facility will be calculated based on a rate of 0.24% per annum.
 
The KML 2018 Credit Agreement contains various financial and other covenants that apply to KML and its subsidiaries and that are common in such agreements, including a maximum ratio of KML’s consolidated total funded debt to its consolidated capitalization of 70% and restrictions on KML’s ability to incur debt, grant liens, make dispositions (although the Transaction is specifically permitted), engage in transactions with affiliates, make restricted payments, make investments, enter into sale leaseback transactions, amend organizational documents and engage in corporate reorganization transactions.
 
In addition, the KML 2018 Credit Agreement contains customary events of default, including non-payment; non-compliance with covenants (in some cases, subject to grace periods); payment default under, or acceleration events affecting, certain other indebtedness; bankruptcy or insolvency events involving KML or guarantors; and changes of control. If an event of default under the KML 2018 Credit Agreement exists and is continuing, the lenders could terminate their commitments and accelerate the maturity of the outstanding obligations under the KML 2018 Credit Agreement.

On June 14, 2018, KML’s and our subsidiary, TMPL, as the borrower, entered into new, non-revolving, unsecured construction credit agreement (the “TMPL Non-recourse Credit Agreement”) among TMPL, Royal Bank of Canada (“RBC”), as administrative agent (“Agent”), and The Toronto-Dominion Bank (together with RBC, the “Lenders”) in an aggregate principal amount of up to approximately C$1 billion to facilitate the resumption of the TMEP planning and construction work until the closing of the Transaction.  The TMPL Non-recourse Credit Agreement provides for a maturity date on the earliest to occur of (i) completion of the Transaction or another disposition of KML’s interest in the entities or material assets that are subject to the Transaction; (ii) termination of the Purchase Agreement; (iii) assignment by KML of its rights and obligations under the Purchase Agreement; or (iv) December 31, 2018.
 
The payment obligations of TMPL to the Agent and the Lenders under the TMPL Non-recourse Credit Agreement are guaranteed by Her Majesty in Right of Canada (“TMPL Non-recourse Credit Agreement Guarantor”) pursuant to an unconditional and irrevocable guarantee (“TMPL Non-recourse Credit Agreement Guarantee”). The TMPL Non-recourse Credit Agreement is non-recourse to TMPL, its subsidiaries, KML or KMI, or any of their respective property, assets and undertakings; the Agent and the Lenders’ sole recourse is to the TMPL Non-recourse Credit Agreement Guarantor under the TMPL Non-recourse Credit Agreement Guarantee.
 
In connection with the TMPL Non-recourse Credit Agreement and the TMPL Non-recourse Credit Agreement Guarantee, TMPL’s, KML’s and our subsidiary, Kinder Morgan Cochin ULC (“KMCU”), entered into an indemnity agreement (the “Indemnity Agreement”) in favor of the TMPL Non-recourse Credit Agreement Guarantor obligating TMPL to reimburse and indemnify the TMPL Non-recourse Credit Agreement Guarantor for amounts paid under and pursuant to the TMPL Non-recourse Credit Agreement Guarantee in certain very limited circumstances. In addition, the Indemnity Agreement includes, for the benefit of the TMPL Non-recourse Credit Agreement Guarantor, limited rights to indemnification in the event of inaccuracies in certain representations, or the failure of KMCU to perform certain covenants, under the Purchase Agreement.  Except for the indemnities referred to in this paragraph and certain other limited exceptions, the TMPL Non-recourse Credit Agreement Guarantor has no recourse to TMPL or KMCU under the Indemnity Agreement.
 
As security for TMPL’s and KMCU’s limited recourse obligations under the Indemnity Agreement, TMPL and its subsidiaries granted second ranking security in favor of the TMPL Non-recourse Credit Agreement Guarantor against their respective assets, and KMCU granted a limited recourse pledge of its equity in TMPL and the general partner thereof.

As of June 30, 2018, KML had C$313 million (U.S. $238 million) available under the KML 2018 Credit Facility, after reducing the C$500 million (U.S.$380 million) capacity for the C$133.0 million (U.S.$101 million) outstanding borrowings and

16

the C$54 million (U.S.$41 million) in letters of credit. As of June 30, 2018, KML was in compliance with all required covenants. As of December 31, 2017, KML had no borrowings outstanding under the KML 2017 Credit Facility.

As of June 30, 2018, TMPL had C$886 million (U.S.$672 million) available under the TMPL Non-Recourse Credit Agreement, after reducing the approximate C$1 billion (U.S.$759 million) in aggregate capacity for the C$114 million (U.S.$87 million) outstanding under this credit facility. As of June 30, 2018, TMPL was in compliance with all its required covenants.

5.  Stockholders’ Equity
 
Common Equity
 
As of June 30, 2018, 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 2017 Form 10-K.

On July 19, 2017, our board of directors approved a $2 billion common share buy-back program that began in December 2017. During the six months ended June 30, 2018, we repurchased approximately 13 million of our Class P shares for approximately $250 million.

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. The following table provides information about our per share dividends:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Per common share cash dividend declared for the period
$
0.20

 
$
0.125

 
$
0.40

 
$
0.25

Per common share cash dividend paid in the period
$
0.20

 
$
0.125

 
$
0.325

 
$
0.25


On July 18, 2018, our board of directors declared a cash dividend of $0.20 per common share for the quarterly period ended June 30, 2018, which is payable on August 15, 2018 to common shareholders of record as of the close of business on July 31, 2018.

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 that, unless converted earlier at the option of the holders, will automatically convert into common stock on October 26, 2018. For additional information regarding our mandatory convertible preferred stock, see Note 11 to our consolidated financial statements included in our 2017 Form 10-K.

Preferred Stock Dividends

On April 18, 2018, 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 April 26, 2018 through and including July 25, 2018, which is payable on July 26, 2018 to mandatory convertible preferred shareholders of record as of the close of business on July 11, 2018.

Noncontrolling Interests

KML Distributions

KML has a dividend policy pursuant to which it may pay a quarterly dividend on its restricted voting shares in an amount based on a portion of its DCF. For additional information regarding our KML distributions, see Note 11 to our consolidated financial statements included in our 2017 Form 10-K.

During the three and six months ended June 30, 2018, KML paid dividends on its Restricted Voting Shares to the public valued at$13 million and $26 million, respectively, of which $8 million and $18 million, respectively, were paid in cash. The remaining values of $5 million and $8 million for the three and six months ended June 30, 2018, respectively, were paid in

17

362,158 and 656,555 KML Restricted Voting Shares, respectively. KML also paid dividends to the public on its Series 1 and Series 3 Preferred Shares of $6 million and $10 million for the three and six months ended June 30, 2018, respectively.

6.  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.

During the three months ended June 30, 2018, due to volatility in certain basis differentials, we discontinued hedge accounting on certain of our crude derivative contracts as we do not expect them to be highly effective, for accounting purposes, in offsetting the variability in cash flows. 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 June 30, 2018, 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
(12.9
)
 
MMBbl
Crude oil basis
(7.9
)
 
MMBbl
Natural gas fixed price
(43.3
)
 
Bcf
Natural gas basis
(35.1
)
 
Bcf
Derivatives not designated as hedging contracts
 

 
 
Crude oil fixed price
(10.3
)
 
MMBbl
Natural gas fixed price
(1.9
)
 
Bcf
Natural gas basis
(13.2
)
 
Bcf
NGL fixed price
(3.9
)
 
MMBbl

As of June 30, 2018, 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 2022.

Interest Rate Risk Management

 As of June 30, 2018 and December 31, 2017, we had a combined notional principal amount of $10,575 million and $9,575 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 LIBOR plus a spread and have termination dates that correspond to the maturity dates of the related series of senior notes. As of June 30, 2018, 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 both June 30, 2018 and December 31, 2017, we had a combined 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. 

18


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
 
 
 
 
June 30,
2018
 
December 31,
2017
 
June 30,
2018
 
December 31,
2017
 
 
Location
 
Fair value
 
Fair value
Derivatives designated as hedging contracts
 
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts
 
Fair value of derivative contracts/(Other current liabilities)
 
$
71

 
$
65

 
$
(91
)
 
$
(53
)
 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
—

 
14

 
(44
)
 
(24
)
Subtotal
 
 
 
71

 
79

 
(135
)
 
(77
)
Interest rate swap agreements
 
Fair value of derivative contracts/(Other current liabilities)
 
19

 
41

 
(27
)
 
(3
)
 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
89

 
164

 
(195
)
 
(62
)
Subtotal
 
 
 
108

 
205

 
(222
)
 
(65
)
Cross-currency swap agreements
 
Fair value of derivative contracts/(Other current liabilities)
 
—

 
—

 
(20
)
 
(6
)
 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
169

 
166

 
—

 
—

Subtotal
 
 
 
169

 
166

 
(20
)
 
(6
)
Total
 
 
 
348

 
450

 
(377
)
 
(148
)
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging contracts
 
 
 
 

 
 
 
 

 
 
Energy commodity derivative contracts
 
Fair value of derivative contracts/(Other current liabilities)
 
3

 
8

 
(64
)
 
(22
)
 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
1

 
—

 
(39
)
 
(2
)
Total
 
 
 
4

 
8

 
(103
)
 
(24
)
Total derivatives
 
 
 
$
352

 
$
458

 
$
(480
)
 
$
(172
)



19

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 June 30,
 
Six Months Ended June 30,
 
 
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
Interest, net
 
$
(81
)
 
$
46

 
$
(254
)
 
$
7

 
 
 
 
 
 
 
 
 
 
 
Hedged fixed rate debt
 
Interest, net
 
$
77

 
$
(47
)
 
$
245

 
$
(11
)

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 June 30,
 
 
 
Three Months Ended June 30,
 
 
 
Three Months Ended June 30,
 
 
2018
 
2017
 
 
 
2018
 
2017
 
 
 
2018
 
2017
Energy commodity derivative contracts
 
$
(23
)
 
$
52

 
Revenues—Natural
  gas sales
 
$
(5
)
 
$
(1
)
 
Revenues—Natural
  gas sales
 
$
—

 
$
—

 
 
 
 
 
 
Revenues—Product
  sales and other
 
(13
)
 
14

 
Revenues—Product
  sales and other
 
(56
)
 
5

 
 
 
 
 
 
Costs of sales
 
—

 
1

 
Costs of sales
 
—

 
—

Interest rate swap
agreements(c)
 
1

 
(1
)
 
Earnings from equity investments
 
(3
)
 
(1
)
 
Earnings from equity investments
 
—

 
—

Cross-currency swap
 
(58
)
 
57

 
Other, net
 
(62
)
 
62

 
Other, net
 
—

 
—

Total
 
$
(80
)
 
$
108

 
Total
 
$
(83
)
 
$
75

 
Total
 
$
(56
)
 
$
5


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)
 
 
Six Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
2018
 
2017
 
 
 
2018
 
2017
 
 
 
2018
 
2017
Energy commodity derivative contracts
 
$
(40
)
 
$
120

 
Revenues—Natural
  gas sales
 
$
(5
)
 
$
1

 
Revenues—Natural
  gas sales
 
$
—

 
$
—

 
 
 
 
 
 
Revenues—Product
  sales and other
 
(27
)
 
20

 
Revenues—Product
  sales and other
 
(85
)
 
8

 
 
 
 
 
 
Costs of sales
 
—

 
4

 
Costs of sales
 
—

 
—

Interest rate swap
agreements(c)
 
2

 
(1
)
 
Earnings from equity investments
 
(4
)
 
(1
)
 
Earnings from equity investments
 
—

 
—

Cross-currency swap
 
(8
)
 
59

 
Other, net
 
(31
)
 
72

 
Other, net
 
—

 
—

Total
 
$
(46
)
 
$
178

 
Total
 
$
(67
)
 
$
96

 
Total
 
$
(85
)
 
$
8

_____
(a)
We do not expect to reclassify any gain or loss associated with cash flow hedge price risk management activities included in our accumulated other comprehensive loss balances as of June 30, 2018 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)
During the three and six months ended June 30, 2018, we recognized a $3 million loss as a result of our equity investment’s forecasted transactions being probable of not occurring. All other 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.

20

Derivatives not designated as accounting hedges
 
Location
 
Gain/(loss) recognized in income on derivatives
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
 
 
2018
 
2017
 
2018
 
2017
Energy commodity derivative contracts
 
Revenues—Natural gas sales
 
$
(1
)
 
$
5

 
$
2

 
$
11

 
 
Revenues—Product sales and other
 
(45
)
 
7

 
(46
)
 
19

 
 
Costs of sales
 
1

 
—

 
1

 
—

Total(a)
 
 
 
$
(45
)
 
$
12

 
$
(43
)
 
$
30

_______
(a) The three and six months ended June 30, 2018 include an approximate loss of $5 million and gain of $3 million, respectively, and the three and six months ended June 30, 2017 include approximate gains of $17 million and $29 million, respectively. These gains and losses were 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 June 30, 2018 and December 31, 2017, we had no outstanding letters of credit supporting our commodity price risk management program. As of June 30, 2018 and December 31, 2017, we had cash margins of $23 million and $1 million, respectively, posted by us with our counterparties as collateral and reported within “Restricted deposits” on our accompanying consolidated balance sheets. The balance at June 30, 2018 consisted of initial margin requirements of $10 million and variation margin requirements of $13 million. We also use industry standard commercial agreements that 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 June 30, 2018, 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 $100 million of additional collateral and $9 million of additional collateral beyond this $100 million if we were downgraded two notches.


21

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, 2017
$
(27
)
 
$
(189
)
 
$
(325
)
 
$
(541
)
Other comprehensive gain (loss) before reclassifications
(46
)
 
(73
)
 
12

 
(107
)
Gains reclassified from accumulated other comprehensive loss
67

 
—

 
—

 
67

Impact of adoption of ASU 2018-02 (Note 1)
(4
)
 
(36
)
 
(69
)
 
(109
)
Net current-period other comprehensive income (loss)
17

 
(109
)
 
(57
)
 
(149
)
Balance as of June 30, 2018
$
(10
)
 
$
(298
)
 
$
(382
)
 
$
(690
)

 
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
178

 
32

 
13

 
223

Gains reclassified from accumulated other comprehensive loss
(96
)
 
—

 
—

 
(96
)
KML IPO
—

 
44

 
7

 
51

Net current-period other comprehensive income