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EX-31.2 - KMI EXHIBIT 31.2 CFO CERTIFICATION - KINDER MORGAN, INC.kmiex31_2q2.htm
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EX-32.1 - KMI EXHIBIT 32.1 CEO CERTIFICATION - KINDER MORGAN, INC.kmiex32_1q2.htm
EX-31.1 - KMI EXHIBIT 31.1 CEO CERTIFICATION - KINDER MORGAN, INC.kmiex31_1q2.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
F O R M   10-Q
 
þ  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2010
 
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:  1-06446
 

KINDER MORGAN, INC.
(Exact name of registrant as specified in its charter)
 

Kansas
  
48-0290000
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)

 
500 Dallas Street, Suite 1000, Houston, Texas 77002
(Address of principal executive offices)(zip code)
Registrant’s telephone number, including area code: 713-369-9000
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes o No þ
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.  Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).  Yes o No þ
 
Number of outstanding shares of Common stock, $0.01 par value, as of July 30, 2010 was 100 shares.

 
 

 
Kinder Morgan, Inc. Form 10-Q





TABLE OF CONTENTS

   
Page
Number
   
     
3
 
3
 
4
 
5
 
6
     
44
 
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45
 
46
 
62
 
67
 
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70
     
70
     
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70
     
70
     
70
     
71
     
 
72


 
2

 
Kinder Morgan, Inc. Form 10-Q

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.

KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Millions)
(Unaudited)

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenues
                       
Natural gas sales
  $ 848.1     $ 716.9     $ 1,865.6     $ 1,605.6  
Services
    751.7       652.1       1,490.2       1,313.5  
Product sales and other
    391.1       324.3       792.7       603.1  
Total Revenues
    1,990.9       1,693.3       4,148.5       3,522.2  
  
                               
Operating Costs, Expenses and Other
                               
Gas purchases and other costs of sales
    847.9       709.5       1,864.5       1,575.1  
Operations and maintenance
    319.2       273.0       773.7       529.4  
Depreciation, depletion and amortization
    269.7       256.8       552.0       521.6  
General and administrative
    104.8       84.1       220.5       177.0  
Taxes, other than income taxes
    40.8       23.4       86.2       62.4  
Other expense (income)
    3.1       (0.2 )     1.8       0.1  
Total Operating Costs, Expenses and Other
    1,585.5       1,346.6       3,498.7       2,865.6  
  
                               
Operating Income
    405.4       346.7       649.8       656.6  
  
                               
Other Income (Expense)
                               
Earnings (loss) from equity investments
    60.9       49.2       (313.3 )     97.8  
Amortization of excess cost of equity investments
    (1.5 )     (1.5 )     (2.9 )     (2.9 )
Interest, net
    (156.4 )     (139.3 )     (307.0 )     (281.3 )
Other, net
    (2.3 )     20.3       4.3       30.9  
Total Other Income (Expense)
    (99.3 )     (71.3 )     (618.9 )     (155.5 )
  
                               
Income from Continuing Operations Before Income Taxes
    306.1       275.4       30.9       501.1  
                                 
Income Tax Benefit (Expense)
    (45.8 )     (67.0 )     49.7       (147.6 )
                                 
Income from Continuing Operations
    260.3       208.4       80.6       353.5  
                                 
Income (Loss) from Discontinued Operations, Net of Tax
    -       0.7       (0.2 )     0.5  
                                 
Net Income
    260.3       209.1       80.4       354.0  
                                 
Net Income Attributable to Noncontrolling Interests
    (214.3 )     (79.3 )     (195.3 )     (108.9 )
  
                               
Net Income (Loss) Attributable to Kinder Morgan, Inc.
  $ 46.0     $ 129.8     $ (114.9 )   $ 245.1  

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

 
3

 
Kinder Morgan, Inc. Form 10-Q

KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Millions, Except Share and Per Share Amounts)

   
June 30,
2010
   
December 31,
2009
 
   
(Unaudited)
       
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 144.7     $ 165.6  
Restricted deposits
    61.8       52.5  
Accounts, notes and interest receivable, net
    859.8       921.6  
Inventories
    101.5       71.9  
Gas in underground storage
    50.8       43.5  
Fair value of derivative contracts
    44.5       20.8  
Other current assets
    78.9       109.7  
Total current assets
    1,342.0       1,385.6  
                 
Property, plant and equipment, net
    16,858.6       16,803.5  
Investments
    4,271.0       3,695.6  
Notes receivable
    188.5       190.6  
Goodwill
    4,802.4       4,744.3  
Other intangibles, net
    354.5       259.8  
Fair value of derivative contracts
    588.0       293.3  
Deferred charges and other assets
    173.2       213.6  
Total Assets
  $ 28,578.2     $ 27,586.3  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities
               
Current portion of debt
  $ 2,466.3     $ 768.7  
Cash book overdrafts
    43.8       36.6  
Accounts payable
    583.0       620.8  
Accrued interest
    302.3       292.1  
Accrued taxes
    58.2       58.6  
Deferred revenues
    78.3       76.1  
Fair value of derivative contracts
    189.1       272.0  
Accrued other current liabilities
    189.1       194.6  
Total current liabilities
    3,910.1       2,319.5  
                 
Long-term liabilities and deferred credits
               
Long-term debt
               
Outstanding
    12,305.7       12,779.7  
Preferred interest in general partner of Kinder Morgan Energy Partners, L.P.
    100.0       100.0  
Value of interest rate swaps
    793.8       361.0  
Total long-term debt
    13,199.5       13,240.7  
Deferred income taxes
    1,893.2       2,039.9  
Fair value of derivative contracts
    150.3       469.6  
Other long-term liabilities and deferred credits
    598.0       670.5  
Total long-term liabilities and deferred credits
    15,841.0       16,420.7  
                 
Total Liabilities
    19,751.1       18,740.2  
                 
Commitments and contingencies (Notes 4 and 11)
               
Stockholders’ Equity
               
Common stock – authorized and outstanding – 100 shares, par value $0.01 per share
    -       -  
Additional paid-in capital
    7,863.3       7,845.7  
Retained deficit
    (3,946.3 )     (3,506.3 )
Accumulated other comprehensive loss
    (104.6 )     (167.9 )
Total Kinder Morgan, Inc. stockholder’s equity
    3,812.4       4,171.5  
Noncontrolling interests
    5,014.7       4,674.6  
Total Stockholders’ Equity
    8,827.1       8,846.1  
Total Liabilities and Stockholders’ Equity
  $ 28,578.2     $ 27,586.3  

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

 
4

 
Kinder Morgan, Inc. Form 10-Q

KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)

   
Six Months Ended June 30,
 
   
2010
   
2009
 
Cash Flows From Operating Activities
           
Net Income
  $ 80.4     $ 354.0  
Adjustments to reconcile net income to net cash provided by operating activities
               
(Income) loss from discontinued operations, net of tax
    0.2       (0.6 )
Depreciation, depletion and amortization
    552.0       521.6  
Deferred income taxes
    (199.0 )     15.8  
Amortization of excess cost of equity investments
    2.9       2.9  
Income from the allowance for equity funds used during construction
    (0.6 )     (20.3 )
Loss from the sale or casualty of property, plant and equipment and other net assets
    1.9       0.1  
(Earnings) loss from equity investments
    313.3       (97.8 )
Distributions from equity investments
    101.9       122.7  
Proceeds from termination of interest rate swap agreements
    -       144.4  
Pension contributions in excess of expense
    -       (13.7 )
Changes in components of working capital
               
Accounts receivable
    67.0       175.2  
Inventories
    (29.7 )     (11.2 )
Other current assets
    (19.5 )     (73.3 )
Accounts payable
    (39.7 )     (277.2 )
Accrued interest
    10.3       21.2  
Accrued taxes
    21.5       (137.3 )
Accrued liabilities
    (42.4 )     (78.7 )
Rate reparations, refunds and other litigation reserve adjustments
    (48.3 )     (15.5 )
Other, net
    (36.6 )     (51.8 )
Cash Flows Provided By Continuing Operations
    735.6       580.5  
Net Cash Flows (Used in) Provided by Discontinued Operations
    (0.3 )     0.3  
Net Cash Provided by Operating Activities
    735.3       580.8  
                 
Cash Flows From Investing Activities
               
Acquisitions of investments
    (929.7 )     -  
Acquisitions of assets
    (218.1 )     (18.5 )
Repayments from customers
    -       109.6  
Capital expenditures
    (458.7 )     (794.1 )
Deconsolidation of variable interest entity due to the implementation of ASU 2009-17 (Note 13)
    (17.5 )     -  
Sale or casualty of property, plant and equipment, and other net assets net of removal costs
    22.5       (4.0 )
Investments in margin deposits
    (3.9 )     (24.9 )
Investments in restricted deposits
    (5.3 )     -  
Contributions to investments
    (181.4 )     (803.6 )
Distributions from equity investments in excess of cumulative earnings
    109.9       6.5  
Net Cash Used in Investing Activities
    (1,682.2 )     (1,529.0 )
                 
Cash Flows From Financing Activities
               
Issuance of debt
    5,280.5       3,857.0  
Payment of debt
    (4,042.3 )     (2,996.5 )
Repayments from related party
    1.3       2.5  
Debt issue costs
    (22.9 )     (7.4 )
Increase (decrease) in cash book overdrafts
    7.3       (22.3 )
Cash dividends
    (325.0 )     (150.0 )
Contributions from noncontrolling interests
    433.2       669.5  
Distributions to noncontrolling interests
    (405.3 )     (358.6 )
Other, net
    -       (0.1 )
Net Cash Provided by Financing Activities
    926.8       994.1  
                 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
    (0.8 )     2.5  
                 
(Decrease) Increase in Cash and Cash Equivalents
    (20.9 )     48.4  
Cash and Cash Equivalents, beginning of period
    165.6       118.6  
Cash and Cash Equivalents, end of period
  $ 144.7     $ 167.0  
                 
Noncash Investing and Financing Activities
               
Assets acquired by the assumption or incurrence of liabilities
  $ 8.1     $ 3.7  
Assets acquired by contributions from noncontrolling interests
  $ 81.7     $ 5.0  
Supplemental Disclosures of Cash Flow Information
               
Cash paid during the period for interest (net of capitalized interest)
  $ 302.0     $ 294.0  
Cash paid during the period for income taxes (net of refunds)
  $ 137.8     $ 277.6  

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

 
5

 
Kinder Morgan, Inc. Form 10-Q

KINDER MORGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.  General
 
Organization
 
We are a large energy transportation and storage company, operating or owning an interest in approximately 37,000 miles of pipelines and approximately 180 terminals.  We have both regulated and nonregulated operations.  We also own all the common equity of the general partner of, and a significant limited partner interest in, Kinder Morgan Energy Partners, L.P., a publicly traded pipeline limited partnership.  We are a wholly owned subsidiary of Kinder Morgan Holdco LLC, a private company. Unless the context requires otherwise, references to “we,” “us,” “our,” or the “Company” are intended to mean Kinder Morgan, Inc. and its consolidated subsidiaries.  Unless the context requires otherwise, references to “KMP” are intended to mean Kinder Morgan Energy Partners, L.P. and its consolidated subsidiaries.
 
Kinder Morgan Management, LLC, referred to in this report as “KMR,” is a publicly traded Delaware limited liability company.  Kinder Morgan G.P., Inc., the general partner of KMP and a wholly owned subsidiary of ours, owns all of KMR’s voting shares.  KMR, pursuant to a delegation of control agreement, has been delegated, to the fullest extent permitted under Delaware law, all of Kinder Morgan G.P., Inc.’s power and authority to manage and control the business and affairs of KMP, subject to Kinder Morgan G.P., Inc.’s right to approve certain transactions.
 
As further disclosed in Note 2 of our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2009 (“2009 Form 10-K”), on May 30, 2007, Kinder Morgan, Inc. merged with a wholly owned subsidiary of Kinder Morgan Holdco LLC, with Kinder Morgan, Inc. continuing as the surviving legal entity.  This transaction is referred to in this report as “the Going Private transaction.”  Effective with the closing of the Going Private transaction, all of our assets and liabilities were recorded at their estimated fair market values based on an allocation of the aggregate purchase price paid in the Going Private transaction.
 
Basis of Presentation
 
We have prepared our accompanying unaudited consolidated financial statements under the rules and regulations of the United States Securities and Exchange Commission.  These rules and regulations conform to the accounting principles contained in the Financial Accounting Standards Board’s Accounting Standards Codification, the single source of generally accepted accounting principles in the United States of America and referred to in this report as the Codification. Under such rules and regulations, we have condensed or omitted certain information and notes normally included in financial statements prepared in conformity with the Codification.  We believe, however, that our disclosures are adequate to make the information presented not misleading.
 
In addition, our consolidated financial statements reflect normal adjustments, and also recurring adjustments that are, in the opinion of our management, necessary for a fair presentation of our financial results for the interim periods, and certain amounts from prior periods have been reclassified to conform to the current presentation.  Interim results are not necessarily indicative of results for a full year; accordingly, you should read these consolidated financial statements in conjunction with our consolidated financial statements and related notes included in our 2009 Form 10-K.
 
Our accounting records are maintained in United States dollars, and all references to dollars are United States dollars, except where stated otherwise.  Canadian dollars are designated as C$.  Our consolidated financial statements include the accounts of Kinder Morgan, Inc. and our majority-owned subsidiaries, as well as those of KMP and KMR, and prior to January 1, 2010 Triton Power Company LLC, see Note 8 “Reportable Segments” and Note 13 “Recent Accounting Pronouncements.”  Investments in jointly owned operations in which we hold a 50% or less interest (other than KMP and KMR, because we have the ability to exercise significant control over their operating and financial policies) are accounted for under the equity method.  All significant intercompany transactions and balances have been eliminated.
 
Notwithstanding the consolidation of KMP and its subsidiaries into our financial statements, we are not liable for, and our assets are not available to satisfy, the obligations of KMP and/or its subsidiaries and vice versa, except as discussed in the following paragraph.  Responsibility for payments of obligations reflected in our or KMP’s financial statements is a legal determination based on the entity that incurs the liability.
 

 
6

 
Kinder Morgan, Inc. Form 10-Q

In conjunction with KMP’s acquisition of certain natural gas pipelines from us, we agreed to indemnify KMP with respect to approximately $733.5 million of its debt.  We would be obligated to perform under this indemnity only if KMP’s assets were unable to satisfy its obligations.
 
2.  Investments, Acquisitions, Joint Ventures and Divestitures
 
Investments
 
NGPL PipeCo LLC Investment Impairment Charge
 
On November 19, 2009, NGPL PipeCo LLC was notified by the Federal Energy Regulatory Commission (“FERC”) of a proceeding against it pursuant to section 5 of the Natural Gas Act (the “Order”). The proceeding instituted an investigation into the justness and reasonableness of Natural Gas Pipeline Company of America LLC’s (“Natural”) transportation and storage rates as well as its fuel and natural gas lost percentages.  Natural reached a settlement in principal on the Order on April 22, 2010.  On June 11, 2010, Natural filed an Offer of Settlement (“Settlement”), which was approved without modification by the FERC on July 29, 2010.  Rehearing requests, if any, are due in the 30 days following the FERC’s order approving the settlement.  If no rehearing request is filed, the order approving the settlement will become final and nonappealable.  The Settlement resolved all issues in the proceeding.  The Settlement provides that Natural will reduce its fuel and gas lost and unaccounted for (“GL&U”) retention factors as of July 1, 2010.  The Settlement further provides a timeline for additional prospective fuel and GL&U reductions and prospective reductions in the maximum recourse reservation rates that it bills firm transportation and storage shippers.
 
The settlement in principle (discussed above), which was reached prior to the filing of our quarterly report on Form 10-Q for the three months ended March 31, 2010, caused us to reconsider the carrying value of our investment in NGPL PipeCo LLC as of March 31, 2010. A current fair value of an investment that is less than its carrying amount may indicate a loss in value of the investment.  The fair value represents the price that would be received to sell the investment in an orderly transaction between market participants.  We determined the fair value of our investment in NGPL PipeCo LLC by taking the total fair value of NGPL PipeCo LLC (calculated as discussed below) deducting the fair value of the joint venture debt and multiplying by our 20% ownership interest.  We calculated the total fair value of NGPL PipeCo LLC from the present value of the expected future after-tax cash flows of the reporting unit, inclusive of a terminal value, which implies a market multiple of approximately 9.5 times EBITDA (earnings before interest, income taxes, depreciation and amortization) discounted at a rate of 7.4%.  The expected future pre-interest, after-tax cash flows are lower than our previous expectations by approximately $25.0 million to $70.0 million per year. The result of our analysis showed that the fair value of our investment in NGPL PipeCo LLC was less than our carrying value.  For the quarter ended March 31, 2010, we recognized a $430.0 million, pre-tax, non-cash impairment charge included in the caption “Earnings (loss) from equity investments” in our accompanying consolidated statement of income.
 
Acquisitions
 
USD Terminal Acquisition
 
On January 15, 2010, KMP acquired three ethanol handling train terminals from US Development Group LLC for an aggregate consideration of $200.8 million, consisting of $115.7 million in cash, $81.7 million in common units, and $3.4 million in assumed liabilities.  The three train terminals are located in Linden, New Jersey; Baltimore, Maryland and Dallas, Texas.  As part of the transaction, KMP announced the formation of a venture with US Development Group LLC to optimize and coordinate customer access to the three acquired terminals, other ethanol terminal assets it already owns and operates, and other terminal projects currently under development by both parties.  The acquisition complemented and expanded the ethanol and rail terminal operations KMP previously owned, and all of the acquired assets are included in the Terminals–KMP business segment.
 
Based on the measurement of fair market values for all of the identifiable tangible and intangible assets acquired and liabilities assumed on the acquisition date, KMP assigned $94.6 million of the combined purchase price to “Other intangibles, net,” (representing customer relationships) $43.1 million to “Property, Plant and Equipment, net” and a combined $5.1 million to “Other current assets” and “Deferred charges and other assets.”  The remaining $58.0 million of the purchase price represented the future economic benefits expected to be derived from the acquisition that was not assigned to other identifiable, separately recognizable assets acquired, and KMP recorded this amount as “Goodwill.”  KMP believes the primary items that generated the goodwill are the value of the synergies created between the acquired assets and its pre-existing ethanol handling assets, and its expected ability to grow the business by leveraging its pre-existing experience in ethanol handling operations.  KMP expects that the
 

 
7

 
Kinder Morgan, Inc. Form 10-Q

entire amount of goodwill will be deductible for tax purposes. Furthermore, in the third quarter of 2010, KMP will make a final settlement with the seller for acquired working capital balances.
 
Slay Industries Terminal Acquisition
 
On March 5, 2010, KMP acquired certain bulk and liquids terminal assets from Slay Industries for an aggregate consideration of $101.6 million, consisting of $97.0 million in cash, assumed liabilities of $1.6 million, and an obligation to pay additional cash consideration of $3.0 million in years 2013 through 2019, contingent upon the purchased assets providing KMP an agreed-upon amount of earnings during the three years following the acquisition.  Including accrued interest, KMP expects to pay approximately $2.0 million of this contingent consideration in the first half of 2013.
 
The acquired assets include (i) a marine terminal located in Sauget, Illinois, (ii) a transload liquid operation located in Muscatine, Iowa, (iii) a liquid bulk terminal located in St. Louis, Missouri and (iv) a warehousing distribution center located in St. Louis.  All of the acquired terminals have long-term contracts with large creditworthy shippers.  As part of the transaction, KMP and Slay Industries entered into joint venture agreements at both the Kellogg Dock coal bulk terminal, located in Modoc, Illinois, and at the newly created North Cahokia terminal, located in Sauget and which has approximately 175 acres of land ready for development.  All of the assets located in Sauget have access to the Mississippi River and are served by five rail carriers.  The acquisition complemented and expanded KMP’s pre-existing Midwest terminal operations by adding a diverse mix of liquid and bulk capabilities, and all of the acquired assets are included in the Terminals–KMP business segment.
 
Based on the measurement of fair market values for all of the identifiable tangible and intangible assets acquired and liabilities assumed, KMP assigned $67.9 million of the purchase price to “Property, Plant and Equipment, net,” $24.6 million to “Other intangibles, net” (representing customer contracts) and a combined $8.2 million to “Investments.”  KMP recorded the remaining $0.9 million of the combined purchase price as “Goodwill,” representing certain advantageous factors that contributed to the acquisition price exceeding the fair value of acquired identifiable net assets—in the aggregate, these factors represented goodwill, and KMP expects that the entire amount of goodwill will be deductible for tax purposes.
 
Mission Valley Terminal Acquisition
 
On March 1, 2010, KMP acquired the refined products terminal assets at Mission Valley, California from Equilon Enterprises LLC (d/b/a Shell Oil Products US) for $13.5 million in cash.  The acquired assets include buildings, equipment, delivery facilities (including two truck loading racks), and storage tanks with a total capacity of approximately 170,000 barrels for gasoline, diesel fuel and jet fuel.  The terminal operates under a long-term terminaling agreement with Tesoro Refining and Marketing Company.  KMP assigned the entire purchase price to “Property, Plant and Equipment, net.”  The acquisition enhanced KMP’s Pacific operations and complemented its existing West Coast terminal operations, and the acquired assets are included in the Products Pipelines–KMP business segment.
 
KinderHawk Field Services LLC Acquisition
 
On May 21, 2010, KMP completed its previously announced agreement to purchase a 50% ownership interest in Petrohawk Energy Corporation’s natural gas gathering and treating business in the Haynesville shale gas formation located in northwest Louisiana.  On that date, KMP paid an aggregate consideration of $921.4 million in cash for its 50% equity ownership interest, and pursuant to the provisions of the joint venture formation and contribution agreement, KMP’s payment included approximately $46.4 million for both estimated capital expenditures and estimated net cash outflows from operating activities for the period January 1, 2010 through May 21, 2010.
 
Petrohawk will continue to operate the business during a short transition period, and following the transition period, a newly formed company named KinderHawk Field Services LLC, owned 50% by KMP and 50% by Petrohawk, will assume the joint venture operations.  The joint venture assets consist of more than 200 miles of pipeline currently in service, and it is expected that the pipeline mileage will increase to approximately 375 miles with projected throughput of over 800 million cubic feet per day of natural gas by the end of 2010.  Additionally, it is expected that the system’s natural gas amine treating plants will have capacity of approximately 2,635 gallons per minute by the end of 2010.  The joint venture has also received a dedication to transport and treat all of Petrohawk’s operated Haynesville and Bossier shale gas production in northwest Louisiana for the life of the leases at agreed upon rates, as well as minimum volume commitments from Petrohawk for the first five years of the joint venture agreement.  It will also focus on providing transportation services to third-party producers.  The joint venture ultimately is expected to have approximately two billion cubic feet per day of throughput capacity, which will make
 

 
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Kinder Morgan, Inc. Form 10-Q

it one of the largest gathering and treating systems in the United States.
 
The acquisition complemented and expanded KMP’s existing natural gas gathering and treating businesses, and KMP assigned the entire purchase price to “Investments” on our accompanying consolidated balance sheet as of June 30, 2010. KMP’s investment and pro rata share of the joint venture’s operating results are included as part of the Natural Gas Pipelines–KMP business segment.
 
Pro Forma Information
 
Pro forma consolidated income statement information that gives effect to all of the acquisitions we have made and all of the joint ventures we have entered into since January 1, 2009 as if they had occurred as of January 1, 2009 is not presented because it would not be materially different from the information presented in our accompanying consolidated statements of income.
 
Acquisitions Subsequent to June 30, 2010
 
On July 22, 2010, KMP acquired a terminal with ethanol tanks, a truck rack and additional acreage in Dallas, Texas, from Direct Fuels Partners, L.P. for an aggregate consideration of $16 million, consisting of $15.9 million in cash and an assumed property tax liability of $0.1 million.  The acquired terminal facility is connected to the Dallas, Texas unit train terminal KMP acquired from USD Development Group LLC in January 2010 (described above in “Acquisitions—USD Terminal Acquisition).
 
Joint Ventures
 
Joint Venture Formations and Ownership Changes
 
Eagle Ford Gathering LLC
 
On May 14, 2010, KMP and Copano Energy, L.L.C. entered into formal agreements for a joint venture to provide natural gas gathering, transportation and processing services to natural gas producers in the Eagle Ford Shale formation in south Texas.  The joint venture is named Eagle Ford Gathering LLC, and as previously announced in November 2009, KMP will own 50% of the equity in the project (a 50% member interest in Eagle Ford Gathering LLC), and Copano will own the remaining 50% interest.  Copano will serve as operator and managing member of Eagle Ford Gathering LLC. KMP and Copano have committed approximately 375 million cubic feet per day of natural gas capacity to the joint venture through 2024 for both transportation on KMP’s natural gas pipeline that extends from Laredo to Katy, Texas, and for processing at Copano’s natural gas processing plant located in Colorado County, Texas.
 
On July 6, 2010, Eagle Ford Gathering LLC announced the execution of a definitive long-term, fee-based gas services agreement with SM Energy Company.  According to the provisions of the agreement (i) SM Energy will commit Eagle Ford production from its assets located in LaSalle, Dimmitt, and Webb Counties, Texas up to a maximum level of 200 million cubic feet per day over a ten year term; and (ii) Eagle Ford Gathering LLC will construct approximately 85-miles of 24-inch and 30-inch diameter pipeline to serve SM Energy’s acreage in the western Eagle Ford Shale formation to KMP’s Freer compressor station located in Duval County, Texas.  The pipeline is expected to begin service during the summer of 2011.
 
Combined, KMP and Copano will invest approximately $137 million for the first phase of construction, which will significantly extend the natural gas gathering pipeline beyond the length previously announced in November 2009.  As of June 30, 2010, KMP’s capital contributions (and net equity investment) in Eagle Ford Gathering LLC totaled $0.1 million.
 
Midcontinent Express Pipeline LLC
 
On May 26, 2010, Energy Transfer Partners, L.P. transferred to Regency Energy Partners LP (i) a 49.9% ownership interest in Midcontinent Express Pipeline LLC; and (ii) a one-time right to purchase its remaining 0.1% ownership interest in Midcontinent Express Pipeline LLC on May 26, 2011. As a result of this transfer, Energy Transfer Partners, L.P. now owns a 0.1% ownership interest in Midcontinent Express Pipeline LLC. KMP’s subsidiary, Kinder Morgan Operating L.P. “A,” owns the remaining 50% ownership interest in Midcontinent Express Pipeline LLC, and KMP did not record any equity method adjustments as a result of the ownership change between Regency Energy Partners LP and Energy Transfer Partners, L.P.
 

 
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Kinder Morgan, Inc. Form 10-Q

Joint Venture Contributions
 
During the three and six months ended June 30, 2010, KMP contributed $45.3 million and $180.9 million, respectively, to its equity investees.  KMP combined contributions to equity investees during the first half of 2010 included contributions of $130.5 million to Rockies Express Pipeline LLC and contributions of $39.0 million to Midcontinent Express Pipeline LLC.
 
During the three and six months ended June 30, 2009, KMP contributed $629.3 million and $802.8 million, respectively, to its equity investees.  KMP’s 2009 contributions were paid primarily to West2East Pipeline LLC, Midcontinent Express Pipeline LLC, and Fayetteville Express Pipeline LLC to partially fund their respective Rockies Express, Midcontinent Express, and Fayetteville Express natural gas pipeline system construction and/or pre-construction costs.  KMP owns a 50% equity interest in Fayetteville Express Pipeline LLC.  Equity contributions are reported separately as “Contributions to equity investments” in our accompanying consolidated statements of cash flows for the six months ended June 30, 2010 and 2009.
 
Divestitures
 
Cypress Pipeline
 
On July 14, 2009, KMP received notice from Westlake Petrochemicals LLC, a wholly-owned subsidiary of Westlake Chemical Corporation, that it was exercising an option it held to purchase a 50% ownership interest in KMP’s Cypress Pipeline.  KMP expects the transaction to close by the end of the third quarter of 2010.  As of June 30, 2010, the net assets of KMP’s Cypress Pipeline totaled approximately $20.6 million.  At the time of the sale, KMP will (i) deconsolidate the net assets of the Cypress Pipeline, (ii) recognize a gain or loss on the sale of net assets equal to the difference between (a) the proceeds received from the sale and (b) 50% of the net assets’ carrying value and (iii) recognize the remaining 50% noncontrolling investment retained at its fair value (which is expected to result in a gain).
 
 
3.  Intangibles
 
Goodwill
 
We evaluate goodwill for impairment on May 31 of each year.  For this purpose, we have six reporting units as follows: (i) Products Pipelines–KMP (excluding associated terminals), (ii) Products Pipelines Terminals–KMP (evaluated separately from Products Pipelines–KMP for goodwill purposes), (iii) Natural Gas Pipelines–KMP, (iv) CO2–KMP, (v) Terminals–KMP and (vi) Kinder Morgan Canada–KMP.
 
There were no impairment charges resulting from our May 31, 2010 impairment testing, and no event indicating an impairment has occurred subsequent to that date.  The fair value of each reporting unit was determined from the present value of the expected future cash flows from the applicable reporting unit (inclusive of a terminal value calculated using market multiples between six and ten times cash flows) discounted at a rate of 9.0%.  The value of each reporting unit was determined on a stand-alone basis from the perspective of a market participant and represented the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date.
 
Changes in the gross amounts of our goodwill and accumulated impairment losses for the six months ended June 30, 2010 are summarized as follows (in millions):
 
   
Products
Pipelines–
KMP
   
Natural Gas
Pipelines–
KMP
   
CO2–KMP
   
Terminals–
KMP
   
Kinder
Morgan
Canada–
KMP
   
Total
 
Historical Goodwill
  $ 2,116.5     $ 3,488.0     $ 1,521.7     $ 1,415.4     $ 613.1     $ 9,154.7  
Accumulated impairment losses.
    (1,266.5 )     (2,090.2 )     -       (676.6 )     (377.1 )     (4,410.4 )
Balance as of December 31, 2009
    850.0       1,397.8       1,521.7       738.8       236.0       4,744.3  
Acquisitions and adjustments
    -       -       -       61.2       -       61.2  
Currency translation adjustments
    -       -       -       -       (3.1 )     (3.1 )
Balance as of June 30, 2010
  $ 850.0     $ 1,397.8     $ 1,521.7     $ 800.0     $ 232.9     $ 4,802.4  

In addition, we identify any premium or excess cost we pay over our proportionate share of the underlying fair value of net assets acquired and accounted for as investments under the equity method of accounting.  This premium or excess cost is referred to as equity method goodwill and is also not subject to amortization but rather to
 

 
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Kinder Morgan, Inc. Form 10-Q

impairment testing.  For all investments we own containing equity method goodwill, no event or change in circumstances that may have a significant adverse effect on the fair value of our equity investments has occurred during the first six months of 2010, and as of both June 30, 2010 and December 31, 2009, we reported $138.2 million in equity method goodwill within the caption “Investments” in our accompanying consolidated balance sheets.
 
Other Intangibles
 
Excluding goodwill, our other intangible assets include customer relationships, contracts and agreements, technology-based assets and lease value.  These intangible assets have definite lives and are reported separately as “Other intangibles, net” in our accompanying consolidated balance sheets.  Following is information related to our intangible assets subject to amortization (in millions):
 
   
June 30,
2010
   
December 31,
2009
 
Customer relationships, contracts and agreements
           
Gross carrying amount
  $ 417.1     $ 297.9  
Accumulated amortization
    (75.1 )     (50.9 )
Net carrying amount
    342.0       247.0  
                 
Technology-based assets, lease value and other
               
Gross carrying amount
    14.1       14.1  
Accumulated amortization
    (1.6 )     (1.3 )
Net carrying amount
    12.5       12.8  
                 
Total other intangibles, net
  $ 354.5     $ 259.8  

The increase in the carrying amount of the customer relationships, contracts and agreements since December 31, 2009 was mainly due to the acquisition of intangibles included in KMP’s purchase of terminal assets from US Development Group LLC and Slay Industries, discussed in Note 2.
 
We amortize the costs of our intangible assets to expense in a systematic and rational manner over their estimated useful lives.  Among the factors we weigh, depending on the nature of the asset, are the effects of obsolescence, new technology, and competition.  For the three months ended June 30, 2010 and 2009, the amortization expense on our intangibles totaled $12.1 million and $4.8 million, respectively. For the six months ended June 30, 2010 and 2009, the amortization expense on our intangibles totaled $24.5 million and $9.5 million, respectively. As of June 30, 2010, the weighted average amortization period for our intangible assets was approximately 14 years, and our estimated amortization expense for these assets for each of the next five fiscal years (2011 – 2015) is approximately $42.0 million, $36.6 million, $32.7 million, $29.4 million and $26.4 million, respectively.
 
 
4.  Debt
 
We classify our debt based on the contractual maturity dates of the underlying debt instruments or as of the earliest put date available to the holders of the applicable debt.  We defer costs associated with debt issuance over the applicable term or to the first put date, in the case of debt with a put feature.  These costs are then amortized as interest expense in our accompanying consolidated statements of income.
 
The net carrying amount of our debt (including both short-term and long-term amounts and excluding the value of interest rate swap agreements and the preferred interest in the general partner of KMP) as of June 30, 2010 and December 31, 2009 was $14,772.0 million and $13,548.4 million, respectively.
 
Our outstanding short-term debt as of June 30, 2010 was $2,466.3 million.  The balance consisted of  (i) $142.7 million in outstanding borrowings under Kinder Morgan, Inc.’s senior secured credit facility, (ii) $750.0 million in principal amount of our 5.35% series senior notes due January 5, 2011 (including discount and purchase accounting adjustments, the notes had a carrying amount of $747.9 million as of June 30, 2010), (iii) a $1.1 million current portion of our 6.50% series debentures, due 2013, (iv) $700.0 million in principal amount of KMP’s 6.75% senior notes due March 15, 2011 (including discount and purchase accounting adjustments, the notes had a carrying amount of $702.6 million as of June 30, 2010), (v) $501.4 million of KMP’s commercial paper borrowings, (vi) $250.0 million in principal amount of KMP’s 7.50% senior notes due November 1, 2010 (including discount and
 

 
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Kinder Morgan, Inc. Form 10-Q

purchase accounting adjustments, the notes had a carrying amount of $250.7 million as of June 30, 2010), (vii) $75.0 million in outstanding borrowings under KMP’s unsecured revolving bank credit facility, (viii) $23.7 million in principal amount of tax-exempt bonds that mature on April 1, 2024, but are due on demand pursuant to certain standby purchase agreement provisions contained in the bond indenture (KMP’s subsidiary Kinder Morgan Operating L.P. “B” is the obligor on the bonds), (ix) a $9.1 million portion of a 5.40% long-term note payable (KMP’s subsidiaries Kinder Morgan Operating L.P. “A” and Kinder Morgan Canada Company are the obligors on the note), (x) a $7.1 million portion of 5.23% long-term senior notes (KMP’s subsidiary Kinder Morgan Texas Pipeline, L.P. is the obligor on the notes) and (xi) $5.0 million in principal amount of 6.00% Development Revenue Bonds due January 1, 2011 and issued by the Louisiana Community Development Authority, a political subdivision of the state of Louisiana (KMP’s subsidiary Kinder Morgan Louisiana Pipeline LLC is the obligor on the bonds).
 
Credit Facilities
 
 
June 30, 2010
 
Short-term
notes payable
   
Weighted-
average
interest rate
 
(In millions)
Kinder Morgan, Inc. – Secured debt(a)
  $ 142.7       1.71 %
KMP – Unsecured debt(b)
               
Credit facility
  $ 75.0       2.10 %
Commercial paper
  $ 501.4       0.67 %
____________
(a)
The average short-term debt outstanding (and related weighted-average interest rate) was $142.4 million (1.82%) and $157.1 million (1.80%) during the three and six months ended June 30, 2010, respectively.
(b)
The average short-term debt outstanding (and related weighted-average interest rate) was $598.7 million (0.79%) and $557.2 million (0.71%) during the three and six months ended June 30, 2010, respectively.

As of June 30, 2010, the amount available for borrowing under the Kinder Morgan, Inc. $1.0 billion six-year senior secured credit facility was reduced by $70.2 million of letters of credit consisting of: (i) a combined $33.6 million in four letters of credit required under provisions of our property and casualty, workers’ compensation and general liability insurance policies, (ii) a combined total of $20.4 million in two letters of credit supporting the operation and lease payments of the Jackson, Michigan power generation facility and (iii) a $16.2 million letter of credit to fund the debt service reserve account required under KMP’s Express pipeline system’s trust indenture.
 
As of December 31, 2009, there were $171.0 million in borrowings under Kinder Morgan, Inc.’s credit facility and the average interest on these borrowings was 1.61%.  Our credit facility matures on May 30, 2013 and includes a sublimit of $300 million for the issuance of letters of credit and a sublimit of $50 million for swingline loans.  We do not have a commercial paper program.
 
As of March 31, 2010, KMP had a $1.79 billion five-year unsecured revolving bank credit facility that was due August 18, 2010. On June 23, 2010, KMP successfully renegotiated this credit facility, replacing it with a new $2.0 billion three-year, senior unsecured revolving credit facility that expires June 23, 2013. The covenants of this credit facility are substantially similar to the terms of its previous facility; however, the interest rates for borrowings under this facility have increased from KMP’s previous facility.
 
Similar to its previous facility, KMP’s $2.0 billion credit facility is with a syndicate of financial institutions, and the facility permits KMP to obtain bids for fixed rate loans from members of the lending syndicate.  Wells Fargo Bank, National Association is the administrative agent, and borrowings under the credit facility can be used for general partnership purposes and as a backup for KMP’s commercial paper program. Interest on KMP’s credit facility accrues at its option at a floating rate equal to either (i) the administrative agent’s base rate (but not less than the Federal Funds Rate, plus 0.5%), or (ii) LIBOR, plus a margin, which varies depending upon the credit rating of its long-term senior unsecured debt.  The credit facility can be amended to allow for borrowings of up to $2.3 billion.
 
The outstanding balance under KMP’s $2.0 billion credit facility was $75.0 million as of June 30, 2010, and the weighted average interest rate on these borrowings was 2.10%.  As of December 31, 2009, the outstanding balance under KMP’s previous $1.79 billion credit facility was $300 million, and the weighted average interest rate on these borrowings was 0.59%.
 

 
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Kinder Morgan, Inc. Form 10-Q

Additionally, as of June 30, 2010, the amount available for borrowing under KMP’s credit facility was reduced by a combined amount of $723.6 million, consisting of $501.4 million of commercial paper borrowings and $222.2 million of letters of credit, consisting of: (i) a $100.0 million letter of credit that supports certain proceedings with the California Public Utilities Commission involving refined products tariff charges on the intrastate common carrier operations of KMP’s Pacific operations’ pipelines in the state of California, (ii) a combined $89.4 million in three letters of credit that support tax-exempt bonds, (iii) a $16.1 million letter of credit that supports KMP’s indemnification obligations on the Series D note borrowings of Cortez Capital Corporation and (iv) a combined $16.7 million in other letters of credit supporting other obligations of KMP and its subsidiaries.
 
Commercial Paper Program
 
On October 13, 2008, Standard & Poor’s Ratings Services lowered KMP’s short-term credit rating to A-3 from A-2, and on May 6, 2009, Moody’s Investors Service, Inc. downgraded KMP’s commercial paper rating to Prime-3 from Prime-2 and assigned a negative outlook to KMP’s long-term credit rating.  As a result of these revisions and the commercial paper market conditions, KMP was unable to access commercial paper borrowings throughout 2009.
 
However, on February 25, 2010, Standard & Poor’s revised its outlook on KMP’s long-term credit rating to stable from negative, affirmed KMP’s long-term credit rating at BBB, and raised KMP’s short-term credit rating to A-2 from A-3.  The rating agency’s revisions reflected its expectations that KMP’s financial profile will improve due to lower guaranteed debt obligations and higher expected cash flows associated with the completion and start-up of KMP’s 50%-owned Rockies Express and Midcontinent Express natural gas pipeline systems and its fully-owned Kinder Morgan Louisiana natural gas pipeline system.  Due to this favorable change in KMP’s short-term credit rating it resumed issuing commercial paper in March 2010, and as of June 30, 2010, KMP had $501.4 million of commercial paper outstanding with a weighted average interest rate of approximately 0.67%.  In the near term, KMP expects that its short-term liquidity and financing needs will to be met through a combination of borrowings made under its bank credit facility and commercial paper program.
 
Long-term Debt
 
Senior Notes
 
On May 19, 2010, KMP completed a public offering of senior notes.  KMP issued a total of $1 billion in principal amount of senior notes in two separate series, consisting of $600 million of 5.30% notes due September 15, 2020, and $400 million of 6.55% notes due September 15, 2040.  KMP received proceeds from the issuance of the notes, after underwriting discounts and commissions, of $993.1 million, and it used the proceeds to reduce the borrowings under its commercial paper program and its bank credit facility.
 
K N Capital Trust I and K N Capital Trust III
 
As a result of the implementation of Accounting Standards Update (“ASU”) No. 2009-17, effective January 1, 2010, we (i) include the transactions and balances of our business trusts, K N Capital Trust I and K N Capital Trust III, including $27.1 million of long-term debt at June 30, 2010 in our accompanying consolidated financial statements and (ii) no longer include our Junior Subordinated Deferrable Interest Debentures issued to the Capital Trusts, which balance was $35.7 million reported under the heading “Long-term DebtOutstanding” in our accompanying consolidated balance sheet at December 31, 2009. Also, see Note 13 “Recent Accounting Pronouncements—Accounting Standards Updates.”
 
Interest Rate Swaps
 
Information on interest rate swaps is contained in Note 6, “Risk Management – Interest Rate Risk Management.”
 
Contingent Debt
 
The following contingent debt disclosures pertain to certain types of guarantees or indemnifications KMP has made and cover certain types of guarantees included within debt agreements, even if the likelihood of requiring its performance under such guarantee is remote.  The following is a description of KMP’s contingent debt agreements as of June 30, 2010.
 
Cortez Pipeline Company Debt
 
Pursuant to a Throughput and Deficiency Agreement, the partners of Cortez Pipeline Company (KMP’s subsidiary, Kinder Morgan CO2 Company, L.P. – 50% partner; a subsidiary of Exxon Mobil Corporation – 37%
 

 
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Kinder Morgan, Inc. Form 10-Q

partner; and Cortez Vickers Pipeline Company – 13% partner) are required, on a several, proportional percentage ownership basis, to contribute capital to Cortez Pipeline Company in the event of a cash deficiency.  Furthermore, due to KMP’s indirect ownership of Cortez Pipeline Company through Kinder Morgan CO2 Company, L.P., it severally guarantees 50% of the debt of Cortez Capital Corporation, a wholly-owned subsidiary of Cortez Pipeline Company.
 
As of June 30, 2010, the debt facilities of Cortez Capital Corporation consisted of (i) $32.1 million of fixed rate Series D notes due May 15, 2013, (ii) $100 million of variable rate Series E notes due on December 11, 2012 (interest on the Series E notes is paid quarterly and based on an interest rate of three-month LIBOR plus a spread) and (iii) a $40 million committed revolving credit facility also due December 11, 2012.  As of June 30, 2010, in addition to the outstanding Series D and Series E notes, Cortez Capital Corporation had outstanding borrowings of $11.8 million under its credit facility.  Accordingly, as of June 30, 2010, KMP’s contingent share of Cortez Capital Corporation’s debt was $72.0 million (50% of total borrowings).
 
With respect to Cortez Capital Corporation’s Series D notes, the average interest rate on the notes is 7.14%, and the outstanding $32.1 million principal amount of the notes is due in three equal annual installments of $10.7 million beginning May 2011.  Shell Oil Company (“Shell”) shares KMP’s guaranty obligations jointly and severally; however, KMP is obligated to indemnify Shell for liabilities it incurs in connection with such guaranty.  Accordingly, as of June 30, 2010, JP Morgan Chase has issued a letter of credit on KMP’s behalf in the amount of $16.1 million to secure its indemnification obligations to Shell for 50% of the $32.1 million in principal amount of Series D notes outstanding as of that date.
 
Nassau County, Florida Ocean Highway and Port Authority Debt
 
KMP has posted a letter of credit as security for borrowings under Adjustable Demand Revenue Bonds issued by the Nassau County, Florida Ocean Highway and Port Authority.  The bonds were issued for the purpose of constructing certain port improvements located in Fernandino Beach, Nassau County, Florida.  KMP’s subsidiary, Nassau Terminals LLC, is the operator of the marine port facilities.  The bond indenture is for 30 years and allows the bonds to remain outstanding until December 1, 2020.  Principal payments on the bonds are made on the first of December each year and corresponding reductions are made to the letter of credit.  As of June 30, 2010, this letter of credit had a face amount of $19.8 million.
 
Fayetteville Express Pipeline LLC Debt
 
Fayetteville Express Pipeline LLC is an equity method investee of KMP, and pursuant to certain guaranty agreements with Fayetteville Express Pipeline LLC, both of the member owners of Fayetteville Express Pipeline LLC have agreed to guarantee, severally in the same proportion as their percentage ownership of the member interests in Fayetteville Express, borrowings under its $1.1 billion, unsecured revolving credit facility that is due May 11, 2012.  The two member owners and their respective ownership interests consist of the following: KMP’s subsidiary, Kinder Morgan Operating L.P. “A” – 50%; and Energy Transfer Partners, L.P. – 50%.
 
The Fayetteville Express Pipeline LLC credit facility is with a syndicate of financial institutions with The Royal Bank of Scotland plc as the administrative agent.  Borrowings under the credit facility are primarily used to finance the construction of the Fayetteville Express natural gas pipeline system and to pay related expenses.  As of June 30, 2010, Fayetteville Express had outstanding borrowings of $663.0 million under its bank credit facility.  Accordingly, as of June 30, 2010, KMP’s contingent share of Fayetteville Express’ debt was $331.5 million (50% of total borrowings).
 
Midcontinent Express Pipeline LLC Debt
 
Midcontinent Express Pipeline LLC is also an equity method investee of KMP, and the three member owners and their respective ownership interests consist of the following: KMP’s subsidiary, Kinder Morgan Operating L.P. “A” – 50%; Regency Energy Partners, L.P. – 49.9%; and Energy Transfer Partners, L.P. – 0.1%.  Pursuant to certain guaranty agreements, each of the member owners of Midcontinent Express Pipeline LLC have agreed to guarantee, severally in the same proportion as their percentage ownership of the member interests in Midcontinent Express Pipeline LLC, borrowings under its three-year, unsecured revolving credit facility due February 28, 2011.  The facility is with a syndicate of financial institutions with The Royal Bank of Scotland plc as the administrative agent. Borrowings under the credit facility can be used for general limited liability company purposes.
 

 
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Kinder Morgan, Inc. Form 10-Q

As of March 31, 2010, the credit facility allowed for borrowings up to $255.4 million.  On April 30, 2010, Midcontinent Express Pipeline LLC amended its bank credit facility to allow for borrowings up to $175.4 million (a reduction from $255.4 million), and as of June 30, 2010, Midcontinent Express Pipeline LLC had outstanding borrowings of $33.1 million under its bank credit facility.  Accordingly, as of June 30, 2010, KMP’s contingent share of Midcontinent Express’ debt was $16.6 million (50% of total guaranteed borrowings).  Furthermore, the credit facility can be used for the issuance of letters of credit to support the operation of the Midcontinent Express pipeline system, and as of June 30, 2010, a letter of credit having a face amount of $33.3 million was issued under the credit facility by the Bank of Tokyo-Mitsubishi UFJ, Ltd.  Accordingly, as of June 30, 2010, KMP’s contingent responsibility with regard to this outstanding letter of credit was $16.7 million (50% of total face amount).
 
Rockies Express Pipeline LLC Debt
 
Rockies Express Pipeline LLC is another equity method investee of KMP, and pursuant to certain guaranty agreements remaining in effect on March 31, 2010, all three member owners of Rockies Express Pipeline LLC had agreed to guarantee, severally in the same proportion as their percentage ownership of the member interests in Rockies Express Pipeline LLC, borrowings under its $2.0 billion five-year, unsecured revolving bank credit facility due April 28, 2011.  The three member owners and their respective ownership interests consist of the following: KMP’s subsidiary Kinder Morgan W2E Pipeline LLC – 50%; a subsidiary of Sempra Energy – 25%; and a subsidiary of ConocoPhillips – 25%.
 
As of March 31, 2010, Rockies Express Pipeline LLC had no outstanding borrowings under its bank credit facility; therefore, KMP had no contingent debt obligation associated with KMP’s guaranty agreement.  On April 8, 2010, Rockies Express Pipeline LLC amended its bank credit facility to allow for borrowings up to $200 million (a reduction from $2.0 billion), and on this same date, each of its three member owners were released from their respective debt obligations under the previous guaranty agreements.  Accordingly, KMP no longer has a contingent debt obligation with respect to Rockies Express Pipeline LLC.
 
For additional information regarding ours, and our subsidiary, KMP’s, debt facilities and contingent debt agreements, see Note 8 “Debt” and Note 12 “Commitments and Contingent Liabilities” in our consolidated financial statements included in our 2009 Form 10-K.
 
Kinder Morgan G.P., Inc. Preferred Shares
 
On July 21, 2010, Kinder Morgan G.P., Inc.’s board of directors declared a quarterly cash distribution on its Series A Fixed-to-Floating Rate Term Cumulative Preferred Stock of $20.825 per share payable on August 18, 2010 to shareholders of record as of July 30, 2010. On April 21, 2010, Kinder Morgan G.P., Inc.’s board of directors declared a quarterly cash distribution on its Series A Fixed-to-Floating Rate Term Cumulative Preferred Stock of $20.825 per share paid on May 18, 2010 to shareholders of record as of April 30, 2010.
 

 
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Kinder Morgan, Inc. Form 10-Q

5.  Stockholders’ Equity
 
During the first six months of both 2010 and 2009, there were no material changes in our ownership interests in subsidiaries, in which we retained a controlling financial interest.
 
Our Board of Directors declared a dividend of $175.0 million on July 21, 2010 that will be paid on August 16, 2010. On May 17, 2010 and February 16, 2010, we paid cash dividends on our common stock of $175.0 million and $150.0 million, respectively, to our sole stockholder, which then made dividends to Kinder Morgan Holdco LLC.
 
The following tables set forth for the respective periods (i) changes in the carrying amounts of our Stockholders’ Equity attributable to both us and our noncontrolling interests, including our comprehensive income (loss) and (ii) associated tax amounts included in the respective components of other comprehensive income (loss) (in millions):
 
   
Three Months Ended June 30,
 
   
2010
   
2009
 
   
Kinder
Morgan, Inc.
   
Noncontrolling
interests
   
Total
   
Kinder
Morgan, Inc.
   
Noncontrolling
interests
   
Total
 
Beginning Balance
  $ 3,901.6     $ 4,546.5     $ 8,448.1     $ 4,451.3     $ 4,187.4     $ 8,638.7  
Impact from equity transactions of KMP
    11.9       (18.6 )     (6.7 )     9.3       (14.5 )     (5.2 )
A-1 and B unit amortization
    1.6       -       1.6       1.9       -       1.9  
Distributions to noncontrolling interests
    -       (204.4 )     (204.4 )     -       (183.1 )     (183.1 )
Contributions from noncontrolling interests
    -       433.3       433.3       -       386.6       386.6  
Cash dividends
    (175.0 )     -       (175.0 )     (100.0 )     -       (100.0 )
Other
    -       -       -       -       (0.4 )     (0.4 )
Comprehensive income
                                               
Net income
    46.0       214.3       260.3       129.8       79.3       209.1  
Other comprehensive income (loss), net of tax
                                               
Change in fair value of derivatives utilized for hedging purposes
    43.0       65.1       108.1       (111.3 )     (153.8 )     (265.1 )
Reclassification of change in fair value of derivatives to net income
    3.9       17.9       21.8       (14.4 )     14.4       -  
Foreign currency translation adjustments
    (20.6 )     (39.4 )     (60.0 )     31.4       59.7       91.1  
Adjustments to pension and other postretirement benefit plan liabilities
    -       -       -       -       0.1       0.1  
Total other comprehensive income (loss)
    26.3       43.6       69.9       (94.3 )     (79.6 )     (173.9 )
Total comprehensive income (loss)
    72.3       257.9       330.2       35.5       (0.3 )     35.2  
Ending Balance
  $ 3,812.4     $ 5,014.7     $ 8,827.1     $ 4,398.0     $ 4,375.7     $ 8,773.7  
                                                 
(Tax Expense) Tax Benefit Included in Other Comprehensive Income (Loss):
                                               
Change in fair value of derivatives utilized for hedging purposes
  $ (34.0 )   $ (7.1 )   $ (41.1 )   $ 65.8     $ 17.0     $ 82.8  
Reclassification of change in fair value of derivatives to net income
    (3.7 )     (2.0 )     (5.7 )     5.8       (1.4 )     4.4  
Foreign currency translation adjustments
    15.6       4.2       19.8       (26.9 )     (6.1 )     (33.0 )
Adjustments to pension and other postretirement benefit plan liabilities
    -       -       -       (0.1 )     (0.1 )     (0.2 )
Tax included in total other comprehensive income (loss)
  $ (22.1 )   $ (4.9 )   $ (27.0 )   $ 44.6     $ 9.4     $ 54.0  


 
16

 
Kinder Morgan, Inc. Form 10-Q


   
Six Months Ended June 30,
 
   
2010
   
2009
 
   
Kinder
Morgan, Inc.
   
Noncontrolling
interests
   
Total
   
Kinder
Morgan, Inc.
   
Noncontrolling
interests
   
Total
 
Beginning Balance
  $ 4,171.5     $ 4,674.6     $ 8,846.1     $ 4,404.3     $ 4,072.6     $ 8,476.9  
Impact from equity transactions of KMP
    14.0       (22.0 )     (8.0 )     15.8       (24.6 )     (8.8 )
A-1 and B unit amortization
    3.5       -       3.5       3.8       -       3.8  
Distributions to noncontrolling interests
    -       (405.2 )     (405.2 )     -       (359.4 )     (359.4 )
Contributions from noncontrolling interests
    -       515.0       515.0       -       674.5       674.5  
Implementation of Accounting Standards Update 2009-17(a)
    -       (45.9 )     (45.9 )     -       -       -  
Cash dividends
    (325.0 )     -       (325.0 )     (150.0 )     -       (150.0 )
Other
    -       0.1       0.1       -       2.3       2.3  
Comprehensive income
                                               
Net income (loss)
    (114.9 )     195.3       80.4       245.1       108.9       354.0  
Other comprehensive income (loss), net of tax
                                               
Change in fair value of derivatives utilized for hedging purposes
    58.6       76.4       135.0       (95.4 )     (136.3 )     (231.7 )
Reclassification of change in fair value of derivatives to net income
    8.0       39.6       47.6       (34.9 )     6.0       (28.9 )
Foreign currency translation adjustments
    (2.5 )     (12.1 )     (14.6 )     10.2       33.0       43.2  
Adjustments to pension and other postretirement benefit plan liabilities
    (0.8 )     (1.1 )     (1.9 )     (0.9 )     (1.3 )     (2.2 )
Total other comprehensive income (loss)
    63.3       102.8       166.1       (121.0 )     (98.6 )     (219.6 )
Total comprehensive income (loss)
    (51.6 )     298.1       246.5       124.1       10.3       134.4  
Ending Balance
  $ 3,812.4     $ 5,014.7     $ 8,827.1     $ 4,398.0     $ 4,375.7     $ 8,773.7  
                                                 
(Tax Expense) Tax Benefit Included in Other Comprehensive Income (Loss):
                                               
Change in fair value of derivatives utilized for hedging purposes
  $ (44.3 )   $ (8.3 )   $ (52.6 )   $ 55.6     $ 15.4     $ 71.0  
Reclassification of change in fair value of derivatives to net income
    (6.5 )     (4.3 )     (10.8 )     19.0       (0.7 )     18.3  
Foreign currency translation adjustments
    3.0       1.3       4.3       (14.3 )     (3.7 )     (18.0 )
Adjustments to pension and other postretirement benefit plan liabilities
    0.6       0.1       0.7       0.6       0.1       0.7  
Tax included in total other comprehensive income (loss)
  $ (47.2 )   $ (11.2 )   $ (58.4 )   $ 60.9     $ 11.1     $ 72.0  
____________
(a)
Upon the adoption of Accounting Standards Update No. 2009-17, which amended the codification’s “Consolidation” topic, on January 1, 2010, Triton Power Company LLC is no longer consolidated into our financial statements, but is treated as an equity investment (see Note 13).

Noncontrolling Interests
 
The caption “Noncontrolling interests” in our accompanying consolidated balance sheets consists of interests in the following subsidiaries (in millions):
 
   
June 30,
2010
   
December 31,
2009
 
KMP
  $ 3,073.8     $ 2,746.4  
KMR
    1,929.5       1,870.7  
Triton Power Company LLC(a)
    -       45.9  
Other
    11.4       11.6  
    $ 5,014.7     $ 4,674.6  
____________
(a)
Upon the adoption of Accounting Standards Update No. 2009-17, which amended the codification’s “Consolidation” topic, on January 1, 2010, Triton Power Company LLC is no longer consolidated into our financial statements, but is treated as an equity investment (see Note 13).

KMP’s Common Units
 
On January 15, 2010, KMP issued 1,287,287 common units as part of its purchase price for the ethanol handling terminal assets it acquired from US Development Group LLC.  KMP valued the common units at $81.7 million, determining the units’ value based on the $63.45 closing market price of the common units on the New York Stock
 

 
17

 
Kinder Morgan, Inc. Form 10-Q

Exchange on the January 15, 2010 acquisition date.  For more information on this acquisition, see Note 2 “Investments, Acquisitions, Joint Ventures and Divestitures—Acquisitions—USD Terminal Acquisition.”
 
On May 7, 2010, KMP issued, in a public offering, 6,500,000 of its common units at a price of $66.25 per unit, less commissions and underwriting expenses. After commissions and underwriting expenses, KMP received net proceeds of $417.4 million for the issuance of these 6,500,000 common units, and KMP used the proceeds to reduce the borrowings under its commercial paper program and its bank credit facility.
 
In June 2010, KMP issued 243,042 of its common units pursuant to its equity distribution agreement with UBS Securities LLC (UBS).  After commissions of $0.1 million, KMP received net proceeds from the issuance of these common units of $15.8 million, and used the proceeds to reduce the borrowings under its commercial paper program and bank credit facility.  KMP’s equity distribution agreement provides it the right, but not the obligation, to sell common units in the future, at prices it deems appropriate.  KMP retains at all times complete control over the amount and the timing of each sale, and it will designate the maximum number of common units to be sold through UBS, on a daily basis or otherwise as it and UBS agree.  Either KMP or UBS may suspend the offering of common units pursuant to the agreement by notifying the other party.  For additional information regarding KMP’s equity distribution agreement, see Note 10 “Stockholders’ Equity—Noncontrolling Interests—Kinder Morgan Energy Partners’ Common Units” to our consolidated financial statements included in our 2009 Form 10-K.
 
The above issuances during the six months ended June 30, 2010 had the associated effects of increasing our (i) noncontrolling interests associated with KMP by $492.9 million (ii) accumulated deferred income taxes by $8.0 million and (iii) additional paid-in capital by $14.0 million.
 
Equity Issuances Subsequent to June 30, 2010
 
On July 1, 2010, KMP issued 47,800 of its common units for the settlement of sales made before June 30, 2010 pursuant to its equity distribution agreement.  After commissions of $0.1 million, KMP received net proceeds of $3.1 million for the issuance of these 47,800 common units, and used the proceeds to reduce the borrowings under its commercial paper program and bank credit facility.
 
Also, on July 2, 2010, KMP completed an offering of 1,167,315 of its common units at a price of $64.25 per unit in a privately negotiated transaction.  KMP received net proceeds of $75.0 million for the issuance of these 1,167,315 common units, and used the proceeds to reduce the borrowings under its commercial paper program and its bank credit facility.
 
KMR’s Share Distributions
 
On February 12, 2010, KMR made a share distribution of 0.018430 shares per outstanding share (1,576,470 total shares) to shareholders of record as of January 29, 2010, based on the $1.05 per common unit distribution declared by KMP.  On May 14, 2010, KMR made a share distribution of 0.017863 shares per outstanding share (1,556,130 total shares) to shareholders of record as of April 30, 2010, based on the $1.07 per common unit distribution declared by KMP.  On August 13, 2010, KMR will make a share distribution of 0.018336 shares per outstanding share (1,625,869 total shares) to shareholders of record as of July 30, 2010, based on the $1.09 per common unit distribution declared by KMP.  KMR’s distributions are paid in the form of additional shares or fractions thereof calculated by dividing the KMP cash distribution per common unit by the average of the market closing prices of a KMR share determined for a ten-trading day period ending on the trading day immediately prior to the ex-dividend date for the shares.
 
 
6.  Risk Management
 
Certain of our business activities expose us to risks associated with unfavorable changes in the market price of natural gas, natural gas liquids and crude oil.  We also have exposure to interest rate risk as a result of the issuance of our debt obligations.  Pursuant to our management’s approved risk management policy, we use derivative contracts to hedge or reduce our exposure to certain of these risks.
 
Energy Commodity Price Risk Management
 
We are exposed to risks associated with changes in the market price of natural gas, natural gas liquids and crude oil as a result of the forecasted purchase or sale of these products.  Specifically, these risks are primarily associated with price volatility related to (i) pre-existing or anticipated physical natural gas, natural gas liquids and crude oil sales, (ii) natural gas purchases and (iii) natural gas system use and storage.  Price changes are often caused by shifts
 

 
18

 
Kinder Morgan, Inc. Form 10-Q

in the supply and demand for these commodities, as well as their locations.
 
Our principal use of energy commodity derivative contracts is to mitigate the risk associated with unfavorable market movements in the price of energy commodities.  Our energy commodity derivative contracts act as a hedging (offset) mechanism against the volatility of energy commodity prices by allowing us to transfer this price risk to counterparties who are able and willing to bear it.
 
For derivative contracts that are designated and qualify as cash flow hedges pursuant to generally accepted accounting principles, the portion of the gain or loss on the derivative contract that is effective in offsetting the variable cash flows associated with the hedged forecasted transaction is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings (e.g., in “revenues” when the hedged transactions are commodity sales).  The remaining gain or loss on the derivative contract in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffective portion), is recognized in earnings during the current period.  The effectiveness of hedges using an option contract may be assessed based on changes in the option’s intrinsic value with the change in the time value of the contract being excluded from the assessment of hedge effectiveness.  Changes in the excluded component of the change in an option’s time value are included currently in earnings.  During the three and six months ended June 30, 2010, we recognized net gains of $7.8 million and $14.1 million, respectively, related to crude oil and natural gas hedges and resulting from hedge ineffectiveness and amounts excluded from effectiveness testing. We recognized no gains or losses resulting from hedge ineffectiveness during the first six months of 2009.
 
Additionally, during the three and six months ended June 30, 2010, we reclassified losses of $3.9 million and $8.0 million, respectively, from “Accumulated other comprehensive loss” into earnings, and for the same comparable periods last year, we reclassified gains of $14.4 million and $34.9 million, respectively, of “Accumulated other comprehensive loss” into earnings.  No material amounts were reclassified into earnings as a result of the discontinuance of cash flow hedges because it was probable that the original forecasted transactions would no longer occur by the end of the originally specified time period or within an additional two-month period of time thereafter, but rather, were reclassified as a result of the hedged forecasted transactions actually affecting earnings (i.e. when the forecasted sales and purchase actually occurred).  The proceeds or payments resulting from the settlement of cash flow hedges are reflected in the operating section of our accompanying consolidated statements of cash flows as changes to net income and working capital.
 
The “Accumulated other comprehensive loss” balance included in our Stockholders’ Equity was $104.6 million as of June 30, 2010, and $167.9 million as of December 31, 2009.  These totals included “Accumulated other comprehensive loss” amounts of $29.1 million and $95.7 million of losses as of June 30, 2010 and December 31, 2009, respectively, associated with energy commodity price risk management activities.  Approximately $19.5 million of the total amount associated with energy commodity price risk management activities and included in our Shareholder’s Equity as of June 30, 2010 is expected to be reclassified into earnings during the next twelve months (when the associated forecasted sales and purchases are also expected to occur), and as of June 30, 2010, 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 2014.
 
As of June 30, 2010, KMP had entered into the following outstanding commodity forward contracts to hedge its forecasted energy commodity purchases and sales:
 
 
Net open position
long/(short)
Derivatives designated as hedging contracts
 
Crude oil
(22.2) million barrels
Natural gas fixed price
(34.3) billion cubic feet
Natural gas basis
(28.1) billion cubic feet
Derivatives not designated as hedging contracts
 
Natural gas fixed price
(0.2) billion cubic feet
Natural gas basis
 0.8 billion cubic feet

For derivative contracts that are not designated as a hedge for accounting purposes, all realized and unrealized gains and losses are recognized in the statement of income during the current period.  These types of transactions include basis spreads, basis-only positions and gas daily swap positions.  KMP primarily enters into these positions to economically hedge an exposure through a relationship that does not qualify for hedge accounting.  This will result in non-cash gains or losses being reported in our operating results.
 

 
19

 
Kinder Morgan, Inc. Form 10-Q

Interest Rate Risk Management
 
In order to maintain a cost effective capital structure, it is our policy to borrow funds using a mix of fixed rate debt and variable rate debt.  We use interest rate swap agreements to manage the interest rate risk associated with the fair value of our fixed rate borrowings and to effectively convert a portion of the underlying cash flows related to our long-term fixed rate debt securities into variable rate cash flows in order to achieve our desired mix of fixed and variable rate debt.
 
Since the fair value of fixed rate debt varies inversely with changes in the market rate of interest, we enter into swap agreements to receive a fixed and pay a variable rate of interest in order to convert the interest expense associated with certain of our senior notes from fixed rates to variable rates, resulting in future cash flows that vary with the market rate of interest.  These swaps, therefore, hedge against changes in the fair value of our fixed rate debt that result from market interest rate changes.  For derivative contracts that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings.
 
As of December 31, 2009, we were a party to interest rate swap agreements with a total notional principal amount of $725.0 million, and our subsidiary, KMP, had a combined notional principal amount of $5.2 billion of fixed-to-variable interest rate swap agreements effectively converting the interest expense associated with certain series of its senior notes from fixed rates to variable rates based on an interest rate of LIBOR plus a spread.  In the second quarter of 2010, KMP entered into three additional fixed-to-variable interest rate swap agreements having a combined notional principal amount of $400 million.  Each agreement effectively converts a portion of the interest expense associated with KMP’s 5.30% senior notes due September 15, 2020 from a fixed rate to a variable rate based on an interest rate of LIBOR plus a spread.
 
As of June 30, 2010, we were a party to interest rate swap agreements with a total notional principal amount of $725.0 million and our subsidiary, KMP, had a combined notional principal amount of $5.6 billion of fixed-to-variable interest rate swap agreements. All of our and KMP’s swap agreements have termination dates that correspond to the maturity dates of the related series of senior notes and, as of June 30, 2010, the maximum length of time over which we or KMP have hedged a portion of our exposure to the variability in the value of this debt due to interest rate risk is through January 15, 2038.
 
Fair Value of Derivative Contracts
 
The fair values of our current and non-current asset and liability derivative contracts are each reported separately as “Fair value of derivative contracts” in our accompanying consolidated balance sheets.  The following table summarizes the fair values of our derivative contracts included in our accompanying consolidated balance sheets as of June 30, 2010 and December 31, 2009 (in millions):
 
Fair Value of Derivative Contracts
 
 
Asset derivatives
   
Liability derivatives
 
June 30, 2010
 
December 31, 2009
   
June 30, 2010
 
December 31, 2009
 
Balance sheet
location
 
Fair
value
 
Balance sheet
location
 
Fair
value
   
Balance sheet
location
 
Fair
value
 
Balance sheet
location
 
Fair
value
                                         
Derivatives designated as hedging contracts
                     
Energy commodity derivative contracts
Current
 
$
36.0
 
Current
 
$
19.1
   
Current
 
$
(180.7)
 
Current
 
$
(270.8)
 
Non-current
   
84.8
 
Non-current
   
57.3
   
Non-current
   
(108.9)
 
Non-current
   
(241.5)
Subtotal
     
120.8
       
76.4
         
(289.6)
       
(512.3)
                                         
Interest rate swap agreements
Non-current
   
503.2
 
Non-current
   
236.0
   
Non-current
   
(41.4)
 
Non-current
   
(218.5)
Cross currency swap agreements
Non-current
   
-
 
Non-current
   
-
   
Non-current
   
-   
 
Non-current
   
(9.6)
Total
     
624.0
       
312.4
         
(331.0)
       
(740.4)
                                         
Derivatives not designated as hedging contracts
                     
Energy commodity derivative contracts
Current
   
8.5
 
Current
   
1.7
   
Current
   
(8.4)
 
Current
   
(1.2)
 
Non-current
   
-
 
Non-current
   
-
   
Non-current
   
-   
 
Non-current
   
-
       
8.5
       
1.7
         
(8.4)
       
(1.2)
Total
   
$
632.5
     
$
314.1
       
$
(339.4)
     
$
(741.6)


 
20

 
Kinder Morgan, Inc. Form 10-Q

The offsetting entry to adjust the carrying value of the debt securities whose fair value was being hedged is included within “Value of interest rate swaps” on our accompanying consolidated balance sheets, which also includes any unamortized portion of proceeds received from the early termination of interest rate swap agreements.  As of June 30, 2010 and December 31, 2009, this unamortized premium totaled $326.6 million and $337.5 million, respectively.
Effect of Derivative Contracts on the Statements of Income
 
The following four tables summarize the impact of our derivative contracts on our accompanying consolidated statements of income for the three and six months ended June 30, 2010 and 2009 (in millions):
 
Derivatives in
fair value
hedging
relationships
 
Location of
gain/(loss)
recognized in
income on
derivative
 
Amount of gain/(loss)
recognized in income
on derivative(a)
   
Hedged items in
fair value
hedging
relationships
 
Location of
gain/(loss)
recognized in
income on related
hedged item
 
Amount of gain/(loss)
recognized in income on
related hedged items(a)
       
Three Months Ended
June 30,
           
Three Months Ended
June 30,
       
2010
 
2009
           
2010
 
2009
Interest rate swap agreements
 
Interest, net – income/(expense)
 
$
377.3
 
$
(336.9)
   
Fixed rate debt
 
 
Interest, net – income/(expense)
 
$
(377.3)
 
$
336.9
Total
     
$
377.3
 
$
(336.9)
   
Total
     
$
(377.3)
 
$
336.9
                                       
       
Six Months Ended
June 30,
           
Six Months Ended
June 30,
       
2010
 
2009
           
2010
 
2009
Interest rate swap agreements
 
Interest, net – income/(expense)
 
$
444.2
 
$
(467.3)
   
Fixed rate debt
 
 
Interest, net – income/(expense)
 
$
(444.2)
 
$
467.3
Total
     
$
444.2
 
$
(467.3)
   
Total
     
$
(444.2)
 
$
467.3
____________
(a)
Amounts reflect the change in the fair value of interest rate swap agreements and the change in the fair value of the associated fixed rate debt which exactly offset each other as a result of no hedge ineffectiveness.  Amounts do not reflect the impact on interest expense from the interest rate swap agreements under which we pay variable rate interest and receive fixed rate interest.

Derivatives in
cash flow hedging
relationships
 
Amount of gain/(loss)
recognized in OCI on
derivative (effective
portion)
 
Location of
gain/(loss)
reclassified from
Accumulated OCI
into income
(effective portion)
 
Amount of gain/(loss)
reclassified from
Accumulated OCI
into income
(effective portion)
 
Location of
gain/(loss)
recognized in
income on
derivative
(ineffective portion
and amount
excluded from
effectiveness
testing)
 
Amount of gain/(loss)
recognized in income
on derivative
(ineffective portion
and amount
excluded from
effectiveness testing
   
Three Months Ended
June 30,
     
Three Months Ended
June 30,
     
Three Months Ended
June 30,
   
2010
 
2009
     
2010
 
2009
     
2010
 
2009
Energy commodity derivative contracts
 
$
43.0
 
$
(111.3)
 
Revenues-natural gas sales
 
$
0.1 
 
$
3.9
 
Revenues-product sales and other
 
$
7.9 
 
$
-
               
Revenues-product sales and other
   
(4.6)
   
9.6
             
-
               
Gas purchases and other costs of sales
   
0.6 
   
0.9
 
Gas purchases and other costs of sales
   
(0.1)
   
-
Total
 
$
43.0
 
$
(111.3)
 
Total
 
$
(3.9)
 
$
14.4
 
Total
 
$
7.8 
 
$
-
                                             
   
Six Months Ended
June 30,
     
Six Months Ended
June 30,
     
Six Months Ended
June 30,
   
2010
 
2009
     
2010
 
2009
     
2010
 
2009
Energy commodity derivative contracts
 
$
58.6
 
$
(95.4)
 
Revenues-natural gas sales
 
$
0.1 
 
$
4.4
 
Revenues-product sales and other
 
$
13.3 
 
$
-
               
Revenues-product sales and other
   
(8.8)
   
29.7
               
               
Gas purchases and other costs of sales
   
0.7 
   
0.8
 
Gas purchases and other costs of sales
   
0.8 
   
-
Total
 
$
58.6
 
$
(95.4)
 
Total
 
$
(8.0)
 
$
34.9
 
Total
 
$
14.1 
 
$
-


 
21

 
Kinder Morgan, Inc. Form 10-Q


Derivatives in 
net investment
hedging
relationships
 
Amount of gain/(loss)
recognized in OCI on
derivative (effective
portion)
 
Location of
gain/(loss)
reclassified from
Accumulated OCI
into income
(effective portion)
 
Amount of gain/(loss)
reclassified from
Accumulated OCI
into income
(effective portion)
 
Location of
gain/(loss)
recognized in
income on
derivative
(ineffective portion
and amount
excluded from
effectiveness
testing)
 
Amount of gain/(loss)
recognized in income
on derivative
(ineffective portion
and amount
excluded from
effectiveness testing
   
Three Months Ended
June 30,
     
Three Months Ended
June 30,
     
Three Months Ended
June 30,
   
2010
 
2009
     
2010
 
2009
     
2010
 
2009
Cross currency swap agreements
 
$
15.1
 
$
(20.1)
 
Other, net
 
$
-
 
$
-
 
Revenues
 
$
-
 
$
-
Total
 
$
15.1
 
$
(20.1)
 
Total
 
$
-
 
$
-
 
Total
 
$
-
 
$
-
                                             
   
Six Months Ended
June 30,
     
Six Months Ended
June 30,
     
Six Months Ended
June 30,
   
2010
 
2009
     
2010
 
2009
     
2010
 
2009
Cross currency swap agreements
 
$
9.6
 
$
(26.1)
 
Other, net
 
$
-
 
$
-
 
Revenues
 
$
-
 
$
-
Total
 
$
9.6
 
$
(26.1)
 
Total
 
$
-
 
$
-
 
Total
 
$
-
 
$
-

Derivatives not designated
as hedging contracts 
 
Location of gain/(loss) recognized
in income on derivative
 
Amount of gain/(loss) recognized
in income on derivative
       
Three Months Ended
June 30,
       
2010
 
2009
Energy commodity derivative contracts
 
Gas purchases and other costs of sales
 
$
0.1
 
$
(1.9)
Total
     
$
0.1
 
$
(1.9)
                 
       
Six Months Ended
June 30,
       
2010
 
2009
Energy commodity derivative contracts
 
Gas purchases and other costs of sales
 
$
0.8
 
$
(2.3)
Total
     
$
0.8
 
$
(2.3)

Net Investment Hedges
 
We are exposed to foreign currency risk from our investments in businesses owned and operated outside the United States.  To hedge the value of our investment in Canadian operations, we have entered into various cross-currency interest rate swap transactions that have been designated as net investment hedges.  The effective portion of the changes in fair value of these swap transactions is reported as a cumulative translation adjustment included in the caption “Accumulated other comprehensive loss” in our accompanying consolidated balance sheets.  The combined notional value of our remaining cross currency interest rate swaps at June 30, 2010 was approximately C$96.3 million.
 
Credit Risks
 
We and our subsidiary, KMP, have counterparty credit risk as a result of our use of financial derivative contracts. Our counterparties consist primarily of financial institutions, major energy companies and local distribution companies.  This concentration of counterparties may impact our overall exposure to credit risk, either positively or negatively, in that the counterparties may be similarly affected by changes in economic, regulatory or other conditions.
 
We maintain credit policies with regard to our counterparties that we believe minimize our overall credit risk.  These policies include (i) an evaluation of potential counterparties’ financial condition (including credit ratings), (ii) collateral requirements under certain circumstances and (iii) the use of standardized agreements which allow for netting of positive and negative exposure associated with a single counterparty.  Based on our policies, exposure, credit and other reserves, our management does not anticipate a material adverse effect on our financial position, results of operations, or cash flows as a result of counterparty performance.
 

 
22

 
Kinder Morgan, Inc. Form 10-Q

Our over-the-counter swaps and options are entered into with counterparties outside central trading organizations such as futures, options or stock exchanges.  These contracts are with a number of parties, all of which have investment grade credit ratings.  While we enter into derivative transactions principally with investment grade counterparties and actively monitor their ratings, it is nevertheless possible that from time to time losses will result from counterparty credit risk in the future.  The maximum potential exposure to credit losses on derivative contracts as of June 30, 2010 was (in millions):
 
   
Asset
position
 
Interest rate swap agreements
  $ 503.2  
Energy commodity derivative contracts
    129.3  
Gross exposure
    632.5  
Netting agreement impact
    (93.6 )
Net exposure
  $ 538.9  

In conjunction with the purchase of exchange-traded derivative contracts or when the market value of our derivative contracts with specific counterparties exceeds established limits, we are required to provide collateral to our counterparties, which may include posting letters of credit or placing cash in margin accounts.  As of December 31, 2009, KMP had outstanding letters of credit totaling $55.0 million in support of its hedging of energy commodity price risks associated with the sale of natural gas, natural gas liquids and crude oil. As of June 30, 2010 and December 31, 2009, KMP had cash margin deposits associated with its energy commodity contract positions and over-the-counter swap partners totaling $19.3 million and $15.2 million, respectively, and we reported these amounts as “Restricted deposits” in our accompanying consolidated balance sheets.
 
KMP also has agreements with certain counterparties to its derivative contracts that contain provisions requiring it to post additional collateral upon a decrease in its credit rating.  Based on contractual provisions as of June 30, 2010, we estimate that if KMP’s credit rating was downgraded, KMP would have the following additional collateral obligations (in millions):
 
Credit ratings downgraded(a)
 
Incremental
obligations
 
Cumulative
obligations(b)
One notch to BBB-/Baa3
 
$
3.7
   
$
23.0
 
                 
Two notches to below BBB-/Baa3 (below investment grade)
 
$
90.8
   
$
113.8
 
__________
(a)
If there are split ratings among the independent credit rating agencies, most counterparties use the higher credit rating to determine our incremental collateral obligations, while the remaining use the lower credit rating.  Therefore, a one notch downgrade to BBB-/Baa3 by one agency would not trigger the entire $3.7 million incremental obligation.
(b)
Includes current posting at current rating.

 
7.  Fair Value
 
The Codification emphasizes that fair value is a market-based measurement that should be determined based on assumptions (inputs) that market participants would use in pricing an asset or liability.  Inputs may be observable or unobservable, and valuation techniques used to measure fair value should maximize the use of relevant observable inputs and minimize the use of unobservable inputs. Accordingly, the Codification establishes a hierarchal disclosure framework that ranks the quality and reliability of information used to determine fair values.  The hierarchy is associated with the level of pricing observability utilized in measuring fair value and defines three levels of inputs to the fair value measurement process—quoted prices are the most reliable valuation inputs, whereas model values that include inputs based on unobservable data are the least reliable.  Each fair value measurement must be assigned to a level corresponding to the lowest level input that is significant to the fair value measurement in its entirety.
 
The three broad levels of inputs defined by the fair value hierarchy are as follows:
 
 
Level 1 Inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;