10-Q 1 kmp-2013930x10q.htm 10-Q KMP-2013.9.30-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
F O R M 10‑Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to_____
Commission file number: 1‑11234
KINDER MORGAN ENERGY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)

Delaware
 
76-0380342
(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 [X] No [   ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [   ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer [X] Accelerated filer [   ] Non-accelerated filer [   ] (Do not check if a smaller reporting company) Smaller reporting company [   ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ] No [X]
The Registrant had 310,224,830 common units outstanding as of October 25, 2013.

1


KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


KINDER MORGAN ENERGY PARTNERS, L.P.
 
Company Abbreviations
BOSTCO
=
Battleground Oil Specialty Terminal Company LLC
 
KMEP
=
Kinder Morgan Energy Partners, L.P.
Calnev
=
Calnev Pipe Line LLC
 
KMP
=
Kinder Morgan Energy Partners, L.P., our majority-owned and controlled subsidiaries
Copano
=
Copano Energy, L.L.C.
 
KinderHawk
=
KinderHawk Field Services LLC
Eagle Ford
=
Eagle Ford Gathering LLC
 
KMI
=
Kinder Morgan, Inc.
EP
=
El Paso Corporation and its majority-owned and controlled subsidiaries
 
KMR
=
Kinder Morgan Management, LLC
EPB
=
El Paso Pipeline Partners, L.P.
 
MEP
=
Midcontinent Express Pipeline LLC
EPNG
=
El Paso Natural Gas Company, L.L.C.
 
Plantation
=
Plantation Pipe Line Company
FEP
=
Fayetteville Express Pipeline LLC
 
SFPP
=
SFPP, L.P.
IMT
=
International Marine Terminals
 
TGP
=
Tennessee Gas Pipeline Company, L.L.C.
KMCO2
=
Kinder Morgan CO2 Company, L.P.
 
TransColorado
=
TransColorado Gas Transmission Company LLC
Unless the context otherwise requires, references to “we,” “us,” “our,” “KMP” or the “Partnership” are intended to mean Kinder Morgan Energy Partners, L.P., our majority-owned and controlled subsidiaries, and our operating limited partnerships and their majority-owned and controlled subsidiaries.
 
Common Industry and Other Terms
Bcf/d
=
billion cubic feet per day
 
LIBOR
=
London Interbank Offered Rate
CERCLA
=
Comprehensive Environmental Response, Compensation and Liability Act
 
LNG
=
liquefied natural gas
CO2
=
carbon dioxide
 
MLP
=
master limited partnership
CPUC
=
California Public Utilities Commission
 
MMcf/d
=
million cubic feet per day
EBDA
=
earnings before all non-cash depreciation, depletion and amortization expenses, and amortization of excess cost of equity investments
 
NEB
=
National Energy Board
DD&A
=
depreciation, depletion and amortization
 
NGLs
=
natural gas liquids
DCF
=
distributable cash flow
 
NYMEX
=
New York Mercantile Exchange
EPA
=
Environmental Protection Agency
 
NYSE
=
New York Stock Exchange
FERC
=
Federal Energy Regulatory Commission
 
OTC
=
over-the-counter
FASB
=
Financial Accounting Standards Board
 
PHMSA
=
Pipeline and Hazardous Materials Safety Administration
FTC
=
Federal Trade Commission
 
SEC
=
Securities and Exchange Commission
GAAP
=
Generally Accepted Accounting Principles in the United States of America
 
WTI
=
West Texas Intermediate
When we refer to cubic feet measurements, all measurements are at a pressure of 14.73 pounds per square inch.


3


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Millions Except Per Unit Amounts)
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012(a)
 
2013
 
2012(a)
Revenues
 
 
 
 
 
 
 
Natural gas sales
$
955

 
$
682

 
$
2,632

 
$
1,766

Services
1,328

 
1,174

 
3,811

 
2,900

Product sales and other
1,098

 
641

 
2,616

 
1,689

Total Revenues
3,381

 
2,497

 
9,059

 
6,355

 
 
 
 
 
 
 
 
Operating Costs, Expenses and Other
 
 
 
 
 
 
 
Costs of sales
1,531

 
845

 
3,736

 
2,058

Operations and maintenance
458

 
456

 
1,439

 
1,136

Depreciation, depletion and amortization
377

 
319

 
1,062

 
834

General and administrative
136

 
146

 
433

 
424

Taxes, other than income taxes
71

 
70

 
220

 
179

Other expense (income)
(59
)
 
(8
)
 
(83
)
 
(28
)
Total Operating Costs, Expenses and Other
2,514

 
1,828

 
6,807

 
4,603

 
 
 
 
 
 
 
 
Operating Income
867

 
669

 
2,252

 
1,752

 
 
 
 
 
 
 
 
Other Income (Expense)
 
 
 
 
 
 
 
Earnings from equity investments
68

 
74

 
225

 
207

Amortization of excess cost of equity investments
(3
)
 
(1
)
 
(7
)
 
(5
)
Interest expense, net
(219
)
 
(194
)
 
(632
)
 
(485
)
Gain on remeasurement of previously held equity interest in Eagle Ford Gathering to fair value (Note 2)

 

 
558

 

(Loss) gain on sale of investments in Express pipeline system (Note 2)
(1
)
 

 
224

 

Other, net
5

 
6

 
28

 
16

Total Other Income (Expense)
(150
)
 
(115
)
 
396

 
(267
)
 
 
 
 
 
 
 
 
Income from Continuing Operations Before Income Taxes
717

 
554

 
2,648

 
1,485

 
 
 
 
 
 
 
 
Income Tax Expense
(20
)
 
(15
)
 
(147
)
 
(49
)
 
 
 
 
 
 
 
 
Income from Continuing Operations
697

 
539

 
2,501

 
1,436

 
 
 
 
 
 
 
 
Discontinued Operations (Notes 1 and 2)
 
 
 
 
 
 
 
Income from operations of FTC Natural Gas Pipelines disposal group

 
47

 

 
145

Loss on sale and the remeasurement of FTC Natural Gas Pipelines disposal group to fair value

 
(178
)
 
(2
)
 
(827
)
Loss from Discontinued Operations

 
(131
)
 
(2
)
 
(682
)
 
 
 
 
 
 
 
 
Net Income
697

 
408

 
2,499

 
754

 
 
 
 
 
 
 
 
Net Income Attributable to Noncontrolling Interests
(8
)
 
(3
)
 
(27
)
 
(11
)
 
 
 
 
 
 
 
 
Net Income Attributable to Kinder Morgan Energy Partners, L.P.
$
689

 
$
405

 
$
2,472

 
$
743

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Calculation of Limited Partners’ Interest in Net Income (Loss)
 
 
 
 
 
 
 
Attributable to Kinder Morgan Energy Partners, L.P.:
 
 
 
 
 
 
 
Income from Continuing Operations
$
689

 
$
535

 
$
2,474

 
$
1,418

Less: Pre-acquisition income from operations of drop-down asset groups allocated to General Partner (Note 2)

 
(62
)
 
(19
)
 
(41
)
Add: Drop-Down asset groups’ severance expense allocated to General Partner
2

 

 
8

 

Less: General Partner’s remaining interest
(436
)
 
(367
)
 
(1,260
)
 
(1,024
)
Limited Partners’ Interest
255

 
106

 
1,203

 
353

Add: Limited Partners’ Interest in discontinued operations

 
(128
)
 
(2
)
 
(668
)
Limited Partners’ Interest in Net Income (Loss)
$
255

 
$
(22
)
 
$
1,201

 
$
(315
)
 
 
 
 
 
 
 
 
Limited Partners’ Net Income (Loss) per Unit - Basic and Diluted:
 
 
 
 
 
 
 
Income from Continuing Operations
$
0.59

 
$
0.30

 
$
2.95

 
$
1.02

Loss from Discontinued Operations

 
(0.36
)
 
(0.01
)
 
(1.93
)
Net Income (Loss) - Basic and Diluted
$
0.59

 
$
(0.06
)
 
$
2.94

 
$
(0.91
)
 
 
 
 
 
 
 
 
Weighted Average Number of Units Used in Computation of Limited Partners’ Net Income (Loss) per Unit
435

 
356

 
408

 
345

 
 
 
 
 
 
 
 
Per Unit Cash Distribution Declared for the Period
$
1.35

 
$
1.26

 
$
3.97

 
$
3.69

The accompanying notes are an integral part of these consolidated financial statements.
____________
(a)
Retrospectively adjusted as discussed in Note 1.

4


KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Millions)
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012(a)
 
2013
 
2012(a)
Net Income
$
697

 
$
408

 
$
2,499

 
$
754

 
 
 
 
 
 
 
 
Other Comprehensive Income (Loss):
 
 
 
 
 
 
 
Change in fair value of derivatives utilized for hedging purposes
(102
)
 
(90
)
 
(73
)
 
99

Reclassification of change in fair value of derivatives to net income
25

 
(10
)
 
15

 
10

Foreign currency translation adjustments
42

 
70

 
(72
)
 
68

Adjustments to pension and other postretirement benefit plan liabilities, net of tax
31

 
(1
)
 
32

 

Total Other Comprehensive Income (Loss)
(4
)
 
(31)

 
(98
)
 
177

 
 
 
 
 
 
 
 
Comprehensive Income
693

 
377

 
2,401

 
931

Comprehensive Income Attributable to Noncontrolling Interests
(8
)
 
(3
)
 
(26
)
 
(13
)
Comprehensive Income Attributable to Kinder Morgan Energy Partners, L.P.
$
685

 
$
374

 
$
2,375

 
$
918

The accompanying notes are an integral part of these consolidated financial statements.
____________
(a)
Retrospectively adjusted as discussed in Note 1.


5


KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Millions)
(Unaudited)
 
September 30,
2013
 
December 31, 2012(a)
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
534

 
$
529

Accounts receivable, net
1,236

 
1,114

Inventories
399

 
338

Assets held for sale

 
211

Other current assets
283

 
185

Total Current assets
2,452

 
2,377

 
 
 
 
Property, plant and equipment, net
26,742

 
22,330

Investments
2,207

 
1,864

Goodwill
6,532

 
5,417

Other intangibles, net
2,448

 
1,142

Deferred charges and other assets
1,604

 
1,846

Total Assets
$
41,985

 
$
34,976

 
 
 
 
 
 
 
 
LIABILITIES AND PARTNERS’ CAPITAL
 
 
 
Current liabilities
 
 
 
Current portion of debt
$
702

 
$
1,155

Accounts payable
1,313

 
1,091

Accrued interest
206

 
327

Accrued other current liabilities
1,218

 
674

Total Current liabilities
3,439

 
3,247

 
 
 
 
Long-term liabilities and deferred credits
 
 
 
Long-term debt
 
 
 
Outstanding
18,910

 
15,907

Debt fair value adjustments
1,332

 
1,698

Total Long-term debt
20,242

 
17,605

Deferred income taxes
273

 
249

Other long-term liabilities and deferred credits
1,010

 
1,113

Total Long-term liabilities and deferred credits
21,525

 
18,967

 
 
 
 
Total Liabilities
24,964

 
22,214

Commitments and contingencies (Notes 3 and 9)


 
 
Partners’ Capital
 
 
 
Common units
9,416

 
4,723

Class B units
9

 
14

i-units
4,054

 
3,564

General partner
3,073

 
4,026

Accumulated other comprehensive income
71

 
168

Total Kinder Morgan Energy Partners, L.P. Partners’ Capital
16,623

 
12,495

Noncontrolling interests
398

 
267

Total Partners’ Capital
17,021

 
12,762

Total Liabilities and Partners’ Capital
$
41,985

 
$
34,976

The accompanying notes are an integral part of these consolidated financial statements.
____________
(a)
Retrospectively adjusted as discussed in Note 1.

6


KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
 
Nine Months Ended
September 30,
 
2013
 
2012(a)
Cash Flows From Operating Activities
 
 
 
Net Income
$
2,499

 
$
754

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
1,062

 
841

Amortization of excess cost of equity investments
7

 
5

(Gain) loss from the remeasurement of net assets to fair value (Note 2)
(558
)
 
749

Gain from the sale of investments in Express pipeline system (Note 2)
(224
)
 

Loss from the the sale of discontinued operations (Note 2)
2

 
78

Earnings from equity investments
(225
)
 
(271
)
Distributions from equity investments
217

 
251

Proceeds from termination of interest rate swap agreements
96

 
53

Changes in components of working capital, net of the effects of acquisitions:
 
 
 
Accounts receivable
55

 
(106
)
Inventories
(57
)
 
(99
)
Other current assets
(25
)
 
16

Accounts payable
(150
)
 
28

Accrued interest
(132
)
 
(132
)
Accrued other current liabilities
32

 
235

Rate reparations, refunds and other litigation reserve adjustments
174

 
(42
)
Other, net
(92
)
 
7

Net Cash Provided by Operating Activities
2,681

 
2,367

 
 
 
 
Cash Flows From Investing Activities
 
 
 
Payment to KMI for drop-down asset groups, net of cash acquired (Note 2)
(994
)
 
(3,465
)
Acquisitions of assets and investments, net of cash acquired
(292
)
 
(72
)
Repayments from related party

 
63

Capital expenditures
(2,160
)
 
(1,314
)
Proceeds from sale of investments in Express pipeline system
402

 

Sale or casualty of property, plant and equipment, investments and other net assets, net of removal costs
61

 
36

Contributions to equity investments
(163
)
 
(143
)
Distributions from equity investments in excess of cumulative earnings
48

 
120

Other, net
22

 
(34
)
Net Cash Used in Investing Activities
(3,076
)
 
(4,809
)
 
 
 
 
Cash Flows From Financing Activities
 
 
 
Issuance of debt
7,915

 
8,378

Payment of debt
(6,574
)
 
(5,079
)
Debt issue costs
(22
)
 
(16
)
Proceeds from issuance of common units
1,080

 
387

Proceeds from issuance of i-units
145

 
727

Contributions from noncontrolling interests
128

 
40

Contributions from General Partner
38

 

Pre-acquisition contributions from (distributions to) KMI to (from) drop-down asset group
35

 
(14
)
Distributions to partners and noncontrolling interests:
 
 
 
Common units
(1,068
)
 
(847
)
Class B units
(21
)
 
(19
)
General Partner
(1,213
)
 
(970
)
Noncontrolling interests
(30
)
 
(23
)
Other, net
(1
)
 
(1
)
Net Cash Provided by Financing Activities
412

 
2,563

 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
(12
)
 
13

 
 
 
 
Net increase in Cash and Cash Equivalents
5

 
134

Cash and Cash Equivalents, beginning of period
529

 
409

Cash and Cash Equivalents, end of period
$
534

 
$
543

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

7


KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In Millions)
(Unaudited)
 
Nine Months Ended
September 30,
 
2013
 
2012(a)
Noncash Investing and Financing Activities
 
 
 
Net assets acquired by the transfer of the drop-down asset groups
$

 
$
7,507

Assets acquired or liabilities settled by the issuance of common units
$
3,841

 
$
686

Increase in accrual for capital expenditures
$
232

 
$
69

Assets acquired by the assumption or incurrence of liabilities
$
1,487

 
$

 
 
 
 
Supplemental Disclosures of Cash Flow Information
 
 
 
Cash paid during the period for interest (net of capitalized interest)
$
764

 
$
610

Cash paid during the period for income taxes
$
15

 
$
16

The accompanying notes are an integral part of these consolidated financial statements.
____________
(a)
Retrospectively adjusted as discussed in Note 1.


8


KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(In Millions, Except Units)
(Unaudited)
 
Nine Months Ended September 30,
 
2013
 
2012(a)
 
Units
 
Amount
 
Units
 
Amount
Common units:
 
 
 
 
 
 
 
Beginning Balance
252,756,425

 
$
4,723

 
232,677,222

 
$
4,347

Net income (loss)


 
841

 


 
(216
)
Units issued as consideration in the acquisition of assets
44,620,662

 
3,841

 
8,661,627

 
686

Units issued for cash
12,847,743

 
1,080

 
4,772,741

 
387

Distributions


 
(1,068
)
 


 
(847
)
Other adjustments


 
(1
)
 


 
3

Ending Balance
310,224,830

 
9,416

 
246,111,590

 
4,360

 
 
 
 
 
 
 
 
Class B units:
 

 
 

 
 

 
 

Beginning Balance
5,313,400

 
14

 
5,313,400

 
42

Net income (loss)


 
16

 


 
(5
)
Distributions


 
(21
)
 


 
(19
)
Ending Balance
5,313,400

 
9

 
5,313,400

 
18

 
 
 
 
 
 
 
 
i-Units:
 

 
 

 
 

 
 

Beginning Balance
115,118,338

 
3,564

 
98,509,392

 
2,857

Net income (loss)


 
345

 


 
(93
)
Units issued for cash
1,757,300

 
145

 
10,120,000

 
727

Distributions
5,411,720

 

 
4,646,736

 

Other adjustments


 

 


 
1

Ending Balance
122,287,358

 
4,054

 
113,276,128

 
3,492

 
 
 
 
 
 
 
 
General partner:
 

 
 

 
 

 
 

Beginning Balance


 
4,026

 


 
259

Net income


 
1,270

 


 
1,057

Distributions


 
(1,213
)
 


 
(970
)
Drop-Down acquisitions (Note 1)


 
(1,057
)
 


 
3,624

Reimbursed severance expense allocated from KMI


 
7

 


 

Contributions


 
38

 


 
45

Other adjustments


 
2

 


 

Ending Balance


 
3,073

 


 
4,015

 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss):
 

 
 

 
 

 
 

Beginning Balance


 
168

 


 
3

Change in fair value of derivatives utilized for hedging purposes


 
(72
)
 


 
97

Reclassification of change in fair value of derivatives to net income


 
15

 


 
10

Foreign currency translation adjustments


 
(72
)
 


 
68

Adjustments to pension and other postretirement benefit plan liabilities


 
32

 


 

Ending Balance


 
71

 


 
178

 
 
 
 
 
 
 
 
Total Kinder Morgan Energy Partners, L.P. Partners’ Capital
437,825,588

 
16,623

 
364,701,118

 
12,063

 
 
 
 
 
 
 
 
Noncontrolling interests:
 
 
 
 
 
 
 
Beginning Balance


 
267

 


 
96

Net income


 
27

 


 
11

Contributions


 
128

 


 
40

Distributions


 
(30
)
 


 
(23
)
Drop-Down acquisitions (Note 2)


 
(10
)
 


 
37

Copano acquisition (Note 2)
 
 
17

 
 
 

Change in fair value of derivatives utilized for hedging purposes


 
(1
)
 


 
2

Other adjustments


 

 


 
1

Ending Balance


 
398

 


 
164

 
 
 
 
 
 
 
 
Total Partners’ Capital
437,825,588

 
$
17,021

 
364,701,118

 
$
12,227

The accompanying notes are an integral part of these consolidated financial statements.
____________
(a)
Retrospectively adjusted as discussed in Note 1.



9


KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
Organization
Kinder Morgan Energy Partners, L.P. is a leading pipeline transportation and energy storage company in North America, and unless the context requires otherwise, references to “we,” “us,” “our,” “KMP” or the “Partnership” are intended to mean Kinder Morgan Energy Partners, L.P., our operating limited partnerships and their majority-owned and controlled subsidiaries. We own an interest in or operate more than 54,000 miles of pipelines and 180 terminals, and conduct our business through five reportable business segments (described further in Note 7). Our common units trade on the NYSE under the symbol “KMP.”
Our pipelines transport natural gas, refined petroleum products, crude oil, CO2 and other products, and our terminals store petroleum products and chemicals, and handle such products as ethanol, coal, petroleum coke and steel. We are also the leading producer and transporter of CO2 for enhanced oil recovery projects in North America.
Kinder Morgan, Inc. and Kinder Morgan G.P., Inc.
KMI, a Delaware corporation, indirectly owns all the common stock of our general partner, Kinder Morgan G.P., Inc., a Delaware corporation. In July 2007, our general partner issued and sold to a third party 100,000 shares of Series A fixed-to-floating rate term cumulative preferred stock due 2057. The consent of holders of a majority of these preferred shares is required with respect to a commencement of or a filing of a voluntary bankruptcy proceeding with respect to us or two of our subsidiaries, SFPP and Calnev.
KMI’s common stock trades on the NYSE under the symbol “KMI.” As of September 30, 2013, KMI and its consolidated subsidiaries owned, through KMI’s general and limited partner interests in us and its ownership of shares issued by KMR (discussed below), an approximate 11.7% interest in us.
Effective May 25, 2012, KMI acquired all of the outstanding shares of EP. KMI’s acquisition of EP created one of the largest energy companies in the United States. As a result, KMI now owns a 41% limited partner interest and the 2% general partner interest in EPB.
Kinder Morgan Management, LLC
KMR is a Delaware limited liability company. Our general partner owns all of KMR’s voting securities and, pursuant to a delegation of control agreement, has delegated to KMR, to the fullest extent permitted under Delaware law and our partnership agreement, all of its power and authority to manage and control our business and affairs, except that KMR cannot take certain specified actions without the approval of our general partner. KMR’s shares representing limited liability company interests trade on the NYSE under the symbol “KMR.” As of September 30, 2013, KMR, through its sole ownership of our i-units, owned approximately 27.9% of all of our outstanding limited partner units (all of our i-units are issued only to KMR).
More information about the entities referred to above and the delegation of control agreement is contained in our Annual Report on Form 10-K for the year ended December 31, 2012. In this report, we refer to our Annual Report on Form 10-K for the year ended December 31, 2012 as our 2012 Form 10-K.

10


Basis of Presentation
General
We have prepared our accompanying unaudited consolidated financial statements under the rules and regulations of the SEC. These rules and regulations conform to the accounting principles contained in the FASB’s Accounting Standards Codification. Under such rules and regulations, we have condensed or omitted certain information and notes normally included in financial statements prepared in conformity with the Codification. We believe, however, that our disclosures are adequate to make the information presented not misleading.
Our accompanying unaudited consolidated financial statements reflect normal adjustments, and also recurring adjustments that are, in the opinion of our management, necessary for a fair statement of our financial results for the interim periods. In addition, certain amounts from prior periods have been reclassified to conform to the current presentation (including reclassifications between “Services” and “Product sales and other” within the “Revenues” section of our accompanying consolidated statements of income). Interim results are not necessarily indicative of results for a full year; accordingly, you should read these consolidated financial statements in conjunction with our consolidated financial statements and related notes included in our 2012 Form 10-K.
We maintain our accounting records in United States dollars, and all references to dollars are United States dollars, except where stated otherwise. We designate Canadian dollars as C$. Our consolidated financial statements include our accounts and those of our operating partnerships and their majority-owned and controlled subsidiaries, and all significant intercompany items have been eliminated in consolidation.
Our financial statements are consolidated into the consolidated financial statements of KMI; however, except for the related party transactions described in Note 8 “Related Party Transactions—Asset Acquisitions,” KMI is not liable for, and its assets are not available to satisfy, our obligations and/or our subsidiaries’ obligations, and vice versa.  Responsibility for payments of obligations reflected in our or KMI’s financial statements is a legal determination based on the entity that incurs the liability. Furthermore, the determination of responsibility for payment among entities in our consolidated group of subsidiaries is not impacted by the consolidation of our financial statements into the consolidated financial statements of KMI.
KMI Asset Drop-Downs
Effective August 1, 2012, we acquired a 100% interest in TGP and a 50% ownership interest in EPNG from KMI for an aggregate consideration of approximately $6.2 billion (including our proportional share of assumed debt borrowings as of August 1, 2012). In this report, we refer to this acquisition of assets from KMI as the August 2012 drop-down transaction; and the combined group of assets acquired from KMI effective August 1, 2012 as the August 2012 drop-down asset group.
Effective March 1, 2013, we acquired from KMI the remaining 50% ownership interest we did not already own in both EPNG and the EP midstream assets for an aggregate consideration of approximately $1.7 billion (including our proportional share of assumed debt borrowings as of March 1, 2013). In this report, we refer to this acquisition of assets from KMI as the March 2013 drop-down transaction; the combined group of assets acquired from KMI effective March 1, 2013 as the March 2013 drop-down asset group; the EP midstream assets of Kinder Morgan Altamont LLC (formerly, El Paso Midstream Investment Company, L.L.C.) as the EP midstream assets; the combined August 2012 drop-down transaction (described above) and the March 2013 drop-down transaction as the drop-down transactions; and the combined August 2012 drop-down asset group (described above) and the March 2013 drop-down asset group as the drop-down asset groups. We acquired our initial 50% ownership interest in the EP midstream assets from an investment vehicle affiliated with Kohlberg Kravis Roberts & Co. L.P., referred to as KKR, effective June 1, 2012. Prior to the March 2013 drop-down transaction, we accounted for our initial 50% ownership interests in both EPNG and the EP midstream assets under the equity method of accounting.

11


KMI acquired all of the assets included in the drop-down asset groups as part of its acquisition of EP on May 25, 2012, and KMI accounted for its EP acquisition under the acquisition method of accounting. We, however, accounted for the drop-down transactions as combinations of entities under common control. Accordingly, we prepared our consolidated financial statements to reflect the transfers of the drop-down asset groups from KMI to us as if such transfers had taken place on the date when the drop-down asset groups met the accounting requirements for entities under common control—May 25, 2012 for both TGP and EPNG, and June 1, 2012 for the EP midstream assets. Specifically, we (i) consolidated our now 100% investments in the drop-down asset groups as of the effective dates of common control, and recognized the acquired assets and assumed liabilities at KMI’s carrying value (including all of KMI’s purchase accounting adjustments); (ii) recognized any difference between our purchase price and the carrying value of the net assets we acquired as an adjustment to our Partners’ Capital (specifically, as an adjustment to our general partner’s and our noncontrolling interests’ capital interests); and (iii) retrospectively adjusted our consolidated financial statements, for any date after the effective dates of common control.
Additionally, because KMI both controls us and consolidates our financial statements into its consolidated financial statements as a result of its ownership of our general partner, we fully allocated to our general partner:
the earnings of the drop-down asset groups for the periods beginning on the effective dates of common control (described above) and ending August 1, 2012 for the August 2012 drop-down asset group and March 1, 2013 for the March 2013 drop-down asset group, respectively (we refer to these earnings as “pre-acquisition” earnings and we reported these earnings separately as “Pre-acquisition income from operations of drop-down asset groups allocated to General Partner” within the “Calculation of Limited Partners’ Interest in Net Income (Loss)” section of our accompanying consolidated statements of income for the three and nine months ended September 30, 2013 and 2012); and
incremental severance expense related to KMI’s acquisition of EP and allocated to us from KMI (and we reported this expense separately as “Drop-down asset groups’ severance expense allocated to General Partner” within the “Calculation of Limited Partners’ Interest in Net Income (Loss)” section of our accompanying consolidated statements of income for the three and nine months ended September 30, 2013). The severance expense allocated to us was associated with the drop-down asset groups; however, we do not have any obligation, nor did we pay any amounts related to this expense.
For all periods beginning after our acquisition dates of August 1, 2012 and March 1, 2013, respectively, we allocated our earnings (including the earnings from the drop-down asset groups) to all of our partners according to our partnership agreement. For further information about the drop-down transactions, see Note 2 “Acquisitions and Divestitures—Acquisitions.”
FTC Natural Gas Pipelines Disposal Group – Discontinued Operations
Effective November 1, 2012, we sold our (i) Kinder Morgan Interstate Gas Transmission natural gas pipeline system; (ii) Trailblazer natural gas pipeline system; (iii) Casper and Douglas natural gas processing operations; and (iv) 50% equity investment in the Rockies Express natural gas pipeline system to Tallgrass Energy Partners, LP (now known as Tallgrass Development, LP) (Tallgrass) for approximately $1.8 billion in cash (before selling costs), or $3.3 billion including our share of joint venture debt. In this report, we refer to this combined group of assets as our FTC Natural Gas Pipelines disposal group. The sale of our FTC Natural Gas Pipelines disposal group satisfied the terms of a March 15, 2012 agreement between KMI and the FTC to divest certain of our assets in order to receive regulatory approval for KMI’s EP acquisition. For more information about the presentation of our FTC Natural Gas Pipelines disposal group as discontinued operations, see Note 2 “Summary of Significant Accounting Policies—Basis of Presentation—FTC Natural Gas Pipelines Disposal Group - Discontinued Operations” to our consolidated financial statements included in our 2012 Form 10-K.
Goodwill
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.  There were no impairment charges resulting from our May 31, 2013 impairment testing, and no event indicating an impairment has occurred subsequent to that date.

12


The fair value of each reporting unit was determined based on a market approach utilizing an average dividend/distribution yield of comparable companies. The value of each reporting unit was determined on a stand-alone basis from the perspective of a market participant and represented the price estimated to be received in a sale of the unit as a whole in an orderly transaction between market participants at the measurement date.

During the quarter ended June 30, 2013, we created the Natural Gas Pipelines Non-Regulated reporting unit to include the non-regulated businesses we acquired in our acquisition of Copano on May 1, 2013 as well as other non-regulated businesses that were historically part of the former Natural Gas Pipelines reporting unit (now the Natural Gas Pipelines Regulated reporting unit). We then allocated goodwill between these two reporting units based on the relative fair values of the reporting units.

Limited Partners’ Net Income (Loss) per Unit
We compute Limited Partners’ Net Income (Loss) per Unit by dividing our limited partners’ interest in net income (loss) by the weighted average number of units outstanding during the period.

2. Acquisitions and Divestitures    

Acquisitions

March 2013 KMI Asset Drop-Down

As discussed above in Note 1 General—Basis of Presentation—KMI Asset Drop-Downs,” we acquired the March 2013 drop-down asset group from KMI effective March 1, 2013. Our consideration to KMI consisted of (i) $994 million in cash (including $6 million paid to KMI in the second quarter of 2013 to settle the final working capital adjustment); (ii) 1,249,452 common units (valued at $108 million based on the $86.72 closing market price of a common unit on the NYSE on the March 1, 2013 issuance date); and (iii) $557 million in assumed debt (consisting of 50% of the outstanding principal amount of EPNG’s debt borrowings as of March 1, 2013, excluding any debt fair value adjustments). The terms of the drop-down transaction were approved on behalf of KMI by the independent members of its board of directors and on our behalf by the audit committees and the boards of directors of both our general partner and KMR, in its capacity as the delegate of our general partner, following the receipt by the independent directors of KMI and the audit committees of our general partner and KMR of separate fairness opinions from different independent financial advisors. We included the March 2013 drop-down asset group in our Natural Gas Pipelines segment.
August 2012 KMI Asset Drop-Down
As discussed above in Note 1 General—Basis of Presentation—KMI Asset Drop-Downs,” we acquired the August 2012 drop-down asset group from KMI effective August 1, 2012. For additional information about this acquisition, see Note 2 “Summary of Significant Accounting Policies—Basis of Presentation—August 2012 KMI Asset Drop-Down” and Note 3 “Acquisitions and Divestitures—August 2012 KMI Asset Drop-Down” to our consolidated financial statements included in our 2012 Form 10-K.
Copano Energy, L.L.C.

Effective May 1, 2013, we closed our previously announced acquisition of Copano. We acquired all of Copano’s outstanding units for a total purchase price of approximately $5.2 billion (including assumed debt and all other assumed liabilities). The transaction was a 100% unit for unit transaction with an exchange ratio of 0.4563 of our common units for each Copano common unit. We issued 43,371,210 of our common units valued at $3,733 million as consideration for the Copano acquisition (based on the $86.08 closing market price of a common unit on the NYSE on the May 1, 2013 issuance date).
We accounted for our acquisition of Copano under the acquisition method of accounting, and accordingly, we measured the consideration paid to Copano unitholders, the acquired identifiable tangible and intangible assets, and the assumed liabilities at their acquisition-date fair values. Also, due to the fact that our acquisition included the remaining 50% interest in Eagle Ford that we did not already own, we remeasured our existing 50% equity investment in Eagle Ford to its fair value as of the acquisition date. As a result of our remeasurement, we recognized a $558 million pre-tax non-cash gain, which we reported separately within “Other Income (Expense)” on our accompanying consolidated statement

13


of income for the nine months ended September 30, 2013.
As of September 30, 2013, our preliminary purchase price allocation related to the Copano acquisition, as adjusted to date, is as follows (in millions). Our evaluation of the assigned fair values is ongoing and subject to adjustment.
Preliminary Purchase Price Allocation:
 
Current assets (including cash acquired of $30)
$
218

Property, plant and equipment
2,805

Investments
387

Goodwill
1,119

Other intangibles
1,375

Other assets
13

Total assets
5,917

Less: Fair value of previously held 50% interest in Eagle Ford Gathering, LLC
(704
)
Total assets acquired
5,213

Current liabilities
(207
)
Other liabilities
(4
)
Long-term debt
(1,252
)
Noncontrolling interests
(17
)
Common unit consideration
$
3,733


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

Copano provides comprehensive services to natural gas producers, including natural gas gathering, processing, treating and NGL fractionation. Copano owns an interest in or operates approximately 6,900 miles of pipelines with 2.7 Bcf/d of natural gas transportation capacity, and also owns nine natural gas processing plants with more than 1 Bcf/d of natural gas processing capacity and 315 MMcf/d of natural gas treating capacity. Its operations are located primarily in Texas, Oklahoma and Wyoming. Most of the acquired assets are included in our Natural Gas Pipelines business segment.
Goldsmith Landreth Unit

On June 1, 2013, we acquired certain oil and gas properties, rights, and related assets in the Permian Basin of West Texas from Legado Resources LLC for approximately $285 million (before working capital adjustments). We also assumed $18 million of liabilities. The acquisition of the Goldsmith Landreth San Andres oil field unit includes more than 6,000 acres located in Ector County, Texas, and based on our measurement of fair values for all of the identifiable tangible and intangible assets acquired and liabilities assumed, we assigned the $285 million amount to “Property, plant and equipment, net.” The acquired oil field is in the early stages of CO2 flood development and includes a residual oil zone along with a classic San Andres waterflood. The field currently produces approximately 1,250 barrels of oil per day, and as part of the transaction, we obtained a long-term supply contract for up to 150 MMcf/d of CO2. The acquisition complemented our existing oil and gas producing assets in the Permian Basin, and we included the acquired assets as part of our CO2 business segment.

14


Pro Forma Information
The following summarized unaudited pro forma consolidated income statement information for the three and nine months ended September 30, 2013 and 2012, assumes that our acquisitions of the drop-down asset groups, Copano and the Goldsmith Landreth Unit had occurred as of January 1, 2012. We prepared the following unaudited pro forma financial results for comparative purposes only. The unaudited pro forma financial results may not be indicative of the results that would have occurred if we had completed our acquisitions of the drop-down asset groups and Copano as of January 1, 2012 or the results that will be attained in the future. Amounts presented below are in millions, except for the per unit amounts:
 
Pro Forma
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
(Unaudited)
Revenues
$
3,381

 
$
2,980

 
$
9,764

 
$
8,345

Income from Continuing Operations
$
697

 
$
540

 
$
2,463

 
$
1,233

Loss from Discontinued Operations
$

 
$
(131
)
 
$
(2
)
 
$
(682
)
Net Income
$
697

 
$
409

 
$
2,461

 
$
551

Net Income Attributable to Noncontrolling Interests
$
(8
)
 
$
(3
)
 
$
(27
)
 
$
(12
)
Net Income Attributable to Kinder Morgan Energy Partners, L.P.
$
689

 
$
406

 
$
2,434

 
$
539

 
 
 
 
 
 
 
 
Limited Partners’ Net Income (Loss) per Unit:
 
 
 
 
 
 
 
Income from Continuing Operations
$
0.59

 
$
0.29

 
$
2.79

 
$
0.45

Loss from Discontinued Operations

 
(0.33
)
 

 
(1.73
)
Net Income (Loss)
$
0.59

 
$
(0.04
)
 
$
2.79

 
$
(1.28
)

Divestitures

FTC Natural Gas Pipelines Disposal Group – Discontinued Operations

As described above in Note 1 “General—Basis of Presentation,” we began accounting for our FTC Natural Gas Pipelines disposal group as discontinued operations in the first quarter of 2012 (prior to KMI’s sale announcement, we included the disposal group in our Natural Gas Pipelines business segment). For the nine months ended September 30, 2012, we recognized a combined $827 million non-cash loss from both the remeasurement of the disposal group to fair value and from estimated costs to sell, and we reported this loss amount separately as Loss on sale and the remeasurement of FTC Natural Gas Pipelines disposal group to fair value” within the discontinued operations section of our accompanying consolidated statement of income.

We and Tallgrass trued up the final consideration for the sale of our FTC Natural Gas Pipelines disposal group in the first quarter of 2013, and based on this true up, we recognized an additional $2 million loss. We reported this loss amount separately as Loss on sale and the remeasurement of FTC Natural Gas Pipelines disposal group to fair value” within the discontinued operations section of our accompanying consolidated statement of income for the nine months ended September 30, 2013, and except for this loss amount, we recorded no other financial results from the operations of our FTC Natural Gas Pipelines disposal group in the first nine months of 2013.


15


Summarized financial information for the FTC Natural Gas Pipelines Disposal Group is as follows (in millions):
 
Three Months Ended September 30, 2012
 
Nine Months Ended September 30, 2012
Operating revenues
$
71

 
$
204

Operating expenses
(45
)
 
(116
)
Depreciation and amortization

 
(7
)
Other expense
(1
)
 
(1
)
Earnings from equity investments
22

 
64

Interest income and Other, net

 
1

Income from operations of FTC Natural Gas Pipelines disposal group
$
47

 
$
145


Express Pipeline System

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

As of the date of sale, our equity investment in Express totaled $67 million and our note receivable due from Express totaled $110 million. Prior to the sale, we (i) accounted for our equity investment under the equity method of accounting; (ii) accounted for our debt investment under the historical amortized cost method of accounting; and (iii) included the financial results of the Express pipeline system within our Kinder Morgan Canada business segment. As of December 31, 2012, our equity and debt investments in Express totaled $65 million and $114 million, respectively, and we included the combined $179 million amount within “Assets held for sale” on our accompanying consolidated balance sheet.

TGP’s Sale of Production Area Facilities

On September 1, 2013, TGP sold certain natural gas facilities located offshore in the Gulf of Mexico and onshore in the state of Louisiana for an aggregate consideration of $32 million in cash. TGP’s net assets sold in this transaction (including assets identified as “held for sale”) totaled $88 million, and as a result of the sale, TGP recognized both a $92 million increase in regulatory assets pursuant to a FERC order, and a $36 million gain from the sale of assets. We included the cash proceeds received from the sale in 2013 within “Sale or casualty of property, plant and equipment, investments and other net assets, net of removal costs” within the investing section of our accompanying consolidated statement of cash flows for the nine months ended September 30, 2013, and we included the gain amount within “Other Income (Expense)” on our accompanying consolidated statements of income for the three and nine months ended September 30, 2013.


16


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 as of September 30, 2013 and December 31, 2012. The table amounts exclude all debt fair value adjustments, including debt discounts and premiums (in millions).
 
September 30,
2013
 
December 31,
2012
KMEP borrowings:
 
 
 
Senior notes, 2.65% through 9.00%, due 2013 through 2043(a)
$
16,100

 
$
13,350

Commercial paper borrowings(b)
174

 
621

Credit facility due May 1, 2018(c)

 

Subsidiary borrowings (as obligor):
 
 
 

TGP - Notes, 7.00% through 8.375%, due 2016 through 2037(d)
1,790

 
1,790

EPNG - Notes, 5.95% through 8.625%, due 2017 through 2032(e)
1,115

 
1,115

Copano - Notes, 7.125%, due April 1, 2021(f)
332

 

Other miscellaneous subsidiary debt
101

 
186

Total long-term debt
19,612

 
17,062

Less: Current portion of debt(g)
(702
)
 
(1,155
)
Total long-term debt, less current portion of debt(h)
$
18,910

 
$
15,907

__________
(a)
All of our fixed rate senior notes provide that we may redeem the notes at any time at a price equal to 100% of the principal amount of the notes plus accrued interest to the redemption date plus a make-whole premium.
(b)
In May 2013, in association with the increase in capacity negotiated for our senior unsecured revolving credit facility (see “—Credit Facility” below), we increased our commercial paper program by $500 million to provide for the issuance of up to $2.7 billion.  Our senior unsecured revolving credit facility supports our commercial paper program, and borrowings under our commercial paper program reduce the borrowings allowed under our credit facility. As of September 30, 2013 and December 31, 2012, the average interest rates on our outstanding commercial paper borrowings were 0.27% and 0.45%, respectively. The borrowings under our commercial paper program were used principally to finance the acquisitions and capital expansions we made during the first nine months of 2013 and during 2012, and in the near term, we expect that our short-term liquidity and financing needs will be met primarily through borrowings made under our commercial paper program.
(c)
See “—Credit Facility” below.
(d)
Consists of six separate series of fixed-rate unsecured senior notes that we assumed as part of the August 2012 drop-down transaction.
(e)
Consists of four separate series of fixed-rate unsecured senior notes that we assumed as part of the August 2012 and March 2013 drop-down transactions.
(f)
Consists of a single series of fixed-rate unsecured senior notes that we guaranteed as part of our May 1, 2013 Copano acquisition. The notes mature on April 1, 2021, and interest on the notes is payable semiannually on April 1 and October 1 of each year. For further information about these notes, see “—2013 Changes in Debt—Copano Debt” below.
(g)
As of September 30, 2013 and December 31, 2012, includes commercial paper borrowings of $174 million and $621 million, respectively.
(h)
Excludes debt fair value adjustments. As of September 30, 2013 and December 31, 2012, our “Debt fair value adjustments increased our debt balances by $1,332 million and $1,698 million, respectively. In addition to all unamortized debt discount/premium amounts and purchase accounting on our debt balances, our debt fair value adjustments also include (i) amounts associated with the offsetting entry for hedged debt; and (ii) any unamortized portion of proceeds received from the early termination of interest rate swap agreements. For further information about our debt fair value adjustments, see Note 5 “Risk Management—Fair Value of Derivative Contracts.”


17


Credit Facility
On May 1, 2013, we replaced our previous $2.2 billion senior unsecured revolving bank credit facility that was due July 1, 2016, with a new $2.7 billion five-year, senior unsecured revolving credit facility expiring May 1, 2018. Borrowings under the credit facility can be used for general partnership purposes and as a backup for our commercial paper program. We had no borrowings under the credit facility as of September 30, 2013. The credit facility’s financial covenants are substantially similar to those in our previous facility, and as of September 30, 2013, we were in compliance with all required financial covenants. The new facility provides that the margin we will pay with respect to borrowings and the facility fee we will pay on the total commitment will vary based on our senior debt credit rating. Interest on the credit facility accrues at our option at a floating rate equal to either:

the administrative agent’s base rate, plus a margin, which varies depending upon the credit rating of our long-term senior unsecured debt (the administrative agent’s base rate is a rate equal to the greatest of (i) the Federal Funds Rate, plus 0.5%; (ii) the Prime Rate; or (iii) LIBOR for a one-month eurodollar loan, plus 1%); or

LIBOR for a one-month eurodollar loan, plus a margin, which varies depending upon the credit rating of our long-term senior unsecured debt.

In addition, we had, as of September 30, 2013, $2,322 million of borrowing capacity available under our credit facility. The amount available for borrowing under our credit facility was reduced by a combined amount of $378 million, consisting of $174 million of commercial paper borrowings and $204 million of letters of credit, consisting of (i) a $100 million letter of credit that supports certain proceedings with the CPUC involving refined products tariff charges on the intrastate common carrier operations of our Pacific operations’ pipelines in the state of California; (ii) a combined $85 million in three letters of credit that support tax-exempt bonds; and (iii) a combined $19 million in other letters of credit supporting other obligations of us and our subsidiaries.

2013 Changes in Debt
KMEP Debt
During the first nine months of 2013, we completed two separate public offerings of senior notes.  With regard to these offerings, we received net proceeds as follows (i) $991 million from a February 28, 2013 public offering of a total of $1 billion in principal amount of senior notes in two separate series, consisting of $600 million of 3.50% notes due September 1, 2023 and $400 million of 5.00% notes due March 1, 2043; and (ii) $1,724 million from an August 5, 2013 public offering of a total of $1.75 billion in principal amount of senior notes in three separate series, consisting of $800 million of 2.65% notes due February 1, 2019, $650 million of 4.15% notes due February 1, 2024, and $300 million of 5.00% notes due March 1, 2043 (the 5.00% notes we issued in August 2013 constitute a further issuance of the $400 million aggregate principal amount of 5.00% notes we issued in February 2013 and form a single series with those notes). We used the proceeds from our February 2013 debt offering to pay a portion of the purchase price for our March 2013 drop-down transaction and to reduce the borrowings under our commercial paper program. We used the proceeds from our August 2013 debt offering to reduce the borrowings under our commercial paper program and to fund our partial redemption and retirement of Copano’s 7.125% senior notes in September 2013 (described following in “—Copano Debt).

Copano Debt

As of our May 1, 2013 acquisition date, we assumed the following outstanding Copano debt amounts (i) $404 million of outstanding borrowings under Copano’s revolving credit facility due June 10, 2016; (ii) $249 million aggregate principal amount of Copano’s 7.75% unsecured senior notes due June 1, 2018; and (iii) $510 million aggregate principal amount of Copano’s 7.125% unsecured senior notes due April 1, 2021. Immediately following our acquisition, we repaid the outstanding $404 million of borrowings under Copano’s revolving credit facility, and we terminated the credit facility at the time of such repayment. On June 1, 2013, we paid $259 million (based on a price of 103.875% of the principal amount) to fully redeem and retire the 7.75% series of senior notes in accordance with the terms and conditions of the indenture governing the notes. As part of our May 1, 2013 purchase price allocation, we valued the 7.75% senior notes equal to the $259 million redemption value and accordingly, we recorded no gain or loss from this debt retirement. We utilized borrowings under our commercial paper program for both of these debt retirements.


18


On September 4, 2013, we paid $191 million to complete the partial redemption and retirement of $178 million (35%) of the total $510 million outstanding principal amount of Copano’s 7.125% senior notes (excluding a $6 million payment for accrued and unpaid interest on the redeemed notes as of September 4, 2013).  As part of our May 1, 2013 purchase price allocation, we valued the 7.125% senior notes equal to the $191 million redemption value and accordingly, we recorded no gain or loss from this debt retirement.  As of September 30, 2013, an aggregate principal amount of $332 million of 7.125% senior notes remained outstanding.

Kinder Morgan Altamont LLC ( EP midstream assets) Debt

In February 2013, prior to the close of the March 2013 drop-down transaction, we and KMI each contributed $45 million to Kinder Morgan Altamont LLC to allow it to repay the outstanding $90 million of borrowings under its revolving credit facility and following this repayment, Kinder Morgan Altamont LLC had no outstanding debt. In May 2013, we terminated the credit facility.

4. Partners’ Capital
Limited Partner Units
As of September 30, 2013 and December 31, 2012, our Partners’ Capital included the following limited partner units:
 
September 30,
2013
 
December 31,
2012
Common units:
 
 
 
Held by third parties
287,937,375

 
231,718,422

Held by KMI and affiliates (excluding our general partner)
20,563,455

 
19,314,003

Held by our general partner
1,724,000

 
1,724,000

Total Common units
310,224,830

 
252,756,425

Class B units(a)
5,313,400

 
5,313,400

i-units(b)
122,287,358

 
115,118,338

Total limited partner units
437,825,588

 
373,188,163

_________
(a)
As of both September 30, 2013 and December 31, 2012, all of our Class B units were held by a wholly-owned subsidiary of KMI.  The Class B units are similar to our common units except that they are not eligible for trading on the NYSE.

(b)
As of both September 30, 2013 and December 31, 2012, all of our i-units were held by KMR.  Our i-units are a separate class of limited partner interests in us and are not publicly traded.  In accordance with KMR’s limited liability company agreement, KMR’s activities are restricted to being a limited partner in us, and to controlling and managing our business and affairs and the business and affairs of our operating limited partnerships and their subsidiaries.  Through the combined effect of the provisions in our partnership agreement and the provisions of KMR’s limited liability company agreement, the number of outstanding KMR shares and the number of our i-units will at all times be equal. The number of i-units we distribute to KMR is based upon the amount of cash we distribute to the owners of our common units. When cash is paid to the holders of our common units, we issue additional i-units to KMR. The fraction of an i-unit paid per i-unit owned by KMR will have a value based on the cash payment on the common units.

The total limited partner units represent our limited partners’ interest and an effective 98% interest in us, exclusive of our general partner’s right to receive incentive distributions. Our general partner has an effective 2% interest in us, excluding its right to receive incentive distributions.

19


Equity Issuances
On June 3, 2013, we entered into a fourth amended and restated equity distribution agreement with UBS Securities LLC, referred to as UBS, which increased the aggregate offering price of our common units to up to $2.175 billion (up from $1.9 billion), and on August 7, 2013, we entered into a new equity distribution agreement with UBS. The terms of this new equity distribution agreement are substantially similar to those in our previous agreement, and it allows us to offer and sell from time to time additional common units having an aggregate offering price of up to $1.9 billion through UBS, as sales agent. During the nine months ended September 30, 2013, we issued 8,247,743 of our common units pursuant to our equity distribution agreements with UBS. We received net proceeds from the issuance of these common units of $695 million, and we used the proceeds to reduce the borrowings under our commercial paper program.
In addition, during the nine months ended September 30, 2013, we issued 1,757,300 i-units to KMR. We received net proceeds of $145 million for the issuance of these i-units, and we used the proceeds to reduce the borrowings under our commercial paper program. KMR realized net proceeds of $145 million from the issuance of 1,757,300 of its shares pursuant to its equity distribution agreement with Credit Suisse, and KMR used the net proceeds received from the issuance of these shares to buy the additional i-units from us. KMR entered into its equity distribution agreement with Credit Suisse on May 4, 2012. The terms of this agreement are substantially similar to the terms of our equity distribution agreement with UBS, and it allows KMR to sell from time to time through Credit Suisse, as KMR’s sales agent, KMR’s shares representing limited liability company interests having an aggregate offering price of up to $500 million.
For the nine month period ended September 30, 2013, in addition to the issuance of units described above, our significant equity issuances consisted of the following:
on February 26, 2013, we issued, in a public offering, 4,600,000 of our common units at a price of $86.35 per unit, less commissions and underwriting expenses. We received net proceeds, of $385 million for the issuance of these 4,600,000 common units, and used the proceeds to pay a portion of the purchase price for the March 2013 drop-down transaction;
on March 1, 2013, in connection with the March 2013 drop-down transaction, we issued 1,249,452 of our common units to KMI. We valued the units at $108 million, based on the $86.72 closing market price of a common unit on the NYSE on March 1, 2013; and
on May 1, 2013, we issued 43,371,210 common units to Copano unitholders as our purchase price for Copano. We valued the units at $3,733 million, based on the $86.08 closing market price of a common unit on the NYSE on May 1, 2013.
Income Allocations
For the purposes of maintaining partner capital accounts, our partnership agreement specifies that items of income and loss shall be allocated among the partners, other than owners of i-units, in accordance with their percentage interests. Normal allocations according to percentage interests are made, however, only after giving effect to any priority income allocations in an amount equal to the incentive distributions that are allocated 100% to our general partner. Incentive distributions are generally defined as all cash distributions paid to our general partner that are in excess of 2% of the aggregate value of cash and i-units being distributed, and we determine the allocation of incentive distributions to our general partner by the amount quarterly distributions to unitholders exceed certain specified target levels, according to the provisions of our partnership agreement.

20


Partnership Distributions
The following table provides information about our distributions for the three and nine month periods ended September 30, 2013 and 2012 (in millions except per unit and i-unit distributions amounts):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Per unit cash distribution declared for the period
$
1.35

 
$
1.26

 
$
3.97

 
$
3.69

Per unit cash distribution paid in the period
$
1.32

 
$
1.23

 
$
3.91

 
$
3.59

Cash distributions paid in the period to all partners(a)(b)
$
845

 
$
650

 
$
2,332

 
$
1,859

i-unit distributions made in the period to KMR(c)
1,880,172

 
1,578,616

 
5,411,720

 
4,646,736

General Partner’s incentive distribution(d):
 
 
 
 
 
 
 
Declared for the period(e)
$
434

 
$
364

 
$
1,248

 
$
1,020

Paid in the period(b)(c)
$
416

 
$
337

 
$
1,198

 
$
958

__________
(a)
Consisting of our common and Class B unitholders, our general partner and noncontrolling interests.

(b)
The period-to-period increases in distributions paid reflect the increases in amounts distributed per unit as well as the issuance of additional units.

(c)
Under the terms of our partnership agreement, we agreed that we will not, except in liquidation, make a distribution on an i-unit other than in additional i-units or a security that has in all material respects the same rights and privileges as our i-units.  The number of i-units we distribute to KMR is based upon the amount of cash we distribute to the owners of our common units. When cash is paid to the holders of our common units, we will issue additional i-units to KMR.  The fraction of an i-unit paid per i-unit owned by KMR will have a value based on the cash payment on the common units.  If additional units are distributed to the holders of our common units, we will issue an equivalent amount of i-units to KMR based on the number of i-units it owns. Based on the preceding, the i-units we distributed were based on the $1.32 and $1.23 per unit paid to our common unitholders during the third quarters of 2013 and 2012, respectively, and the $3.91 and $3.59 per unit paid to our common unitholders during the first nine months of 2013 and 2012, respectively.

(d)
Incentive distribution does not include the general partner’s initial 2% distribution of available cash.

(e)
Three and nine month 2013 amounts include decreases of $25 million and $50 million, respectively, for waived general partner incentive amounts related to common units issued to finance our May 1, 2013 Copano acquisition. Nine month 2013 amount and three and nine month 2012 amounts include decreases of $4 million, $6 million and $19 million, respectively, for waived general partner incentive amounts related to common units issued to finance a portion of our July 2011 KinderHawk acquisition.

For additional information about our 2012 partnership distributions, see Note 16 “Litigation, Environmental and Other Contingencies” and Note 17 “Regulatory Matters” to our consolidated financial statements included in our 2012 Form 10-K.
Subsequent Event
On October 16, 2013, we declared a cash distribution of $1.35 per unit for the quarterly period ended September 30, 2013. The distribution will be paid on November 14, 2013 to unitholders of record as of October 31, 2013. Our common unitholders and our Class B unitholder will receive cash. KMR will receive a distribution of additional i-units based on the $1.35 distribution per common unit. For each outstanding i-unit that KMR holds, a fraction of an i-unit will be issued. This fraction will be determined by dividing:
$1.35, the cash amount distributed per common unit
by
the average of KMR’s shares’ closing market prices from October 15-28, 2013, the ten consecutive trading days preceding the date on which the shares began to trade ex-dividend under the rules of the NYSE.

21


5. Risk Management    
Certain of our business activities expose us to risks associated with unfavorable changes in the market price of natural gas, NGLs and crude oil. We also have exposure to interest rate risk as a result of the issuance of our debt obligations. Pursuant to our management’s approved risk management policy, we use derivative contracts to hedge or reduce our exposure to certain of these risks.
As part of our May 1, 2013 Copano acquisition, we acquired derivative contracts related to natural gas, NGLs and crude oil. None of these derivatives are designated as accounting hedges.

Energy Commodity Price Risk Management
As of September 30, 2013, 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
(23.1)
million barrels
Natural gas fixed price
(35.2)
billion cubic feet
Natural gas basis
(30.7)
billion cubic feet
Derivatives not designated as hedging contracts
 
 
Crude oil fixed price
0.5
million barrels
Crude oil basis
(1.2)
million barrels
Natural gas fixed price
0.3
billion cubic feet
Natural gas basis
7.0
billion cubic feet
NGLs fixed price
0.4
million barrels
As of September 30, 2013, the maximum length of time over which we have hedged our exposure to the variability in future cash flows associated with energy commodity price risk is through December 2017.
Interest Rate Risk Management
As of September 30, 2013, we had a combined notional principal amount of $5,050 million of fixed-to-variable interest rate swap agreements, effectively converting the interest expense associated with certain series of our senior notes from fixed rates to variable rates based on an interest rate of LIBOR plus a spread. All of our swap agreements have termination dates that correspond to the maturity dates of the related series of senior notes and, as of September 30, 2013, 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.
In June 2013, we terminated three of our existing fixed-to-variable interest rate swap agreements in separate transactions. These swap agreements had a combined notional principal amount of $975 million, and we received combined proceeds of $96 million from the early termination of these swap agreements. In August 2013, we entered into six separate fixed-to-variable interest rate swap agreements having a combined notional principal amount of $500 million. Four of these agreements effectively convert a portion of the interest expense associated with our 2.65% senior notes due February 1, 2019, from a fixed rate to a variable rate based on an interest rate of LIBOR plus a spread, and the remaining two agreements effectively convert a portion of the interest expense associated with our 4.15% senior notes due February 1, 2024, from a fixed rate to a variable rate based on an interest rate of LIBOR plus a spread. As of December 31, 2012, we had a combined notional principal amount of $5,525 million of fixed-to-variable interest rate swap agreements.

22


Fair Value of Derivative Contracts
The following table summarizes the fair values of our derivative contracts included on our accompanying consolidated balance sheets as of September 30, 2013 and December 31, 2012 (in millions):
Fair Value of Derivative Contracts
 
 
 
Asset derivatives
 
Liability derivatives
 
 
 
September 30,
2013
 
December 31,
2012
 
September 30,
2013
 
December 31,
2012
 
Balance sheet location
 
Fair value
 
Fair value
 
Fair value
 
Fair value
Derivatives designated as hedging contracts
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts
Other current assets/(Accrued other current liabilities)
 
$
19

 
$
42

 
$
(49
)
 
$
(18
)
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
65

 
40

 
(43
)
 
(11
)
Subtotal
 
 
84

 
82

 
(92
)
 
(29
)
Interest rate swap agreements
Other current assets/(Accrued other current liabilities)
 
98

 
9

 

 

 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
170

 
594

 
(79
)
 
(1
)
Subtotal
 
 
268

 
603

 
(79
)
 
(1
)
Total
 
 
352

 
685

 
(171
)
 
(30
)
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging contracts
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts
Other current assets/(Accrued other current liabilities)
 
11

 
4

 
(2
)
 
(3
)
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
2

 

 
(1
)
 
(1
)
Total
 
 
13

 
4

 
(3
)
 
(4
)
Total derivatives
 
 
$
365

 
$
689

 
$
(174
)
 
$
(34
)
Certain of our derivative contracts are subject to master netting agreements. As of September 30, 2013 and December 31, 2012, we presented the fair value of our derivative contracts on a gross basis on our accompanying consolidated balance sheets.  The following tables present our derivative contracts subject to such netting agreements as of September 30, 2013 and December 31, 2012 (in millions):
Offsetting of Financial Assets and Derivative Assets
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Balance Sheet
 
Amounts of Assets Presented in the Balance Sheet
 
Gross Amounts Not Offset in the Balance Sheet
 
Net Amount
Financial Instruments
 
Cash Collateral Held(a)
As of September 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts
$
97

 
$

 
$
97

 
$
(60
)
 
$

 
$
37

Interest rate swap agreements
$
268

 
$

 
$
268

 
$
(19
)
 
$

 
$
249

As of December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts
$
86

 
$

 
$
86

 
$
(17
)
 
$

 
$
69

Interest rate swap agreements
$
603

 
$

 
$
603

 
$

 
$

 
$
603



23


Offsetting of Financial Liabilities and Derivative Liabilities
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Balance Sheet
 
Amounts of Liabilities Presented in the Balance Sheet
 
Gross Amounts Not Offset in the Balance Sheet
 
Net Amount
Financial Instruments
 
Cash Collateral Posted(b)
As of September 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts
$
(95
)
 
$

 
$
(95
)
 
$
60

 
$

 
$
(35
)
Interest rate swap agreements
$
(79
)
 
$

 
$
(79
)
 
$
19

 
$

 
$
(60
)
As of December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts
$
(33
)
 
$

 
$
(33
)
 
$
17

 
$
5

 
$
(11
)
Interest rate swap agreements
$
(1
)
 
$

 
$
(1
)
 
$

 
$

 
$
(1
)
___________
(a)
Cash margin deposits held by us associated with our energy commodity contract positions and OTC swap agreements and reported within “Accrued other current liabilities” on our accompanying consolidated balance sheets.

(b)
Cash margin deposits posted by us associated with our energy commodity contract positions and OTC swap agreements and reported within “Other current assets” on our accompanying consolidated balance sheets.

Debt Fair Value Adjustments

The offsetting entry to adjust the carrying value of the debt securities whose fair value was being hedged is included within “Debt fair value adjustments” on our accompanying consolidated balance sheets. Our “Debt fair value adjustments” also include all unamortized debt discount/premium amounts, purchase accounting on our debt balances, and any unamortized portion of proceeds received from the early termination of interest rate swap agreements. As of September 30, 2013 and December 31, 2012, these fair value adjustments to our debt balances included (i) $660 million and $638 million, respectively, associated with fair value adjustments to our debt previously recorded in purchase accounting; (ii) $189 million and $602 million, respectively, associated with the offsetting entry for hedged debt; (iii) $533 million and $488 million, respectively, associated with unamortized premium from the termination of interest rate swap agreements; and offset by (iv) $50 million and $30 million, respectively, associated with unamortized debt discount amounts. As of September 30, 2013, the weighted-average amortization period of the unamortized premium from the termination of the interest rate swaps was approximately 16 years.

Effect of Derivative Contracts on the Income Statement
The following two tables summarize the impact of our derivative contracts on our accompanying consolidated statements of income for each of the three and nine months ended September 30, 2013 and 2012 (in millions):
Derivatives in fair value hedging
relationships
 
Location of gain/(loss) recognized
in income on derivatives
 
Amount of gain/(loss) recognized in income
on derivatives and related hedged item(a)
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
 
 
2013
 
2012
 
2013
 
2012
Interest rate swap agreements
 
Interest expense
 
$
(23
)
 
$
28

 
$
(317
)
 
$
109

Total
 
 
 
$
(23
)
 
$
28

 
$
(317
)
 
$
109

 
 
 
 
 
 
 
 
 
 
 
Fixed rate debt
 
Interest expense
 
$
23

 
$
(28
)
 
$
317

 
$
(109
)
Total
 
 
 
$
23

 
$
(28
)
 
$
317

 
$
(109
)
___________
(a)
Amounts reflect the change in the fair value of interest rate swap agreements and the change in the fair value of the associated fixed rate debt, which exactly offset each other as a result of no hedge ineffectiveness.

24


Derivatives in
cash flow hedging
relationships
 
Amount of gain/(loss)
recognized in OCI on
derivative (effective
portion)(a)
 
Location of
gain/(loss)
reclassified from
Accumulated OCI
into income
(effective portion)
 
Amount of gain/(loss)
reclassified from
Accumulated OCI
into income
(effective portion)(b)
 
Location of
gain/(loss)
recognized in
income on
derivative
(ineffective portion
and amount
excluded from
effectiveness
testing)
 
Amount of gain/(loss)
recognized in income
on derivative
(ineffective portion
and amount
excluded from
effectiveness testing)
 
 
Three Months Ended
September 30,
 
 
 
Three Months Ended
September 30,
 
 
 
Three Months Ended
September 30,
 
 
2013
 
2012
 
 
 
2013
 
2012
 
 
 
2013
 
2012
Energy commodity derivative contracts
 
$
(102
)
 
$
(90
)
 
Natural gas sales
 
$

 
$
2

 
Natural gas sales
 
$