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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
F O R M   10-Q
 
þ  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014
 
or
 
o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____to_____
 
Commission file number: 001-35081

KINDER MORGAN, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
80-0682103
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

1001 Louisiana Street, Suite 1000, Houston, Texas 77002
(Address of principal executive offices)(zip code)
Registrant’s telephone number, including area code: 713-369-9000
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No þ
 
As of October 24, 2014, the registrant had 1,028,229,501 Class P shares outstanding.





KINDER MORGAN, INC. AND SUBSIDIARIES
TABLE OF CONTENTS

 
 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recent Developments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


KINDER MORGAN, INC. AND SUBSIDIARIES
GLOSSARY


Company Abbreviations

APT
=
American Petroleum Tankers
KinderHawk
=
KinderHawk Field Services LLC
BOSTCO
=
Battleground Oil Specialty Terminal Company LLC
KMEP
=
Kinder Morgan Energy Partners, L.P.
Calnev
=
Calnev Pipe Line LLC
KMGP
=
Kinder Morgan G.P., Inc.
Copano
=
Copano Energy, L.L.C.
KMI
=
Kinder Morgan Inc. and its majority-owned and/or controlled subsidiaries, excluding KMP and EPB
Eagle Ford
=
Eagle Ford Gathering LLC
KMP
=
Kinder Morgan Energy Partners, L.P. and its majority-owned and controlled subsidiaries
El Paso
=
El Paso Holdco LLC
KMR
=
Kinder Morgan Management, LLC
EP
=
El Paso Corporation and its majority-owned and controlled subsidiaries
SFPP
=
SFPP, L.P.
EPB
=
El Paso Pipeline Partners, L.P. and its majority-owned and controlled subsidiaries
SLNG
=
Southern LNG Company, L.L.C.
EPNG
=
El Paso Natural Gas Company, L.L.C.
SNG
=
Southern Natural Gas Company, L.L.C.
EPPOC
=
El Paso Pipeline Partners Operating Company, L.L.C.
TGP
=
Tennessee Gas Pipeline Company, L.L.C.
 
 
 
 
 
 
Unless the context otherwise requires, references to “we,” “us,” or “our,” are intended to mean Kinder Morgan, Inc. and/or its majority-owned and controlled subsidiaries.
 
 
 
 
 
 
Common Industry and Other Terms
BBtu/d
=
billion British Thermal Units per day
LIBOR
=
London Interbank Offered Rate
Bcf/d
=
billion cubic feet per day
LLC
=
limited liability company
CERCLA
=
Comprehensive Environmental Response, Compensation and Liability Act
MBbl/d
=
thousands of barrels per day
CO2
=
carbon dioxide
MLP
=
master limited partnership
CPUC
=
California Public Utilities Commission
MMBbl/d
=
millions barrels per day

DD&A
=
depreciation, depletion and amortization
NGL
=
natural gas liquids
EBDA
=
earnings before depreciation, depletion and amortization expenses
NYSE
=
New York Stock Exchange
EPA
=
United States Environmental Protection Agency
OTC
=
over-the-counter
FASB
=
Financial Accounting Standards Board
PHMSA
=
Pipeline and Hazardous Materials Safety Administration
FERC
=
Federal Energy Regulatory Commission
Sustaining
=
capital expenditures which do not increase capacity or throughput
GAAP
=
United States Generally Accepted Accounting Principles
WTI
=
West Texas Intermediate
When we refer to cubic feet measurements; all measurements are at a pressure of 14.73 pounds per square inch.



2

 
Kinder Morgan, Inc. Form 10-Q


Information Regarding Forward-Looking Statements

This report includes forward-looking statements. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. They use words such as “anticipate,” “believe,” “intend,” “plan,” “projection,” “forecast,” “strategy,” “position,” “continue,” “estimate,” “expect,” “may,” or the negative of those terms or other variations of them or comparable terminology. In particular, expressed or implied statements concerning future actions, conditions or events, future operating results or the ability to generate sales, income or cash flow or to pay dividends are forward-looking statements. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Future actions, conditions or events and future results of operations may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results are beyond our ability to control or predict.

See “Information Regarding Forward-Looking Statements” and Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 (2013 Form 10-K) and Item 1A “Risk Factors” included elsewhere in this report for a more detailed description of factors that may affect the forward-looking statements. When considering forward-looking statements, one should keep in mind the risk factors described in our 2013 Form 10-K. The risk factors could cause our actual results to differ materially from those contained in any forward-looking statement. Because of these risks and uncertainties, you should not place undue reliance on any forward-looking statement. We plan to provide updates to projections included in this report when we believe previously disclosed projections no longer have a reasonable basis.


3

 
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 September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
Natural gas sales
$
1,043

 
$
968

 
$
3,154

 
$
2,649

Services
2,050

 
1,675

 
5,655

 
4,881

Product sales and other
1,198

 
1,113

 
3,466

 
2,668

Total Revenues
4,291

 
3,756

 
12,275

 
10,198

 
 
 
 
 
 
 
 
Operating Costs, Expenses and Other
 
 
 
 
 

 
 

Costs of sales
1,642

 
1,543

 
4,895

 
3,767

Operations and maintenance
557

 
517

 
1,580

 
1,579

Depreciation, depletion and amortization
520

 
467

 
1,518

 
1,327

General and administrative
135

 
158

 
461

 
481

Taxes, other than income taxes
105

 
95

 
326

 
295

Other expense (income), net

 
(65
)
 
3

 
(81
)
Total Operating Costs, Expenses and Other
2,959

 
2,715

 
8,783

 
7,368

 
 
 
 
 
 
 
 
Operating Income
1,332

 
1,041

 
3,492

 
2,830

 
 
 
 
 
 
 
 
Other Income (Expense)
 
 
 
 
 

 
 

Earnings from equity investments
107

 
100

 
306

 
294

Amortization of excess cost of equity investments
(12
)
 
(11
)
 
(33
)
 
(29
)
Interest, net
(432
)
 
(418
)
 
(1,320
)
 
(1,247
)
Gain on remeasurement of previously held equity interest in Eagle Ford to fair value (Note 2)

 

 

 
558

(Loss) gain on sale of investments in Express pipeline system (Note 2)

 
(1
)
 

 
224

Other, net
30

 
11

 
56

 
35

Total Other Expense
(307
)
 
(319
)
 
(991
)
 
(165
)
 
 
 
 
 
 
 
 
Income from Continuing Operations Before Income Taxes
1,025

 
722

 
2,501

 
2,665

 
 
 
 
 
 
 
 
Income Tax Expense
(246
)
 
(171
)
 
(624
)
 
(675
)
 
 
 
 
 
 
 
 
Income from Continuing Operations
779

 
551

 
1,877

 
1,990

 
 
 
 
 
 
 
 
Loss from Discontinued Operations, Net of Tax

 

 

 
(2
)
 
 
 
 
 
 
 
 
Net Income
779

 
551

 
1,877

 
1,988

 
 
 
 
 
 
 
 
Net Income Attributable to Noncontrolling Interests
(450
)
 
(265
)
 
(977
)
 
(1,133
)
 
 
 
 
 
 
 
 
Net Income Attributable to Kinder Morgan, Inc.
$
329

 
$
286

 
$
900

 
$
855

 
 
 
 
 
 
 
 
Basic and Diluted Earning Per Common Share
 
 
 
 
 
 
 
From Continuing Operations
$
0.32

 
$
0.27

 
$
0.87

 
$
0.82

From Discontinued Operations

 

 

 

Total Basic and Diluted Earnings Per Common Share
$
0.32

 
$
0.27

 
$
0.87

 
$
0.82

 
 
 
 
 
 

 
 

Basic and Diluted Weighted-Average Number of Shares Outstanding
1,028

 
1,036

 
1,028

 
1,036

 
 
 
 
 
 
 
 
Dividends Per Common Share Declared for the Period
$
0.44

 
$
0.41

 
$
1.29

 
$
1.19


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 COMPREHENSIVE INCOME
(In Millions)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Kinder Morgan, Inc.
 
 
 
 
 
 
 
Net income
$
329

 
$
286

 
$
900

 
$
855

Other comprehensive income (loss), net of tax
 

 
 

 
 
 
 
Change in fair value of derivatives utilized for hedging purposes (net of tax (expense) benefit of $(29), $19, $3 and $9, respectively)
48

 
(42
)
 
(8
)
 
(22
)
Reclassification of change in fair value of derivatives to net income (net of tax benefit (expense) of $1, $(5), $(6) and $(2), respectively)
(1
)
 
10

 
11

 
5

Foreign currency translation adjustments (net of tax benefit (expense) of $18, $(7), $19 and $12, respectively)
(29
)
 
17

 
(31
)
 
(28
)
Adjustments to pension and other postretirement benefit plan liabilities (net of tax (expense) benefit of $(1), $(36), $- and $(37), respectively)

 
66

 
2

 
66

Total other comprehensive income (loss)
18

 
51

 
(26
)
 
21

Total comprehensive income
347

 
337

 
874

 
876

 
 
 
 
 
 
 
 
Noncontrolling Interests
 

 
 

 
 
 
 
Net income
450

 
265

 
977

 
1,133

Other comprehensive income (loss), net of tax
 

 
 

 
 
 
 
Change in fair value of derivatives utilized for hedging purposes (net of tax (expense) benefit of $(8), $6, $1, and $4 respectively)
73

 
(38
)
 
(12
)
 
(27
)
Reclassification of change in fair value of derivatives to net income (net of tax benefit (expense) of $-, $(2), $(2) and $(1), respectively)

 
9

 
18

 
5

Foreign currency translation adjustments (net of tax benefit (expense) of $5, $(2), $5 and $4, respectively)
(44
)
 
16

 
(48
)
 
(26
)
Adjustments to pension and other postretirement benefit plan liabilities (net of tax benefit (expense) of $-, $(2), $- and $(2), respectively)
(1
)
 
13

 
(2
)
 
13

Total other comprehensive income (loss)
28

 

 
(44
)
 
(35
)
Total comprehensive income
478

 
265

 
933

 
1,098

 
 
 
 
 
 
 
 
Total
 

 
 

 
 
 
 
Net income
779

 
551

 
1,877

 
1,988

Other comprehensive income (loss), net of tax
 

 
 

 
 
 
 
Change in fair value of derivatives utilized for hedging purposes (net of tax (expense) benefit of $(37), $25, $4 and $13, respectively)
121

 
(80
)
 
(20
)
 
(49
)
Reclassification of change in fair value of derivatives to net income (net of tax benefit (expense) of $1, $(7), $(8) and $(3), respectively)
(1
)
 
19

 
29

 
10

Foreign currency translation adjustments (net of tax benefit (expense) of $23, $(9), $24 and $16, respectively)
(73
)
 
33

 
(79
)
 
(54
)
Adjustments to pension and other postretirement benefit plan liabilities (net of tax (expense) benefit of $(1), $(38), $-, and $(39), respectively)
(1
)
 
79

 

 
79

Total other comprehensive income (loss)
46

 
51

 
(70
)
 
(14
)
Total comprehensive income
$
825

 
$
602

 
$
1,807

 
$
1,974


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

5

 
Kinder Morgan, Inc. Form 10-Q


KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Millions, Except Share and Per Share Amounts)
 
September 30, 2014
 
December 31, 2013
 
(Unaudited)
 
 
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents – KMI (Note 12)
$
56

 
$
116

Cash and cash equivalents – KMP and EPB (Note 12)
416

 
482

Accounts receivable, net
1,696

 
1,721

Inventories
461

 
430

Deferred income taxes
222

 
567

Other current assets
635

 
552

Total current assets
3,486

 
3,868

 
 
 
 
Property, plant and equipment, net (Note 12)
38,100

 
35,847

Investments
6,041

 
5,951

Goodwill (Note 12)
24,642

 
24,504

Other intangibles, net
2,337

 
2,438

Deferred charges and other assets
2,512

 
2,577

Total Assets
$
77,118

 
$
75,185

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current Liabilities
 

 
 

Current portion of debt – KMI (Note 12)
$
1,307

 
$
725

Current portion of debt – KMP and EPB (Note 12)
1,000

 
1,581

Accounts payable
1,543

 
1,676

Accrued interest
421

 
565

Accrued contingencies
684

 
584

Other current liabilities
1,130

 
944

Total current liabilities
6,085

 
6,075

 
 
 
 
Long-term liabilities and deferred credits
 

 
 

Long-term debt
 

 
 

Outstanding – KMI (Note 12)
8,086

 
9,221

Outstanding – KMP and EPB (Note 12)
25,559

 
22,589

Preferred interest in general partner of KMP
100

 
100

Debt fair value adjustments
1,891

 
1,977

Total long-term debt
35,636

 
33,887

Deferred income taxes
4,605

 
4,651

Other long-term liabilities and deferred credits
2,023

 
2,287

Total long-term liabilities and deferred credits
42,264

 
40,825

Total Liabilities
48,349

 
46,900

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

 
 

Class P shares, $0.01 par value, 2,000,000,000 shares authorized, 1,028,229,501 and 1,030,677,076 shares, respectively, issued and outstanding
10

 
10

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

 

Additional paid-in capital
14,361

 
14,479

Retained deficit
(1,776
)
 
(1,372
)
Accumulated other comprehensive loss
(50
)
 
(24
)
Total Kinder Morgan, Inc.’s stockholders’ equity
12,545

 
13,093

Noncontrolling interests
16,224

 
15,192

Total Stockholders’ Equity
28,769

 
28,285

Total Liabilities and Stockholders’ Equity
$
77,118

 
$
75,185


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

6

 
Kinder Morgan, Inc. Form 10-Q


KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
 
Nine Months Ended September 30,
 
2014
 
2013
Cash Flows From Operating Activities
 
 
 
Net income
$
1,877

 
$
1,988

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

Depreciation, depletion and amortization
1,518

 
1,327

Deferred income taxes
369

 
474

Amortization of excess cost of equity investments
33

 
29

Gain on remeasurement of previously held equity interest in Eagle Ford to fair value (Note 2)

 
(558
)
Gain on sale of investments in Express pipeline system (Note 2)

 
(224
)
Earnings from equity investments
(306
)
 
(294
)
Distributions from equity investment earnings
294

 
303

Proceeds from termination of interest rate swap agreements

 
96

Pension contributions in excess of expense
(50
)
 
(59
)
Changes in components of working capital, net of the effects of acquisitions
 
 
 
Accounts receivable
23

 
126

Inventories
(29
)
 
(57
)
Other current assets
34

 
53

Accounts payable
(90
)
 
(232
)
Accrued interest
(144
)
 
(133
)
Accrued contingencies and other current liabilities
228

 
20

Rate reparations, refunds and other litigation reserve adjustments, net
37

 
174

Other, net
(302
)
 
(241
)
Net Cash Provided by Operating Activities
3,492

 
2,792

Cash Flows From Investing Activities
 
 
 
Acquisitions of assets and investments, net of cash acquired
(1,100
)
 
(292
)
Capital expenditures
(2,678
)
 
(2,270
)
Proceeds from sales of investments

 
490

Contributions to investments
(342
)
 
(171
)
Distributions from equity investments in excess of cumulative earnings
138

 
117

Natural gas storage and natural gas and liquids line-fill
22

 

Sale or casualty of property, plant and equipment, investments and other net assets, net of removal costs
14

 
74

Other, net
(74
)
 
(1
)
Net Cash Used in Investing Activities
(4,020
)
 
(2,053
)
Cash Flows From Financing Activities
 
 
 
Issuance of debt – KMI
3,258

 
1,592

Payment of debt – KMI
(3,811
)
 
(1,985
)
Issuance of debt – KMP and EPB
10,141

 
7,915

Payment of debt – KMP and EPB
(7,774
)
 
(6,666
)
Debt issue costs
(52
)
 
(23
)
Cash dividends
(1,304
)
 
(1,196
)
Repurchases of shares and warrants
(192
)
 
(463
)
Contributions from noncontrolling interests
1,638

 
1,420

Distributions to noncontrolling interests
(1,491
)
 
(1,220
)
Other, net
(2
)
 
1

Net Cash Provided by (Used in) Financing Activities
411

 
(625
)
Effect of Exchange Rate Changes on Cash and Cash Equivalents
(9
)
 
(12
)
Net (decrease) increase in Cash and Cash Equivalents
(126
)
 
102

Cash and Cash Equivalents, beginning of period
598

 
714

Cash and Cash Equivalents, end of period
$
472

 
$
816

 
Non-cash Investing and Financing Activities
 
 
 
Assets acquired by the assumption or incurrence of liabilities
$
73

 
$
1,487

Assets acquired or liabilities settled by contributions from noncontrolling interests
$

 
$
3,733

 
 
 
 
Supplemental Disclosures of Cash Flow Information
 
 
 
Cash paid during the period for interest (net of capitalized interest)
$
1,446

 
$
1,362

Cash paid during the period for income taxes, net
$
228

 
$
82


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

7


                    KINDER MORGAN, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Millions)
(Unaudited)
 
Nine Months Ended September 30, 2014
 
Par value of common shares
 
Additional
paid-in
capital
 
Retained
deficit
 
Accumulated
other
comprehensive
loss
 
Stockholders’
equity
attributable
to KMI
 
Non-controlling
interests
 
Total
Beginning Balance at December 31, 2013
$
10

 
$
14,479

 
$
(1,372
)
 
$
(24
)
 
$
13,093

 
$
15,192

 
$
28,285

Shares repurchased
 
 
(94
)
 
 
 
 
 
(94
)
 
 
 
(94
)
Warrants repurchased
 
 
(98
)
 
 
 
 
 
(98
)
 
 
 
(98
)
Amortization of restricted shares
 
 
43

 
 
 
 
 
43

 
 
 
43

Impact from equity transactions of KMP, EPB and KMR
 
 
29

 
 
 
 
 
29

 
(44
)
 
(15
)
Net income
 
 
 
 
900

 
 
 
900

 
977

 
1,877

Distributions
 
 
 
 
 
 
 
 

 
(1,491
)
 
(1,491
)
Contributions
 
 
 
 
 
 
 
 

 
1,638

 
1,638

Cash dividends
 
 
 
 
(1,304
)
 
 
 
(1,304
)
 
 
 
(1,304
)
Other
 
 
2

 
 
 
 
 
2

 
(4
)
 
(2
)
Other comprehensive loss
 
 
 
 
 
 
(26
)
 
(26
)
 
(44
)
 
(70
)
Ending Balance at September 30, 2014
$
10

 
$
14,361

 
$
(1,776
)
 
$
(50
)
 
$
12,545

 
$
16,224

 
$
28,769


 
Nine Months Ended September 30, 2013
 
Par value of common shares
 
Additional
paid-in
capital
 
Retained
deficit
 
Accumulated
other
comprehensive
loss
 
Stockholders’
equity
attributable
to KMI
 
Non-controlling
interests
 
Total
Beginning Balance at December 31, 2012
$
10

 
$
14,917

 
$
(943
)
 
$
(118
)
 
$
13,866

 
$
10,234

 
$
24,100

Warrants repurchased

 
(463
)
 

 

 
(463
)
 

 
(463
)
Warrants exercised
 
 
1

 
 
 
 
 
1

 
 
 
1

EP Trust I Preferred security conversions

 
3

 

 

 
3

 

 
3

Amortization of restricted shares
 
 
24

 
 
 
 
 
24

 
 
 
24

Impact from equity transactions of KMP, EPB and KMR
 
 
154

 
 
 
 
 
154

 
(244
)
 
(90
)
Net income
 
 


 
855

 
 
 
855

 
1,133

 
1,988

Distributions
 
 
 

 
 
 
 
 

 
(1,220
)
 
(1,220
)
Contributions
 
 
 

 
 
 
 
 

 
5,153

 
5,153

KMP’s acquisition of Copano noncontrolling interests
 
 
 
 
 
 
 
 

 
17

 
17

Cash dividends
 
 
 
 
(1,196
)
 
 
 
(1,196
)
 
 
 
(1,196
)
Other
 
 
 
 
 
 
 
 

 
(1
)
 
(1
)
Other comprehensive income (loss)
 
 
 
 
 
 
21

 
21

 
(35
)
 
(14
)
Ending Balance at September 30, 2013
$
10

 
$
14,636

 
$
(1,284
)
 
$
(97
)
 
$
13,265

 
$
15,037

 
$
28,302



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

8

 
Kinder Morgan, Inc. Form 10-Q


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

1.  General
 
Organization

Kinder Morgan, Inc. is the largest midstream and the third largest energy company in North America with a combined enterprise value of approximately $120 billion. We own an interest in or operate approximately 80,000 miles of pipelines and 180 terminals. Our pipelines transport natural gas, refined petroleum products, crude oil, condensate, CO2 and other products, and our terminals transload and store petroleum products, ethanol and chemicals, and handle such products as coal, petroleum coke and steel. We are also the leading producer and transporter of CO2, for enhanced oil recovery projects in North America.
 
We own an approximate 10% limited partner interest and the 2% general partner interest in KMP, a leading pipeline transportation and energy storage company and one of the largest publicly-traded pipeline limited partnerships in America. KMP’s limited partner units are traded on the NYSE under the ticker symbol “KMP.” 

We also own an approximate 39% limited partner interest and the 2% general partner interest in EPB, as well as certain natural gas pipeline assets. EPB’s limited partner units are traded on the NYSE under the ticker symbol “EPB.”

Our common stock trades on the NYSE under the symbol “KMI.”
 
KMR is a publicly traded Delaware LLC.  KMGP, 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 KMGP’s power and authority to manage and control the business and affairs of KMP, subject to KMGP’s right to approve certain transactions.
 
Basis of Presentation
 
General

Our reporting currency is U.S. dollars, and all references to dollars are U.S. dollars, except where stated otherwise. Our accompanying unaudited consolidated financial statements have been prepared under the rules and regulations of the United States Securities and Exchange Commission. These rules and regulations conform to the accounting principles contained in the FASB’s Accounting Standards Codification (the “Codification”), the single source of GAAP. Under such rules and regulations, all significant intercompany items have been eliminated in consolidation. Additionally, 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. 
 
Our accompanying unaudited 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. In addition, certain amounts from prior periods have been reclassified to conform to the current presentation (including reclassifications between “Services” and “Product sales and other” within the “Revenues” section of our accompanying consolidated statements of income). 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 2013 Form 10-K.

Our consolidated financial statements include our accounts and those of our majority-owned and controlled subsidiaries including the accounts of KMP, EPB and KMR.  Investments in jointly-owned operations in which we hold a 50% or less interest (other than KMP, EPB and KMR, because we have the ability to exercise significant control over their operating and financial policies) are accounted for under the equity method.
 
Notwithstanding the consolidation of KMP and EPB, and their respective subsidiaries, into our financial statements, we are not liable for, and our assets are not available to satisfy, the obligations of KMP and EPB, and/or their respective subsidiaries, and vice versa, except as discussed in Note 10, “Litigation, Environmental and Other Contingencies — Other Contingencies.”  Responsibility for payments of obligations reflected in our, KMP’s or EPB’s financial statements is a legal determination based on the entity that incurs the liability.


9

 
Kinder Morgan, Inc. Form 10-Q


 
Goodwill

We evaluate goodwill for impairment on May 31 of each year. There were no impairment charges resulting from our May 31, 2014 impairment testing, and no event indicating an impairment has occurred subsequent to that date.

Earnings per Share
 
We calculate earnings per share using the two-class method. Earnings were allocated to Class P shares of common stock and participating securities based on the amount of dividends paid in the current period plus an allocation of the undistributed earnings or excess distributions over earnings to the extent that each security participates in earnings or excess distributions over earnings. Our unvested restricted stock awards do not participate in excess distributions over earnings.

The following table sets forth the allocation of net income available to shareholders for Class P shares and for participating securities (in millions):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Class P
$
327

 
$
283

 
$
892

 
$
851

Participating securities(a)
2

 
3

 
8

 
4

Net Income Attributable to Kinder Morgan, Inc.
$
329

 
$
286

 
$
900

 
$
855

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

The following potential common stock equivalents are antidilutive and, accordingly, are excluded from the determination of diluted earnings per share (in millions on a weighted-average basis):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Unvested restricted stock awards
7

 
6

 
7

 
3

Outstanding warrants to purchase our Class P shares(a)
298

 
400

 
316

 
419

Convertible trust preferred securities
10

 
10

 
10

 
10

_______
(a)
Each of our warrants entitles the holder to purchase one share of our common stock for an exercise price of $40 per share, payable in cash or by cashless exercise, at any time until May 25, 2017.

Recent Developments
On August 9, 2014, we entered into a separate definitive merger agreement with each of KMP, KMR and EPB, pursuant to which we will acquire directly or indirectly all of the outstanding common units of KMP and EPB and all of the outstanding shares of KMR that we and our subsidiaries do not already own. The transactions contemplated by these three merger agreements are referred to collectively as the “Merger Transactions.”
If the Merger Transactions are completed, all the outstanding KMR shares not owned by us or our subsidiaries will be converted into the right to receive shares of our common stock, and all of the outstanding KMP and EPB common units not owned by us or our subsidiaries will be converted into the right to receive, at the election of each unitholder but subject to proration, shares of our common stock, cash or a combination of the two.
The completion of each merger is contingent upon the completion of the other two. The completion of each merger is also subject to the satisfaction or waiver of customary closing conditions, including but not limited to: (a) approval of the merger agreement by the unitholders or shareholders of KMP, KMR or EPB, as applicable; and (b) approval by our stockholders of (i) the amendment of our certificate of incorporation to increase the number of authorized shares of common stock and (ii) the issuance of our common stock in the Merger Transactions, as required pursuant to certain rules of the NYSE.

10

 
Kinder Morgan, Inc. Form 10-Q


Each merger agreement contains certain customary termination rights. In the event of termination of the KMP merger agreement under specified circumstances, we may be required to pay KMP a termination fee of $817 million through a waiver by KMGP of its incentive distribution rights over a period of eight fiscal quarters and, under other specified circumstances, KMP may be required to pay us a termination fee of $817 million in cash. In the event of termination of the KMR merger agreement under specified circumstances, we may be required to pay KMR a termination fee of $311 million in cash and, under other specified circumstances, KMR may be required to pay us a termination fee of $311 million in cash. There is no termination fee payable by either us or EPB under any circumstance under the EPB merger agreement. Either we or KMP, KMR or EPB, as applicable, may terminate the KMP merger agreement, the KMR merger agreement or the EPB merger agreement, respectively, if the closing of the merger contemplated by such merger agreement has not occurred on or before May 11, 2015.
Each merger agreement also contains customary covenants and agreements, including covenants and agreements relating to the conduct of each party’s business between the date of the signing of such merger agreement and the closing of the Merger Transactions. On October 22, 2014, we, KMP, KMR and EPB each (i) announced November 20, 2014 as the date for the respective special meetings of shareholders or unitholders to vote on the proposals related to the Merger Transactions; and (ii) commenced mailing of proxy materials to the respective shareholders or unitholders. Unitholders and shareholders of record at the close of business on October 20, 2014, will be entitled to vote at the applicable special meeting.

As we control each of KMP, KMR and EPB and will continue to control each of them after the Merger Transactions, the changes in our ownership interest in each of KMP, KMR and EPB will be accounted for as an equity transaction and no gain or loss will be recognized in our consolidated statements of income resulting from the mergers.

As previously announced, KMI expects to finance the cash portion of the merger consideration for the KMP merger and the EPB merger and the fees and expenses of the Merger Transactions with the proceeds of the issuance of debt securities in capital markets transactions.  To the extent the proceeds of the issuance of debt securities are not sufficient, the proceeds of the Bridge Facility discussed below are expected to be used.

On September 19, 2014, KMI entered into a Bridge Credit Agreement (the “Bridge Facility”) with a syndicate of lenders. The Bridge Facility provides for up to a $5.0 billion term loan facility which, if funded, will mature 364 days following the closing date of the Merger Transactions. KMI may use borrowings under the Bridge Facility to pay cash consideration and transaction costs associated with the Merger Transactions. KMI also may use a portion of the borrowings under the Bridge Facility to refinance certain term loan facility indebtedness. Interest on borrowings under the Bridge Facility will initially be calculated based on either (i) LIBOR plus an applicable margin ranging from 1.250% to 1.750% per annum based on the credit rating of KMI’s senior unsecured non-credit enhanced long-term indebtedness for borrowed money (“KMI’s Credit Rating”); or (ii) the greatest of (1) the federal funds effective rate in effect on such day plus 1/2 of 1%; (2) the Prime Rate in effect for such day; and (3) the LIBOR Rate for a Eurodollar Loan with a one month interest period that begins on such day plus 1%, plus, in each case an applicable margin ranging from 0.250% to 0.750% per annum based on KMI’s Credit Rating. In addition, in each case the applicable margin will increase by 0.25% for each 90 day period that any loans remain outstanding under the Bridge Facility. The Bridge Facility provides for the payment by KMI of certain fees, including but not limited to a ticking fee and a duration fee. The Bridge Facility contains a financial covenant providing for a maximum debt to Earnings Before Interest, Income Taxes and Depreciation, Depletion and Amortization (EBITDA) ratio of 6.50 to 1.00 and various other covenants that are substantially consistent with the Prior Credit Facilities, discussed below.

On September 19, 2014, KMI entered into a replacement revolving credit agreement (the “Replacement Facility”) with a syndicate of lenders. The Replacement Facility provides for up to $4.0 billion in borrowing capacity, which can be increased to $5.0 billion if certain conditions are met, and has a five-year term. In connection with the consummation of the Merger Transactions, the Replacement Facility will replace (i) the existing credit agreement, dated as of May 6, 2014, by and among KMI, various lenders, and Barclays Bank PLC, as administrative agent (“KMI’s Existing Credit Agreement”); (ii) the facilities set forth in the credit agreement, dated as of May 1, 2013, among KMP, Wells Fargo Bank, National Association, as administrative agent and the other lenders and agents party thereto (the “KMP Credit Agreement”); and (iii) the facilities set forth in the credit agreement, dated May 27, 2011, among EPPOC, Wyoming Interstate Company, L.L.C., EPB, Bank of America, N.A., as administrative agent, and the other lenders and letter of credit issuers from time to time parties thereto (the “EPB Credit Agreement” and, together with KMI’s Existing Credit Agreement and the KMP Credit Agreement, the “Prior Credit Facilities”). Borrowings under the Replacement Facility may be used for working capital and other general corporate purposes. Interest on the Replacement Facility will be calculated based on either (i) LIBOR plus an applicable margin ranging from 1.125% to 2.000% per annum based on KMI’s Credit Rating; or (ii) the greatest of (1) the federal funds effective rate in effect on such day plus 1/2 of 1%; (2) the prime rate in effect for such day; and (3) the LIBOR Rate for a Eurodollar Loan with a one month interest period that begins on such day plus 1%, plus, in each case, an applicable margin ranging from 0.125% to 1.000% per annum based on KMI’s Credit Rating. The Replacement Facility contains a financial covenant providing for a

11

 
Kinder Morgan, Inc. Form 10-Q


maximum debt to EBITDA ratio of 6.50 to 1.00 (which falls to 6.25 to 1.00 for periods ending in 2018 and 6.00 to 1.00 for periods ending in 2019) and various other covenants that are substantially consistent with the Prior Credit Facilities.

2.  Acquisitions and Divestitures
 
Acquisitions

American Petroleum Tankers and State Class Tankers

Effective January 17, 2014, KMP acquired APT and State Class Tankers (SCT) for aggregate consideration of $961 million in cash (the APT acquisition). APT is engaged in the marine transportation of crude oil, condensate and refined products in the U.S. domestic trade, commonly referred to as the Jones Act trade. APT’s primary assets consist of a fleet of five medium range Jones Act qualified product tankers, each with 330 MBbl of cargo capacity, and each operating pursuant to long-term time charters with high quality counterparties, including major integrated oil companies, major refiners and the U.S. Military Sealift Command. As of the closing date, the vessels’ time charters had an average remaining term of approximately four years, with renewal options to extend the terms by an average of two years. APT’s vessels are operated by Crowley Maritime Corporation.

SCT has commissioned the construction of four medium range Jones Act qualified product tankers, each with 330 MBbl of cargo capacity. The SCT vessels are scheduled to be delivered in 2015 and 2016 and are being constructed by General Dynamics’ NASSCO shipyard. KMP expects to invest approximately $214 million to complete the construction of these four SCT vessels, and upon delivery, the vessels will be operated pursuant to long-term time charters with a major integrated oil company. Each of the time charters has an initial term of five years, with renewal options to extend the term by up to three years. The APT acquisition complements and extends KMP’s existing crude oil and refined products transportation and storage business. We include the acquired assets as part of the Terminals—KMP business segment.

As of September 30, 2014, KMP’s preliminary purchase price allocation related to the APT acquisition, as adjusted to date, is as follows (in millions). The evaluation of the assigned fair values is ongoing and subject to adjustment.
Purchase Price Allocation:
 
Current assets
$
6

Property, plant and equipment
951

Goodwill
67

Other assets
3

Total assets acquired
1,027

Current liabilities
(5
)
Unfavorable customer contracts
(61
)
Cash consideration
$
961


The “Goodwill” intangible asset amount represents the future economic benefits expected to be derived from KMP’s acquisition that are not assignable to other individually identifiable, separately recognizable assets acquired. We believe the goodwill was primarily generated by the value of the synergies created by expanding KMP’s non-pipeline liquids handling operations. Furthermore, KMP expects to fully deduct for tax purposes the entire amount of goodwill recognized. The “Unfavorable customer contracts” figure represents the amount, on a present value basis, by which the customer contracts were below market day rates at the time of acquisition. This amount is being amortized as a noncash adjustment to revenue over the remaining contract period.


12

 
Kinder Morgan, Inc. Form 10-Q


Other

Effective May 1, 2013, KMP acquired all of Copano’s outstanding units for a total purchase price of approximately $5.2 billion (including assumed debt and all other assumed liabilities). The transaction was a 100% unit for unit transaction with an exchange ratio of 0.4563 of KMP’s common units for each Copano common unit. KMP issued 43,371,210 of its common units valued at $3,733 million as consideration for the Copano acquisition (based on the $86.08 closing market price of a common unit on the NYSE on the May 1, 2013 issuance date). Also, due to the fact that KMP’s Copano acquisition included the remaining 50% interest in Eagle Ford that it did not already own, KMP remeasured its existing 50% equity investment in Eagle Ford to its fair value as of the acquisition date. As a result of this remeasurement, we recognized a $558 million non-cash gain, which represented the excess of the investment’s fair value ($704 million) over the carrying value as of May 1, 2013 ($146 million), and we reported this gain separately as “Gain on remeasurement of previously held equity interest in Eagle Ford to fair value” on our accompanying consolidated statement of income for the nine months ended September 30, 2013.

As of September 30, 2014, the final purchase price allocation related to the Copano acquisition was as follows (in millions):
Purchase Price Allocation:
 
Current assets (including cash acquired of $30)
$
218

Property, plant and equipment
2,788

Investments
300

Goodwill
1,248

Other intangibles
1,375

Other assets
13

Total assets
5,942

Less: Fair value of previously held 50% interest in Eagle Ford
(704
)
Total assets acquired
5,238

Current liabilities
(208
)
Other liabilities
(28
)
Long-term debt
(1,252
)
Noncontrolling interests
(17
)
Common unit consideration
$
3,733


The table above reflects changes we made in the first six months of 2014 to our preliminary purchase price allocation as of December 31, 2013. Based on our final measurement of fair values for all of the identifiable tangible and intangible assets acquired and liabilities assumed on the acquisition date, we reduced the preliminary value assigned to (i) “Investments” by $87 million; (ii) “Property, plant and equipment” by $17 million; and (iii) combined working capital items by $3 million.

The “Goodwill” intangible asset amount represents the future economic benefits expected to be derived from this acquisition that are not assignable to other individually identifiable, separately recognizable assets acquired. We believe the goodwill was primarily generated by the value of the synergies created by expanding KMP’s natural gas gathering and refined product transportation operations. This goodwill is not deductible for tax purposes and is subject to an impairment test at least annually. The “Other intangibles” asset amount represents the fair value of acquired customer contracts and agreements. We are currently amortizing these intangible assets over an estimated remaining useful life of 25 years.

Our accounting policy is to apply the look-through method of recording deferred taxes on the outside book tax basis differences in our investments without regard to non-tax deductible goodwill. As a result of the goodwill recorded by KMP for its Copano acquisition, KMI’s deferred tax liability and goodwill were decreased by $285 million for the portion of its outside basis difference associated with KMP’s underlying goodwill.

Effective June 1, 2013, KMP acquired certain oil and gas properties, rights, and related assets located in the Goldsmith Landreth San Andres oil field unit in the Permian Basin of West Texas from Legado Resources LLC for an aggregate consideration of $298 million, consisting of $280 million in cash and assumed liabilities of $18 million (including $12 million of long-term asset retirement obligations).


13

 
Kinder Morgan, Inc. Form 10-Q


For additional information about KMP’s Copano and Goldsmith Landreth acquisitions (including our preliminary purchase price allocations as of December 31, 2013), see Note 3 “Acquisitions and Divestitures—Business Combinations and Acquisitions of Investments” to our consolidated financial statements included in our 2013 Form 10-K.
     
Pro Forma Information

The following summarized unaudited pro forma consolidated income statement information for the nine months ended September 30, 2013 assumes that KMP’s acquisitions of (i) APT, (ii) Copano and (iii) the Goldsmith Landreth oil field unit had occurred as of January 1, 2013. We prepared the following summarized unaudited pro forma financial results for comparative purposes only. The summarized unaudited pro forma financial results may not be indicative of the results that would have occurred if these acquisitions had been completed as of January 1, 2013, or the results that will be attained in the future. Amounts presented below are in millions, except for the per share amounts:
 
 
Pro Forma
 
 
Nine Months Ended
 
 
September 30, 2013
 
 
(Unaudited)
Revenues
 
$
10,976

Income from Continuing Operations
 
1,954

Loss from Discontinued Operations, Net of Tax
 
(2
)
Net Income
 
1,952

Net Income Attributable to Noncontrolling Interests
 
(1,122
)
Net Income Attributable to Kinder Morgan, Inc.
 
830

 
 

Diluted Earnings per Class P Share
 
$
0.80


Divestitures

Express Pipeline System

Effective March 14, 2013, KMP sold both its one-third equity ownership interest in the Express pipeline system and its subordinated debenture investment in Express to Spectra Energy Corp. KMP received net cash proceeds of $402 million (after paying $1 million in the third quarter of 2013 for both a final working capital settlement and certain transaction-related selling expenses), and we reported the net cash proceeds received within “Proceeds from sales of investments” within the investing section of our accompanying consolidated statement of cash flows for the nine months ended September 30, 2013. Additionally, we recognized a combined $224 million pre-tax gain with respect to this sale, and we reported this gain amount separately as “(Loss) gain on sale of investments in Express pipeline system” on our accompanying consolidated statement of income for the nine months ended September 30, 2013. We also recorded an income tax expense of $84 million related to this gain on sale for the nine months ended September 30, 2013, and we included this expense within “Income Tax Expense.” As of the date of sale, KMP’s equity investment in Express totaled $67 million and its note receivable due from Express totaled $110 million.

BBPP Holdings Ltda

On January 18, 2013, we completed the sale of our equity interests in the Bolivia to Brazil Pipeline for $88 million, which amount is included in “Proceeds from sales of investments” within the investing section of our accompanying consolidated statement of cash flows for the nine months ended September 30, 2013.

Drop-down of Assets to EPB

On May 2, 2014, EPB acquired from us our 50% equity interest in Ruby Pipeline Holding Company, L.L.C. (Ruby), our indirect 50% equity interest in Gulf LNG Holdings Group, L.L.C. (Gulf LNG) and our indirect 47.5% equity interest in Young Gas Storage Company, Ltd. in a transaction valued at approximately $2 billion (the “May 2014 drop-down transaction”). The transaction value includes approximately $1 billion of debt as of April 30, 2014, representing 50% of total debt of Ruby and Gulf LNG as of such date and was effective as of the close of business on April 30, 2014. Following the receipt of separate

14

 
Kinder Morgan, Inc. Form 10-Q


fairness opinions from different investment banks, the terms of this drop-down transaction were approved on our behalf by the independent members of our board of directors and on EPB’s behalf by a conflicts committee comprised of the independent members of EPB’s general partner’s board of directors, and following the recommendation by such conflicts committee, by its general partner’s board of directors. The aggregate consideration of $972 million paid to us in this drop-down transaction consisted of approximately $875 million of cash and 3,059,924 newly issued EPB common units representing limited partner interests in EPB.


15

 
Kinder Morgan, Inc. Form 10-Q


3. Debt

We classify our debt based on the contractual maturity dates of the underlying debt instruments.  We defer costs associated with debt issuance over the applicable term. These costs are then amortized as interest expense in our accompanying consolidated statements of income using the effective interest rate method. The following table provides detail on the principal amount of our outstanding debt balances. The table amounts exclude all debt fair value adjustments, including debt discounts and premiums (in millions).
 
 
September 30, 2014
 
December 31, 2013
KMI
 
 
 
 
Senior term loan facilities, variable rate, due May 24, 2015 and May 6, 2017(a)
 
$
650

 
$
1,528

Senior notes and debentures, 5.00% through 7.45%, due 2015 through 2098
 
1,815

 
1,815

Senior notes, 6.50% through 8.25%, due 2014 through 2037(b)
 
3,623

 
3,830

Preferred securities, 4.75%, due March 31, 2028(b)
 
280

 
280

Credit facility due May 6, 2019(c)
 
907

 
175

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

 
1,636

EPC Building, LLC, promissory note, 3.967%, due 2014 through 2035
 
455

 
461

Other miscellaneous debt
 
27

 
221

Total debt — KMI
 
9,393

 
9,946

Less: Current portion of debt — KMI
 
(1,307
)
 
(725
)
Total long-term debt outstanding — KMI
 
8,086

 
9,221

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

 
100

Total long-term debt — KMI(d)
 
$
8,186

 
$
9,321

 
 
 
 
 
KMP and EPB
 
 
 
 
KMP
 
 
 
 
Senior notes, 2.65% through 9.00%, due 2014 through 2044
 
$
18,300

 
$
15,600

Commercial paper borrowings(e)
 
135

 
979

Credit facility due May 1, 2018
 

 

KMP subsidiary borrowings (as obligor)
 
 
 
 
TGP senior notes, 7.00% through 8.375%, due 2016 through 2037
 
1,790

 
1,790

EPNG senior notes, 5.95% through 8.625%, due 2017 through 2032
 
1,115

 
1,115

Copano senior notes, 7.125%, due April 1, 2021
 
332

 
332

Other miscellaneous subsidiary debt
 
97

 
98

Total debt — KMP
 
21,769

 
19,914

Less: Current portion of debt — KMP(f)
 
(959
)
 
(1,504
)
Total long-term debt — KMP(d)
 
20,810

 
18,410

EPB
 
 
 
 
EPPOC
 
 
 
 
Senior notes, 4.10% through 7.50%, due 2015 through 2042
 
2,860

 
2,260

Credit facility due May 27, 2016(g)
 

 

EPB subsidiary borrowings (as obligor)
 
 
 
 
Colorado Interstate Gas Company, L.L.C. (CIG), senior notes, 5.95% through 6.85%, due 2015 through 2037
 
475

 
475

SLNG senior notes, 9.50% through 9.75%, due 2014 through 2016
 
64

 
135

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

 
1,211

Other financing obligations
 
180

 
175

Total debt — EPB
 
4,790

 
4,256

Less: Current portion of debt — EPB
 
(41
)
 
(77
)
Total long-term debt — EPB(d)
 
4,749

 
4,179

Total long-term debt outstanding — KMP and EPB
 
$
25,559

 
$
22,589

_______

16

 
Kinder Morgan, Inc. Form 10-Q


(a)
The senior secured term loan facility, due May 24, 2015, was repaid and replaced in May 2014 with a new unsecured senior term loan facility due May 6, 2017 (see “— Credit Facilities” below).
(b)
On June 30, 2014, El Paso Issuing Corporation, a wholly-owned subsidiary of El Paso Holdco LLC and the corporate co-issuer under certain guaranteed notes, merged with and into El Paso Holdco LLC, a wholly-owned subsidiary of KMI, and immediately thereafter, El Paso Holdco LLC merged with and into KMI pursuant to an internal restructuring transaction. KMI succeeded El Paso Holdco LLC as issuer with respect to these debt obligations. Consequently, El Paso Holdco LLC ceased to be an obligor with respect to approximately $3.6 billion of outstanding senior notes. Therefore, the condensed consolidating financial information that had previously been disclosed in the notes to our consolidated financial statements is no longer required as of June 30, 2014.
(c)
As of September 30, 2014 and December 31, 2013, the weighted average interest rates on KMI’s credit facility borrowings were 2.16% and 2.67%, respectively.
(d)
As of September 30, 2014 and December 31, 2013, our “Debt fair value adjustments” increased our combined debt balances by $1,891 million and $1,977 million, respectively. In addition to all unamortized debt discount/premium amounts and purchase accounting on our debt balances, our debt fair value adjustments also include (i) amounts associated with the offsetting entry for hedged debt; and (ii) any unamortized portion of proceeds received from the early termination of interest rate swap agreements. For further information about our debt fair value adjustments, see Note 5 “Risk Management—Debt Fair Value Adjustments.”
(e)
As of September 30, 2014 and December 31, 2013, the average interest rate on KMP’s outstanding commercial paper borrowings was 0.27% and 0.28%, respectively. The borrowings under KMP’s commercial paper program were used principally to finance the acquisitions and capital expansions, and 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.
(f)
Amounts include outstanding commercial paper borrowings discussed above in footnote (e).
(g)
LIBOR plus 1.75%.

Credit Facilities

The following discussions represent the primary revolving credit facilities that were available to KMI and its subsidiaries, KMP and EPB, as of September 30, 2014. Additionally, on September 19, 2014, in anticipation of the announced Merger Transactions, KMI entered into an agreement for a Replacement Facility as discussed in Note 1, “General—Recent Developments,” that would replace these existing credit facilities upon the consummation of the Merger Transactions.

KMI
 
On May 2, 2014, KMI’s term loan facility was partially repaid using proceeds from the May 2014 drop-down transaction, resulting in a remaining outstanding balance of $650 million. On May 6, 2014, KMI replaced its previous $1.75 billion secured revolving credit facility and its term loan facility, which were scheduled to mature in December 2014 and May 2015, respectively, with a new $1.75 billion five-year, unsecured revolving credit facility due May 2019 and a new $650 million three-year, term loan facility maturing May 2017. Additionally, as a result of the new unsecured revolving credit and term loan facilities, KMI’s and its wholly-owned subsidiaries’ senior notes are now unsecured. Borrowings under the new revolving credit facility may be used for working capital and general corporate purposes. The credit facility’s financial covenants are similar to those in our previous revolving credit facility, including restrictions on incurring indebtedness, entering into mergers, granting liens and making any dividends if an event of default exists. The covenants also include a maximum ratio of total debt (net of cash on hand) divided by Consolidated EBITDA (as defined in the credit agreement and which includes cash items from operations and distributions received from subsidiaries or investments, and excludes non-cash items) of 4.75 or 5.5 for periods following specified acquisitions. As of September 30, 2014, we were in compliance with all required financial covenants. The new revolving credit facility provides that the margin we will pay with respect to borrowings and the facility fee we will pay on the total commitment will vary based on our senior debt rating. Interest on the new revolving credit facility accrues at KMI’s option at a floating rate equal to either:

the administrative agent’s base rate, plus a margin, which varies depending upon the credit rating of KMI’s long-term senior unsecured debt (the administrative agent’s base rate is a rate equal to the greatest of (i) the Federal Funds Rate, plus 0.50%, (ii) the Prime Rate and (iii) one-month LIBOR plus 1.0%, plus, in each case, an applicable margin between 0.25% and 1.25% per annum); or
LIBOR plus an applicable margin ranging from 1.25% to 2.25% per annum.

As of September 30, 2014, we had $907 million outstanding under KMI’s $1.75 billion unsecured revolving credit facility and $18 million in letters of credit. Our availability under this facility as of September 30, 2014 was approximately $825 million.  

KMP

As of both September 30, 2014 and December 31, 2013, KMP had no borrowings under its $2.7 billion five-year senior unsecured revolving credit facility maturing May 1, 2018. Borrowings under KMP’s revolving credit facility can be used for

17

 
Kinder Morgan, Inc. Form 10-Q


general partnership purposes and as a backup for KMP’s commercial paper program. Similarly, KMP’s borrowings under its commercial paper program reduce the borrowings allowed under its credit facility.

As of September 30, 2014, KMP had (i) $135 million of commercial paper borrowings outstanding under its $2.7 billion credit facility and (ii) $210 million in letters of credit. KMP’s availability under its credit facility as of September 30, 2014 was $2,355 million.

EPB

As of September 30, 2014, EPB had no outstanding balance under its revolving credit facility. EPB’s availability under its facility as of September 30, 2014 was $1 billion.
Long-term Debt Issuances and Repayments
Following are significant long-term debt issuances and repayments made during the nine months ended September 30, 2014:
 
 
 
KMI
 
 
  Issuances
 
$650 million senior term loan facility due 2017
 
 
 
  Repayments
 
$1,528 million senior term loan facility due 2015
 
 
 
KMP
 
 
  Issuances
 
$750 million 3.50% notes due 2021
 
 
$750 million 5.50% notes due 2044
 
 
$650 million 4.25% notes due 2024
 
 
$550 million 5.40% notes due 2044
 
 
 
EPB (through EPPOC)
 
 
  Issuances
 
$600 million 4.30% notes due 2024
 
 
 
    
Kinder Morgan G.P., Inc. Preferred Shares

The following table provides information about KMGP’s per share distributions on 100,000 shares of its Series A Fixed-to-Floating Rate Term Cumulative Preferred Stock:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Per share cash distribution declared for the period(a)
 
$
10.551

 
$
10.517

 
$
31.307

 
$
31.531

Per share cash distribution paid in the period
 
$
10.423

 
$
10.545

 
$
31.326

 
$
31.652

_______
(a)
On October 15, 2014, KMGP declared a distribution for the three months ended September 30, 2014, of $10.551 per share, which will be paid on November 18, 2014 to shareholders of record as of October 31, 2014.

4.  Stockholders’ Equity
 
Common Equity
 
As of September 30, 2014, our common equity consisted of our Class P common stock. For additional information regarding our common stock, see Note 10 “Stockholders’ Equity” to our consolidated financial statements included in our 2013 Form 10-K.


18

 
Kinder Morgan, Inc. Form 10-Q


On October 16, 2013, we announced that our board of directors had approved a share and warrant repurchase program authorizing us to repurchase in the aggregate up to $250 million of additional shares or warrants, which purchase was completed as of March 2014. On March 4, 2014 we announced that our board of directors had approved an additional share and warrant repurchase program authorizing us to repurchase in the aggregate up to $100 million of additional shares or warrants. As of September 30, 2014, we had $2 million available for repurchases under the March 4, 2014 repurchase program.

The following table sets forth the changes in our outstanding shares during the nine months ended September 30, 2014 and 2013:
 
Nine Months Ended
September 30,
 
2014
 
2013
Beginning balance
1,030,677,076

 
1,035,668,596

   Shares repurchased and canceled
(2,780,337
)
 

   Shares issued with conversions of EP Trust I Preferred securities
2,820

 
74,421

   Shares issued for exercised warrants
5,238

 
16,886

   Restricted shares vested
324,704

 
86,922

Ending balance
1,028,229,501

 
1,035,846,825

Dividends
 
Holders of our common stock share equally in any dividend declared by our board of directors, subject to the rights of the holders of any outstanding preferred stock. The following table provides information about our per share dividends:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Per common share cash dividend declared for the period
$
0.44

 
$
0.41

 
$
1.29

 
$
1.19

Per common share cash dividend paid in the period
$
0.43

 
$
0.40

 
$
1.26

 
$
1.15


Dividends Subsequent to September 30, 2014

On October 15, 2014, our board of directors declared a cash dividend of $0.44 per share for the quarterly period ended September 30, 2014, which is payable on November 17, 2014 to shareholders of record as of October 31, 2014.

Warrants

Each of our warrants entitles the holder to purchase one share of our common stock for an exercise price of $40 per share, payable in cash or by cashless exercise, at any time until May 25, 2017. For additional information regarding our warrants, see Note 10 “Stockholders’ Equity” to our consolidated financial statements included in our 2013 Form 10-K.

The table below sets forth the changes in our outstanding warrants during the nine months ended September 30, 2014 and 2013:
 
Nine Months Ended September 30,
 
2014
 
2013
Beginning balance
347,933,107

 
439,809,442

Warrants repurchased and canceled
(49,783,406
)
 
(91,460,387
)
Warrants issued with conversions of EP Trust I Preferred securities
4,315

 
113,757

Warrants exercised
(9,170
)
 
(21,208
)
Ending balance
298,144,846

 
348,441,604



19

 
Kinder Morgan, Inc. Form 10-Q


Noncontrolling Interests
 
The caption “Noncontrolling interests” in our accompanying consolidated balance sheets consists of interests that we do not own in the following subsidiaries (in millions):
 
 
September 30,
2014
 
December 31,
2013
KMP
$
8,030

 
$
7,642

EPB
4,418

 
4,122

KMR
3,429

 
3,142

Other
347

 
286

 
$
16,224

 
$
15,192


Contributions
 
The table below shows significant issuances to the public of common units or shares, the net proceeds from the issuances and the use of the proceeds during the nine months ended September 30, 2014 by KMP, EPB and KMR (dollars in millions and units and shares in thousands):
 
Issuances
 
Common units/shares
 
Net proceeds
 
Use of proceeds
 
 
 
(in thousands)
 
(in millions)
 
 
KMP
 
 
 
 
 
 
 
Issued under equity distribution agreement with UBS
 
2014
 
5,513

 
$
441

 
Reduced borrowings under KMP’s commercial paper program
Other issuances
 
 
 
 
 
 
 
February 2014
 
7,935

 
$
603

 
Reduced borrowings under KMP’s commercial paper program that were used to fund KMP’s APT acquisition in January 2014
EPB
 
 
 
 
 
 
 
Issued under equity distribution agreement with Citigroup
 
2014
 
4,245

 
$
149

 
General partnership purposes
Other issuances
 
 
 
 
 
 
 
May 2014
 
7,820

 
$
242

 
Issued to pay a portion of the purchase price for the May 2014 drop-down transaction
KMR
 
 
 
 
 
 
 
Issued under equity distribution agreement with Credit Suisse
 
2014
 
1,735

 
$
134

 
Purchased additional KMP i-units; KMP then used proceeds to reduce borrowings under its commercial paper program

The above equity issuances by KMP, EPB and KMR during the nine months ended September 30, 2014 had the associated effects of increasing our (i) noncontrolling interests by $1,525 million; (ii) accumulated deferred income taxes by $15 million; and (iii) additional paid-in capital by $29 million.


20

 
Kinder Morgan, Inc. Form 10-Q


Distributions

The following table provides information about distributions from our noncontrolling interests (in millions except per unit distribution amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
KMP
 
 
 
 
 
 
 
Per unit cash distribution declared for the period
$
1.40

 
$
1.35

 
$
4.17

 
$
3.97

Per unit cash distribution paid in the period
$
1.39

 
$
1.32

 
$
4.13

 
$
3.91

Cash distributions paid in the period to the public
$
421

 
$
377

 
$
1,228

 
$
983

EPB
 
 
 
 
 
 
 
Per unit cash distribution declared for the period
$
0.65

 
$
0.65

 
$
1.95

 
$
1.90

Per unit cash distribution paid in the period
$
0.65

 
$
0.63

 
$
1.95

 
$
1.86

Cash distributions paid in the period to the public
$
89

 
$
80

 
$
256

 
$
235

KMR(a)
 
 
 
 
 
 
 
Share distributions paid in the period to the public
1,996,474

 
1,638,069

 
6,032,967

 
4,710,749

_______
(a)
KMR’s distributions are paid in the form of additional shares or fractions thereof calculated by dividing the KMP cash distribution per common unit by the average of the market closing prices of a KMR share determined for a ten-trading day period ending on the trading day immediately prior to the ex-dividend date for the shares.  Represents share distributions made in the period to noncontrolling interests and excludes 287,435 and 875,014 of shares distributed for the three and nine months ended September 30, 2014, respectively, and 242,103 and 700,971 of shares distributed in the three months and nine months ended September 30, 2013, respectively, on KMR shares we directly and indirectly own. On October 15, 2014, KMR declared a share distribution of 0.015033 shares per outstanding share, or 2,013,914 shares (of which 1,761,216 shares will be payable to the public), on November 14, 2014 to shareholders of record as of October 31, 2014, based on the $1.40 per common unit distribution declared by KMP.

Distributions Subsequent to September 30, 2014

Noncontrolling Interests Distributions

On October 15, 2014, KMP declared a cash distribution of $1.40 per unit for the quarterly period ended September 30, 2014. The distribution will be paid on November 14, 2014 to KMP’s unitholders of record as of October 31, 2014.
  
On October 15, 2014, EPB declared a cash distribution of $0.65 per unit for the quarterly period ended September 30, 2014. The distribution will be paid on November 14, 2014 to EPB’s unitholders of record as of October 31, 2014.

5.  Risk Management
 
Certain of our business activities expose us to risks associated with unfavorable changes in the market price of natural gas, NGL and crude oil.  We also have exposure to interest rate 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.

As part of the EP acquisition, we acquired power forward and swap contracts.  We have entered into offsetting positions that eliminate the price risks associated with our power contracts. 


21

 
Kinder Morgan, Inc. Form 10-Q


Energy Commodity Price Risk Management
 
As of September 30, 2014, KMI and KMP had the following outstanding commodity forward contracts to hedge their forecasted energy commodity purchases and sales:
 
Net open position long/(short)
Derivatives designated as hedging contracts
 
 
 
Crude oil fixed price
(22.3
)
 
MMBbl
Natural gas fixed price
(25.3
)
 
Bcf
Natural gas basis
(23.5
)
 
Bcf
Derivatives not designated as hedging contracts
 

 
 
Crude oil fixed price
(0.2
)
 
MMBbl
Crude oil basis
(3.3
)
 
MMBbl
Natural gas fixed price
(4.5
)
 
Bcf
Natural gas basis
(2.8
)
 
Bcf
NGL fixed price
(0.4
)
 
MMBbl

As of September 30, 2014, 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 2018.

Interest Rate Risk Management
 
As of September 30, 2014, KMI and KMP had a combined notional principal amount of $725 million and $5,775 million, respectively, of fixed-to-variable interest rate swap agreements, effectively converting the interest expense associated with certain series of senior notes from fixed rates to variable rates based on an interest rate of LIBOR plus a spread.  All of KMI’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 September 30, 2014, the maximum length of time over which we have hedged a portion of our exposure to the variability in the value of this debt due to interest rate risk is through March 15, 2035.

 As of December 31, 2013, KMI and KMP had a combined notional principal amount of $725 million and $4,675 million, respectively, of fixed-to-variable interest rate swap agreements. In February 2014, KMP entered into four separate fixed-to-variable interest rate swap agreements having a combined notional principal amount of $500 million. These agreements effectively convert a portion of the interest expense associated with KMP’s 3.50% senior notes due March 1, 2021, from a fixed rate to a variable rate based on an interest rate of LIBOR plus a spread. Additionally, in September 2014, KMP entered into five separate fixed-to-variable interest rate swap agreements having a combined notional principal amount of $600 million. These agreements effectively convert a portion of the interest expense associated with KMP’s 4.25% senior notes due September 1, 2024, from a fixed rate to a variable rate based on an interest rate of LIBOR plus a spread.
 

22

 
Kinder Morgan, Inc. Form 10-Q


Fair Value of Derivative Contracts
 
The following table summarizes the fair values of our derivative contracts included in our accompanying consolidated balance sheets (in millions):
Fair Value of Derivative Contracts
 
 
 
 
Asset derivatives
 
Liability derivatives
 
 
 
 
September 30,
2014
 
December 31,
2013
 
September 30,
2014
 
December 31,
2013
 
 
Balance sheet location
 
Fair value
 
Fair value
 
Fair value
 
Fair value
Derivatives designated as hedging contracts
 
 
 
 
 
 
 
 
 
 
Natural gas and crude derivative contracts
 
Other current assets/(Other current liabilities)
 
$
42

 
$
18

 
$
(12
)
 
$
(33
)
 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
18

 
58

 
(22
)
 
(30
)
Subtotal
 
 
 
60

 
76

 
(34
)
 
(63
)
Interest rate swap agreements
 
Other current assets/(Other current liabilities)
 
128

 
87

 
(2
)
 

 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
172

 
172

 
(68
)
 
(116
)
Subtotal