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EX-32.2 - EXHIBIT 32.2 - KINDER MORGAN, INC.kmi-03312018ex322.htm
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EX-31.2 - EXHIBIT 31.2 - KINDER MORGAN, INC.kmi-03312018ex312.htm
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EX-12.1 - EXHIBIT 12.1 - KINDER MORGAN, INC.kmi-03312018ex121.htm
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EX-4.1 - EXHIBIT 4.1 - KINDER MORGAN, INC.kmi-03312018ex41.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
F O R M   10-Q
 
þ  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2018
 
or
 
o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____to_____
 
Commission file number: 001-35081
image0a30a03.gif

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No þ
 
As of April 20, 2018, the registrant had 2,206,071,454 Class P shares outstanding.




KINDER MORGAN, INC. AND SUBSIDIARIES
TABLE OF CONTENTS

 
 
Page
Number
 
 
 
 
 
 
 
 
 
Consolidated Statements of Income - Three Months Ended March 31, 2018 and 2017
 
Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2018 and 2017
 
Consolidated Balance Sheets - March 31, 2018 and December 31, 2017
 
Consolidated Statements of Cash Flows - Three Months Ended March 31, 2018 and 2017
 
Consolidated Statements of Stockholders’ Equity - Three Months Ended March 31, 2018 and 2017
 
 
 
 
 Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
Liquidity and Capital Resources
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


KINDER MORGAN, INC. AND SUBSIDIARIES
GLOSSARY

Company Abbreviations

CIG
=
Colorado Interstate Gas Company, L.L.C.
KMI
=
Kinder Morgan, Inc. and its majority-owned and/or
EIG
=
EIG Global Energy Partners
 
 
controlled subsidiaries
ELC
=
Elba Liquefaction Company, L.L.C.
KML
=
Kinder Morgan Canada Limited and its majority-
EPB
=
El Paso Pipeline Partners, L.P. and its majority-
 
 
owned and/or controlled subsidiaries
 
 
owned and/or controlled subsidiaries
KMLT
=
Kinder Morgan Liquid Terminals, LLC
EPNG
=
El Paso Natural Gas Company, L.L.C.
KMP
=
Kinder Morgan Energy Partners, L.P. and its
Hiland
=
Hiland Partners, LP
 
 
majority-owned and/or controlled subsidiaries
KMBT
=
Kinder Morgan Bulk Terminals, Inc.
SFPP
=
SFPP, L.P.
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.
 
 
 
TMEP
=
Trans Mountain Expansion Project
 
 
 
 
 
 
Unless the context otherwise requires, references to “we,” “us,” “our,” or “the company” are intended to mean Kinder Morgan, Inc. and its majority-owned and/or controlled subsidiaries.
 
 
 
 
 
 
Common Industry and Other Terms
2017 Tax
 
 
EPA
=
United States Environmental Protection Agency
Reform
=
The Tax Cuts & Jobs Act of 2017
FASB
=
Financial Accounting Standards Board
/d
=
per day
FERC
=
Federal Energy Regulatory Commission
BBtu
=
billion British Thermal Units
GAAP
=
United States Generally Accepted Accounting
Bcf
=
billion cubic feet
 
 
Principles
CERCLA
=
Comprehensive Environmental Response,
IPO
=
Initial Public Offering
 
 
Compensation and Liability Act
LLC
=
limited liability company
C$
=
Canadian dollars
MBbl
=
thousand barrels
CO2
=
carbon dioxide or our CO2 business segment
MMBbl
=
million barrels
DCF
=
distributable cash flow
NGL
=
natural gas liquids
DD&A
=
depreciation, depletion and amortization
U.S.
=
United States of America
EBDA
=
earnings before depreciation, depletion and
 
 
 
 
 
amortization expenses, including amortization of
 
 
 
 
 
excess cost of equity investments
 
 
 
 
 
 
 
 
 
When we refer to cubic feet measurements, all measurements are at a pressure of 14.73 pounds per square inch.




2


Information Regarding Forward-Looking Statements

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

See “Information Regarding Forward-Looking Statements” and Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 (2017 Form 10-K) for a more detailed description of factors that may affect the forward-looking statements. You should keep these risk factors in mind when considering forward-looking statements. These risk factors could cause our actual results to differ materially from those contained in any forward-looking statement. Because of these risks and uncertainties, you should not place undue reliance on any forward-looking statement. We plan to provide updates to projections included in this report when we believe previously disclosed projections no longer have a reasonable basis.


3


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.

KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Millions, Except Per Share Amounts)
(Unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
Revenues
 
 
 
Natural gas sales
$
827

 
$
809

Services
1,967

 
1,977

Product sales and other
624

 
638

Total Revenues
3,418

 
3,424

 
 
 
 
Operating Costs, Expenses and Other
 

 
 

Costs of sales
1,019

 
1,061

Operations and maintenance
619

 
533

Depreciation, depletion and amortization
570

 
558

General and administrative
173

 
184

Taxes, other than income taxes
88

 
104

Other expense, net

 
7

Total Operating Costs, Expenses and Other
2,469

 
2,447

 
 
 
 
Operating Income
949

 
977

 
 
 
 
Other Income (Expense)
 

 
 

Earnings from equity investments
220

 
175

Amortization of excess cost of equity investments
(32
)
 
(15
)
Interest, net
(467
)
 
(465
)
Other, net
36

 
19

Total Other Expense
(243
)
 
(286
)
 
 
 
 
Income Before Income Taxes
706

 
691

 
 
 
 
Income Tax Expense
(164
)
 
(246
)
 
 
 
 
Net Income
542

 
445

 
 
 
 
Net Income Attributable to Noncontrolling Interests
(18
)
 
(5
)
 
 
 
 
Net Income Attributable to Kinder Morgan, Inc.
524

 
440

 
 
 
 
Preferred Stock Dividends
(39
)
 
(39
)
 
 
 
 
Net Income Available to Common Stockholders
$
485

 
$
401

 
 
 
 
Class P Shares
 
 
 
Basic and Diluted Earnings Per Common Share
$
0.22

 
$
0.18

 
 
 
 
Basic and Diluted Weighted Average Common Shares Outstanding
2,207

 
2,230

 
 
 
 
Dividends Per Common Share Declared for the Period
$
0.20

 
$
0.125


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 March 31,
 
2018
 
2017
 
 
 
 
Net income
$
542

 
$
445

Other comprehensive income (loss), net of tax
 
 
 
Change in fair value of hedge derivatives (net of tax expense of $(11) and $(39), respectively)
34

 
70

Reclassification of change in fair value of derivatives to net income (net of tax benefit of $5 and $12, respectively)
(16
)
 
(21
)
Foreign currency translation adjustments (net of tax benefit (expense) of $12 and $(7), respectively)
(65
)
 
13

Benefit plan adjustments (net of tax expense of $(2) and $(5), respectively)
6

 
6

Total other comprehensive (loss) income
(41
)
 
68

 
 
 
 
Comprehensive income
501

 
513

Comprehensive loss (income) attributable to noncontrolling interests
6

 
(5
)
Comprehensive income attributable to Kinder Morgan, Inc.
$
507

 
$
508


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)
 
March 31, 2018
 
December 31, 2017
 
(Unaudited)
 
 
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
294

 
$
264

Restricted deposits
69

 
62

Accounts receivable, net
1,349

 
1,448

Fair value of derivative contracts
94

 
114

Inventories
442

 
424

Income tax receivable
163

 
165

Other current assets
217

 
238

Total current assets
2,628

 
2,715

 
 
 
 
Property, plant and equipment, net
40,333

 
40,155

Investments
7,420

 
7,298

Goodwill
22,157

 
22,162

Other intangibles, net
3,044

 
3,099

Deferred income taxes
1,886

 
2,044

Deferred charges and other assets
1,543

 
1,582

Total Assets
$
79,011

 
$
79,055

 
 
 
 
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
 

 
 

Current Liabilities
 

 
 

Current portion of debt
$
2,494

 
$
2,828

Accounts payable
1,221

 
1,340

Accrued interest
409

 
621

Accrued contingencies
307

 
291

Other current liabilities
998

 
1,101

Total current liabilities
5,429

 
6,181

Long-term liabilities and deferred credits
 

 
 

Long-term debt
 

 
 

Outstanding
34,723

 
33,988

Preferred interest in general partner of KMP
100

 
100

Debt fair value adjustments
720

 
927

Total long-term debt
35,543

 
35,015

Other long-term liabilities and deferred credits
2,381

 
2,735

Total long-term liabilities and deferred credits
37,924

 
37,750

Total Liabilities
43,353

 
43,931

Commitments and contingencies (Notes 1, 2 and 9)


 


Redeemable Noncontrolling Interest
523

 

Stockholders’ Equity
 

 
 

Class P shares, $0.01 par value, 4,000,000,000 shares authorized, 2,203,965,721 and 2,217,110,072 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
41,677

 
41,909

Retained deficit
(7,365
)
 
(7,754
)
Accumulated other comprehensive loss
(667
)
 
(541
)
Total Kinder Morgan, Inc.’s stockholders’ equity
33,667

 
33,636

Noncontrolling interests
1,468

 
1,488

Total Stockholders’ Equity
35,135

 
35,124

Total Liabilities, Redeemable Noncontrolling Interest and Stockholders’ Equity
$
79,011

 
$
79,055


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

6


KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
Cash Flows From Operating Activities
 
 
 
Net income
$
542

 
$
445

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

Depreciation, depletion and amortization
570

 
558

Deferred income taxes
149

 
244

Amortization of excess cost of equity investments
32

 
15

Change in fair market value of derivative contracts
40

 
(6
)
Earnings from equity investments
(220
)
 
(175
)
Distributions from equity investment earnings
127

 
102

Changes in components of working capital
 
 
 
Accounts receivable, net
126

 
105

Inventories
(15
)
 
(35
)
Other current assets
4

 
10

Accounts payable
(140
)
 
(35
)
Accrued interest, net of interest rate swaps
(195
)
 
(165
)
Accrued contingencies and other current liabilities
(136
)
 
(146
)
Rate reparations, refunds and other litigation reserve adjustments
31

 

Other, net
59

 
(31
)
Net Cash Provided by Operating Activities
974

 
886

 
 
 
 
Cash Flows From Investing Activities
 
 
 
Acquisitions of assets and investments
(20
)
 
(4
)
Capital expenditures
(707
)
 
(664
)
Proceeds from sales of equity investments
33

 

Sales of property, plant and equipment, and other net assets, net of removal costs
1

 
71

Contributions to investments
(66
)
 
(191
)
Distributions from equity investments in excess of cumulative earnings
42

 
138

Loans to related party
(8
)
 

Net Cash Used in Investing Activities
(725
)
 
(650
)
 
 
 
 
Cash Flows From Financing Activities
 
 
 
Issuances of debt
6,039

 
1,517

Payments of debt
(5,684
)
 
(2,122
)
Debt issue costs
(21
)
 
(1
)
Cash dividends - common shares
(277
)
 
(280
)
Cash dividends - preferred shares
(39
)
 
(39
)
Repurchases of shares
(250
)
 

Contributions from investment partner
38

 
391

Contributions from noncontrolling interests
3

 
6

Distributions to noncontrolling interests
(17
)
 
(9
)
Other, net
(1
)
 
(1
)
Net Cash Used in Financing Activities
(209
)
 
(538
)
 
 
 
 
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Deposits
(3
)
 
1

 
 
 
 
Net increase (decrease) in Cash, Cash Equivalents and Restricted Deposits
37

 
(301
)
Cash, Cash Equivalents, and Restricted Deposits, beginning of period
326

 
787

Cash, Cash Equivalents, and Restricted Deposits, end of period
$
363

 
$
486

 
Cash and Cash Equivalents, beginning of period
$
264

 
$
684

Restricted Deposits, beginning of period
62

 
103

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

 
787

 
 
 
 
Cash and Cash Equivalents, end of period
294

 
396

Restricted Deposits, end of period
69

 
90

Cash, Cash Equivalents, and Restricted Deposits, end of period
363

 
486

 
 
 
 
Net increase (decrease) in Cash, Cash Equivalents and Restricted Deposits
$
37

 
$
(301
)
 
 
 
 
Non-cash Investing and Financing Activities
 
 
 
Increase in property, plant and equipment from both accruals and contractor retainage
$
44

 
 
Supplemental Disclosures of Cash Flow Information
 
 
 
Cash paid during the period for interest (net of capitalized interest)
$
657

 
$
643

Cash paid (refund) during the period for income taxes, net
15

 
(2
)
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, 2017
2,217

 
$
22

 
2

 
$

 
$
41,909

 
$
(7,754
)
 
$
(541
)
 
$
33,636

 
$
1,488

 
$
35,124

Impact of adoption of ASUs (Note 1)
 
 
 
 
 
 
 
 
 
 
181

 
(109
)
 
72

 
 
 
72

Balance at January 1, 2018
2,217

 
22

 
2

 

 
41,909

 
(7,573
)
 
(650
)
 
33,708

 
1,488

 
35,196

Repurchase of shares
(13
)
 
 
 
 
 
 
 
(250
)
 
 
 
 
 
(250
)
 
 
 
(250
)
Restricted shares
 
 
 
 
 
 
 
 
18

 
 
 
 
 
18

 
 
 
18

Net income
 
 
 
 
 
 
 
 
 
 
524

 
 
 
524

 
18

 
542

Distributions
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(21
)
 
(21
)
Contributions
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
7

 
7

Preferred stock dividends
 
 
 
 
 
 
 
 
 
 
(39
)
 
 
 
(39
)
 
 
 
(39
)
Common stock dividends
 
 
 
 
 
 
 
 
 
 
(277
)
 
 
 
(277
)
 
 
 
(277
)
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
(17
)
 
(17
)
 
(24
)
 
(41
)
Balance at March 31, 2018
2,204

 
$
22

 
2

 
$

 
$
41,677

 
$
(7,365
)
 
$
(667
)
 
$
33,667

 
$
1,468

 
$
35,135


 
Common stock
 
Preferred stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued shares
 
Par value
 
Issued shares
 
Par value
 
Additional
paid-in
capital
 
Retained
deficit
 
Accumulated
other
comprehensive
loss
 
Stockholders’
equity
attributable
to KMI
 
Non-controlling
interests
 
Total
Balance at December 31, 2016
2,230

 
$
22

 
2

 
$

 
$
41,739

 
$
(6,669
)
 
$
(661
)
 
$
34,431

 
$
371

 
$
34,802

Restricted shares
 
 
 
 
 
 
 
 
18

 
 
 
 
 
18

 
 
 
18

Net income
 
 
 
 
 
 
 
 
 
 
440

 
 
 
440

 
5

 
445

Distributions
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(9
)
 
(9
)
Contributions
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
6

 
6

Preferred stock dividends
 
 
 
 
 
 
 
 
 
 
(39
)
 
 
 
(39
)
 
 
 
(39
)
Common stock dividends
 
 
 
 
 
 
 
 
 
 
(280
)
 
 
 
(280
)
 
 
 
(280
)
Impact of adoption of ASU 2016-09
 
 
 
 
 
 
 
 
 
 
8

 
 
 
8

 
 
 
8

Other
 
 
 
 
 
 
 
 
(1
)
 
 
 
 
 
(1
)
 
(13
)
 
(14
)
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
68

 
68

 
 
 
68

Balance at March 31, 2017
2,230

 
$
22

 
2

 
$

 
$
41,756

 
$
(6,540
)
 
$
(593
)
 
$
34,645

 
$
360

 
$
35,005



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 one of the largest energy infrastructure companies in North America. We own an interest in or operate approximately 85,000 miles of pipelines and 152 terminals. Our pipelines transport natural gas, refined petroleum products, crude oil, condensate, CO2 and other products, and our terminals transload and store liquid commodities including petroleum products, ethanol and chemicals, and bulk products, including petroleum coke, metals and ores. We are also a leading producer of CO2, which we and others utilize for enhanced oil recovery projects primarily in the Permian basin.

Suspension of Non-Essential Spending on Trans Mountain Expansion Project

On April 8, 2018, KML announced that it was suspending all non-essential activities and related spending on the TMEP. KML also announced that under current circumstances, specifically including the continued actions in opposition to the TMEP by the Province of British Columbia (BC), it will not commit additional shareholder resources to the TMEP. However, KML further announced that it will consult with various stakeholders in an effort to reach agreements by May 31, 2018 that may allow the TMEP to proceed. KML stated it is difficult to conceive of any scenario in which it would proceed with the TMEP if an agreement is not reached by May 31, 2018. The focus in those consultations will be on two principles: clarity on the path forward, particularly with respect to the ability to construct through BC and adequate protection of KML shareholders.

KML had previously announced a “primarily permitting” strategy for the first half of 2018, focused on advancing the permitting process, rather than spending at full construction levels, until it obtained greater clarity on outstanding permits, approvals and judicial reviews. Rather than achieving greater clarity, the TMEP is now facing unquantifiable risk. Previously, opposition by BC was manifesting itself largely through BC’s participation in an ongoing judicial review. Unfortunately, BC has now been asserting broad jurisdiction and reiterating its intention to use that jurisdiction to stop the TMEP. On April 18, 2018, the Attorney General for BC announced that the Province will file a reference case by April 30, 2018, presenting a constitutional question to the BC Court of Appeal. The reference question has yet to be publicly disclosed; it is anticipated the question will seek to define the extent of BC’s constitutional jurisdiction, if any, to regulate marine or environmental risks, or the transport of certain petroleum products into BC. BC’s intention in that regard has been neither validated nor quashed, and BC has continued to threaten unspecified additional actions to prevent the TMEP success. Those actions have created even greater, and growing, uncertainty with respect to the regulatory landscape facing the TMEP. In addition, the parties still await judicial decisions on challenges to the original Order in Council and the BC Environmental Assessment Certificate approving the TMEP. These items, combined with the impending approach of critical construction windows, the lead-time required to ramp up spending, and the imperative that KML avoid incurring significant debt while lacking the necessary clarity, brought KML to the decision it announced on April 8, 2018. Given the current uncertain conditions, KML is not updating its cost and schedule estimate at this time. However, construction delays are likely to entail increased costs due to a variety of factors including extended personnel, equipment and facilities charges, storage charges for unused material and equipment, extended debt service, and inflation, among others.

In the event the TMEP is terminated, resulting impairments, foregone capitalized equity costs and potential wind down costs would have a significant effect on our results of operations. Potential impairments would be recognized primarily in the period in which the decision to terminate is made. As of March 31, 2018, C$1,135 million has been spent on development of the TMEP.

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.


9


In our opinion, all adjustments, which are of a normal and recurring nature, considered necessary for a fair statement of our financial position and operating results for the interim periods have been included in the accompanying consolidated financial statements, and certain amounts from prior periods have been reclassified to conform to the current presentation. Interim results are not necessarily indicative of results for a full year; accordingly, you should read these consolidated financial statements in conjunction with our consolidated financial statements and related notes included in our 2017 Form 10-K.

The accompanying unaudited consolidated financial statements include our accounts and the accounts of our subsidiaries over which we have control or are the primary beneficiary. We evaluate our financial interests in business enterprises to determine if they represent variable interest entities where we are the primary beneficiary.  If such criteria are met, we consolidate the financial statements of such businesses with those of our own.

Accounting Policy Changes

Adoption of New Accounting Pronouncements

On January 1, 2018, we adopted Accounting Standards Updates (ASU) No. 2014-09, “Revenue from Contracts with Customers” and a series of related accounting standard updates designed to create improved revenue recognition and disclosure comparability in financial statements.  For more information, see Note 6.

On January 1, 2018, we retroactively adopted ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).” This ASU requires the statements of cash flows to present the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents are now included with cash and cash equivalents when reconciling the beginning of period and end of period amounts presented on the statements of cash flows. The retrospective application of this new accounting guidance resulted in a decrease of $13 million in “Other, net” in Cash Flows from Investing Activities, an increase of $103 million in “Cash, Cash Equivalents, and Restricted Deposits, beginning of the period,” and an increase of $90 million in “Cash, Cash Equivalents, and Restricted Deposits, end of period” in our accompanying consolidated statement of cash flows for the three months ended March 31, 2017 from what was previously presented in our Quarterly Report on Form 10-Q for the three months ended March 31, 2017.
Amounts included in the restricted deposits in the accompanying consolidated financial statements represent a combination of restricted cash amounts required to be set aside by regulatory agencies to cover obligations for our captive and other insurance subsidiaries, and cash margin deposits posted by us with our counterparties associated with certain energy commodity contract positions.

On January 1, 2018, we adopted ASU No. 2017-05, “Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.”  This ASU clarifies the scope and application of ASC 610-20 on contracts for the sale or transfer of  nonfinancial assets and in substance nonfinancial assets to noncustomers, including partial sales. This ASU also clarifies that the derecognition of all businesses is in the scope of ASC 810 and defines an “in substance nonfinancial asset.” We utilized the modified retrospective method to adopt the provisions of this ASU, which required us to apply the new standard to (i) all new contracts entered into after January 1, 2018, and (ii) to contracts that were not completed contracts as of January 1, 2018 through a cumulative adjustment to our “Retained deficit” balance. The cumulative effect of the adoption of this ASU was a $72 million, net of income taxes, adjustment to our “Retained deficit” balance as presented in our consolidated statement of stockholders’ equity for the three months ended March 31, 2018.  This ASU also requires us to classify EIG’s cumulative contribution to ELC as mezzanine equity, which we have included as “Redeemable noncontrolling interest” on our consolidated balance sheet as of March 31, 2018, as EIG has the right under certain conditions to redeem their interests for cash. The December 31, 2017 balance of $485 million is included in “Other long-term liabilities and deferred credits” on our consolidated balance sheet as of December 31, 2017.

On January 1, 2018, we adopted ASU No. 2017-07, “Compensation - Retirement Benefits (Topic 715).” This ASU requires an employer to disaggregate the service cost component from the other components of net benefit cost, allows only the service cost component of net benefit cost to be eligible for capitalization and establishes how to present the service cost component and the other components of net benefit cost in the income statement. Topic 715 required us to retrospectively reclassify $3 million of other components of net benefit credits (excluding the service cost component) from “General and administrative” to “Other, net” in our accompany consolidated statement of income for the three months ended March 31, 2017. We prospectively applied Topic 715 related to net benefit costs eligible for capitalization.

On January 1, 2018, we adopted ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”  This ASU permits companies to reclassify the income tax effects of the 2017 Tax Reform on items

10


within accumulated other comprehensive income to retained earnings.  The FASB refers to these amounts as “stranded tax effects.”  Only the stranded tax effects resulting from the 2017 Tax Reform are eligible for reclassification.  The adoption of this ASU resulted in a $109 million reclassification adjustment of stranded income effects from “Accumulated other comprehensive loss” to “Retained deficit” on our consolidated statement of stockholders’ equity for the three months ended March 31, 2018.

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

The following table sets forth the allocation of net income available to shareholders of Class P shares and participating securities (in millions):
 
 
Three Months Ended March 31,

 
2018
 
2017
Net Income Available to Common Stockholders
 
$
485

 
$
401

Participating securities:
 
 
 
 
   Less: Net Income Allocated to Restricted stock awards(a)
 
(2
)
 
(2
)
Net Income Allocated to Class P Stockholders
 
$
483

 
$
399

 
 
 
 
 
Basic Weighted Average Common Shares Outstanding
 
2,207

 
2,230

Basic Earnings Per Common Share
 
$
0.22

 
$
0.18

________
(a)
As of March 31, 2018, there were approximately 10 million restricted stock awards outstanding.

The following maximum number of potential common stock equivalents are antidilutive and, accordingly, are excluded from the determination of diluted earnings per share (in millions on a weighted-average basis):
 
Three Months Ended March 31,
 
2018
 
2017
Unvested restricted stock awards
10

 
9

Warrants to purchase our Class P shares(a)

 
293

Convertible trust preferred securities
3

 
8

Mandatory convertible preferred stock(b)
58

 
58

_______
(a)
On May 25, 2017, approximately 293 million unexercised warrants expired without the issuance of Class P common stock. Prior to expiration, each warrant entitled the holder to purchase one share of our common stock for an exercise price of $40 per share. The potential dilutive effect of the warrants did not consider the assumed proceeds to KMI upon exercise.
(b)
Until our mandatory convertible preferred shares are converted to common shares, on or before the expected mandatory conversion date of October 26, 2018, the holder of each preferred share participates in our earnings by receiving preferred stock dividends.

2. 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.

11



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):
 
March 31, 2018
 
December 31, 2017
Senior note, floating rate, due January 15, 2023
$
250

 
$
250

Senior notes, 1.50% through 8.05%, due 2018 through 2098(a)
15,093

 
13,136

Credit facility due November 26, 2019
275

 
125

Commercial paper borrowings
210

 
240

KML Credit Facility(b)
78

 

KMP senior notes, 2.65% through 9.00%, due 2018 through 2044(c)
17,910

 
18,885

TGP senior notes, 7.00% through 8.375%, due 2027 through 2037
1,240

 
1,240

EPNG senior notes, 7.50% through 8.625%, due 2022 through 2032
760

 
760

CIG senior notes, 4.15% and 6.85%, due 2026 and 2037
475

 
475

Kinder Morgan Finance Company, LLC, senior notes, 6.00% and 6.40%, due 2018 and 2036(d)
36

 
786

EPC Building, LLC, promissory note, 3.967%, due 2018 through 2035
418

 
421

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
251

 
277

Total debt – KMI and Subsidiaries
37,317

 
36,916

Less: Current portion of debt(e)
2,494

 
2,828

Total long-term debt – KMI and Subsidiaries(f)
$
34,823

 
$
34,088

_______
(a)
Amounts include senior notes that are denominated in Euros and have been converted to U.S. dollars and are respectively reported above at the March 31, 2018 exchange rate of 1.2324 U.S. dollars per Euro and the December 31, 2017 exchange rate of 1.2005 U.S. dollars per Euro. For the three months ended March 31, 2018, our debt balance increased by $39 million as a result of the change in the exchange rate of U.S. dollars per Euro. The increase in debt due to the changes in exchange rates is offset by a corresponding change in the value of cross-currency swaps reflected in “Deferred charges and other assets” and “Other long-term liabilities and deferred credits” on our consolidated balance sheets. 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 4 “Risk Management—Foreign Currency Risk Management”). In February 2018, we repaid $82 million of maturing 7.00% senior notes. On March 1, 2018, we issued $1,250 million of 4.30% fixed rate and $750 million of 5.20%, fixed rate unsecured senior notes due March 1, 2028 and March 1, 2048, respectively. The net proceeds from the notes were used primarily to repay our commercial paper and borrowings under our revolving credit facility that largely resulted from the repayment of KMP senior notes in the first quarter of 2018. See (c) and (d) below. Interest on both series of notes is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2018. We may redeem all or a part of these notes at any time at the redemption prices plus accrued interest.
(b)
The KML credit facility is denominated in C$ and has been converted to U.S. dollars and reported above at the March 31, 2018 exchange rate of 0.7756 U.S. dollars per C$. See “—Credit Facilities” below.
(c)
In February 2018, we repaid $975 million of maturing 5.95% senior notes.
(d)
In January 2018, we repaid $750 million of maturing 6.00% Kinder Morgan Finance Company, LLC senior notes.
(e)
Amounts include KMI and KML outstanding credit facility borrowings, commercial paper borrowings and other debt maturing within 12 months (see “—Current Portion of Debt” below).
(f)
Excludes our “Debt fair value adjustments” which, as of March 31, 2018 and December 31, 2017, increased our combined debt balances by $720 million and $927 million, respectively. In addition to all unamortized debt discount/premium amounts, debt issuance costs and purchase accounting on our debt balances, our debt fair value adjustments also include amounts associated with the offsetting entry for hedged debt and any unamortized portion of proceeds received from the early termination of interest rate swap agreements.

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

Credit Facilities

KMI
 
As of March 31, 2018, we had $275 million outstanding under our credit facility, $210 million outstanding under our commercial paper program and $99 million in letters of credit. Our availability under our $5 billion credit facility as of March 31, 2018 was $4,416 million. As of March 31, 2018, we were in compliance with all required covenants.

12



KML

As of March 31, 2018, KML had C$447 million available under its five year C$500 million working capital facility (after reducing the capacity for the C$53 million (U.S.$41 million) in letters of credit), C$100.0 million (U.S.$78 million) outstanding under its C$4.0 billion construction facility and no amounts outstanding under its C$1.0 billion revolving contingent credit facility. As of March 31, 2018, KML was in compliance with all required covenants.

Current Portion of Debt
Our current portion of debt as of March 31, 2018, primarily includes the above credit facilities and commercial paper borrowings and the following significant series of long-term notes maturing within the next 12 months:
Senior notes - $477 million 7.25% notes due June 1, 2018
Senior notes - $500 million 9.00% notes due February 1, 2019
Senior notes - $800 million 2.65% notes due February 1, 2019

3.  Stockholders’ Equity
 
Common Equity
 
As of March 31, 2018, our common equity consisted of our Class P common stock. For additional information regarding our Class P common stock, see Note 11 to our consolidated financial statements included in our 2017 Form 10-K.

On July 19, 2017, our board of directors approved a $2 billion common share buy-back program that began in December 2017. During the three months ended March 31, 2018, we repurchased approximately 13 million of our Class P shares for approximately $250 million.

KMI Common Stock Dividends

Holders of our common stock participate in any dividend declared by our board of directors, subject to the rights of the holders of any outstanding preferred stock. The following table provides information about our per share dividends:
 
Three Months Ended March 31,
 
2018
 
2017
Per common share cash dividend declared for the period
$
0.20

 
$
0.125

Per common share cash dividend paid in the period
$
0.125

 
$
0.125


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

Mandatory Convertible Preferred Stock

We have issued and outstanding 1,600,000 shares of 9.750% Series A mandatory convertible preferred stock, with a liquidating preference of $1,000 per share that, unless converted earlier at the option of the holders, will automatically convert into common stock on October 26, 2018. For additional information regarding our mandatory convertible preferred stock, see Note 11 to our consolidated financial statements included in our 2017 Form 10-K.

Preferred Stock Dividends

On January 17, 2018, our board of directors declared a cash dividend of $24.375 per share of our mandatory convertible preferred stock (equivalent of $1.21875 per depositary share) for the period from and including January 26, 2018 through and including April 25, 2018, which is payable on April 26, 2018 to mandatory convertible preferred shareholders of record as of the close of business on April 11, 2018.

13



Noncontrolling Interests

KML Distributions

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

The following table provides information regarding KML distributions to our noncontrolling interests (in millions except per share and share distribution amounts):
 
 
Three Months Ended March 31, 2018
 
 
Shares
 
U.S.$
 
C$
KML Restricted Voting Shares
 
 
 
 
 
 
Per restricted voting share declared for the period
 
 
 
 
 
$0.1625
Per restricted voting share paid in the period
 
 
 
$0.1291
 
$0.1625
Total value of distributions paid in the period
 
 
 
13
 
17
Cash distributions paid in the period to the public
 
 
 
9
 
12
Share distributions paid in the period to the public under KML’s DRIP
 
294,397
 
 
 
 
KML Series 1 Preferred Shares
 
 
 
 
 
 
Per Series 1 Preferred Share paid in the period
 
 
 
$0.2607
 
$0.328125
Cash distributions paid in the period to the public
 
 
 
3
 
4
KML Series 3 Preferred Shares
 
 
 
 
 
 
Per Series 3 Preferred Share paid in the period
 
 
 
$0.1754
 
$0.22082
Cash distributions paid in the period to the public
 
 
 
2
 
2

On April 18, 2018, KML’s board of directors declared a cash dividend of C$0.328125 per share of its Series 1 Preferred Shares for the period from and including February 15, 2018 through and including May 14, 2018, which is payable on May 15, 2018 to Series 1 Preferred Shareholders of record as of the close of business on April 30, 2018.

On April 18, 2018, KML’s board of directors declared a cash dividend of C$0.325 per share of its Series 3 Preferred Shares for the period from and including February 15, 2018 through and including May 14, 2018, which is payable on May 15, 2018 to Series 3 Preferred Shareholders of record as of the close of business on April 30, 2018.

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


14


Energy Commodity Price Risk Management
 
As of March 31, 2018, we had the following outstanding commodity forward contracts to hedge our forecasted energy commodity purchases and sales: 
 
Net open position long/(short)
Derivatives designated as hedging contracts
 
 
 
Crude oil fixed price
(21.4
)
 
MMBbl
Crude oil basis
(6.2
)
 
MMBbl
Natural gas fixed price
(57.4
)
 
Bcf
Natural gas basis
(47.1
)
 
Bcf
Derivatives not designated as hedging contracts
 

 
 
Crude oil fixed price
(1.6
)
 
MMBbl
Crude oil basis
(0.3
)
 
MMBbl
Natural gas fixed price
(3.1
)
 
Bcf
Natural gas basis
(1.4
)
 
Bcf
NGL fixed price
(3.7
)
 
MMBbl

As of March 31, 2018, the maximum length of time over which we have hedged, for accounting purposes, our exposure to the variability in future cash flows associated with energy commodity price risk is through December 2022.

Interest Rate Risk Management

 As of March 31, 2018 and December 31, 2017, we had a combined notional principal amount of $10,575 million and $9,575 million, respectively, of fixed-to-variable interest rate swap agreements, all of which were designated as fair value hedges. All of our swap agreements effectively convert the interest expense associated with certain series of senior notes from fixed rates to variable rates based on an interest rate of 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 March 31, 2018, the maximum length of time over which we have hedged a portion of our exposure to the variability in the value of this debt due to interest rate risk is through March 15, 2035.

Foreign Currency Risk Management

As of both March 31, 2018 and December 31, 2017, we had a combined notional principal amount of $1,358 million of cross-currency swap agreements to manage the foreign currency risk related to our Euro denominated senior notes by effectively converting all of the fixed-rate Euro denominated debt, including annual interest payments and the payment of principal at maturity, to U.S. dollar denominated debt at fixed rates equivalent to approximately 3.79% and 4.67% for the 7-year and 12-year senior notes, respectively. These cross-currency swaps are accounted for as cash flow hedges. The terms of the cross-currency swap agreements correspond to the related hedged senior notes, and such agreements have the same maturities as the hedged senior notes. 

15



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
 
 
 
 
March 31,
2018
 
December 31,
2017
 
March 31,
2018
 
December 31,
2017
 
 
Location
 
Fair value
 
Fair value
Derivatives designated as hedging contracts
 
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts
 
Fair value of derivative contracts/(Other current liabilities)
 
$
51

 
$
65

 
$
(76
)
 
$
(53
)
 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
8

 
14

 
(33
)
 
(24
)
Subtotal
 
 
 
59

 
79

 
(109
)
 
(77
)
Interest rate swap agreements
 
Fair value of derivative contracts/(Other current liabilities)
 
33

 
41

 
(15
)
 
(3
)
 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
105

 
164

 
(156
)
 
(62
)
Subtotal
 
 
 
138

 
205

 
(171
)
 
(65
)
Cross-currency swap agreements
 
Fair value of derivative contracts/(Other current liabilities)
 

 

 
(26
)
 
(6
)
 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
251

 
166

 

 

Subtotal
 
 
 
251

 
166

 
(26
)
 
(6
)
Total
 
 
 
448

 
450

 
(306
)
 
(148
)
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging contracts
 
 
 
 

 
 
 
 

 
 
Energy commodity derivative contracts
 
Fair value of derivative contracts/(Other current liabilities)
 
10

 
8

 
(18
)
 
(22
)
 
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 

 

 
(2
)
 
(2
)
Total
 
 
 
10

 
8

 
(20
)
 
(24
)
Total derivatives
 
 
 
$
458

 
$
458

 
$
(326
)
 
$
(172
)



16


Effect of Derivative Contracts on the Income Statement
 
The following tables summarize the impact of our derivative contracts in our accompanying consolidated statements of income (in millions): 
Derivatives in fair value hedging relationships
 
Location
 
Gain/(loss) recognized in income
 on derivatives and related hedged item
 
 
 
 
Three Months Ended March 31,
 
 
 
 
2018
 
2017
 
 
 
 
 
 
 
Interest rate swap agreements
 
Interest, net
 
$
(173
)
 
$
(39
)
 
 
 
 
 
 
 
Hedged fixed rate debt
 
Interest, net
 
$
168

 
$
36


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 March 31,
 
 
 
Three Months Ended March 31,
 
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
 
2018
 
2017
 
 
 
2018
 
2017
Energy commodity derivative contracts
 
$
(17
)
 
$
68

 
Revenues—Natural
  gas sales
 
$

 
$
2

 
Revenues—Natural
  gas sales
 
$

 
$

 
 
 
 
 
 
Revenues—Product
  sales and other
 
(14
)
 
6

 
Revenues—Product
  sales and other
 
(29
)
 
3

 
 
 
 
 
 
Costs of sales
 

 
3

 
Costs of sales
 

 

Interest rate swap
agreements(c)
 
1

 

 
Earnings from equity investments
 
(1
)
 

 
Earnings from equity investments
 

 

Cross-currency swap
 
50

 
2

 
Other, net
 
31

 
10

 
Other, net
 

 

Total
 
$
34

 
$
70

 
Total
 
$
16

 
$
21

 
Total
 
$
(29
)
 
$
3

_____
(a)
We expect to reclassify an approximate $21 million loss associated with cash flow hedge price risk management activities included in our accumulated other comprehensive loss balances as of March 31, 2018 into earnings during the next twelve months (when the associated forecasted transactions are also expected to occur), however, actual amounts reclassified into earnings could vary materially as a result of changes in market prices. 
(b)
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.
Derivatives not designated as accounting hedges
 
Location
 
Gain/(loss) recognized in income on derivatives
 
 
 
 
Three Months Ended March 31,
 
 
 
 
2018
 
2017
Energy commodity derivative contracts
 
Revenues—Natural gas sales
 
$
3

 
$
6

 
 
Revenues—Product sales and other
 
(1
)
 
12

Total(a)
 
 
 
$
2

 
$
18

_______
(a) The three months ended March 31, 2018 and 2017 include approximate gains of $8 million and $12 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 March 31, 2018 and December 31, 2017, we had no outstanding letters of credit supporting our commodity price risk management program. As of March 31, 2018 and December 31, 2017, we had cash margins of $11 million and $1 million, respectively, posted by us with our counterparties as collateral and reported within “Restricted deposits” on our accompanying consolidated balance sheets. The balance at

17


March 31, 2018 consisted of initial margin requirements of $10 million and variation margin requirements of $1 million. 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 March 31, 2018, based on our current mark to market positions and posted collateral, we estimate that if our credit rating were downgraded one notch we would be required to post $43 million of additional collateral and no additional collateral beyond this $43 million if we were downgraded two notches.

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Loss
Cumulative revenues, expenses, gains and losses that under GAAP are included within our comprehensive income but excluded from our earnings are reported as “Accumulated other comprehensive loss” within “Stockholders’ Equity” in our consolidated balance sheets. Changes in the components of our “Accumulated other comprehensive loss” not including non-controlling interests are summarized as follows (in millions):
 
Net unrealized
gains/(losses)
on cash flow
hedge derivatives
 
Foreign
currency
translation
adjustments
 
Pension and
other
postretirement
liability adjustments
 
Total
accumulated other
comprehensive loss
Balance as of December 31, 2017
$
(27
)
 
$
(189
)
 
$
(325
)
 
$
(541
)
Other comprehensive gain (loss) before reclassifications
34

 
(41
)
 
6

 
(1
)
Gains reclassified from accumulated other comprehensive loss
(16
)
 

 

 
(16
)
Impact of adoption of ASU 2018-02 (Note 1)
(4
)
 
(36
)
 
(69
)
 
(109
)
Net current-period other comprehensive income (loss)
14

 
(77
)
 
(63
)
 
(126
)
Balance as of March 31, 2018
$
(13
)
 
$
(266
)
 
$
(388
)
 
$
(667
)

 
Net unrealized
gains/(losses)
on cash flow
hedge derivatives
 
Foreign
currency
translation
adjustments
 
Pension and
other
postretirement
liability adjustments
 
Total
accumulated other
comprehensive loss
Balance as of December 31, 2016
$
(1
)
 
$
(288
)
 
$
(372
)
 
$
(661
)
Other comprehensive gain before reclassifications
70

 
13

 
6

 
89

Gains reclassified from accumulated other comprehensive loss
(21
)
 

 

 
(21
)
Net current-period other comprehensive income
49

 
13

 
6

 
68

Balance as of March 31, 2017
$
48

 
$
(275
)
 
$
(366
)
 
$
(593
)

5.  Fair Value
 
The fair values of our financial instruments are separated into three broad levels (Levels 1, 2 and 3) based on our assessment of the availability of observable market data and the significance of non-observable data used to determine fair value. Each fair value measurement must be assigned to a level corresponding to the lowest level input that is significant to the fair value measurement in its entirety.

The three broad levels of inputs defined by the fair value hierarchy are as follows:
Level 1 Inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;

18


Level 2 Inputs—inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability; and
Level 3 Inputs—unobservable inputs for the asset or liability. These unobservable inputs reflect the entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances (which might include the reporting entity’s own data).
 
Fair Value of Derivative Contracts
 
The following two tables summarize the fair value measurements of our (i) energy commodity derivative contracts; (ii) interest rate swap agreements; and (iii) cross-currency swap agreements, based on the three levels established by the Codification (in millions). The tables also identify the impact of derivative contracts which we have elected to present on our accompanying consolidated balance sheets on a gross basis that are eligible for netting under master netting agreements. 
 
Balance sheet asset
fair value measurements by level
 
 
 
Net amount
 
Level 1
 
Level 2
 
Level 3
 
Gross amount
 
Contracts available for netting
 
Cash collateral held(b)
As of March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts(a)
$
5

 
$
64

 
$

 
$
69

 
$
(40
)
 
$

 
$
29

Interest rate swap agreements

 
138

 

 
138

 
(8
)
 

 
130

Cross-currency swap agreements

 
251

 

 
251

 
(26
)
 

 
225

As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts(a)
$
17

 
$
70

 
$

 
$
87

 
$
(42
)
 
$
(12
)
 
$
33

Interest rate swap agreements

 
205

 

 
205

 
(15
)
 

 
190

Cross-currency swap agreements
$

 
$
166

 
$

 
$
166

 
$
(6
)
 
$

 
$
160


 
Balance sheet liability
fair value measurements by level
 
 
 
Net amount
 
Level 1
 
Level 2
 
Level 3
 
Gross amount
 
Contracts available for netting
 
Collateral posted(b)
As of March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts(a)
$
(4
)
 
$
(125
)
 
$

 
$
(129
)
 
$
40

 
$
1

 
$
(88
)
Interest rate swap agreements

 
(171
)
 

 
(171
)
 
8

 

 
(163
)
Cross-currency swap agreements

 
(26
)
 

 
(26
)
 
26

 

 

As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts(a)
$
(3
)
 
$
(98
)
 
$

 
$
(101
)
 
$
42

 
$

 
$
(59
)
Interest rate swap agreements

 
(65
)
 

 
(65
)
 
15

 

 
(50
)
Cross-currency swap agreements

 
(6
)
 

 
(6
)
 
6

 

 

_______
(a)
Level 1 consists primarily of New York Mercantile Exchange natural gas futures.  Level 2 consists primarily of over-the-counter West Texas Intermediate swaps and options and NGL swaps.  
(b)
Any cash collateral paid or received is reflected in this table, but only to the extent that it represents variation margins. Any amount associated with derivative prepayments or initial margins that are not influenced by the derivative asset or liability amounts or those that are determined solely on their volumetric notional amounts are excluded from this table.

Fair Value of Financial Instruments
 
The carrying value and estimated fair value of our outstanding debt balances are disclosed below (in millions): 
 
March 31, 2018
 
December 31, 2017
 
Carrying
value
 
Estimated
fair value
 
Carrying
value
 
Estimated
fair value
Total debt
$
38,037

 
$
39,525

 
$
37,843

 
$
40,050

 

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We used Level 2 input values to measure the estimated fair value of our outstanding debt balances as of both March 31, 2018 and December 31, 2017.

6.  Revenue Recognition
Adoption of Topic 606

Effective January 1, 2018, we adopted ASU No. 2014-09, “Revenue from Contracts with Customers” and the series of related accounting standard updates that followed (collectively referred to as “Topic 606”). We utilized the modified retrospective method to adopt Topic 606, which required us to apply the new revenue standard to (i) all new revenue contracts entered into after January 1, 2018 and (ii) revenue contracts which were not completed as of January 1, 2018. In accordance with this approach, our consolidated revenues for periods prior to January 1, 2018 were not revised. The cumulative effect of this adoption of Topic 606 as of January 1, 2018 was not material.

The impact to our consolidated financial statement line items from the adoption of Topic 606 for these changes was as follows (in millions):
 
 
Three Months Ended March 31, 2018
Line Item
 
As Reported
 
Amounts Without Adoption of Topic 606
 
Effect of Change Increase/(Decrease)
Consolidated Statement of Income
 
 
 
 
 
 
Natural gas sales
 
$
827

 
$
841

 
$
(14
)
Services
 
1,967

 
2,012

 
(45
)
Product sales and other
 
624

 
711

 
(87
)
Total Revenues
 
3,418

 
3,564

 
(146
)
 
 
 
 
 
 
 
Cost of sales
 
1,019

 
1,165

 
(146
)
Operating Income
 
949

 
949

 


The effect-of-change amounts in the table above are attributable to our Natural Gas Pipelines - Non-Regulated reporting unit, which provides gathering, processing and processed commodity sales services for various producers.

In those instances where we purchase and obtain control of the entire natural gas stream in our producer arrangements, we have determined these are contracts with suppliers rather than contracts with customers and therefore, these arrangements are not included in the scope of Topic 606. These supplier arrangements are subject to updated guidance in ASC 705, Cost of Sales and Services, whereby any embedded fees within such contracts, which historically have been reported as Services revenue, are now reported as a reduction to Cost of sales upon adoption of Topic 606.

In our natural gas processing arrangements where we extract and sell the commodities derived from the processed natural gas stream (i.e., residue gas or NGLs), we may take control of: (i) none of the commodities we sell, (ii) a portion of the commodities we sell, or (iii) all of the commodities we sell.

In those instances where we remit all of the cash proceeds received from third parties for selling the extracted commodities, less the fees attributable to these arrangements, we have determined that the producer has control over these commodities. Upon adoption of Topic 606, we eliminated recording both sales revenue (Natural gas and Product) and Cost of sales amounts and now only record fees attributable to these arrangements to Service revenues.

In other instances where we do not obtain control of the extracted commodities we sell, we are acting as an agent for the producer and, upon adoption of Topic 606, we have continued to recognize Services revenue for the net amount of consideration we retain in exchange for our service.

When we purchase and obtain control of a portion of the residue gas or NGLs we sell, we have determined these arrangements contain both a supply and a service revenue element and therefore are partially in the scope of Topic 606. In these arrangements, the producer is a supplier for the cash settled portion of the commodity we purchase and a customer with regards to the service provided to gather and redeliver the other component. Upon adoption of Topic 606, fees attributable to the supply element are recorded as a reduction to Cost of sales and fees attributable to the service element are recorded as Services revenue. Previously, we recognized Services revenue for both elements.

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Revenue from Contracts with Customers

Beginning in 2018, we account for revenue from contracts with customers in accordance with Topic 606. The unit of account in Topic 606 is a performance obligation, which is a promise in a contract to transfer to a customer either a distinct good or service (or bundle of goods or services) or a series of distinct goods or services provided over a period of time. Topic 606 requires that a contract’s transaction price, which is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, is to be allocated to each performance obligation in the contract based on relative standalone selling prices and recognized as revenue when (point in time) or as (over time) the performance obligation is satisfied.

Our customer sales contracts primarily include natural gas sales, NGL sales, crude oil sales, CO2 sales, and transmix sales contracts, as described below. Generally, for the majority of these contracts: (i) each unit (Mcf, gallon, barrel, etc.) of commodity product is a separate performance obligation, as our promise is to sell multiple distinct units of commodity product at a point in time; (ii) the transaction price principally consists of variable consideration, which amount is determinable each month end based on our right to invoice at month end for the value of commodity product sold to the customer that month; and (iii) the transaction price is allocated to each performance obligation based on the commodity product’s standalone selling price and recognized as revenue upon delivery of the commodity product, which is the point in time when the customer obtains control of the commodity product and our performance obligation is satisfied.

Our customer services contracts primarily include transportation service, storage service, gathering and processing service, and terminaling service contracts, as described below. Generally, for the majority of these contracts: (i) our promise is to transfer (or stand ready to transfer) a series of distinct integrated services over a period of time, which is a single performance obligation; (ii) the transaction price includes fixed and/or variable consideration, which amount is determinable at contract inception and/or at each month end based on our right to invoice at month end for the value of services provided to the customer that month; and (iii) the transaction price is recognized as revenue over the service period specified in the contract (which can be a day, including each day in a series of promised daily services, a month, a year, or other time increment, including a deficiency makeup period) as the services are rendered using a time-based (passage of time) or units-based (units of service transferred) method for measuring transfer of control of the services and progress towards satisfying our performance obligation, based on the nature of the promised service (e.g., firm or non-firm) and the terms and conditions of the contract (e.g., contracts with or without makeup rights).

Firm Services

Firm services (also called uninterruptible services) are services that are promised to be available to the customer at all times during the period(s) covered by the contract, with limited exceptions. Our firm service contracts are typically structured with take-or-pay or minimum volume provisions, which specify minimum service quantities a customer will pay for even if it chooses not to receive or use them in the specified service period (referred to as “deficiency quantities”). We typically recognize the portion of the transaction price associated with such provisions, including any deficiency quantities, as revenue depending on whether the contract prohibits the customer from making up deficiency quantities in subsequent periods, or the contract permits this practice, as follows:

Contracts without Makeup Rights. If contractually the customer cannot make up deficiency quantities in future periods, our performance obligation is satisfied, and revenue associated with any deficiency quantities is generally recognized as each service period expires. Because a service period may exceed a reporting period, we determine at inception of the contract and at each subsequent reporting period if we expect the customer to take the minimum volume associated with the service period. If we expect the customer to make up all deficiencies in the specified service period (i.e., we expect the customer to take the minimum service quantities), the minimum volume provision is deemed not substantive and we will recognize the transaction price as revenue in the specified service period as the promised units of service are transferred to the customer. Alternatively, if we expect that there will be any deficiency quantities that the customer cannot or will not make up in the specified service period (referred to as “breakage”), we will recognize the estimated breakage amount (subject to the constraint on variable consideration) as revenue ratably over such service period in proportion to the revenue that we will recognize for actual units of service transferred to the customer in the service period. For certain take-or-pay contracts where we make the service, or a part of the service (e.g., reservation), continuously available over the service period, we typically recognize the take-or-pay amount as revenue ratably over such period based on the passage of time.


21


Contracts with Makeup Rights. If contractually the customer can acquire the promised service in a future period and make up the deficiency quantities in such future period (the “deficiency makeup period”), we have a performance obligation to deliver those services at the customer’s request (subject to contractual and/or capacity constraints) in the deficiency makeup period. At inception of the contract, and at each subsequent reporting period, we estimate if we expect that there will be deficiency quantities that the customer will or will not make up. If we expect the customer will make up all deficiencies it is contractually entitled to, any consideration received relating to temporary deficiencies that will be made up in the deficiency makeup period will be deferred as a contract liability, and we will recognize that amount as revenue in the deficiency makeup period when either of the following occurs: (i) the customer makes up the volumes or (ii) the likelihood that the customer will exercise its right for deficiency volumes then becomes remote (e.g., there is insufficient capacity to make up the volumes, the deficiency makeup period expires). Alternatively, if we expect at inception of the contract, or at the beginning of any subsequent reporting period, that there will be any deficiency quantities that the customer cannot or will not make up (i.e., breakage), we will recognize the estimated breakage amount (subject to the constraint on variable consideration) as revenue ratably over the specified service periods in proportion to the revenue that we will recognize for actual units of service transferred to the customer in those service periods.

Non-Firm Services

Non-firm services (also called interruptible services) are the opposite of firm services in that such services are provided to a customer on an “as available” basis. Generally, we do not have an obligation to perform these services until we accept a customer’s periodic request for service. For the majority of our non-firm service contracts, the customer will pay only for the actual quantities of services it chooses to receive or use, and we typically recognize the transaction price as revenue as those units of service are transferred to the customer in the specified service period (typically a daily or monthly period).

Nature of Revenue by Segment

Natural Gas Pipelines Segment

We provide various types of natural gas transportation and storage services, natural gas and NGL sales contracts, and various types of gathering and processing services for producers, including receiving, compressing, transporting and re-delivering quantities of natural gas and/or NGLs made available to us by producers to a specified delivery location.

Natural Gas Transportation and Storage Contracts

The natural gas we receive under our transportation and storage contracts remains under the control of our customers. In many cases, generally described as firm service, the customer generally pays a two-part transaction price that includes (i) a fixed fee reserving the right to transport or store natural gas in our facilities up to contractually specified capacity levels (referred to as “reservation”) and (ii) a per-unit rate for quantities of natural gas actually transported or injected into/withdrawn from storage. In our firm service contracts we generally promise to provide a single integrated service each day over the life of the contract, which is fundamentally a stand-ready obligation to provide services up to the customer’s reservation capacity prescribed in the contract. Our customers have a take-or-pay payment obligation with respect to the fixed reservation fee component, regardless of the quantities they actually transport or store. In other cases, generally described as interruptible service, there is no fixed fee associated with these transportation and storage services because the customer accepts the possibility that service may be interrupted at our discretion in order to serve customers who have firm service contracts. We do not have an obligation to perform under interruptible customer arrangements until we accept and schedule the customer’s request for periodic service. The customer pays a transaction price based on a per-unit rate for the quantities actually transported or injected into/withdrawn from storage.

Natural Gas and NGL Sales Contracts

Our sales and purchases of natural gas and NGL are primarily accounted for on a gross basis as natural gas sales or product sales, as applicable, and cost of sales. These customer contracts generally provide for the customer to nominate a specified quantity of commodity products to be delivered and sold to the customers at specified delivery points. The customer pays a transaction price typically based on a market indexed per-unit rate for the quantities sold.

22



Gathering and Processing Contracts

We provide various types of gathering and processing services for producers, including receiving, processing, compressing, transporting and re-delivering quantities of natural gas made available to us by producers to a specified delivery location. This integrated service can be firm if subject to a minimum volume commitment or acreage dedication or non-firm when offered on an as requested, non-guaranteed basis. In our gathering contracts we generally promise to provide the contracted integrated services each day over the life of the contract. The customer pays a transaction price typically based on a per-unit rate for the quantities actually gathered and/or processed, including amounts attributable to deficiency quantities associated with minimum volume contracts.

CO2 Segment

Our crude oil, NGL, CO2 and natural gas production customer sales contracts typically include a specified quantity and quality of commodity product to be delivered and sold to the customer at a specified delivery point. The customer pays a transaction price typically based on a market indexed per-unit rate for the quantities sold.

Terminals Segment

We provide various types of liquid tank and bulk terminal services. These services are generally comprised of inbound, storage and outbound handling of customer products.

Liquids Tank Services

Firm Storage and Handling Contracts: We have liquids tank storage and handling service contracts that include a promised tank storage capacity provision and prepaid volume throughput of the stored product. In these contracts, we have a stand-ready obligation to perform this contracted service each day over the life of the contract. The customer pays a transaction price typically in the form of a fixed monthly charge and is obligated to pay whether or not it uses the storage capacity and throughput service (i.e., a take-or-pay payment obligation). These contracts generally include a per-unit rate for any quantities we handle at the request of the customer in excess of the prepaid volume throughput amount and also typically include per-unit rates for additional, ancillary services that may be periodically requested by the customer.

Firm Handling Contracts: For our firm handling service contracts, we typically promise to handle on a stand-ready basis throughput volumes up to the customer’s minimum volume commitment amount. The customer is obligated to pay for its minimum volume commitment amount, regardless of whether or not it used the handling service. The customer pays a transaction price typically based on a per-unit rate for volumes handled, including amounts attributable to deficiency quantities.

Bulk Services

Our bulk storage and handling contracts generally include inbound handling of our customers’ dry bulk material product (e.g. petcoke, metals, ores) into our storage facility and outbound handling of these products from our storage facility. These services are provided on both a firm and non-firm basis. In our firm bulk storage and handling contracts, we are committed to handle and store on a stand-ready basis the minimum throughput quantity of bulk materials contracted by the customer. In some cases, the customer is obligated to pay for its minimum volume commitment amount, regardless of whether or not it uses the storage and handling service. The customer pays a transaction price typically based on a per-unit rate for quantities handled, including amounts attributable to deficiency quantities. For non-firm storage and handling services, the customer pays a transaction price typically based on a per-unit rate for quantities handled on an as requested, non-guaranteed basis.

Products Pipelines Segment

We provide crude oil and refined petroleum transportation and storage services on a firm or non-firm basis. For our firm transportation service, we typically promise to transport on a stand-ready basis the customer’s minimum volume commitment amount. The customer is obligated to pay for its volume commitment amount, regardless of whether or not it flows volumes into our pipeline. The customer pays a transaction price typically based on a per-unit rate for quantities transported, including amounts attributable to deficiency quantities. Our firm storage service generally includes a fixed monthly fee for the portion of storage capacity reserved by the customer and a per-unit rate for actual quantities injected into/withdrawn from storage. The customer is obligated to pay the fixed monthly reservation fee, regardless of whether or not it uses our storage facility (i.e., take-or-pay payment obligation). Non-firm transportation and storage service is provided to our customers when and to the

23


extent we determine the requested capacity is available in our pipeline system and/or terminal storage facility. The customer typically pays a per-unit rate for actual quantities of product injected into/withdrawn from storage and/or transported.

We sell transmix, crude oil or other commodity products. The customer’s contracts generally include a specified quantity of commodity products to be delivered and sold to the customers at specified delivery points. The customer pays a transaction price typically based on a market indexed per-unit rate for the quantities sold.

Kinder Morgan Canada Segment