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EX-10.1 - EXHIBIT 10.1 - KINDER MORGAN, INC.kmi-06302016ex101.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 June 30, 2016
 
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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one): 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 July 21, 2016, the registrant had 2,232,323,355 Class P shares outstanding.




KINDER MORGAN, INC. AND SUBSIDIARIES
TABLE OF CONTENTS

 
 
Page
Number
 
 
 
 
 
 
 
 
 
Consolidated Statements of Income - Three and Six Months Ended June 30, 2016 and 2015
 
Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2016 and 2015
 
Consolidated Balance Sheets - June 30, 2016 and December 31, 2015
 
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2016 and 2015
 
Consolidated Statements of Stockholders’ Equity - Six Months Ended June 30, 2016 and 2015
 
 
 
 
 Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
Liquidity and Capital Resources
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


KINDER MORGAN, INC. AND SUBSIDIARIES
GLOSSARY

Company Abbreviations

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




2


Information Regarding Forward-Looking Statements

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

See “Information Regarding Forward-Looking Statements” and Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015 (2015 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. You should keep these risk factors in mind when considering forward-looking statements. These risk factors could cause our actual results to differ materially from those contained in any forward-looking statement. Because of these risks and uncertainties, you should not place undue reliance on any forward-looking statement. We plan to provide updates to projections included in this report when we believe previously disclosed projections no longer have a reasonable basis.


3


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.

KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Millions, Except Per Share Amounts)
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
Natural gas sales
$
478

 
$
677

 
$
1,021

 
$
1,462

Services
2,034

 
1,963

 
4,148

 
3,933

Product sales and other
632

 
823

 
1,170

 
1,665

Total Revenues
3,144

 
3,463

 
6,339

 
7,060

 
 
 
 
 
 
 
 
Operating Costs, Expenses and Other
 
 
 
 
 

 
 

Costs of sales
752

 
1,085

 
1,483

 
2,175

Operations and maintenance
603

 
590

 
1,168

 
1,095

Depreciation, depletion and amortization
552

 
570

 
1,103

 
1,108

General and administrative
189

 
164

 
379

 
380

Taxes, other than income taxes
110

 
116

 
218

 
231

(Gain) loss on impairments and disposals of long-lived assets, net
(4
)
 
50

 
231

 
104

Other expense (income), net
2

 
(4
)
 
1

 
(3
)
Total Operating Costs, Expenses and Other
2,204

 
2,571

 
4,583

 
5,090

 
 
 
 
 
 
 
 
Operating Income
940

 
892

 
1,756

 
1,970

 
 
 
 
 
 
 
 
Other Income (Expense)
 
 
 
 
 

 
 

Earnings from equity investments
106

 
114

 
200

 
190

Amortization of excess cost of equity investments
(16
)
 
(14
)
 
(30
)
 
(26
)
Interest, net
(471
)
 
(472
)
 
(912
)
 
(984
)
Other, net
29

 
11

 
42

 
24

Total Other Expense
(352
)
 
(361
)
 
(700
)
 
(796
)
 
 
 
 
 
 
 
 
Income Before Income Taxes
588

 
531

 
1,056

 
1,174

 
 
 
 
 
 
 
 
Income Tax Expense
(213
)
 
(189
)
 
(367
)
 
(413
)
 
 
 
 
 
 
 
 
Net Income
375

 
342

 
689

 
761

 
 
 
 
 
 
 
 
Net (Income) Loss Attributable to Noncontrolling Interests
(3
)
 
(9
)
 
(2
)
 
1

 
 
 
 
 
 
 
 
Net Income Attributable to Kinder Morgan, Inc.
372

 
333

 
687

 
762

 
 
 
 
 
 
 
 
Preferred Stock Dividends
(39
)
 

 
(78
)
 

 


 


 
 
 
 
Net Income Available to Common Stockholders
$
333

 
$
333

 
$
609

 
$
762

 
 
 
 
 
 
 
 
Class P Shares
 
 
 
 
 
 
 
Basic Earnings Per Common Share
$
0.15

 
$
0.15

 
$
0.27

 
$
0.35

 
 
 
 
 
 
 
 
Basic Weighted Average Common Shares Outstanding
2,229

 
2,175

 
2,229

 
2,158

 
 
 
 
 
 
 
 
Diluted Earnings Per Common Share
$
0.15

 
$
0.15

 
$
0.27

 
$
0.35

 
 
 
 
 
 
 
 
Diluted Weighted Average Common Shares Outstanding
2,229

 
2,187

 
2,229

 
2,169

 
 
 
 
 
 
 
 
Dividends Per Common Share Declared for the Period
$
0.125

 
$
0.490

 
$
0.250

 
$
0.970


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

4


KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Millions)
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net income
$
375

 
$
342

 
$
689

 
$
761

Other comprehensive income (loss), net of tax
 

 
 

 
 
 
 
Change in fair value of hedge derivatives (net of tax benefit of $82, $34, $40 and $35, respectively)
(142
)
 
(58
)
 
(69
)
 
(60
)
Reclassification of change in fair value of derivatives to net income (net of tax benefit of $6, $33, $69 and $74, respectively)
(11
)
 
(57
)
 
(119
)
 
(129
)
Foreign currency translation adjustments (net of tax (expense) benefit of $(4), $(9), $(49) and $53, respectively)
7

 
17

 
85

 
(91
)
Benefit plan adjustments (net of tax expense of $(3), $-, $(6) and $(4), respectively)
6

 

 
10

 
6

Total other comprehensive loss
(140
)
 
(98
)
 
(93
)
 
(274
)
 
 
 
 
 
 
 
 
Comprehensive income
235

 
244

 
596

 
487

Comprehensive (income) loss attributable to noncontrolling interests
(3
)
 
(9
)
 
(2
)
 
1

Comprehensive income attributable to KMI
$
232

 
$
235

 
$
594

 
$
488


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

5


KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Millions, Except Share and Per Share Amounts)
 
June 30, 2016
 
December 31, 2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
180

 
$
229

Accounts receivable, net
1,278

 
1,315

Fair value of derivative contracts
313

 
507

Inventories
361

 
407

Other current assets
338

 
366

Total current assets
2,470

 
2,824

Property, plant and equipment, net
41,199

 
40,547

Investments
6,202

 
6,040

Goodwill
23,802

 
23,790

Other intangibles, net
3,440

 
3,551

Deferred income taxes
4,975

 
5,323

Deferred charges and other assets
2,229

 
2,029

Total Assets
$
84,317

 
$
84,104

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current Liabilities
 

 
 

Current portion of debt
$
3,419

 
$
821

Accounts payable
1,087

 
1,324

Accrued interest
630

 
695

Accrued contingencies
405

 
298

Other current liabilities
1,025

 
927

Total current liabilities
6,566

 
4,065

Long-term liabilities and deferred credits
 

 
 

Long-term debt
 

 
 

Outstanding
38,113

 
40,632

Preferred interest in general partner of KMP
100

 
100

Debt fair value adjustments
1,988

 
1,674

Total long-term debt
40,201

 
42,406

Other long-term liabilities and deferred credits
2,077

 
2,230

Total long-term liabilities and deferred credits
42,278

 
44,636

Total Liabilities
48,844

 
48,701

Commitments and contingencies (Notes 3 and 9)


 


Stockholders’ Equity
 

 
 

Class P shares, $0.01 par value, 4,000,000,000 shares authorized, 2,229,330,134 and 2,229,223,864 shares, respectively, issued and outstanding
22

 
22

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

 

Additional paid-in capital
41,696

 
41,661

Retained deficit
(6,053
)
 
(6,103
)
Accumulated other comprehensive loss
(554
)
 
(461
)
Total Kinder Morgan, Inc.’s stockholders’ equity
35,111

 
35,119

Noncontrolling interests
362

 
284

Total Stockholders’ Equity
35,473

 
35,403

Total Liabilities and Stockholders’ Equity
$
84,317

 
$
84,104


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

6


KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
 
Six Months Ended June 30,
 
2016
 
2015
Cash Flows From Operating Activities
 
 
 
Net income
$
689

 
$
761

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

Depreciation, depletion and amortization
1,103

 
1,108

Deferred income taxes
388

 
413

Amortization of excess cost of equity investments
30

 
26

Loss on impairments and disposals of long-lived assets, net
231

 
104

Earnings from equity investments
(200
)
 
(190
)
Distributions from equity investment earnings
203

 
187

Noncash pension benefit credits

 
(23
)
Changes in components of working capital, net of the effects of acquisitions and dispositions
 
 
 
Accounts receivable, net
81

 
366

Income tax receivable

 
195

Inventories
49

 
(34
)
Other current assets
7

 
50

Accounts payable
(144
)
 
(222
)
Accrued interest, net of interest rate swaps
(49
)
 
9

Accrued contingencies and other current liabilities
72

 
(7
)
Rate reparations, refunds and other litigation reserve adjustments
31

 
27

Other, net
(147
)
 
(232
)
Net Cash Provided by Operating Activities
2,344

 
2,538

 
 
 
 
Cash Flows From Investing Activities
 
 
 
Acquisitions of assets and investments, net of cash acquired
(333
)
 
(1,919
)
Capital expenditures
(1,470
)
 
(1,909
)
Sale of property, plant and equipment, investments, and other net assets, net of removal costs
220

 
4

Contributions to investments
(363
)
 
(45
)
Distributions from equity investments in excess of cumulative earnings
81

 
114

Other, net
(15
)
 
11

Net Cash Used in Investing Activities
(1,880
)
 
(3,744
)
 
 
 
 
Cash Flows From Financing Activities
 
 
 
Issuances of debt
6,847

 
9,485

Payments of debt
(6,800
)
 
(8,941
)
Debt issue costs
(6
)
 
(20
)
Issuances of common shares

 
2,562

Cash dividends - common shares
(559
)
 
(2,006
)
Cash dividends - preferred shares
(76
)
 

Repurchases of warrants

 
(5
)
Contributions from noncontrolling interests
87

 

Distributions to noncontrolling interests
(11
)
 
(16
)
Other, net

 
(1
)
Net Cash (Used in) Provided by Financing Activities
(518
)
 
1,058

 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
5

 
(4
)
 
 
 
 
Net decrease in Cash and Cash Equivalents
(49
)
 
(152
)
Cash and Cash Equivalents, beginning of period
229

 
315

Cash and Cash Equivalents, end of period
$
180

 
$
163

 
Non-cash Investing and Financing Activities
 
 
 
Assets acquired by the assumption or incurrence of liabilities
$
43

 
$
1,671

Net assets contributed to equity investment
$
37

 
$
34

 
 
 
 
Supplemental Disclosures of Cash Flow Information
 
 
 
Cash paid during the period for interest (net of capitalized interest)
$
1,047

 
$
1,002

Cash paid (refunded) during the period for income taxes, net
$
5

 
$
(185
)

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

7


KINDER MORGAN, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Millions)
(Unaudited)
 
Common stock
 
Preferred stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued shares
 
Par value
 
Issued shares
 
Par value
 
Additional
paid-in
capital
 
Retained
deficit
 
Accumulated
other
comprehensive
loss
 
Stockholders’
equity
attributable
to KMI
 
Non-controlling
interests
 
Total
Balance at December 31, 2015
2,229

 
$
22

 
2

 
$

 
$
41,661

 
$
(6,103
)
 
$
(461
)
 
$
35,119

 
$
284

 
$
35,403

Restricted shares
 
 
 
 
 
 
 
 
35

 
 
 
 
 
35

 
 
 
35

Net income
 
 
 
 
 
 
 
 
 
 
687

 
 
 
687

 
2

 
689

Distributions
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(11
)
 
(11
)
Contributions
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
87

 
87

Preferred stock dividends
 
 
 
 
 
 
 
 
 
 
(78
)
 
 
 
(78
)
 
 
 
(78
)
Common stock dividends
 
 
 
 
 
 
 
 
 
 
(559
)
 
 
 
(559
)
 
 
 
(559
)
Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
(93
)
 
(93
)
 

 
(93
)
Balance at June 30, 2016
2,229

 
$
22

 
2

 
$

 
$
41,696

 
$
(6,053
)
 
$
(554
)
 
$
35,111

 
$
362

 
$
35,473


 
Common stock
 
Preferred stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued shares
 
Par value
 
Issued shares
 
Par value
 
Additional
paid-in
capital
 
Retained
deficit
 
Accumulated
other
comprehensive
loss
 
Stockholders’
equity
attributable
to KMI
 
Non-controlling
interests
 
Total
Balance at December 31, 2014
2,125

 
$
21

 

 
$

 
$
36,178

 
$
(2,106
)
 
$
(17
)
 
$
34,076

 
$
350

 
$
34,426

Issuances of common shares
62

 
1

 
 
 
 
 
2,561

 
 
 
 
 
2,562

 
 
 
2,562

Repurchase of warrants
 
 
 
 
 
 
 
 
(5
)
 
 
 
 
 
(5
)
 
 
 
(5
)
EP Trust I Preferred security conversions
1

 
 
 
 
 
 
 
23

 
 
 
 
 
23

 
 
 
23

Warrants exercised
 
 
 
 
 
 
 
 
2

 
 
 
 
 
2

 
 
 
2

Restricted shares
 
 
 
 
 
 
 
 
32

 
 
 
 
 
32

 
 
 
32

Net income
 
 
 
 
 
 
 
 
 
 
762

 
 
 
762

 
(1
)
 
761

Distributions
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(16
)
 
(16
)
Common stock dividends
 
 
 
 
 
 
 
 
 
 
(2,006
)
 
 
 
(2,006
)
 
 
 
(2,006
)
Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
(274
)
 
(274
)
 
 
 
(274
)
Balance at June 30, 2015
2,188

 
$
22

 

 
$

 
$
38,791

 
$
(3,350
)
 
$
(291
)
 
$
35,172

 
$
333

 
$
35,505



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

8


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

1.  General
 
Organization

We are the largest energy infrastructure company in North America. We own an interest in or operate approximately 84,000 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, which is utilized for enhanced oil recovery projects in North America.

On November 26, 2014, we completed our acquisition, pursuant to three separate merger agreements, of all of the outstanding common units of KMP and EPB and all of the outstanding shares of KMR that we did not already own, which transactions are referred to collectively as the “Merger Transactions.”

Basis of Presentation
 
General

Our reporting currency is U.S. dollars, and all references to dollars are U.S. dollars, unless stated otherwise. Our accompanying unaudited consolidated financial statements have been prepared under the rules and regulations of the United States Securities and Exchange Commission (SEC). These rules and regulations conform to the accounting principles contained in the FASB’s Accounting Standards Codification, the single source of GAAP. Under such rules and regulations, all significant intercompany items have been eliminated in consolidation.

In our opinion, all adjustments, which are of a normal and recurring nature, considered necessary for a fair presentation of our financial position and operating results for the interim periods have been included in the accompanying consolidated financial statements, and certain amounts from prior periods have been reclassified to conform to the current presentation. Interim results are not necessarily indicative of results for a full year; accordingly, you should read these consolidated financial statements in conjunction with our consolidated financial statements and related notes included in our 2015 Form 10-K.

Goodwill
 
Goodwill is the cost of an acquisition in excess of the fair value of acquired assets and liabilities and is recorded as an asset on our balance sheet. Goodwill is not subject to amortization but must be tested for impairment at least annually. This test requires us to assign goodwill to an appropriate reporting unit and to determine if the implied fair value of the reporting unit’s goodwill is less than its carrying amount.

We evaluate goodwill for impairment on May 31 of each year.  For this purpose, we have seven reporting units as follows: (i) Products Pipelines (excluding associated terminals); (ii) Products Pipelines Terminals (evaluated separately from Products Pipelines for goodwill purposes); (iii) Natural Gas Pipelines Regulated; (iv) Natural Gas Pipelines Non-Regulated; (v) CO2; (vi) Terminals; and (vii) Kinder Morgan Canada.  We also evaluate goodwill for impairment to the extent events or conditions indicate a risk of possible impairment during the interim periods subsequent to our annual impairment test. Generally, the evaluation of goodwill for impairment involves a two-step test, although under certain circumstance an initial qualitative evaluation may be sufficient to conclude that goodwill is not impaired without conducting the quantitative test.

Step 1 involves comparing the estimated fair value of each respective reporting unit to its carrying value, including goodwill. If the estimated fair value exceeds the carrying value, the reporting unit’s goodwill is not considered impaired. If the carrying value exceeds the estimated fair value, step 2 must be performed to determine whether goodwill is impaired and, if so, the amount of the impairment. Step 2 involves calculating an implied fair value of goodwill by performing a hypothetical allocation of the estimated fair value of the reporting unit determined in step 1 to the respective tangible and intangible net assets of the reporting unit. The remaining implied goodwill is then compared to the actual carrying amount of the goodwill for the reporting unit. To the extent the carrying amount of goodwill exceeds the implied goodwill, the difference is the amount of the goodwill impairment. A large portion of our goodwill is non-deductible for tax purposes, and as such, to the extent there are impairments, all or a portion of the impairment may not result in a corresponding tax benefit.


9


In the fourth quarter 2015, we recorded a $1,150 million impairment of goodwill associated with our Natural Gas Pipeline - Non-Regulated reporting unit triggered by decreases in market valuations in our industry which were caused by the commodity price environment at that time.

The results of our May 31, 2016 annual impairment test indicated that for each of our reporting units other than our Natural Gas Pipelines - Non-Regulated, the reporting unit fair value exceeded the carrying value. For our Natural Gas Pipelines - Non-Regulated, and similar to December 31, 2015, the fair value of the reporting unit continues to be slightly less than the carrying value of the reporting unit, thereby necessitating a step 2 evaluation. The hypothetical fair value allocation to the assets and liabilities of the reporting unit in the step 2 evaluation, resulted in an amount of implied goodwill exceeding the carrying amount of the reporting unit’s goodwill and, as a result, no adjustment to the reporting unit’s goodwill carrying value was warranted.

The fair value estimates used in the step 1 and step 2 goodwill tests are based on Level 3 inputs of the fair value hierarchy. The methodologies and key inputs used by management were substantially consistent with those utilized in the fourth quarter 2015.

We expect that the carrying value of our Natural Gas Pipelines - Non-Regulated reporting unit will continue to approximate fair value so long as our estimate of future cash flows and the market valuation remain consistent with current levels. A continued or prolonged period of lower commodity prices could result in further deterioration of market multiples, comparable sales transactions prices, weighted average costs of capital, and our cash flow estimates. Changes to any one or combination of these factors, particularly for our Natural Gas Pipelines - Non-Regulated reporting unit given that the carrying value slightly exceeds the current estimated fair value, would result in a change to the reporting unit fair values discussed above which could lead to further impairment charges. Such potential impairment could have a significant effect on our results of operations.

Impairments and Disposals

During the six months ended June 30, 2016, we had non-cash pre-tax impairment charges and losses on disposals of assets of $257 million substantially all of which was recorded in the first quarter of 2016 comprised of (i) $106 million of project write-offs on our Northeast Energy Direct (NED) Market project and $13 million related to an equity investment in a gas gathering entity within our Natural Gas Pipelines business segment; (ii) $33 million of project write-offs within our CO2 business segment; (iii) $20 million related to certain terminals with significant coal operations within our Terminals business segment; (iv) $64 million of write-offs associated with our Palmetto project and an $8 million loss on a held-for-sale Transmix facility both within our Products Pipelines business segment; and (v) $13 million net losses on other disposals of assets. The project write-offs recorded in the six months ended June 30, 2016 were driven by management's assessment of the probability of those projects moving forward based on insufficient progress in obtaining contractual commitments from customers in the New England market, in the case of the NED Market project, and an unfavorable action by the Georgia legislature regarding permitting for refined products pipelines affecting the Palmetto project.

During the three and six months ended June 30, 2015 we had non-cash pre-tax impairment charges and losses on disposals of assets of $50 million and $130 million, respectively. These amounts include (i) $48 million and $99 million for the three and six months ended June 30, 2015, respectively, of impairments and project write-offs, related to certain gas gathering and processing assets within our midstream operations and $26 million for the six months ended June 30, 2015 primarily related to an equity investment in a gathering entity, both within our Natural Gas Pipelines business segment; (ii) $9 million for both the three and six months ended June 30, 2015 related to an impairment charge associated with the pending sale of excess construction pipe within our CO2 business segment; and (iii) $7 million and $4 million for the three and six months ended June 30, 2015, respectively, of net gains on other disposals of assets.

In addition, during the three and six months ended June 30, 2016 we recognized a $12 million gain on the sale of an equity investment, which is included in “Other, net” on the accompanying consolidated statements of income.

As conditions warrant, we routinely evaluate our assets for potential triggering events that could impact the fair value of certain assets or our ability to recover the carrying value of long-lived assets. Such assets include accounts receivable, equity investments, goodwill, other intangibles and property plant and equipment, including oil and gas properties and in-process construction. Depending on the nature of the asset, these evaluations require the use of significant judgments including but not limited to judgments related to customer credit worthiness, future cash flow estimates, future volume expectations, current and future commodity prices, regulatory environment, management’s decisions to dispose of certain assets and estimates of the fair values of our reporting units, as well as general economic conditions and the related demand for products handled or transported by our assets. In the current commodity price environment and to the extent conditions further deteriorate, we may

10


identify additional triggering events that may require future evaluations of the recoverability of the carrying value of our long-lived assets, investments and goodwill which could result in further impairment charges. Because certain of our assets, including our oil and gas producing properties have been written down to fair value, any deterioration in fair value that exceeds the rate of depletion of the related asset would result in further impairments. Such non-cash impairments could have a significant effect on our results of operations, which would be recognized in the period in which the carrying value is determined to not be recoverable. Certain of these impairments are based on Level 3 estimates of fair value using income approach valuation methodologies which include assumptions regarding future cash flows, terminal values and discount rates. We believe our methodologies are standard techniques and results would not vary materially using a reasonable range of assumptions.

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

The following tables set forth the allocation of net income available to shareholders of Class P shares and participating securities and the reconciliation of Basic Weighted Average Common Shares Outstanding to Diluted Weighted Average Common Shares Outstanding (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,

2016
 
2015
 
2016
 
2015
Class P
$
332

 
$
330

 
$
607

 
$
756

Participating securities:
 
 
 
 
 
 
 
   Restricted stock awards(a)
1

 
3

 
2

 
6

Net Income Available to Common Stockholders
$
333

 
$
333

 
$
609

 
$
762


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Basic Weighted Average Common Shares Outstanding
2,229

 
2,175

 
2,229

 
2,158

Effect of dilutive securities:
 
 
 
 
 
 
 
   Warrants

 
12

 

 
11

Diluted Weighted Average Common Shares Outstanding
2,229

 
2,187

 
2,229

 
2,169

________
(a)
As of June 30, 2016, there were approximately 8 million such restricted stock awards.


11


The following maximum number of potential common stock equivalents are antidilutive and, accordingly, are excluded from the determination of diluted earnings per share (in millions on a weighted-average basis):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Unvested restricted stock awards
8

 
7

 
8

 
7

Warrants to purchase our Class P shares(a)
293

 
287

 
293

 
288

Convertible trust preferred securities
8

 
8

 
8

 
9

Mandatory convertible preferred stock(b)
58

 
n/a

 
58

 
n/a

_______
n/a - not applicable
(a) Each warrant 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. The potential dilutive effect of the warrants does not consider the assumed proceeds to KMI upon exercise.
(b) Until our mandatory convertible preferred shares are converted to common shares, on or before the expected mandatory conversion date of October 26, 2018, the holder of each preferred share participates in our earnings by receiving preferred dividends.

2.  Acquisitions and Divestitures
 
Acquisition of Terminal Assets from and Joint Venture With BP Products North America Inc. (BP)

On February 1, 2016, we completed the acquisition of 15 products terminals and associated infrastructure from BP for $349 million, including a transaction deposit paid in 2015 and working capital adjustments paid in 2016. In conjunction with this transaction, we and BP formed a joint venture, with an equity ownership interest of 75% and 25%, respectively. Subsequent to the acquisition, we contributed 14 of the acquired terminals to the joint venture, which we operate, and the remaining terminal is solely owned by us. BP acquired its 25% interest in the joint venture for $84 million, which we reported as “Contributions from noncontrolling interests” within our accompanying consolidated statement of cash flows for the six months ended June 30, 2016. Of the acquired assets, 10 terminals are included in our Terminals business segment and 5 terminals are included in our Products Pipelines business segment based on synergies with each segment’s respective existing operations.

Allocation of Purchase Price

The evaluation of the assigned fair values for the BP terminals acquisition is ongoing and subject to adjustment. As of June 30, 2016, our preliminary allocation of the purchase price for the BP terminals acquisition and the adjusted purchase price allocations for the Hiland acquisition and Royal Vopak terminals acquisition, both completed in February 2015, are detailed below (in millions).
 
Acquisitions
 
BP Terminal Assets
 
Hiland
 
Royal Vopak Terminal Assets
Purchase Price Allocation:
 
 
 
 
 
Current assets
$
2

 
$
79

 
$
2

Property, plant and equipment
396

 
1,492

 
155

Goodwill

 
310

 
6

Deferred charges and other assets(a)

 
1,498

 

Total assets acquired
398

 
3,379

 
163

Current liabilities

 
(253
)
 
(1
)
Debt

 
(1,413
)
 

Other liabilities
(49
)
 
(4
)
 
(4
)
Cash consideration
$
349

 
$
1,709

 
$
158

_______
(a)
Primarily consists of customer contracts and relationships with a weighted average amortization period of 16.4 years.


12


After measuring all of the identifiable tangible and intangible assets acquired and liabilities assumed at fair value on the acquisition date, goodwill is an intangible asset representing the future economic benefits expected to be derived from an acquisition that are not assigned to other identifiable, separately recognizable assets.  We believe the primary items that generated our goodwill are both the value of the synergies created between the acquired assets and our pre-existing assets, and our expected ability to grow the business we acquired by leveraging our pre-existing business experience. We apply a look through method of recording deferred income taxes on the outside book-tax basis differences in our investments. As a result, no deferred income taxes are recorded associated with non-deductible goodwill recorded at the investee level.

Subsequent Event—Sale of Equity Interest in SNG

On July 10, 2016, we announced the anticipated sale of a 50% interest in our SNG natural gas pipeline system to The Southern Company (Southern Company) for an expected $1.47 billion and the formation of a joint venture, which will include our remaining 50% interest in SNG, which we will operate. Inclusive of existing SNG debt, the transaction equates to an SNG total enterprise value of $4.15 billion. Subject to customary closing conditions and regulatory approvals, the transaction is expected to close in the third or early fourth quarter of 2016, at which time, any difference between the sales price and the proportionate carrying value of the interests in SNG being sold would be recognized.

3. Debt

We classify our debt based on the contractual maturity dates of the underlying debt instruments.  We defer costs associated with debt issuance over the applicable term. These costs are then amortized as interest expense in our accompanying consolidated statements of income.

The following table provides detail on the principal amount of our outstanding debt balances. The table amounts exclude all debt fair value adjustments, including debt discounts, premiums and issuance costs (in millions):
 
 
June 30, 2016
 
December 31, 2015
KMI
 
 
 
 
Unsecured term loan facility, variable rate, due January 26, 2019(a)
 
$
1,000

 
$

Senior notes, 1.50% through 8.25%, due 2016 through 2098(b)
 
13,309

 
13,346

Credit facility due November 26, 2019(c)
 
700

 

Commercial paper borrowings(c)
 
24

 

KMP
 
 
 
 
Senior notes, 2.65% through 9.00%, due 2016 through 2044
 
19,485

 
19,985

TGP senior notes, 7.00% through 8.375%, due 2016 through 2037(a)
 
1,540

 
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

CIG senior notes, 6.85%, due June 15, 2037
 
100

 
100

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

 
1,211

Other Subsidiary Borrowings (as obligor)
 
 
 
 
Kinder Morgan Finance Company, LLC, senior notes, 5.70% through 6.40%, due 2016 through 2036(a)
 
786

 
1,636

Hiland Partners Holdings LLC, senior notes, 5.50% and 7.25%, due 2020 and 2022
 
974

 
974

EPC Building, LLC, promissory note, 3.967%, due 2016 through 2035
 
438

 
443

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

 
221

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

 
100

Other miscellaneous debt
 
297

 
300

Total debt – KMI and Subsidiaries
 
41,632

 
41,553

Less: Current portion of debt(a)(d)
 
3,419

 
821

Total long-term debt – KMI and Subsidiaries(e)
 
$
38,213

 
$
40,732

_______
(a)
On January 26, 2016, we entered into a $1.0 billion three-year unsecured term loan facility with a variable interest rate, which is determined in the same manner as interest on our revolving credit facility borrowings. In January 2016, we repaid $850 million of maturing 5.70% senior notes, and in February 2016, we repaid $250 million of maturing 8.00% senior notes primarily using proceeds

13


from the three-year term loan. Since we refinanced a portion of the maturing debt with proceeds from long-term debt, we classified $1 billion of the maturing debt within “Long-term debt” on our consolidated balance sheet as of December 31, 2015.  
(b)
Amount includes senior notes that are denominated in Euros and have been converted and are respectively reported above at the June 30, 2016 exchange rate of 1.1106 U.S. dollars per Euro and the December 31, 2015 exchange rate of 1.0862 U.S. dollars per Euro. For the six months ended June 30, 2016, our debt increased by $31 million as a result of the change in the exchange rate of U.S. dollars per Euro. At the time of issuance, we entered into cross-currency swap agreements associated with these senior notes, effectively converting these Euro-denominated senior notes to U.S. dollars (see Note 5 “Risk Management—Foreign Currency Risk Management”).
(c)
As of June 30, 2016, the weighted average interest rate on our credit facility borrowings, including commercial paper borrowings, was 1.91%.
(d)
Amounts include outstanding credit facility borrowings, commercial paper borrowings and other debt maturing within 12 months (see “—Current Portion of Debt” below).
(e)
Excludes our “Debt fair value adjustments” which, as of June 30, 2016 and December 31, 2015, increased our combined debt balances by $1,988 million and $1,674 million, respectively. In addition to all unamortized debt discount/premium amounts, debt issuance costs and purchase accounting on our debt balances, our debt fair value adjustments also include amounts associated with the offsetting entry for hedged debt and any unamortized portion of proceeds received from the early termination of interest rate swap agreements.

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

Credit Facilities
 
On January 26, 2016, in accordance with the terms of our revolving credit agreement, we increased the capacity of our revolving credit agreement from $4.0 billion to $5.0 billion. The other terms of the revolving credit agreement remain the same. Our availability under this facility as of June 30, 2016 was $4,102 million, which is net of borrowings, and $174 million in letters of credit. Borrowings under our revolving credit facility can be used for working capital and other general corporate purposes and as a backup to our commercial paper program. Borrowings under our commercial paper program reduce the borrowings allowed under our credit facility.

Current Portion of Debt
In addition to outstanding credit facility borrowings, commercial paper borrowings, and other debt maturing within 12 months, our current portion of debt includes the current portion of the following significant series of long-term notes:
As of June 30, 2016
 
$600 million 6.00% notes due February 2017
 
 
$300 million 7.50% notes due April 2017
 
 
$355 million 5.95% notes due April 2017
 
 
$500 million 5.90% notes due April 2017
 
 
$786 million 7.00% notes due June 2017
 
 
 
As of December 31, 2015
 
$500 million 3.50% notes due March 2016
 
Long-term Debt Issuances and Repayments
The following are significant long-term debt issuances and repayments made during the six months ended June 30, 2016:
  Issuances
 
$1.0 billion unsecured term loan facility due 2019
 
 
 
  Repayments
 
$850 million 5.70% notes due 2016
 
 
$500 million 3.50% notes due 2016
 
 
$250 million 8.00% notes due 2016
 
 
$67 million 8.25% notes due 2016

4.  Stockholders’ Equity
 
Common Equity
 
As of June 30, 2016, our common equity consisted of our Class P common stock. For additional information regarding our Class P common stock, see Note 11 to our consolidated financial statements included in our 2015 Form 10-K.

14



Common Dividends

Holders of our common stock participate in any dividend declared by our board of directors, subject to the rights of the holders of any outstanding preferred stock. The following table provides information about our per share dividends:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Per common share cash dividend declared for the period
$
0.125

 
$
0.49

 
$
0.250

 
$
0.97

Per common share cash dividend paid in the period
$
0.125

 
$
0.48

 
$
0.250

 
$
0.93


On July 20, 2016, our board of directors declared a cash dividend of $0.125 per common share for the quarterly period ended June 30, 2016, which is payable on August 15, 2016 to common shareholders of record as of August 1, 2016.

Mandatory Convertible Preferred Stock

On October 30, 2015, we completed an offering of 32,000,000 depositary shares, each of which represents a 1/20th interest in a share of our 1,600,000 shares of 9.750% Series A mandatory convertible preferred stock, with a liquidating preference of $1,000 per share (equal to a $50 liquidation preference per depositary share). For additional information regarding our mandatory convertible preferred stock, see Note 11 to our consolidated financial statements included in our 2015 Form 10-K.

Preferred Dividends

On April 20, 2016, our board of directors declared a cash dividend of $24.375 per share of our mandatory convertible preferred stock (equivalent of $1.21875 per depositary share) for the period from and including April 26, 2016 through and including July 25, 2016, which is payable on July 26, 2016 to mandatory convertible preferred shareholders of record as of July 11, 2016.

5.  Risk Management
 
Certain of our business activities expose us to risks associated with unfavorable changes in the market price of natural gas, NGL and crude oil.  We also have exposure to interest rate and foreign currency risk as a result of the issuance of our debt obligations.  Pursuant to our management’s approved risk management policy, we use derivative contracts to hedge or reduce our exposure to certain of these risks. In addition, prior to May 2016, we had power forward and swap contracts related to legacy operations of acquired businesses.

Energy Commodity Price Risk Management
 
As of June 30, 2016, we had the following outstanding commodity forward contracts to hedge our forecasted energy commodity purchases and sales: 
 
Net open position long/(short)
Derivatives designated as hedging contracts
 
 
 
Crude oil fixed price
(21.2
)
 
MMBbl
Crude oil basis
(4.1
)
 
MMBbl
Natural gas fixed price
(31.9
)
 
Bcf
Natural gas basis
(21.8
)
 
Bcf
Derivatives not designated as hedging contracts
 

 
 
Crude oil fixed price
(0.3
)
 
MMBbl
Crude oil basis
(0.4
)
 
MMBbl
Natural gas fixed price
(12.8
)
 
Bcf
Natural gas basis
(2.6
)
 
Bcf
NGL and other fixed price
(3.4
)
 
MMBbl


15


As of June 30, 2016, the maximum length of time over which we have hedged, for accounting purposes, our exposure to the variability in future cash flows associated with energy commodity price risk is through December 2020.

Interest Rate Risk Management

 As of June 30, 2016, we had a combined notional principal amount of $9,775 million of fixed-to-variable interest rate swap agreements, of which $8,475 million were designated as fair value hedges.  As of December 31, 2015, we had a combined notional principal amount of $11,000 million of fixed-to-variable interest rate swap agreements, of which $9,700 million were designated as fair value hedges. All of our swap agreements effectively convert the interest expense associated with certain series of senior notes from fixed rates to variable rates based on an interest rate of London Interbank Offered Rate plus a spread and have termination dates that correspond to the maturity dates of the related series of senior notes. As of June 30, 2016, the maximum length of time over which we have hedged a portion of our exposure to the variability in the value of this debt due to interest rate risk is through March 15, 2035.

Foreign Currency Risk Management

In connection with the issuance of our Euro denominated senior notes in March 2015 (see Note 3), we entered into $1,358 million cross-currency swap agreements to manage the related foreign currency risk by effectively converting all of the fixed-rate Euro denominated debt, including annual interest payments and the payment of principal at maturity, to U.S. dollar denominated debt at fixed rates equivalent to approximately 3.79% and 4.67% for the 7-year and 12-year senior notes, respectively. These cross-currency swaps are accounted for as cash flow hedges. The terms of the cross-currency swap agreements correspond to the related hedged senior notes, and such agreements have the same maturities as the hedged senior notes. 

16



Fair Value of Derivative Contracts
 
The following table summarizes the fair values of our derivative contracts included in our accompanying consolidated balance sheets (in millions):
Fair Value of Derivative Contracts
 
 
 
 
Asset derivatives
 
Liability derivatives
 
 
 
 
June 30,
2016
 
December 31,
2015
 
June 30,
2016
 
December 31,
2015
 
 
Location
 
Fair value
 
Fair value
Derivatives designated as hedging contracts
 
 
 
 
 
 
 
 
 
 
Natural gas and crude derivative contracts
 
Fair value of derivative contracts/(Other current liabilities)
 
$
177

 
$
359

 
$
(38
)
 
$
(13
)
 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
139

 
244

 
(18
)
 

Subtotal
 
 
 
316

 
603

 
(56
)
 
(13
)
Interest rate swap agreements
 
Fair value of derivative contracts/(Other current liabilities)
 
117

 
111

 

 

 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
657

 
273

 

 
(9
)
Subtotal
 
 
 
774

 
384

 

 
(9
)
Cross-currency swap agreements
 
Fair value of derivative contracts/(Other current liabilities)
 

 

 
(22
)
 
(6
)
 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
13

 

 
(12
)
 
(46
)
Subtotal
 
 
 
13

 

 
(34
)
 
(52
)
Total
 
 
 
1,103

 
987

 
(90
)
 
(74
)
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging contracts
 
 
 
 

 
 
 
 

 
 
Natural gas, crude, NGL and other derivative contracts
 
Fair value of derivative contracts/(Other current liabilities)
 
7

 
35

 
(10
)
 
(1
)
Subtotal
 
 
 
7

 
35

 
(10
)
 
(1
)
Interest rate swap agreements
 
Fair value of derivative contracts/(Other current liabilities)
 
12

 
1

 

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

 

 

 
(5
)
Subtotal
 
 
 
62

 
1

 

 
(16
)
Power derivative contracts
 
Fair value of derivative contracts/(Other current liabilities)
 

 
1

 

 
(17
)
Subtotal
 
 
 

 
1

 

 
(17
)
Total
 
 
 
69

 
37

 
(10
)
 
(34
)
Total derivatives
 
 
 
$
1,172

 
$
1,024

 
$
(100
)
 
$
(108
)



17


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 (in millions): 
Derivatives in fair value hedging relationships
 
Location
 
Gain/(loss) recognized in income
 on derivatives and related hedged item
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
 
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
Interest, net
 
$
119

 
$
(233
)
 
$
399

 
$
(88
)
 
 
 
 
 
 
 
 
 
 
 
Hedged fixed rate debt
 
Interest, net
 
$
(120
)
 
$
256

 
$
(404
)
 
$
117


Derivatives in cash flow hedging relationships
 
Gain/(loss)
recognized in OCI on derivative (effective portion)(a)
 
Location
 
Gain/(loss) reclassified from Accumulated OCI
into income (effective portion)(b)
 
Location
 
Gain/(loss)
recognized in income
on derivative
(ineffective portion
and amount
excluded from
effectiveness testing)
 
 
Three Months Ended June 30,
 
 
 
Three Months Ended June 30,
 
 
 
Three Months Ended June 30,
 
 
2016
 
2015
 
 
 
2016
 
2015
 
 
 
2016
 
2015
Energy commodity
 derivative contracts
 
$
(111
)
 
$
(82
)
 
Revenues—Natural
 gas sales
 
$
2

 
$
1

 
Revenues—Natural
 gas sales
 
$

 
$

 
 

 
 
 
Revenues—Product
 sales and other
 
33

 
37

 
Revenues—Product
 sales and other
 
(6
)
 
3

 
 


 
 
 
Costs of sales
 
(2
)
 
(14
)
 
Costs of sales
 

 

Interest rate swap
 agreements(c)
 
(1
)
 
1

 
Interest, net
 

 

 
Interest, net
 

 

Cross-currency swap
 
(30
)
 
23

 
Other, net
 
(22
)
 
33

 
Other, net
 

 

Total
 
$
(142
)
 
$
(58
)
 
Total
 
$
11

 
$
57

 
Total
 
$
(6
)
 
$
3


Derivatives in cash flow hedging relationships
 
Gain/(loss)
recognized in OCI on derivative (effective portion)(a)
 
Location
 
Gain/(loss) reclassified from Accumulated OCI
into income (effective portion)(b)
 
Location
 
Gain/(loss)
recognized in income
on derivative
(ineffective portion
and amount
excluded from
effectiveness testing)
 
 
Six Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
2016
 
2015
 
 
 
2016
 
2015
 
 
 
2016
 
2015
Energy commodity
 derivative contracts
 
$
(84
)
 
$
(47
)
 
Revenues—Natural
 gas sales
 
$
23

 
$
25

 
Revenues—Natural
 gas sales
 
$

 
$

 
 
 
 
 
 
Revenues—Product
 sales and other
 
90

 
101

 
Revenues—Product
 sales and other
 
(5
)
 
10

 
 
 
 
 
 
Costs of sales
 
(12
)
 
(19
)
 
Costs of sales
 

 

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

 

Cross-currency swap
 
20

 
(11
)
 
Other, net
 
19

 
23

 
Other, net
 

 

Total
 
$
(69
)
 
$
(60
)
 
Total
 
$
119

 
$
129

 
Total
 
$
(5
)
 
$
10

_____
(a)
We expect to reclassify an approximate $46 million gain associated with cash flow hedge price risk management activities included in our accumulated other comprehensive loss balances as of June 30, 2016 into earnings during the next twelve months (when the associated forecasted sales and purchases are also expected to occur), however, actual amounts reclassified into earnings could vary materially as a result of changes in market prices. 
(b)
Amounts reclassified were the result of the hedged forecasted transactions actually affecting earnings (i.e., when the forecasted sales and purchases actually occurred).
(c)
Amounts represent our share of an equity investee’s accumulated other comprehensive loss.

18


Derivatives not designated as accounting hedges
 
Location
 
Gain/(loss) recognized in income on derivatives
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
 
 
2016
 
2015
 
2016
 
2015
Energy commodity derivative contracts
 
Revenues—Natural gas sales
 
$
(11
)
 
$
(2
)
 
$
(5
)
 
$
3

 
 
Revenues—Product sales and other
 
(12
)
 
(40
)
 
(14
)
 
4

 
 
Costs of sales
 
3

 
3

 
(2
)
 

Interest rate swap agreements
 
Interest, net
 
24

 

 
77

 

Total(a)
 
 
 
$
4

 
$
(39
)
 
$
56

 
$
7

_______
(a) Three and six months ended June 30, 2016 includes an approximate gain of $20 million and $39 million, respectively, associated with natural gas, crude and NGL derivative contract settlements. Three and six months ended June 30, 2015 includes an approximate gain of $7 million and $2 million, respectively, associated with natural gas, crude and NGL derivative contract settlements.

Credit Risks
In conjunction with certain derivative contracts, we are required to provide collateral to our counterparties, which may include posting letters of credit or placing cash in margin accounts.  As of June 30, 2016 and December 31, 2015, we had no and $2 million of outstanding letters of credit supporting our commodity price risk management program. As of June 30, 2016, we had cash margins of $18 million posted by us as collateral and no amounts posted by our counterparties as collateral. As of December 31, 2015, we had no cash margins posted by us as collateral and cash margins of $37 million posted by our counterparties as collateral. We also use industry standard commercial agreements which allow for the netting of exposures associated with transactions executed under a single commercial agreement. Additionally, we generally utilize master netting agreements to offset credit exposure across multiple commercial agreements with a single counterparty.
 
We also have agreements with certain counterparties to our derivative contracts that contain provisions requiring the posting of additional collateral upon a decrease in our credit rating.  As of June 30, 2016, based on our current mark to market positions and posted collateral, we estimate that if our credit rating were downgraded one or two notches, we would not be required to post additional collateral.


19


Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Loss
Cumulative revenues, expenses, gains and losses that under GAAP are included within our comprehensive income but excluded from our earnings are reported as “Accumulated other comprehensive loss” within “Stockholders’ Equity” in our consolidated balance sheets. Changes in the components of our “Accumulated other comprehensive loss” not including non-controlling interests are summarized as follows (in millions):
 
Net unrealized
gains/(losses)
on cash flow
hedge derivatives
 
Foreign
currency
translation
adjustments
 
Pension and
other
postretirement
liability adjustments
 
Total
accumulated other
comprehensive loss
Balance as of December 31, 2015
$
219

 
$
(322
)
 
$
(358
)
 
$
(461
)
Other comprehensive (loss) gain before reclassifications
(69
)
 
85