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KMI > SEC Filings for KMI > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for KINDER MORGAN, INC.

Form 10-Q for KINDER MORGAN, INC.


14-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

General and Basis of Presentation

The following information should be read in conjunction with (i) our accompanying interim consolidated financial statements and related notes (included elsewhere in this report); (ii) our consolidated financial statements and related notes included in our 2011 Form 10-K and in our Current Report on Form 8-K filed May 4, 2012; and (iii) our management's discussion and analysis of financial condition and results of operations included in our 2011 Form 10-K and in our Current Report on Form 8-K filed May 4, 2012.

We prepared our consolidated financial statements in accordance with GAAP and these statements include the reclassifications necessary to reflect the results of KMP's FTC Natural Gas Pipelines disposal group as discontinued operations. Accordingly, we have excluded the disposal group's financial results from the Natural Gas Pipelines business segment disclosures for all periods presented in this report. For more information about the discontinued operations, see Notes 1 and 2 to our consolidated financial statements included elsewhere in this report.

Acquisition of El Paso Corporation

Effective on May 25, 2012, we completed the acquisition of all of the outstanding shares of EP. As part of the acquisition, we acquired an emerging midstream business and one of North America's largest interstate natural gas pipeline systems, including a 43.5% (currently 41%) limited partner interest and 2% general partner interest in EPB. Together EP and EPB offer natural gas transmission services to a range of customers, including natural gas producers, marketers and end-users, as well as other natural gas transmission, distribution and electric generation companies. Our combined enterprise, including the associated master limited partnerships, KMP and EPB, now owns an interest in or operates more than 75,000 miles of pipeline and 180 terminals and represents the largest natural gas pipeline network in the United States, the largest independent transporter of petroleum products in the United States, the largest transporter of CO2 in the United States, the second largest oil producer in Texas and the largest independent terminal owner/operator in the United States.

In connection with our acquisition of EP we issued approximately 330 million shares of common stock and approximately 505 million warrants to purchase our common stock and paid approximately $11.6 billion in cash to former EP stockholders and equity award holders. Each warrant entitles the holder to purchase one share of our common stock for an exercise price of $40 per share, payable in cash or by cashless exercise, at any time until May 25, 2017. On May 23, 2012, we announced that our board of directors had approved a warrant repurchase program, authorizing us to repurchase in the aggregate up to $250 million of the warrants we issued in our acquisition of EP. Subsequent to the EP acquisition, and through September 30, 2012, we paid approximately $136 million to repurchase approximately 60 million warrants that were then canceled.

KMI Dividends
Our board of directors has adopted the dividend policy set forth in our shareholders' agreement, which provides that, subject to applicable law, we will pay quarterly cash dividends on all classes of our capital stock equal to the cash we receive from our subsidiaries and other sources less any cash disbursements and reserves established by a majority vote of our board of directors, including for general and administrative expenses, interest and cash taxes. The division of our dividends among our classes of capital stock is in accordance with our charter. Our board of directors may declare dividends by a majority vote in accordance with our dividend policy pursuant to our bylaws. This policy reflects our judgment that our stockholders would be better served if we distributed to them a substantial portion of our cash. As a result, we may not retain a sufficient amount of cash to fund our operations or to finance unanticipated capital expenditures or growth opportunities, including acquisitions.

                            Total quarterly
  Three months ended       dividend per share    Date of declaration    Date of record    Date of dividend
   December 31, 2011      $             0.31      January 18, 2012     January 31, 2012   February 15, 2012
    March 31, 2012        $             0.32       April 18, 2012       April 30, 2012      May 16, 2012
     June 30, 2012        $             0.35        July 18, 2012       July 31, 2012      August 15, 2012
  September 30, 2012      $             0.36      October 17, 2012     October 31, 2012   November 15, 2012

As presented in the following tables, during the three and nine months ended September 30, 2012, we generated cash available to pay dividends of $362 million and $972 million, respectively. Incorporating the impact of the EP acquisition, we


Kinder Morgan, Inc. Form 10-Q

expect to declare dividends of at least $1.40 per share for 2012, a 20% increase over our 2011 declared dividends of $1.20 (the 2011 per share amounts are presented as if we were publicly traded for all of 2011).

Dividends on our investor retained stock generally are paid at the same time as dividends on our common stock and are based on the aggregate number of shares of common stock into which our investor retained stock is convertible on the record date for the applicable dividend. The portion of our dividends payable on the three classes of our investor retained stock may vary among those classes, but the variations will not affect the dividends we pay on our common stock since the total number of shares of common stock into which our investor retained stock could convert in the aggregate was fixed on the closing of our initial public offering. As of September 30, 2012, our outstanding investor retained stock was convertible into an aggregate of 388,717,261 shares of our common stock, which represents 37.5% of our common stock on a fully-converted basis. Our board of directors may amend, revoke or suspend our dividend policy at any time and for any reason. There is nothing in our dividend policy or our governing documents that prohibits us from borrowing to pay dividends. The actual amount of dividends to be paid on our capital stock will depend on many factors, including our financial condition and results of operations, liquidity requirements, market opportunities, our capital requirements, legal, regulatory and contractual constraints, tax laws and other factors. In particular, distributions received from KMP continue to be the most significant source of our cash available to pay dividends. Our ability to pay and increase dividends to our stockholders is primarily dependent on distributions received from KMP and EPB.
Our dividends are not cumulative. Consequently, if dividends on our common stock are not paid at the intended levels, our common stockholders are not entitled to receive those payments in the future. We pay our dividends after we receive quarterly distributions from KMP and EPB, which are paid within 45 days after the end of each quarter, generally on or about the 15th day of each February, May, August and November. Therefore, our dividend generally will be paid on or about the 16th day of each February, May, August and November. If the day after we receive KMP's and EPB's distributions is not a business day, we expect to pay our dividend on the business day immediately following.


                                                   Kinder Morgan, Inc. Form 10-Q



                        Cash Available to Pay Dividends
                                 (In millions)
                                                  Three Months Ended             Nine Months Ended
                                                     September 30,                 September 30,
                                                  2012           2011           2012           2011
KMP distributions to us
From ownership of general partner interest(a) $     378       $     310     $    1,057      $     904
On KMP units owned by us(b)                          33              25             86             74
On KMR shares owned by us(c)                         18              16             53             47
Total KMP distributions to us(d)                    429             351          1,196          1,025
EPB distributions to us
From ownership of general partner interest(e)        40               -             72              -
On EPB units owned by us(f)                          52               -            102              -
Total EPB distributions to us                        92               -            174              -
NGPL cash available for distribution to us(d)         -               3              7             23
Total cash generated                                521             354          1,377          1,048
General and administrative expenses and
sustaining capital expenditures                      (8 )            (2 )          (14 )           (7 )
Interest expense                                    (82 )           (80 )         (167 )         (161 )
Cash available to pay dividends before cash
taxes                                               431             272          1,196            880
Cash taxes                                         (117 )           (84 )         (310 )         (257 )
Subtotal - Cash available to pay dividends(d)       314             188            886            623
EP's cash available for distribution
EP operations - Earnings before interest,
taxes, depreciation and amortization
(EBITDA)(g)                                         236               -            378              -
Interest expense(h)                                (139 )             -           (219 )            -
EP general and administrative expenses              (27 )             -            (35 )            -
Sustaining capital expenditures(i)                  (22 )             -            (38 )            -
EP's net cash available(j)                           48               -             86              -
Total - Consolidated cash available to pay
dividends(k)                                  $     362       $     188     $      972      $     623


______


(a) Based on (i) KMP distributions of $1.26 and $3.69 per common unit declared for the three and nine months ended September 30, 2012, respectively, and $1.16 and $3.45 per common unit declared for the three and nine months ended September 30, 2011, respectively; (ii) 340 million and 319 million aggregate common units, Class B units and i-units (collectively, KMP units) outstanding as of April 30, 2012 and April 29, 2011, respectively; (iii) 347 million and 330 million aggregate KMP units outstanding as of July 31, 2012 and July 29, 2011, respectively; (iv) 365 million and 333 million aggregate KMP units outstanding as of October 31, 2012 and October 31, 2011, respectively; and (v) waived incentive distributions of $6 million and $19 million for the three and nine months ended September 30, 2012, respectively, and $7 million and $21 million for the three and nine months ended September 30, 2011, respectively. In conjunction with KMP's acquisition of its initial 50% interest in May 2010, and subsequently, the remaining 50% interest in May 2011 of KinderHawk, we as general partner of KMP have agreed to waive receipt of a portion of our incentive distributions related to this investment from the first quarter of 2010 through the first quarter of 2013.

(b) Based on 26 million KMP units owned by us for the three months ended September 30, 2012 and 22 million KMP units owned by us in the prior periods multiplied by the KMP per unit distribution declared, as outlined in footnote (a) above.

(c) Assumes that we sold the KMR shares that we estimate to be received as distributions for the three and nine months ended September 30, 2012 and received as distributions for the three and nine months ended September 30, 2011, respectively. We did not sell any KMR shares in the first nine months of 2012 or 2011. We intend periodically to sell the KMR shares we receive as distributions to generate cash.

(d) 2011 KMP distributions to us have been presented on a declared basis and NGPL amounts have been presented on a cash available basis to be consistent with the current year presentation.


Kinder Morgan, Inc. Form 10-Q

(e) Based on (i) EPB distributions of $0.58 and $1.13 per common unit declared for the three months and nine months ended September 30, 2012, respectively; and (ii) 208 million and 216 million common units outstanding as of July 31, 2012 and October 31, 2012, respectively.

(f) Based on 90 million EPB units owned by us multiplied by the EPB per unit distribution declared, as outlined in footnote (e) above.

(g) Includes our share of depreciation expense incurred by our equity investees,

(h) 2012 amounts include interest associated with KMI incremental debt issued to finance the cash portion of the EP acquisition purchase price as well as EP consolidated interest expense, excluding EPB. EP interest expense is shown on an accrual basis (rather than a cash basis, as KMI is shown). Due to the timing of the EP cash interest payments, more than 7/12 of the payments occur after May 24.

(i) Includes our share of sustaining capital expenditures incurred by our equity investees.

(j) Represents cash available from EP, exclusive of EPB operations, for the period after May 24, 2012.

(k) Excludes $37 million and $322 million in after-tax expenses associated with the EP acquisition and EP Energy sale for the three and nine months ended September 30, 2012, respectively. The three months ended September 30, 2012 include (i) $60 million of expense for capitalized financing fees associated with the EP acquisition financing that were written-off (due to debt repayments) or amortized in the third quarter and (ii) $23 million benefit associated with pension income and tax benefits on deferred compensation. The nine months ended September 30, 2012 include (i) $99 million in employee severance, retention and bonus costs; (ii) $55 million of accelerated EP stock based compensation allocated to the post-combination period under applicable GAAP rules; (iii) $37 million in advisory fees; (iv) $67 million write-off (primarily due to debt repayments) or amortization of capitalized financing fees; and (v) $70 million for legal fees and reserves.

Reconciliation of Cash Available to Pay Dividends to Income from Continuing

                                   Operations
                                 (In millions)

                                                  Three Months Ended             Nine Months Ended
                                                     September 30,                 September 30,
                                                  2012           2011           2012            2011
Income from continuing operations(a)          $     386       $      29     $     728       $      221
Income from discontinued operations(a)               48              55           145              146
Income attributable to EPB(b)                         -               -           (37 )              -
Distributions declared by EPB(b)                      -               -            82                -
Depreciation, depletion and amortization(c)         403             287         1,017              807
Amortization of excess cost of equity
investments(a)                                        5               2             9                5
Earnings from equity investments(d)                (123 )           (71 )        (302 )           (215 )
Distributions from equity investments               122              65           290              201
Distributions from equity investments in
excess of cumulative earnings                        46              54           159              185
KMP certain items(e)                                 48             232            33              480
EP acquisition related costs(f)                      74               -           468                -
EP certain items(g)                                  11               -            16                -
KMI deferred tax adjustment(h)                       (3 )             -            35                -
Difference between cash and book taxes              (65 )           (21 )        (212 )            (29 )
Difference between cash and book interest
expense for KMI                                     (39 )           (39 )         (14 )            (37 )
Sustaining capital expenditures(i)                 (117 )           (55 )        (232 )           (141 )
KMP declared distribution on its limited
partner units owned by the public(j)               (408 )          (345 )      (1,155 )         (1,007 )
EPB declared distribution on its limited
partner units owned by the public(k)                (72 )             -          (137 )              -
Other(l)                                             46              (5 )          79                7
Cash available to pay dividends(m)            $     362       $     188     $     972       $      623


______


                                                   Kinder Morgan, Inc. Form 10-Q


(a) Consists of the corresponding line items in our consolidated statements of income included
    elsewhere in this report.
(b) On May 25, 2012, we began recognizing income from our investment in EPB, and we received in the
    third quarter the full distribution for the second quarter as we were the holder of record as of
    July 31, 2012.
(c) Consists of the following:
                                                      Three Months Ended          Nine Months Ended
                                                        September 30,               September 30,
                                                      2012           2011          2012         2011
    Depreciation, depletion and amortization from
    continuing operations                         $     403       $    281     $    1,010     $   789
    Depreciation, depletion and amortization from
    discontinued operations                               -              6              7          18
                                                  $     403       $    287     $    1,017     $   807
(d) Consists of the following:
                                                      Three Months Ended          Nine Months Ended
                                                        September 30,               September 30,
                                                      2012           2011          2012         2011
    Earnings from equity investments from
    continuing operations                         $    (101 )     $    (50 )   $     (238 )   $  (156 )
    Earnings from equity investments from
    discontinued operations                             (22 )          (21 )          (64 )       (59 )
                                                  $    (123 )     $    (71 )   $     (302 )   $  (215 )

(e) Consists of items such as hedge ineffectiveness, legal and environmental reserves, gain/loss on sale, insurance proceeds from casualty losses, and asset disposition expenses. Three months 2011 includes $167 million non-cash loss on remeasurement of KMP's previously held equity interest in KinderHawk to fair value and $69 million attributable to rate case and other litigation matters in KMP's products pipelines on the West Coast. Nine months 2011 includes (i) $167 million non-cash loss on KMP's previously held equity interest in KinderHawk discussed above; (ii) $234 million increase to KMP's legal reserve attributable to rate case and other litigation involving KMP's products pipelines on the West Coast, and (iii) KMP's portion ($87 million) of a $100 million special bonus expense for non-senior employees, which KMP is required to recognize in accordance with GAAP. However, KMP had no obligation, nor did it pay any amounts in respect to such bonuses. The cost of the $100 million special bonus for non-senior employees was not borne by our Class P shareholders. In May of 2011 we paid for the $100 million of special bonuses, which included the amounts allocated to KMP, using $64 million (after-tax) in available earnings and profits reserved for this purpose and not paid in dividends to our Class A shareholders. KMP adds back these certain items in its calculation of distributable cash flow used to determine its distribution.
(f) Includes pre-tax expenses associated with the EP acquisition and EP Energy sale. The three months ended September 30, 2012 include (i) $95 million of expense for capitalized financing fees associated with the EP acquisition financing that were written-off (due to debt repayments) or amortized and (ii) $38 million benefit associated with pension income and legal recoveries. The nine months ended September 30, 2012 include (i) $157 million in employee severance, retention and bonus costs; (ii) $87 million of accelerated EP stock based compensation allocated to the post-combination period under applicable GAAP rules; (iii) $37 million in advisory fees; and (iv) $106 million write-off (primarily due to repayments) or amortization of capitalized financing fees, and (v) $96 million for legal fees and reserves.
(g) Legacy marketing contracts and associated interest.
(h) Due to an increase in our state effective tax rate as a result of the EP acquisition.
(i) We define sustaining capital expenditures as capital expenditures that do not expand the capacity of an asset.
(j) Declared distribution multiplied by limited partner units outstanding on the applicable record date less units owned by us. Includes distributions on KMR shares. KMP must generate the cash to cover the distributions on the KMR shares, but those distributions are paid in additional shares and KMP retains the cash. We do not have access to that cash.

(k) Declared distribution multiplied by EPB limited partner units outstanding on the applicable record date less units owned by us.
(l) Consists of items such as timing and other differences between earnings and cash, KMP's and EPB's cash flow in excess of their distributions, non-cash purchase accounting adjustments related to the EP acquisition and going-private transaction primarily associated with non-cash amortization of debt fair value adjustments, and in the nine months of 2011 KMP's crude hedges, and KMI certain items, which includes for the first quarter of 2011, KMI's portion ($13 million) of the special bonus as described in footnote (e) above.
(m) 2011 KMP distributions to us have been presented on a declared basis and NGPL amounts have been presented on a cash available basis to be consistent with the current year presentation.

Critical Accounting Policies and Estimates

Accounting standards require information in financial statements about the risks and uncertainties inherent in significant estimates, and the application of U.S. generally accepted accounting principles involves the exercise of varying degrees of judgment. Certain amounts included in or affecting our consolidated financial statements and related disclosures must be


Kinder Morgan, Inc. Form 10-Q

estimated, requiring us to make certain assumptions with respect to values or conditions that cannot be known with certainty at the time our financial statements are prepared. These estimates and assumptions affect the amounts we report for our assets and liabilities, our revenues and expenses during the reporting period, and our disclosure of contingent assets and liabilities at the date of our financial statements. We routinely evaluate these estimates, utilizing historical experience, consultation with experts and other methods we consider reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from our estimates, and any effects on our business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.

Furthermore, with regard to goodwill impairment testing, we review our goodwill for impairment annually, and we evaluated our goodwill for impairment on May 31, 2012. Our goodwill impairment analysis performed on that date did not result in an impairment charge, and subsequent to that date, no event has occurred indicating that the implied fair value of each of our reporting units (including its inherent goodwill) is less than the carrying value of its net assets.
Further information about us and information regarding our accounting policies and estimates that we consider to be "critical" can be found in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2011 Form 10-K and our Current Report on Form 8-K filed May 4, 2012.

Results of Operations

 In our discussions of the operating results of individual businesses that
follow, we generally identify the important fluctuations between periods that
are attributable to acquisitions and dispositions separately from those that are
attributable to businesses owned in both periods.

Consolidated
                                                                     Three Months Ended
                                                                        September 30,
                                                                                                              Earnings
                                                                   2012               2011              increase/(decrease)
                                                                               (In millions, except percentages)
Segment earnings (loss) before depreciation, depletion and
amortization
expense and amortization of excess cost of equity
investments(a)
Natural Gas Pipelines(b)                                      $        825       $         20     $        805            4,025  %
Products Pipelines-KMP(c)                                              150                103               47               46  %
CO2-KMP(d)                                                             327                299               28                9  %
Terminals-KMP(e)                                                       183                178                5                3  %
Kinder Morgan Canada-KMP                                                56                 48                8               17  %
 Other(f)                                                               (6 )                -               (6 )            n/a
Segment
earnings before depreciation, depletion and amortization
expense and amortization of excess cost of equity investments        1,535                648              887              137  %
Depreciation, depletion and amortization expense                      (403 )             (281 )           (122 )            (43 )%
Amortization of excess cost of equity investments                       (5 )               (2 )             (3 )           (150 )%
Other revenues                                                           9                  7                2               29  %
General and administrative expense(g)                                 (186 )             (109 )            (77 )            (71 )%
Unallocable interest expense, net of interest income and
other, net(h)                                                         (517 )             (175 )           (342 )           (195 )%
. . .
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