Edgar Filing: KINDER MORGAN, INC.

kmi10q1_2010.htm Table of Contents

Kinder Morgan, Inc. Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

F O R M 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

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: 1-06446

KINDER MORGAN, INC.

(Exact name of registrant as specified in its charter)

Kansas		48-0290000
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

500 Dallas 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 o No þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934. Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No þ

Number of outstanding shares of Common stock, $0.01 par value, as of April 30, 2010 was 100 shares.

Kinder Morgan, Inc. Form 10-Q

KINDER MORGAN, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page Number
	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3
	Consolidated Statements of Income - Three Months Ended March 31, 2010 and 2009	3
	Consolidated Balance Sheets – March 31, 2010 and December 31, 2009	4
	Consolidated Statements of Cash Flows - Three Months Ended March 31, 2010 and 2009	5
	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44
	General and Basis of Presentation	44
	Critical Accounting Policies and Estimates	44
	Results of Operations	45
	Financial Condition	56
	Recent Accounting Pronouncements	61
	Information Regarding Forward-Looking Statements	61

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	62

Item 4.	Controls and Procedures	63



	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	63

Item 1A.	Risk Factors	63

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63

Item 3.	Defaults Upon Senior Securities	63

Item 4.	(Removed and Reserved)	63

Item 5.	Other Information	63

Item 6.	Exhibits	64

	Signature	65

Kinder Morgan, Inc. Form 10-Q

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

KINDER MORGAN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In Millions)

(Unaudited)

	Three Months Ended March 31,
	2010			2009
Revenues
Natural gas sales	$	1,017.5		$	888.7
Services		738.5			661.4
Product sales and other		401.6			278.8
Total Revenues		2,157.6			1,828.9

Operating Costs, Expenses and Other
Gas purchases and other costs of sales		1,016.6			865.6
Operations and maintenance		454.5			256.4
Depreciation, depletion and amortization		282.3			264.8
General and administrative		115.7			92.9
Taxes, other than income taxes		45.4			39.0
Other expense (income)		(1.3	)		0.3
Total Operating Costs, Expenses and Other		1,913.2			1,519.0

Operating Income		244.4			309.9

Other Income (Expense)
Earnings (loss) from equity investments		(374.2	)		48.6
Amortization of excess cost of equity investments		(1.4	)		(1.4	)
Interest, net		(150.6	)		(142.0	)
Other, net		6.6			10.6
Total Other Income (Expense)		(519.6	)		(84.2	)

Income (Loss) from Continuing Operations Before Income Taxes		(275.2	)		225.7

Income Taxes		95.5			(80.6	)

Income (Loss) from Continuing Operations		(179.7	)		145.1

Loss from Discontinued Operations, net of tax		(0.2	)		(0.2	)

Net Income (Loss)		(179.9	)		144.9

Net Loss (Income) Attributable to Noncontrolling Interests		19.0			(29.6	)

Net Income (Loss) Attributable to Kinder Morgan, Inc.	$	(160.9	)	$	115.3

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

Kinder Morgan, Inc. Form 10-Q

KINDER MORGAN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Millions, Except Share and Per Share Amounts)

	March 31, 2010			December 31, 2009
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	137.1		$	165.6
Restricted deposits		35.1			52.5
Accounts, notes and interest receivable, net		835.0			921.6
Inventories		79.6			71.9
Gas in underground storage		51.9			43.5
Fair value of derivative contracts		58.6			20.8
Other current assets		50.2			109.7
Total current assets		1,247.5			1,385.6

Property, plant and equipment, net		16,949.4			16,803.5
Investments		3,340.7			3,695.6
Notes receivable		194.3			190.6
Goodwill		4,813.6			4,744.3
Other intangibles, net		369.0			259.8
Fair value of derivative contracts		312.1			293.3
Deferred charges and other assets		161.4			213.6
Total Assets	$	27,388.0		$	27,586.3

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of debt	$	2,599.9		$	768.7
Cash book overdrafts		48.1			36.6
Accounts payable		591.3			620.8
Accrued interest		124.2			292.1
Accrued taxes		100.3			58.6
Deferred revenues		86.9			76.1
Fair value of derivative contracts		278.2			272.0
Accrued other current liabilities		172.8			194.6
Total current liabilities		4,001.7			2,319.5

Long-term liabilities and deferred credits
Long-term debt
Outstanding		11,306.5			12,779.7
Preferred interest in general partner of Kinder Morgan Energy Partners, L.P.		100.0			100.0
Value of interest rate swaps		422.2			361.0
Total long-term debt		11,828.7			13,240.7
Deferred income taxes		1,918.0			2,039.9
Fair value of derivative contracts		380.4			469.6
Other long-term liabilities and deferred credits		811.1			670.5
Total long-term liabilities and deferred credits		14,938.2			16,420.7

Total Liabilities		18,939.9			18,740.2

Commitments and contingencies (Notes 4 and 11)
Stockholders’ Equity
Common stock – authorized and outstanding – 100 shares, par value $0.01 per share		-			-
Additional paid-in capital		7,849.7			7,845.7
Retained deficit		(3,817.2	)		(3,506.3	)
Accumulated other comprehensive loss		(130.9	)		(167.9	)
Total Kinder Morgan, Inc. stockholder’s equity		3,901.6			4,171.5
Noncontrolling interests		4,546.5			4,674.6
Total Stockholders’ Equity		8,448.1			8,846.1
Total Liabilities and Stockholders’ Equity	$	27,388.0		$	27,586.3

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

Kinder Morgan, Inc. Form 10-Q

KINDER MORGAN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Millions)

(Unaudited)

	Three Months Ended March 31,
	2010			2009
Cash Flows From Operating Activities
Net Income (Loss)	$	(179.9	)	$	144.9
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Loss from discontinued operations, net of tax		0.2			0.2
Depreciation, depletion and amortization		282.3			264.8
Deferred income taxes		(156.6	)		17.0
Amortization of excess cost of equity investments		1.4			1.4
Income from the allowance for equity funds used during construction		(0.5	)		(9.3	)
(Income) loss from the sale or casualty of property, plant and equipment and other net assets		(1.3	)		0.4
(Earnings) loss from equity investments		374.2			(48.6	)
Distributions from equity investments		49.8			60.0
Proceeds from termination of interest rate swap agreements		-			144.4
Changes in components of working capital
Accounts receivable		53.3			199.6
Inventories		(7.5	)		(4.3	)
Other current assets		36.2			5.3
Accounts payable		(8.3	)		(246.2	)
Accrued interest		(167.8	)		(126.5	)
Accrued taxes		77.3			(52.9	)
Accrued liabilities		(41.3	)		(101.1	)
Rate reparations, refunds and other litigation reserve adjustments		158.0			-
Other, net		(30.6	)		(35.5	)
Cash flows provided by continuing operations		438.9			213.6
Net cash flows used in discontinued operations		(0.2	)		(0.3	)
Net Cash Provided by Operating Activities		438.7			213.3

Cash Flows From Investing Activities
Acquisitions of assets and investments		(226.3	)		(0.5	)
Repayments from customers		-			98.1
Capital expenditures		(223.8	)		(417.6	)
Deconsolidation of variable interest entity due to the implementation of ASU 2009-17 (Note 13)		(17.5	)		-
Sale or casualty of property, plant and equipment, and other net assets net of removal costs		13.4			(0.8	)
Net proceeds from (investments in) margin deposits		15.9			(5.8	)
Proceeds from restricted deposits		2.1			-
Contributions to investments		(136.0	)		(174.2	)
Distributions from equity investments in excess of cumulative earnings		73.9			-
Net Cash Used in Investing Activities		(498.3	)		(500.8	)

Cash Flows From Financing Activities
Issuance of debt		1,189.5			1,268.0
Payment of debt		(814.9	)		(1,048.0	)
Repayments from related party		-			1.2
Debt issue costs		(0.8	)		(1.5	)
Increase (decrease) in cash book overdrafts		11.5			(3.3	)
Cash dividends		(150.0	)		(50.0	)
Contributions from noncontrolling interests		-			287.9
Distributions to noncontrolling interests		(200.8	)		(175.8	)
Other, net		-			1.8
Net Cash Provided by Financing Activities		34.5			280.3

Effect of Exchange Rate Changes on Cash and Cash Equivalents		(3.4	)		(0.9	)

Decrease in Cash and Cash Equivalents		(28.5	)		(8.1	)
Cash and Cash Equivalents, beginning of period		165.6			118.6
Cash and Cash Equivalents, end of period	$	137.1		$	110.5

Noncash Investing and Financing Activities
Assets acquired by the assumption or incurrence of liabilities	$	10.5		$	-
Assets acquired by contributions from noncontrolling interests	$	81.7		$	-
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest (net of capitalized interest)	$	286.9		$	271.6
Cash paid during the period for income taxes (net of refunds)	$	2.2		$	140.5

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

Kinder Morgan, Inc. Form 10-Q

KINDER MORGAN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. General

Organization

We are a large energy transportation and storage company, operating or owning an interest in approximately 37,000 miles of pipelines and approximately 180 terminals. We have both regulated and nonregulated operations. We also own all the common equity of the general partner of, and a significant limited partner interest in, Kinder Morgan Energy Partners, L.P., a publicly traded pipeline limited partnership. We are a wholly owned subsidiary of Kinder Morgan Holdco LLC, a private company. Our executive offices are located at 500 Dallas Street, Suite 1000, Houston, Texas 77002 and our telephone number is (713) 369-9000. Unless the context requires otherwise, references to “we,” “us,” “our,” or the “Company” are intended to mean Kinder Morgan, Inc. and its consolidated subsidiaries. Unless the context requires otherwise, references to “KMP” are intended to mean Kinder Morgan Energy Partners, L.P. and its consolidated subsidiaries.

Kinder Morgan Management, LLC, referred to in this report as “KMR,” is a publicly traded Delaware limited liability company. Kinder Morgan G.P., Inc., the general partner of KMP and a wholly owned subsidiary of ours, owns all of KMR’s voting shares. KMR, pursuant to a delegation of control agreement, has been delegated, to the fullest extent permitted under Delaware law, all of Kinder Morgan G.P., Inc.’s power and authority to manage and control the business and affairs of KMP, subject to Kinder Morgan G.P., Inc.’s right to approve certain transactions.

As further disclosed in Note 2 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2009 (“2009 Form 10-K”), on May 30, 2007, Kinder Morgan, Inc. merged with a wholly owned subsidiary of Kinder Morgan Holdco LLC, with Kinder Morgan, Inc. continuing as the surviving legal entity. This transaction is referred to in this report as “the Going Private transaction.” Effective with the closing of the Going Private transaction, all of our assets and liabilities were recorded at their estimated fair market values based on an allocation of the aggregate purchase price paid in the Going Private transaction.

Basis of Presentation

We have prepared our accompanying unaudited consolidated financial statements under the rules and regulations of the United States Securities and Exchange Commission. These rules and regulations conform to the accounting principles contained in the Financial Accounting Standards Board’s Accounting Standards Codification, the single source of generally accepted accounting principles in the United States of America and referred to in this report as the Codification. Under such rules and regulations, we have condensed or omitted certain information and notes normally included in financial statements prepared in conformity with the Codification. We believe, however, that our disclosures are adequate to make the information presented not misleading.

In addition, our consolidated financial statements reflect normal adjustments, and also recurring adjustments that are, in the opinion of our management, necessary for a fair presentation of our financial results for the interim periods, 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 2009 Form 10-K.

Our accounting records are maintained in United States dollars, and all references to dollars are United States dollars, except where stated otherwise. Canadian dollars are designated as C$. Our consolidated financial statements include the accounts of Kinder Morgan, Inc. and our majority-owned subsidiaries, as well as those of KMP and KMR, and prior to January 1, 2010 Triton Power Company LLC, see Note 9 “Reportable Segments” and Note 13 “Recent Accounting Pronouncements.” Investments in jointly owned operations in which we hold a 50% or less interest (other than KMP and KMR, because we have the ability to exercise significant control over their operating and financial policies) are accounted for under the equity method. All significant intercompany transactions and balances have been eliminated.

Notwithstanding the consolidation of KMP and its subsidiaries into our financial statements, we are not liable for, and our assets are not available to satisfy, the obligations of KMP and/or its subsidiaries and vice versa, except as discussed in the following paragraph. Responsibility for payments of obligations reflected in our or KMP’s financial statements is a legal determination based on the entity that incurs the liability.

Kinder Morgan, Inc. Form 10-Q

In conjunction with KMP’s acquisition of certain natural gas pipelines from us, we agreed to indemnify KMP with respect to approximately $733.5 million of its debt. We would be obligated to perform under this indemnity only if KMP’s assets were unable to satisfy its obligations.

2. Investments, Acquisitions and Divestitures

Investments

NGPL PipeCo LLC Investment Impairment Charge

On November 19, 2009, NGPL PipeCo LLC was notified by the Federal Energy Regulatory Commission (“FERC”) of a proceeding against it pursuant to section 5 of the Natural Gas Act (the “Order”). The proceeding instituted an investigation into the justness and reasonableness of NGPL PipeCo LLC’s transportation and storage rates as well as its fuel and natural gas lost percentages. On April 22, 2010, the FERC Staff filed a motion on behalf of the active participants in the proceeding, including NGPL PipeCo LLC, stating that the parties had reached a settlement in principle and requesting a suspension of the procedural schedule to permit the parties to memorialize their agreement. The Staff’s motion was granted on April 23, 2010. The parties are in the process of drafting the settlement agreement which is anticipated to be filed in mid-June 2010.

These events have caused us to reconsider the carrying value of our investment in NGPL PipeCo LLC included in the “Investments” caption on the accompanying interim Consolidated Balance Sheets. A current fair value of an investment that is less than its carrying amount may indicate a loss in value of the investment. The fair value represents the price that would be received to sell the investment in an orderly transaction between market participants. We determined the fair value of our investment in NGPL PipeCo LLC by taking the total fair value of NGPL PipeCo LLC (calculated as discussed below) deducting the fair value of the joint venture debt and multiplying by our 20% ownership interest. We calculated the total fair value of NGPL PipeCo LLC from the present value of the expected future after-tax cash flows of the reporting unit, inclusive of a terminal value, which implies a market multiple of approximately 9.5 times EBITDA (earnings before interest, income taxes, depreciation and amortization) discounted at a rate of 7.4%. The expected future pre-interest, after-tax cash flows are lower than our previous expectations by approximately $25.0 million to $70.0 million per year. The result of our analysis showed that the fair value of our investment in NGPL PipeCo LLC was less than our carrying value. Based on this information we recognized a $430.0 million, pre-tax, non-cash impairment charge included in the caption “Earnings from equity investments” in the accompanying interim Consolidated Statement of Income for the three months ended March 31, 2010.

Joint Venture (Equity Investment) Contributions

During the first quarter of 2010, KMP contributed $135.6 million to its equity investees, including contributions of $130.5 million to Rockies Express Pipeline LLC. KMP operates and owns a 50% equity interest in Rockies Express Pipeline LLC (the surviving legal entity from its December 30, 2009 merger with its parent entity, West2East Pipeline LLC), and Rockies Express Pipeline LLC used the contributions as partial funding for its Rockies Express natural gas pipeline system construction costs and for other corporate purposes.

In the first quarter of 2009, KMP equity investment contributions totaled $173.5 million, including contributions of $111.0 million to Midcontinent Express Pipeline LLC and $51.0 million to West2East Pipeline LLC to partially fund construction costs for the Midcontinent Express and the Rockies Express natural gas pipeline systems, respectively. KMP also made a $9.0 million capital contribution to Fayetteville Express Pipeline LLC to partially fund certain pre-construction pipeline costs for its Fayetteville Express natural gas pipeline system. KMP owns a 50% equity interest in both Midcontinent Express Pipeline LLC and Fayetteville Express Pipeline LLC. Equity contributions are reported separately as “Contributions to equity investments” in the accompanying interim Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009.

Acquisitions

USD Terminal Acquisition

On January 15, 2010, KMP acquired three ethanol handling train terminals from US Development Group LLC for an aggregate consideration of $200.8 million, consisting of $115.7 million in cash, $81.7 million in common units, and $3.4 million in assumed liabilities. The three train terminals are located in Linden, New Jersey; Baltimore, Maryland and Dallas, Texas. As part of the transaction, KMP announced the formation of a venture with

Kinder Morgan, Inc. Form 10-Q

US Development Group LLC to optimize and coordinate customer access to the three acquired terminals, other ethanol terminal assets it already owns and operates, and other terminal projects currently under development by both parties. The acquisition complemented and expanded the ethanol and rail terminal operations KMP previously owned, and all of the acquired assets are included in the Terminals-KMP business segment.

Based on the measurement of fair market values for all of the identifiable tangible and intangible assets acquired and liabilities assumed on the acquisition date, KMP assigned $94.6 million of the combined purchase price to “Other intangibles, net,” (representing customer relationships) $43.1 million to “Property, Plant and Equipment, net” and a combined $5.1 million to “Other current assets” and “Deferred charges and other assets.” The remaining $58.0 million of the purchase price represented the future economic benefits expected to be derived from the acquisition that was not assigned to other identifiable, separately recognizable assets acquired, and KMP recorded this amount as “Goodwill.” KMP believes the primary items that generated the goodwill are the value of the synergies created between the acquired assets and its pre-existing ethanol handling assets, and its expected ability to grow the business by leveraging its pre-existing experience in ethanol handling operations. KMP expects that the entire amount of goodwill will be deductible for tax purposes.

Slay Industries Terminal Acquisition

On March 5, 2010, KMP acquired certain bulk and liquids terminal assets from Slay Industries for an aggregate consideration of $104.0 million, consisting of $97.0 million in cash, assumed liabilities of $1.7 million, and an obligation to pay additional cash consideration in years 2013 through 2019, contingent upon the purchased assets providing KMP an agreed-upon amount of earnings during the three years following the closing. As of the acquisition date, the contingent consideration had a fair value of $5.3 million, and KMP expects to pay approximately $4.6 million of this liability in the first half of 2013.

The acquired assets include (i) a marine terminal located in Sauget, Illinois; (ii) a transload liquid operation located in Muscatine, Iowa, (iii) a liquid bulk terminal located in St. Louis, Missouri and (iv) a warehousing distribution center located in St. Louis. All of the acquired terminals have long-term contracts with large creditworthy shippers. As part of the transaction, KMP and Slay Industries entered into joint venture agreements at both the Kellogg Dock coal bulk terminal, located in Modoc, Illinois, and at the newly created North Cahokia terminal, located in Sauget and which has approximately 175 acres of land ready for development. All of the assets located in Sauget have access to the Mississippi River and are served by five rail carriers. The acquisition complemented and expanded KMP’s pre-existing Midwest terminal operations by adding a diverse mix of liquid and bulk capabilities, and all of the acquired assets are included in the Terminals-KMP business segment.

Based on the measurement of fair market values for all of the identifiable tangible and intangible assets acquired and liabilities assumed on the acquisition date, KMP assigned $67.9 million of the purchase price to “Property, Plant and Equipment, net,” $27.0 million to “Other intangibles, net” (representing customer contracts) and a combined $8.2 million to “Investments.” KMP recorded the remaining $0.9 million of the combined purchase price as “Goodwill,” representing certain advantageous factors that contributed to the acquisition price exceeding the fair value of acquired identifiable net assets—in the aggregate, these factors represented goodwill, and KMP expects that the entire amount of goodwill will be deductible for tax purposes.

Mission Valley Terminal Acquisition

On March 1, 2010, KMP acquired the refined products terminal assets at Mission Valley, California from Equilon Enterprises LLC (d/b/a Shell Oil Products US) for $13.5 million in cash. The acquired assets include buildings, equipment, delivery facilities (including two truck loading racks), and storage tanks with a total capacity of approximately 170,000 barrels for gasoline, diesel fuel and jet fuel. The terminal operates under a long-term terminaling agreement with Tesoro Refining and Marketing Company. KMP assigned the entire purchase price to “Property, Plant and Equipment, net.” The acquisition enhanced KMP’s Pacific operations and complemented its existing West Coast terminal operations, and the acquired assets are included in the Products Pipelines-KMP business segment.

Pro Forma Information

Pro forma consolidated income statement information that gives effect to all of the acquisitions we have made and all of the joint ventures we have entered into since January 1, 2010 as if they had occurred as of January 1, 2010 is not presented because it would not be materially different from the information presented in the accompanying interim Consolidated Statements of Income.

Kinder Morgan, Inc. Form 10-Q

Acquisitions Subsequent to March 31, 2010

On April 13, 2010, KMP announced it had entered into a definitive agreement to purchase a 50% ownership interest in Petrohawk Energy Corporation’s natural gas gathering and treating business in the Haynesville shale gas formation located in northwest Louisiana for $875 million in cash. The assets consist of more than 170 miles of pipeline currently in service, and it is expected that the pipeline mileage will increase to approximately 375 miles with projected throughput of over 800 million cubic feet per day of natural gas by the end of 2010. Additionally, it is expected that the system’s natural gas amine treating plants will have a capacity of approximately 2,635 gallons per minute by the end of 2010. Closing of the transaction is subject to customary closing conditions and is expected to occur by the end of May 2010.

Petrohawk will continue to operate the business during a short transition period, and following the transition period, the newly formed company named KinderHawk Field Services LLC, owned 50% by KMP and 50% by Petrohawk, will assume the joint venture operations. KinderHawk Field Services LLC has also received a dedication to transport and treat all of Petrohawk’s operated Haynesville and Bossier shale gas production in Louisiana for the life of the leases at agreed upon rates, as well as minimum volume commitments from Petrohawk for the first five years of the joint venture agreement. It will also focus on providing firm transportation services to third-party producers. The joint venture ultimately is expected to have approximately two billion cubic feet per day of mainline throughput capacity, which will make it one of the largest gathering and treating systems in the United States. The acquisition will complement and expand KMP’s existing natural gas gathering and treating businesses, and all of the acquired assets will be included as part of the Natural Gas Pipelines-KMP business segment.

Divestitures

Cypress Pipeline

On July 14, 2009, KMP received notice from Westlake Petrochemicals LLC, a wholly-owned subsidiary of Westlake Chemical Corporation, that it was exercising an option it held to purchase a 50% ownership interest in its Cypress Pipeline. KMP expects the transaction to close by the end of the second quarter of 2010. As of March 31, 2010, the net assets of KMP’s Cypress Pipeline totaled approximately $21.0 million. At the time of the sale, KMP will (i) deconsolidate the net assets of the Cypress Pipeline, (ii) recognize a gain or loss on the sale of net assets equal to the difference between (a) the proceeds received from the sale and (b) 50% of the net assets’ carrying value and (iii) recognize the remaining 50% noncontrolling investment retained at its fair value (which is expected to result in a gain).

3. Intangibles

Goodwill

We evaluate goodwill for impairment on May 31 of each year. For this purpose, we have six reporting units as follows: (i) Products Pipelines–KMP (excluding associated terminals), (ii) Products Pipelines Terminals–KMP (evaluated separately from Products Pipelines–KMP for goodwill purposes), (iii) Natural Gas Pipelines–KMP, (iv) CO2, (v) Terminals–KMP and (vi) Kinder Morgan Canada–KMP.

There were no impairment charges resulting from the May 31, 2009 impairment testing, and no event indicating an impairment has occurred subsequent to that date. The fair value of each reporting unit was determined from the present value of the expected future cash flows from the applicable reporting unit (inclusive of a terminal value calculated using market multiples between six and ten times cash flows) discounted at a rate of 9.0%. The value of each reporting unit was determined on a stand-alone basis from the perspective of a market participant and represented the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date.

Kinder Morgan, Inc. Form 10-Q

Changes in the gross amounts of our goodwill and accumulated impairment losses for the three months ended March 31, 2010 are summarized as follows (in millions):

	Products Pipelines–KMP			Natural Gas Pipelines–KMP			CO2–KMP		Terminals–KMP			Kinder Morgan Canada–KMP			Total
Goodwill	$	2,116.5		$	3,488.0		$	1,521.7	$	1,415.4		$	613.1		$	9,154.7
Accumulated impairment losses.		(1,266.5	)		(2,090.2	)		-		(676.6	)		(377.1	)		(4,410.4	)
Balance as of December 31, 2009		850.0			1,397.8			1,521.7		738.8			236.0			4,744.3
Acquisitions and adjustments		-			-			-		61.2			-			61.2
Currency translation adjustments		-			-			-		-			8.1			8.1
Balance as of March 31, 2010	$	850.0		$	1,397.8		$	1,521.7	$	800.0		$	244.1		$	4,813.6

In addition, we identify any premium or excess cost we pay over our proportionate share of the underlying fair value of net assets acquired and accounted for as investments under the equity method of accounting. This premium or excess cost is referred to as equity method goodwill and is also not subject to amortization but rather to impairment testing. No event or change in circumstances that may have a significant adverse effect on the fair value of our equity investments has occurred during the first three months of 2010, and as of both March 31, 2010 and December 31, 2009, we reported $138.2 million in equity method goodwill within the caption “Investments” in the accompanying interim Consolidated Balance Sheets.

Other Intangibles

Excluding goodwill, our other intangible assets include customer relationships, contracts and agreements, technology-based assets and lease value. These intangible assets have definite lives and are reported separately as “Other intangibles, net” in the accompanying interim Consolidated Balance Sheets. Following is information related to our intangible assets subject to amortization (in millions):

	March 31, 2010			December 31, 2009
Customer relationships, contracts and agreements
Gross carrying amount	$	419.5		$	297.9
Accumulated amortization		(63.1	)		(50.9	)
Net carrying amount		356.4			247.0

Technology-based assets, lease value and other
Gross carrying amount		14.1			14.1
Accumulated amortization		(1.5	)		(1.3	)
Net carrying amount		12.6			12.8

Total other intangibles, net	$	369.0		$	259.8

The increase in the carrying amount of the customer relationships, contracts and agreements since December 31, 2009 was mainly due to the acquisition of intangibles included in the purchase of terminal assets from US Development Group LLC and Slay Industries, discussed in Note 2. We amortize the costs of our intangible assets to expense in a systematic and rational manner over their estimated useful lives. Among the factors we weigh, depending on the nature of the asset, are the effect of obsolescence, new technology, and competition. For the three months ended March 31, 2010 and 2009, the amortization expense on our intangibles totaled $12.4 million and $4.7 million, respectively. As of March 31, 2010, the weighted average amortization period for all of our intangible assets combined was approximately 14 years, and the weighted average amortization period for the intangible assets KMP acquired from US Development Group LLC and Slay Industries in the first quarter of 2010 was approximately 11.7 years. Our estimated amortization expense for all of our intangible assets for each of the next five fiscal years (2011 – 2015) is approximately $42.2 million, $36.8 million, $32.8 million, $29.7 million and $26.7 million, respectively.

Kinder Morgan, Inc. Form 10-Q

4. Debt

We classify our debt based on the contractual maturity dates of the underlying debt instruments or as of the earliest put date available to the holders of the applicable debt. We defer costs associated with debt issuance over the applicable term or to the first put date, in the case of debt with a put feature. These costs are then amortized as interest expense in the accompanying interim Consolidated Statements of Income.

The net carrying amount of our debt (including both short-term and long-term amounts but excluding the value of interest rate swap agreements and the preferred interest in the general partner of KMP) as of March 31, 2010 and December 31, 2009 was $13,906.4 million and $13,548.4 million, respectively.

Our outstanding short-term debt as of March 31, 2010 was $2,599.9 million. The balance consisted of (i) $112.6 million in outstanding borrowings under Kinder Morgan, Inc.’s senior secured credit facility, (ii) a $750.0 million in principal amount of our 5.35% series senior notes due January 5, 2011 (including discount and purchase accounting, the notes had a carrying amount of $746.9 million as of March 31, 2010), (iii) a $1.1 million current portion of our 6.50% series debentures, due 2013, (iv) $700.0 million in principal amount of KMP’s 6.75% senior notes due March 15, 2011 (including discount, the notes had a carrying amount of $703.4 million as of March 31, 2010), (v) $675.0 million in outstanding borrowings under KMP’s unsecured revolving bank credit facility, (vi) $250.0 million in principal amount of KMP’s 7.50% senior notes due November 1, 2010 (including discount and purchase accounting, the notes had a carrying amount of $251.3 million as of March 31, 2010), (vii) $65.0 million of commercial paper borrowings at KMP, (viii) $23.7 million in principal amount of tax-exempt bonds that mature on April 1, 2024, but are due on demand pursuant to certain standby purchase agreement provisions contained in the bond indenture (KMP’s subsidiary Kinder Morgan Operating L.P. “B” is the obligor on the bonds), (ix) a $9.0 million portion of a 5.40% long-term note payable (KMP’s subsidiaries Kinder Morgan Operating L.P. “A” and Kinder Morgan Canada Company are the obligors on the note), (x) a $6.9 million portion of 5.23% senior notes (KMP’s subsidiary Kinder Morgan Texas Pipeline, L.P. is the obligor on the notes) and (xi) $5.0 million in principal amount of 6.00% Development Revenue Bonds issued by the Louisiana Community Development Authority, a political subdivision of the state of Louisiana (KMP’s subsidiary Kinder Morgan Louisiana Pipeline LLC is the obligor on the bonds).

Credit Facilities

	March 31, 2010
	Short-term notes payable			Weighted- average interest rate
	(In millions)
Kinder Morgan, Inc. – Secured debt(a)		$	112.6		1.49	%
KMP – Unsecured debt(b)
Credit facility		$	675.0		0.58	%
Commercial paper		$	65.0		0.49	%

____________

(a)	The average short-term debt outstanding (and related weighted-average interest rate) was $172.1 million (1.78%) during the three months ended March 31, 2010.
(b)	The average short-term debt outstanding (and related weighted-average interest rate) was $515.2 million (0.63%) during the three months ended March 31, 2010.

As of March 31, 2010, the amount available for borrowing under the Kinder Morgan, Inc. $1.0 billion six-year senior secured credit facility was reduced by $70.2 million of letters of credit consisting of: (i) a combined $33.6 million in four letters of credit required under provisions of our property and casualty, worker’s compensation and general liability insurance policies, (ii) a combined total of $20.4 million of two letters of credit supporting the operation and lease payments of the Jackson, Michigan power generation facility and (iii) a $16.2 million letter of credit to fund the debt service reserve account required under the KMP Express pipeline system’s trust indenture.

As of December 31, 2009, there were $171.0 million in borrowings under Kinder Morgan, Inc.’s credit facility and the average interest on these borrowings was 1.61%. Our credit facility matures on May 30, 2013 and includes a sublimit of $300 million for the issuance of letters of credit and a sublimit of $50 million for swingline loans. We do not have a commercial paper program. As of December 31, 2009, there were $300.0 million in borrowings under

Kinder Morgan, Inc. Form 10-Q

KMP’s credit facility and the average interest on these borrowings was 0.59%. KMP’s credit facility matures August 18, 2010 and it plans to negotiate a renewal of the credit facility before its maturity date.

KMP’s $1.79 billion unsecured bank credit facility is with a syndicate of financial institutions, and Wells Fargo Bank, National Association is the administrative agent. The credit facility permits KMP to obtain bids for fixed rate loans from members of the lending syndicate and the facility can be amended to allow for borrowings of up to $2.04 billion. Interest on KMP’s credit facility accrues at its option at a floating rate equal to either (i) the administrative agent’s base rate (but not less than the Federal Funds Rate, plus 0.5%), or (ii) LIBOR, plus a margin, which varies depending upon the credit rating of its long-term senior unsecured debt. Borrowings under KMP’s credit facility can be used for partnership purposes and as a backup for its commercial paper program.

Additionally, as of March 31, 2010, the amount available for borrowing under KMP’s credit facility was reduced by a combined amount of $318.3 million, consisting of commercial paper borrowings of $65.0 million and $253.3 million of letters of credit, consisting of: (i) a $100 million letter of credit that supports certain proceedings with the California Public Utilities Commission involving refined products tariff charges on the intrastate common carrier operations of KMP’s Pacific operations’ pipelines in the state of California, (ii) a combined $89.4 million in three letters of credit that support tax-exempt bonds, (iii) a combined $25.5 million in two letters of credit that support KMP’s hedging of commodity price risks associated with the sale of natural gas, natural gas liquids and crude oil, (iv) a $21.4 million letter of credit that supports KMP’s indemnification obligations on the Series D note borrowings of Cortez Capital Corporation and (v) a combined $17.0 million in other letters of credit supporting other obligations of KMP and its subsidiaries.

Commercial Paper Program

On October 13, 2008, Standard & Poor’s Ratings Services lowered KMP’s short-term credit rating to A-3 from A-2, and on May 6, 2009, Moody’s Investors Service, Inc. downgraded KMP’s commercial paper rating to Prime-3 from Prime-2 and assigned a negative outlook to KMP’s long-term credit rating. As a result of these revisions and the commercial paper market conditions, KMP was unable to access commercial paper borrowings throughout 2009.

However, on February 25, 2010, Standard & Poor’s revised its outlook on KMP’s long-term credit rating to stable from negative, affirmed KMP’s long-term credit rating at BBB, and raised KMP’s short-term credit rating to A-2 from A-3. The rating agency’s revisions reflected its expectations that KMP’s financial profile will improve due to lower guaranteed debt obligations and higher expected cash flows associated with the completion and start-up of KMP’s 50%-owned Rockies Express and Midcontinent Express natural gas pipeline systems and its fully-owned Kinder Morgan Louisiana natural gas pipeline system. Due to this favorable change in KMP’s short-term credit rating it resumed issuing commercial paper in March 2010. However, in the near term, KMP expects that most of its financing and its short-term liquidity needs will continue to be met primarily through borrowings made under its bank credit facility.

Long-term Debt

K N Capital Trust I and K N Capital Trust III

As a result of the implementation of ASU No. 2009-17, effective January 1, 2010, we (i) include the transactions and balances of our business trusts, K N Capital Trust I and K N Capital Trust III, including $27.1 million of long-term debt, in our consolidated financial statements and (ii) no longer include our Junior Subordinated Deferrable Interest Debentures of $35.7 million issued to the Capital Trusts previously reported under the heading “Long-term Debt – Outstanding” in our consolidated balance sheets.

Arrow Terminals L.P. Debt

On January 4, 2010, KMP’s subsidiary Arrow Terminals L.P. paid the $5.3 million outstanding principal amount of its Adjustable Rate Industrial Development Revenue Bonds issued by the Illinois Development Finance Authority that matured on that date, and following its repayment, Arrow Terminals L.P. had no outstanding debt.

Kinder Morgan Operating L.P. “A” and Kinder Morgan Canada

Effective January 1, 2007, KMP acquired the remaining approximately 50.2% interest in the Cochin pipeline system that it did not already own. As part of the purchase price consideration, two of its subsidiaries issued a long-term note payable to the seller having a fair value of $42.3 million. It valued the debt equal to the present value of

Kinder Morgan, Inc. Form 10-Q

amounts to be paid, determined using an annual interest rate of 5.40%. KMP’s subsidiaries Kinder Morgan Operating L.P. “A” and Kinder Morgan Canada Company are the obligors on the note, and the principal amount of the note, along with interest, is due in five annual installments of $10.0 million beginning March 31, 2008. As of December 31, 2009, the net present value (representing the outstanding balance) of the note was $28.1 million. KMP paid the third installment on March 31, 2010, and as of March 31, 2010, the net present value of the note was $18.5 million.

Kinder Morgan Texas Pipeline, L.P. Debt

KMP’s subsidiary, Kinder Morgan Texas Pipeline, L.P. is the obligor on a series of unsecured senior notes assumed on August 1, 2005 when it acquired a natural gas storage facility located in Liberty County, Texas from a third party. The notes have a fixed annual stated interest rate of 8.85%; however, it valued the debt equal to the present value of amounts to be paid determined using an approximate interest rate of 5.23%. The assumed principal amount, along with interest, is due in monthly installments of approximately $0.7 million, and the final payment is due January 2, 2014. In the first quarter of 2010, KMP paid a combined principal amount of $1.7 million, and as of March 31, 2010, Kinder Morgan Texas Pipeline L.P.’s outstanding balance under the senior notes was $28.8 million. Additionally, the unsecured senior notes may be prepaid at any time in amounts of at least $1.0 million and at a price equal to the higher of par value or the present value of the remaining scheduled payments of principal and interest on the portion being prepaid.

Interest Rate Swaps

Information on interest rate swaps is contained in Note 6, “Risk Management – Interest Rate Risk Management.”

Contingent Debt

The following contingent debt disclosures pertain to certain types of guarantees or indemnifications KMP has made and cover certain types of guarantees included within debt agreements, even if the likelihood of requiring its performance under such guarantee is remote. The following is a description of KMP’s contingent debt agreements as of March 31, 2010.

Cortez Pipeline Company Debt

Pursuant to a Throughput and Deficiency Agreement, the partners of Cortez Pipeline Company (Kinder Morgan CO2 Company, L.P. – 50% partner; a subsidiary of Exxon Mobil Corporation – 37% partner; and Cortez Vickers Pipeline Company – 13% partner) are required, on a several, proportional percentage ownership basis, to contribute capital to Cortez Pipeline Company in the event of a cash deficiency. Furthermore, due to KMP’s indirect ownership of Cortez Pipeline Company through Kinder Morgan CO2 Company, L.P., it severally guarantees 50% of the debt of Cortez Capital Corporation, a wholly-owned subsidiary of Cortez Pipeline Company.

As of March 31, 2010, the debt facilities of Cortez Capital Corporation consisted of (i) $42.9 million of fixed rate Series D notes due May 15, 2013, (ii) $100 million of variable rate Series E notes due on December 11, 2012 (interest on the Series E notes is paid quarterly and based on an interest rate of LIBOR plus a spread) and (iii) a $40 million committed revolving credit facility also due December 11, 2012. As of March 31, 2010, in addition to the outstanding Series D and Series E notes, Cortez Capital Corporation had outstanding borrowings of $6.3 million under its credit facility. Accordingly, as of March 31, 2010, KMP’s contingent share of Cortez’s debt was $74.6 million (50% of total borrowings).

With respect to Cortez Capital Corporation’s Series D notes, the average interest rate on the notes is 7.14%, and the outstanding $42.9 million principal amount of the notes is due in four equal annual installments of approximately $10.7 million beginning May 2010. Shell Oil Company (“Shell”) shares KMP’s several guaranty obligations jointly and severally; however, KMP is obligated to indemnify Shell for liabilities it incurs in connection with such guaranty. Accordingly, as of March 31, 2010, JP Morgan Chase has issued a letter of credit on KMP’s behalf in the amount of $21.4 million to secure its indemnification obligations to Shell for 50% of the $42.9 million in principal amount of Series D notes outstanding as of that date.

Nassau County, Florida Ocean Highway and Port Authority Debt

KMP has posted a letter of credit as security for borrowings under Adjustable Demand Revenue Bonds issued by the Nassau County, Florida Ocean Highway and Port Authority. The bonds were issued for the purpose of

Kinder Morgan, Inc. Form 10-Q

constructing certain port improvements located in Fernandino Beach, Nassau County, Florida. KMP’s subsidiary, Nassau Terminals LLC, is the operator of the marine port facilities. The bond indenture is for 30 years and allows the bonds to remain outstanding until December 1, 2020. Principal payments on the bonds are made on the first of December each year and corresponding reductions are made to the letter of credit. As of March 31, 2010, this letter of credit had a face amount of $19.8 million.

Rockies Express Pipeline LLC Debt

Rockies Express Pipeline LLC is an equity method investee of KMP’s, and pursuant to certain guaranty agreements remaining in effect on March 31, 2010, all three member owners of Rockies Express Pipeline LLC had agreed to guarantee, severally in the same proportion as their percentage ownership of the member interests in Rockies Express Pipeline LLC, borrowings under its $2.0 billion five-year, unsecured revolving bank credit facility. Borrowings under the credit facility can be used for general corporate purposes, and the credit facility is due April 28, 2011. As of March 31, 2010, the credit facility could be amended to allow for borrowings of up to $2.5 billion. The three member owners and their respective ownership interests consist of the following: our subsidiary Kinder Morgan W2E Pipeline LLC – 50%, a subsidiary of Sempra Energy – 25% and a subsidiary of ConocoPhillips – 25%.

On March 22, 2010, Rockies Express Pipeline LLC completed a private offering of an aggregate of $1.7 billion in principal amount of fixed rate senior notes. After deducting the initial purchasers’ discounts and offering expenses, Rockies Express received net proceeds of approximately $1.69 billion from this offering, and the net proceeds from the sale of these notes were used to repay all of the borrowings under its bank credit facility. Accordingly, as of March 31, 2010, KMP had no contingent debt obligation associated with its guaranty agreement with Rockies Express Pipeline LLC.

All payments of principal and interest in respect of these fixed rate senior notes are the sole obligation of Rockies Express Pipeline LLC. Noteholders will have no recourse against KMP, Sempra Energy or ConocoPhillips, or against any of KMP or their respective officers, directors, employees, shareholders, members, managers, unitholders or affiliates for any failure by Rockies Express to perform or comply with its obligations pursuant to the notes or the indenture.

Subsequent Event

On April 8, 2010, Rockies Express Pipeline LLC amended its bank credit facility to allow for borrowings up to $200 million (a reduction from $2.0 billion) and on this same date, each of its three member owners were released from their respective debt obligations under the previous guaranty agreements. Accordingly, KMP no longer has a contingent debt obligation with respect to Rockies Express Pipeline LLC.

Midcontinent Express Pipeline LLC Debt

Midcontinent Express Pipeline LLC is also an equity method investee of KMP’s, and the two member owners and their respective ownership interests consist of the following: KMP’s subsidiary Kinder Morgan Operating L.P. “A” – 50% and Energy Transfer Partners, L.P. – 50%. Pursuant to certain guaranty agreements, both of the member owners of Midcontinent Express Pipeline LLC have agreed to guarantee, severally in the same proportion as their percentage ownership of the member interests in Midcontinent Express Pipeline LLC, borrowings under its $255.4 million three-year, unsecured revolving credit facility due February 28, 2011. The facility is with a syndicate of financial institutions with The Royal Bank of Scotland plc as the administrative agent.

Borrowings under the credit facility can be used for general limited liability company purposes, and as of March 31, 2010, Midcontinent Express Pipeline LLC had outstanding borrowings of $89.0 million under its bank credit facility. Accordingly, as of March 31, 2010, KMP’s contingent share of Midcontinent Express’ debt was $44.5 million (50% of total guaranteed borrowings). Furthermore, the credit facility can be used for the issuance of letters of credit to support the operation of the Midcontinent Express pipeline system, and as of March 31, 2010, a letter of credit having a face amount of $33.3 million was issued under the credit facility by the Bank of Tokyo – Mitsubishi UFJ, Ltd. Accordingly, as of March 31, 2010, KMP’s contingent responsibility with regard to this outstanding letter of credit was $16.7 million (50% of total face amount).

Kinder Morgan, Inc. Form 10-Q

Subsequent Event

On April 28, 2010, Midcontinent Express Pipeline LLC announced that it intended to amend its bank credit facility to allow for borrowings up to $175.4 million (a reduction from $255.4 million). This amendment was effective April 20, 2010.

Fayetteville Express Pipeline LLC Debt

Pursuant to certain guaranty agreements with Fayetteville Express Pipeline LLC, a third equity method investee of KMP’s, both of the member owners of Fayetteville Express Pipeline LLC have agreed to guarantee, severally in the same proportion as their percentage ownership of the member interests in Fayetteville Express, borrowings under its $1.1 billion, unsecured revolving credit facility that is due May 11, 2012. The two member owners and their respective ownership interests consist of the following: KMP’s subsidiary Kinder Morgan Operating L.P. “A” – 50% and Energy Transfer Partners, L.P. – 50%.

The Fayetteville Express Pipeline LLC credit facility is with a syndicate of financial institutions with The Royal Bank of Scotland plc as the administrative agent. Borrowings under the credit facility will be used to finance the construction of the Fayetteville Express natural gas pipeline system and to pay related expenses. As of March 31, 2010, Fayetteville Express had outstanding borrowings of $468.0 million under its bank credit facility. Accordingly, as of March 31, 2010, KMP’s contingent share of Fayetteville Express’ debt was $234.0 million (50% of total borrowings).

Kinder Morgan G.P., Inc. Preferred Shares

On April 21, 2010, Kinder Morgan G.P., Inc.’s board of directors declared a quarterly cash distribution on its Series A Fixed-to-Floating Rate Term Cumulative Preferred Stock of $20.825 per share payable on May 18, 2010 to shareholders of record as of April 30, 2010. On January 20, 2010, Kinder Morgan G.P., Inc.’s board of directors declared a quarterly cash dividend on its Series A Fixed-to-Floating Rate Term Cumulative Preferred Stock of $20.825 per share, which was paid on February 18, 2010 to shareholders on record as of January 29, 2010.

Kinder Morgan, Inc. Form 10-Q

5. Stockholders’ Equity

During the first three months of both 2010 and 2009, there were no material changes in our ownership interests in subsidiaries, in which we retained a controlling financial interest.

On February 16, 2010, we paid a cash dividend on our common stock of $150.0 million to our sole stockholder, which then made a dividend to Kinder Morgan Holdco LLC. On April 21, 2010, our Board of Directors declared a dividend of $175.0 million that is payable on May 17, 2010.

The following table sets forth for the respective periods (i) changes in the carrying amounts of our Stockholders’ Equity attributable to both us and our noncontrolling interests, including our comprehensive income (loss) and (ii) associated tax amounts included in the respective components of other comprehensive income (loss) (in millions):

	Three Months Ended March 31,
	2010									2009
	Kinder Morgan, Inc.			Noncontrolling interests			Total			Kinder Morgan, Inc.			Noncontrolling interests			Total
Beginning Balance	$	4,171.5		$	4,674.6		$	8,846.1		$	4,404.3		$	4,072.6		$	8,476.9
Impact from equity transactions of KMP		2.1			(3.4	)		(1.3	)		6.5			(10.1	)		(3.6	)
A-1 and B unit amortization		1.9			-			1.9			1.9			-			1.9
Distributions to noncontrolling interests		-			(200.8	)		(200.8	)		-			(176.3	)		(176.3	)
Contributions from noncontrolling interests		-			81.7			81.7			-			287.9			287.9
Implementation of Accounting Standards Update 2009-17(a)		-			(45.9	)		(45.9	)		-			-			-
Cash dividends		(150.0	)		-			(150.0	)		(50.0	)		-			(50.0	)
Other		-			0.1			0.1			-			2.7			2.7
Comprehensive income
Net income (loss)		(160.9	)		(19.0	)		(179.9	)		115.3			29.6			144.9
Other comprehensive income (loss), net of tax
Change in fair value of derivatives utilized for hedging purposes		15.6			11.3			26.9			15.9			17.5			33.4
Reclassification of change in fair value of derivatives to net income		4.1			21.7			25.8			(20.5	)		(8.4	)		(28.9	)
Foreign currency translation adjustments		18.1			27.3			45.4			(21.2	)		(26.7	)		(47.9	)
Adjustments to pension and other postretirement benefit plan liabilities		(0.8	)		(1.1	)		(1.9	)		(0.9	)		(1.4	)		(2.3	)
Total other comprehensive income (loss)		37.0			59.2			96.2			(26.7	)		(19.0	)		(45.7	)
Total comprehensive income (loss)		(123.9	)		40.2			(83.7	)		88.6			10.6			99.2
Ending Balance	$	3,901.6		$	4,546.5		$	8,448.1		$	4,451.3		$	4,187.4		$	8,638.7

(Tax Expense) Tax Benefit Included in Other Comprehensive Income:
Change in fair value of derivatives utilized for hedging purposes	$	(10.3	)	$	(1.2	)	$	(11.5	)	$	(10.2	)	$	(1.6	)	$	(11.8	)
Reclassification of change in fair value of derivatives to net income		(2.8	)		(2.3	)		(5.1	)		13.2			0.7			13.9
Foreign currency translation adjustments		(12.6	)		(2.9	)		(15.5	)		12.6			2.4			15.0
Adjustments to pension and other postretirement benefit plan liabilities		0.6			0.1			0.7			0.7			0.2			0.9
Tax included in total other comprehensive income	$	(25.1	)	$	(6.3	)	$	(31.4	)	$	16.3		$	1.7		$	18.0

____________

(a)	Upon the adoption of Accounting Standards Update No. 2009-17, which amended the codification’s “Consolidation” topic, on January 1, 2010, Triton Power Company LLC is no longer consolidated into our financial statements, but is treated as an equity investment (see Note 13).

Kinder Morgan, Inc. Form 10-Q

Noncontrolling Interests

The caption “Noncontrolling interests” in the accompanying interim Consolidated Balance Sheets consists of interests in the following subsidiaries (in millions):

	March 31, 2010		December 31, 2009
KMP	$	2,657.2	$	2,746.4
KMR		1,878.2		1,870.7
Triton Power Company LLC(a)		-		45.9
Other		11.1		11.6
	$	4,546.5	$	4,674.6

____________

(a)	Upon the adoption of Accounting Standards Update No. 2009-17, which amended the codification’s “Consolidation” topic, on January 1, 2010, Triton Power Company LLC is no longer consolidated into our financial statements, but is treated as an equity investment (see Note 13).

KMP’s Common Units

On January 15, 2010, KMP issued 1,287,287 common units as part of its purchase price for the ethanol handling terminal assets it acquired from US Development Group LLC. KMP valued the common units at $81.7 million, determining the units’ value based on the $63.45 closing market price of the common units on the New York Stock Exchange on the January 15, 2010 acquisition date. For more information on this acquisition, see Note 2 “Investments, Acquisitions and Divestitures—Acquisitions—USD Terminal Acquisition.”

The above issuance during the three months ended March 31, 2010 had the associated effects of increasing our (i) noncontrolling interests associated with KMP by $78.3 million (ii) accumulated deferred income taxes by $1.3 million and (iii) additional paid-in capital by $2.1 million.

Subsequent Event

On May 7, 2010, KMP issued 6,500,000 of its common units at a price of $66.25 per unit, less commissions and underwriting expenses. KMP received net proceeds of $417.4 million which were used to repay short-term borrowings and for general partnership purposes. At the time of the offering, KMP granted the underwriters a 30-day option to purchase up to an additional 975,000 common units.

KMR’s Share Distributions

On February 12, 2010, KMR made a share distribution of 0.018430 shares per outstanding share (1,576,470 total shares) to shareholders of record as of January 29, 2010, based on the $1.05 per common unit distribution declared by KMP. On May 14, 2010, KMR will make a share distribution of 0.017863 shares per outstanding share (1,556,130 total shares) to shareholders of record as of April 30, 2010, based on the $1.07 per common unit distribution declared by KMP. KMR’s distributions are paid in the form of additional shares or fractions thereof calculated by dividing the KMP cash distribution per common unit by the average of the market closing prices of a KMR share determined for a ten-trading day period ending on the trading day immediately prior to the ex-dividend date for the shares.

6. Risk Management

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

Energy Commodity Price Risk Management

We are exposed to risks associated with changes in the market price of natural gas, natural gas liquids and crude oil as a result of the forecasted purchase or sale of these products. Specifically, these risks are primarily associated with unfavorable price volatility related to (i) pre-existing or anticipated physical natural gas, natural gas liquids and

Kinder Morgan, Inc. Form 10-Q

crude oil sales, (ii) natural gas purchases and (iii) natural gas system use and storage. The unfavorable price changes are often caused by shifts in the supply and demand for these commodities, as well as their locations.

Our principal use of energy commodity derivative contracts is to mitigate the risk associated with unfavorable market movements in the price of energy commodities. Our energy commodity derivative contracts act as a hedging (offset) mechanism against the volatility of energy commodity prices by allowing us to transfer this price risk to counterparties who are able and willing to bear it.

For derivative contracts that are designated and qualify as cash flow hedges pursuant to generally accepted accounting principles, the portion of the gain or loss on the derivative contract that is effective in offsetting the variable cash flows associated with the hedged forecasted transaction is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings (e.g., in “revenues” when the hedged transactions are commodity sales). The remaining gain or loss on the derivative contract in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffective portion), is recognized in earnings during the current period. The effectiveness of hedges using an option contract may be assessed based on changes in the option’s intrinsic value with the change in the time value of the contract being excluded from the assessment of hedge effectiveness. Changes in the excluded component of the change in an option’s time value are included currently in earnings. In the first quarter of 2010, we recognized a net gain of $6.3 million related to crude oil and natural gas hedges, which resulted from hedge ineffectiveness and amounts excluded from effectiveness testing.

Additionally, during the three months ended March 31, 2010 and 2009, we reclassified losses of $4.1 million and gains of $20.5 million, respectively, from “Accumulated other comprehensive loss” into earnings. All amounts reclassified into net income during the first quarter of both years resulted from the hedged forecasted transactions actually affecting earnings (i.e., when the forecasted sales and purchases actually occurred). No amounts were reclassified into earnings as a result of the discontinuance of cash flow hedges because it was probable that the original forecasted transactions would not occur by the end of the originally specified time period or within an additional two-month period of time thereafter. The proceeds or payments resulting from the settlement of cash flow hedges are reflected in the operating section of the accompanying interim Consolidated Statements of Cash Flows as changes to net income and working capital.

The “Accumulated other comprehensive loss” balance included in our Stockholders’ Equity was $130.9 million as of March 31, 2010, and $167.9 million as of December 31, 2009. These totals included “Accumulated other comprehensive loss” amounts of $76.0 million of losses as of March 31, 2010 and $95.7 million of losses as of December 31, 2009, associated with energy commodity price risk management activities. Approximately $32.9 million of the total amount associated with energy commodity price risk management activities and included in our Shareholder’s Equity as of March 31, 2010 is expected to be reclassified into earnings during the next twelve months (when the associated forecasted sales and purchases are also expected to occur), and as of March 31, 2010, the maximum length of time over which we have hedged our exposure to the variability in future cash flows associated with energy commodity price risk is through December 2014.

As of March 31, 2010, KMP had entered into the following outstanding commodity forward contracts to hedge its forecasted energy commodity purchases and sales:

	Notional quantity
Derivatives designated as hedging contracts
Crude oil	23.9 million barrels
Natural gas(a)	69.8 billion cubic feet
Derivatives not designated as hedging contracts
Natural gas(a)	0.1 billion cubic feet

____________

(a)	Notional quantities are shown net.

For derivative contracts that are not designated as a hedge for accounting purposes, all realized and unrealized gains and losses are recognized in the statement of income during the current period. These types of transactions include basis spreads, basis-only positions and gas daily swap positions. KMP primarily enters into these positions to economically hedge an exposure through a relationship that does not qualify for hedge accounting. This will result in non-cash gains or losses being reported in KMP’s operating results.

Kinder Morgan, Inc. Form 10-Q

Interest Rate Risk Management

In order to maintain a cost effective capital structure, it is our policy to borrow funds using a mix of fixed rate debt and variable rate debt. We use interest rate swap agreements to manage the interest rate risk associated with the fair value of our fixed rate borrowings and to effectively convert a portion of the underlying cash flows related to our long-term fixed rate debt securities into variable rate cash flows in order to achieve our desired mix of fixed and variable rate debt.

Since the fair value of fixed rate debt varies inversely with changes in the market rate of interest, we enter into swap agreements to receive a fixed and pay a variable rate of interest in order to convert the interest expense associated with certain of our senior notes from fixed rates to variable rates, resulting in future cash flows that vary with the market rate of interest. These swaps, therefore, hedge against changes in the fair value of our fixed rate debt that result from market interest rate changes. For derivative contracts that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings.

As of both March 31, 2010 and December 31, 2009, we were a party to interest rate swap agreements with a total notional principal amount of $725.0 million, and our subsidiary, KMP, had a combined notional principal amount of $5.2 billion of fixed-to-variable interest rate swap agreements effectively converting the interest expense associated with certain series of its senior notes from fixed rates to variable rates based on an interest rate of LIBOR plus a spread. All of our and KMP’s swap agreements have termination dates that correspond to the maturity dates of the related series of senior notes and, as of March 31, 2010, the maximum length of time over which we or KMP has hedged a portion of our exposure to the variability in the value of this debt due to interest rate risk is through January 15, 2038.

Fair Value of Derivative Contracts

The fair values of our current and non-current asset and liability derivative contracts are each reported separately as “Fair value of derivative contracts” in the accompanying interim Consolidated Balance Sheets. The following table summarizes the fair values of our derivative contracts included in the accompanying interim Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009 (in millions):

Fair Value of Derivative Contracts

	Asset derivatives						Liability derivatives
	March 31, 2010			December 31, 2009			March 31, 2010			December 31, 2009
	Balance sheet location	Fair value		Balance sheet location	Fair value		Balance sheet location	Fair value		Balance sheet location	Fair value

Derivatives designated as hedging contracts
Energy commodity derivative contracts	Current	$	52.6	Current	$	19.1	Current	$	(273.1)	Current	$	(270.8)
	Non-current		53.6	Non-current		57.3	Non-current		(190.4)	Non-current		(241.5)
Subtotal			106.2			76.4			(463.5)			(512.3)

Interest rate swap agreements	Non-current		258.4	Non-current		236.0	Non-current		(174.0)	Non-current		(218.5)
Cross currency swap agreements	Non-current		-	Non-current		-	Non-current		(15.1)	Non-current		(9.6)
Total			364.6			312.4			(652.6)			(740.4)

Derivatives not designated as hedging contracts
Energy commodity derivative contracts	Current		6.0	Current		1.7	Current		(5.1)	Current		(1.2)
	Non-current		0.1	Non-current		-	Non-current		(0.9)	Non-current		-
			6.1			1.7			(6.0)			(1.2)
Total derivatives		$	370.7		$	314.1		$	(658.6)		$	(741.6)

The offsetting entry to adjust the carrying value of the debt securities whose fair value was being hedged is included within “Value of interest rate swaps” on the accompanying interim Consolidated Balance Sheets, which also includes any unamortized portion of proceeds received from the early termination of interest rate swap agreements. As of March 31, 2010 and December 31, 2009, this unamortized premium totaled $332.0 million and $337.5 million, respectively.

Kinder Morgan, Inc. Form 10-Q

Effect of Derivative Contracts on the Statements of Income

The following four tables summarize the impact of our derivative contracts on the accompanying interim Consolidated Statements of Income for the three months ended March 31, 2010 and 2009 (in millions):

Derivatives in fair value hedging relationships	Location of gain/(loss) recognized in income on derivative	Amount of gain/(loss) recognized in income on derivative(a)				Hedged items in fair value hedging relationships	Location of gain/(loss) recognized in income on related hedged item	Amount of gain/(loss) recognized in income on related hedged items(a)
		Three Months Ended March 31,						Three Months Ended March 31,
		2010		2009				2010		2009
Interest rate swap agreements	Interest, net – income/(expense)	$	66.9	$	(130.4)	Fixed rate debt	Interest, net – income/(expense)	$	(66.9)	$	130.4
Total		$	66.9	$	(130.4)	Total		$	(66.9)	$	130.4

____________

(a)

Amounts reflect the change in the fair value of interest rate swap agreements and the change in the fair value of the associated fixed rate debt which exactly offset each other as a result of no hedge ineffectiveness. Amounts do not reflect the impact on interest expense from the interest rate swap agreements under which we pay variable rate interest and receive fixed rate interest.

Derivatives in cash flow hedging relationships	Amount of gain/(loss) recognized in OCI on derivative (effective portion)						Location of gain/(loss) reclassified from Accumulated OCI into income (effective portion)	Amount of gain/(loss) reclassified from Accumulated OCI into income (effective portion)								Location of gain/(loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)	Amount of gain/(loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing
	Three Months Ended March 31,							Three Months Ended March 31,									Three Months Ended March 31,
	2010			2009				2010				2009					2010			2009
Energy commodity derivative contracts		$	15.6		$	15.9	Revenues-natural gas sales		$	-			$	0.5		Revenues		$	5.4		$	-
							Revenues-product sales and other			(4.2	)			20.1								-
							Gas purchases and other costs of sales			0.1				(0.1	)	Gas purchases and other costs of sales			0.9			-
Total		$	15.6		$	15.9	Total		$	(4.1	)		$	20.5		Total		$	6.3		$	-

Derivatives in net investment hedging relationships	Amount of gain/(loss) recognized in OCI on derivative (effective portion)						Location of gain/(loss) reclassified from Accumulated OCI into income (effective portion	Amount of gain/(loss) reclassified from Accumulated OCI into income (effective portion)				Location of gain/(loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)	Amount of gain/(loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing
	Three Months Ended March 31,							Three Months Ended March 31,					Three Months Ended March 31,
	2010			2009				2010		2009			2010		2009
Cross currency swap agreements	$	(5.5	)	$	(6.0	)	Other, net	$	-	$	-	Revenues	$	-	$	-
Total	$	(5.5	)	$	(6.0	)	Total	$	-	$	-	Total	$	-	$	-

Derivatives not designated as hedging contracts	Location of gain/(loss) recognized in income on derivative	Amount of gain/(loss) recognized in income on derivative
		Three Months Ended March 31,
		2010		2009
Energy commodity derivative contracts	Gas purchases and other costs of sales	$	0.7	$	(0.4)
Total		$	0.7	$	(0.4)

Kinder Morgan, Inc. Form 10-Q

Net Investment Hedges

We are exposed to foreign currency risk from our investments in businesses owned and operated outside the United States. To hedge the value of our investment in Canadian operations, we have entered into various cross-currency interest rate swap transactions that have been designated as net investment hedges. The effective portion of the changes in fair value of these swap transactions is reported as a cumulative translation adjustment included in the caption “Accumulated other comprehensive loss” in the accompanying interim Consolidated Balance Sheets. The combined notional value of our remaining cross currency interest rate swaps at March 31, 2010 was approximately C$96.3 million.

Credit Risks

As discussed in Note 13 of the Notes to Consolidated Financial Statements of the 2009 Form 10-K, we and our subsidiary, KMP, have counterparty credit risk as a result of our use of financial derivative contracts. Our counterparties consist primarily of financial institutions, major energy companies and local distribution companies. This concentration of counterparties may impact our overall exposure to credit risk, either positively or negatively, in that the counterparties may be similarly affected by changes in economic, regulatory or other conditions.

We maintain credit policies with regard to our counterparties that we believe minimize our overall credit risk. These policies include (i) an evaluation of potential counterparties’ financial condition (including credit ratings), (ii) collateral requirements under certain circumstances and (iii) the use of standardized agreements which allow for netting of positive and negative exposure associated with a single counterparty. Based on our policies, exposure, credit and other reserves, our management does not anticipate a material adverse effect on our financial position, results of operations, or cash flows as a result of counterparty performance.

Our over-the-counter swaps and options are entered into with counterparties outside central trading organizations such as futures, options or stock exchanges. These contracts are with a number of parties, all of which have investment grade credit ratings. While we enter into derivative transactions principally with investment grade counterparties and actively monitor their ratings, it is nevertheless possible that from time to time losses will result from counterparty credit risk in the future. The maximum potential exposure to credit losses on derivative contracts as of March 31, 2010 was (in millions):

	Asset position
Interest rate swap agreements	$	258.4
Energy commodity derivative contracts		112.3
Gross exposure		370.7
Netting agreement impact		(76.8	)
Net exposure	$	293.9

In conjunction with the purchase of exchange-traded derivative contracts or when the market value of our derivative contracts with specific counterparties exceeds established limits, we are required to provide collateral to our counterparties, which may include posting letters of credit or placing cash in margin accounts. As of March 31, 2010 and December 31, 2009, KMP had outstanding letters of credit totaling $25.5 million and $55.0 million, respectively, in support of its hedging of energy commodity price risks associated with the sale of natural gas, natural gas liquids and crude oil.

Additionally, as of March 31, 2010, KMP’s counterparties associated with its energy commodity contract positions and over-the-counter swap agreements had margin deposits with KMP totaling $0.7 million, and we reported this amount within “Accrued other liabilities” in the accompanying interim Consolidated Balance Sheet. As of December 31, 2009, KMP had cash margin deposits associated with its energy commodity contract positions and over-the-counter swap partners totaling $15.2 million, and we reported this amount as “Restricted deposits” in the accompanying interim Consolidated Balance Sheet.

Kinder Morgan, Inc. Form 10-Q

KMP also has agreements with certain counterparties to its derivative contracts that contain provisions requiring it to post additional collateral upon a decrease in its credit rating. Based on contractual provisions as of March 31, 2010, we estimate that if KMP’s credit rating was downgraded, KMP would have the following additional collateral obligations (in millions):

Credit ratings downgraded(a)	Incremental obligations		Cumulative obligations(b)
One notch to BBB-/Baa3	$	19.0	$	44.5

Two notches to below BBB-/Baa3 (below investment grade)	$	115.2	$	159.7

__________

(a)	If there are split ratings among the independent credit rating agencies, most counterparties use the higher credit rating to determine our incremental collateral obligations, while the remaining use the lower credit rating. Therefore, a one notch downgrade to BBB-/Baa3 by one agency would not trigger the entire $19.0 million incremental obligation.
(b)	Includes current posting at current rating.

7. Fair Value

The Codification emphasizes that fair value is a market-based measurement that should be determined based on assumptions (inputs) that market participants would use in pricing an asset or liability. Inputs may be observable or unobservable, and valuation techniques used to measure fair value should maximize the use of relevant observable inputs and minimize the use of unobservable inputs. Accordingly, the Codification establishes a hierarchal disclosure framework that ranks the quality and reliability of information used to determine fair values. The hierarchy is associated with the level of pricing observability utilized in measuring fair value and defines three levels of inputs to the fair value measurement process—quoted prices are the most reliable valuation inputs, whereas model values that include inputs based on unobservable data are the least reliable. 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).

Kinder Morgan, Inc. Form 10-Q

Fair Value of Derivative Contracts

The following two tables summarize the fair value measurements of our (i) energy commodity derivative contracts, (ii) interest rate swap agreements and (iii) cross currency interest rate swap agreements as of March 31, 2010 and December 31, 2009, based on the three levels established by the Codification (in millions):

	Asset fair value measurements using
	Total			Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)
As of March 31, 2010
Energy commodity derivative contracts(a)		$	112.3		$	-		$	53.5		$	58.8
Interest rate swap agreements		$	258.4		$	-		$	258.4		$	-

As of December 31, 2009
Energy commodity derivative contracts(a)		$	78.1		$	-		$	14.4		$	63.7
Interest rate swap agreements		$	236.0		$	-		$	236.0		$	-

	Liability fair value measurements using
	Total			Quoted prices in active markets for identical liabilities (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)
As of March 31, 2010
Energy commodity derivative contracts(b)		$	(469.5)		$	-		$	(433.3)		$	(36.2)
Interest rate swap agreements		$	(174.0)		$	-		$	(174.0)		$	-
Cross currency interest rate swap agreements		$	(15.1)		$	-		$	(15.1)		$	-

As of December 31, 2009
Energy commodity derivative contracts(b)		$	(513.5)		$	-		$	(462.8)		$	(50.7)
Interest rate swap agreements		$	(218.5)		$	-		$	(218.5)		$	-
Cross currency interest rate swap agreements		$	(9.6)		$	-		$	(9.6)		$	-

__________

(a)	Level 2 consists primarily of OTC West Texas Intermediate hedges and OTC natural gas hedges that are settled on NYMEX. Level 3 consists primarily of natural gas basis swaps, natural gas options and West Texas Intermediate options.
(b)	Level 2 consists primarily of OTC West Texas Intermediate hedges and OTC natural gas hedges that are settled on NYMEX. Level 3 consists primarily of West Texas Sour hedges, natural gas basis swaps, natural gas options and West Texas Intermediate options.

The fair value measurements in the table above do not include cash margin deposits, which would be reported separately as “Restricted deposits” or included within “Accrued other liabilities” in our accompanying consolidated balance sheets. The table below provides a summary of changes in the fair value of our Level 3 energy commodity derivative contracts for each of the three months ended March 31, 2010 and 2009 (in millions):

Significant unobservable inputs (Level 3)

	Three Months Ended March 31,
	2010		2009
Derivatives-net asset (liability)
Beginning of Period	$	13.0	$	44.1
Realized and unrealized net losses		8.6		6.3
Purchases and settlements		1.0		3.0
Transfers in (out) of Level 3		-		-
End of Period	$	22.6	$	53.4

Change in unrealized net losses relating to contracts still held at end of period	$	3.8	$	(14.5	)

Kinder Morgan, Inc. Form 10-Q

Fair Value of Financial Instruments

Fair value as used in the disclosure of financial instruments represents the amount at which an instrument could be exchanged in a current transaction between willing parties. As of each reporting date, the estimated fair value of our outstanding publicly-traded debt is based upon quoted market prices, if available, and for all other debt, fair value is based upon prevailing interest rates currently available to us. In addition, we adjust (discount) the fair value measurement of our long-term debt for the effect of credit risk.

The estimated fair value of our outstanding debt balance as of March 31, 2010 and December 31, 2009 (both short-term and long-term, but excluding the value of interest rate swaps), is disclosed below (in millions):

	March 31, 2010				December 31, 2009
	Carrying value		Estimated fair value		Carrying value		Estimated fair value
Total debt	$	14,006.4	$	14,659.3	$	13,648.4	$	14,158.2

Assets Measured at Fair Value on a Non-Recurring Basis

The following table summarizes the fair value measurements of assets and liabilities as of March 31, 2010 that are initially measured at fair value or on another measurement basis (e.g. historical cost) and are re-measured at fair value on a non-recurring basis based on the three levels established by the Codification (in millions):

	Asset fair value measurements using
	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Investment in NGPL PipeCo LLC	$	269.0	$	-	$	-	$	269.0

We re-measured the fair value of our investment in NGPL PipeCo LLC as of March 31, 2010, upon recognition of an impairment of this investment. See Note 2 “Investments, Acquisitions and Divestitures” for more information on this impairment and the valuation techniques used to measure fair value.

8. Reportable Segments

We divide our operations into seven reportable business segments. These segments and their principal source of revenues are as follows:

▪

Products Pipelines–KMP— the transportation and terminaling of refined petroleum products, including gasoline, diesel fuel, jet fuel and natural gas liquids;

▪

Natural Gas Pipelines–KMP—the sale, transport, processing, treating, storage and gathering of natural gas;

▪

CO2–KMP—the production and sale of crude oil from fields in the Permian Basin of West Texas and the transportation and marketing of carbon dioxide used as a flooding medium for recovering crude oil from mature oil fields;

▪

Terminals–KMP—the transloading and storing of refined petroleum products and dry and liquid bulk products, including coal, petroleum coke, cement, alumina, salt and other bulk chemicals;

▪

Kinder Morgan Canada–KMP—the transportation of crude oil and refined products from Alberta, Canada to marketing terminals and refineries in British Columbia, the state of Washington and the Rocky Mountains and Central regions of the United States;

▪

NGPL PipeCo LLC— consists of our 20% interest in NGPL PipeCo LLC, the owner of Natural Gas Pipeline Company of America and certain affiliates, collectively referred to as Natural Gas Pipeline Company of America or NGPL, a major interstate natural gas pipeline and storage system, which we operate; and

▪

Power—consists of a natural gas-fired electric generation facility.

Kinder Morgan, Inc. Form 10-Q

The accounting policies we apply in the generation of reportable segment earnings are generally the same as those applied to our consolidated operations, except that (i) certain items below the “Operating Income (Loss)” line (such as interest expense) are either not allocated to reportable segments or are not considered by management in its evaluation of reportable segment performance, (ii) equity in earnings of equity method investees are included in segment earnings (these equity method earnings are included in “Other Income (Expense)” in the accompanying interim Consolidated Statements of Income, (iii) certain items included in operating income (such as general and administrative expenses and depreciation, depletion and amortization (“DD&A”)) are not considered by management in its evaluation of reportable segment performance and, thus, are not included in reported performance measures, (iv) gains and losses from incidental sales of assets are included in segment earnings and (v) our reportable segments that are also segments of KMP include certain other income and expenses and income taxes in its segment earnings. With adjustment for these items, we currently evaluate reportable segment performance primarily based on segment earnings before DD&A expenses (including amortization of excess cost of equity investments) in relation to the level of capital employed.

Selected financial information by segment follows (in millions):

	Three Months Ended March 31,
	2010			2009
Revenues
Products Pipelines–KMP
Revenues from external customers	$	207.5		$	188.2
Natural Gas Pipelines–KMP
Revenues from external customers		1,236.7			1,051.7
CO2–KMP
Revenues from external customers		335.2			253.2
Terminals–KMP
Revenues from external customers		303.8			267.7
Intersegment revenues		0.3			0.2
Kinder Morgan Canada–KMP
Revenues from external customers		59.8			50.0
Power(a)
Revenues from external customers		2.8			6.6
Other
NGPL PipeCo LLC fixed fee revenue		11.8			11.5
Total segment revenues		2,157.9			1,829.1
Less: Total intersegment revenues		(0.3	)		(0.2	)
Total consolidated revenues	$	2,157.6		$	1,828.9

Kinder Morgan, Inc. Form 10-Q

	Three Months Ended March 31,
	2010			2009
Segment earnings (loss) before depreciation, depletion, amortization and amortization of excess cost of equity investments(b)
Products Pipelines–KMP(c)	$	6.4		$	145.4
Natural Gas Pipelines–KMP		220.6			200.0
CO2–KMP		266.6			191.7
Terminals–KMP		150.5			134.3
Kinder Morgan Canada–KMP		45.0			19.5
NGPL PipeCo LLC(d)		(419.6	)		12.3
Power(a)		1.2			1.1
Total segment earnings before DD&A		270.7			704.3
Total segment depreciation, depletion and amortization		(282.3	)		(264.8	)
Total segment amortization of excess cost of investments		(1.4	)		(1.4	)
NGPL PipeCo LLC fixed fee revenue		11.8			11.5
General and administrative expenses		(115.7	)		(92.9	)
Unallocable interest and other, net of interest income(e)		(155.8	)		(150.3	)
Unallocable income tax benefit (expense)		93.0			(61.3	)
Income (loss) from continuing operations	$	(179.7	)	$	145.1

	March 31, 2010		December 31, 2009
Assets
Products Pipelines–KMP	$	5,633.2	$	5,614.7
Natural Gas Pipelines–KMP		10,017.6		9,956.7
CO2–KMP		4,179.6		4,230.5
Terminals–KMP		4,861.5		4,537.3
Kinder Morgan Canada–KMP		1,845.5		1,797.7
NGPL PipeCo LLC(d)		269.0		698.5
Power(a)		4.2		67.6
Total segment assets		26,810.6		26,903.0
Corporate assets(f)		577.4		683.3
Total consolidated assets	$	27,388.0	$	27,586.3

____________

(a)	Upon the adoption of Accounting Standards Update No. 2009-17, which amended the codification’s “Consolidation” topic, on January 1, 2010, Triton Power Company LLC is no longer consolidated into our financial statements, but is treated as an equity investment (see Note 13). This resulted in decreases to 2010 revenues, operating expenses and noncontrolling interests with no impact to segment earnings before DD&A as compared to 2009.
(b)	Includes revenues, earnings from equity investments, allocable interest income, and other, net, less operating expenses, allocable income taxes, and other expense (income).
(c)	2010 amount includes a $158.0 million increase in expense associated with rate case liability adjustments.
(d)	Includes a $430.0 million non-cash investment impairment charge (see Note 2).
(e)	Includes (i) interest expense and (ii) miscellaneous other income and expenses not allocated to reportable segments.
(f)	Includes cash and cash equivalents, margin and restricted deposits, unallocable interest receivable, prepaid assets and deferred charges, risk management assets related to the fair value of interest rate swaps and miscellaneous corporate assets (such as information technology and telecommunications equipment) not allocated to individual segments.

Kinder Morgan, Inc. Form 10-Q

9. Related Party Transactions

Notes Receivable

Plantation Pipe Line Company Note Receivable

KMP has a long-term note receivable bearing interest at the rate of 4.72% per annum from Plantation Pipe Line Company, its 51.17%-owned equity investee. The note provides for semiannual payments of principal and interest on June 30 and December 31 each year, with a final principal payment due July 20, 2011. The outstanding note receivable balance was $84.8 million as of March 31, 2010 and December 31, 2009. Of this amount, $2.6 million was included within “Accounts, notes and interest receivable, net,” on the accompanying interim Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009, and the remainder was included within “Notes receivable” at each reporting date.

Express US Holdings LP Note Receivable

KMP has a long-term investment in a C$113.6 million debt security issued by Express US Holdings LP (the obligor), the partnership that maintains ownership of the U.S. portion of the Express pipeline system. The debenture is denominated in Canadian dollars, due in full on January 9, 2023, bears interest at the rate of 12.0% per annum and provides for quarterly payments of interest in Canadian dollars on March 31, June 30, September 30 and December 31 each year. As of March 31, 2010 and December 31, 2009, the outstanding note receivable balance, representing the translated amount included in the accompanying Consolidated Financial Statements in U.S. dollars, was $111.8 million and $108.1 million, respectively, and we included these amounts within “Accounts, notes and interest receivable, net” in the accompanying interim Consolidated Balance Sheets.

Other Receivables and Payables

As of March 31, 2010 and December 31, 2009, our related party receivables (other than the note receivables discussed above) totaled $21.6 million and $19.9 million, respectively. The March 31, 2010 amount consisted of (i) $19.3 million included within “Accounts, notes and interest receivable, net” and primarily related to receivables due from Kinder Morgan Midco LLC, Plantation Pipe Line Company and from the Express pipeline system and (ii) $2.3 million of natural gas imbalance receivables, included within “Other current assets.” Our related party imbalance receivables are primarily due from NGPL. The December 31, 2009 amount consisted of (i) $16.8 million included within “Accounts, notes and interest receivable, net” and primarily related to receivables due from Kinder Morgan Midco LLC, the Express pipeline system and NGPL and (ii) $3.1 million of natural gas imbalance receivables, primarily due from NGPL and included within “Other current assets.”

As of March 31, 2010 and December 31, 2009, our related party payables totaled $0.9 million and $1.2 million, respectively. Both liabilities primarily consisted of amounts owed to RGZ, Inc., which has an equity interest in one of KMP’s investments, and we included these related party payable amounts within “Accounts payable” on the accompanying interim Consolidated Balance Sheets.

Revenues, Operating Costs and Interest, Net

Related-party revenues included in the accompanying interim Consolidated Statements of Income for the three months ended March 31, 2010 and March 31, 2009, were $3.0 million and $5.5 million, respectively, and were primarily attributable to transactions with Plantation Pipe Line Company.

The caption “Gas purchases and other costs of sales” in the accompanying interim Consolidated Statements of Income includes related-party costs totaling $1.8 million and $1.9 million for the three months ended March 31, 2010 and 2009, respectively, which is primarily related to purchases from NGPL.

The caption “Interest, net” in the accompanying interim Consolidated Statements of Income includes related-party net interest income totaling $4.3 million and $3.8 million for the three months ended March 31, 2010 and 2009, respectively, which is primarily related to interest income from Plantation Pipe Line Company and Express US Holdings LP.

Kinder Morgan, Inc. Form 10-Q

NGPL PipeCo LLC Fixed Fee Revenue and Other Transactions

On February 15, 2008, we entered into an Operations and Reimbursement Agreement (“Agreement”) with Natural Gas Pipeline Company of America LLC, a wholly owned subsidiary of NGPL PipeCo LLC. The Agreement provides for us to be reimbursed, at cost, for pre-approved operations and maintenance costs, plus a $43.2 million annual general and administration fixed fee charge (“Fixed Fee”), for services provided under the Agreement. This Fixed Fee escalates at 3% each year until 2011 and is billed monthly. For the three months ended March 31, 2010 and 2009, these Fixed Fees, included within the caption, “Product sales and other” in the accompanying interim Consolidated Statements of Income, totaled $11.8 million and $11.5 million, respectively.

Derivative Counterparties

As a result of our Going Private transaction, a number of individuals and entities became significant investors in us, and by virtue of the size of its ownership interest in us, one of those investors—Goldman Sachs Capital Partners and certain of its affiliates—remains a “related party” (as that term is defined in authoritative accounting literature) to us as of March 31, 2010. Goldman Sachs has also acted in the past, and may act in the future, as an underwriter for equity and/or debt issuances for us, and Goldman Sachs effectively owned 49% of the terminal assets we acquired from US Development Group LLC.

In addition, we conduct energy commodity risk management activities in the ordinary course of implementing our risk management strategies in which the counterparty to certain of our derivative transactions is an affiliate of Goldman Sachs, and in conjunction with these activities, we are a party (through one of KMP’s subsidiaries engaged in the production of crude oil) to a hedging facility with J. Aron & Company/Goldman Sachs.

The hedging facility requires us to provide certain periodic information but does not require the posting of margin. As a result of changes in the market value of our derivative positions, we have created both amounts receivable from and payable to Goldman Sachs affiliates.

The following table summarizes the fair values of our energy commodity derivative contracts that are (i) associated with commodity price risk management activities with related parties and (ii) included within “Fair value of derivative contracts” in the accompanying interim Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009 (in millions):

	March 31, 2010			December 31, 2009
Derivatives - asset (liability)
Current Assets: Fair value of derivative contracts	$	1.5		$	4.3
Assets: Fair value of derivative contracts	$	17.4		$	18.4
Current Liabilities: Fair value of derivative contracts	$	(120.8	)	$	(96.8	)
Long-term Liabilities and Deferred Credits: Fair value of derivative contracts	$	(150.9	)	$	(190.8	)

For more information on our risk management activities see Note 6.

10. Income Taxes

Income taxes from continuing operations included in the accompanying interim Consolidated Statements of Income were as follows (in millions, except percentages):

	Three Months Ended March 31,
	2010			2009
Income taxes	$	(95.5	)	$	80.6
Effective tax rate		34.7	%		35.7	%

The tax benefit for the three months ended March 31, 2010 is the result of a loss sustained during the period, primarily related to a NGPL PipeCo LLC investment impairment charge (see Note 2). This tax benefit of approximately $95.5 million results in an effective tax rate of 34.7% from continuing operations, as compared with $80.6 million of tax expense for an effective tax rate of 35.7% for the same period in 2009. The effective tax rate is lower than the statutory federal rate of 35% for the three months ended March 31, 2010 due to the net effect of

Kinder Morgan, Inc. Form 10-Q

consolidating KMP’s income tax provision, partially offset by state income taxes and a dividends received deduction from our 20% ownership interest in NGPL PipeCo LLC.

For the three months ended March 31, 2009, the effective rate was higher than the statutory federal rate primarily due to (i) additional tax expense for one-time non-cash deferred tax liability and expense adjustments associated with the Kinder Morgan Canada-KMP business segment, (ii) state income taxes and (iii) a decrease in our share of nondeductible goodwill associated with our investment in KMP. These increases were partially offset by (i) the net effect of consolidating KMP’s income tax provision, (ii) a dividends received deduction from our 20% ownership interest in NGPL PipeCo LLC and (iii) adjustments to the our uncertain tax positions.

11. Litigation, Environmental and Other Contingencies

Below is a brief description of our ongoing material legal proceedings, including any material developments that occurred in such proceedings during the three months ended March 31, 2010. Additional information with respect to these proceedings can be found in Note 16 to the Consolidated Financial Statements included in our 2009 Form 10-K. This note also contains a description of any material legal proceedings that were initiated against us during the three months ended March 31, 2010, and a description of any material events occurring subsequent to March 31, 2010 but before the filing of this report.

In this note, we refer to KMP’s subsidiary SFPP, L.P. as SFPP; KMP’s subsidiary Calnev Pipe Line LLC as Calnev; Chevron Products Company as Chevron; Navajo Refining Company, L.P. as Navajo; ARCO Products Company as ARCO; BP West Coast Products, LLC as BP; ConocoPhillips Company as ConocoPhillips; Tesoro Refining and Marketing Company as Tesoro; Texaco Refining and Marketing Inc. as Texaco; Western Refining Company, L.P. as Western Refining; ExxonMobil Oil Corporation as ExxonMobil; Tosco Corporation as Tosco; Ultramar Diamond Shamrock Corporation/Ultramar Inc. as Ultramar; Valero Energy Corporation as Valero; Valero Marketing and Supply Company as Valero Marketing; Continental Airlines, Inc., Northwest Airlines, Inc., Southwest Airlines Co. and US Airways, Inc., collectively, as the Airlines; KMP’s subsidiary Kinder Morgan CO2 Company, L.P. (the successor to Shell CO2 Company, Ltd.) as Kinder Morgan CO2;the United States Court of Appeals for the District of Columbia Circuit as the D.C. Circuit; the Federal Energy Regulatory Commission as the FERC; the California Public Utilities Commission as the CPUC; the United States Department of the Interior, Minerals Management Service as the MMS; the Union Pacific Railroad Company (the successor to Southern Pacific Transportation Company) as UPRR; the Texas Commission of Environmental Quality as the TCEQ; the United States Department of Transportation Pipeline and Hazardous Materials Safety Administration as the PHMSA; the North Carolina Department of Environment and Natural Resources as the NCDENR; the Florida Department of Environmental Protection as the Florida DEP; KMP’s subsidiary Kinder Morgan Bulk Terminals, Inc. as KMBT; KMP’s subsidiary Kinder Morgan Port Manatee Terminal LLC as KM PMT; Rockies Express Pipeline LLC as Rockies Express; and Plantation Pipe Line Company as Plantation. “OR” dockets designate complaint proceedings, and “IS” dockets designate protest proceedings.

Federal Energy Regulatory Commission Proceedings

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FERC Docket Nos. OR92-8, et al (West and East Line Rates)—Complainants: Chevron, Navajo, ARCO, BP, Western Refining, ExxonMobil, Tosco, and Texaco—Defendant: SFPP—Status: Appeals pending at the D.C. Circuit;

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FERC Docket No. OR92-8-025 (Watson Drain-Dry Charge)—Complainants: BP; ExxonMobil; Chevron; ConocoPhillips; and Ultramar—Defendant: SFPP—Status: Appeal denied by the D.C. Circuit;

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FERC Docket Nos. OR96-2, et al (All SFPP Rates)—Complainants: All shippers except Chevron—Defendant: SFPP—Status: Compliance filings pending with FERC;

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FERC Docket No. OR02-4 (All SFPP Rates)—Complainant: Chevron—Defendant: SFPP—Status: Appeal of complaint dismissal pending at the D.C. Circuit;

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FERC Docket Nos. OR03-5, OR04-3, OR05-4 & OR05-5 (West, East, North, and Oregon Line Rates)—Complainants: BP, ExxonMobil, ConocoPhillips, the Airlines—Defendant: SFPP—Status: Exceptions to initial decision pending at FERC;

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FERC Docket Nos. OR07-1 & OR07-2 (North and West Line Rates)—Complainant: Tesoro—Defendant: SFPP—Status: Held in abeyance;

Kinder Morgan, Inc. Form 10-Q

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FERC Docket Nos. OR07-3 & OR07-6 (not consolidated) (2005-2006 Index Rate Increases)—Complainants: BP, Chevron, ConocoPhillips, ExxonMobil, Tesoro, and Valero Marketing—Defendant: SFPP—Status: Appeal of dismissal by FERC pending at the D.C. Circuit;

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FERC Docket No. OR07-4 (All SFPP Rates)—Complainants: BP, Chevron, and ExxonMobil—Defendant: SFPP—Status: Held in abeyance;

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FERC Docket Nos. OR07-7, OR07-18, OR07-19 & OR07-22 (not consolidated) (Calnev Rates)—Complainants: Tesoro, Airlines, BP, Chevron, ConocoPhillips and Valero Marketing—Defendant: Calnev—Status: Complaint amendments pending before FERC;

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FERC Docket No. OR07-20 (2007 Index Rate Increases)—Complainant: BP—Defendant: SFPP—Status: Appeal of dismissal by FERC pending at the D.C. Circuit;

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FERC Docket No. OR08-13 (Most SFPP Rates)—Complainants: BP and ExxonMobil—Defendant: SFPP—Status: Held in abeyance;

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FERC Docket No. IS05-230 (North Line Rates)—Protestants: shippers—Defendant: SFPP—Status: Exceptions to initial decision pending at FERC;

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FERC Docket No. IS08-390 (West Line Rates)—Protestants: BP, ExxonMobil, ConocoPhillips, Valero Marketing, Chevron, the Airlines—Defendant: SFPP—Status: Exceptions to initial decision pending at FERC;

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FERC Docket No. IS09-375 (2009 Index Rate Increases)—Protestants: BP, ExxonMobil, Chevron, Tesoro, ConocoPhillips, Western, Navajo, Valero Marketing, and Southwest—Defendant: SFPP—Status: Requests for rehearing of FERC dismissal pending before FERC;

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FERC Docket No. IS09-377 (2009 Index Rate Increases)—Protestants: BP, Chevron, and Tesoro—Defendant: Calnev—Status: Requests for rehearing of FERC dismissal pending before FERC;

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FERC Docket No. IS09-437 (East Line Rates)—Protestants: BP, ExxonMobil, ConocoPhillips, Valero, Chevron, Western Refining, and Southwest Airlines—Defendant: SFPP—Status: Pre-hearing stage;

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FERC Docket Nos. OR08-15/OR09-8 (consolidated) (2008 Index Increases)—Complainants: BP/Chevron—Defendant: SFPP—Status: Complaints partially dismissed and remainder set for hearing; hearing held in abeyance pending settlement discussions;

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FERC Docket Nos. OR09-18/OR09-21 (not consolidated) (2008 and 2009 Index Increases)—Complainants: BP (for 2009)/Tesoro (for 2008 and 2009)—Defendant: SFPP—Status: BP appeal of FERC dismissal pending at the D.C. Circuit;

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FERC Docket Nos. OR09-11/OR09-14 (not consolidated) (2007 and 2008 Page 700 Audit Request)—Complainants: BP/Tesoro—Defendant: Calnev—Status: BP appeal of FERC dismissal pending at the D.C. Circuit;

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FERC Docket Nos. OR09-12/OR09-16 (not consolidated) (2007 and 2008 Page 700 Audit Request)—Complainants: BP/Tesoro—Defendant: SFPP—Status: BP appeal of FERC dismissal pending at the D.C. Circuit;

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FERC Docket Nos. OR09-15/OR09-20 (not consolidated) (Calnev Rates)—Complainants: Tesoro/BP—Defendant: Calnev—Status: Complaints pending at FERC;

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FERC Docket Nos. OR09-17/OR09-22 (Most SFPP Rates) (not consolidated)—Complainants: Tesoro/BP—Defendant: SFPP—Status: BP appeal of FERC dismissal pending at the D.C. Circuit; and

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FERC Docket Nos. OR09-19/OR09-23 (not consolidated) (2009 Index Increases)—Complainants: Tesoro/BP—Defendant: Calnev—Status: BP appeal of FERC dismissal pending at the D.C. Circuit.

The tariffs and rates charged by SFPP and Calnev are subject to numerous ongoing proceedings at the FERC, including the above listed shippers’ complaints and protests regarding interstate rates on these pipeline systems.

Kinder Morgan, Inc. Form 10-Q

These complaints have been filed over numerous years beginning in 1992 through and including 2009. In general, these complaints allege the r