Attached files

file filename
EX-3.1 - KMI EXHIBIT 3.1 CERTIFICATE OF INCORPORATION - KINDER MORGAN, INC.kmiex3_1.htm
EX-4.2 - KMI EXHIBIT 4.2 SHAREHOLDER AGREEMENT - KINDER MORGAN, INC.kmiex4_2.htm
EX-3.2 - KMI EXHIBIT 3.2 BYLAWS - KINDER MORGAN, INC.kmiex3_2.htm
EX-10.8 - KMI EXHIBIT 10.8 KEAN SEVERANCE AGREEMENT - KINDER MORGAN, INC.kmiex10_8.htm
EX-10.2 - KMI EXHIBIT 10.2 RESTRICTED STOCK AGREEMENT - KINDER MORGAN, INC.kmiex10_2.htm
EX-10.1 - KMI EXHIBIT 10.1 STOCK INCENTIVE PLAN - KINDER MORGAN, INC.kmiex10_1.htm
EX-10.7 - KMI EXHIBIT 10.7 SHAPER SEVERANCE AGREEMENT - KINDER MORGAN, INC.kmiex10_7.htm
EX-32.1 - KMI EXHIBIT 32.1 CEO CERTIFICATION - KINDER MORGAN, INC.kmiex32_1.htm
EX-32.2 - KMI EXHIBIT 32.2 CFO CERTIFICATION - KINDER MORGAN, INC.kmiex32_2.htm
EX-10.9 - KMI EXHIBIT 10.9 DANG SEVERANCE AGREEMENT - KINDER MORGAN, INC.kmiex10_9.htm
EX-31.1 - KMI EXHIBIT 31.1 CEO CERTIFICATION - KINDER MORGAN, INC.kmiex31_1.htm
EX-10.6 - KMI EXHIBIT 10.6 ANNUAL INCENTIVE PLAN - KINDER MORGAN, INC.kmiex10_6.htm
EX-10.3 - KMI EXHIBIT 10.3 BOD STOCK COMP AGREEMENT - KINDER MORGAN, INC.kmiex10_3.htm
EX-10.5 - KMI EXHIBIT 10.5 EMPLOYEES STOCK PURCHASE PLAN - KINDER MORGAN, INC.kmiex10_5.htm
EX-10.4 - KMI EXHIBIT 10.4 BOD STOCK COMP PLAN - KINDER MORGAN, INC.kmiex10_4.htm
EX-31.2 - KMI EXHIBIT 31.2 CFO CERTIFICATION - KINDER MORGAN, INC.kmiex31_2.htm
EX-10.10 - KMI EXHIBIT 10.9 DANG SEVERANCE AGREEMENT - KINDER MORGAN, INC.kmiex10_10.htm


 

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, 2011
 
or
 
o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____to_____
 
Commission file number: 001-35081
KINDER MORGAN, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
  
80-0682103
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)

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
 

As of April 29, 2011, the registrant had the following number of shares of common stock outstanding:
 
Class A common stock
596,102,672
Class B common stock
100,000,000
Class C common stock
2,462,927
Class P common stock
110,897,328


 
 

 
Kinder Morgan, Inc. Form 10-Q




TABLE OF CONTENTS

   
Page
Number
   
     
3
 
3
 
4
 
5
 
6
     
41
 
41
 
45
 
46
 
57
 
63
 
63
     
65
     
65
     
     
     
   
     
66
     
66
     
66
     
66
     
66
     
66
     
66
     
 
67


 
2

 
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 Except Per Share Amounts)
(Unaudited)

   
Three Months Ended
March 31,
 
   
2011
   
2010
 
Revenues
           
Natural gas sales
  $ 806.0     $ 1,017.5  
Services
    784.4       738.5  
Product sales and other
    417.7       401.6  
Total Revenues
    2,008.1       2,157.6  
                 
Operating Costs, Expenses and Other
               
Gas purchases and other costs of sales
    815.7       1,016.6  
Operations and maintenance
    309.5       454.5  
Depreciation, depletion and amortization
    256.1       282.3  
General and administrative
    180.4       115.7  
Taxes, other than income taxes
    48.7       45.4  
Other expense (income)
    0.7       (1.3 )
Total Operating Costs, Expenses and Other
    1,611.1       1,913.2  
                 
Operating Income
    397.0       244.4  
                 
Other Income (Expense)
               
Earnings (loss) from equity investments
    68.4       (374.2 )
Amortization of excess cost of equity investments
    (1.5 )     (1.4 )
Interest expense
    (174.1 )     (156.2 )
Interest income
    5.4       5.6  
Other, net
    1.7       6.6  
Total Other Income (Expense)
    (100.1 )     (519.6 )
                 
Income (Loss) from Continuing Operations Before Income Taxes
    296.9       (275.2 )
                 
Income Tax (Expense) Benefit
    (95.9 )     95.5  
                 
Income (Loss) from Continuing Operations
    201.0       (179.7 )
                 
Loss from Discontinued Operations, net of tax                                                                                               
    -       (0.2 )
                 
Net Income (Loss)
    201.0       (179.9 )
                 
Net (Income) Loss Attributable to Noncontrolling Interests
    (46.0 )     19.0  
                 
Net Income (Loss) Attributable to Kinder Morgan, Inc.
  $ 155.0     $ (160.9 )
                 
Basic Earnings Per Common Share
               
Class P Shares
  $ 0.12          
Class A Shares
  $ 0.12          
Basic Weighted Average Number of Share Outstanding
               
Class P Shares
    110.6          
Class A Shares
    596.4          
Diluted Earnings Per Common Share
               
Class P Shares
  $ 0.12          
Class A Shares
  $ 0.12          
Diluted Weighted Average Number of Shares
               
Class P Shares
    110.6          
Class A Shares
    596.4          
Dividends Per Common Share Declared
  $ 0.14          

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

 
3

 
Kinder Morgan, Inc. Form 10-Q
 
KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions, Except Share and Per Share Amounts)

   
March 31,
2011
   
December 31,
2010
 
   
(Unaudited)
       
ASSETS
           
Current assets
           
Cash and cash equivalents–Kinder Morgan Kansas, Inc.
  $ 11.1     $ 373.3  
Cash and cash equivalents–KMP
    178.4       129.1  
Restricted deposits
    41.4       90.5  
Accounts, notes and interest receivable, net
    843.8       971.4  
Inventories
    93.0       92.0  
Gas in underground storage
    27.4       2.2  
Fair value of derivative contracts
    35.2       24.0  
Other current assets
    58.5       104.4  
Total current assets
    1,288.8       1,786.9  
                 
Property, plant and equipment, net
    17,133.7       17,070.7  
Investments
    4,310.4       4,291.1  
Notes receivable
    117.9       115.0  
Goodwill
    4,826.8       4,830.9  
Other intangibles, net
    325.1       339.2  
Fair value of derivative contracts
    224.6       301.7  
Deferred charges and other assets
    179.2       172.6  
Total Assets
  $ 28,406.5     $ 28,908.1  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities
               
Current portion of debt–Kinder Morgan Kansas, Inc.
  $ 368.0     $ 750.9  
Current portion of debt–KMP
    1,333.2       1,262.4  
Cash book overdrafts
    37.1       34.3  
Accounts payable
    601.1       647.5  
Accrued interest
    124.8       310.4  
Accrued taxes
    141.0       44.7  
Deferred revenues
    103.8       96.7  
Fair value of derivative contracts
    380.5       281.5  
Accrued other current liabilities
    307.5       215.7  
Total current liabilities
    3,397.0       3,644.1  
                 
Long-term liabilities and deferred credits
               
Long-term debt
               
Outstanding–Kinder Morgan Kansas, Inc.
    2,777.7       2,779.2  
Outstanding–KMP
    10,415.6       10,277.4  
Preferred interest in general partner of KMP
    100.0       100.0  
Value of interest rate swaps
    573.5       656.3  
Total long-term debt
    13,866.8       13,812.9  
Deferred income taxes
    2,054.3       2,092.7  
Fair value of derivative contracts
    282.3       172.2  
Other long-term liabilities and deferred credits
    592.3       647.2  
Total long-term liabilities and deferred credits
    16,795.7       16,725.0  
                 
Total Liabilities
    20,192.7       20,369.1  
                 
Commitments and contingencies (Notes 4 and 11)
               
Stockholders’ Equity
               
Class P shares, $0.01 par value, 2,000,000,000 shares authorized, 110,897,328 shares issued and outstanding
    1.1       -  
Class A shares, $0.01 par value, 707,000,000 shares authorized, 596,102,672 shares issued and outstanding
    6.0       -  
Class B shares, $0.01 par value, 100,000,000 shares authorized, 100,000,000 shares issued and outstanding
    1.0       -  
Class C shares, $0.01 par value, 2,462,927 shares authorized, 2,462,927 shares issued and outstanding
    -       -  
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none outstanding
    -       -  
Additional paid-in capital
    3,397.7       -  
Retained earnings
    84.4       -  
Members’ capital (Note 5)
    -       3,575.6  
Accumulated other comprehensive loss
    (192.0 )     (136.5 )
Total Kinder Morgan, Inc.’s stockholders’ equity
    3,298.2       3,439.1  
Noncontrolling interests
    4,915.6       5,099.9  
Total Stockholders’ Equity
    8,213.8       8,539.0  
Total Liabilities and Stockholders’ Equity
  $ 28,406.5     $ 28,908.1  

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

 
4

 
Kinder Morgan, Inc. Form 10-Q
 
KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)

   
Three Months Ended
March 31,
 
   
2011
   
2010
 
Cash Flows From Operating Activities
           
Net income (loss)
  $ 201.0     $ (179.9 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities
               
Loss from discontinued operations, net of tax
    -       0.2  
Depreciation, depletion and amortization
    256.1       282.3  
Deferred income taxes
    5.1       (156.6 )
Amortization of excess cost of equity investments
    1.5       1.4  
Earnings (loss) from equity investments
    (68.4 )     374.2  
Distributions from equity investments
    64.8       49.8  
Changes in components of working capital
               
Accounts receivable
    99.4       53.3  
Inventories
    -       (7.5 )
Other current assets
    49.8       36.2  
Accounts payable
    (39.8 )     (8.3 )
Accrued interest
    (185.6 )     (167.8 )
Accrued taxes
    92.6       77.3  
Accrued liabilities
    77.4       (41.3 )
Rate reparations, refunds and other litigation reserve adjustments
    (63.0 )     158.0  
Other, net
    (12.3 )     (32.4 )
Cash flows provided by continuing operations
    478.6       438.9  
Net cash flows used in discontinued operations
    (0.1 )     (0.2 )
Net Cash Provided by Operating Activities
    478.5       438.7  
                 
Cash Flows From Investing Activities
               
Acquisitions of assets and investments
    (65.9 )     (226.3 )
Capital expenditures
    (269.9 )     (223.8 )
Deconsolidation of variable interest entity
    -       (17.5 )
Sale or casualty of property, plant and equipment, and other net assets net of removal costs
    0.9       13.4  
Net proceeds from margin and restricted deposits
    46.7       18.0  
Contributions to investments
    (22.6 )     (136.0 )
Distributions from equity investments in excess of cumulative earnings
    83.6       73.9  
Net Cash Used in Investing Activities
    (227.2 )     (498.3 )
                 
Cash Flows From Financing Activities
               
Issuance of debt–Kinder Morgan Kansas, Inc.
    802.1       232.5  
Payment of debt–Kinder Morgan Kansas, Inc.
    (1,187.1 )     (290.9 )
Issuance of debt–KMP
    2,522.7       957.0  
Payment of debt–KMP
    (2,304.6 )     (524.0 )
Debt issue costs
    (8.2 )     (0.8 )
Increase in cash book overdrafts
    2.9       11.5  
Cash dividends
    (245.8 )     (150.0 )
Contributions from noncontrolling interests
    81.2       -  
Distributions to noncontrolling interests
    (229.1 )     (200.8 )
Other, net
    (0.8 )     -  
Net Cash (Used in) Provided by Financing Activities
    (566.7 )     34.5  
                 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
    2.5       (3.4 )
                 
Net decrease in Cash and Cash Equivalents
    (312.9 )     (28.5 )
Cash and Cash Equivalents, beginning of period
    502.4       165.6  
Cash and Cash Equivalents, end of period
  $ 189.5     $ 137.1  
                 
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  
Contribution of net assets to investments
  $ 7.9     $ -  
Supplemental Disclosures of Cash Flow Information
               
Cash paid during the period for interest (net of capitalized interest)
  $ 324.9     $ 286.9  
Net cash paid during the period for income taxes
  $ 1.3     $ 2.2  

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

 
5

 
Kinder Morgan, Inc. Form 10-Q
 
KINDER MORGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.  General
 
Organization
 
On February 10, 2011, we converted from a Delaware limited liability company to a Delaware corporation and we changed our name from Kinder Morgan Holdco LLC to Kinder Morgan, Inc. Our subsidiary formerly known as Kinder Morgan, Inc. was renamed Kinder Morgan Kansas, Inc., and is referred to in these financial statements for all periods as Kinder Morgan Kansas, Inc.  On February 16, 2011, we completed the initial public offering of our common stock (the offering).  All of the common stock that was sold in the offering was sold by our existing investors consisting of funds advised by or affiliated with Goldman Sachs & Co., Highstar Capital LP, The Carlyle Group and Riverstone Holdings LLC. No members of management sold shares in the offering and we did not receive any proceeds from the offering.  Our common stock trades on the New York Stock Exchange under the symbol “KMI.” For additional information on the offering, see Note 5 “Stockholders’ Equity—Initial Public Offering.”
 
We own the general partner and approximately 11% of the limited partner interests of Kinder Morgan Energy Partners, L.P., referred to in this report as KMP.  KMP is a publicly traded pipeline limited partnership whose limited partner units are traded on the New York Stock Exchange under the ticker symbol “KMP.”  Primarily through KMP, we operate or own an interest in approximately 38,000 miles of pipelines and approximately 180 terminals.  These pipelines transport natural gas, gasoline, crude oil, carbon dioxide and other products, and these terminals store petroleum products, chemicals and handle bulk materials like coal and petroleum coke. Unless the context requires otherwise, references to “we,” “us,” “our,” or the “Company” are intended to mean Kinder Morgan, Inc. and our consolidated subsidiaries including Kinder Morgan Kansas, Inc.
 
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.
 
On May 30, 2007, we acquired Kinder Morgan Kansas, Inc. through a wholly owned subsidiary.  See Note 2 of our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2010 (2010 Form 10-K). 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 statement 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 2010 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 our accounts of Kinder Morgan, Inc. and our majority-owned subsidiaries as well as those of KMP and KMR.  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.
 

 
6

 
Kinder Morgan, Inc. Form 10-Q

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.
 
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.
 
Earnings per Share
 
Earnings per share is calculated using the two-class method. For accounting purposes, both our Class P and our Class A shares are considered common stock, and our Class B and Class C shares are considered participating securities.  The Class A shares, Class B shares and Class C shares are owned by the investors as defined in Note 5 “Stockholders’ Equity.” The computation of earnings per share is calculated by first reducing income by dividends declared in the current period for each class of stock and by the contractual amount of dividends that must be paid for the current period. Then, the remaining undistributed earnings or excess distributions over earnings, if any, are allocated to the extent that each security shares in earnings, which for the investor retained stock is in direct proportion to the maximum number of shares of common stock into which it can convert. The total earnings allocated to each class of stock is determined by adding together the amount allocated for dividends and the amount allocated for a participation feature.  For the basic per share computations, the total net income attributable to each class of common stock is divided by the weighted average shares of each class of common stock outstanding during the period.
 
For the diluted per share computations, total net income attributable to each class of common stock is divided by the adjusted weighted average shares outstanding during the period, including all dilutive potential shares. This includes the Class P shares into which the investor retained stock is convertible.  Thus, the number of Class P shares on a fully-converted basis is the same before and after any conversion of our investor retained stock. Each time one Class P share is issued upon conversion of investor retained stock, the number of Class P shares goes up by one, and the number of Class P shares into which the investor retained stock is convertible goes down by one. Accordingly, there is no difference between basic and diluted earnings per share because the conversion of Class A, Class B, and Class C shares into Class P shares does not impact the number of Class P shares on a fully-converted basis. As no securities are convertible into Class A shares, the basic and diluted earnings per share computations for Class A shares are the same.
 
The following table sets forth the computation of basic and diluted earnings per share for the period from February 11, 2011 (the date of our initial public offering) through March 31, 2011 (in millions, except per share amounts):
 
Net income available to shareholders
  $ 84.4  
         
Numerator for basis and diluted earnings per share
       
Allocation of net income amongst share classes
       
Net income allocable to Class P shares
  $ 13.2  
Net income allocable to Class A shares
    71.2  
Net income allocable to Class B shares(a)
    -  
Net income allocable to Class C shares(a)
    -  
Net income available to shareholders
  $ 84.4  
         
Denominator
       
Basic and diluted weighted average number of shares(b)
       
Weighted average Class P shares outstanding
    110.6  
Weighted average Class A shares outstanding
    596.4  
         
Basic and diluted net income per share
       
Class P shares
  $ 0.12  
Class A shares
  $ 0.12  
____________
(a)
As of March 31, 2011 our Class B and C shares were not entitled to participate in our earnings, losses or distributions in accordance with terms of our shareholder agreement as necessary performance conditions have not been satisfied.  As a result, no earnings were allocated to the Class B and C shares in our determination of basic and diluted earnings per share.
(b)
The weighted average shares outstanding calculation is based on the actual days in which the shares were outstanding for the period from February 11, 2011 to March 31, 2011.


 
7

 
Kinder Morgan, Inc. Form 10-Q

2.  Investments, Acquisitions, Joint Ventures and Divestitures
 
Investments
 
NGPL PipeCo LLC Investment Impairment Charge
 
On November 19, 2009, the Federal Energy Regulatory Commission (“FERC”) initiated an investigation, pursuant to Section 5 of the Natural Gas Act, into the justness and reasonableness of the transportation and storage rates as well as the fuel and natural gas lost percentages of NGPL PipeCo LLC’s subsidiary, Natural Gas Pipeline Company of America LLC, referred to as “NGPL.”  NGPL reached a settlement in principal with the FERC on April 22, 2010.  On June 11, 2010, NGPL filed an offer of settlement, which was approved without modification by the FERC on July 29, 2010.  The order approving the settlement has become final and nonappealable. The settlement resolved all issues in the proceeding. The settlement provided that NGPL reduce its fuel and gas lost and unaccounted for, or “GL&U,” retention factors as of July 1, 2010.  The settlement further provided a timeline for additional prospective fuel and GL&U reductions and prospective reductions in the maximum recourse reservation rates that it bills firm transportation and storage shippers.
 
The events discussed above caused us to reconsider the carrying value of our investment in NGPL PipeCo LLC as of March 31, 2010. 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 result of our analysis showed that the fair value of our investment in NGPL PipeCo LLC was less than our carrying value. For the quarter ended March 31, 2010, we recognized a $430.0 million, pre-tax, non-cash impairment charge included in the caption “Earnings (loss) from equity investments” in our accompanying consolidated statement of income.
 
Equity Method Investment Financial Information on NGPL PipeCo LLC.
 
   
Three Months Ended
March 31,
 
   
2011
   
2010
 
   
(In millions)
 
Revenues
  $ 212.3     $ 235.6  
Gross profit
  $ 187.9     $ 208.2  
Net income (loss)
  $ 36.7     $ (763.6 )
Net income (loss) attributable to us (a)
  $ 7.3     $ (419.6 )
_____________
(a) 2010 amount includes a non-cash investment impairment charge of $430.0 million as discussed above.
 
Acquisitions
 
Watco Companies, LLC
 
On January 3, 2011, KMP purchased 50,000 Class A preferred shares of Watco Companies, LLC for $50.0 million in cash in a private transaction. In connection with its purchase of these preferred shares, the most senior equity security of Watco, KMP entered into a limited liability company agreement with Watco that provides KMP certain priority and participating cash distribution and liquidation rights. Pursuant to the agreement, KMP receives priority, cumulative cash distributions from the preferred shares at a rate of 3.25% per quarter, and it participates partially in additional profit distributions at a rate equal to 0.5%. The preferred shares have no conversion features and hold no voting powers, but do provide KMP certain approval rights, including the right to appoint one of the members to Watco’s Board of Managers. As of December 31, 2010, KMP placed its $50.0 million investment in a cash escrow account and this balance was included within “Restricted Deposits” on our accompanying consolidated balance sheet. As of March 31, 2011, KMP’s $50.0 million investment is included within “Investments” on our accompanying consolidated balance sheet. The acquired investment complemented KMP’s existing rail transload operations. KMP accounts for this investment under the equity method of accounting, and we include it in our Terminals–KMP business segment.
 

 
8

 
Kinder Morgan, Inc. Form 10-Q

Watco Companies, LLC is a privately owned, Pittsburg, Kansas based transportation company that was formed in 1983. It is the largest privately held short line railroad company in the United States, operating 22 short line railroads on approximately 3,500 miles of leased and owned track. It also operates transload/intermodal and mechanical services divisions. KMP’s investment provides capital to Watco for further expansion of specific projects, complements KMP’s existing terminal network, provides its customers more transportation services for many of the commodities that it currently handles, and offers it the opportunity to share in additional growth opportunities through new projects.
 
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 our accompanying consolidated statements of income.
 
Joint Ventures
 
Deeprock North, LLC
 
On February 17, 2011, KMP’s subsidiary Kinder Morgan Cushing LLC and Mecuria Energy Trading, Inc. entered into formal agreements for a crude oil storage joint venture located in Cushing, Oklahoma. On this date, KMP contributed $15.9 million for a 50% ownership interest in an existing crude oil tank farm that has storage capacity of one million barrels, and it expects to invest an additional $8.8 million for the construction of three new storage tanks that will provide incremental storage capacity of 750,000 barrels. The new tanks are expected to be in service by the end of the third quarter of 2011. The joint venture is named Deeprock North, LLC. Deeprock Energy owns a 12.02% member interest in Deeprock North, LLC and will remain construction manager and operator of the joint venture. Mecuria owns the remaining 37.98% member interest and will remain the anchor tenant for the joint venture’s crude oil capacity for the next five years with an option to extend. In addition, KMP entered into a development agreement with Deeprock Energy that gives it an option to participate in future expansions on Deeprock’s remaining 254 acres of undeveloped land.
 
KMP accounts for its investment under the equity method of accounting, and its investment and pro rata share of Deeprock North LLC’s operating results are included as part of the Terminals–KMP business segment. As of March 31, 2011, KMP’s net equity investment in Deeprock North, LLC totaled $16.0 million and is included within “Investments” on our accompanying consolidated balance sheet. In April 2011, KMP contributed an additional $2.1 million to Deeprock North as partial funding for its ongoing tankage and truck rack expansion projects.
 
Megafleet Towing Co., Inc. Assets
 
On February 9, 2011, KMP sold a marine vessel to Kirby Inland Marine, L.P., and additionally, KMP and Kirby formed a joint venture named Greens Bayou Fleeting, LLC. Pursuant to the joint venture agreement, KMP sold its ownership interest in the boat fleeting business it acquired from Megafleet Towing Co., Inc. in April 2009 to the joint venture for $4.1 million in cash and a 49% ownership interest in the joint venture. Kirby then made cash contributions to the joint venture in exchange for the remaining 51% ownership interest. Related to the above transactions, KMP recorded a loss of $5.5 million ($4.1 million after tax) in the fourth quarter of 2010 to write down the carrying value of the net assets to be sold to their estimated fair values as of December 31, 2010. In the first quarter of 2011, after final reconciliation and measurement of all of the net assets sold, KMP recognized a combined $2.2 million increase in income from the sale of these net assets, primarily consisting of a $1.9 million reduction in income tax expense, which is included within the caption “Income Tax (Expense) Benefit” in the accompanying consolidated statement of income for the three months ended March 31, 2011. Additionally, the sale of KMP’s ownership interest resulted in a $10.5 million non-cash reduction in goodwill (see Note 3), and was a transaction with a related party (see Note 9). Information about KMP’s acquisition of assets from Megafleet Towing Co., Inc. is described more fully in Note 3 to our consolidated financial statements included in our 2010 Form 10-K.
 
Acquisitions Subsequent to March 31, 2011
 
KinderHawk Field Services LLC
 
On May 5, 2011, KMP entered into a definitive agreement with Petrohawk Energy Corporation (Petrohawk) to acquire Petrohawk’s 50% interest in KinderHawk Field Services LLC (KinderHawk) and a 25% interest in Petrohawk’s natural gas gathering and treating services provider in the Eagle Ford Shale of South Texas for $855 million in cash and the assumption of $65 million in debt. Upon closing, which is expected in the third quarter of 2011, KMP will own 100% of

 
9

 
Kinder Morgan, Inc. Form 10-Q

KinderHawk, the largest natural gas gathering and midstream business in the Haynesville Shale. We will recognize a pre-tax, non-cash write down of the carrying value of KMP's KinderHawk investment, which is expected to be less than $200 million upon the closing of this transaction and will result in a less than $17 million after-tax, non-cash reduction to net income attributable to Kinder Morgan, Inc.
 
Divestitures Subsequent to March 31, 2011
 
River Consulting, LLC and Devco USA L.L.C.
 
Effective April 1, 2011, KMP sold 51% ownership interests in two separate wholly-owned subsidiaries to two separate buyers, both Oklahoma limited liability companies, for an aggregate consideration of $5.1 million, consisting of a $4.1 million note receivable and $1.0 million in cash. Following the sale, KMP continues to own 49% membership interests in both River Consulting LLC, a Louisiana limited liability company engaged in the business of providing engineering, consulting and management services, and Devco USA L.L.C., an Oklahoma limited liability company engaged in the business of processing, handling and marketing sulfur, and selling related pouring equipment. KMP now accounts for its retained investments under the equity method of accounting. At the time of the sale, the combined carrying value of the net assets (and members’ capital on a 100% basis) of both entities totaled approximately $7.5 million and consisted mostly of trade receivables and technology-based assets. The sale of 51% of each of these two subsidiaries will not have a material impact on our results of operations or our cash flows.
 
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–KMP; (v) Terminals–KMP; and (vi) Kinder Morgan Canada–KMP. There were no impairment charges resulting from our May 31, 2010 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.
 
Changes in the gross amounts of our goodwill and accumulated impairment losses for the three months ended March 31, 2011 are summarized as follows (in millions):
 
   
Products
Pipelines–
KMP
   
Natural Gas
Pipelines–
KMP
   
CO2–KMP
   
Terminals–
KMP
   
Kinder
Morgan
Canada–
KMP
   
Total
 
Historical Goodwill
  $ 2,116.5     $ 3,488.0     $ 1,521.7     $ 1,488.6     $ 626.5     $ 9,241.3  
Accumulated impairment losses.
    (1,266.5 )     (2,090.2 )     -       (676.6 )     (377.1 )     (4,410.4 )
Balance as of December 31, 2010
    850.0       1,397.8       1,521.7       812.0       249.4       4,830.9  
Acquisitions
    -       -       -       -       -       -  
Disposals(a)
    -       -       -       (10.5 )     -       (10.5 )
Currency translation adjustments
    -       -       -       -       6.4       6.4  
Balance as of March 31, 2011
  $ 850.0     $ 1,397.8     $ 1,521.7     $ 801.5     $ 255.8     $ 4,826.8  
__________
(a)
First quarter 2011 disposal related to the sale of KMP’s ownership interest in the boat fleeting business it acquired from Megafleet Towing Co., Inc. in April 2009 (discussed further in Note 2.)

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. For all investments we own containing equity method goodwill, 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 2011. As of March 31, 2011 and December 31, 2010, we reported $286.9 million and $283.0 million, respectively, in equity method goodwill within the caption “Investments” in our accompanying consolidated balance sheets. The increase in the
 
 
10

 
Kinder Morgan, Inc. Form 10-Q

equity method goodwill since December 31, 2010 was due to measurement period adjustments related to the acquisition of a 50% ownership interest in KinderHawk Field Services LLC in May 2010.
 

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 our accompanying consolidated balance sheets. Following is information related to our intangible assets subject to amortization (in millions):
 
   
March 31,
2011
   
December 31,
2010
 
Customer relationships, contracts and agreements
           
Gross carrying amount
  $ 423.7     $ 424.7  
Accumulated amortization
    (110.7 )     (99.9 )
Net carrying amount
    313.0       324.8  
                 
Technology-based assets, lease value and other
               
Gross carrying amount
    14.1       16.3  
Accumulated amortization
    (2.0 )     (1.9 )
Net carrying amount
    12.1       14.4  
                 
Total other intangibles, net
  $ 325.1     $ 339.2  

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 effects of obsolescence, new technology, and competition. For the three months ended March 31, 2011 and 2010, the amortization expense on our intangibles totaled $10.9 million and $12.4 million, respectively. As of March 31, 2011, the weighted average amortization period for our intangible assets was approximately 11.3 years, and our estimated amortization expense for these assets for each of the next five fiscal years (2012 – 2016) is approximately $37.7 million, $33.8 million, $30.7 million, $27.9 million and $25.0 million, respectively.
 
4.  Debt
 
We classify our debt based on the contractual maturity dates of the underlying debt instruments. We defer costs associated with debt issuance over the applicable term. These costs are then amortized as interest expense in our consolidated statements of income.
 
Kinder Morgan Kansas, Inc.’s debt balances included in our accompanying consolidated balance sheets (including both short-term and long-term amounts, the preferred interest in the general partner of KMP and purchase accounting adjustments on the carrying value of our debt and KMP’s debt, but excluding the value of interest rate swap agreements) as of March 31, 2011 and December 31, 2010 was $3,245.7 million and $3,630.1 million (including the $750.0 million of 5.35% Kinder Morgan Finance Company LLC’s senior notes paid on January 5, 2011), respectively. These balances included net unamortized purchase accounting adjustments, increasing the debt balances by $36.9 million and $37.5 million at March 31, 2011 and December 31, 2010, respectively.  The weighted average interest rate on all of Kinder Morgan Kansas, Inc. and its subsidiaries’ (excluding KMP and its subsidiaries’) borrowings was approximately 4.91% during the first quarter of 2011 and 4.95% during the first quarter of 2010. KMP’s debt balances included in our accompanying consolidated balance sheets (including both short-term and long-term amounts and excluding the value of interest rate swap agreements) as of  March 31, 2011 and December 31, 2010 was $11,748.8 million and $11,539.8 million, respectively. The weighted average interest rate on all of KMP’s and its subsidiaries’ borrowings was approximately 4.44% during the first quarter of 2011 and approximately 4.32% during the first quarter of 2010.
 
As of March 31, 2011, Kinder Morgan Kansas, Inc.’s short-term debt was $368.0 million, which consisted of (i) $365.0 million of borrowings under its credit facility and (ii) a $3.0 million current portion of purchase accounting adjustments on our carrying value of KMP’s debt. As of March 31, 2011, KMP’s short-term debt balances included in our accompanying consolidated balance sheets was $1,333.2 million, which consisted of (i) $500.0 million in principal amount of KMP’s 9.00% senior notes due February 1, 2019, that may be repurchased by KMP on February 1, 2012 pursuant to certain repurchase provisions contained in the bond indenture; (ii) $450.0 million in principal amount of KMP’s 7.125% senior notes due March 15, 2012 (including discount, KMP’s carrying amount of the notes was $449.8
 
 
11

 
Kinder Morgan, Inc. Form 10-Q

million as of March 31, 2011); (iii) $343.0 million of KMP’s commercial paper borrowings; (iv) $23.7 million in principal amount of tax-exempt bonds that mature on April 1, 2024, that 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); (v) a $9.4 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); and (vi) a $7.3 million portion of 5.23% long-term senior notes (KMP’s subsidiary Kinder Morgan Texas Pipeline, L.P. is the obligor on the notes).
 
Credit Facilities
 
   
March 31, 2011
 
December 31, 2010
   
Short-term
notes
payable
 
Weighted
average
interest rate
 
Short-term
notes
payable
 
Weighted
average
interest rate
   
(Dollars in millions)
Kinder Morgan Kansas, Inc. – Secured debt(a)
  $ 365.0       1.39 %   $ -       - %
KMP – Commercial paper(b)
  $ 343.0       0.35 %   $ 522.1       0.67 %
____________
(a)
The average short-term debt outstanding (and related weighted average interest rate) was $403.8 million (1.55%) during the three months ended March 31, 2011.
  
(b)
The average short-term debt outstanding (and related weighted average interest rate) was $450.4 million (0.55%) during the three months ended March 31, 2011.

As of March 31, 2011, the amount available for borrowing under the Kinder Morgan Kansas, Inc. $1.0 billion six-year senior secured credit facility was reduced by a combined amount of $405.6 million consisting of $365.0 million in borrowings under the credit facility and $40.6 million in four letters of credit required under provisions of our property and casualty, workers’ compensation and general liability insurance policies.
 
KMP’s $2.0 billion three-year, senior unsecured revolving credit facility expires June 23, 2013 and can be amended to allow for borrowings of up to $2.3 billion.  The credit facility is with a syndicate of financial institutions, and the facility permits KMP to obtain bids for fixed rate loans from members of the lending syndicate.  Wells Fargo Bank, National Association is the administrative agent, and borrowings under the credit facility can be used for KMP’s general partnership purposes and as a backup for its $2.0 billion commercial paper program.  There were no borrowings under the credit facility as of March 31, 2011 or as of December 31, 2010.
 
As of March 31, 2011, the amount available for borrowing under KMP’s credit facility was reduced by a combined amount of $579.8 million, consisting of $343.0 million of commercial paper borrowings and $236.8 million of letters of credit consisting of: (i) a $100.0 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 $87.9 million in three letters of credit that support tax-exempt bonds; (iii) a $16.2 million letter of credit that supports debt securities issued by the Express pipeline system; (iv) a $16.1 million letter of credit that supports KMP’s indemnification obligations on the Series D note borrowings of Cortez Capital Corporation; and (v) a combined $16.6 million in other letters of credit supporting other obligations of KMP and its subsidiaries.
 
KMP’s Commercial Paper Program
 
KMP’s commercial paper program provides for the issuance of $2.0 billion of commercial paper.  KMP’s $2.0 billion unsecured three-year bank credit facility supports its commercial paper program, and borrowings under KMP’s commercial paper program reduce the borrowings allowed under its credit facility.  The borrowings under KMP’s commercial paper program were used principally to finance the acquisitions and capital expansions it made during 2011 and 2010.  In the near term, KMP expects that its short-term liquidity and financing needs will be met primarily through borrowings made under its commercial paper program.
 
Long-term Debt
 
Kinder Morgan Finance Company LLC
 
In January 2011, Kinder Morgan Finance Company LLC, a wholly owned subsidiary of Kinder Morgan Kansas, Inc., retired the principal amount of its 5.35% senior notes that matured on January 5, 2011 using proceeds from the December
 
 
12

 
Kinder Morgan, Inc. Form 10-Q
 
2010 issuance of $750 million in principal amount of 6.00% senior notes due January 15, 2018.
 
KMP - Senior Notes
 
On March 4, 2011, KMP completed a public offering of $1.1 billion in principal amount of senior notes in two separate series, consisting of $500 million of 3.500% notes due March 1, 2016, and $600 million of 6.375% notes due March 1, 2041.  KMP received proceeds from the issuance of the notes, after underwriting discounts and commissions, of $1,092.7 million, and it used the proceeds to reduce the borrowings under its commercial paper program.
 
In addition, on March 15, 2011, KMP paid $700 million to retire the principal amount of its 6.75% senior notes that matured on that date.  KMP used both cash on hand and borrowings under its commercial paper program to repay the maturing senior notes.
 
KMP’s Subsidiary Debt
 
Kinder Morgan Operating L.P. “A” Debt
 
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 KMP’s subsidiaries issued a long-term note payable to the seller having a fair value of $42.3 million. KMP valued the debt equal to the present value of 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. KMP paid the fourth installment on March 31, 2011, and as of this date, the net present value of the note (representing the outstanding balance included as debt on our accompanying consolidated balance sheet) was $9.4 million. As of December 31, 2010, the net present value of the note was $19.2 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, which were 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, KMP 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.  During the first quarter of 2011, KMP paid a combined principal amount of $1.8 million, and as of March 31, 2011, Kinder Morgan Texas Pipeline L.P.’s outstanding balance under the senior notes was $21.8 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. As of December 31, 2010, the outstanding balance under the notes was $23.6 million.
 
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.  Most of these agreements are with entities that are not consolidated in our financial statements; however, KMP has invested in and holds equity ownership interests in these entities.
 

 
13

 
Kinder Morgan, Inc. Form 10-Q
 
As of March 31, 2011, KMP’s contingent debt obligations with respect to these investments, as well as its obligations with respect to related letters of credit, are summarized below (dollars in millions):
 
Entity
 
KMP’s
Ownership
Interest
 
Investment Type
 
Total Entity
Debt
 
KMP’s
Contingent
Share of
Entity Debt(a)
Fayetteville Express Pipeline LLC(b)
 
50%
 
Limited Liability
 
$
962.5
(c)
 
$
481.3
 
  
                       
Cortez Pipeline Company(d)
 
50%
 
General Partner
 
$
140.1
(e)
 
$
86.2
(f)
                         
Nassau County,
Florida Ocean Highway and Port Authority(g)
 
N/A
 
N/A
   
N/A
   
$
18.3
(h)
_________

(a)
Represents the portion of the entity’s debt that KMP may be responsible for if the entity cannot satisfy its obligations.
  
(b)
 
Fayetteville Express Pipeline LLC is a limited liability company and the owner of the Fayetteville Express natural gas pipeline system.  The remaining limited liability company member interest in Fayetteville Express Pipeline LLC is owned by Energy Transfer Partners, L.P.
  
(c)
Amount represents borrowings under a $1.1 billion, unsecured revolving bank credit facility that is due May 11, 2012.
  
(d)
 
Cortez Pipeline Company is a Texas general partnership that owns and operates a common carrier carbon dioxide pipeline system. The remaining general partner interests are owned by ExxonMobil Cortez Pipeline, Inc., an indirect wholly-owned subsidiary of Exxon Mobil Corporation, and Cortez Vickers Pipeline Company, an indirect subsidiary of M.E. Zuckerman Energy Investors Incorporated.
  
(e)
 
Amount consists of (i) $32.1 million aggregate principal amount of Series D notes due May 15, 2013 (interest on the Series D notes is paid annually and based on a fixed interest rate of 7.14% per annum); (ii) $100.0 million of variable rate Series E notes due December 11, 2012 (interest on the Series E notes is paid quarterly and based on an interest rate of three-month LIBOR plus a spread); and (iii) $8.0 million of outstanding borrowings under a $40.0 million committed revolving bank credit facility that is also due December 11, 2012.
  
(f)
 
KMP is severally liable for its percentage ownership share (50%) of the Cortez Pipeline Company debt ($70.1 million).  In addition, as of March 31, 2011, Shell Oil Company shares KMP’s several guaranty obligations jointly and severally for $32.1 million of Cortez’s debt balance related to the Series D notes; however, KMP is obligated to indemnify Shell for the liabilities it incurs in connection with such guaranty.  Accordingly, as of March 31, 2011, KMP has a letter of credit in the amount of $16.1 million issued by JP Morgan Chase, in order to secure its indemnification obligations to Shell for 50% of the Cortez debt balance of $32.1 million related to the Series D notes.
  
 
Further, pursuant to a Throughput and Deficiency Agreement, the partners of Cortez Pipeline Company are required to contribute capital to Cortez in the event of a cash deficiency.  The agreement contractually supports the financings of Cortez Capital Corporation, a wholly-owned subsidiary of Cortez Pipeline Company, by obligating the partners of Cortez Pipeline to fund cash deficiencies at Cortez Pipeline, including anticipated deficiencies and cash deficiencies relating to the repayment of principal and interest on the debt of Cortez Capital Corporation.  The partners’ respective parent or other companies further severally guarantee the obligations of the Cortez Pipeline owners under this agreement.
  
(g)
 
Arose from KMP’s Vopak terminal acquisition in July 2001.  Nassau County, Florida Ocean Highway and Port Authority is a political subdivision of the state of Florida.
  
(h)
 
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 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, 2011, this letter of credit had a face amount of $18.3 million. 

On February 25, 2011, Midcontinent Express Pipeline LLC entered into a three-year $75.0 million unsecured revolving bank credit facility that is due February 25, 2014. This credit facility replaced Midcontinent Express’ previous $175.4 million credit facility that was terminated on February 28, 2011, and on this same date, each of its two member owners, including KMP, were released from their respective debt obligations under the previous guaranty agreements.  Accordingly, KMP no longer has a contingent debt obligation with respect to Midcontinent Express Pipeline LLC. For additional information regarding Kinder Morgan Kansas, Inc.’s and KMP’s debt facilities and contingent debt agreements, see Note 8 “Debt” and Note 12 “Commitments and Contingent Liabilities” in our consolidated financial statements included in our 2010 Form 10-K.
 

 
14

 
Kinder Morgan, Inc. Form 10-Q
 
Kinder Morgan G.P., Inc. Preferred Shares
 
On April 20, 2011, 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, 2011 to shareholders of record as of April 29, 2011. On January 19, 2011, 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 that was paid on February 18, 2011 to shareholders of record as of January 31, 2011.
 
5.  Stockholders’ Equity
 
Common Equity
 
As of March 31, 2011, our stockholders’ equity included the following shares:
 
 
March 31, 2011
Class P shares
110,897,328
Class A shares
596,102,672
Class B shares
100,000,000
Class C shares
2,462,927

For accounting purposes, both our Class P and our Class A shares are considered common stock, and our Class B and Class C shares are considered participating securities.
 
Initial Public Offering
 
In the following discussion, the Investors refer to: (i) Richard D. Kinder, our Chairman and Chief Executive Officer; (ii) investment funds advised by, or affiliated with, Goldman, Sachs & Co., Highstar Capital LP, The Carlyle Group and Riverstone Holdings LLC, which we refer to collectively as the ‘‘Sponsor Investors;’’ (iii) Fayez Sarofim, one of our directors, and investment entities affiliated with him, and an investment entity affiliated with Michael C. Morgan, another of our directors, and William V. Morgan, one of our founders; and (iv) a number of other members of our management.
 
On February 16, 2011, we completed an initial public offering of our common stock (the offering).  In connection with the offering, we converted from a Delaware limited liability company to a Delaware corporation.  Our outstanding Class A units, Class B units and Class A-1 units were converted to Class A shares, Class B shares and Class C shares, respectively.  Upon this conversion, the Sponsor Investors then converted some of their Class A shares on a one-for-one basis into our common stock sold in the offering.  No shares were sold by members of Kinder Morgan management in the offering.  All of the common stock that was sold in the offering was sold by existing investors, consisting of investment funds advised by, or affiliated with, Goldman, Sachs & Co., Highstar Capital LP, The Carlyle Group and Riverstone Holdings LLC, and we did not receive any proceeds from the offering. The class of common stock sold in the offering was our Class P common stock, which is sometimes referred to herein as our “common stock.” Our then existing investors prior to the initial public offering hold our Class A, Class B and Class C common stock, which is sometimes collectively referred to herein as our “investor retained stock.”
 
We have 707,000,000 shares outstanding on a fully converted basis. In the offering, the selling stockholders sold 109,786,590 shares, or approximately 15.5% of our outstanding shares. Upon the closing of the offering, our investor retained stock was convertible into a fixed aggregate of 597,213,410 shares of common stock, which represents 84.5% of our outstanding shares of common stock on a fully-converted basis. The number of shares of common stock into which Class A shares, Class B shares and Class C shares will convert will be determined in accordance with our certificate of incorporation.  The conversion of investor retained stock into shares of our common stock will not increase our total fully converted shares outstanding.  Initially, our Class A shares will be convertible into shares of common stock on a one-for-one basis and our Class B shares and Class C shares will not be convertible into any shares of our common stock.  Any conversion of Class B shares and Class C shares will decrease on a share for share basis the number of shares of our common stock  into which our Class A shares would be able to convert.  The terms of the Class A shares, Class B shares and Class C shares are intended to preserve substantially the same relative rights to share in the value of Kinder Morgan, Inc.’s equity that the Class A units, Class B units and Class A-1 units, respectively, had with respect to Kinder Morgan Holdco LLC’s equity.
 

 
15

 
Kinder Morgan, Inc. Form 10-Q
 
Kinder Morgan, Inc. Dividends
 
On February 11, 2011, our Board of Directors declared and paid a dividend to our then existing investors of $245.8 million with respect to the period for which we were not public.  This consisted of $205.0 million for the fourth quarter of 2010 and $104.8 million for the first 46 days of 2011, representing the portion of the first quarter of 2011 that we were not public, less a one time adjustment of $64.0 million in available earnings and profits reserved for the after tax cost of special bonuses (and premium pay) in an aggregate amount of approximately $100 million to certain of our non-senior employees. We expect to pay such bonuses pursuant to the shareholders’ agreement in late May of 2011. No holders of our Class B shares or Class C shares will receive such bonuses.
 
On April 20, 2011, our Board of Directors declared a prorated dividend of $0.14 per share for the first quarter of 2011, payable on May 16, 2011, to shareholders of record as of May 2, 2011. The initial dividend is prorated from February 16, 2011, the day that we closed the offering, to March 31, 2011.  Based on a full quarter, the dividend amounts to $0.29 per share ($1.16 annualized).
 
Changes in Equity
 
The following tables set 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, 2011
 
   
KMI
Members
   
Common
Shares(a)
   
Additional
paid-in
capital
   
Retained
earnings
   
Accumulated
other
comprehensive
loss
   
Stockholders’
equity
attributable
to KMI
   
Noncontrolling
interests
   
Total
 
Beginning Balance
  $ 3,575.6     $ -     $ -     $ -     $ (136.5 )   $ 3,439.1     $ 5,099.9     $ 8,539.0  
Reclassification of Equity
upon the offering
    (3,404.0 )     8.1       3,395.9                       -               -  
Impact from equity transactions of KMP
                    2.5                       2.5       (3.9 )     (1.4 )
A-1 and B unit amortization
    3.6                                       3.6               3.6  
Distributions
                                            -       (229.1 )     (229.1 )
Contributions
                                            -       81.2       81.2  
Cash dividends
    (245.8 )                                     (245.8 )             (245.8 )
Other
                    (0.7 )                     (0.7 )     0.1       (0.6 )
Comprehensive income
                                                               
Net Income
    70.6                       84.4               155.0       46.0       201.0  
Other comprehensive income (loss), net of tax
                                                               
Change in fair value of derivatives utilized for hedging purposes
                                    (80.5 )     (80.5 )     (120.0 )     (200.5 )
Reclassification of change in fair value of derivatives to net income
                                    13.5       13.5       24.3       37.8  
Foreign currency translation adjustments
                                    15.5       15.5       23.1       38.6  
Adjustments to pension and other postretirement benefit plan liabilities
                                    (4.0 )     (4.0 )     (6.0 )     (10.0 )
Total other comprehensive
loss
                                    (55.5 )     (55.5 )     (78.6 )     (134.1 )
Total comprehensive
income (loss)
                                            99.5       (32.6 )     66.9  
Ending Balance
  $ -     $ 8.1     $ 3,397.7     $ 84.4     $ (192.0 )   $ 3,298.2     $ 4,915.6     $ 8,213.8  
____________
(a)
Common shares include $1.1 million, $6.0 million and $1.0 million of Class P, Class A and Class B shares, respectively.


 
16

 
Kinder Morgan, Inc. Form 10-Q
 
   
Three Months Ended March 31, 2010
 
   
Kinder
Morgan, Inc.
   
Noncontrolling
interests
   
Total
 
                   
Beginning Balance
  $ 4,170.5     $ 4,674.6     $ 8,845.1  
Impact from equity transactions of KMP
    2.1       (3.4 )     (1.3 )
A-1 and B unit amortization
    1.9       -       1.9  
Distributions
    -       (200.8 )     (200.8 )
Contributions
    -       81.7       81.7  
Deconsolidation of variable interest entity(a)
    -       (45.9 )     (45.9 )
Cash dividends
    (150.0 )     -       (150.0 )
Other
    -       0.1       0.1  
Comprehensive income
                       
Net income (loss)
    (160.9 )     (19.0 )     (179.9 )
Other comprehensive income (loss), net of tax
                       
Change in fair value of derivatives utilized for hedging purposes
    15.6       11.3       26.9  
Reclassification of change in fair value of derivatives to net income
    4.1       21.7       25.8  
Foreign currency translation adjustments
    18.1       27.3       45.4  
Adjustments to pension and other postretirement benefit plan liabilities
    (0.8 )     (1.1 )     (1.9 )
Total other comprehensive income
    37.0       59.2       96.2  
Total comprehensive income (loss)
    (123.9 )     40.2       (83.7 )
Ending Balance
  $ 3,900.6     $ 4,546.5     $ 8,447.1  
____________
(a)
Upon the adoption of Accounting Standards Update No. 2009-17, which amended the codification’s “Consolidation” topic, on January 1, 2010, we no longer consolidate Triton Power Company LLC into our financial statements.

   
Three Months Ended March 31,
 
   
2011
   
2010
 
   
Kinder
Morgan, Inc.
   
Noncontrolling
interests
   
Total
   
Kinder
Morgan, Inc.
   
Noncontrolling
interests
   
Total
 
Tax (Expense) Benefit Included in Other Comprehensive Income:
                                   
Change in fair value of derivatives utilized for hedging purposes
  $ 48.5     $ 13.6     $ 62.1     $ (10.3 )   $ (1.2 )   $ (11.5 )
Reclassification of change in fair value of derivatives to net income
    (8.1 )     (2.8 )     (10.9 )     (2.8 )     (2.3 )     (5.1 )
Foreign currency translation adjustments
    (9.4 )     (2.6 )     (12.0 )     (12.6 )     (2.9 )     (15.5 )
Adjustments to pension and other postretirement benefit plan liabilities
    2.4       0.7       3.1       0.6       0.1       0.7  
Tax (expense) benefit included in total other comprehensive (loss) income
  $ 33.4     $ 8.9     $ 42.3     $ (25.1 )   $ (6.3 )   $ (31.4 )

Noncontrolling Interests
 
The caption “Noncontrolling interests” in our accompanying consolidated balance sheets consists of interests in the following subsidiaries (in millions):
 
   
March 31,
2011
   
December 31,
2010
 
KMP
  $ 2,957.7     $ 3,135.4  
KMR
    1,950.0       1,956.2  
Other
    7.9       8.3  
    $ 4,915.6     $ 5,099.9  

KMP
 
Noncontrolling interests in KMP represent the economic interests in this subsidiary that we do not own. At March 31, 2011, we owned, directly, and indirectly in the form of i-units corresponding to the number of shares of KMR we owned, approximately 35.0 million limited partner units of KMP. These units, which consist of 16.4 million common units, 5.3 million Class B units and 13.3 million i-units, represent approximately 11.0% of the total outstanding limited partner interests of KMP. In addition, we indirectly own all the common equity of the general partner of KMP, which holds an effective 2% combined interest in KMP and its operating partnerships. Together, at March 31, 2011, our limited partner
 

 
17

 
Kinder Morgan, Inc. Form 10-Q

and general partner interests represented approximately 12.8% of KMP’s total equity interests and represented an approximate 50% economic interest in KMP. This difference results from the existence of incentive distribution rights held by Kinder Morgan G.P., Inc., the general partner of KMP.
 
Contributions
 
On February 25, 2011, KMP entered into a second amended and restated equity distribution agreement with UBS Securities LLC to provide for the offer and sale of common units having an aggregate offering price of up to $1.2 billion (up from an aggregate offering price of up to $600 million under KMP’s first amended and restated agreement) from time to time through UBS, as KMP’s sales agent.  During the three months ended March 31, 2011, KMP issued 1,130,206 of its common units pursuant to this equity distribution agreement, and after commissions of $0.6 million, KMP received net proceeds of $81.2 million from the issuance of these common units.  KMP used the proceeds to reduce the borrowings under its commercial paper program.  For additional information regarding KMP’s equity distribution agreement, see Note 10 to our consolidated financial statements included in our 2010 Form 10-K.
 
The above equity issuances during the three months ended March 31, 2011 had the associated effects of increasing our (i) noncontrolling interests associated with KMP by $77.3 million, (ii) accumulated deferred income taxes by $1.4 million and (iii) additional paid-in capital by $2.5 million.
 
Distributions
 
Distributions to our noncontrolling interests consist primarily of distributions by KMP to its common unit holders.  On February 14, 2011, KMP paid a quarterly distribution of $1.13 per common unit for the fourth quarter of 2010, of which $229.0 million was paid to the public holders (included in noncontrolling interests) of KMP’s common units.
 
Subsequent Events
 
Noncontrolling Interest Contributions
 
In the first week of April 2011, KMP issued 114,690 of its common units for the settlement of sales made on or before March 31, 2011 pursuant to its equity distribution agreement.  After commissions of $0.1 million, KMP received net proceeds of $8.4 million for the issuance of these 114,690 common units, and used the proceeds to reduce the borrowings under its commercial paper program.
 
Noncontrolling Interest Distributions
 
On April 20, 2011, KMP declared a cash distribution of $1.14 per unit for the quarterly period ended March 31, 2011. The distribution will be paid on May 13, 2011, to unitholders of record as of April 29, 2011.
 
On May 13, 2011, KMR will pay a share distribution of 0.017102 shares per outstanding share (1,599,149 total shares) to shareholders of record as of April 29, 2011. This distribution was determined by dividing:
 
 
$1.14, the cash amount distributed per KMP common unit
 
by
 
 
$66.659, the average of KMR’s shares’ closing market prices from April 12-26, 2011, the ten consecutive trading days preceding the date on which KMR’s shares began to trade ex-dividend under the rules of the New York Stock Exchange.
 
 
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.
 

 
18

 
Kinder Morgan, Inc. Form 10-Q
 
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 price volatility related to (i) pre-existing or anticipated physical natural gas, natural gas liquids and crude oil sales; (ii) natural gas purchases; and (iii) natural gas system use and storage. 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 (as defined by generally accepted accounting principles) 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 as defined by generally accepted accounting principles), 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. During the three months ended March 31, 2011, we recognized a net gain of $3.7 million, related to crude oil hedges and resulting from both hedge ineffectiveness and amounts excluded from effectiveness testing. During the three months ended March 31, 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, 2011 and 2010, we reclassified losses of $13.5 million and $4.1 million, respectively, from “Accumulated other comprehensive loss” into earnings. No material 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 no longer occur by the end of the originally specified time period or within an additional two-month period of time thereafter, but rather, the amounts reclassified were the result of the hedged forecasted transactions actually affecting earnings (i.e. when the forecasted sales and purchase actually occurred). The proceeds or payments resulting from the settlement of cash flow hedges are reflected in the operating section of our accompanying consolidated statement of cash flows as changes to net income and working capital.
 
The “Accumulated other comprehensive loss” balance included in our Stockholders’ Equity was $192.0 million and $136.5 million as of March 31, 2011 and December 31, 2010, respectively. These totals included “Accumulated other comprehensive loss” amounts of $160.3 million and $93.3 million of losses as of March 31, 2011 and December 31, 2010, respectively, associated with energy commodity price risk management activities. Approximately $99.0 million of the total loss amount associated with energy commodity price risk management activities and included in our Stockholder’s Equity as of March 31, 2011 is expected to be reclassified into earnings during the next twelve months (when the associated forecasted sales and purchases are also expected to occur), however, actual amounts could vary materially as a result of changes in market prices. As of March 31, 2011, 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 2015.
 
As of March 31, 2011, KMP had entered into the following outstanding commodity forward contracts to hedge its forecasted energy commodity purchases and sales:
 
   
Net open position
long/(short)
Derivatives designated as hedging contracts
       
Crude oil
    (24.9 )
million barrels
Natural gas fixed price
    (28.8 )
billion cubic feet
Natural gas basis
    (28.8 )
billion cubic feet
Derivatives not designated as hedging contracts
         
Natural gas basis
    1.7  
billion cubic feet


 
19

 
Kinder Morgan, Inc. Form 10-Q
 
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. Until settlement occurs, this will result in non-cash gains or losses being reported in our operating results.
 
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 March 31, 2011, our subsidiaries, Kinder Morgan Kansas, Inc. and KMP, had notional principal amounts of $725 million and $5,275 million, respectively, and as of December 31, 2010, $725 million and $4,775 million, respectively, of fixed-to-variable interest rate swap agreements, effectively converting the interest expense associated with certain senior notes from fixed rates to variable rates based on an interest rate of LIBOR plus a spread.  All of Kinder Morgan Kansas, Inc.’s and KMP’s swap agreements have termination dates that correspond to the maturity dates of the related series of senior notes and, as of March 31, 2011, the maximum length of time over which they have hedged a portion of their exposure to the variability in the value of this debt due to interest rate risk is through January 15, 2038.
 
During the three months ended March 31, 2011, KMP entered into four additional fixed-to-variable interest rate swap agreements having a combined notional principal amount of $500 million. Each agreement effectively converts a portion of the interest expense associated with KMP’s 3.50% senior notes due March 1, 2016 from a fixed rate to a variable rate based on an interest rate of LIBOR plus a spread.
 

 
20

 
Kinder Morgan, Inc. Form 10-Q
 
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” on our accompanying consolidated balance sheets. The following table summarizes the fair values of our derivative contracts included on our accompanying consolidated balance sheets as of March 31, 2011 and December 31, 2010 (in millions):
 
Fair Value of Derivative Contracts
 
     
Asset derivatives
   
Liability derivatives
 
     
March 31,
2011
   
December 31,
2010
   
March 31,
2011
   
December 31,
2010
 
 
Balance sheet
location
 
Fair value
   
Fair value
 
Derivatives designated as hedging contracts
                         
Energy commodity derivative contracts
Current
  $ 19.9     $ 20.1     $ (372.4 )   $ (275.9 )
 
Non-current
    24.6       43.1       (189.9 )     (103.0 )
Subtotal
      44.5       63.2       (562.3 )     (378.9 )
                                   
Interest rate swap agreements
Current
    10.6       -       -       -  
 
Non-current
    200.0       258.6       (92.4 )     (69.2 )
Subtotal
      210.6       258.6       (92.4 )     (69.2 )
Total
      255.1       321.8       (654.7 )     (448.1 )
                                   
Derivatives not designated as hedging contracts
                                 
Energy commodity derivative contracts
Current
    4.7       3.9       (8.1 )     (5.6 )
Total
      4.7       3.9       (8.1 )     (5.6 )
Total derivatives
    $ 259.8     $ 325.7     $ (662.8 )   $ (453.7 )

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 our accompanying 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, 2011 and December 31, 2010, this unamortized premium totaled $450.7 million and $461.9 million, respectively, and as of March 31, 2011, the weighted average amortization period for this premium was approximately 17.0 years.
 
Effect of Derivative Contracts on the Income Statement
 
The following tables summarize the impact of our derivative contracts on our accompanying consolidated statements of income for each of the three months ended March 31, 2011 and 2010 (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,
 
     
2011
   
2010
       
2011
   
2010
 
Interest rate swap agreements
Interest, net – income/(expense)
  $ (71.2 )   $ 66.9  
Fixed rate debt
 
Interest, net – income/(expense)
  $ 71.2     $ (66.9 )
Total
    $ (71.2 )   $ 66.9  
Total
    $ 71.2     $ (66.9 )
____________
(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.


 
21

 
Kinder Morgan, Inc. Form 10-Q
 
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,
 
 
2011
 
2010
   
2011
 
2010
   
2011
 
2010
 
Energy commodity derivative contracts
  $ (80.5 )   $ 15.6  
Revenues-natural gas sales
  $ 0.2     $ -  
Revenues-product sales and other
  $ 3.7     $ 5.4  
                 
Revenues-product sales and other
    (16.1 )     (4.2 )                  
                 
Gas purchases and other costs of sales
    2.4       0.1  
Gas purchases and other costs of sales
    -       0.9  
Total
  $ (80.5 )   $ 15.6  
Total
  $ (13.5 )   $ (4.1 )
Total
  $ 3.7     $ 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,
 
   
2011
   
2010
     
2011
   
2010
     
2011
   
2010
 
Cross currency swap agreements
  $ -     $ (5.5 )
Other, net
  $ -     $ -  
Revenues
  $ -     $ -  
Total
  $ -     $ (5.5 )
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,
 
       
2011
   
2010
 
Energy commodity derivative contracts
 
Gas purchases and other costs of sales
  $ 0.1     $ 0.7  
Total
      $ 0.1     $ 0.7  

Net Investment Hedges
 
We are exposed to foreign currency risk from our investments in businesses owned and operated outside the United States. In 2005 and 2006, Kinder Morgan Kansas, Inc. entered into various cross-currency interest rate swap transactions, which were designated as net investment hedges, in order to hedge the value of the investment in Canadian operations. Over time, as the exposure to foreign currency risk through our Canadian operations was reduced through dispositions, Kinder Morgan Kansas, Inc. began to terminate cross-currency swap agreements. The final cross-currency swap agreements were terminated during the third quarter of 2010 and there were no outstanding cross currency interest rate swaps at March 31, 2011 and December 31, 2010, respectively. In the periods with outstanding cross-currency swap agreements, the effective portion of the changes in fair value of these swap transactions was reported as a cumulative translation adjustment included in the balance sheet caption “Accumulated other comprehensive loss.”
 
Credit Risks
 
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.
 

 
22

 
Kinder Morgan, Inc. Form 10-Q
 
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, 2011 was (in millions):
 
   
Asset
position
 
Interest rate swap agreements
  $ 210.6  
Energy commodity derivative contracts
    49.2  
Gross exposure
    259.8  
Netting agreement impact
    (49.4 )
Net exposure
  $ 210.4  

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, 2011 and December 31, 2010, KMP had no outstanding letters of credit supporting its hedging of energy commodity price risks associated with the sale of natural gas, natural gas liquids, and crude oil.
 
As of March 31, 2011, KMP had cash margin deposits associated with its energy commodity contract positions and over-the-counter swap partners totaling $4.4 million, and we reported this amount as “Restricted deposits” in our accompanying consolidated balance sheet.  As of December 31, 2010, KMP’s counterparties associated with its energy commodity contract positions and over-the-counter swap agreements had margin deposits with KMP totaling $2.4 million, and we reported this amount within “Accrued other liabilities” in our accompanying consolidated balance sheet.
 
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, 2011, 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
  $ -     $ 4.4  
                 
Two notches to below BBB-/Baa3 (below investment grade)
  $ 87.0     $ 91.4  
__________
(a)
If there are split ratings among the independent credit rating agencies, most counterparties use the higher credit rating to determine KMP’s incremental collateral obligations, while the remaining use the lower credit rating.  Therefore, a two notch downgrade to below BBB-/Baa3 by one agency would not trigger the entire $87.0 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
 

 
23

 
Kinder Morgan, Inc. Form 10-Q
 
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).
 
Fair Value of Derivative Contracts
 
The following two tables summarize the fair value measurements of our (i) energy commodity derivative contracts and (ii) interest rate swap agreements as of March 31, 2011 and December 31, 2010, based on the three levels established by the Codification (in millions). The fair value measurements in the tables below do not include cash margin deposits made by KMP or its counterparties, which would be reported within “Restricted deposits” and “Accrued other current liabilities,” respectively, in the accompanying consolidated balance sheets.
 
   
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, 2011
                       
Energy commodity derivative contracts(a)
  $ 49.2     $ 12.8     $ 6.9     $ 29.5  
Interest rate swap agreements
  $ 210.6     $ -     $ 210.6     $ -  
                                 
As of December 31, 2010