filings.toolsItem 15. Exhibits, Financial Statement Schedules.
357K characters. Original on sec.gov · Markdown
Item 15. Exhibits, Financial Statement Schedules.
| (a) | (1) Financial Statements and (2) Financial Statement Schedules |
| See “Index to Financial Statements” set forth on Page 76. |
| (3) | Exhibits |
*Asterisk indicates exhibits incorporated by reference as indicated; all other exhibits are filed herewith, except as noted otherwise.
| KINDER MORGAN, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS | |
|---|---|
| Page Number | |
| Report of Independent Registered Public Accounting Firm | 77 |
| Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015 | 79 |
| Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015 | 80 |
| Consolidated Balance Sheets as of December 31, 2017 and 2016 | 81 |
| Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 | 82 |
| Consolidated Statement of Stockholders’ Equity as of and for the years ended December 31, 2017, 2016 and 2015 | 84 |
| Notes to Consolidated Financial Statements | 85 |
| Supplemental Selected Quarterly Financial Data (Unaudited) | 153 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Kinder Morgan, Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Kinder Morgan, Inc. and its subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of income, of comprehensive income (loss), of cash flows and of stockholders’ equity for each of the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers LLP
Houston, Texas
February 9, 2018
We have served as the Company’s auditor since 1997.
| KINDER MORGAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Millions, Except Per Share Amounts) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Revenues | |||||||||||
| Natural gas sales | $ | 3,053 | $ | 2,454 | $ | 2,839 | |||||
| Services | 7,901 | 8,146 | 8,290 | ||||||||
| Product sales and other | 2,751 | 2,458 | 3,274 | ||||||||
| Total Revenues | 13,705 | 13,058 | 14,403 | ||||||||
| Operating Costs, Expenses and Other | |||||||||||
| Costs of sales | 4,345 | 3,429 | 4,059 | ||||||||
| Operations and maintenance | 2,472 | 2,372 | 2,393 | ||||||||
| Depreciation, depletion and amortization | 2,261 | 2,209 | 2,309 | ||||||||
| General and administrative | 673 | 669 | 690 | ||||||||
| Taxes, other than income taxes | 398 | 421 | 439 | ||||||||
| Loss on impairment of goodwill | — | — | 1,150 | ||||||||
| Loss on impairments and divestitures, net | 13 | 387 | 919 | ||||||||
| Other income, net | (1 | ) | (1 | ) | (3 | ) | |||||
| Total Operating Costs, Expenses and Other | 10,161 | 9,486 | 11,956 | ||||||||
| Operating Income | 3,544 | 3,572 | 2,447 | ||||||||
| Other Income (Expense) | |||||||||||
| Earnings from equity investments | 578 | 497 | 414 | ||||||||
| Loss on impairments and divestitures of equity investments, net | (150 | ) | (610 | ) | (30 | ) | |||||
| Amortization of excess cost of equity investments | (61 | ) | (59 | ) | (51 | ) | |||||
| Interest, net | (1,832 | ) | (1,806 | ) | (2,051 | ) | |||||
| Other, net | 82 | 44 | 43 | ||||||||
| Total Other Expense | (1,383 | ) | (1,934 | ) | (1,675 | ) | |||||
| Income Before Income Taxes | 2,161 | 1,638 | 772 | ||||||||
| Income Tax Expense | (1,938 | ) | (917 | ) | (564 | ) | |||||
| Net Income | 223 | 721 | 208 | ||||||||
| Net (Income) Loss Attributable to Noncontrolling Interests | (40 | ) | (13 | ) | 45 | ||||||
| Net Income Attributable to Kinder Morgan, Inc. | 183 | 708 | 253 | ||||||||
| Preferred Stock Dividends | (156 | ) | (156 | ) | (26 | ) | |||||
| Net Income Available to Common Stockholders | $ | 27 | $ | 552 | $ | 227 | |||||
| Class P Shares | |||||||||||
| Basic Earnings Per Common Share | $ | 0.01 | $ | 0.25 | $ | 0.10 | |||||
| Basic Weighted Average Common Shares Outstanding | 2,230 | 2,230 | 2,187 | ||||||||
| Diluted Earnings Per Common Share | $ | 0.01 | $ | 0.25 | $ | 0.10 | |||||
| Diluted Weighted Average Common Shares Outstanding | 2,230 | 2,230 | 2,193 | ||||||||
| Dividends Per Common Share Declared for the Period | $ | 0.500 | $ | 0.500 | $ | 1.605 |
The accompanying notes are an integral part of these consolidated financial statements.
KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In Millions)
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Net income | $ | 223 | $ | 721 | $ | 208 | |||||
| Other comprehensive income (loss), net of tax | |||||||||||
| Change in fair value of hedge derivatives (net of tax (expense) benefit of $(82), $60 and $(94), respectively) | 145 | (104 | ) | 164 | |||||||
| Reclassification of change in fair value of derivatives to net income (net of tax benefit of $97, $67 and $156, respectively) | (171 | ) | (116 | ) | (272 | ) | |||||
| Foreign currency translation adjustments (net of tax (expense) benefit of $(56), $(20) and $123, respectively) | 101 | 34 | (214 | ) | |||||||
| Benefit plan adjustments (net of tax (expense) benefit of $(27), $19 and $69, respectively) | 40 | (14 | ) | (122 | ) | ||||||
| Total other comprehensive income (loss) | 115 | (200 | ) | (444 | ) | ||||||
| Comprehensive income (loss) | 338 | 521 | (236 | ) | |||||||
| Comprehensive (income) loss attributable to noncontrolling interests | (86 | ) | (13 | ) | 45 | ||||||
| Comprehensive income (loss) attributable to KMI | $ | 252 | $ | 508 | $ | (191 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
| KINDER MORGAN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Millions, Except Share and Per Share Amounts) | |||||||
|---|---|---|---|---|---|---|---|
| December 31, | |||||||
| 2017 | 2016 | ||||||
| ASSETS | |||||||
| Current assets | |||||||
| Cash and cash equivalents | $ | 264 | $ | 684 | |||
| Restricted deposits | 62 | 103 | |||||
| Accounts receivable, net | 1,448 | 1,370 | |||||
| Fair value of derivative contracts | 114 | 198 | |||||
| Inventories | 424 | 357 | |||||
| Income tax receivable | 165 | 180 | |||||
| Other current assets | 238 | 337 | |||||
| Total current assets | 2,715 | 3,229 | |||||
| Property, plant and equipment, net | 40,155 | 38,705 | |||||
| Investments | 7,298 | 7,027 | |||||
| Goodwill | 22,162 | 22,152 | |||||
| Other intangibles, net | 3,099 | 3,318 | |||||
| Deferred income taxes | 2,044 | 4,352 | |||||
| Deferred charges and other assets | 1,582 | 1,522 | |||||
| Total Assets | $ | 79,055 | $ | 80,305 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
| Current liabilities | |||||||
| Current portion of debt | $ | 2,828 | $ | 2,696 | |||
| Accounts payable | 1,340 | 1,257 | |||||
| Accrued interest | 621 | 625 | |||||
| Accrued contingencies | 291 | 261 | |||||
| Other current liabilities | 1,101 | 1,085 | |||||
| Total current liabilities | 6,181 | 5,924 | |||||
| Long-term liabilities and deferred credits | |||||||
| Long-term debt | |||||||
| Outstanding | 33,988 | 36,105 | |||||
| Preferred interest in general partner of KMP | 100 | 100 | |||||
| Debt fair value adjustments | 927 | 1,149 | |||||
| Total long-term debt | 35,015 | 37,354 | |||||
| Other long-term liabilities and deferred credits | 2,735 | 2,225 | |||||
| Total long-term liabilities and deferred credits | 37,750 | 39,579 | |||||
| Total Liabilities | 43,931 | 45,503 | |||||
| Commitments and contingencies (Notes 9, 13 and 17) | |||||||
| Stockholders’ Equity | |||||||
| Class P shares, $0.01 par value, 4,000,000,000 shares authorized, 2,217,110,072 and 2,230,102,384 shares, respectively, issued and outstanding | 22 | 22 | |||||
| Preferred stock, $0.01 par value, 10,000,000 shares authorized, 9.75% Series A Mandatory Convertible, $1,000 per share liquidation preference, 1,600,000 shares issued and outstanding | — | — | |||||
| Additional paid-in capital | 41,909 | 41,739 | |||||
| Retained deficit | (7,754 | ) | (6,669 | ) | |||
| Accumulated other comprehensive loss | (541 | ) | (661 | ) | |||
| Total Kinder Morgan, Inc.’s stockholders’ equity | 33,636 | 34,431 | |||||
| Noncontrolling interests | 1,488 | 371 | |||||
| Total Stockholders’ Equity | 35,124 | 34,802 | |||||
| Total Liabilities and Stockholders’ Equity | $ | 79,055 | $ | 80,305 |
The accompanying notes are an integral part of these consolidated financial statements.
KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Cash Flows From Operating Activities | |||||||||||
| Net income | $ | 223 | $ | 721 | $ | 208 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities | |||||||||||
| Depreciation, depletion and amortization | 2,261 | 2,209 | 2,309 | ||||||||
| Deferred income taxes | 2,073 | 1,087 | 692 | ||||||||
| Amortization of excess cost of equity investments | 61 | 59 | 51 | ||||||||
| Change in fair market value of derivative contracts | 40 | 64 | (166 | ) | |||||||
| Loss (gain) on early extinguishment of debt | 4 | (45 | ) | — | |||||||
| Loss on impairment of goodwill (Note 4) | — | — | 1,150 | ||||||||
| Loss on impairments and divestitures, net (Note 4) | 13 | 387 | 919 | ||||||||
| Loss on impairments and divestitures of equity investments, net (Note 4) | 150 | 610 | 30 | ||||||||
| Earnings from equity investments | (578 | ) | (497 | ) | (414 | ) | |||||
| Distributions of equity investment earnings | 426 | 431 | 391 | ||||||||
| Pension contributions and noncash pension benefit expenses (credits) | 8 | 9 | (90 | ) | |||||||
| Changes in components of working capital, net of the effects of acquisitions and dispositions | |||||||||||
| Accounts receivable, net | (78 | ) | (107 | ) | 382 | ||||||
| Income tax receivable | 7 | (148 | ) | 195 | |||||||
| Inventories | (90 | ) | 49 | 34 | |||||||
| Other current assets | (25 | ) | (81 | ) | 113 | ||||||
| Accounts payable | 73 | 144 | (154 | ) | |||||||
| Accrued interest, net of interest rate swaps | 10 | (18 | ) | 37 | |||||||
| Accrued contingencies and other current liabilities | 101 | 79 | (121 | ) | |||||||
| Rate reparations, refunds and other litigation reserve adjustments | (100 | ) | (32 | ) | 18 | ||||||
| Other, net | 22 | (126 | ) | (271 | ) | ||||||
| Net Cash Provided by Operating Activities | 4,601 | 4,795 | 5,313 | ||||||||
| Cash Flows From Investing Activities | |||||||||||
| Acquisitions of assets and investments, net of cash acquired | (4 | ) | (333 | ) | (2,079 | ) | |||||
| Capital expenditures | (3,188 | ) | (2,882 | ) | (3,896 | ) | |||||
| Proceeds from sale of equity interests in subsidiaries, net | — | 1,401 | — | ||||||||
| Sales of property, plant and equipment, investments, and other net assets, net of removal costs | 118 | 330 | 39 | ||||||||
| Contributions to investments | (684 | ) | (408 | ) | (96 | ) | |||||
| Distributions from equity investments in excess of cumulative earnings | 374 | 231 | 228 | ||||||||
| Other, net | 22 | (44 | ) | 98 | |||||||
| Net Cash Used in Investing Activities | (3,362 | ) | (1,705 | ) | (5,706 | ) | |||||
| Cash Flows From Financing Activities | |||||||||||
| Issuances of debt | 8,868 | 8,629 | 14,316 | ||||||||
| Payments of debt | (11,064 | ) | (10,060 | ) | (15,116 | ) | |||||
| Debt issue costs | (70 | ) | (19 | ) | (24 | ) | |||||
| Issuances of common shares (Note 11) | — | — | 3,870 | ||||||||
| Issuance of mandatory convertible preferred stock (Note 11) | — | — | 1,541 | ||||||||
| Cash dividends - common shares (Note 11) | (1,120 | ) | (1,118 | ) | (4,224 | ) | |||||
| Cash dividends - preferred shares (Note 11) | (156 | ) | (154 | ) | — | ||||||
| Repurchases of shares and warrants (Note 11) | (250 | ) | — | (12 | ) | ||||||
| Contributions from investment partner | 485 | — | — | ||||||||
| Contributions from noncontrolling interests - net proceeds from KML IPO (Note 3) | 1,245 | — | — | ||||||||
| Contributions from noncontrolling interests - net proceeds from KML preferred share issuances (Note 11) | 420 | — | — | ||||||||
| Contributions from noncontrolling interests - other | 12 | 117 | 11 | ||||||||
| Distributions to noncontrolling interests | (42 | ) | (24 | ) | (34 | ) | |||||
| Other, net | (9 | ) | (8 | ) | (11 | ) | |||||
| Net Cash (Used in) Provided by Financing Activities | (1,681 | ) | (2,637 | ) | 317 | ||||||
| Effect of Exchange Rate Changes on Cash and Cash Equivalents | 22 | 2 | (10 | ) | |||||||
| Net (decrease) increase in Cash and Cash Equivalents | (420 | ) | 455 | (86 | ) | ||||||
| Cash and Cash Equivalents, beginning of period | 684 | 229 | 315 | ||||||||
| Cash and Cash Equivalents, end of period | $ | 264 | $ | 684 | $ | 229 |
KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In Millions)
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Noncash Investing and Financing Activities | |||||||||||
| Assets acquired by the assumption or incurrence of liabilities | $ | — | $ | 43 | $ | 1,681 | |||||
| Net assets contributed to equity investments | — | 37 | 46 | ||||||||
| Increase in property, plant and equipment from both accruals and contractor retainage | 14 | ||||||||||
| Supplemental Disclosures of Cash Flow Information | |||||||||||
| Cash paid during the period for interest (net of capitalized interest) | 1,854 | 2,050 | 1,985 | ||||||||
| Cash (refunded) paid during the period for income taxes, net | (140 | ) | 4 | (331 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Millions)
| Common stock | Preferred stock | ||||||||||||||||||||||||||||||||||||
| Issued shares | Par value | Issued shares | Par value | Additional paid-in capital | Retained deficit | Accumulated other comprehensive loss | Stockholders’ equity attributable to KMI | Non-controlling interests | Total | ||||||||||||||||||||||||||||
| Balance at December 31, 2014 | 2,125 | $ | 21 | — | $ | — | $ | 36,178 | $ | (2,106 | ) | $ | (17 | ) | $ | 34,076 | $ | 350 | $ | 34,426 | |||||||||||||||||
| Issuances of common shares | 103 | 1 | 3,869 | 3,870 | 3,870 | ||||||||||||||||||||||||||||||||
| Issuances of preferred shares | 2 | 1,541 | 1,541 | 1,541 | |||||||||||||||||||||||||||||||||
| Repurchase of warrants | (12 | ) | (12 | ) | (12 | ) | |||||||||||||||||||||||||||||||
| EP Trust I Preferred security conversions | 1 | 23 | 23 | 23 | |||||||||||||||||||||||||||||||||
| Warrants exercised | 2 | 2 | 2 | ||||||||||||||||||||||||||||||||||
| Restricted shares | 57 | 57 | 57 | ||||||||||||||||||||||||||||||||||
| Net income | 253 | 253 | (45 | ) | 208 | ||||||||||||||||||||||||||||||||
| Distributions | — | (34 | ) | (34 | ) | ||||||||||||||||||||||||||||||||
| Contributions | — | 11 | 11 | ||||||||||||||||||||||||||||||||||
| Preferred stock dividends | (26 | ) | (26 | ) | (26 | ) | |||||||||||||||||||||||||||||||
| Common stock dividends | (4,224 | ) | (4,224 | ) | (4,224 | ) | |||||||||||||||||||||||||||||||
| Other | 3 | 3 | 2 | 5 | |||||||||||||||||||||||||||||||||
| Other comprehensive loss | (444 | ) | (444 | ) | (444 | ) | |||||||||||||||||||||||||||||||
| Balance at December 31, 2015 | 2,229 | 22 | 2 | — | 41,661 | (6,103 | ) | (461 | ) | 35,119 | 284 | 35,403 | |||||||||||||||||||||||||
| Restricted shares | 1 | 66 | 66 | 66 | |||||||||||||||||||||||||||||||||
| Net income | 708 | 708 | 13 | 721 | |||||||||||||||||||||||||||||||||
| Distributions | — | (24 | ) | (24 | ) | ||||||||||||||||||||||||||||||||
| Contributions | — | 117 | 117 | ||||||||||||||||||||||||||||||||||
| Preferred stock dividends | (156 | ) | (156 | ) | (156 | ) | |||||||||||||||||||||||||||||||
| Common stock dividends | (1,118 | ) | (1,118 | ) | (1,118 | ) | |||||||||||||||||||||||||||||||
| Other | 12 | 12 | (19 | ) | (7 | ) | |||||||||||||||||||||||||||||||
| Other comprehensive loss | (200 | ) | (200 | ) | (200 | ) | |||||||||||||||||||||||||||||||
| Balance at December 31, 2016 | 2,230 | 22 | 2 | — | 41,739 | (6,669 | ) | (661 | ) | 34,431 | 371 | 34,802 | |||||||||||||||||||||||||
| Repurchases of shares | (14 | ) | (250 | ) | (250 | ) | (250 | ) | |||||||||||||||||||||||||||||
| Restricted shares | 1 | 65 | 65 | 65 | |||||||||||||||||||||||||||||||||
| Net income | 183 | 183 | 40 | 223 | |||||||||||||||||||||||||||||||||
| KML IPO | 314 | 51 | 365 | 684 | 1,049 | ||||||||||||||||||||||||||||||||
| KML preferred share issuance | — | 419 | 419 | ||||||||||||||||||||||||||||||||||
| Reorganization of foreign subsidiaries | 38 | 38 | 38 | ||||||||||||||||||||||||||||||||||
| Distributions | — | (48 | ) | (48 | ) | ||||||||||||||||||||||||||||||||
| Contributions | — | 18 | 18 | ||||||||||||||||||||||||||||||||||
| Preferred stock dividends | (156 | ) | (156 | ) | (156 | ) | |||||||||||||||||||||||||||||||
| Common stock dividends | (1,120 | ) | (1,120 | ) | (1,120 | ) | |||||||||||||||||||||||||||||||
| Impact of adoption of ASU 2016-09 (See Note 5) | 8 | 8 | 8 | ||||||||||||||||||||||||||||||||||
| Sale and deconsolidation of interest in Deeprock Development, LLC | — | (30 | ) | (30 | ) | ||||||||||||||||||||||||||||||||
| Other | 3 | 3 | (12 | ) | (9 | ) | |||||||||||||||||||||||||||||||
| Other comprehensive income | 69 | 69 | 46 | 115 | |||||||||||||||||||||||||||||||||
| Balance at December 31, 2017 | 2,217 | $ | 22 | 2 | $ | — | $ | 41,909 | $ | (7,754 | ) | $ | (541 | ) | $ | 33,636 | $ | 1,488 | $ | 35,124 |
The accompanying notes are an integral part of these consolidated financial statements.
KINDER MORGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- General
We are one of the largest energy infrastructure companies in North America and unless the context requires otherwise, references to “we,” “us,” “our,” “the Company,” or “KMI” are intended to mean Kinder Morgan, Inc. and its consolidated subsidiaries. Our pipelines transport natural gas, refined petroleum products, crude oil, condensate, CO2 and other products, and our terminals transload and store petroleum products, ethanol and chemicals, and handle products including petroleum coke, steel and coal. We are also a leading producer of CO2, which we and others utilize for enhanced oil recovery projects primarily in the Permian basin.
Our common stock trades on the NYSE under the symbol “KMI.”
- Summary of Significant Accounting Policies
Basis of Presentation
Our reporting currency is U.S. dollars, and all references to dollars are U.S. dollars, unless stated otherwise. Our accompanying consolidated financial statements have been prepared under the rules and regulations of the SEC. These rules and regulations conform to the accounting principles contained in the FASB’s Accounting Standards Codification, the single source of GAAP. Under such rules and regulations, all significant intercompany items have been eliminated in consolidation. Additionally, certain amounts from prior years have been reclassified to conform to the current presentation.
Use of Estimates
Certain amounts included in or affecting our financial statements and related disclosures must be estimated, requiring us to make certain assumptions with respect to values or conditions which cannot be known with certainty at the time our financial statements are prepared. These estimates and assumptions affect the amounts we report for assets and liabilities, our revenues and expenses during the reporting period, and our disclosures, including as it relates to contingent assets and liabilities at the date of our financial statements. We evaluate these estimates on an ongoing basis, 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. 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.
Certain accounting policies are of more significance in our financial statement preparation process than others, and set out below are the principal accounting policies we apply in the preparation of our consolidated financial statements.
Cash Equivalents and Restricted Deposits
We define cash equivalents as all highly liquid short-term investments with original maturities of three months or less.
Restricted deposits were $62 million and $103 million as of December 31, 2017 and 2016, respectively.
Accounts Receivable, net
The amounts reported as “Accounts receivable, net” on our accompanying consolidated balance sheets as of December 31, 2017 and 2016 primarily consist of amounts due from customers net of the allowance for doubtful accounts.
Our policy for determining an appropriate allowance for doubtful accounts varies according to the type of business being conducted and the customers being served. Generally, we make periodic reviews and evaluations of the appropriateness of the allowance for doubtful accounts based on a historical analysis of uncollected amounts, and we record adjustments as necessary for changed circumstances and customer-specific information. When specific receivables are determined to be uncollectible, the reserve and receivable are relieved.
The allowance for doubtful accounts was $35 million and $39 million as of December 31, 2017 and 2016, respectively.
Inventories
Our inventories consist of materials and supplies and products such as, NGL, crude oil, condensate, refined petroleum products, transmix and natural gas. We report products inventory at the lower of weighted-average cost or net realizable value. We report materials and supplies inventories at cost, and periodically review for physical deterioration and obsolescence.
Gas Imbalances
We value gas imbalances due to or due from interconnecting pipelines at market prices. As of December 31, 2017 and 2016, our gas imbalance receivables—including both trade and related party receivables—totaled $42 million and $108 million, respectively, and we included these amounts within “Other current assets” on our accompanying consolidated balance sheets. As of December 31, 2017 and 2016, our gas imbalance payables—including both trade and related party payables—totaled $47 million and $45 million, respectively, and we included these amounts within “Other current liabilities” on our accompanying consolidated balance sheets.
Property, Plant and Equipment, net
Capitalization, Depreciation and Depletion and Disposals
We report property, plant and equipment at its acquisition cost. We expense costs for routine maintenance and repairs in the period incurred.
We generally compute depreciation using either the straight-line method based on estimated economic lives or the composite depreciation method, which applies a single depreciation rate for a group of assets. Generally, we apply composite depreciation rates to functional groups of property having similar economic characteristics. The rates range from 1.09% to 23.0% excluding certain short-lived assets such as vehicles. For FERC-regulated entities, the FERC-accepted composite depreciation rate is applied to the total cost of the composite group until the net book value equals the salvage value. For other entities, depreciation estimates are based on various factors, including age (in the case of acquired assets), manufacturing specifications, technological advances, contract term for assets on leased or customer property and historical data concerning useful lives of similar assets. Uncertainties that impact these estimates include changes in laws and regulations relating to restoration and abandonment requirements, economic conditions, and supply and demand in the area. When assets are put into service, we make estimates with respect to useful lives (and salvage values where appropriate) that we believe are reasonable. Subsequent events could cause us to change our estimates, thus impacting the future calculation of depreciation and amortization expense. Historically, adjustments to useful lives have not had a material impact on our aggregate depreciation levels from year to year.
Our oil and gas producing activities are accounted for under the successful efforts method of accounting. Under this method costs that are incurred to acquire leasehold and subsequent development costs are capitalized. Costs that are associated with the drilling of successful exploration wells are capitalized if proved reserves are found. Costs associated with the drilling of exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of certain non-producing leasehold costs are expensed as incurred. The capitalized costs of our producing oil and gas properties are depreciated and depleted by the units-of-production method. Other miscellaneous property, plant and equipment are depreciated over the estimated useful lives of the asset.
We engage in enhanced recovery techniques in which CO2 is injected into certain producing oil reservoirs. In some cases, the cost of the CO2 associated with enhanced recovery is capitalized as part of our development costs when it is injected. The cost of CO2 associated with pressure maintenance operations for reservoir management is expensed when it is injected. When CO2 is recovered in conjunction with oil production, it is extracted and re-injected, and all of the associated costs are expensed as incurred. Proved developed reserves are used in computing units of production rates for drilling and development costs, and total proved reserves are used for depletion of leasehold costs.
A gain on the sale of property, plant and equipment used in our oil and gas producing activities or in our bulk and liquids terminal activities is calculated as the difference between the cost of the asset disposed of, net of depreciation, and the sales proceeds received. A gain on an asset disposal is recognized in income in the period that the sale is closed. A loss on the sale of property, plant and equipment is calculated as the difference between the cost of the asset disposed of, net of depreciation, and the sales proceeds received or the market value if the asset is being held for sale. A loss is recognized when the asset is sold or when the net cost of an asset held for sale is greater than the market value of the asset. For our pipeline system assets under the composite method of depreciation, we generally charge the original cost of property sold or retired to accumulated
depreciation and amortization, net of salvage and cost of removal. Gains and losses are booked for operating unit sales and land sales and are recorded to income or expense accounts in accordance with regulatory accounting guidelines. In those instances where we receive recovery in tariff rates related to losses on dispositions of operating units, we record a regulatory asset for the estimated recoverable amount.
Asset Retirement Obligations
We record liabilities for obligations related to the retirement and removal of long-lived assets used in our businesses. We record, as liabilities, the fair value of asset retirement obligations on a discounted basis when they are incurred and can be reasonably estimated, which is typically at the time the assets are installed or acquired. Amounts recorded for the related assets are increased by the amount of these obligations. Over time, the liabilities increase due to the change in their present value, and the initial capitalized costs are depreciated over the useful lives of the related assets. The liabilities are eventually extinguished when the asset is taken out of service.
We have various other obligations throughout our businesses to remove facilities and equipment on rights-of-way and other leased facilities. We currently cannot reasonably estimate the fair value of these obligations because the associated assets have indeterminate lives. These assets include pipelines, certain processing plants and distribution facilities, and certain bulk and liquids terminal facilities. An asset retirement obligation, if any, will be recognized once sufficient information is available to reasonably estimate the fair value of the obligation.
Long-lived Asset and Other Intangibles Impairments
We evaluate long-lived assets and investments for impairment whenever events or changes in circumstances indicate that our carrying amount of an asset or investment may not be recoverable. We recognize impairment losses when estimated future cash flows expected to result from our use of the asset and its eventual disposition is less than its carrying amount.
In addition to our annual goodwill impairment test, to the extent triggering events exist, we complete a review of the carrying value of our long-lived assets, including property, plant and equipment as well as other intangibles, and record, as applicable, the appropriate impairments. Because the impairment test for long-lived assets held in use is based on undiscounted cash flows, there may be instances where an asset or asset group is not considered impaired, even when its fair value may be less than its carrying value, because the asset or asset group is recoverable based on the cash flows to be generated over the estimated life of the asset or asset group.
We evaluate our oil and gas producing properties for impairment of value on a field-by-field basis or, in certain instances, by logical grouping of assets if there is significant shared infrastructure, using undiscounted future cash flows based on total proved and risk-adjusted probable reserves.
Oil and gas producing properties deemed to be impaired are written down to their fair value, as determined by discounted future cash flows based on total proved and risk-adjusted probable and possible reserves or, if available, comparable market values. Unproved oil and gas properties that are individually significant are periodically assessed for impairment of value, and a loss is recognized at the time of impairment.
Equity Method of Accounting and Excess Investment Cost
We account for investments which we do not control, but do have the ability to exercise significant influence using the equity method of accounting. Under this method, our equity investments are carried originally at our acquisition cost, increased by our proportionate share of the investee’s net income and by contributions made, and decreased by our proportionate share of the investee’s net losses and by distributions received.
With regard to our equity investments in unconsolidated affiliates, in almost all cases, either (i) the price we paid to acquire our share of the net assets of such equity investees or (ii) the revaluation of our share of the net assets of any retained noncontrolling equity investment (from the sale of a portion of our ownership interest in a consolidated subsidiary, thereby losing our controlling financial interest in the subsidiary) differed from the underlying carrying value of such net assets. This differential consists of two pieces. First, an amount related to the difference between the investee’s recognized net assets at book value and at current fair values (representing the appreciated value in plant and other net assets), and secondly, to any premium in excess of fair value (referred to as equity method goodwill) we paid to acquire the investment. We include both amounts within “Investments” on our accompanying consolidated balance sheets.
The first differential, representing the excess of the fair market value of our investees’ plant and other net assets over its underlying book value at either the date of acquisition or the date of the loss of control totaled $732 million and $767 million as of December 31, 2017 and 2016, respectively. Generally, this basis difference relates to our share of the underlying depreciable assets, and, as such, we amortize this portion of our investment cost against our share of investee earnings. As of December 31, 2017, this excess investment cost is being amortized over a weighted average life of approximately fourteen years.
The second differential, representing equity method goodwill, totaled $956 million for both periods as of December 31, 2017 and 2016. This differential is not subject to amortization but rather to impairment testing as part of our periodic evaluation of the recoverability of our investment as compared to the fair value of net assets accounted for under the equity method. Our impairment test considers whether the fair value of the equity investment as a whole has declined and whether that decline is other than temporary.
Goodwill
Goodwill is the cost of an acquisition in excess of the fair value of acquired assets and liabilities and is recorded as an asset on our balance sheet. Goodwill is not subject to amortization but must be tested for impairment at least annually. This test requires us to assign goodwill to an appropriate reporting unit and to determine if the implied fair value of the reporting unit’s goodwill is less than its carrying amount.
We evaluate goodwill for impairment on May 31 of each year. For this purpose, we have seven reporting units as follows: (i) Products Pipelines (excluding associated terminals); (ii) Products Pipelines Terminals (evaluated separately from Products Pipelines for goodwill purposes); (iii) Natural Gas Pipelines Regulated; (iv) Natural Gas Pipelines Non-Regulated; (v) CO2; (vi) Terminals; and (vii) Kinder Morgan Canada. We also evaluate goodwill for impairment to the extent events or conditions indicate a risk of possible impairment during the interim periods subsequent to our annual impairment test. Generally, the evaluation of goodwill for impairment involves a two-step test, although under certain circumstance an initial qualitative evaluation may be sufficient to conclude that goodwill is not impaired without conducting the quantitative test.
Step 1 involves comparing the estimated fair value of each respective reporting unit to its carrying value, including goodwill. If the estimated fair value exceeds the carrying value, the reporting unit’s goodwill is not considered impaired. If the carrying value exceeds the estimated fair value, step 2 must be performed to determine whether goodwill is impaired and, if so, the amount of the impairment. Step 2 involves calculating an implied fair value of goodwill by performing a hypothetical allocation of the estimated fair value of the reporting unit determined in step 1 to the respective tangible and intangible net assets of the reporting unit. The remaining implied goodwill is then compared to the actual carrying amount of the goodwill for the reporting unit. To the extent the carrying amount of goodwill exceeds the implied goodwill, the difference is the amount of the goodwill impairment.
A large portion of our goodwill is non-deductible for tax purposes, and as such, to the extent there are impairments, all or a portion of the impairment may not result in a corresponding tax benefit.
Refer to Note 8 “Goodwill” for further information.
Other Intangibles
Excluding goodwill, our other intangible assets include customer contracts, relationships and agreements, lease value, and technology-based assets. As of both periods of December 31, 2017 and 2016, the gross carrying amounts of these intangible assets was $4,305 million and the accumulated amortization was $1,206 million and $987 million, respectively, resulting in net carrying amounts of $3,099 million and $3,318 million, respectively. These intangible assets primarily consisted of customer contracts, relationships and agreements associated with our Natural Gas Pipelines and Terminals business segments.
Primarily, these contracts, relationships and agreements relate to the gathering of natural gas, and the handling and storage of petroleum, chemical, and dry-bulk materials, including oil, gasoline and other refined petroleum products, petroleum coke, steel and ores. We determined the values of these intangible assets by first, estimating the revenues derived from a customer contract or relationship (offset by the cost and expenses of supporting assets to fulfill the contract), and second, discounting the revenues at a risk adjusted discount rate.
We amortize the costs of our intangible assets to expense in a systematic and rational manner over their estimated useful lives. The life of each intangible asset is based either on the life of the corresponding customer contract or agreement or, in
the case of a customer relationship intangible (the life of which was determined by an analysis of all available data on that business relationship), the length of time used in the discounted cash flow analysis to determine the value of the customer relationship. Among the factors we weigh, depending on the nature of the asset, are the effect of obsolescence, new technology, and competition.
For the years ended December 31, 2017, 2016 and 2015, the amortization expense on our intangibles totaled $220 million, $223 million and $221 million, respectively. Our estimated amortization expense for our intangible assets for each of the next five fiscal years (2018 – 2022) is approximately $214 million, $212 million, $209 million, $209 million, and $206 million, respectively. As of December 31, 2017, the weighted average amortization period for our intangible assets was approximately sixteen years.
Revenue Recognition
We recognize revenue as services are rendered or goods are delivered and, if applicable, risk of loss has passed. We recognize natural gas, crude and NGL sales revenue when the commodity is sold to a purchaser at a fixed or determinable price, delivery has occurred and risk of loss has transferred, and collectability of the revenue is reasonably assured. Our sales and purchases of natural gas, crude and NGL are primarily accounted for on a gross basis as natural gas sales or product sales, as applicable, and cost of sales, except in circumstances where we solely act as an agent and do not have price and related risk of ownership, in which case we recognize revenue on a net basis.
In addition to storing and transporting a significant portion of the natural gas volumes we purchase and resell, we provide various types of natural gas storage and transportation services for third-party customers. Under these contracts, the natural gas remains the property of these customers at all times. In many cases, generally described as firm service, the customer pays a two-part rate that includes (i) a fixed fee reserving the right to transport or store natural gas in our facilities and (ii) a per-unit rate for volumes actually transported or injected into/withdrawn from storage. The fixed-fee component of the overall rate is recognized as revenue in the period the service is provided. The per-unit charge is recognized as revenue when the volumes are delivered to the customers’ agreed upon delivery point, or when the volumes are injected into/withdrawn from our storage facilities.
In other cases, generally described as interruptible service, there is no fixed fee associated with the services because the customer accepts the possibility that service may be interrupted at our discretion in order to serve customers who have purchased firm service. In the case of interruptible service, revenue is recognized in the same manner utilized for the per-unit rate for volumes actually transported under firm service agreements.
We provide crude oil and refined petroleum products transportation and storage services to customers. Revenues are recorded when products are delivered and services have been provided, and adjusted according to terms prescribed by the toll settlements with shippers and approved by regulatory authorities.
We recognize bulk terminal transfer service revenues based on volumes loaded and unloaded. We recognize liquids terminal tank rental revenue ratably over the contract period. We recognize liquids terminal throughput revenue based on volumes received and volumes delivered. We recognize transmix processing revenues based on volumes processed or sold, and if applicable, when risk of loss has passed. We recognize energy-related product sales revenues based on delivered quantities of product.
Revenues from the sale of crude oil, NGL, CO2 and natural gas production within the CO2 business segment are recorded using the entitlement method. Under the entitlement method, revenue is recorded when title passes based on our net interest. We record our entitled share of revenues based on entitled volumes and contracted sales prices. Since there is a ready market for oil and gas production, we sell the majority of our products soon after production at various locations, at which time title and risk of loss pass to the buyer.
Cost of Sales
Cost of sales primarily includes the cost of energy commodities sold, including natural gas, NGL and other refined petroleum products, adjusted for the effects of our energy commodity activities, as applicable, other than production from our CO2 business segment.
Operations and Maintenance
Operations and maintenance include costs of services and is primarily comprised of (i) operational labor costs and (ii) operations, maintenance and asset integrity, regulatory and environmental costs. Costs associated with our oil, gas and CO2 producing activities included within operations and maintenance totaled $342 million, $349 million and $366 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Environmental Matters
We capitalize or expense, as appropriate, environmental expenditures. We capitalize certain environmental expenditures required in obtaining rights-of-way, regulatory approvals or permitting as part of the construction. We accrue and expense environmental costs that relate to an existing condition caused by past operations, which do not contribute to current or future revenue generation. We generally do not discount environmental liabilities to a net present value, and we record environmental liabilities when environmental assessments and/or remedial efforts are probable and we can reasonably estimate the costs. Generally, our recording of these accruals coincides with our completion of a feasibility study or our commitment to a formal plan of action. We recognize receivables for anticipated associated insurance recoveries when such recoveries are deemed to be probable. We record at estimated fair value, where appropriate, environmental liabilities assumed in a business combination.
We routinely conduct reviews of potential environmental issues and claims that could impact our assets or operations. These reviews assist us in identifying environmental issues and estimating the costs and timing of remediation efforts. We also routinely adjust our environmental liabilities to reflect changes in previous estimates. In making environmental liability estimations, we consider the material effect of environmental compliance, pending legal actions against us, and potential third-party liability claims. Often, as the remediation evaluation and effort progresses, additional information is obtained, requiring revisions to estimated costs. These revisions are reflected in our income in the period in which they are reasonably determinable.
Pensions and Other Postretirement Benefits
We recognize the differences between the fair value of each of our and our consolidated subsidiaries’ pension and other postretirement benefit plans’ assets and the benefit obligations as either assets or liabilities on our consolidated balance sheet. We record deferred plan costs and income—unrecognized losses and gains, unrecognized prior service costs and credits, and any remaining unamortized transition obligations—in “Accumulated other comprehensive loss,” with the proportionate share associated with less than wholly owned consolidated subsidiaries allocated and included within “Noncontrolling interests,” or as a regulatory asset or liability for certain of our regulated operations, until they are amortized as a component of benefit expense.
Noncontrolling Interests
Noncontrolling interests represents the interests in our consolidated subsidiaries that are not owned by us. In our accompanying consolidated income statements, the noncontrolling interest in the net income (or loss) of our consolidated subsidiaries is shown as an allocation of our consolidated net income and is presented separately as “Net (Income) Loss Attributable to Noncontrolling Interests.” In our accompanying consolidated balance sheets, noncontrolling interests is presented separately as “Noncontrolling interests” within “Stockholders’ Equity.”
Income Taxes
Income tax expense is recorded based on an estimate of the effective tax rate in effect or to be in effect during the relevant periods. Changes in tax legislation are included in the relevant computations in the period in which such changes are enacted. We do business in a number of states with differing laws concerning how income subject to each state’s tax structure is measured and at what effective rate such income is taxed. Therefore, we must make estimates of how our income will be apportioned among the various states in order to arrive at an overall effective tax rate. Changes in our effective rate, including any effect on previously recorded deferred taxes, are recorded in the period in which the need for such change is identified.
Deferred income tax assets and liabilities are recognized for temporary differences between the basis of assets and liabilities for financial reporting and tax purposes. Deferred tax assets are reduced by a valuation allowance for the amount that is, more likely than not, to not be realized. While we have considered estimated future taxable income and prudent and feasible tax planning strategies in determining the amount of our valuation allowance, any change in the amount that we
expect to ultimately realize will be included in income in the period in which such a determination is reached.
In determining the deferred income tax asset and liability balances attributable to our investments, we apply an accounting policy that looks through our investments. The application of this policy resulted in no deferred income taxes being provided on the difference between the book and tax basis on the non-tax-deductible goodwill portion of our investments.
Foreign Currency Transactions and Translation
Foreign currency transaction gains or losses result from a change in exchange rates between (i) the functional currency, for example the Canadian dollar for a Canadian subsidiary and (ii) the currency in which a foreign currency transaction is denominated, for example the U.S. dollar for a Canadian subsidiary. In our accompanying consolidated statements of income, gains and losses from our foreign currency transactions are included within “Other Income (Expense)—Other, net.”
Foreign currency translation is the process of expressing, in U.S. dollars, amounts recorded in a local functional currency other than U.S. dollars, for example the Canadian dollar for a Canadian subsidiary. We translate the assets and liabilities of each of our consolidated foreign subsidiaries that have a local functional currency to U.S. dollars at year-end exchange rates. Income and expense items are translated at weighted-average rates of exchange prevailing during the year and stockholders’ equity accounts are translated by using historical exchange rates. The cumulative translation adjustments balance is reported as a component of “Accumulated other comprehensive loss.”
Risk Management Activities
We utilize energy commodity derivative contracts for the purpose of mitigating our risk resulting from fluctuations in the market price of commodities including natural gas, NGL and crude oil. In addition, we enter into interest rate swap agreements for the purpose of hedging the interest rate risk associated with our debt obligations. We also enter into cross-currency swap agreements to manage our foreign currency risk with certain debt obligations. We measure our derivative contracts at fair value and we report them on our balance sheet as either an asset or liability. For certain physical forward commodity derivatives contracts, we apply the normal purchase/normal sale exception, whereby the revenues and expenses associated with such transactions are recognized during the period when the commodities are physically delivered or received.
For qualifying accounting hedges, we formally document the relationship between the hedging instrument and the hedged item, the risk management objectives and the methods used for assessing and testing effectiveness, and how any ineffectiveness will be measured and recorded. If we designate a derivative contract as a cash flow accounting hedge, the effective portion of the change in fair value of the derivative is deferred in “Accumulated other comprehensive loss” and reclassified into earnings in the period in which the hedged item affects earnings. Any ineffective portion of the derivative’s change in fair value or amount excluded from the assessment of hedge effectiveness is recognized currently in earnings. If we designate a derivative contract as a fair value accounting hedge, the effective portion of the change in fair value of the derivative is recorded as an adjustment to the item being hedged. Any ineffective portion of the derivative’s change in fair value is recognized currently in earnings.
For derivative instruments that are not designated as accounting hedges, or for which we have not elected the normal purchase/normal sales exception, changes in fair value are recognized currently in earnings.
Regulatory Assets and Liabilities
Regulatory assets and liabilities represent probable future revenues or expenses associated with certain charges and credits that will be recovered from or refunded to customers through the ratemaking process. We included the amounts of our regulatory assets and liabilities within “Other current assets,” “Deferred charges and other assets,” “Other current liabilities” and “Other long-term liabilities and deferred credits,” respectively, in our accompanying consolidated balance sheets.
The following table summarizes our regulatory asset and liability balances as of December 31, 2017 and 2016 (in millions):
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Current regulatory assets | $ | 60 | $ | 49 | |||
| Non-current regulatory assets | 288 | 330 | |||||
| Total regulatory assets(a) | $ | 348 | $ | 379 | |||
| Current regulatory liabilities | $ | 107 | $ | 101 | |||
| Non-current regulatory liabilities | 236 | 108 | |||||
| Total regulatory liabilities(b) | $ | 343 | $ | 209 |
| (a) | Regulatory assets as of December 31, 2017 include (i) $193 million of unamortized losses on disposal of assets; (ii) $55 million income tax gross up on equity AFUDC; and (iii) $100 million of other assets including amounts related to fuel tracker arrangements. Approximately $124 million of the regulatory assets, with a weighted average remaining recovery period of 17 years, are recoverable without earning a return, including the income tax gross up on equity AFUDC for which there is an offsetting deferred income tax balance for FERC rate base purposes, and therefore, it does not earn a return. |
| (b) | Regulatory liabilities as of December 31, 2017 are comprised of customer prepayments to be credited to shippers or other over-collections that are expected to be returned to shippers or netted against under-collections over time. Approximately $20 million of the $236 million classified as non-current is expected to be credited to shippers over a remaining weighted average period of 28 years, while the remaining $216 million is not subject to a defined period. |
Transfer of Net Assets Between Entities Under Common Control
We account for the transfer of net assets between entities under common control by carrying forward the net assets recognized in the balance sheets of each combining entity to the balance sheet of the combined entity, and no other assets or liabilities are recognized as a result of the combination. Transfers of net assets between entities under common control do not affect the historical income statement or balance sheet of the combined entity.
Earnings per Share
We calculate earnings per share using the two-class method. Earnings were allocated to Class P shares of common stock and participating securities based on the amount of dividends paid in the current period plus an allocation of the undistributed earnings or excess distributions over earnings to the extent that each security participates in earnings or excess distributions over earnings. Our unvested restricted stock awards, which may be stock or stock units issued to management employees and include dividend equivalent payments, do not participate in excess distributions over earnings.
The following tables set forth the allocation of net income available to shareholders of Class P shares and participating securities and the reconciliation of Basic Weighted Average Common Shares Outstanding to Diluted Weighted Average Common Shares Outstanding (in millions):
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Net Income Available to Common Stockholders | $ | 27 | $ | 552 | $ | 227 | |||||
| Participating securities: | |||||||||||
| Less: Net Income Allocated to Restricted stock awards(a) | (5 | ) | (4 | ) | (13 | ) | |||||
| Net Income Allocated to Class P Stockholders | $ | 22 | $ | 548 | $ | 214 | |||||
| Basic Weighted Average Common Shares Outstanding | 2,230 | 2,230 | 2,187 | ||||||||
| Basic Earnings Per Common Share | $ | 0.01 | $ | 0.25 | $ | 0.10 |
| Year Ended December 31, | ||||||||
| 2017 | 2016 | 2015 | ||||||
| Basic Weighted Average Common Shares Outstanding | 2,230 | 2,230 | 2,187 | |||||
| Effect of dilutive securities: | ||||||||
| Warrants | — | — | 6 | |||||
| Diluted Weighted Average Common Shares Outstanding | 2,230 | 2,230 | 2,193 |
| (a) | As of December 31, 2017, there were approximately 11 million such restricted stock awards. |
The following maximum number of potential common stock equivalents are antidilutive and, accordingly, are excluded from the determination of diluted earnings per share (in millions on a weighted average basis):
| Year Ended December 31, | ||||||||
| 2017 | 2016 | 2015 | ||||||
| Unvested restricted stock awards | 10 | 8 | 7 | |||||
| Warrants to purchase our Class P shares(a) | 116 | 293 | 291 | |||||
| Convertible trust preferred securities | 3 | 8 | 8 | |||||
| Mandatory convertible preferred stock(b) | 58 | 58 | 10 |
| (a) | On May 25, 2017, approximately 293 million of unexercised warrants expired without the issuance of Class P common stock. Prior to expiration, each warrant entitled the holder to purchase one share of our common stock for an exercise price of $40 per share. The potential dilutive effect of the warrants did not consider the assumed proceeds to KMI upon exercise. |
| (b) | Until our mandatory convertible preferred shares are converted to common shares, on or before the expected mandatory conversion date of October 26, 2018, the holder of each preferred share participates in our earnings by receiving preferred stock dividends. |
- Acquisitions and Divestitures
Business Combinations
There were no significant acquisitions during 2017. During 2016 and 2015, we completed the following significant acquisitions.
Allocation of Purchase Price
As of December 31, 2017, the purchase allocation for our significant acquisitions completed during the reporting periods are detailed below (in millions):
| Assignment of Purchase Price | ||||||||||||||||||||||||||||||||
| Ref. | Date | Acquisition | Purchase price | Current assets | Property plant & equipment | Deferred charges & other | Goodwill | Debt | Other liabilities | |||||||||||||||||||||||
| (1) | 2/16 | BP Products North America Inc. Terminal Assets | $ | 349 | $ | 2 | $ | 396 | $ | — | $ | — | $ | — | $ | (49 | ) | |||||||||||||||
| (2) | 2/15 | Vopak Terminal Assets | 158 | 2 | 155 | — | 6 | — | (5 | ) | ||||||||||||||||||||||
| (3) | 2/15 | Hiland | 1,709 | 79 | 1,492 | 1,498 | 310 | (1,413 | ) | (257 | ) |
After measuring all of the identifiable tangible and intangible assets acquired and liabilities assumed at fair value on the acquisition date, goodwill is an intangible asset representing the future economic benefits expected to be derived from an acquisition that are not assigned to other identifiable, separately recognizable assets. We believe the primary items that generated our goodwill are both the value of the synergies created between the acquired assets and our pre-existing assets, and our expected ability to grow the business we acquired by leveraging our pre-existing business experience. We apply a look through method of recording deferred income taxes on the outside book-tax basis differences in our investments. As a result, no deferred income taxes are recorded associated with non-deductible goodwill recorded at the investee level.
(1) BP Products North America Inc. (BP) Terminal Assets
On February 1, 2016, we completed the acquisition of 15 products terminals and associated infrastructure from BP for $349 million, including a transaction deposit paid in 2015 and working capital adjustments paid in 2016. In conjunction with this transaction, we and BP formed a joint venture with an equity ownership interest of 75% and 25%, respectively. Subsequent to the acquisition, we contributed 14 of the acquired terminals to the joint venture, which we operate, and the remaining terminal is solely owned by us. BP acquired its 25% interest in the joint venture for $84 million, which we reported as “Contributions from noncontrolling interests” within our accompanying consolidated statement of cash flows for the year ended December 31, 2016. Of the acquired assets, 10 terminals are included in our Terminals business segment and 5 terminals are included in our Products Pipelines business segment based on synergies with each segment’s respective existing operations.
(2) Vopak Terminal Assets
On February 27, 2015, we acquired three U.S. terminals and one undeveloped site from Royal Vopak (Vopak) for approximately $158 million in cash. The acquisition included (i) a 36-acre, 1,069,500-barrel storage facility at Galena Park, Texas that handles base oils, biodiesel and crude oil and is immediately adjacent to our Galena Park terminal facility; (ii) two terminals in North Carolina: one in North Wilmington that handles chemicals and black oil and the other in South Wilmington that is not currently operating; and (iii) an undeveloped waterfront access site in Perth Amboy, New Jersey. We include the acquired assets as part of our Terminals business segment.
(3) Hiland
On February 13, 2015, we acquired Hiland, a privately held Delaware limited partnership for aggregate consideration of approximately $3,122 million, including assumed debt. Approximately $368 million of the debt assumed was immediately paid down after closing. Hiland’s assets consist primarily of crude oil gathering and transportation pipelines and gas gathering and processing systems, primarily handling production from the Bakken Formation in North Dakota and Montana. The acquired gathering and processing assets are included in our Natural Gas Pipelines business segment while the acquired crude oil transport pipeline (Double H pipeline) is included in our Products Pipelines business segment. Deferred charges and other relates to customer contracts and relationships with a weighted average amortization period as of the acquisition date of 16.4 years.
Asset Purchase and Subsequent Sale of Noncontrolling Interest
On July 15, 2015, we purchased from Shell US Gas & Power LLC (Shell) its 49% interest in a joint venture, ELC, that was in the pre-construction stage of development for liquefaction facilities at Elba Island, Georgia. The transaction was treated as an asset purchase for the net cash consideration of $185 million. Immediately subsequent to the purchase and before the partial sale discussed below, we had full ownership and control of ELC and prospectively changed our method of accounting for ELC from the equity method to full consolidation. Shell remains subscribed to 100% of the liquefaction capacity.
Effective February 28, 2017, we sold a 49% partnership interest in ELC to investment funds managed by EIG Global Energy Partners (EIG). We continue to own a 51% controlling interest in and operate ELC. Under the terms of ELC’s limited liability company agreement, we are responsible for placing in service and operating certain supply pipelines and terminal facilities that support the operations of ELC and which are wholly owned by us. In certain limited circumstances which are not expected to occur, EIG has the right to relinquish its interest in ELC and redeem its capital account.
As a result of these contingencies, the sale proceeds of $386 million, and subsequent EIG contributions, have been recorded as a deferred credit within “Other long-term liabilities and deferred credits” on our consolidated balance sheet as of December 31, 2017. EIG is not entitled to any specified return on its capital. Once these contingencies expire, EIG’s capital account will be reflected in Noncontrolling interests on our consolidated balance sheet.
Investment Acquisition
On December 10, 2015, we and Brookfield Infrastructure Partners L.P. (Brookfield) acquired from Myria Holdings, Inc. the 53% equity interest in NGPL Holdings LLC not previously owned by us and Brookfield, increasing our ownership to 50% with Brookfield owning the remaining 50%. We paid $136 million for our additional 30% interest in NGPL Holdings LLC. See Note 7 “Investments” for additional information regarding our equity interests in NGPL Holdings LLC.
Sale of Approximate 30% Interest in Canadian Business
On May 30, 2017, our indirectly owned subsidiary, KML, completed an IPO of 102,942,000 restricted voting shares listed on the Toronto Stock Exchange at a price to the public of $17.00 per restricted voting share for total gross proceeds of approximately C$1,750 million (US$1,299 million). The net proceeds from the IPO were used by KML to indirectly acquire from us an approximate 30% interest in a limited partnership that holds our Canadian business while we retained the remaining 70% interest. We used the proceeds from KML’s IPO to pay down debt.
Subsequent to the IPO, we retained control of KML and the limited partnership, and as a result, they remain consolidated in our consolidated financial statements. The public ownership of the KML restricted voting shares is reflected within “Noncontrolling interests” in our consolidated statements of stockholders’ equity and consolidated balance sheets. Earnings attributable to the public ownership of KML are presented in “Net (income) loss attributable to noncontrolling interests” in our consolidated statements of income for the periods presented after May 30, 2017.
The net proceeds received of $1,245 million are presented as “Contributions from noncontrolling interests - net proceeds from KML IPO” on our consolidated statement of cash flows for the year ended December 31, 2017. Because we retained control of KML subsequent to the IPO, the $314 million adjustment made to “Additional paid-in capital” on our consolidated statement of stockholders equity for the year ended December 31, 2017 represents the difference between our book value prior to the sale and our share of book value in KML’s net assets after the sale. The impact of the IPO resulted in a $166 million deferred income tax adjustment. At the date of the IPO, $765 million was attributed to the KML public shareholders to reflect their proportionate ownership percentage in the net assets of KML acquired from us and is included in “Noncontrolling interests” on our consolidated statement of stockholders equity. The above amounts recorded to “Additional paid-in capital” and “Noncontrolling interests” are net of IPO fees.
In addition, the amount recorded to “Noncontrolling interests” at the date of the IPO was reduced by $81 million primarily associated with the allocation of currency translation adjustments from “Accumulated other comprehensive loss” to “Noncontrolling interests.”
The portion of the Canadian business operations that we sold to the public on May 30, 2017 represented Canadian assets that are included in our Kinder Morgan Canada, Terminals and Product Pipelines business segments and include (i) the Trans Mountain pipeline system; (ii) the Canadian Cochin pipeline system; (iii) the Puget Sound pipeline system; (iv) the Jet Fuel pipeline system; and (v) terminal facilities located in Western Canada. In January 2018, KML completed the registration of its restricted voting shares pursuant to Section 12(g) of the United States Securities Exchange Act of 1934 (the “Exchange Act”) and KML is now subject to the reporting requirements of Section 13(a) of the Exchange Act.
In conjunction with the IPO, Kinder Morgan Canada Limited Partnership (KMC LP) and Kinder Morgan Canada GP Inc. (KMC GP) were formed to hold our Canadian business. We have determined that KMC LP is a variable interest entity because a simple majority or lower threshold of the limited partnership interests do not possess substantive “kick-out rights” (i.e., the right to remove the general partner or to dissolve (liquidate) the entity without cause) or substantive participation rights. We have also determined KMC GP is the primary beneficiary because it has the power to direct the activities that most significantly impact KMC LP’s performance, the right to receive benefits and the obligation to absorb losses, that could be significant to KMC LP. As a result, KMC GP consolidates KMC LP. KMC GP is a wholly owned subsidiary of KML, which is indirectly controlled by us through our 100% interest in KML’s special voting shares that represent approximately 70% of KML’s total voting shares (comprised of restricted voting shares and special voting shares). Consequently, we consolidate KML and the variable interest entity, KMC LP, in our consolidated financial statements.
The following table shows the carrying amount and classification of KMC LP’s assets and liabilities in our consolidated balance sheet (in millions):
| December 31, 2017 | ||||
| Assets | ||||
| Total current assets | $ | 270 | ||
| Property, plant and equipment, net | 2,956 | |||
| Total goodwill, deferred charges and other assets | 322 | |||
| Total assets | $ | 3,548 | ||
| Liabilities | ||||
| Current portion of debt | $ | — | ||
| Total other current liabilities | 236 | |||
| Long-term debt, excluding current maturities | — | |||
| Total other long-term liabilities and deferred credits | 414 | |||
| Total liabilities | $ | 650 |
We receive distributions from KMC LP through our indirectly owned limited partnership interests in KMC LP, but otherwise the assets of KMC LP cannot be used to settle our obligations other than those of KML. Our subsidiaries that are the direct owners of our limited partnership interests in KMC LP have guaranteed the obligations of KMC LP’s wholly owned subsidiaries, Kinder Morgan Cochin ULC and Trans Mountain Pipeline ULC, under the Credit Facility (see Note 9 “Debt”), but recourse in respect of such guarantee is limited solely to the limited partnership interests of KMC LP held by such subsidiaries and any proceeds thereof. Additionally, in connection with the Credit Facility, we entered into an Equity Nomination and Support Agreement whereby, among other things, we commit to contribute or cause to be contributed at the time of each drawdown on the construction credit facility or the contingent credit facility either equity or subordinated debt to Kinder Morgan Cochin ULC in an amount sufficient to cause the outstanding indebtedness under the credit facilities and any other funded debt for the TMEP not to exceed 60% of the total project costs for the project as projected over the six month period following the date of such drawdown. Other than such guarantees and the Equity Nomination and Support Agreement, we do not guarantee the debt, commercial paper or other similar commitments of KMC LP or any of its subsidiaries, and the obligations of KMC LP may only be settled using the assets of KMC LP. KMC LP does not guarantee the debt or other similar commitments of KMI.
Terminals Asset Sale
In October 2016, we entered into a definitive agreement to sell several bulk terminals to an affiliate of Watco Companies, LLC for approximately $100 million. The terminals are predominantly located along the inland river system and handle mostly coal and steel products, and are included within our Terminals business segment. The sale of eight of the locations closed in the fourth quarter of 2016, for which we received $37 million of the total consideration, and the balance of this transaction, which included an additional eleven locations, closed in the second quarter of 2017 as certain conditions were satisfied. As a result of this transaction, we recognized a pre-tax loss of $81 million, including a $7 million reduction of goodwill, which is included within “Loss on impairments and divestitures, net” on our accompanying consolidated statement of income for the year ended December 31, 2016, and we classified $61 million as held for sale for the remaining locations which is included within “Other current assets” on our accompanying consolidated balance sheet at December 31, 2016.
Sale of Equity Interest in SNG
On September 1, 2016, we completed the sale of a 50% interest in our SNG natural gas pipeline system to The Southern Company (Southern Company), receiving proceeds of $1.4 billion, and the formation of a joint venture, which includes our remaining 50% interest in SNG. We used the proceeds from the sale to reduce outstanding debt. We recognized a pre-tax loss of $84 million on the sale of our interest in SNG which is included within “Loss on impairments and divestitures, net” on the accompanying consolidated statement of income for the year ended December 31, 2016. As a result of this transaction, we no longer hold a controlling interest in SNG or Bear Creek Storage Company, LLC (Bear Creek) (50% of which is owned by SNG) and, as such, we now account for our remaining equity interests in SNG and Bear Creek as equity investments.
- Impairments and Losses on Divestitures
During the years ended December 31, 2017, 2016, and 2015, we recorded impairments of certain equity investments, long-lived assets, and intangible assets, and net losses on divestitures totaling $172 million, $1,013 million, and $2,125 million, respectively. During 2015 and 2016, and to a lesser degree in 2017, a sustained lower commodity price environment, and negative outlook for certain long-term transportation contracts, led us to cancel certain construction projects, divest of certain assets, write-down certain assets and investments to fair value. In addition, an interim goodwill impairment test was performed during the fourth quarter of 2015 resulting in a partial impairment of goodwill in our Natural Gas Pipelines Non-Regulated reporting unit of approximately $1,150 million. See Note 8 “Goodwill” for further information.
These impairments were driven by market conditions that existed at the time and required management to estimate the fair value of these assets. The estimates of fair value are based on Level 3 valuation estimates using industry standard income approach valuation methodologies which include assumptions primarily involving management’s significant judgments and estimates with respect to general economic conditions and the related demand for products handled or transported by our assets as well as assumptions regarding commodity prices, future cash flows based on rate and volume assumptions, terminal values and discount rates. In certain cases, management’s decisions to dispose of certain assets may trigger an impairment. We typically use discounted cash flow analyses to determine the fair value of our assets. We may probability weight various forecasted cash flow scenarios utilized in the analysis as we consider the possible outcomes. We use discount rates representing our estimate of the risk-adjusted discount rates that would be used by market participants specific to the particular asset.
We may identify additional triggering events requiring future evaluations of the recoverability of the carrying value of our long-lived assets, investments and goodwill. Because certain of our assets, including some equity investments and oil and gas producing properties, have been written down to fair value, any deterioration in fair value relative to our carrying value increases the likelihood of further impairments. Such non-cash impairments could have a significant effect on our results of operations, which would be recognized in the period in which the carrying value is determined to be not fully recoverable.
We recognized the following non-cash pre-tax impairment charges and losses (gains) on divestitures of assets (in millions):
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Natural Gas Pipelines | |||||||||||
| Impairment of goodwill | $ | — | $ | — | $ | 1,150 | |||||
| Impairments of long-lived assets(a) | 30 | 106 | 79 | ||||||||
| Losses on divestitures of long-lived assets(b) | — | 94 | 43 | ||||||||
| Impairments of equity investments(c) | 150 | 606 | 26 | ||||||||
| Impairments at equity investees(d) | 10 | 7 | — | ||||||||
| CO2 | |||||||||||
| Impairments of long-lived assets(e) | (1 | ) | 20 | 606 | |||||||
| Gains on divestitures of long-lived assets | — | (1 | ) | — | |||||||
| Impairments at equity investee(d) | (4 | ) | 9 | 26 | |||||||
| Terminals | |||||||||||
| Impairments of long-lived assets(f) | 3 | 19 | 188 | ||||||||
| (Gains) losses on divestitures of long-lived assets(g) | (18 | ) | 80 | 3 | |||||||
| Losses on impairments and divestitures of equity investments, net | — | 16 | 4 | ||||||||
| Products Pipelines | |||||||||||
| Impairments of long-lived assets(h) | — | 66 | — | ||||||||
| Losses (gains) on divestitures of long-lived assets | — | 10 | 1 | ||||||||
| Gain on divestiture of equity investment | — | (12 | ) | — | |||||||
| Other losses (gains) on divestitures of long-lived assets | 2 | (7 | ) | (1 | ) | ||||||
| Pre-tax losses on impairments and divestitures, net | $ | 172 | $ | 1,013 | $ | 2,125 |
(a) 2017 amount represents the impairment of our Colden storage facility, of which $3 million is included in “Costs of sales” on our accompanying consolidated statement of income. 2016 amount represents the project write-off of our portion of the Northeast Energy Direct (NED) Market project. 2015 amount represents $47 million and $32 million of project write-offs in our non-regulated midstream and regulated natural gas pipelines assets, respectively.
(b) 2016 amount primarily relates to our sale of a 50% interest in SNG.
(c) 2017 amount represents the impairment of our investment in FEP. 2016 amount includes a $350 million impairment of our investment in MEP and a $250 million impairment of our investment in Ruby. 2015 amount is primarily related to an impairment of an investment in a gathering and processing asset in Oklahoma.
(d) Amounts represent losses on impairments recorded by equity investees and are included in “Earnings from equity investments” on our accompanying consolidated statements of income.
(e) 2015 amount includes (i) $399 million related to oil and gas properties and (ii) $207 million related to the certain CO2 source and transportation project write-offs.
(f) 2015 amount is primarily related to certain terminals with significant coal operations, including a $175 million impairment of a terminal facility reflecting the impact of an agreement to adjust certain payment terms under a contract with a coal customer in February 2016.
(g) 2017 amount includes a $23 million gain related to the sale of a 40% membership interest in the Deeprock Development joint venture. 2016 amount primarily relates to the sale of 20 bulk terminals that handle mostly coal and steel products, predominately located along the inland river system.
(h) 2016 amount represents project write-offs associated with the canceled Palmetto project.
- Income Taxes
The components of “Income Before Income Taxes” are as follows (in millions):
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| U.S. | $ | 1,976 | $ | 1,466 | $ | 611 | |||||
| Foreign | 185 | 172 | 161 | ||||||||
| Total Income Before Income Taxes | $ | 2,161 | $ | 1,638 | $ | 772 |
Components of the income tax provision applicable for federal, foreign and state taxes are as follows (in millions):
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Current tax expense (benefit) | |||||||||||
| Federal | $ | (137 | ) | $ | (148 | ) | $ | (125 | ) | ||
| State | (16 | ) | (28 | ) | (7 | ) | |||||
| Foreign | 18 | 6 | 4 | ||||||||
| Total | (135 | ) | (170 | ) | (128 | ) | |||||
| Deferred tax expense (benefit) | |||||||||||
| Federal | 2,022 | 998 | 653 | ||||||||
| State | 4 | 51 | (4 | ) | |||||||
| Foreign | 47 | 38 | 43 | ||||||||
| Total | 2,073 | 1,087 | 692 | ||||||||
| Total tax provision | $ | 1,938 | $ | 917 | $ | 564 |
We are subject to taxation in Canada and Mexico. In Canada we recognized income tax expense of $58 million, $38 million and $46 million at December 31, 2017, 2016, and 2015, respectively. In Mexico we recognized income tax expense of $7 million, $6 million and $1 million at December 31, 2017, 2016, and 2015, respectively.
The difference between the statutory federal income tax rate and our effective income tax rate is summarized as follows (in millions, except percentages):
| Year Ended December 31, | ||||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||
| Federal income tax | $ | 756 | 35.0 | % | $ | 573 | 35.0 | % | $ | 271 | 35.0 | % | ||||||||
| Increase (decrease) as a result of: | ||||||||||||||||||||
| State deferred tax rate change | 10 | 0.5 | % | 11 | 0.7 | % | (24 | ) | (3.1 | )% | ||||||||||
| Taxes on foreign earnings, net of federal benefit | 42 | 1.9 | % | 28 | 1.7 | % | 26 | 3.5 | % | |||||||||||
| Net effects of noncontrolling interests | (14 | ) | (0.7 | )% | (4 | ) | (0.3 | )% | 15 | 2.0 | % | |||||||||
| State income tax, net of federal benefit | 38 | 1.8 | % | 26 | 1.6 | % | 12 | 1.5 | % | |||||||||||
| Dividend received deduction | (56 | ) | (2.6 | )% | (48 | ) | (2.9 | )% | (51 | ) | (6.6 | )% | ||||||||
| Adjustments to uncertain tax positions | (12 | ) | (0.6 | )% | (23 | ) | (1.4 | )% | (14 | ) | (1.9 | )% | ||||||||
| Valuation allowance on investment and tax credits | 13 | 0.6 | % | 34 | 2.1 | % | — | — | % | |||||||||||
| Impact of the 2017 Tax Reform | 1,240 | 57.4 | % | — | — | % | — | — | % | |||||||||||
| Nondeductible goodwill | — | — | % | 301 | 18.5 | % | 323 | 41.7 | % | |||||||||||
| General business credit | (95 | ) | (4.4 | )% | — | — | % | — | — | % | ||||||||||
| Other | 16 | 0.8 | % | 19 | 1.1 | % | 6 | 0.8 | % | |||||||||||
| Total | $ | 1,938 | 89.7 | % | $ | 917 | 56.1 | % | $ | 564 | 72.9 | % |
Deferred tax assets and liabilities result from the following (in millions):
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Deferred tax assets | |||||||
| Employee benefits | $ | 251 | $ | 401 | |||
| Accrued expenses | 73 | 118 | |||||
| Net operating loss, capital loss and tax credit carryforwards | 1,113 | 1,307 | |||||
| Derivative instruments and interest rate and currency swaps | 12 | 22 | |||||
| Debt fair value adjustment | 37 | 74 | |||||
| Investments | 968 | 2,804 | |||||
| Other | 6 | 14 | |||||
| Valuation allowances | (171 | ) | (184 | ) | |||
| Total deferred tax assets | 2,289 | 4,556 | |||||
| Deferred tax liabilities | |||||||
| Property, plant and equipment | 225 | 177 | |||||
| Other | 20 | 27 | |||||
| Total deferred tax liabilities | 245 | 204 | |||||
| Net deferred tax assets | $ | 2,044 | $ | 4,352 | |||
Deferred Tax Assets and Valuation Allowances: The step-up in tax basis from the merger transactions that occurred in November 2014 resulted in a deferred tax asset, primarily related to our investment in KMP. As book earnings from our investment in KMP are projected to exceed taxable income (primarily as a result of the partnership’s tax depreciation in excess of book depreciation), the deferred tax asset related to our investment in KMP is expected to be fully realized.
We decreased our valuation allowances in 2017 by $13 million, primarily due to $4 million release for capital loss carryover as a result of the 2016 return to provision adjustment, $5 million release for foreign operating losses and $24 million reduction related to our investment in NGPL as a result of the reduction of federal tax rate, partially offset by $18 million for state net operating losses and $2 million for foreign tax credits.
We have deferred tax assets of $935 million related to net operating loss carryovers, $178 million related to general business, alternative minimum and foreign tax credits and $133 million of valuation allowances related to these deferred tax assets at December 31, 2017. As of December 31, 2016, we had deferred tax assets of $1,128 million related to net operating loss carryovers, $175 million related to alternative minimum and foreign tax credits, $4 million related to capital loss carryovers and valuation allowances related to these deferred tax assets of $123 million. We expect to generate taxable income and utilize federal net operating loss carryforwards and tax credits beginning in 2022.
Our alternative minimum tax credit carryforwards decreased by $143 million in 2017 as a result of our decision to elect to forgo bonus depreciation on property placed in service in that year. Code Section 168(k)(4) allows for corporate taxpayers with minimum tax credit carryforwards to forgo bonus depreciation and accelerate their use of the credits to reduce tax liability in that same tax year if the amount of the allowable credit exceeds the taxpayer’s tax liability. The corporation may receive a cash refund of the excess notwithstanding that it may not otherwise be paying taxes. We received an income tax refund of $144 million in 2017.
The tax impact of ASU 2016-09, which was adopted and effective January 1, 2017, resulted in $8 million of deferred tax assets being recorded through a cumulative-effect adjustment to our retained deficit. The previously unrecorded deferred tax asset is related to net operating loss carryovers as a result of the delayed recognition of a windfall tax benefit related to share-based compensation. Post-adoption the excess tax benefits or deficiencies are recognized for income tax purposes in the period in which they occur through the income statement.
Expiration Periods for Deferred Tax Assets: As of December 31, 2017, we have U.S. federal net operating loss carryforwards of $3.4 billion, which will expire from 2018 - 2037; state losses of $3.2 billion which will expire from 2018 - 2037; and foreign losses of $134 million which will expire from 2029 - 2036. We also have $8 million of federal alternative minimum tax credits which do not expire; $147 million of general business credits which will expire from 2018 - 2027; and approximately $21 million of foreign tax credits, which will expire from 2018 - 2023. Use of a portion of our U.S. federal carryforwards is subject to the limitations provided under Sections 382 and 383 of the Internal Revenue Code as well as the separate return limitation rules of Internal Revenue Service regulations. If certain substantial changes in our ownership occur, there would be an annual limitation on the amount of carryforwards that could be utilized.
Unrecognized Tax Benefits: We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based not only on the technical merits of the tax position based on tax law, but also the past administrative practices and precedents of the taxing authority. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
A reconciliation of our gross unrecognized tax benefit excluding interest and penalties is as follows (in millions):
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Balance at beginning of period | $ | 122 | $ | 148 | $ | 189 | |||||
| Additions based on current year tax positions | 3 | 3 | 4 | ||||||||
| Additions based on prior year tax positions | — | 7 | — | ||||||||
| Reductions based on prior year tax positions | — | (1 | ) | (6 | ) | ||||||
| Reductions based on settlements with taxing authority | (22 | ) | (26 | ) | (25 | ) | |||||
| Reductions due to lapse in statute of limitations | (2 | ) | (9 | ) | (14 | ) | |||||
| Impact of the 2017 Tax Reform | (4 | ) | — | — | |||||||
| Balance at end of period | $ | 97 | $ | 122 | $ | 148 |
We recognize interest and/or penalties related to income tax matters in income tax expense. We recognized a tax benefit of $9 million, expense of $2 million and a benefit of $4 million at December 31, 2017, 2016, and 2015, respectively. As of December 31, 2017, 2016, and 2015, we had $19 million, $28 million and $24 million, respectively, of accrued interest. We
had no accrued penalties as of both December 31, 2017 and 2016 and $2 million in accrued penalties as of December 31, 2015. All of the $97 million of unrecognized tax benefits, if recognized, would affect our effective tax rate in future periods. In addition, we believe it is reasonably possible that our liability for unrecognized tax benefits will decrease by approximately $6 million during the next year to approximately $91 million, primarily due to lapses in statute of limitations partially offset by additions for state filing positions taken in prior years.
We are subject to taxation, and have tax years open to examination for the periods 2011-2016 in the U.S., 2005-2016 in various states and 2007-2016 in various foreign jurisdictions.
Impact of 2017 Tax Reform
On December 22, 2017, the U.S. enacted the 2017 Tax Reform. Among the many provisions included in the 2017 Tax Reform is a provision to reduce the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018.
As of December 31, 2017, we had deferred tax assets related to our net operating loss carryforwards and tax credits, in addition to tax basis in excess of accounting basis primarily related to our investment in KMP. Prior to the 2017 Tax Reform, the value of these deferred tax assets was recorded at the previous income tax rate of 35%, which represented their expected future benefit to us. As a result of the 2017 Tax Reform, the future benefit of these deferred tax assets was re-measured at the new income tax rate of 21% and we recorded an approximate $1,240 million provisional non-cash adjustment for the year ended December 31, 2017. We determined the effects of the rate change using our best estimate of temporary book-to-tax differences. Upon final analysis and remeasurement of our deferred tax balances, the December 31, 2017 adjustment we recorded to reflect the change in corporate income tax rates may need to be adjusted in subsequent periods.
In addition, the 2017 Tax Reform will require a mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits. As of December 31, 2017, we have recorded a provisional amount for this 2017 Tax Reform provision and we are continuing to finalize earnings and profits used in this calculation as well assess other 2017 Tax Reform impacts to complete our analysis on this provision. However, we do not expect this provision of the 2017 Tax Reform to be material to us.
The income tax rate change in the 2017 Tax Reform had an impact not only on our corporate income taxes but also resulted in us recording an approximate $144 million after-tax ($219 million pre-tax) provisional non-cash adjustment, including our share of equity investee provisional adjustments, related to our FERC regulated business for the year ended December 31, 2017. We have determined a reasonable estimate of its impact and recorded a provisional regulatory reserve as of December 31, 2017. However, as the impact on the regulatory rate making process is currently uncertain, we have not completed our assessment of the 2017 Tax Reform’s effect on our FERC regulated business.
As described above, we continue to assess the impact of the 2017 Tax Reform on our business in order to complete our analysis. Any adjustment to our provisional amounts will be reported in the reporting period in which any such adjustments are determined and may be material in the period in which the adjustments are made.
- Property, Plant and Equipment, net
Classes and Depreciation
As of December 31, 2017 and 2016, our property, plant and equipment, net consisted of the following (in millions):
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Pipelines (Natural gas, liquids, crude oil and CO2) | $ | 20,157 | $ | 19,341 | |||
| Equipment (Natural gas, liquids, crude oil, CO2, and terminals) | 24,152 | 23,298 | |||||
| Other(a) | 5,570 | 4,780 | |||||
| Accumulated depreciation, depletion and amortization | (14,175 | ) | (12,306 | ) | |||
| 35,704 | 35,113 | ||||||
| Land and land rights-of-way | 1,456 | 1,431 | |||||
| Construction work in process | 2,995 | 2,161 | |||||
| Property, plant and equipment, net | $ | 40,155 | $ | 38,705 |
(a) Includes general plant, general structures and buildings, computer and communication equipment, intangibles, vessels, transmix products, linefill and miscellaneous property, plant and equipment.
As of December 31, 2017 and 2016, property, plant and equipment, net included $14,055 million and $12,900 million, respectively, of assets which were regulated by either the FERC or the NEB. Depreciation, depletion, and amortization expense charged against property, plant and equipment was $2,022 million, $1,970 million, and $2,059 million for the years ended December 31, 2017, 2016, and 2015, respectively.
Asset Retirement Obligations
As of December 31, 2017 and 2016, we recognized asset retirement obligations in the aggregate amount of $208 million and $193 million, respectively, of which $4 million and $9 million, respectively, were classified as current. The majority of our asset retirement obligations are associated with our CO2 business segment, where we are required to plug and abandon oil and gas wells that have been removed from service and to remove the surface wellhead equipment and compressors.
- Investments
Our investments primarily consist of equity investments where we hold significant influence over investee actions and for which we apply the equity method of accounting. As of December 31, 2017 and 2016, our investments consisted of the following (in millions):
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Citrus Corporation | $ | 1,698 | $ | 1,709 | |||
| SNG | 1,495 | 1,505 | |||||
| Ruby | 774 | 798 | |||||
| NGPL Holdings LLC | 687 | 475 | |||||
| Gulf LNG Holdings Group, LLC | 461 | 485 | |||||
| Plantation Pipe Line Company | 331 | 333 | |||||
| EagleHawk | 314 | 329 | |||||
| Utopia Holding LLC | 276 | 55 | |||||
| MEP | 253 | 328 | |||||
| Red Cedar Gathering Company | 187 | 191 | |||||
| Watco Companies, LLC | 182 | 180 | |||||
| Double Eagle Pipeline LLC | 149 | 151 | |||||
| FEP | 112 | 101 | |||||
| Liberty Pipeline Group LLC | 71 | 75 | |||||
| Bear Creek Storage | 63 | 61 | |||||
| Sierrita Gas Pipeline LLC | 55 | 57 | |||||
| Fort Union Gas Gathering L.L.C. | 12 | 25 | |||||
| All others | 178 | 169 | |||||
| Total investments | $ | 7,298 | $ | 7,027 |
As shown in the investment balance table above and the earnings (losses) from equity investments table below, our significant equity investments, as of December 31, 2017 consisted of the following:
| • | Citrus Corporation—We own a 50% interest in Citrus Corporation, the sole owner of Florida Gas Transmission Company, L.L.C. (Florida Gas). Florida Gas transports natural gas to cogeneration facilities, electric utilities, independent power producers, municipal generators, and local distribution companies through a 5,300-mile natural gas pipeline. Energy Transfer Partners L.P. operates Florida Gas and owns the remaining 50% interest in Citrus; |
| • | SNG—We operate SNG and own a 50% interest in SNG; and Evergreen Enterprise Holdings, LLC, a subsidiary of Southern Company, owns the remaining 50% interest. |
| • | Ruby—We operate Ruby and own the common interest in Ruby, the sole owner of the Ruby Pipeline natural gas transmission system. Pembina Pipeline Corporation (Pembina) owns the remaining interest in Ruby in the form of a convertible preferred interest. If Pembina converted its preferred interest into common interest, we and Pembina would each own a 50% common interest in Ruby; |
| • | NGPL Holdings LLC— We operate NGPL Holdings LLC and own a 50% interest in NGPL Holdings LLC, the indirect owner of NGPL and certain affiliates, collectively referred to in this report as NGPL, a major interstate natural gas pipeline and storage system. The remaining 50% interest is owned by Brookfield; |
| • | Gulf LNG Holdings Group, LLC—We operate Gulf LNG Holdings Group, LLC and own a 50% interest in Gulf LNG Holdings Group, LLC, the owner of a LNG receiving, storage and regasification terminal near Pascagoula, Mississippi, as well as pipeline facilities to deliver vaporized natural gas into third party pipelines for delivery into various markets around the country. The remaining 50% interest is owned by a variety of investment entities, including subsidiaries of The Blackstone Group, LP; Warburg Pincus, LLC; Kelso and Company; and Lightfoot Capital Partners, LP, which is majority owned by GE Energy Financial Services. |
| • | Plantation—We operate Plantation and own a 51.17% interest in Plantation, the sole owner of the Plantation refined petroleum products pipeline system. A subsidiary of Exxon Mobil Corporation owns the remaining interest. Each investor has an equal number of directors on Plantation’s board of directors, and board approval is required for certain corporate actions that are considered substantive participating rights; therefore, we do not control Plantation, and account for the investment under the equity method; |
| • | BHP Billiton Petroleum (Eagle Ford) LLC, (EagleHawk)—We own a 25% interest in EagleHawk, the sole owner of natural gas and condensate gathering systems serving the producers of the Eagle Ford shale formation. A subsidiary of BHP Billiton Petroleum operates EagleHawk and owns the remaining 75% ownership interest; |
| • | Utopia Holding L.L.C. — We operate Utopia Holding L.L.C. and own a 50% interest in Utopia Holding L.L.C. Riverstone Investment Group LLC owns the remaining 50% interest; |
| • | MEP—We operate MEP and own a 50% interest in MEP, the sole owner of the MEP natural gas pipeline system. The remaining 50% ownership interest is owned by subsidiaries of Energy Transfer Partners L.P.; |
| • | Red Cedar Gathering Company—We own a 49% interest in Red Cedar Gathering Company, the sole owner of the Red Cedar natural gas gathering, compression and treating system. The Southern Ute Indian Tribe owns the remaining 51% interest and serves as operator of Red Cedar; |
| • | Watco Companies, LLC—We hold a preferred and common equity investment in Watco Companies, LLC, the largest privately held short line railroad company in the U.S. We own 100,000 Class A and 50,000 Class B preferred shares and pursuant to the terms of the investment, receive priority, cumulative cash and stock distributions from the preferred shares at a rate of 3.25% and 3.00% per quarter, respectively, and participate partially in additional profit distributions at a rate equal to 0.4%. Neither class holds any voting powers, but do provide us certain approval rights, including the right to appoint one of the members to Watco’s board of managers. In addition to the senior interests, we also hold approximately 13,000 common equity units, which represents a 3.2% common ownership; |
| • | Double Eagle Pipeline LLC - We own a 50% equity interest in Double Eagle Pipeline LLC. The remaining 50% interest is owned by Magellan Midstream Partners; |
| • | FEP —We own a 50% interest in FEP, the sole owner of the Fayetteville Express natural gas pipeline system. Energy Transfer Partners, L.P. owns the remaining 50% interest and serves as operator of FEP; |
| • | Liberty Pipeline Group, LLC (Liberty) —We own a 50% interest in Liberty. ETC NGL Transport, LLC, a subsidiary of Energy Transfer Partners, L.P. owns the remaining 50% interest and serves as operator of Liberty; |
| • | Bear Creek Storage—We own a combined 75% interest in Bear Creek through: our wholly owned subsidiary’s (TGP) 50% interest and an additional 25% indirect interest through our 50% equity interest in SNG, which owns the remaining 50% interest; |
| • | Sierrita Gas Pipeline LLC — We operate Sierrita Gas Pipeline LLC and own a 35% equity interest in the Sierrita Gas Pipeline LLC. MGI Enterprises U.S. LLC, a subsidiary of PEMEX, owns 35%; and MIT Pipeline Investment Americas, Inc., a subsidiary of Mitsui & Co., Ltd, owns 30%; |
| • | Fort Union Gas Gathering LLC—We own a 37.04% equity interest in the Fort Union Gas Gathering LLC. Crestone Powder River LLC, a subsidiary of ONEOK Partners L.P., owns 37.04%; Powder River Midstream, LLC owns 11.11%; and Western Gas Wyoming, LLC owns the remaining 14.81%. Western Gas Resources, Inc. serves as operator of Fort Union Gas Gathering LLC; |
| • | Cortez Pipeline Company—We operate the Cortez CO2 pipeline system, and as of December 31, 2017, we owned a 52.98% interest in the Cortez Pipeline Company, the sole owner of the Cortez CO2 pipeline system. Mobil Cortez Pipeline Inc. owns 33.25%; and Cortez Vickers Pipeline Company owns the remaining 13.77%. |
Our earnings (losses) from equity investments were as follows (in millions):
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Citrus Corporation | $ | 108 | $ | 102 | $ | 96 | |||||
| SNG | 77 | 58 | — | ||||||||
| FEP | 53 | 51 | 55 | ||||||||
| Gulf LNG Holdings Group, LLC | 47 | 48 | 49 | ||||||||
| Plantation Pipe Line Company | 46 | 37 | 29 | ||||||||
| Cortez Pipeline Company(a) | 44 | 24 | (3 | ) | |||||||
| Ruby | 44 | 15 | 18 | ||||||||
| MEP | 38 | 40 | 45 | ||||||||
| EagleHawk | 24 | 10 | 24 | ||||||||
| Watco Companies, LLC | 19 | 25 | 16 | ||||||||
| Red Cedar Gathering Company(b) | 14 | 24 | 26 | ||||||||
| Fort Union Gas Gathering L.L.C.(c) | 10 | 1 | 16 | ||||||||
| NGPL Holdings LLC | 10 | 12 | — | ||||||||
| Liberty Pipeline Group LLC | 9 | 11 | 9 | ||||||||
| Bear Creek Storage | 8 | 2 | — | ||||||||
| Sierrita Gas Pipeline LLC | 7 | 7 | 9 | ||||||||
| Double Eagle Pipeline LLC | 7 | 5 | 3 | ||||||||
| Parkway Pipeline LLC | — | 14 | 5 | ||||||||
| All others | 13 | 11 | 17 | ||||||||
| Total earnings from equity investments | $ | 578 | $ | 497 | $ | 414 | |||||
| Amortization of excess costs | (61 | ) | (59 | ) | (51 | ) |
| (a) | 2017, 2016 and 2015 amounts include $(4) million, $9 million and $26 million, respectively, representing our share of a non-cash impairment charge (pre-tax) recorded by Cortez Pipeline Company. |
| (b) | 2017 amount includes non-cash impairment charges of $10 million (pre-tax) related to our investment. |
| (c) | 2016 amount includes non-cash impairment charges of $7 million (pre-tax) related to our investment. |
Summarized combined financial information for our significant equity investments (listed or described above) is reported below (in millions; amounts represent 100% of investee financial information):
| Year Ended December 31, | ||||||||||||
| Income Statement | 2017 | 2016 | 2015 | |||||||||
| Revenues | $ | 4,703 | $ | 4,084 | $ | 3,857 | ||||||
| Costs and expenses | 3,398 | 3,056 | 3,408 | |||||||||
| Net income | $ | 1,305 | $ | 1,028 | $ | 449 |
| December 31, | ||||||||
| Balance Sheet | 2017 | 2016 | ||||||
| Current assets | $ | 956 | $ | 892 | ||||
| Non-current assets | 22,344 | 22,170 | ||||||
| Current liabilities | 1,241 | 3,532 | ||||||
| Non-current liabilities | 10,605 | 9,187 | ||||||
| Partners’/owners’ equity | 11,454 | 10,343 |
- Goodwill
Changes in the amounts of our goodwill for each of the years ended December 31, 2017 and 2016 are summarized by reporting unit as follows (in millions):
| Natural Gas Pipelines Regulated | Natural Gas Pipelines Non-Regulated | CO2 | Products Pipelines | Products Pipelines Terminals | Terminals | Kinder Morgan Canada | Total | ||||||||||||||||||||||||
| Historical Goodwill | $ | 17,527 | $ | 5,812 | $ | 1,528 | $ | 2,125 | $ | 221 | $ | 1,584 | $ | 556 | $ | 29,353 | |||||||||||||||
| Accumulated impairment losses | (1,643 | ) | (1,597 | ) | — | (1,197 | ) | (70 | ) | (679 | ) | (377 | ) | (5,563 | ) | ||||||||||||||||
| December 31, 2015 | 15,884 | 4,215 | 1,528 | 928 | 151 | 905 | 179 | 23,790 | |||||||||||||||||||||||
| Currency translation | — | — | — | — | — | — | 6 | 6 | |||||||||||||||||||||||
| Divestitures(a) | (1,635 | ) | — | — | — | — | (9 | ) | — | (1,644 | ) | ||||||||||||||||||||
| December 31, 2016 | 14,249 | 4,215 | 1,528 | 928 | 151 | 896 | 185 | 22,152 | |||||||||||||||||||||||
| Currency translation | — | — | — | — | — | — | 13 | 13 | |||||||||||||||||||||||
| Divestitures(b) | — | — | — | — | — | (3 | ) | — | (3 | ) | |||||||||||||||||||||
| December 31, 2017 | $ | 14,249 | $ | 4,215 | $ | 1,528 | $ | 928 | $ | 151 | $ | 893 | $ | 198 | $ | 22,162 |
| (a) | 2016 includes $1,635 million related to the sale of a 50% interest in our SNG natural gas pipeline system by Natural Gas Pipelines Regulated to Southern Company and $9 million related to certain terminal divestitures. |
| (b) | 2017 includes $3 million related to certain terminal divestitures. |
Refer to Note 2 “Summary of Significant Accounting Policies—Goodwill” for a description of our accounting for goodwill and Note 4 “Impairments and Losses on Divestitures” for further discussion regarding impairments.
We determine the fair value of each reporting unit as of May 31 of each year based primarily on a market approach utilizing enterprise value to estimated EBITDA multiples of comparable companies. The value of each reporting unit is determined on a stand-alone basis from the perspective of a market participant representing the price estimated to be received in a sale of the reporting unit in an orderly transaction between market participants at the measurement date. For our Natural Gas Pipelines Non-Regulated reporting unit, our May 31, 2017 annual test included a discounted cash flow analysis (income approach) to evaluate the fair value of this reporting unit to provide additional indication of fair value based on the present value of cash flows this reporting unit is expected to generate in the future. We weighted the market and income approaches for this reporting unit to arrive at an estimated fair value of this reporting unit giving more weighting on the income approach and less on the market approach as we believed the value indicated using the income approach is more representative of the value that could be received from a market participant. As of May 31, 2017, each of our reporting units indicated a fair value in excess of their respective carrying values and step 2 was not required. The amount of excess fair value over the carrying value ranged from approximately 3% for our Natural Gas Pipelines Non-Regulated reporting unit to 89% for our Products Pipelines Terminals as of May 31, 2017. The results of our Step 1 analysis did not indicate an impairment of goodwill and we did not identify any triggers for further impairment analysis during the remainder of the year.
Due to the effect of commodity prices on market conditions that impacted the energy sector, during the fourth quarter 2015, we conducted an interim test of the recoverability of goodwill as of December 31, 2015, and concluded that the goodwill of our Natural Gas Pipelines - Non-Regulated reporting unit was impaired by $1.15 billion.
The fair value estimates of our reporting unit fair value, and in arriving at the fourth quarter 2015 impairment amount, were based on Level 3 inputs of the fair value hierarchy.
A continued period of volatile commodity prices could result in further deterioration of market multiples, comparable sales transactions prices, weighted average costs of capital, and our cash flow estimates. A significant unfavorable change to any one or combination of these factors would result in a change to the reporting unit fair values discussed above potentially resulting in additional impairments of long-lived assets, equity method investments, and/or goodwill. Such non-cash impairments could have a significant effect on our results of operations.
- Debt
We classify our debt based on the contractual maturity dates of the underlying debt instruments. We defer costs associated with debt issuance over the applicable term. These costs are then amortized as interest expense in our accompanying consolidated statements of income.
The following table provides detail on the principal amount of our outstanding debt balances. The table amounts exclude all debt fair value adjustments, including debt discounts, premiums and issuance costs (in millions):
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Unsecured term loan facility, variable rate, due January 26, 2019(a) | $ | — | $ | 1,000 | |||
| Senior note, floating rate, due January 15, 2023(a) | 250 | — | |||||
| Senior notes, 1.50% through 8.05%, due 2017 through 2098(a)(b)(c) | 13,136 | 13,236 | |||||
| Credit facility due November 26, 2019 | 125 | — | |||||
| Commercial paper borrowings | 240 | — | |||||
| KML Credit Facility(d) | — | — | |||||
| KMP senior notes, 2.65% through 9.00%, due 2017 through 2044(c)(e) | 18,885 | 19,485 | |||||
| TGP senior notes, 7.00% through 8.375%, due 2017 through 2037(c)(f) | 1,240 | 1,540 | |||||
| EPNG senior notes, 5.95% through 8.625%, due 2017 through 2032(c)(g) | 760 | 1,115 | |||||
| CIG senior notes, 4.15% and 6.85%, due 2026 and 2037(c) | 475 | 475 | |||||
| Kinder Morgan Finance Company, LLC, senior notes, 6.00% and 6.40%, due 2018 and 2036(c) | 786 | 786 | |||||
| Hiland Partners Holdings LLC, senior notes, 5.50%, due 2022(a)(h) | — | 225 | |||||
| EPC Building, LLC, promissory note, 3.967%, due 2017 through 2035 | 421 | 433 | |||||
| Trust I preferred securities, 4.75%, due March 31, 2028(i) | 221 | 221 | |||||
| KMGP, $1,000 Liquidation Value Series A Fixed-to-Floating Rate Term Cumulative Preferred Stock(j) | 100 | 100 | |||||
| Other miscellaneous debt(k) | 277 | 285 | |||||
| Total debt – KMI and Subsidiaries | 36,916 | 38,901 | |||||
| Less: Current portion of debt(l) | 2,828 | 2,696 | |||||
| Total long-term debt – KMI and Subsidiaries(m) | $ | 34,088 | $ | 36,205 |
| (a) | On August 10, 2017, we issued $1 billion of unsecured senior notes with a fixed rate of 3.15% and $250 million of unsecured senior notes with a floating rate, both due January 2023. The net proceeds from the notes were primarily used to repay the principal amount of Hiland’s 5.50% senior notes due 2022, plus accrued interest, and to repay the $1 billion term loan facility due 2019. Interest on the 3.15% senior notes due 2023 is payable semi-annually in arrears on January 15 and July 15 of each year, beginning on January 15, 2018, and the notes will mature on January 15, 2023. Interest on the floating rate senior notes due 2023 is payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, beginning on October 15, 2017, and such notes will mature on January 15, 2023. We may redeem all or a part of the 3.15% fixed rate notes at any time at the redemption prices. The floating rate notes are not redeemable prior to maturity. See (b) and (h) below. |
| (b) | Amounts include senior notes that are denominated in Euros and have been converted to U.S. dollars and are respectively reported above at the December 31, 2017 exchange rate of 1.2005 U.S. dollars per Euro and the December 31, 2016 exchange rate of 1.0517 U.S. dollars per Euro. For the year ended December 31, 2017, our debt balance increased by $186 million as a result of the change in the exchange rate of U.S dollars per Euro. The increase in debt due to the changes in exchange rates is offset by a corresponding change in the value of cross-currency swaps reflected in “Deferred charges and other assets” and “ Other long-term liabilities and deferred credits” on our consolidated balance sheets. At the time of issuance, we entered into cross-currency swap agreements associated with these senior notes, effectively converting these Euro-denominated senior notes to U.S. dollars (see Note 14 “Risk Management—Foreign Currency Risk Management”). In June 2017, we repaid $786 million of maturing 7.00% senior notes and in December 2017, we repaid $500 million of maturing 2.00% senior notes. The December 31, 2017 balance includes the $1 billion of unsecured term notes with a fixed rate of 3.15% due January 15, 2023 discussed in (a) above. |
| (c) | Notes provide for the redemption at any time at a price equal to 100% of the principal amount of the notes plus accrued interest to the redemption date plus a make whole premium and are subject to a number of restrictions and covenants. The most restrictive of these include limitations on the incurrence of liens and limitations on sale-leaseback transactions. |
| (d) | The KML Credit Facility is denominated in C$ and has been converted to U.S. dollars and reported above at the December 31, 2017 exchange rate of 0.7971 U.S. dollars per C$. See “—Credit Facilities and Restrictive Covenants” below. |
| (e) | In February 2017, we repaid $600 million of maturing 6.00% senior notes. |
| (f) | In April 2017, we repaid $300 million of maturing 7.50% senior notes. |
| (g) | In April 2017, we repaid $355 million of maturing 5.95% senior notes. |
| (h) | In August 2017, we repaid $225 million of the outstanding principal amount of 5.50% senior notes with a maturity date of May 15, 2022 using net proceeds from the sale of the January 2023 notes (see (a) above). We recognized a $3.8 million loss from the early extinguishment of debt, included within “Interest, net” on the accompanying consolidated statements of income for the year ended December 31, 2017 consisting of a $9.3 million premium on the debt repaid and a $5.5 million gain from the write-off of unamortized purchase accounting associated with the early extinguished debt. |
| (i) | Capital Trust I (Trust I), is a 100%-owned business trust that as of December 31, 2017, had 4.4 million of 4.75% trust convertible preferred securities outstanding (referred to as the Trust I Preferred Securities). Trust I exists for the sole purpose of issuing preferred securities and investing the proceeds in 4.75% convertible subordinated debentures, which are due 2028. Trust I’s sole source of income is interest earned on these debentures. This interest income is used to pay distributions on the preferred securities. We provide a full and unconditional guarantee of the Trust I Preferred Securities. There are no significant restrictions from these securities on our ability to obtain funds from our subsidiaries by distribution, dividend or loan. The Trust I Preferred Securities are non-voting (except in limited circumstances), pay quarterly distributions at an annual rate of 4.75%, carry a liquidation value of $50 per security plus accrued and unpaid distributions and are convertible at any time prior to the close of business on March 31, 2028, at the option of the holder, into the following mixed consideration: (i) 0.7197 of a share of our Class P common stock; (ii) $25.18 in cash without interest; and (iii) 1.100 warrants to purchase a share of our Class P common stock. Our warrants expired on May 25, 2017, along with the portion of the mixed consideration that provided for the conversion into 1.100 warrants to purchase a share of our Class P common stock. We have the right to redeem these Trust I Preferred Securities at any time. Because of the substantive conversion rights of the securities into the mixed consideration, we bifurcated the fair value of the Trust I Preferred Securities into debt and equity components and as of December 31, 2017, the outstanding balance of $221 million (of which $111 million was classified as current) was bifurcated between debt ($200 million) and equity ($21 million). |
| (j) | As of December 31, 2017 and 2016, KMGP had outstanding, 100,000 shares of its $1,000 Liquidation Value Series A Fixed-to-Floating Rate Term Cumulative Preferred Stock due 2057. Since August 18, 2012, dividends on the preferred stock accumulate at a floating rate of the 3-month LIBOR plus 3.8975% and are payable quarterly in arrears, when and if declared by KMGP’s board of directors, on February 18, May 18, August 18 and November 18 of each year, beginning November 18, 2012. The preferred stock has approval rights over a commencement of or filing of voluntary bankruptcy by KMP or its SFPP or Calnev subsidiaries. |
| (k) | In conjunction with the construction of the Totem Gas Storage facility (Totem) and the High Plains pipeline (High Plains), CIG’s joint venture partner in WYCO funded 50% of the construction costs. Upon project completion, the advances were converted into a financing obligation to WYCO. As of December 31, 2017, the principal amounts of the Totem and High Plains financing obligations were $69 million and $88 million, respectively, which will be paid in monthly installments through 2039 based on the initial lease term. The interest rate on these obligations is 15.5%, payable on a monthly basis. |
| (l) | Amounts include KMI and KML outstanding credit facility borrowings, commercial paper borrowings and other debt maturing within 12 months. See “—Current Portion of Debt” below. |
| (m) | Excludes our “Debt fair value adjustments” which, as of December 31, 2017 and 2016, increased our combined debt balances by $927 million and $1,149 million, respectively. In addition to all unamortized debt discount/premium amounts, debt issuance costs and purchase accounting on our debt balances, our debt fair value adjustments also include amounts associated with the offsetting entry for hedged debt and any unamortized portion of proceeds received from the early termination of interest rate swap agreements. For further information about our debt fair value adjustments, see —“Debt Fair Value Adjustments” below. |
We and substantially all of our wholly owned domestic subsidiaries are a party to a cross guarantee agreement whereby each party to the agreement unconditionally guarantees, jointly and severally, the payment of specified indebtedness of each other party to the agreement. Also, see Note 19 “Guarantee of Securities of Subsidiaries.”
Credit Facilities and Restrictive Covenants
KMI
On January 26, 2016, we increased the capacity of our revolving credit agreement, initially entered into during 2014, from $4.0 billion to $5.0 billion. The other terms of our revolving credit agreement remain the same. We also maintain a $4.0 billion commercial paper program through the private placement of short-term notes. The notes mature up to 270 days from the date of issue and are not redeemable or subject to voluntary prepayment by us prior to maturity. The notes are sold at par value less a discount representing an interest factor or if interest bearing, at par. Borrowings under our revolving credit facility can be used for working capital and other general corporate purposes and as a backup to our commercial paper program. Borrowings under our commercial paper program reduce the borrowings allowed under our credit facility.
Our credit facility borrowings bear interest at either (i) LIBOR plus an applicable margin ranging from 1.125% to 2.000% per annum based on our credit ratings or (ii) the greatest of (1) the Federal Funds Rate plus 0.5%; (2) the Prime Rate; and (3) LIBOR Rate for a one month eurodollar loan, plus 1%, plus, in each case, an applicable margin ranging from 0.125% to 1.00% per annum based on our credit rating.
Our credit facility included the following restrictive covenants as of December 31, 2017:
| • | total debt divided by earnings before interest, income taxes, depreciation and amortization may not exceed: |
| • | 6.50: 1.00, for the period ended on or prior to December 31, 2017; or |
| • | 6.25: 1.00, for the period ended after December 31, 2017 and on or prior to December 31, 2018; or |
| • | 6.00: 1.00, for the period ended after December 31, 2018; |
| • | certain limitations on indebtedness, including payments and amendments; |
| • | certain limitations on entering into mergers, consolidations, sales of assets and investments; |
| • | limitations on granting liens; and |
| • | prohibitions on making any dividend to shareholders if an event of default exists or would exist upon making such dividend. |
As of December 31, 2017, we had $125 million outstanding under our credit facility, $240 million outstanding under our commercial paper program and $107 million in letters of credit. Our availability under this facility as of December 31, 2017 was $4,528 million. As of December 31, 2017, we were in compliance with all required covenants.
KML
On June 16, 2017, KML’s indirect subsidiaries, Kinder Morgan Cochin ULC and Trans Mountain Pipeline ULC, entered into a definitive credit agreement establishing (i) a C$4.0 billion revolving construction facility for the purposes of funding the development, construction and completion of the TMEP, (ii) a C$1.0 billion revolving contingent credit facility for the purpose of funding, if necessary, additional TMEP costs (and, subject to the need to fund such additional costs, meeting the Canadian NEB-mandated liquidity requirements) and (iii) a C$500 million revolving working capital facility to be used for working capital and other general corporate purposes (collectively, the “KML Credit Facility”). On January 23, 2018, KML entered into an agreement amending certain terms of its Credit Facility to, among other things, provide additional funding certainty with respect to each tranche of its Credit Facility. The KML Credit Facility has a five-year term and is with a syndicate of financial institutions with Royal Bank of Canada as the administrative agent. Any undrawn commitments under the KML Credit Facility will incur a standby fee of 0.30% to 0.625%, with the range dependent on the credit ratings of Kinder Morgan Cochin ULC or KML. The KML Credit Facility is guaranteed by KML and all of the non-borrower subsidiaries of KML and are secured by a first lien security interest on all of the assets of KML and the equity and assets of the other guarantors.
Draw downs of funds on the KML Credit Facility bear interest dependent on the type of loans requested and are as follows:
| • | bankers’ acceptances or LIBOR loans are at an annual rate of approximately Canadian Dealer Offered Rate (CDOR); |
| • | or the LIBOR, as the case may be, plus a fixed spread ranging from 1.50% to 2.50%; |
| • | loans in Canadian dollars or U.S. dollars are at an annual rate of approximately the Canadian prime rate or the U.S. dollar base rate, as the case may be, plus a fixed spread ranging from 0.50% to 1.50%, in each case, with the range dependent on the credit ratings of KML; and |
| • | letters of credit (under the working capital facility only) will have issuance fees based on an annual rate of approximately CDOR plus a fixed spread ranging from 1.50% to 2.50%, with the range dependent on the credit ratings of the Company. |
The foregoing rates and fees will increase by 0.25% upon the fourth anniversary of the KML Credit Facility.
The KML Credit Facility includes various financial and other covenants including:
| • | a maximum ratio of consolidated total funded debt to consolidated capitalization of 70%; |
| • | restrictions on ability to incur debt; |
| • | restrictions on ability to make dispositions, restricted payments and investments; |
| • | restrictions on granting liens and on sale-leaseback transactions; |
| • | restrictions on ability to engage in transactions with affiliates; and |
| • | restrictions on ability to amend organizational documents and engage in corporate reorganization transactions. |
As of December 31, 2017, KML had C$447 million available under its five year C$500 million working capital facility (after reducing the capacity for the C$53.0 million (U.S.$42 million) in letters of credit) and no amounts outstanding under its C$4.0 billion construction facility or its C$1.0 billion revolving contingent credit facility. As of December 31, 2017, KML was in compliance with all required covenants.
Current Portion of Debt
The primary components of our current portion of debt include the following significant series of long-term notes (in millions):
| As of December 31, 2017 | $750 | Kinder Morgan Finance Company, LLC, 6.00% senior notes due January 2018 | ||
| $82 | 7.00% senior notes due February 2018 | |||
| $975 | KMP 5.95% senior notes due February 2018 | |||
| $477 | 7.25% senior notes due June 2018 | |||
| As of December 31, 2016 | $600 | KMP 6.00% senior notes due February 2017 | ||
| $300 | TGP 7.50% senior notes due April 2017 | |||
| $355 | EPNG 5.95% senior notes due April 2017 | |||
| $786 | 7.00% senior notes due June 2017 | |||
| $500 | 2.00% senior notes due December 2017 |
Subsequent Event—Debt Repayments
In January 2018, we repaid $750 million of maturing 6.00% Kinder Morgan Finance Company, LLC senior notes and in February 2018, we repaid $82 million of maturing 7.00% senior notes both listed above in current portion of debt as of December 31, 2017.
Maturities of Debt
The scheduled maturities of the outstanding debt balances, excluding debt fair value adjustments as of December 31, 2017, are summarized as follows (in millions):
| Year | Total | |||
| 2018 | $ | 2,828 | ||
| 2019 | 2,820 | |||
| 2020 | 2,204 | |||
| 2021 | 2,422 | |||
| 2022 | 2,558 | |||
| Thereafter | 24,084 | |||
| Total | $ | 36,916 |
Debt Fair Value Adjustments
The carrying value adjustment to debt securities whose fair value is being hedged is included within “Debt fair value adjustments” on our accompanying consolidated balance sheets. “Debt fair value adjustments” also include unamortized debt discount/premiums, purchase accounting debt fair value adjustments, unamortized portion of proceeds received from the early termination of interest rate swap agreements, and debt issuance costs. As of December 31, 2017, the weighted-average amortization period of the unamortized premium from the termination of interest rate swaps was approximately 16 years. The following table summarizes the “Debt fair value adjustments” included on our accompanying consolidated balance sheets (in millions):
| December 31, | ||||||||
| Debt Fair Value Adjustments | 2017 | 2016 | ||||||
| Purchase accounting debt fair value adjustments | $ | 719 | $ | 806 | ||||
| Carrying value adjustment to hedged debt | 115 | 220 | ||||||
| Unamortized portion of proceeds received from the early termination of interest rate swap agreements | 297 | 342 | ||||||
| Unamortized debt discounts, net | (74 | ) | (80 | ) | ||||
| Unamortized debt issuance costs | (130 | ) | (139 | ) | ||||
| Total debt fair value adjustments | $ | 927 | $ | 1,149 |
Interest Rates, Interest Rate Swaps and Contingent Debt
The weighted average interest rate on all of our borrowings was 5.02% during 2017 and 4.95% during 2016. Information on our interest rate swaps is contained in Note 14 “Risk Management.” For information about our contingent debt agreements, see Note 13 “Commitments and Contingent Liabilities—Contingent Debt”).
- Share-based Compensation and Employee Benefits
Share-based Compensation
Class P Shares
Kinder Morgan, Inc. Amended and Restated Stock Compensation Plan for Non-Employee Directors
We have a Kinder Morgan, Inc. Amended and Restated Stock Compensation Plan for Non-Employee Directors, in which our eligible non-employee directors participate. The plan recognizes that the compensation paid to each eligible non-employee director is fixed by our board, generally annually, and that the compensation is payable in cash. Pursuant to the plan, in lieu of receiving some or all of the cash compensation, each eligible non-employee director may elect to receive shares of Class P common stock. Each election will be generally at or around the first board meeting in January of each calendar year and will be effective for the entire calendar year. An eligible director may make a new election each calendar year. The total number of shares of Class P common stock authorized under the plan is 250,000. During 2017, 2016 and 2015, we made restricted Class P common stock grants to our non-employee directors of 17,740, 31,880 and 9,580, respectively. These grants were valued at time of issuance at $400,000, $400,000 and $401,000, respectively. All of the restricted stock awards made to non-employee directors vest during a six-month period.
Kinder Morgan, Inc. 2015 Amended and Restated Stock Incentive Plan
The Kinder Morgan, Inc. 2015 Amended and Restated Stock Incentive Plan is an equity awards plan available to eligible employees. The total number of shares of Class P common stock authorized under the plan is 33,000,000. The following table sets forth a summary of activity and related balances of our restricted stock awards excluding that issued to non-employee directors (in millions, except share and per share amounts):
| Year Ended | Year Ended | Year Ended | ||||||||||||||||||
| December 31, 2017 | December 31, 2016 | December 31, 2015 | ||||||||||||||||||
| Shares | Weighted Average Grant Date Fair Value | Shares | Weighted Average Grant Date Fair Value | Shares | Weighted Average Grant Date Fair Value | |||||||||||||||
| Outstanding at beginning of period | 9,038,137 | $ | 32.72 | 7,645,105 | $ | 37.91 | 7,373,294 | $ | 37.63 | |||||||||||
| Granted | 3,221,691 | 19.52 | 2,816,599 | 21.36 | 1,488,467 | 38.20 | ||||||||||||||
| Vested | (1,501,939 | ) | 36.67 | (1,226,652 | ) | 38.53 | (817,797 | ) | 35.66 | |||||||||||
| Forfeited | (239,545 | ) | 28.34 | (196,915 | ) | 35.74 | (398,859 | ) | 38.51 | |||||||||||
| Outstanding at end of period | 10,518,344 | $ | 28.21 | 9,038,137 | $ | 32.72 | 7,645,105 | $ | 37.91 |
The intrinsic value of restricted stock awards vested during the years ended December 31, 2017, 2016 and 2015 was $30 million, $25 million and $31 million, respectively. Restricted stock awards made to employees have vesting periods ranging from 1 year with variable vesting dates to 10 years. Following is a summary of the future vesting of our outstanding restricted stock awards:
| Year | Vesting of Restricted Shares | ||
| 2018 | 2,272,019 | ||
| 2019 | 4,268,118 | ||
| 2020 | 3,647,967 | ||
| 2021 | 199,850 | ||
| 2022 | 65,928 | ||
| Thereafter | 64,462 | ||
| Total Outstanding | 10,518,344 |
The related compensation costs less estimated forfeitures is generally recognized ratably over the vesting period of the restricted stock awards. Upon vesting, the grants will be paid in our Class P common shares.
During 2017, 2016 and 2015, we recorded $65 million, $66 million and $52 million, respectively, in expense related to restricted stock awards and capitalized approximately $9 million, $9 million and $15 million, respectively. At December 31, 2017 and 2016, unrecognized restricted stock awards compensation costs, less estimated forfeitures, was approximately $112 million and $133 million, respectively.
KML Restricted Shares
KML adopted the 2017 Restricted Share Unit Plan for Employees, an equity awards plan, for its eligible employees, and the 2017 Restricted Share Unit Plan for Non-Employee Directors, in which its eligible non-employee directors participate. During the year ended December 31, 2017, we recognized $1 million of expense and capitalized $1 million related to these compensation programs. At December 31, 2017, unrecognized compensation costs, less estimated forfeitures associated with KML’s restricted share unit awards, was approximately $8 million.
Pension and Other Postretirement Benefit Plans
Savings Plan
We maintain a defined contribution plan covering eligible U.S. employees. We contribute 5% of eligible compensation for most of the plan participants. Certain collectively bargained participants receive Company contributions in accordance with collective bargaining agreements. The total cost for our savings plan was approximately $47 million, $47 million, and $46
million for the years ended December 31, 2017, 2016 and 2015, respectively.
Pension Plans
Our U.S. pension plans are defined benefit plans that cover substantially all of our U.S. employees and provide benefits under a cash balance formula. A participant in the cash balance formula accrues benefits through contribution credits based on a combination of age and years of service, multiplied by eligible compensation. Interest is also credited to the participant’s plan account. A participant becomes fully vested in the plan after three years and may take a lump sum distribution upon termination of employment or retirement. Certain collectively bargained and grandfathered employees accrue benefits through career pay or final pay formulas.
Two of our subsidiaries, Kinder Morgan Canada Inc. and Trans Mountain Pipeline ULC (as general partner of Trans Mountain Pipeline L.P.), are sponsors of pension plans for eligible Canadian and Trans Mountain pipeline employees. The plans include registered defined benefit pension plans, supplemental unfunded arrangements (which provide pension benefits in excess of statutory limits) and defined contributory plans. Benefits under the defined benefit components accrue through career pay or final pay formulas. The net periodic benefit costs, contributions and liability amounts associated with our Canadian plans are not material to our consolidated income statements or balance sheets; however, we began to include the activity and balances associated with our Canadian plans (including our Canadian OPEB plans discussed below) in the following disclosures on a prospective basis beginning in 2016. For the year ended December 31, 2015, the associated net periodic benefit costs for these combined Canadian plans of $12 million were reported separately.
Other Postretirement Benefit Plans
We and certain of our U.S. subsidiaries provide other postretirement benefits (OPEB), including medical benefits for closed groups of retired employees and certain grandfathered employees and their dependents, and limited postretirement life insurance benefits for retired employees. Our Canadian subsidiaries also provide OPEB benefits to current and future retirees and their dependents. The U.S. plans provide a fixed subsidy to post-age 65 Medicare eligible participants to purchase coverage through a retiree Medicare exchange. Medical benefits under these OPEB plans may be subject to deductibles, co-payment provisions, dollar caps and other limitations on the amount of employer costs, and we reserve the right to change these benefits.
Additionally, our subsidiary SFPP has incurred certain liabilities for postretirement benefits to certain current and former employees, their covered dependents, and their beneficiaries. However, the net periodic benefit costs, contributions and liability amounts associated with the SFPP postretirement benefit plan are not material to our consolidated income statements or balance sheets.
Benefit Obligation, Plan Assets and Funded Status. The following table provides information about our pension and OPEB plans as of and for each of the years ended December 31, 2017 and 2016 (in millions):
| Pension Benefits | OPEB | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Change in benefit obligation: | |||||||||||||||
| Benefit obligation at beginning of period | $ | 2,884 | $ | 2,654 | $ | 473 | $ | 509 | |||||||
| Service cost | 40 | 36 | 1 | 1 | |||||||||||
| Interest cost | 88 | 89 | 13 | 16 | |||||||||||
| Actuarial loss (gain) | 155 | 127 | (16 | ) | (42 | ) | |||||||||
| Benefits paid | (180 | ) | (180 | ) | (38 | ) | (41 | ) | |||||||
| Participant contributions | 3 | 3 | 2 | 2 | |||||||||||
| Medicare Part D subsidy receipts | — | — | 1 | 1 | |||||||||||
| Exchange rate changes | 13 | 4 | 1 | 1 | |||||||||||
| Settlements | (21 | ) | — | — | — | ||||||||||
| Other(a) | — | 151 | (12 | ) | 26 | ||||||||||
| Benefit obligation at end of period | 2,982 | 2,884 | 425 | 473 |
| Change in plan assets: | |||||||||||||||
| Fair value of plan assets at beginning of period | 2,160 | 2,050 | 332 | 325 | |||||||||||
| Actual return on plan assets | 292 | 157 | 29 | 29 | |||||||||||
| Employer contributions | 32 | 8 | 9 | 16 | |||||||||||
| Participant contributions | 3 | 3 | 2 | 2 | |||||||||||
| Medicare Part D subsidy receipts | — | — | 1 | 1 | |||||||||||
| Benefits paid | (180 | ) | (180 | ) | (38 | ) | (41 | ) | |||||||
| Exchange rate changes | 10 | 3 | — | — | |||||||||||
| Settlements | (21 | ) | — | — | — | ||||||||||
| Other(a) | — | 119 | — | — | |||||||||||
| Fair value of plan assets at end of period | 2,296 | 2,160 | 335 | 332 | |||||||||||
| Funded status - net liability at December 31, | $ | (686 | ) | $ | (724 | ) | $ | (90 | ) | $ | (141 | ) |
| (a) | 2017 amounts represent December 31, 2016 balances associated with our Plantation Pipeline OPEB plan that are no longer included in these disclosures. 2016 amounts primarily represent December 31, 2015 balances associated with our Canadian pension and OPEB plans for prospective inclusion in these disclosures, which associated net periodic benefit costs were reported separately in years prior to 2016. |
Components of Funded Status. The following table details the amounts recognized in our balance sheets at December 31, 2017 and 2016 related to our pension and OPEB plans (in millions):
| Pension Benefits | OPEB | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Non-current benefit asset(a) | $ | — | $ | — | $ | 198 | $ | 153 | |||||||
| Current benefit liability | — | — | (15 | ) | (16 | ) | |||||||||
| Non-current benefit liability | (686 | ) | (724 | ) | (273 | ) | (278 | ) | |||||||
| Funded status - net liability at December 31, | $ | (686 | ) | $ | (724 | ) | $ | (90 | ) | $ | (141 | ) |
| (a) | 2017 and 2016 OPEB amounts include $33 million and $29 million, respectively, of non-current benefit assets related to a plan we sponsor which is associated with employee services provided to an unconsolidated joint venture, and for which we have recorded an offsetting related party deferred credit. |
Components of Accumulated Other Comprehensive (Loss) Income. The following table details the amounts of pre-tax accumulated other comprehensive (loss) income at December 31, 2017 and 2016 related to our pension and OPEB plans which are included on our accompanying consolidated balance sheets, including the portion attributable to our noncontrolling interests, (in millions):
| Pension Benefits | OPEB | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Unrecognized net actuarial (loss) gain | $ | (635 | ) | $ | (682 | ) | $ | 88 | $ | 69 | |||||
| Unrecognized prior service (cost) credit | (4 | ) | (5 | ) | 17 | 18 | |||||||||
| Accumulated other comprehensive (loss) income | $ | (639 | ) | $ | (687 | ) | $ | 105 | $ | 87 |
We anticipate that approximately $34 million of pre-tax accumulated other comprehensive loss, inclusive of amounts reported as noncontrolling interests, will be recognized as part of our net periodic benefit cost in 2018, including approximately $36 million of unrecognized net actuarial loss and approximately $2 million of unrecognized prior service credit.
Our accumulated benefit obligation for our pension plans was $2,840 million and $2,834 million at December 31, 2017 and 2016, respectively.
Our accumulated postretirement benefit obligation for our OPEB plans, whose accumulated postretirement benefit obligations exceeded the fair value of plan assets, was $373 million and $415 million at December 31, 2017 and 2016, respectively. The fair value of these plans’ assets was approximately $84 million and $121 million at December 31, 2017 and 2016, respectively.
Plan Assets. The investment policies and strategies are established by the Fiduciary Committee for the assets of each of the U.S. pension and OPEB plans and by the Pension Committee for the assets of the Canadian pension plans (the “Committees”), which are responsible for investment decisions and management oversight of the plans. The stated philosophy of each of the Committees is to manage these assets in a manner consistent with the purpose for which the plans were established and the time frame over which the plans’ obligations need to be met. The objectives of the investment management program are to (1) meet or exceed plan actuarial earnings assumptions over the long term and (2) provide a reasonable return on assets within established risk tolerance guidelines and to maintain the liquidity needs of the plans with the goal of paying benefit and expense obligations when due. In seeking to meet these objectives, the Committees recognize that prudent investing requires taking reasonable risks in order to raise the likelihood of achieving the targeted investment returns. In order to reduce portfolio risk and volatility, the Committees have each adopted a strategy of using multiple asset classes.
As of December 31, 2017, the allowable range for asset allocations in effect for our U.S. pension plan were 34% to 59% equity, 37% to 57% fixed income, 0% to 5% cash, 0% to 2% alternative investments and 0% to 10% company securities (KMI Class P common stock and/or debt securities). As of December 31, 2017, the allowable range for asset allocations in effect for our U.S. retiree medical and retiree life insurance plans were 15% to 55% equity, 15% to 47% fixed income, 0% to 20% cash and 13% to 39% MLPs. As of December 31, 2017, the target asset allocation for our Canadian pension plans that are closed to new participants was 90% fixed income and 10% equity. The target allocation for the remaining Canadian pension plans were 45% fixed income and 55% equity.
Below are the details of our pension and OPEB plan assets by class and a description of the valuation methodologies used for assets measured at fair value.
| • | Level 1 assets’ fair values are based on quoted market prices for the instruments in actively traded markets. Included in this level are cash, equities, exchange traded mutual funds and MLPs. These investments are valued at the closing price reported on the active market on which the individual securities are traded. |
| • | Level 2 assets’ fair values are primarily based on pricing data representative of quoted prices for similar assets in active markets (or identical assets in less active markets). Included in this level are short-term investment funds, fixed income securities and derivatives. Short-term investment funds are valued at amortized cost, which approximates fair value. The fixed income securities’ fair values are primarily based on an evaluated price which is based on a compilation of primarily observable market information or a broker quote in a non-active market. Derivatives are exchange-traded through clearinghouses and are valued based on these prices. |
| • | Level 3 assets’ fair values are calculated using valuation techniques that require inputs that are both significant to the fair value measurement and are unobservable, or are similar to Level 2 assets. Included in this level are guaranteed |
insurance contracts and immediate participation guarantee contracts. These contracts are valued at contract value, which approximates fair value.
| • | Plan assets with fair values that are based on the net asset value per share, or its equivalent (NAV), as reported by the issuers are determined based on the fair value of the underlying securities as of the valuation date and include common/collective trust funds, private investment funds, limited partnerships, and fixed income trusts. The plan assets measured at NAV are not categorized within the fair value hierarchy described above, but are separately identified in the following tables. |
Listed below are the fair values of our pension and OPEB plans’ assets that are recorded at fair value by class and categorized by fair value measurement used at December 31, 2017 and 2016 (in millions):
| Pension Assets | |||||||||||||||||||||||||||||||
| 2017 | 2016 | ||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
| Measured within fair value hierarchy | |||||||||||||||||||||||||||||||
| Cash | $ | 6 | $ | — | $ | — | $ | 6 | $ | 10 | $ | — | $ | — | $ | 10 | |||||||||||||||
| Short-term investment funds | — | 65 | — | 65 | — | 100 | — | 100 | |||||||||||||||||||||||
| Mutual funds(a) | 245 | — | — | 245 | 197 | — | — | 197 | |||||||||||||||||||||||
| Equities(b) | 278 | — | — | 278 | 283 | — | — | 283 | |||||||||||||||||||||||
| Fixed income securities(c) | — | 416 | — | 416 | — | 428 | — | 428 | |||||||||||||||||||||||
| Immediate participation guarantee contract | — | — | — | — | — | — | 16 | 16 | |||||||||||||||||||||||
| Derivatives | — | 5 | — | 5 | — | (2 | ) | — | (2 | ) | |||||||||||||||||||||
| Subtotal | $ | 529 | $ | 486 | $ | — | 1,015 | $ | 490 | $ | 526 | $ | 16 | 1,032 | |||||||||||||||||
| Measured at NAV(d) | |||||||||||||||||||||||||||||||
| Common/collective trusts(e) | 895 | 829 | |||||||||||||||||||||||||||||
| Private investment funds(f) | 337 | 290 | |||||||||||||||||||||||||||||
| Private limited partnerships(g) | 49 | 9 | |||||||||||||||||||||||||||||
| Subtotal | 1,281 | 1,128 | |||||||||||||||||||||||||||||
| Total plan assets fair value | $ | 2,296 | $ | 2,160 |
| (a) | Includes mutual funds which are invested in equity. |
| (b) | Plan assets include $110 million and $126 million of KMI Class P common stock for 2017 and 2016, respectively. |
| (c) | For 2016, plan assets include $1 million of KMI debt securities. |
| (d) | Plan assets for which fair value was measured using NAV as a practical expedient. |
| (e) | Common/collective trust funds were invested in approximately 36% fixed income and 64% equity in 2017 and 39% fixed income and 61% equity in 2016. |
| (f) | Private investment funds were invested in approximately 52% fixed income and 48% equity in 2017 and 54% fixed income and 46% equity in 2016. |
| (g) | Includes assets invested in real estate, venture and buyout funds. 2016 also includes high yield investments. |
| OPEB Assets | |||||||||||||||||||||||||||||||
| 2017 | 2016 | ||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
| Measured within fair value hierarchy | |||||||||||||||||||||||||||||||
| Short-term investment funds | $ | — | $ | 7 | $ | — | $ | 7 | $ | — | $ | 15 | $ | — | $ | 15 | |||||||||||||||
| Equities(a) | 16 | — | — | 16 | 11 | — | — | 11 | |||||||||||||||||||||||
| MLPs | 50 | — | — | 50 | 57 | — | — | 57 | |||||||||||||||||||||||
| Guaranteed insurance contracts | — | — | 49 | 49 | — | — | 47 | 47 | |||||||||||||||||||||||
| Mutual funds | 1 | — | — | 1 | 1 | — | — | 1 | |||||||||||||||||||||||
| Subtotal | $ | 67 | $ | 7 | $ | 49 | 123 | $ | 69 | $ | 15 | $ | 47 | 131 | |||||||||||||||||
| Measured at NAV(b) | |||||||||||||||||||||||||||||||
| Common/collective trusts(c) | 68 | 68 | |||||||||||||||||||||||||||||
| Fixed income trusts | 66 | 64 | |||||||||||||||||||||||||||||
| Limited partnerships(d) | 78 | 69 | |||||||||||||||||||||||||||||
| Subtotal | 212 | 201 | |||||||||||||||||||||||||||||
| Total plan assets fair value | $ | 335 | $ | 332 |
| (a) | Plan assets include $2 million of KMI Class P common stock for each 2017 and 2016. |
| (b) | Plan assets for which fair value was measured using NAV as a practical expedient. |
| (c) | Common/collective trust funds were invested in approximately 71% equity and 29% fixed income securities for 2017 and 72% equity and 28% fixed income securities for 2016. |
| (d) | Limited partnerships were invested in global equity securities. |
The following tables present the changes in our pension and OPEB plans’ assets included in Level 3 for the years ended December 31, 2017 and 2016 (in millions):
| Pension Assets | |||||||||||||||||||
| Balance at Beginning of Period | Transfers In (Out) | Realized and Unrealized Gains (Losses), net | Purchases (Sales), net | Balance at End of Period | |||||||||||||||
| 2017 | |||||||||||||||||||
| Insurance contracts | $ | 16 | $ | — | $ | — | $ | (16 | ) | $ | — | ||||||||
| 2016 | |||||||||||||||||||
| Insurance contracts | $ | 15 | $ | — | $ | 1 | $ | — | $ | 16 |
| OPEB Assets | |||||||||||||||||||
| Balance at Beginning of Period | Transfers In (Out) | Realized and Unrealized Gains (Losses), net | Purchases (Sales), net | Balance at End of Period | |||||||||||||||
| 2017 | |||||||||||||||||||
| Insurance contracts | $ | 47 | $ | — | $ | 5 | $ | (3 | ) | $ | 49 | ||||||||
| 2016 | |||||||||||||||||||
| Insurance contracts | $ | 49 | $ | — | $ | (2 | ) | $ | — | $ | 47 |
Changes in the underlying value of Level 3 assets due to the effect of changes of fair value were immaterial for the years ended December 31, 2017 and 2016.
Expected Payment of Future Benefits and Employer Contributions. As of December 31, 2017, we expect to make the following benefit payments under our plans (in millions):
| Fiscal year | Pension Benefits | OPEB(a) | ||||||
| 2018 | $ | 244 | $ | 36 | ||||
| 2019 | 241 | 36 | ||||||
| 2020 | 242 | 35 | ||||||
| 2021 | 232 | 34 | ||||||
| 2022 | 230 | 33 | ||||||
| 2023 - 2027 | 1,029 | 149 |
| (a) | Includes a reduction of approximately $2 million in each of the years 2018 - 2022 and approximately $13 million in aggregate for 2023 - 2027 for an expected subsidy related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. |
In 2018, we expect to contribute approximately $30 million to our U.S. pension plans and $7 million, net of anticipated subsidies, to our U.S. OPEB plans. In 2018, we expect to contribute approximately $10 million to our Canadian pension plans and $1 million to our Canadian OPEB plan.
Actuarial Assumptions and Sensitivity Analysis. Benefit obligations and net benefit cost are based on actuarial estimates and assumptions. The following table details the weighted-average actuarial assumptions used in determining our benefit obligation and net benefit costs of our pension and OPEB plans for 2017, 2016 and 2015:
| Pension Benefits | OPEB | |||||||||||||||||
| 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||
| Assumptions related to benefit obligations: | ||||||||||||||||||
| Discount rate | 3.56 | % | 3.83 | % | 4.05 | % | 3.48 | % | 3.69 | % | 3.91 | % | ||||||
| Rate of compensation increase | 3.53 | % | 3.52 | % | 3.50 | % | n/a | n/a | n/a | |||||||||
| Assumptions related to benefit costs: | ||||||||||||||||||
| Discount rate for benefit obligations | 3.83 | % | 4.05 | % | 3.66 | % | 3.69 | % | 3.91 | % | 3.56 | % | ||||||
| Discount rate for interest on benefit obligations | 3.09 | % | 3.24 | % | 3.66 | % | 3.05 | % | 3.18 | % | 3.56 | % | ||||||
| Discount rate for service cost | 3.88 | % | 4.15 | % | 3.66 | % | 4.15 | % | 4.36 | % | 3.56 | % | ||||||
| Discount rate for interest on service cost | 3.24 | % | 3.50 | % | 3.66 | % | 3.95 | % | 4.17 | % | 3.56 | % | ||||||
| Expected return on plan assets(a) | 7.07 | % | 7.31 | % | 7.50 | % | 6.84 | % | 7.07 | % | 7.08 | % | ||||||
| Rate of compensation increase | 3.52 | % | 3.51 | % | 4.50 | % | n/a | n/a | n/a |
| (a) | The expected return on plan assets listed in the table above is a pre-tax rate of return based on our targeted portfolio of investments. For the OPEB assets subject to unrelated business income taxes (UBIT), we utilize an after-tax expected return on plan assets to determine our benefit costs, which is based on a UBIT rate of 21% for 2017, 2016 and 2015. |
Prior to 2016, we selected our discount rates by matching the timing and amount of our expected future benefit payments for our pension and other postretirement benefit obligations to the average yields of various high-quality bonds with corresponding maturities. Effective January 1, 2016, we changed our estimate of the service and interest cost components of net periodic benefit cost (credit) for our pension and other postretirement benefit plans. The new estimate utilizes a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to their underlying projected cash flows. The new estimate provides a more precise
measurement of service and interest costs by improving the correlation between projected benefit cash flows and their corresponding spot rates. The change did not affect the measurement of our pension and postretirement benefit obligations and it was accounted for as a change in accounting estimate, which was applied prospectively. The expected long-term rates of return on plan assets were determined by combining a review of the historical returns realized within the portfolio, the investment strategy included in the plans’ investment policy, and capital market projections for the asset classes in which the portfolio is invested and the target weightings of each asset class.
Actuarial estimates for our OPEB plans assumed a weighted-average annual rate of increase in the per capita cost of covered health care benefits of 7.71%, gradually decreasing to 4.54% by the year 2038. Assumed health care cost trends have a significant effect on the amounts reported for OPEB plans. A one-percentage point change in assumed health care cost trends would have the following effects as of December 31, 2017 and 2016 (in millions):
| 2017 | 2016 | |||||||
| One-percentage point increase: | ||||||||
| Aggregate of service cost and interest cost | $ | 1 | $ | 1 | ||||
| Accumulated postretirement benefit obligation | 22 | 27 | ||||||
| One-percentage point decrease: | ||||||||
| Aggregate of service cost and interest cost | $ | (1 | ) | $ | (1 | ) | ||
| Accumulated postretirement benefit obligation | (19 | ) | (23 | ) |
Components of Net Benefit Cost and Other Amounts Recognized in Other Comprehensive Income. For each of the years ended December 31, the components of net benefit cost and other amounts recognized in pre-tax other comprehensive income related to our pension and OPEB plans are as follows (in millions):
| Pension Benefits | OPEB | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||||||||
| Components of net benefit cost: | ||||||||||||||||||||||||
| Service cost | $ | 40 | $ | 36 | $ | 33 | $ | 1 | $ | 1 | $ | — | ||||||||||||
| Interest cost | 88 | 89 | 99 | 13 | 16 | 21 | ||||||||||||||||||
| Expected return on assets | (147 | ) | (151 | ) | (172 | ) | (19 | ) | (19 | ) | (23 | ) | ||||||||||||
| Amortization of prior service cost (credit) | 1 | 1 | — | (3 | ) | (3 | ) | (3 | ) | |||||||||||||||
| Amortization of net actuarial loss (gain) | 52 | 35 | 5 | (6 | ) | — | 1 | |||||||||||||||||
| Curtailment and settlement loss | 5 | — | — | — | — | — | ||||||||||||||||||
| Net benefit (credit) cost(a) | 39 | 10 | (35 | ) | (14 | ) | (5 | ) | (4 | ) | ||||||||||||||
| Other changes in plan assets and benefit obligations recognized in other comprehensive (income) loss: | ||||||||||||||||||||||||
| Net loss (gain) arising during period | 17 | 116 | 267 | (25 | ) | (48 | ) | (49 | ) | |||||||||||||||
| Prior service cost (credit) arising during period | — | — | — | — | — | — | ||||||||||||||||||
| Amortization or settlement recognition of net actuarial (loss) gain | (64 | ) | (34 | ) | (5 | ) | 6 | — | (1 | ) | ||||||||||||||
| Amortization of prior service credit | (1 | ) | — | — | 1 | 1 | 1 | |||||||||||||||||
| Exchange rate changes | — | 1 | — | — | — | — | ||||||||||||||||||
| Total recognized in total other comprehensive (income) loss | (48 | ) | 83 | 262 | (18 | ) | (47 | ) | (49 | ) | ||||||||||||||
| Total recognized in net benefit cost (credit) and other comprehensive (income) loss | $ | (9 | ) | $ | 93 | $ | 227 | $ | (32 | ) | $ | (52 | ) | $ | (53 | ) |
| (a) | 2017 and 2016 OPEB amounts each include $4 million of net benefit credits related to a plan that we sponsor that is associated with employee services provided to an unconsolidated joint venture. We charge or refund these costs or credits associated with this plan to the joint venture as an offset to our net benefit cost or credit and receive our proportionate share of these costs or credits through our share of the equity investee’s earnings. |
Multiemployer Plans
We participate in several multi-employer pension plans for the benefit of employees who are union members. We do not administer these plans and contribute to them in accordance with the provisions of negotiated labor contracts. Other benefits include a self-insured health and welfare insurance plan and an employee health plan where employees may contribute for their dependents’ health care costs. Amounts charged to expense for these plans were approximately $8 million, $8 million and $10 million for the years ended December 31, 2017, 2016 and 2015, respectively. We consider the overall multi-employer pension plan liability exposure to be minimal in relation to the value of its total consolidated assets and net income.
- Stockholders’ Equity
Common Equity
As of December 31, 2017, our common equity consisted of our Class P common stock.
On July 19, 2017, our board of directors approved a $2 billion common share buy-back program that began in December 2017. During the year ended December 31, 2017, we repurchased approximately 14 million of our Class P shares for approximately $250 million. Subsequent to December 31, 2017 and through February 8, 2018, we repurchased approximately 13 million of our Class P shares for approximately $250 million.
On December 19, 2014, we entered into an equity distribution agreement authorizing us to issue and sell through or to the managers party thereto, as sales agents and/or principals, shares of our Class P common stock having an aggregate offering of up to $5.0 billion from time to time during the term of this agreement. During the years ended December 31, 2017 and 2016 we did not issue any Class P common stock under this agreement. During the year ended December 31, 2015, we issued and sold 102,614,508 shares of our Class P common stock pursuant to the equity distribution agreement resulting in net proceeds of $3.9 billion.
KMI Common Stock Dividends
Holders of our common stock participate in any dividend declared by our board of directors, subject to the rights of the holders of any outstanding preferred stock. The following table provides information about our per share dividends:
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Per common share cash dividend declared for the period | $ | 0.50 | $ | 0.50 | $ | 1.605 | |||||
| Per common share cash dividend paid in the period | 0.50 | 0.50 | 1.93 |
On January 17, 2018, our board of directors declared a cash dividend of $0.125 per common share for the quarterly period ended December 31, 2017, which is payable on February 15, 2018 to shareholders of record as of January 31, 2018.
Warrants
During the year ended December 31, 2015, we paid a total of $12 million for the repurchases of warrants. The warrant repurchase program dated June 12, 2015, which authorized us to repurchase up to $100 million of warrants, expired along with the warrants on May 25, 2017, at which time 293 million of unexercised warrants to buy KMI common stock expired without the issuance of Class P common stock. Prior to expiration, each of the warrants entitled 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.
Mandatory Convertible Preferred Stock
On October 30, 2015, we completed an offering of 32,000,000 depositary shares, each of which represents a 1/20th interest in a share of our 1,600,000 shares of 9.75% Series A mandatory convertible preferred stock, with a liquidating preference of $1,000 per share (equal to a $50 liquidation preference per depositary share). Net proceeds, after underwriting discount and expenses, from the depositary share offering were approximately $1,541 million. The proceeds from the offering were used to repay borrowings under our revolving credit facility and commercial paper debt and for general corporate purposes.
Unless converted earlier at the option of the holders, on or around October 26, 2018, each share of convertible preferred stock will automatically convert into between 30.8800 and 36.2840 shares of our common stock (and, correspondingly, each depositary share will convert into between 1.5440 and 1.8142 shares of our common stock), subject to customary anti-dilution adjustments. The conversion range depends on the volume-weighted average price of our common stock over a 20 trading day averaging period immediately prior to that date (Applicable Market Value). If the Applicable Market Value for our common stock is greater than $32.38 or less than $27.56, the conversion rate per preferred stock will be 30.8800 or 36.2840, respectively. If the Applicable Market Value is between $32.38 and $27.56, the conversion rate per preferred stock will be between 30.8800 and 36.2840.
Preferred Stock Dividends
Dividends on our mandatory convertible preferred stock are payable on a cumulative basis when, as and if declared by our board of directors (or an authorized committee thereof) at an annual rate of 9.75% of the liquidation preference of $1,000 per share on January 26, April 26, July 26 and October 26 of each year, commencing on January 26, 2016 to, and including, October 26, 2018. We may pay dividends in cash or, subject to certain limitations, in shares of common stock or any combination of cash and shares of common stock. The terms of the mandatory convertible preferred stock provide that, unless full cumulative dividends have been paid or set aside for payment on all outstanding mandatory convertible preferred stock for all prior dividend periods, no dividends may be declared or paid on common stock. The following table provides information regarding our preferred stock dividends:
| Period | Total dividend per share for the period | Date of declaration | Date of record | Date of dividend | ||||
| January 26, 2017 through April 25, 2017 | $24.375 | January 18, 2017 | April 11, 2017 | April 26, 2017 | ||||
| April 26, 2017 through July 25, 2017 | 24.375 | April 19, 2017 | July 11, 2017 | July 26, 2017 | ||||
| July 26, 2017 through October 25, 2017 | 24.375 | July 19, 2017 | October 11, 2017 | October 26, 2017 | ||||
| October 26, 2017 through January 25, 2018 | 24.375 | October 18, 2017 | January 11, 2018 | January 26, 2018 |
The cash dividend of $24.375 per share of our mandatory convertible preferred stock is equivalent to $1.21875 per depository share.
Noncontrolling Interests
KML Restricted Voting Shares
As discussed in Note 3 “Acquisitions and Divestitures,” on May 30, 2017 our indirect subsidiary, KML, issued 102,942,000 restricted voting shares in a public offering listed on the Toronto Stock Exchange. The public ownership of the KML restricted voting shares represents an approximate 30% interest in our Canadian operations and is reflected within “Noncontrolling interests” in our consolidated financial statements as of and for the period presented after May 30, 2017.
KML Preferred Share Offerings
On August 15, 2017, KML completed an offering of 12,000,000 cumulative redeemable minimum rate reset preferred shares, Series 1 (Series 1 Preferred Shares) on the Toronto Stock Exchange at a price to the public of C$25.00 per Series 1 Preferred Share for total gross proceeds of C$300 million (U.S.$235 million). On December 15, 2017, KML completed an offering of 10,000,000 cumulative redeemable minimum rate reset preferred shares, Series 3 (Series 3 Preferred Shares) on the Toronto Stock Exchange at a price to the public of C$25.00 per Series 3 Preferred Share for total gross proceeds of C$250 million (U.S.$195 million). The net proceeds from the Series 1 and Series 3 Preferred Share offerings of C$293 million (U.S. $230 million) and C$243 million (U.S.$189 million), respectively, were used by KML to indirectly subscribe for preferred units in KMC LP, which in turn were used by KMC LP to repay the KML Credit Facility indebtedness recently incurred to, directly or indirectly, finance the development, construction and completion of the TMEP and Base Line Terminal project, and for its general corporate purposes.
KML Distributions
KML established a dividend policy pursuant to which it may pay a quarterly dividend on its restricted voting shares in an amount based on a portion of its DCF. The payment of dividends is not guaranteed and the amount and timing of any dividends payable will be at the discretion of KML’s board of directors. If declared by KML’s board of directors, KML will pay quarterly dividends, on or about the 45th day (or next business day) following the end of each calendar quarter to holders of its restricted voting shares of record as of the close of business on or about the last business day of the month following the end of each calendar quarter. KML also established a Dividend Reinvestment Plan (DRIP) which allows holders (excluding holders not resident in Canada) of restricted voting shares to elect to have any or all cash dividends payable to such shareholder automatically reinvested in additional restricted voting shares at a price per share calculated by reference to the volume-weighted average of the closing price of the restricted voting shares on the stock exchange on which the restricted voting shares
are then listed for the five trading days immediately preceding the relevant dividend payment date, less a discount of between 0% and 5% (as determined from time to time by KML’s board of directors, in its sole discretion).
Dividends on the Series 1 Preferred Shares are fixed, cumulative, preferential and C$1.3125 per share annually, payable quarterly on the 15th day of February, May, August and November, as and when declared by the KML’s board of directors, for the initial fixed rate period to but excluding November 15, 2022.
Dividends on the Series 3 Preferred Shares are fixed, cumulative, preferential and C$1.3000 per share annually, payable quarterly on the 15th day of February, May, August and November, as and when declared by the KML’s board of directors, for the initial fixed rate period to but excluding February 15, 2023.
The following table provides information regarding distributions to our noncontrolling interests (in millions except per share and share distribution amounts):
| Year Ended December 31, 2017 | ||||||
| Shares | U.S.$ | C$ | ||||
| KML Restricted Voting Shares(a) | ||||||
| Per restricted voting share declared for the period(b) | $0.3821 | |||||
| Per restricted voting share paid in the period | $0.1739 | 0.2196 | ||||
| Total value of distributions paid in the period | 18 | 23 | ||||
| Cash distributions paid in the period to the public | 13 | 16 | ||||
| Share distributions paid in the period to the public under KML’s DRIP | 418,989 | |||||
| KML Series 1 Preferred Shares(c) | ||||||
| Per Series 1 Preferred Share paid in the period | $0.2624 | $0.3308 | ||||
| Cash distributions paid in the period to the public | 3 | 4 |
| (a) | Represents dividends subsequent to KML’s May 30, 2017 IPO. |
| (b) | The U.S.$ equivalent of the dividends declared is calculated based on the exchange rate on the dividend payment date, therefore, the U.S.$ equivalent of the dividend declared for the fourth quarter of 2017 will be calculated using the exchange rate on February 15, 2018. |
The combined U.S.$ equivalent of the dividends declared for the second and third quarters of 2017 was $0.1739.
| (c) | Represents dividends subsequent to the issuance of KML’s Series 1 Preferred Shares. |
On January 17, 2018, KML’s board of directors declared a cash dividend of C$0.328125 per share of its Series 1 Preferred Shares for the period from and including November 15, 2017 through and including February 14, 2018, which is payable on February 15, 2018 to Series 1 Preferred Shareholders of record as of the close of business on January 31, 2018.
On January 17, 2018, KML’s board of directors declared a cash dividend of C$0.22082 per share of its Series 3 Preferred Shares for the period from and including December 15, 2017 through and including February 14, 2018, which is payable on February 15, 2018 to Series 3 Preferred Shareholders of record as of the close of business on January 31, 2018.
- Related Party Transactions
Affiliate Balances
We have transactions with affiliates which consist of (i) unconsolidated affiliates in which we hold an investment accounted for under the equity method of accounting (see Note 7 “Investments” for additional information related to these investments); and (ii) external joint venture partners of our proportional method joint ventures, for which we include our proportionate share of balances and activity in our financial statements. The following tables summarize our affiliate balance sheet balances and income statement activity (in millions):
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Balance sheet location | |||||||
| Accounts receivable, net | $ | 34 | $ | 37 | |||
| Other current assets | 8 | — | |||||
| Deferred charges and other assets | 23 | 10 | |||||
| $ | 65 | $ | 47 | ||||
| Current portion of debt | $ | 6 | $ | 6 | |||
| Accounts payable | 18 | 28 | |||||
| Other current liabilities | 4 | 9 | |||||
| Long-term debt | 155 | 161 | |||||
| Other long-term liabilities and deferred credits | 35 | 29 | |||||
| $ | 218 | $ | 233 |
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Income statement location | |||||||||||
| Revenues | |||||||||||
| Services | $ | 73 | $ | 71 | $ | 72 | |||||
| Product sales and other | 89 | 71 | 71 | ||||||||
| $ | 162 | $ | 142 | $ | 143 | ||||||
| Operating Costs, Expenses and Other | |||||||||||
| Costs of sales | $ | 20 | $ | 38 | $ | 60 | |||||
| Other operating expenses | 100 | 75 | 55 |
- Commitments and Contingent Liabilities
Leases and Rights-of-Way Obligations
The table below depicts future gross minimum rental commitments under our operating leases and rights-of-way obligations as of December 31, 2017 (in millions):
| Year | Commitment | |||
| 2018 | $ | 118 | ||
| 2019 | 106 | |||
| 2020 | 81 | |||
| 2021 | 62 | |||
| 2022 | 55 | |||
| Thereafter | 300 | |||
| Total minimum payments | $ | 722 |
The remaining terms on our operating leases, including probable elections to exercise renewal options, range from one to forty-one years. Total lease and rental expenses were $140 million, $138 million and $143 million for the years ended December 31, 2017, 2016 and 2015, respectively. The amount of capital leases included within “Property, plant and equipment, net” in our accompanying consolidated balance sheets as of December 31, 2017 and 2016 is not material to our consolidated balance sheets.
Contingent Debt
Our contingent debt disclosures pertain to certain types of guarantees or indemnifications we have made and cover certain types of guarantees included within debt agreements, even if the likelihood of requiring our performance under such guarantee is remote.
As of December 31, 2017 and 2016, our contingent debt obligations, as well as our obligations with respect to related letters of credit, totaled $1,070 million and $1,179 million, respectively. Both December 31, 2017 and 2016 amounts are primarily represented by our proportional share of the debt obligations of two equity investees. Under such guarantees we are severally liable for our percentage ownership share of these equity investees’ debt issued in the event of their non-performance. Also included in our contingent debt obligations is a guarantee of a throughput and deficiency agreement supporting certain debt obligations of a subsidiary of our investee, Cortez Pipeline Company. Through this guarantee, we are severally liable for 50% of a Cortez Pipeline Company subsidiary’s debt obligations with respect to a $50 million credit facility and $100 million in bonds. In addition, we have guaranteed 100% of the debt issued by another Cortez Pipeline Company subsidiary to fund an expansion project, of which debt consists of a $50 million credit facility and a $120 million private placement note.
Guarantees and Indemnifications
We are involved in joint ventures and other ownership arrangements that sometimes require financial and performance guarantees. In a financial guarantee, we are obligated to make payments if the guaranteed party fails to make payments under, or violates the terms of, the financial arrangement. In a performance guarantee, we provide assurance that the guaranteed party will execute on the terms of the contract. If they do not, we are required to perform on their behalf. We also periodically provide indemnification arrangements related to assets or businesses we have sold. These arrangements include, but are not limited to, indemnifications for income taxes, the resolution of existing disputes and environmental matters.
While many of these agreements may specify a maximum potential exposure, or a specified duration to the indemnification obligation, there are also circumstances where the amount and duration are unlimited. Currently, we are not subject to any material requirements to perform under quantifiable arrangements, and we expect future requirements to perform under quantifiable arrangements will be immaterial. We are unable to estimate a maximum exposure for our guarantee and indemnification agreements that do not provide for limits on the amount of future payments due to the uncertainty of these exposures.
See Note 17 “Litigation, Environmental and Other Contingencies” for a description of matters that we have identified as contingencies requiring accrual of liabilities and/or disclosure, including any such matters arising under guarantee or indemnification agreements.
- Risk Management
Certain of our business activities expose us to risks associated with unfavorable changes in the market price of natural gas, NGL and crude oil. We also have exposure to interest rate and foreign currency risk as a result of the issuance of our debt obligations. Pursuant to our management’s approved risk management policy, we use derivative contracts to hedge or reduce our exposure to some of these risks. In addition, prior to May 2016, we had legacy power forward and swap contracts related to operations of acquired businesses.
Energy Commodity Price Risk Management
As of December 31, 2017, we had the following outstanding commodity forward contracts to hedge our forecasted energy commodity purchases and sales:
| Net open position long/(short) | |||
| Derivatives designated as hedging contracts | |||
| Crude oil fixed price | (21.0 | ) | MMBbl |
| Crude oil basis | (7.2 | ) | MMBbl |
| Natural gas fixed price | (46.4 | ) | Bcf |
| Natural gas basis | (21.7 | ) | Bcf |
| Derivatives not designated as hedging contracts | |||
| Crude oil fixed price | (1.9 | ) | MMBbl |
| Crude oil basis | (1.2 | ) | MMBbl |
| Natural gas fixed price | (9.0 | ) | Bcf |
| Natural gas basis | (23.1 | ) | Bcf |
| NGL fixed price | (4.1 | ) | MMBbl |
As of December 31, 2017, the maximum length of time over which we have hedged, for accounting purposes, our exposure to the variability in future cash flows associated with energy commodity price risk is through December 2021.
Interest Rate Risk Management
As of December 31, 2017 and December 31, 2016, we had a combined notional principal amount of $9,575 million and $9,775 million, respectively, of fixed-to-variable interest rate swap agreements, all of which were designated as fair value hedges. All of our swap agreements effectively convert the interest expense associated with certain series of senior notes from fixed rates to variable rates based on an interest rate of LIBOR plus a spread and have termination dates that correspond to the maturity dates of the related series of senior notes. As of December 31, 2017, the maximum length of time over which we have hedged a portion of our exposure to the variability in the value of this debt due to interest rate risk is through March 15, 2035.
Foreign Currency Risk Management
As of both December 31, 2017 and 2016, we had a notional principal amount of $1,358 million of cross-currency swap agreements to manage the foreign currency risk related to our Euro denominated senior notes by effectively converting all of the fixed-rate Euro denominated debt, including annual interest payments and the payment of principal at maturity, to U.S. dollar denominated debt at fixed rates equivalent to approximately 3.79% and 4.67% for the 7-year and 12-year senior notes, respectively. These cross-currency swaps are accounted for as cash flow hedges. The terms of the cross-currency swap agreements correspond to the related hedged senior notes, and such agreements have the same maturities as the hedged senior notes.
Fair Value of Derivative Contracts
The following table summarizes the fair values of our derivative contracts included in our accompanying consolidated balance sheets (in millions):
| Fair Value of Derivative Contracts | |||||||||||||||||
| Asset derivatives | Liability derivatives | ||||||||||||||||
| December 31, | December 31, | ||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||||
| Location | Fair value | Fair value | |||||||||||||||
| Derivatives designated as hedging contracts | |||||||||||||||||
| Energy commodity derivative contracts | Fair value of derivative contracts/(Other current liabilities) | $ | 65 | $ | 101 | $ | (53 | ) | $ | (57 | ) | ||||||
| Deferred charges and other assets/(Other long-term liabilities and deferred credits) | 14 | 70 | (24 | ) | (24 | ) | |||||||||||
| Subtotal | 79 | 171 | (77 | ) | (81 | ) | |||||||||||
| Interest rate swap agreements | Fair value of derivative contracts/(Other current liabilities) | 41 | 94 | (3 | ) | — | |||||||||||
| Deferred charges and other assets/(Other long-term liabilities and deferred credits) | 164 | 206 | (62 | ) | (57 | ) | |||||||||||
| Subtotal | 205 | 300 | (65 | ) | (57 | ) | |||||||||||
| Cross-currency swap agreements | Fair value of derivative contracts/(Other current liabilities) | — | — | (6 | ) | (7 | ) | ||||||||||
| Deferred charges and other assets/(Other long-term liabilities and deferred credits) | 166 | — | — | (24 | ) | ||||||||||||
| Subtotal | 166 | — | (6 | ) | (31 | ) | |||||||||||
| Total | 450 | 471 | (148 | ) | (169 | ) | |||||||||||
| Derivatives not designated as hedging contracts | |||||||||||||||||
| Energy commodity derivative contracts | Fair value of derivative contracts/(Other current liabilities) | 8 | 3 | (22 | ) | (29 | ) | ||||||||||
| Deferred charges and other assets/(Other long-term liabilities and deferred credits) | — | — | (2 | ) | (1 | ) | |||||||||||
| Total | 8 | 3 | (24 | ) | (30 | ) | |||||||||||
| Total derivatives | $ | 458 | $ | 474 | $ | (172 | ) | $ | (199 | ) |
Effect of Derivative Contracts on the Income Statement
The following tables summarize the impact of our derivative contracts on our accompanying consolidated statements of income (in millions):
| Derivatives in fair value hedging relationships | Location | Gain/(loss) recognized in income on derivatives and related hedged item | ||||||||||||
| Year Ended December 31, | ||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||
| Interest rate swap agreements | Interest, net | $ | (103 | ) | $ | (180 | ) | $ | 25 | |||||
| Hedged fixed rate debt | Interest, net | $ | 105 | $ | 160 | $ | (33 | ) |
| Derivatives in cash flow hedging relationships | Gain/(loss) recognized in OCI on derivative (effective portion)(a) | Location | Gain/(loss) reclassified from Accumulated OCI into income (effective portion)(b) | Location | Gain/(loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing) | |||||||||||||||||||||||||||||||||||
| Year Ended | Year Ended | Year Ended | ||||||||||||||||||||||||||||||||||||||
| December 31, | December 31, | December 31, | ||||||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||||
| Energy commodity derivative contracts | $ | 24 | $ | (115 | ) | $ | 201 | Revenues—Natural gas sales | $ | 12 | $ | 15 | $ | 54 | Revenues—Natural gas sales | $ | — | $ | — | $ | — | |||||||||||||||||||
| Revenues—Product sales and other | 35 | 148 | 236 | Revenues—Product sales and other | 11 | (12 | ) | 2 | ||||||||||||||||||||||||||||||||
| Costs of sales | 9 | (17 | ) | (15 | ) | Costs of sales | — | — | — | |||||||||||||||||||||||||||||||
| Interest rate swap agreements(c) | — | (2 | ) | (4 | ) | Interest, net | (3 | ) | (3 | ) | (3 | ) | Interest, net | — | — | — | ||||||||||||||||||||||||
| Cross-currency swap | 121 | 13 | (33 | ) | Other, net | 118 | (27 | ) | — | Other, net | — | — | — | |||||||||||||||||||||||||||
| Total | $ | 145 | $ | (104 | ) | $ | 164 | Total | $ | 171 | $ | 116 | $ | 272 | Total | $ | 11 | $ | (12 | ) | $ | 2 |
| (a) | We expect to reclassify an approximate $1 million loss associated with cash flow hedge price risk management activities included in our accumulated other comprehensive loss balances as of December 31, 2017 into earnings during the next twelve months (when the associated forecasted transactions are also expected to occur), however, actual amounts reclassified into earnings could vary materially as a result of changes in market prices. |
| (b) | Amounts reclassified were the result of the hedged forecasted transactions actually affecting earnings (i.e., when the forecasted sales and purchases actually occurred). |
| (c) | Amounts represent our share of an equity investee’s accumulated other comprehensive loss. |
| Derivatives not designated as accounting hedges | Location | Gain/(loss) recognized in income on derivatives | ||||||||||||
| Year Ended December 31, | ||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||
| Energy commodity derivative contracts | Revenues—Natural gas sales | $ | 20 | $ | (10 | ) | $ | 17 | ||||||
| Revenues—Product sales and other | (16 | ) | (26 | ) | 176 | |||||||||
| Costs of sales | — | 3 | (2 | ) | ||||||||||
| Interest rate swap agreements | Interest, net | — | 63 | (15 | ) | |||||||||
| Total(a) | $ | 4 | $ | 30 | $ | 176 |
(a) For the years ended December 31, 2017, 2016 and 2015 includes approximate gains of $57 million, $73 million and $31 million, respectively, associated with natural gas, crude and NGL derivative contract settlements.
Credit Risks
In conjunction with certain derivative contracts, we are required to provide collateral to our counterparties, which may include posting letters of credit or placing cash in margin accounts. As of December 31, 2017 and 2016, we had no outstanding letters of credit supporting our commodity price risk management program. As of December 31, 2017 and December 31, 2016, we had cash margins of $1 million and $37 million, respectively, posted by us with our counterparties as collateral and reported within “Restricted deposits” on our accompanying consolidated balance sheets. The balance at December 31, 2017, consisted of initial margin requirements of $13 million, offset by variation margin requirements of $12 million. We also use industry standard commercial agreements which allow for the netting of exposures associated with transactions executed under a single commercial agreement. Additionally, we generally utilize netting agreements to offset credit exposure across multiple commercial agreements with a single counterparty.
We also have agreements with certain counterparties to our derivative contracts that contain provisions requiring the posting of additional collateral upon a decrease in our credit rating. As of December 31, 2017, based on our current mark to market positions and posted collateral, we estimate that if our credit rating were downgraded one notch we would be required to post $31 million of additional collateral and no additional collateral beyond this $31 million if we were downgraded two notches.
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Loss
Cumulative revenues, expenses, gains and losses that under GAAP are included within our comprehensive income but excluded from our earnings are reported as “Accumulated other comprehensive loss” within “Stockholders’ Equity” in our consolidated balance sheets. Changes in the components of our “Accumulated other comprehensive loss” not including non-controlling interests are summarized as follows (in millions):
| Net unrealized gains/(losses) on cash flow hedge derivatives | Foreign currency translation adjustments | Pension and other postretirement liability adjustments | Total Accumulated other comprehensive loss | ||||||||||||
| Balance as of December 31, 2014 | $ | 327 | $ | (108 | ) | $ | (236 | ) | $ | (17 | ) | ||||
| Other comprehensive gain (loss) before reclassifications | 164 | (214 | ) | (122 | ) | (172 | ) | ||||||||
| Gains reclassified from accumulated other comprehensive loss | (272 | ) | — | — | (272 | ) | |||||||||
| Net current-period other comprehensive loss | (108 | ) | (214 | ) | (122 | ) | (444 | ) | |||||||
| Balance as of December 31, 2015 | 219 | (322 | ) | (358 | ) | (461 | ) | ||||||||
| Other comprehensive (loss) gain before reclassifications | (104 | ) | 34 | (14 | ) | (84 | ) | ||||||||
| Gains reclassified from accumulated other comprehensive loss | (116 | ) | — | — | (116 | ) | |||||||||
| Net current-period other comprehensive (loss) income | (220 | ) | 34 | (14 | ) | (200 | ) | ||||||||
| Balance as of December 31, 2016 | (1 | ) | (288 | ) | (372 | ) | (661 | ) | |||||||
| Other comprehensive gain before reclassifications | 145 | 55 | 40 | 240 | |||||||||||
| Gains reclassified from accumulated other comprehensive loss | (171 | ) | — | — | (171 | ) | |||||||||
| KML IPO | — | 44 | 7 | 51 | |||||||||||
| Net current-period other comprehensive (loss) income | (26 | ) | 99 | 47 | 120 | ||||||||||
| Balance as of December 31, 2017 | $ | (27 | ) | $ | (189 | ) | $ | (325 | ) | $ | (541 | ) |
- Fair Value
The fair values of our financial instruments are separated into three broad levels (Levels 1, 2 and 3) based on our assessment of the availability of observable market data and the significance of non-observable data used to determine fair value. Each fair value measurement must be assigned to a level corresponding to the lowest level input that is significant to the fair value measurement in its entirety.
The three broad levels of inputs defined by the fair value hierarchy are as follows:
| • | Level 1 Inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date; |
| • | Level 2 Inputs—inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability; and |
| • | Level 3 Inputs—unobservable inputs for the asset or liability. These unobservable inputs reflect the entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances (which might include the reporting entity’s own data). |
Fair Value of Derivative Contracts
The following two tables summarize the fair value measurements of our (i) energy commodity derivative contracts; (ii) interest rate swap agreements; and (iii) cross-currency swap agreements, based on the three levels established by the Codification (in millions). The tables also identify the impact of derivative contracts which we have elected to present on our accompanying consolidated balance sheets on a gross basis that are eligible for netting under master netting agreements.
| Balance sheet asset fair value measurements by level | |||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Gross amount | Contracts available for netting | Cash collateral held(b) | Net amount | |||||||||||||||||||||
| As of December 31, 2017 | |||||||||||||||||||||||||||
| Energy commodity derivative contracts(a) | $ | 17 | $ | 70 | $ | — | $ | 87 | $ | (42 | ) | $ | (12 | ) | $ | 33 | |||||||||||
| Interest rate swap agreements | $ | — | $ | 205 | $ | — | $ | 205 | $ | (15 | ) | $ | — | $ | 190 | ||||||||||||
| Cross-currency swap agreements | $ | — | $ | 166 | $ | — | $ | 166 | $ | (6 | ) | $ | — | $ | 160 | ||||||||||||
| As of December 31, 2016 | |||||||||||||||||||||||||||
| Energy commodity derivative contracts(a) | $ | 6 | $ | 168 | $ | — | $ | 174 | $ | (43 | ) | $ | — | $ | 131 | ||||||||||||
| Interest rate swap agreements | $ | — | $ | 300 | $ | — | $ | 300 | $ | (18 | ) | $ | — | $ | 282 |
| Balance sheet liability fair value measurements by level | |||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Gross amount | Contracts available for netting | Collateral posted(b) | Net amount | |||||||||||||||||||||
| As of December 31, 2017 | |||||||||||||||||||||||||||
| Energy commodity derivative contracts(a) | $ | (3 | ) | $ | (98 | ) | $ | — | $ | (101 | ) | $ | 42 | $ | — | $ | (59 | ) | |||||||||
| Interest rate swap agreements | $ | — | $ | (65 | ) | $ | — | $ | (65 | ) | $ | 15 | $ | — | $ | (50 | ) | ||||||||||
| Cross-currency swap agreements | $ | — | $ | (6 | ) | $ | — | $ | (6 | ) | $ | 6 | $ | — | $ | — | |||||||||||
| As of December 31, 2016 | |||||||||||||||||||||||||||
| Energy commodity derivative contracts(a) | $ | (29 | ) | $ | (82 | ) | $ | — | $ | (111 | ) | $ | 43 | $ | 37 | $ | (31 | ) | |||||||||
| Interest rate swap agreements | $ | — | $ | (57 | ) | $ | — | $ | (57 | ) | $ | 18 | $ | — | $ | (39 | ) | ||||||||||
| Cross-currency swap agreements | $ | — | $ | (31 | ) | $ | — | $ | (31 | ) | $ | — | $ | — | $ | (31 | ) |
| (a) | Level 1 consists primarily of NYMEX natural gas futures. Level 2 consists primarily of OTC WTI swaps and NGL swaps. |
| (b) | Any cash collateral paid or received is reflected in this table, but only to the extent that it represents variation margins. Any amount associated with derivative prepayments or initial margins that are not influenced by the derivative asset or liability amounts or those that are determined solely on their volumetric notional amounts are excluded from this table. |
The table below provides a summary of changes in the fair value of our Level 3 energy commodity derivative contracts (in millions):
| Significant unobservable inputs (Level 3) | |||||||
|---|---|---|---|---|---|---|---|
| Year Ended December 31, | |||||||
| 2017 | 2016 | ||||||
| Derivatives-net asset (liability) | |||||||
| Beginning of period | $ | — | $ | (15 | ) | ||
| Total gains or (losses) included in earnings | — | (9 | ) | ||||
| Settlements | — | 24 | |||||
| End of period | $ | — | $ | — | |||
| The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or (losses) relating to assets held at the reporting date | $ | — | $ | — |
During 2016, our Level 3 derivative asset and liability activity consisted primarily of power derivative contracts (which expired in April 2016), where a significant portion of fair value is calculated from underlying market data that is not readily observable. The derived values use industry standard methodologies that may consider the historical relationships among various commodities, modeled market prices, time value, volatility factors and other relevant economic measures. The use of these inputs results in management’s best estimate of fair value, and management would not expect materially different valuation results were we to use different input amounts within reasonable ranges.
Fair Value of Financial Instruments
The carrying value and estimated fair value of our outstanding debt balances is disclosed below (in millions):
| December 31, 2017 | December 31, 2016 | ||||||||||||||
| Carrying value | Estimated fair value | Carrying value | Estimated fair value | ||||||||||||
| Total debt | $ | 37,843 | $ | 40,050 | $ | 40,050 | $ | 41,015 |
We used Level 2 input values to measure the estimated fair value of our outstanding debt balance as of both December 31, 2017 and 2016.
- Reportable Segments
Our reportable business segments are:
| • | Natural Gas Pipelines—the ownership and operation of (i) major interstate and intrastate natural gas pipeline and storage systems; (ii) natural gas and crude oil gathering systems and natural gas processing and treating facilities; (iii) NGL fractionation facilities and transportation systems; and (iv) LNG facilities; |
| • | CO2—(i) the production, transportation and marketing of CO2 to oil fields that use CO2 as a flooding medium for recovering crude oil from mature oil fields to increase production; (ii) ownership interests in and/or operation of oil fields and gas processing plants in West Texas; and (iii) the ownership and operation of a crude oil pipeline system in West Texas; |
| • | Terminals—the ownership and/or operation of (i) liquids and bulk terminal facilities located throughout the U.S. and portions of Canada that transload and store refined petroleum products, crude oil, chemicals, and ethanol and bulk products, including petroleum coke, steel and coal; and (ii) Jones Act tankers; |
| • | Products Pipelines—the ownership and operation of refined petroleum products, NGL and crude oil and condensate pipelines that primarily deliver, among other products, gasoline, diesel and jet fuel, propane, ethane, crude oil and condensate to various markets, plus the ownership and/or operation of associated product terminals and petroleum pipeline transmix facilities; and |
| • | Kinder Morgan Canada—the ownership and operation of the Trans Mountain pipeline system that transports crude oil and refined petroleum products from Edmonton, Alberta, Canada to marketing terminals and refineries in British Columbia, Canada and the state of Washington, plus the Jet Fuel aviation turbine fuel pipeline that serves the Vancouver (Canada) International Airport. |
We evaluate performance principally based on each segment’s EBDA, which excludes general and administrative expenses, interest expense, net, and income tax expense. Our reportable segments are strategic business units that offer different products and services, and they are structured based on how our chief operating decision makers organize their operations for optimal performance and resource allocation. Each segment is managed separately because each segment involves different products and marketing strategies.
We consider each period’s earnings before all non-cash DD&A expenses to be an important measure of business segment performance for our reporting segments. We account for intersegment sales at market prices, while we account for asset transfers at either market value or, in some instances, book value.
During 2017, 2016 and 2015, we did not have revenues from any single external customer that exceeded 10% of our consolidated revenues.
Financial information by segment follows (in millions):
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Revenues | |||||||||||
| Natural Gas Pipelines | |||||||||||
| Revenues from external customers | $ | 8,608 | $ | 7,998 | $ | 8,704 | |||||
| Intersegment revenues | 10 | 7 | 21 | ||||||||
| CO2 | 1,196 | 1,221 | 1,699 | ||||||||
| Terminals | |||||||||||
| Revenues from external customers | 1,965 | 1,921 | 1,878 | ||||||||
| Intersegment revenues | 1 | 1 | 1 | ||||||||
| Products Pipelines | |||||||||||
| Revenues from external customers | 1,645 | 1,631 | 1,828 | ||||||||
| Intersegment revenues | 16 | 18 | 3 | ||||||||
| Kinder Morgan Canada | 256 | 253 | 260 | ||||||||
| Corporate and intersegment eliminations(a) | 8 | 8 | 9 | ||||||||
| Total consolidated revenues | $ | 13,705 | $ | 13,058 | $ | 14,403 |
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Operating expenses(b) | |||||||||||
| Natural Gas Pipelines | $ | 5,457 | $ | 4,393 | $ | 4,738 | |||||
| CO2 | 394 | 399 | 432 | ||||||||
| Terminals | 788 | 768 | 836 | ||||||||
| Products Pipelines | 487 | 573 | 772 | ||||||||
| Kinder Morgan Canada | 95 | 87 | 87 | ||||||||
| Corporate and intersegment eliminations | (6 | ) | 2 | 26 | |||||||
| Total consolidated operating expenses | $ | 7,215 | $ | 6,222 | $ | 6,891 |
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Other expense (income)(c) | |||||||||||
| Natural Gas Pipelines | $ | 26 | $ | 199 | $ | 1,269 | |||||
| CO2 | (1 | ) | 19 | 606 | |||||||
| Terminals | (14 | ) | 99 | 190 | |||||||
| Products Pipelines | — | 76 | 2 | ||||||||
| Kinder Morgan Canada | — | — | (1 | ) | |||||||
| Corporate | 1 | (7 | ) | — | |||||||
| Total consolidated other expense (income) | $ | 12 | $ | 386 | $ | 2,066 |
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| DD&A | |||||||||||
| Natural Gas Pipelines | $ | 1,011 | $ | 1,041 | $ | 1,046 | |||||
| CO2 | 493 | 446 | 556 | ||||||||
| Terminals | 472 | 435 | 433 | ||||||||
| Products Pipelines | 216 | 221 | 206 | ||||||||
| Kinder Morgan Canada | 46 | 44 | 46 | ||||||||
| Corporate | 23 | 22 | 22 | ||||||||
| Total consolidated DD&A | $ | 2,261 | $ | 2,209 | $ | 2,309 |
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Earnings from equity investments and amortization of excess cost of equity investments, including loss on impairments | |||||||||||
| Natural Gas Pipelines | $ | 253 | $ | (269 | ) | $ | 285 | ||||
| CO2 | 42 | 22 | (5 | ) | |||||||
| Terminals | 24 | 19 | 17 | ||||||||
| Products Pipelines | 48 | 56 | 36 | ||||||||
| Total consolidated equity earnings | $ | 367 | $ | (172 | ) | $ | 333 |
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Other, net-income (expense) | |||||||||||
| Natural Gas Pipelines | $ | 49 | $ | 19 | $ | 24 | |||||
| Terminals | 8 | 4 | 8 | ||||||||
| Products Pipelines | (1 | ) | 2 | 4 | |||||||
| Kinder Morgan Canada | 25 | 15 | 8 | ||||||||
| Corporate | 1 | 4 | (1 | ) | |||||||
| Total consolidated other, net-income (expense) | $ | 82 | $ | 44 | $ | 43 |
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Segment EBDA(d) | |||||||||||
| Natural Gas Pipelines | $ | 3,487 | $ | 3,211 | $ | 3,067 | |||||
| CO2 | 847 | 827 | 658 | ||||||||
| Terminals | 1,224 | 1,078 | 878 | ||||||||
| Products Pipelines | 1,231 | 1,067 | 1,106 | ||||||||
| Kinder Morgan Canada | 186 | 181 | 182 | ||||||||
| Total segment EBDA | 6,975 | 6,364 | 5,891 | ||||||||
| DD&A | (2,261 | ) | (2,209 | ) | (2,309 | ) | |||||
| Amortization of excess cost of equity investments | (61 | ) | (59 | ) | (51 | ) | |||||
| General and administrative and corporate charges | (660 | ) | (652 | ) | (708 | ) | |||||
| Interest, net | (1,832 | ) | (1,806 | ) | (2,051 | ) | |||||
| Income tax expense | (1,938 | ) | (917 | ) | (564 | ) | |||||
| Total consolidated net income | $ | 223 | $ | 721 | $ | 208 |
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Capital expenditures | |||||||||||
| Natural Gas Pipelines | $ | 1,376 | $ | 1,227 | $ | 1,642 | |||||
| CO2 | 436 | 276 | 725 | ||||||||
| Terminals | 888 | 983 | 847 | ||||||||
| Products Pipelines | 127 | 244 | 524 | ||||||||
| Kinder Morgan Canada | 338 | 124 | 142 | ||||||||
| Corporate | 23 | 28 | 16 | ||||||||
| Total consolidated capital expenditures | $ | 3,188 | $ | 2,882 | $ | 3,896 |
| 2017 | 2016 | ||||||||
| Investments at December 31 | |||||||||
| Natural Gas Pipelines | $ | 6,218 | $ | 6,185 | |||||
| CO2 | 6 | — | |||||||
| Terminals | 263 | 252 | |||||||
| Products Pipelines | 777 | 566 | |||||||
| Kinder Morgan Canada | 34 | 20 | |||||||
| Corporate | — | 4 | |||||||
| Total consolidated investments | $ | 7,298 | $ | 7,027 |
| 2017 | 2016 | ||||||||
| Assets at December 31 | |||||||||
| Natural Gas Pipelines | $ | 51,173 | $ | 50,428 | |||||
| CO2 | 3,946 | 4,065 | |||||||
| Terminals | 9,935 | 9,725 | |||||||
| Products Pipelines | 8,539 | 8,329 | |||||||
| Kinder Morgan Canada | 2,080 | 1,572 | |||||||
| Corporate assets(e) | 3,382 | 6,108 | |||||||
| Assets held for sale | — | 78 | |||||||
| Total consolidated assets | $ | 79,055 | $ | 80,305 |
| (a) | Includes a management fee for services we perform as operator of an equity investee. |
| (b) | Includes costs of sales, operations and maintenance expenses, and taxes, other than income taxes. |
| (c) | Includes loss on impairment of goodwill, loss on impairments and divestitures, net and other income, net. |
| (d) | Includes revenues, earnings from equity investments, other, net, less operating expenses, and other income, net, loss on impairment of goodwill, and loss on impairments and divestitures, net and loss on impairments and divestitures of equity investments, net. |
| (e) | Includes cash and cash equivalents, margin and restricted deposits, unallocable interest receivable, certain prepaid assets and deferred charges, including income tax related assets, risk management assets related to debt fair value adjustments, corporate headquarters in Houston, Texas and miscellaneous corporate assets (such as information technology, telecommunications equipment and legacy activity) not allocated to the reportable segments. |
We do not attribute interest and debt expense to any of our reportable business segments.
Following is geographic information regarding the revenues and long-lived assets of our business (in millions):
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Revenues from external customers | |||||||||||
| U.S. | $ | 13,073 | $ | 12,459 | $ | 13,797 | |||||
| Canada | 503 | 483 | 479 | ||||||||
| Mexico | 129 | 116 | 127 | ||||||||
| Total consolidated revenues from external customers | $ | 13,705 | $ | 13,058 | $ | 14,403 |
| December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Long-term assets, excluding goodwill and other intangibles | |||||||||||
| U.S. | $ | 47,928 | $ | 49,125 | $ | 51,679 | |||||
| Canada | 3,071 | 2,399 | 2,193 | ||||||||
| Mexico | 80 | 82 | 67 | ||||||||
| Total consolidated long-lived assets | $ | 51,079 | $ | 51,606 | $ | 53,939 |
- Litigation, Environmental and Other Contingencies
We and our subsidiaries are parties to various legal, regulatory and other matters arising from the day-to-day operations of our businesses or certain predecessor operations that may result in claims against the Company. Although no assurance can be given, we believe, based on our experiences to date and taking into account established reserves and insurance, that the ultimate resolution of such items will not have a material adverse impact on our business, financial position, results of operations or dividends to our shareholders. We believe we have meritorious defenses to the matters to which we are a party and intend to vigorously defend the Company. When we determine a loss is probable of occurring and is reasonably estimable, we accrue an undiscounted liability for such contingencies based on our best estimate using information available at that time. If the estimated loss is a range of potential outcomes and there is no better estimate within the range, we accrue the amount at the low end of the range. We disclose contingencies where an adverse outcome may be material, or in the judgment of management, we conclude the matter should otherwise be disclosed.
FERC Proceedings
SFPP
The tariffs and rates charged by SFPP are subject to a number of ongoing proceedings at the FERC, including the complaints and protests of various shippers the most recent of which was filed in 2015 (docketed at OR16-6) challenging SFPP’s filed East Line rates. In general, these complaints and protests allege the rates and tariffs charged by SFPP are not just and reasonable under the Interstate Commerce Act (ICA). In some of these proceedings shippers have challenged the overall rate being charged by SFPP, and in others the shippers have challenged SFPP’s index-based rate increases. If the shippers prevail on their arguments or claims, they are entitled to seek reparations (which may reach back up to two years prior to the filing date of their complaints) or refunds of any excess rates paid, and SFPP may be required to reduce its rates going forward. These proceedings tend to be protracted, with decisions of the FERC often appealed to the federal courts. The issues involved in these proceedings include, among others, whether indexed rate increases are justified, and the appropriate level of return and income tax allowance SFPP may include in its rates. On March 22, 2016, the D.C. Circuit issued a decision in United Airlines, Inc. v. FERC remanding to FERC for further consideration of two issues: (1) the appropriate data to be used to determine the return on equity for SFPP in the underlying docket, and (2) the just and reasonable return to be provided to a tax pass-through entity that includes an income tax allowance in its underlying cost of service. On July 21, 2017, an initial decision by the Administrative Law Judge (ALJ) in OR16-6 concluded that the Complainants are due reparations, with appropriate interest, equal to the difference between what SFPP collected from the Complainants for service on the East Line and the amounts SFPP would have collected had it charged just and reasonable rates for that line. The ALJ ruled that an income tax allowance should be included in the cost of service both to determine reparations and to set going forward rates, and found that the new just and reasonable rates are not knowable until the FERC reviews the initial decision and orders a compliance filing. The FERC will determine which portions of the initial decision to affirm, reject or amend. With respect to the various SFPP related complaints and protest proceedings at the FERC, we estimate that the shippers are seeking approximately $40 million in annual rate reductions and approximately $230 million in refunds. Management believes SFPP has meritorious arguments supporting SFPP’s rates and intends to vigorously defend SFPP against these complaints and protests. However, to the extent the shippers are successful in one or more of the complaints or protest proceedings, SFPP estimates that applying the principles of FERC precedent, as applicable, to pending SFPP cases would result in rate reductions and refunds substantially lower than those sought by the shippers.
EPNG
The tariffs and rates charged by EPNG are subject to two ongoing FERC proceedings (the “2008 rate case” and the “2010 rate case”). With respect to the 2008 rate case, the FERC issued its decision (Opinion 517-A) in July 2015. The FERC generally upheld its prior determinations, ordered refunds to be paid within 60 days, and stated that it will apply its findings in Opinion 517-A to the same issues in the 2010 rate case. EPNG sought federal appellate review of Opinion 517-A and oral arguments were held on February 15, 2017. On February 21, 2017, the reviewing court delayed the case until the FERC rules on the rehearing requests pending in the 2010 Rate Case. With respect to the 2010 rate case, the FERC issued its decision (Opinion 528-A) on February 18, 2016. The FERC generally upheld its prior determinations, affirmed prior findings of an Administrative Law Judge that certain shippers qualify for lower rates, and required EPNG to file revised pro forma recalculated rates consistent with the terms of Opinions 517-A and 528-A. EPNG and two intervenors sought rehearing of certain aspects of the decision, and the judicial review sought by certain intervenors has been delayed until the FERC issues an order on rehearing. All refund obligations related to the 2008 rate case were satisfied during calendar year 2015. With respect to the 2010 rate case, EPNG believes it has an appropriate reserve related to the findings in Opinions 517-A and 528-A.
NGPL and WIC
On January 19, 2017, FERC initiated separate proceedings against NGPL and WIC pursuant to section 5 of the Natural Gas Act. The matters were intended to determine whether NGPL’s and WIC’s current rates were just and reasonable. NGPL and WIC each submitted an Offer of Settlement to the FERC in their respective proceedings. The FERC approved WIC’s Offer of Settlement on November 27, 2017, and the FERC approved NGPL’s Offer of Settlement on January 5, 2018. These settlements will not have a material adverse impact on KMI’s results of operations or cash flows from operations.
TMEP Litigation
There are numerous legal challenges pending before the Federal Court of Appeal which have been filed by various governmental and non-governmental organizations, Aboriginal groups or other parties that seek judicial review of the recommendation of the NEB and subsequent decision by the Federal Governor in Council to conditionally approve the TMEP.
The petitions allege, among other things, that additional consultation, engagement or accommodation is required and that various non-economic impacts of the TMEP were not adequately considered. The remedies sought include requests that the NEB recommendation be quashed, that additional consultations be undertaken, and that the order of the Governor in Council approving the TMEP be quashed. After provincial elections in British Columbia (BC) on May 9, 2017, the New Democratic Party and Green Party formed a majority government. The new BC government sought and was granted limited intervenor status in the Federal Court of Appeal proceedings to argue against the government’s approval of the TMEP. A hearing was conducted by the Federal Court of Appeal from October 2 through October 13, 2017. A decision is expected in the coming months, and is subject to potential further appeal to the Supreme Court of Canada. Although we believe that each of the foregoing appeals lacks merit, in the event an applicant is successful at the Supreme Court of Canada, among other potential impacts, the NEB recommendation or Governor in Council’s approval may be quashed, permits may be revoked, the TMEP may be subject to additional significant regulatory reviews, there may be significant changes to the TMEP plans, further obligations or restrictions may be implemented, or the TMEP may be stopped altogether, which could materially impact the overall feasibility or economic benefits of the TMEP, which in turn would have a material adverse effect on the TMEP and, consequently, our investment in KML.
In addition to the judicial reviews of the NEB recommendation report and Governor in Council’s order, two judicial review proceedings have been commenced at the Supreme Court of BC (Squamish Nation; and the City of Vancouver). The petitions allege a duty and failure to consult or accommodate First Nations, and generally, among other claims, that the Province ought not to have approved the TMEP. Each Applicant seeks to quash the Environmental Assessment Certificate (EAC) that was issued by the BC Environmental Assessment Office. On September 29, 2017, the BC government filed evidence in support of the EAC approval in the judicial review proceeding involving the Squamish Nation. Hearings were conducted in October and November 2017, respectively, for the City of Vancouver and the Squamish Nation judicial review proceedings and the Court took the matters under consideration with decisions expected in the coming months. Although we believe that each of the foregoing appeals lacks merit, in the event that an applicant for judicial review is successful, among other potential impacts, the EAC may be quashed, provincial permits may be revoked, the TMEP may be subject to additional significant regulatory reviews, there may be significant changes to the TMEP plans, further obligations or restrictions may be imposed or the TMEP may be stopped altogether. In the event that an applicant is unsuccessful at the Supreme Court of BC, they may further seek to appeal the decision to the BC Court of Appeal. Any decision of the BC Court of Appeal may be appealed to the Supreme Court of Canada. A successful appeal at either of these levels could result in the same types of consequences described above.
On October 26, 2017 and November 14, 2017, Trans Mountain filed motions with the NEB. The first motion sought to resolve delays experienced by Trans Mountain in obtaining preliminary plan approvals from the City of Burnaby. The second motion sought to establish an NEB process to backstop provincial and municipal processes in a fair, transparent and expedited fashion. On December 7, 2017, the NEB issued an order granting the relief requested by Trans Mountain in respect of its motion related to Burnaby. On January 19, 2018, the NEB granted, in part, Trans Mountain’s motion by establishing a generic process to hear any future motions as they relate to provincial and municipal permitting issues. Burnaby or other interested parties may seek leave to appeal to the Federal Court of Appeal and, if unsuccessful at the Federal Court of Appeal, may further seek to appeal the decision to the Supreme Court of Canada. A successful appeal at either of these levels could result in either one or both of the NEB orders being quashed.
Other Commercial Matters
Union Pacific Railroad Company Easements & Related Litigation
SFPP and Union Pacific Railroad Company (UPRR) have engaged in litigation since 2004 to determine both the extent, if any, to which rent payable by SFPP for the use of pipeline easements on rights-of-way held by UPRR should be adjusted, and the circumstances and conditions under which SFPP must pay to relocate its pipeline within the UPRR rights-of-way. In July 2017, UPRR and SFPP reached a confidential settlement of both the rental and relocation litigation. The amount paid by SFPP to settle the rental litigation was within the right-of-way liability previously recorded by SFPP, and the parties generally agreed to share and allocate the cost of future potential relocations. Although the cost sharing mechanism in the settlement is expected to reduce the cost of future relocations, SFPP does not know UPRR’s plans for projects or other activities that would cause pipeline relocations such that it is difficult to quantify the cost of future potential relocations. Such costs could have an adverse effect on our financial position, results of operations, cash flows, and dividends to our shareholders.
A purported class action lawsuit was filed in 2015 in a U.S. District Court in California by private landowners who claim to be the lawful owners of subsurface real property allegedly used or occupied by UPRR or SFPP. Substantially similar follow-on lawsuits were filed in federal courts by landowners in Nevada, Arizona and New Mexico. These suits, which are brought purportedly as class actions on behalf of all landowners who own land in fee adjacent to and underlying the railroad easement under which the SFPP pipeline is located in those respective states, assert claims against UPRR, SFPP, KMGP, and Kinder
Morgan Operating L.P. “D” alleging that the defendants occupation and use of the subsurface real property was improper. Plaintiffs’ motions for class certification were denied by the federal courts in Arizona and California. The Ninth Circuit Court of Appeals denied Plaintiffs’ request for interlocutory review of the decisions on class certification. The New Mexico and Nevada lawsuits have been stayed. An additional suit was filed in a U.S. District Court in Arizona by private landowners seeking recovery for claims substantially the same as those made in the purported class actions. SFPP views the litigation involving private landowners as primarily a dispute between UPRR and the plaintiff landowners; as such, we expect the lawsuits will be resolved on terms that are not material to KMI’s results of operations, cash flows or dividends to shareholders.
Gulf LNG Facility Arbitration
On March 1, 2016, Gulf LNG Energy, LLC and Gulf LNG Pipeline, LLC (GLNG) received a Notice of Disagreement and Disputed Statements and a Notice of Arbitration from Eni USA Gas Marketing LLC (Eni USA), one of two companies that entered into a terminal use agreement for capacity of the Gulf LNG Facility in Mississippi for an initial term that is not scheduled to expire until the year 2031. Eni USA is an indirect subsidiary of Eni S.p.A., a multi-national integrated energy company headquartered in Milan, Italy. Pursuant to its Notice of Arbitration, Eni USA seeks declaratory and monetary relief based upon its assertion that (i) the terminal use agreement should be terminated because changes in the U.S. natural gas market since the execution of the agreement in December 2007 have “frustrated the essential purpose” of the agreement and (ii) activities allegedly undertaken by affiliates of Gulf LNG Holdings Group LLC “in connection with a plan to convert the LNG Facility into a liquefaction/export facility have given rise to a contractual right on the part of Eni USA to terminate” the agreement. As set forth in the terminal use agreement, disputes are meant to be resolved by final and binding arbitration. A three-member arbitration panel conducted an arbitration hearing in January 2017. During fourth quarter 2017 the arbitration panel informed the parties that it expects to issue its decision on or before February 28, 2018. Eni USA has indicated that it will continue to pay the amounts claimed to be due pending resolution of the dispute. The successful assertion by Eni USA of its claim to terminate or amend its payment obligations under the agreement prior to the expiration of its initial term could have an adverse effect on the business, financial position, results of operations, or cash flows of GLNG and distributions to KMI, a 50% shareholder of GLNG. We view the demand for arbitration to be without merit, and we will continue to contest it vigorously.
Brinckerhoff Merger Litigation
In April 2017, a purported class action suit was filed in the Delaware Court of Chancery by Peter Brinckerhoff, a former EPB unitholder on behalf of a class of former unaffiliated unitholders of EPB, seeking to challenge the $9.2 billion merger of EPB into a subsidiary of KMI as part of a series of transactions in November 2014 whereby KMI acquired all of the outstanding equity interests in KMP, KMR, and EPB that KMI and its subsidiaries did not already own. The suit alleges that the merger consideration did not sufficiently compensate EPB unitholders for the value of three derivative suits concerning drop down transactions which the derivative plaintiff lost standing to pursue after the merger and which the present suit now alleges were collectively worth as much as $700 million. The suit claims that the alleged failure to obtain sufficient merger consideration for the drop down lawsuits constitutes a breach of the EPB limited partnership agreement and the implied covenant of good faith and fair dealing. The suit also asserts claims against KMI and certain individual defendants for allegedly tortiously interfering with and/or aiding and abetting the alleged breach of the limited partnership agreement. Defendants’ motion to dismiss was granted, and the Court dismissed the suit in its entirety. Brinckerhoff filed a notice to appeal the dismissal. In November 2017, counsel for Brinckerhoff filed a separate lawsuit against KMEP and KMI seeking to recover up to $44 million in attorneys’ fees allegedly incurred in connection with the assertion of derivative claims that Brinckerhoff lost standing to pursue. Defendants have moved to dismiss the suit. We continue to believe that both the merger and the drop down transactions were appropriate and in the best interests of EPB, and we intend to continue to defend these lawsuits vigorously.
Price Reporting Litigation
Beginning in 2003, several lawsuits were filed by purchasers of natural gas against El Paso Corporation, El Paso Marketing L.P. and numerous other energy companies based on a claim under state antitrust law that such defendants conspired to manipulate the price of natural gas by providing false price information to industry trade publications that published gas indices. Several of the cases have been settled or dismissed. The remaining cases, which are pending in a U.S. District Court in Nevada, were dismissed, but the dismissal was reversed by the Ninth Circuit Court of Appeals. The U.S. Supreme Court affirmed the Ninth Circuit Court of Appeals in a decision dated April 21, 2015, and the cases were then remanded to the District Court for further consideration and trial, if necessary, of numerous remaining issues. On May 24, 2016, the District Court granted a motion for summary judgment dismissing a lawsuit brought by an industrial consumer in Kansas in which approximately $500 million in damages has been alleged. That ruling has been appealed to the Ninth Circuit Court of Appeals. Settlements have been reached in class actions originally filed in Kansas and Missouri, which settlements received final court approval and have been paid. In the remaining case, a Wisconsin class action in which approximately $300 million in damages
has been alleged against all defendants, the District Court denied plaintiff’s motion for class certification. The Ninth Circuit Court of Appeals granted plaintiff’s request for an interlocutory appeal of this ruling. There remains significant uncertainty regarding the validity of the causes of action, the damages asserted and the level of damages, if any, which may be allocated to us in the remaining lawsuits and therefore, our legal exposure, if any, and costs are not currently determinable.
Pipeline Integrity and Releases
From time to time, despite our best efforts, our pipelines experience leaks and ruptures. These leaks and ruptures may cause explosions, fire, and damage to the environment, damage to property and/or personal injury or death. In connection with these incidents, we may be sued for damages caused by an alleged failure to properly mark the locations of our pipelines and/or to properly maintain our pipelines. Depending upon the facts and circumstances of a particular incident, state and federal regulatory authorities may seek civil and/or criminal fines and penalties.
General
As of December 31, 2017 and 2016, our total reserve for legal matters was $350 million and $407 million, respectively. The reserve primarily relates to various claims from regulatory proceedings arising in our products and natural gas pipeline segments.
Environmental Matters
We and our subsidiaries are subject to environmental cleanup and enforcement actions from time to time. In particular, CERCLA generally imposes joint and several liability for cleanup and enforcement costs on current and predecessor owners and operators of a site, among others, without regard to fault or the legality of the original conduct, subject to the right of a liable party to establish a “reasonable basis” for apportionment of costs. Our operations are also subject to federal, state and local laws and regulations relating to protection of the environment. Although we believe our operations are in substantial compliance with applicable environmental laws and regulations, risks of additional costs and liabilities are inherent in pipeline, terminal and CO2 field and oil field operations, and there can be no assurance that we will not incur significant costs and liabilities. Moreover, it is possible that other developments, such as increasingly stringent environmental laws, regulations and enforcement policies under the terms of authority of those laws, and claims for damages to property or persons resulting from our operations, could result in substantial costs and liabilities to us.
We are currently involved in several governmental proceedings involving alleged violations of environmental and safety regulations, including alleged violations of the Risk Management Program and leak detection and repair requirements of the Clean Air Act. As we receive notices of non-compliance, we attempt to negotiate and settle such matters where appropriate. These alleged violations may result in fines and penalties, but we do not believe any such fines and penalties, individually or in the aggregate, will be material. We are also currently involved in several governmental proceedings involving groundwater and soil remediation efforts under administrative orders or related state remediation programs. We have established a reserve to address the costs associated with the cleanup.
In addition, we are involved with and have been identified as a potentially responsible party in several federal and state superfund sites. Environmental reserves have been established for those sites where our contribution is probable and reasonably estimable. In addition, we are from time to time involved in civil proceedings relating to damages alleged to have occurred as a result of accidental leaks or spills of refined petroleum products, NGL, natural gas and CO2.
Portland Harbor Superfund Site, Willamette River, Portland, Oregon
In December 2000, the EPA issued General Notice letters to potentially responsible parties including GATX Terminals Corporation (n/k/a KMLT). At that time, GATX owned two liquids terminals along the lower reach of the Willamette River, an industrialized area known as Portland Harbor. Portland Harbor is listed on the National Priorities List and is designated as a Superfund Site under CERCLA. A group of potentially responsible parties formed what is known as the Lower Willamette Group (LWG), of which KMLT is a non-voting member. The LWG agreed to conduct the remedial investigation and feasibility study (RI/FS) leading to the proposed remedy for cleanup of the Portland Harbor site. The EPA issued the FS and the Proposed Plan on June 8, 2016 which included a proposed combination of dredging, capping, and enhanced natural recovery. On January 6, 2017, the EPA issued its Record of Decision (ROD) for the final cleanup plan. The final remedy is more stringent than the remedy proposed in the EPA’s Proposed Plan. The estimated cost increased from approximately $750 million to approximately $1.1 billion and active cleanup is now expected to take as long as 13 years to complete. KMLT and 90 other parties are involved in a non-judicial allocation process to determine each party’s respective share of the cleanup costs. We are participating in the allocation process on behalf of KMLT and KMBT in connection with their current or former ownership or
operation of four facilities located in Portland Harbor. Our share of responsibility for Portland Harbor Superfund Site costs will not be determined until the ongoing non-judicial allocation process is concluded in several years or a lawsuit is filed that results in a judicial decision allocating responsibility. Until the allocation process is completed, we are unable to reasonably estimate the extent of our liability for the costs related to the design of the proposed remedy and cleanup of the site. In addition to CERCLA cleanup costs, we are reviewing and will attempt to settle, if possible, natural resource damage (NRD) claims asserted by state and federal trustees following their natural resource assessment of the site. At this time, we are unable to reasonably estimate the extent of our potential NRD liability.
Roosevelt Irrigation District v. Kinder Morgan G.P., Inc., Kinder Morgan Energy Partners, L.P. , U.S. District Court, Arizona
The Roosevelt Irrigation District sued KMGP, KMEP and others under CERCLA for alleged contamination of the water purveyor’s wells. The First Amended Complaint sought $175 million in damages from approximately 70 defendants. On August 6, 2013 plaintiffs filed their Second Amended Complaint seeking monetary damages in unspecified amounts and reducing the number of defendants to 26 including KMEP and SFPP. The claims now presented against KMEP and SFPP are related to alleged releases from a specific parcel within the SFPP Phoenix Terminal and the alleged impact of such releases on water wells owned by the plaintiffs and located in the vicinity of the Terminal. We filed an answer in response to the Second Amended Complaint and fact discovery is proceeding.
Uranium Mines in Vicinity of Cameron, Arizona
In the 1950s and 1960s, Rare Metals Inc., a historical subsidiary of EPNG, mined approximately twenty uranium mines in the vicinity of Cameron, Arizona, many of which are located on the Navajo Indian Reservation. The mining activities were in response to numerous incentives provided to industry by the U.S. to locate and produce domestic sources of uranium to support the Cold War-era nuclear weapons program. In May 2012, EPNG received a general notice letter from the EPA notifying EPNG of the EPA’s investigation of certain sites and its determination that the EPA considers EPNG to be a potentially responsible party within the meaning of CERCLA. In August 2013, EPNG and the EPA entered into an Administrative Order on Consent and Scope of Work pursuant to which EPNG is conducting a radiological assessment of the surface of the mines and the immediate vicinity. On September 3, 2014, EPNG filed a complaint in the U.S. District Court for the District of Arizona seeking cost recovery and contribution from the applicable federal government agencies toward the cost of environmental activities associated with the mines, given the position of the U.S. as owner of the Navajo Reservation, the U.S.’s exploration activities at the mines, and the pervasive control of such federal agencies over all aspects of the nuclear weapons program. Defendants filed an answer and counterclaims seeking contribution and recovery of response costs allegedly incurred by the federal agencies in investigating uranium impacts on the Navajo Reservation. The counterclaim of defendant EPA has been settled, and no viable claims for reimbursement by the other defendants are known to exist. In August 2017, the District Court found the U.S. liable under CERCLA as owner of the Navajo Reservation. The matter seeking cost recovery and contribution from federal government agencies is set for trial in February 2019. We intend to continue to prosecute and defend this case vigorously.
Lower Passaic River Study Area of the Diamond Alkali Superfund Site, Essex, Hudson, Bergen and Passaic Counties, New Jersey
EPEC Polymers, Inc. (EPEC Polymers) and EPEC Oil Company Liquidating Trust (EPEC Oil Trust), former El Paso Corporation entities now owned by KMI, are involved in an administrative action under CERCLA known as the Lower Passaic River Study Area Superfund Site (Site) concerning the lower 17-mile stretch of the Passaic River. It has been alleged that EPEC Polymers and EPEC Oil Trust may be potentially responsible parties (PRPs) under CERCLA based on prior ownership and/or operation of properties located along the relevant section of the Passaic River. EPEC Polymers and EPEC Oil Trust entered into two Administrative Orders on Consent (AOCs) which obligate them to investigate and characterize contamination at the Site. They are also part of a joint defense group of approximately 70 cooperating parties, referred to as the Cooperating Parties Group (CPG), which has entered into AOCs and is directing and funding the work required by the EPA. Under the first AOC, draft remedial investigation and feasibility studies (RI/FS) of the Site were submitted to the EPA in 2015, and comments from the EPA remain pending. Under the second AOC, the CPG members conducted a CERCLA removal action at the Passaic River Mile 10.9, and the group is currently conducting EPA-directed post-remedy monitoring in the removal area. We have established a reserve for the anticipated cost of compliance with the AOCs.
On April 11, 2014, the EPA announced the issuance of its Focused Feasibility Study (FFS) for the lower eight miles of the Passaic River Study Area, and its proposed plan for remedial alternatives to address the dioxin sediment contamination from the mouth of Newark Bay to River Mile 8.3. The EPA estimates the cost for the alternatives will range from $365 million to $3.2 billion. The EPA’s preferred alternative would involve dredging the river bank-to-bank and installing an engineered cap at
an estimated cost of $1.7 billion. On March 4, 2016, the EPA issued its Record of Decision (ROD) for the lower eight miles of the Passaic River Study area. The final cleanup plan in the ROD is substantially similar to the EPA’s preferred alternative announced on April 11, 2014. On October 5, 2016, the EPA entered into an AOC with one member of the PRP group requiring such member to spend $165 million to perform engineering and design work necessary to begin the cleanup of the lower eight miles of the Passaic River. The design work is expected to take four years to complete and the cleanup is expected to take six years to complete.
In addition, the EPA has notified PRPs, including EPEC Polymers and EPEC Oil Trust that it intends to propose an allocation for the implementation of the remedy for the lower eight miles of the Passaic River Study area. The allocation process has not been finalized and we anticipate the EPA will propose an allocation during 2018. There remains significant uncertainty as to the implementation and associated costs of the remedy set forth in the FFS and ROD. There is also uncertainty as to the impact of the RI/FS that the CPG is currently preparing for portions of the Site. The draft RI/FS was submitted by the CPG in 2015 and proposes a different remedy than the FFS announced by the EPA. Therefore, the scope of potential EPA claims for the lower eight miles of the Passaic River is not reasonably estimable at this time.
Southeast Louisiana Flood Protection Litigation
On July 24, 2013, the Board of Commissioners of the Southeast Louisiana Flood Protection Authority - East (SLFPA) filed a petition for damages and injunctive relief in a state district court for Orleans Parish, Louisiana against TGP, SNG and approximately 100 other energy companies, alleging that defendants’ drilling, dredging, pipeline and industrial operations since the 1930’s have caused direct land loss and increased erosion and submergence resulting in alleged increased storm surge risk, increased flood protection costs and unspecified damages to the plaintiff. The SLFPA asserts claims for negligence, strict liability, public nuisance, private nuisance, and breach of contract. Among other relief, the petition seeks unspecified monetary damages, attorney fees, interest, and injunctive relief in the form of abatement and restoration of the alleged coastal land loss including but not limited to backfilling and re-vegetation of canals, wetlands and reef creation, land bridge construction, hydrologic restoration, shoreline protection, structural protection, and bank stabilization. On August 13, 2013, the suit was removed to the U.S. District Court for the Eastern District of Louisiana. On February 13, 2015, the Court granted defendants’ motion to dismiss the suit for failure to state a claim, and issued an order dismissing the SLFPA’s claims with prejudice. On March 3, 2017, the Fifth Circuit Court of Appeals affirmed the U.S. District Court’s decision, and the SLFPA’s petition for writ of certiorari to the U.S. Supreme Court was denied on October 30, 2017, thereby resolving this matter in its entirety.
Plaquemines Parish Louisiana Coastal Zone Litigation
On November 8, 2013, the Parish of Plaquemines, Louisiana filed a petition for damages in the state district court for Plaquemines Parish, Louisiana against TGP and 17 other energy companies, alleging that defendants’ oil and gas exploration, production and transportation operations in the Bastian Bay, Buras, Empire and Fort Jackson oil and gas fields of Plaquemines Parish caused substantial damage to the coastal waters and nearby lands (Coastal Zone) within the Parish, including the erosion of marshes and the discharge of oil waste and other pollutants which detrimentally affected the quality of state waters and plant and animal life, in violation of the State and Local Coastal Resources Management Act of 1978 (Coastal Zone Management Act). As a result of such alleged violations of the Coastal Zone Management Act, Plaquemines Parish seeks, among other relief, unspecified monetary relief, attorney fees, interest, and payment of costs necessary to restore the allegedly affected Coastal Zone to its original condition, including costs to clear, vegetate and detoxify the Coastal Zone. In connection with this suit, TGP has made two tenders for defense and indemnity: (1) to Anadarko, as successor to the entity that purchased TGP’s oil and gas assets in Bastian Bay, and (2) to Kinetica, which purchased TGP’s pipeline assets in Bastian Bay in 2013. Anadarko has accepted TGP’s tender (limited to oil and gas assets), and Kinetica rejected TGP’s tender. The Louisiana Department of Natural Resources and Attorney General have intervened in the lawsuit. The Court has separated the defendants into several trial groups with trials expected to be set to begin in 2019. We expect the case involving TGP will be set for trial in 2020. We will continue to vigorously defend the suit.
Vermilion Parish Louisiana Coastal Zone Litigation
On July 28, 2016, the District Attorney for the Fifteenth Judicial District of Louisiana, purporting to act on behalf of Vermilion Parish and the State of Louisiana, filed suit in the state district court for Vermilion Parish, Louisiana against TGP and 52 other energy companies, alleging that the defendants’ oil and gas and transportation operations associated with the development of several fields in Vermilion Parish (Operational Areas) were conducted in violation of the Coastal Zone Management Act. The suit alleges such operations caused substantial damage to the coastal waters and nearby lands (Coastal Zone) of Vermilion Parish, resulting in the release of pollutants and contaminants into the environment, improper discharge of oil field wastes, the improper use of waste pits and failure to close such pits, and the dredging of canals, which resulted in degradation of the Operational Areas, including erosion of marshes and degradation of terrestrial and aquatic life therein. As a
result of such alleged violations of the Coastal Zone Management Act, the suit seeks a judgment against the defendants awarding all appropriate damages, the payment of costs to clear, revegetate, detoxify and otherwise restore the Vermilion Parish Coastal Zone, actual restoration of the affected Coastal Zone to its original condition, and reasonable costs and attorney fees. On September 2, 2016, the case was removed to the U.S. District Court for the Western District of Louisiana. Plaintiffs filed a motion to remand the case to the state district court. On September 26, 2017, the U.S. District Court remanded the case to the State District Court for Vermillion Parish. We intend to vigorously defend the suit.
Vintage Assets, Inc. Coastal Erosion Litigation
On December 18, 2015, Vintage Assets, Inc. and several individual landowners filed a petition in the State District Court for Plaquemines Parish, Louisiana alleging that its 5,000 acre property is composed of coastal wetlands, and that SNG and TGP failed to maintain pipeline canals and banks, causing widening of the canals, land loss, and damage to the ecology and hydrology of the marsh, in breach of right of way agreements, prudent operating practices, and Louisiana law. The suit also claims that defendants’ alleged failure to maintain pipeline canals and banks constitutes negligence and has resulted in encroachment of the canals, constituting trespass. The suit seeks in excess of $80 million in money damages, including recovery of litigation costs, damages for trespass, and money damages associated with an alleged loss of natural resources and projected reconstruction cost of replacing or restoring wetlands. The suit was removed to the U.S. District Court for the Eastern District of Louisiana. The SNG assets at issue were sold to Highpoint Gas Transmission, LLC in 2011, which was subsequently purchased by American Midstream Partners, LP. In response to SNG’s demand for defense and indemnity, American Midstream Partners agreed to pay 50% of joint defense costs and expenses, with a percentage of indemnity to be determined upon final resolution of the suit. On October 20, 2016, plaintiffs filed an amended complaint naming Highpoint Gas Transmission, LLC as an additional defendant. A non-jury trial was held during September 2017. We anticipate a ruling in the first quarter 2018. We will continue to vigorously defend the suit, and intend to appeal any adverse ruling that may result from the trial.
General
Although it is not possible to predict the ultimate outcomes, we believe that the resolution of the environmental matters set forth in this note, and other matters to which we and our subsidiaries are a party, will not have a material adverse effect on our business, financial position, results of operations or cash flows. As of December 31, 2017 and 2016, we have accrued a total reserve for environmental liabilities in the amount of $279 million and $302 million, respectively. In addition, as of both December 31, 2017 and 2016, we have recorded a receivable of $13 million for expected cost recoveries that have been deemed probable.
- Recent Accounting Pronouncements
Accounting Standards Updates
Topic 606
On May 28, 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” followed by a series of related accounting standard updates (collectively referred to as “Topic 606”). Topic 606 is designed to create greater revenue recognition and disclosure comparability in financial statements. The provisions of Topic 606 include a five-step process by which an entity will determine revenue recognition, depicting the transfer of goods or services to customers in amounts reflecting the payment to which an entity expects to be entitled in exchange for those goods or services. Topic 606 requires certain disclosures about contracts with customers and provides more comprehensive guidance for transactions such as service revenue, contract modifications, and multiple-element arrangements.
Topic 606 will require that our revenue recognition policy disclosure include further detail regarding our performance obligations as to the nature, amount, timing, and estimates of revenue and cash flows generated from our contracts with customers. Topic 606 will require us to reclassify certain gathering and processing service fees currently reflected as revenues within our Natural Gas segment as reductions to Cost of sales in the Consolidated Statements of Income prospectively beginning January 1, 2018. Topic 606 will also require disclosure of significant changes in contract asset and contract liability balances period to period and the amount of the transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period, as applicable. We utilized the modified retrospective method to adopt the provisions of this standard effective January 1, 2018, which required us to apply the new revenue standard to (i) all new revenue contracts entered into after January 1, 2018 and (ii) all existing revenue contracts as of January 1, 2018 through a cumulative adjustment to our retained deficit balance. In accordance with this approach, our consolidated revenues for periods
prior to January 1, 2018 will not be revised. The cumulative effect of the adoption of this standard as of January 1, 2018 was not material.
ASU No. 2015-11
On July 22, 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory.” This ASU requires entities to subsequently measure inventory at the lower of cost and net realizable value, and defines net realizable value as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU No. 2015-11 was effective January 1, 2017. We adopted ASU No. 2015-11 with no material impact to our financial statements.
ASU No. 2016-02
On February 25, 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This ASU requires that lessees recognize assets and liabilities on the balance sheet for the present value of the rights and obligations created by all leases with terms of more than 12 months. The ASU also will require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 will be effective for us as of January 1, 2019. We are currently reviewing the effect of ASU No. 2016-02.
ASU No. 2016-09
On March 30, 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718).” This ASU was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. This ASU covers accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU No. 2016-09 was effective January 1, 2017. We adopted ASU No. 2016-09 with no material impact to our financial statements. See Note 5 “Income Taxes.”
ASU No. 2016-13
On June 16, 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU modifies the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. ASU No. 2016-13 will be effective for us as of January 1, 2020. We are currently reviewing the effect of ASU No. 2016-13.
ASU No. 2016-18
On November 17, 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).” This ASU requires the statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents are to be included with cash and cash equivalents when reconciling the beginning of period and end of period amounts shown on the statement of cash flows. We adopted ASU No. 2016-18 effective January 1, 2018 with no material impact to our financial statements.
ASU No. 2017-04
On January 26, 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment (Topic 350)” to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU No. 2017-04 will be effective for us as of January 1, 2020. We are currently reviewing the effect of this ASU to our financial statements.
ASU No. 2017-05
On February 22, 2017, the FASB issued ASU No. 2017-05, “Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.” This ASU clarifies the scope and application of ASC 610-20 on contracts for the sale or transfer of nonfinancial assets and in substance nonfinancial assets to noncustomers, including partial sales. This ASU also clarifies that the derecognition of all businesses is in the scope of ASC 810 and defines an “in substance nonfinancial asset.” We utilized the modified retrospective method to adopt the provisions of this ASU effective January 1, 2018, which required us to apply the
new standard to (i) all new contracts entered into after January 1, 2018, and (ii) to contracts that were not completed contracts as of January 1, 2018 through a cumulative adjustment to our retained deficit balance. The cumulative effect of the adoption of this standard as of January 1, 2018 was less than $100 million. We will also reclassify EIG’s cumulative contribution to ELC of $485 million from “Other long-term liabilities and deferred credits” to a mezzanine equity classification described as “Redeemable noncontrolling interest” on our future consolidated balance sheets.
ASU No. 2017-07
On March 10, 2017, the FASB issued ASU No. 2017-07, “Compensation - Retirement Benefits (Topic 715).” This ASU requires an employer to disaggregate the service cost component from the other components of net benefit cost, allows only the service cost component of net benefit cost to be eligible for capitalization, and addresses how to present the service cost component and the other components of net benefit cost in the income statement. We adopted ASU No. 2017-07 effective January 1, 2018 with no material impact to our financial statements.
ASU No. 2017-12
On August 28, 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” This ASU amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. ASU No. 2017-12 will be effective for us as of January 1, 2019, and earlier adoption is permitted. We are currently reviewing the effect of this ASU to our financial statements.
ASU No. 2018-01
On January 25, 2018, the FASB issued ASU No. 2018-01, “Land Easement Practical Expedient for Transition to Topic 842.” This ASU provides an optional transition practical expedient that, if elected, would not require companies to reconsider its accounting for existing or expired land easements before the adoption of Topic 842 and that were not previously accounted for as leases under Topic 840. ASU No. 2018-01 will be effective for us as of January 1, 2019, and earlier adoption is permitted. We are currently reviewing the effect of this ASU to our financial statements.
- Guarantee of Securities of Subsidiaries
KMI, along with its direct subsidiary KMP, are issuers of certain public debt securities. KMI, KMP and substantially all of KMI’s wholly owned domestic subsidiaries, are parties to a cross guarantee agreement whereby each party to the agreement unconditionally guarantees, jointly and severally, the payment of specified indebtedness of each other party to the agreement. Accordingly, with the exception of certain subsidiaries identified as Subsidiary Non-Guarantors, the parent issuer, subsidiary issuer and other subsidiaries are all guarantors of each series of public debt. As a result of the cross guarantee agreement, a holder of any of the guaranteed public debt securities issued by KMI or KMP are in the same position with respect to the net assets, income and cash flows of KMI and the Subsidiary Issuer and Guarantors. The only amounts that are not available to the holders of each of the guaranteed public debt securities to satisfy the repayment of such securities are the net assets, income and cash flows of the Subsidiary Non-Guarantors.
In lieu of providing separate financial statements for subsidiary issuer and guarantor, we have included the accompanying condensed consolidating financial statements based on Rule 3-10 of the SEC’s Regulation S-X. We have presented each of the parent and subsidiary issuer in separate columns in this single set of condensed consolidating financial statements.
On September 1, 2016, we sold a 50% equity interest in SNG (see further details discussed in Note 3, “Acquisitions and Divestitures”). Subsequent to the transaction, we deconsolidated SNG and now account for our equity interest in SNG as an equity investment. Our wholly owned subsidiary which holds our interest in SNG is reflected within the Subsidiary Guarantors column of these condensed consolidating financial statements.
On December 31, 2017, KMP’s interests in Kinder Morgan Bulk Terminals LLC were transferred to KMI. The following condensed consolidating financial information reflects this transaction for all periods presented.
Excluding fair value adjustments, as of December 31, 2017, Parent Issuer and Guarantor, Subsidiary Issuer and Guarantor-KMP, and Subsidiary Guarantors had $13,750 million, $18,885 million, and $3,310 million of Guaranteed Notes outstanding, respectively. Included in the Subsidiary Guarantors debt balance as presented in the accompanying December 31,
2017 condensed consolidating balance sheet are approximately $162 million of capitalized lease debt that is not subject to the cross guarantee agreement.
The accounts within the Parent Issuer and Guarantor, Subsidiary Issuer and Guarantor-KMP, Subsidiary Guarantors and Subsidiary Non-Guarantors are presented using the equity method of accounting for investments in subsidiaries, including subsidiaries that are guarantors and non-guarantors, for purposes of these condensed consolidating financial statements only. These intercompany investments and related activity eliminate in consolidation and are presented separately in the accompanying condensed consolidating balance sheets and statements of income and cash flows.
A significant amount of each Issuers’ income and cash flow is generated by its respective subsidiaries. As a result, the funds necessary to meet its debt service and/or guarantee obligations are provided in large part by distributions or advances it receives from its respective subsidiaries. We utilize a centralized cash pooling program among our majority-owned and consolidated subsidiaries, including the Subsidiary Issuers and Guarantors and Subsidiary Non-Guarantors. The following Condensed Consolidating Statements of Cash Flows present the intercompany loan and distribution activity, as well as cash collection and payments made on behalf of our subsidiaries, as cash activities.
| Condensed Consolidating Statements of Income and Comprehensive Income for the Year Ended December 31, 2017 (In Millions) | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Parent Issuer and Guarantor | Subsidiary Issuer and Guarantor - KMP | Subsidiary Guarantors | Subsidiary Non-Guarantors | Consolidating Adjustments | Consolidated KMI | |||||||||||||||||||
| Total Revenues | $ | 35 | $ | — | $ | 12,202 | $ | 1,614 | $ | (146 | ) | $ | 13,705 | |||||||||||
| Operating Costs, Expenses and Other | ||||||||||||||||||||||||
| Costs of sales | — | — | 4,124 | 322 | (101 | ) | 4,345 | |||||||||||||||||
| Depreciation, depletion and amortization | 16 | — | 1,933 | 312 | — | 2,261 | ||||||||||||||||||
| Other operating expenses | 76 | 1 | 2,999 | 524 | (45 | ) | 3,555 | |||||||||||||||||
| Total Operating Costs, Expenses and Other | 92 | 1 | 9,056 | 1,158 | (146 | ) | 10,161 | |||||||||||||||||
| Operating (Loss) Income | (57 | ) | (1 | ) | 3,146 | 456 | — | 3,544 | ||||||||||||||||
| Other Income (Expense) | ||||||||||||||||||||||||
| Earnings from consolidated subsidiaries | 3,575 | 2,681 | 419 | 59 | (6,734 | ) | — | |||||||||||||||||
| Earnings from equity investments | — | — | 428 | — | — | 428 | ||||||||||||||||||
| Interest, net | (701 | ) | 7 | (1,104 | ) | (34 | ) | — | (1,832 | ) | ||||||||||||||
| Amortization of excess cost of equity investments and other, net | — | — | (2 | ) | 23 | — | 21 | |||||||||||||||||
| Income Before Income Taxes | 2,817 | 2,687 | 2,887 | 504 | (6,734 | ) | 2,161 | |||||||||||||||||
| Income Tax (Expense) Benefit | (2,634 | ) | (5 | ) | 237 | 464 | — | (1,938 | ) | |||||||||||||||
| Net Income | 183 | 2,682 | 3,124 | 968 | (6,734 | ) | 223 | |||||||||||||||||
| Net Income Attributable to Noncontrolling Interests | — | — | — | — | (40 | ) | (40 | ) | ||||||||||||||||
| Net Income Attributable to Controlling Interests | 183 | 2,682 | 3,124 | 968 | (6,774 | ) | 183 | |||||||||||||||||
| Preferred Stock Dividends | (156 | ) | — | — | — | — | (156 | ) | ||||||||||||||||
| Net Income Available to Common Stockholders | $ | 27 | $ | 2,682 | $ | 3,124 | $ | 968 | $ | (6,774 | ) | $ | 27 | |||||||||||
| Net Income | $ | 183 | $ | 2,682 | $ | 3,124 | $ | 968 | $ | (6,734 | ) | $ | 223 | |||||||||||
| Total other comprehensive income | 69 | 194 | 217 | 160 | (525 | ) | 115 | |||||||||||||||||
| Comprehensive income | 252 | 2,876 | 3,341 | 1,128 | (7,259 | ) | 338 | |||||||||||||||||
| Comprehensive income attributable to noncontrolling interests | — | — | — | — | (86 | ) | (86 | ) | ||||||||||||||||
| Comprehensive income attributable to controlling interests | $ | 252 | $ | 2,876 | $ | 3,341 | $ | 1,128 | $ | (7,345 | ) | $ | 252 |
| Condensed Consolidating Statements of Income and Comprehensive Income for the Year Ended December 31, 2016 (In Millions) | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Parent Issuer and Guarantor | Subsidiary Issuer and Guarantor - KMP | Subsidiary Guarantors | Subsidiary Non-Guarantors | Consolidating Adjustments | Consolidated KMI | |||||||||||||||||||
| Total Revenues | $ | 34 | $ | — | $ | 11,572 | $ | 1,511 | $ | (59 | ) | $ | 13,058 | |||||||||||
| Operating Costs, Expenses and Other | ||||||||||||||||||||||||
| Costs of sales | — | — | 3,176 | 266 | (13 | ) | 3,429 | |||||||||||||||||
| Depreciation, depletion and amortization | 18 | — | 1,872 | 319 | — | 2,209 | ||||||||||||||||||
| Other operating expenses | 725 | (36 | ) | 2,459 | 746 | (46 | ) | 3,848 | ||||||||||||||||
| Total Operating Costs, Expenses and Other | 743 | (36 | ) | 7,507 | 1,331 | (59 | ) | 9,486 | ||||||||||||||||
| Operating (Loss) Income | (709 | ) | 36 | 4,065 | 180 | — | 3,572 | |||||||||||||||||
| Other Income (Expense) | ||||||||||||||||||||||||
| Earnings from consolidated subsidiaries | 2,948 | 2,802 | 245 | 58 | (6,053 | ) | — | |||||||||||||||||
| Losses from equity investments | — | — | (113 | ) | — | — | (113 | ) | ||||||||||||||||
| Interest, net | (696 | ) | 90 | (1,149 | ) | (51 | ) | — | (1,806 | ) | ||||||||||||||
| Amortization of excess cost of equity investments and other, net | — | — | (20 | ) | 5 | — | (15 | ) | ||||||||||||||||
| Income Before Income Taxes | 1,543 | 2,928 | 3,028 | 192 | (6,053 | ) | 1,638 | |||||||||||||||||
| Income Tax Expense | (835 | ) | (5 | ) | (33 | ) | (44 | ) | — | (917 | ) | |||||||||||||
| Net Income | 708 | 2,923 | 2,995 | 148 | (6,053 | ) | 721 | |||||||||||||||||
| Net Income Attributable to Noncontrolling Interests | — | — | — | — | (13 | ) | (13 | ) | ||||||||||||||||
| Net Income Attributable to Controlling Interests | 708 | $ | 2,923 | $ | 2,995 | $ | 148 | $ | (6,066 | ) | $ | 708 | ||||||||||||
| Preferred Stock Dividends | (156 | ) | $ | — | $ | — | $ | — | $ | — | $ | (156 | ) | |||||||||||
| Net Income Available to Common Stockholders | $ | 552 | $ | 2,923 | $ | 2,995 | $ | 148 | $ | (6,066 | ) | $ | 552 | |||||||||||
| Net Income | $ | 708 | $ | 2,923 | $ | 2,995 | $ | 148 | $ | (6,053 | ) | $ | 721 | |||||||||||
| Total other comprehensive (loss) income | (200 | ) | (341 | ) | (352 | ) | 55 | 638 | (200 | ) | ||||||||||||||
| Comprehensive income | 508 | 2,582 | 2,643 | 203 | (5,415 | ) | 521 | |||||||||||||||||
| Comprehensive income attributable to noncontrolling interests | — | — | — | — | (13 | ) | (13 | ) | ||||||||||||||||
| Comprehensive income attributable to controlling interests | $ | 508 | $ | 2,582 | $ | 2,643 | $ | 203 | $ | (5,428 | ) | $ | 508 |
| Condensed Consolidating Statements of Income and Comprehensive Income for the Year Ended December 31, 2015 (In Millions) | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Parent Issuer and Guarantor | Subsidiary Issuer and Guarantor - KMP | Subsidiary Guarantors | Subsidiary Non-Guarantors | Consolidating Adjustments | Consolidated KMI | |||||||||||||||||||
| Total Revenues | $ | 37 | $ | — | $ | 12,840 | $ | 1,575 | $ | (49 | ) | $ | 14,403 | |||||||||||
| Operating Costs, Expenses and Other | ||||||||||||||||||||||||
| Costs of sales | — | — | 3,691 | 367 | 1 | 4,059 | ||||||||||||||||||
| Depreciation, depletion and amortization | 22 | — | 1,929 | 358 | — | 2,309 | ||||||||||||||||||
| Other operating expenses | 71 | 38 | 4,770 | 759 | (50 | ) | 5,588 | |||||||||||||||||
| Total Operating Costs, Expenses and Other | 93 | 38 | 10,390 | 1,484 | (49 | ) | 11,956 | |||||||||||||||||
| Operating (Loss) Income | (56 | ) | (38 | ) | 2,450 | 91 | — | 2,447 | ||||||||||||||||
| Other Income (Expense) | ||||||||||||||||||||||||
| Earnings (losses) from consolidated subsidiaries | 1,430 | 1,631 | 118 | (30 | ) | (3,149 | ) | — | ||||||||||||||||
| Earnings from equity investments | — | — | 384 | — | — | 384 | ||||||||||||||||||
| Interest, net | (686 | ) | 23 | (1,345 | ) | (43 | ) | — | (2,051 | ) | ||||||||||||||
| Amortization of excess cost of equity investments and other, net | — | 1 | (17 | ) | 8 | — | (8 | ) | ||||||||||||||||
| Income Before Income Taxes | 688 | 1,617 | 1,590 | 26 | (3,149 | ) | 772 | |||||||||||||||||
| Income Tax Expense | (435 | ) | (4 | ) | (6 | ) | (119 | ) | — | (564 | ) | |||||||||||||
| Net Income (Loss) | 253 | 1,613 | 1,584 | (93 | ) | (3,149 | ) | 208 | ||||||||||||||||
| Net Loss Attributable to Noncontrolling Interests | — | — | — | — | 45 | 45 | ||||||||||||||||||
| Net Income (Loss) Attributable to Controlling Interests | 253 | 1,613 | 1,584 | (93 | ) | (3,104 | ) | 253 | ||||||||||||||||
| Preferred Stock Dividends | (26 | ) | — | — | — | — | (26 | ) | ||||||||||||||||
| Net Income (Loss) Available to Common Stockholders | 227 | 1,613 | 1,584 | (93 | ) | (3,104 | ) | 227 | ||||||||||||||||
| Net Income (Loss) | $ | 253 | $ | 1,613 | $ | 1,584 | $ | (93 | ) | $ | (3,149 | ) | $ | 208 | ||||||||||
| Total other comprehensive loss | (444 | ) | (460 | ) | (325 | ) | (326 | ) | 1,111 | (444 | ) | |||||||||||||
| Comprehensive (loss) income | (191 | ) | 1,153 | 1,259 | (419 | ) | (2,038 | ) | (236 | ) | ||||||||||||||
| Comprehensive loss attributable to noncontrolling interests | — | — | — | — | 45 | 45 | ||||||||||||||||||
| Comprehensive (loss) income attributable to controlling interests | $ | (191 | ) | $ | 1,153 | $ | 1,259 | $ | (419 | ) | $ | (1,993 | ) | $ | (191 | ) |
| Condensed Consolidating Balance Sheet as of December 31, 2017 (In Millions) | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Parent Issuer and Guarantor | Subsidiary Issuer and Guarantor - KMP | Subsidiary Guarantors | Subsidiary Non-Guarantors | Consolidating Adjustments | Consolidated KMI | |||||||||||||||||||
| ASSETS | ||||||||||||||||||||||||
| Cash and cash equivalents | $ | 3 | $ | — | $ | — | $ | 262 | $ | (1 | ) | $ | 264 | |||||||||||
| Other current assets - affiliates | 6,214 | 5,201 | 22,402 | 858 | (34,675 | ) | — | |||||||||||||||||
| All other current assets | 243 | 59 | 1,938 | 235 | (24 | ) | 2,451 | |||||||||||||||||
| Property, plant and equipment, net | 236 | — | 31,093 | 8,826 | — | 40,155 | ||||||||||||||||||
| Investments | 665 | — | 6,498 | 135 | — | 7,298 | ||||||||||||||||||
| Investments in subsidiaries | 37,983 | 36,728 | 5,417 | 4,232 | (84,360 | ) | — | |||||||||||||||||
| Goodwill | 13,789 | 22 | 5,166 | 3,185 | — | 22,162 | ||||||||||||||||||
| Notes receivable from affiliates | 1,033 | 20,363 | 1,233 | 776 | (23,405 | ) | — | |||||||||||||||||
| Deferred income taxes | 3,635 | — | — | — | (1,591 | ) | 2,044 | |||||||||||||||||
| Other non-current assets | 254 | 164 | 4,080 | 183 | — | 4,681 | ||||||||||||||||||
| Total assets | $ | 64,055 | $ | 62,537 | $ | 77,827 | $ | 18,692 | $ | (144,056 | ) | $ | 79,055 | |||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||
| Current portion of debt | $ | 924 | $ | 975 | $ | 805 | $ | 124 | $ | — | $ | 2,828 | ||||||||||||
| Other current liabilities - affiliates | 13,225 | 14,188 | 6,512 | 750 | (34,675 | ) | — | |||||||||||||||||
| All other current liabilities | 468 | 347 | 2,055 | 508 | (25 | ) | 3,353 | |||||||||||||||||
| Long-term debt | 13,104 | 18,206 | 3,052 | 653 | — | 35,015 | ||||||||||||||||||
| Notes payable to affiliates | 2,009 | 448 | 20,593 | 355 | (23,405 | ) | — | |||||||||||||||||
| Deferred income taxes | — | — | 449 | 1,142 | (1,591 | ) | — | |||||||||||||||||
| Other long-term liabilities and deferred credits | 689 | 117 | 1,462 | 467 | — | 2,735 | ||||||||||||||||||
| Total liabilities | 30,419 | 34,281 | 34,928 | 3,999 | (59,696 | ) | 43,931 | |||||||||||||||||
| Stockholders’ equity | ||||||||||||||||||||||||
| Total KMI equity | 33,636 | 28,256 | 42,899 | 14,693 | (85,848 | ) | 33,636 | |||||||||||||||||
| Noncontrolling interests | — | — | — | — | 1,488 | 1,488 | ||||||||||||||||||
| Total stockholders’ equity | 33,636 | 28,256 | 42,899 | 14,693 | (84,360 | ) | 35,124 | |||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 64,055 | $ | 62,537 | $ | 77,827 | $ | 18,692 | $ | (144,056 | ) | $ | 79,055 |
| Condensed Consolidating Balance Sheet as of December 31, 2016 (In Millions) | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Parent Issuer and Guarantor | Subsidiary Issuer and Guarantor - KMP | Subsidiary Guarantors | Subsidiary Non-Guarantors | Consolidating Adjustments | Consolidated KMI | |||||||||||||||||||
| ASSETS | ||||||||||||||||||||||||
| Cash and cash equivalents | $ | 471 | $ | — | $ | 9 | $ | 205 | $ | (1 | ) | $ | 684 | |||||||||||
| Other current assets - affiliates | 5,739 | 1,999 | 13,207 | 655 | (21,600 | ) | — | |||||||||||||||||
| All other current assets | 269 | 139 | 1,935 | 205 | (3 | ) | 2,545 | |||||||||||||||||
| Property, plant and equipment, net | 242 | — | 30,795 | 7,668 | — | 38,705 | ||||||||||||||||||
| Investments | 665 | 2 | 6,236 | 124 | — | 7,027 | ||||||||||||||||||
| Investments in subsidiaries | 26,907 | 28,894 | 4,307 | 4,015 | (64,123 | ) | — | |||||||||||||||||
| Goodwill | 13,789 | 22 | 5,167 | 3,174 | — | 22,152 | ||||||||||||||||||
| Notes receivable from affiliates | 516 | 21,608 | 1,132 | 412 | (23,668 | ) | — | |||||||||||||||||
| Deferred income taxes | 6,647 | — | — | — | (2,295 | ) | 4,352 | |||||||||||||||||
| Other non-current assets | 72 | 206 | 4,455 | 107 | — | 4,840 | ||||||||||||||||||
| Total assets | $ | 55,317 | $ | 52,870 | $ | 67,243 | $ | 16,565 | $ | (111,690 | ) | $ | 80,305 | |||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||
| Current portion of debt | $ | 1,286 | $ | 600 | $ | 687 | $ | 123 | $ | — | $ | 2,696 | ||||||||||||
| Other current liabilities - affiliates | 3,551 | 13,299 | 4,197 | 553 | (21,600 | ) | — | |||||||||||||||||
| All other current liabilities | 432 | 362 | 2,016 | 422 | (4 | ) | 3,228 | |||||||||||||||||
| Long-term debt | 13,308 | 19,277 | 4,095 | 674 | — | 37,354 | ||||||||||||||||||
| Notes payable to affiliates | 1,533 | 448 | 20,520 | 1,167 | (23,668 | ) | — | |||||||||||||||||
| Deferred income taxes | — | — | 681 | 1,614 | (2,295 | ) | — | |||||||||||||||||
| Other long-term liabilities and deferred credits | 776 | 111 | 821 | 517 | — | 2,225 | ||||||||||||||||||
| Total liabilities | 20,886 | 34,097 | 33,017 | 5,070 | (47,567 | ) | 45,503 | |||||||||||||||||
| Stockholders’ equity | ||||||||||||||||||||||||
| Total KMI equity | 34,431 | 18,773 | 34,226 | 11,495 | (64,494 | ) | 34,431 | |||||||||||||||||
| Noncontrolling interests | — | — | — | — | 371 | 371 | ||||||||||||||||||
| Total stockholders’ equity | 34,431 | 18,773 | 34,226 | 11,495 | (64,123 | ) | 34,802 | |||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 55,317 | $ | 52,870 | $ | 67,243 | $ | 16,565 | $ | (111,690 | ) | $ | 80,305 |
| Condensed Consolidating Statements of Cash Flows for the Year Ended December 31, 2017 (In Millions) | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Parent Issuer and Guarantor | Subsidiary Issuer and Guarantor - KMP | Subsidiary Guarantors | Subsidiary Non-Guarantors | Consolidating Adjustments | Consolidated KMI | ||||||||||||||||||||
| Net cash (used in) provided by operating activities | $ | (3,184 | ) | $ | 3,911 | $ | 11,523 | $ | 1,121 | $ | (8,770 | ) | $ | 4,601 | |||||||||||
| Cash flows from investing activities | |||||||||||||||||||||||||
| Acquisitions of assets and investments, net of cash acquired | — | — | (4 | ) | — | — | (4 | ) | |||||||||||||||||
| Capital expenditures | (23 | ) | — | (2,390 | ) | (775 | ) | — | (3,188 | ) | |||||||||||||||
| Sales of property, plant and equipment, investments and other net assets, net of removal costs | 16 | — | 94 | 8 | — | 118 | |||||||||||||||||||
| Contributions to investments | (237 | ) | — | (435 | ) | (12 | ) | — | (684 | ) | |||||||||||||||
| Distributions from equity investments in excess of cumulative earnings | 2,297 | — | 326 | — | (2,249 | ) | 374 | ||||||||||||||||||
| Funding (to) from affiliates | (4,419 | ) | 779 | (7,040 | ) | (1,028 | ) | 11,708 | — | ||||||||||||||||
| Other, net | (23 | ) | 36 | 4 | 5 | — | 22 | ||||||||||||||||||
| Net cash (used in) provided by investing activities | (2,389 | ) | 815 | (9,445 | ) | (1,802 | ) | 9,459 | (3,362 | ) | |||||||||||||||
| Cash flows from financing activities | |||||||||||||||||||||||||
| Issuances of debt | 8,609 | — | — | 259 | — | 8,868 | |||||||||||||||||||
| Payments of debt | (9,288 | ) | (600 | ) | (897 | ) | (279 | ) | — | (11,064 | ) | ||||||||||||||
| Debt issue costs | (12 | ) | — | — | (58 | ) | — | (70 | ) | ||||||||||||||||
| Cash dividends - common shares | (1,120 | ) | — | — | — | — | (1,120 | ) | |||||||||||||||||
| Cash dividends - preferred shares | (156 | ) | — | — | — | — | (156 | ) | |||||||||||||||||
| Repurchases of shares | (250 | ) | — | — | — | — | (250 | ) | |||||||||||||||||
| Funding from (to) affiliates | 7,327 | 776 | 3,797 | (192 | ) | (11,708 | ) | — | |||||||||||||||||
| Contributions from investment partner | — | — | 485 | — | — | 485 | |||||||||||||||||||
| Contributions from parents, including net proceeds from KML IPO and preferred share issuance | — | — | — | 1,673 | (1,673 | ) | — | ||||||||||||||||||
| Contributions from noncontrolling interests - net proceeds from KML IPO | 4 | — | — | — | — | 1,241 | 1,245 | ||||||||||||||||||
| Contributions from noncontrolling interests - net proceeds from KML preferred share issuances | — | — | — | — | 420 | 420 | |||||||||||||||||||
| Contributions from noncontrolling interests - other | — | — | — | — | 12 | 12 | |||||||||||||||||||
| Distributions to parents | — | (4,902 | ) | (5,472 | ) | (687 | ) | 11,061 | — | ||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | (42 | ) | (42 | ) | |||||||||||||||||
| Other, net | (9 | ) | — | — | — | — | (9 | ) | |||||||||||||||||
| Net cash provided by (used in) financing activities | 5,105 | (4,726 | ) | (2,087 | ) | 716 | (689 | ) | (1,681 | ) | |||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | — | — | — | 22 | — | 22 | |||||||||||||||||||
| Net (decrease) increase in cash and cash equivalents | (468 | ) | — | (9 | ) | 57 | — | (420 | ) | ||||||||||||||||
| Cash and cash equivalents, beginning of period | 471 | — | 9 | 205 | (1 | ) | 684 | ||||||||||||||||||
| Cash and cash equivalents, end of period | $ | 3 | $ | — | $ | — | $ | 262 | $ | (1 | ) | $ | 264 |
| Condensed Consolidating Statements of Cash Flows for the Year Ended December 31, 2016 (In Millions) | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Parent Issuer and Guarantor | Subsidiary Issuer and Guarantor - KMP | Subsidiary Guarantors | Subsidiary Non-Guarantors | Consolidating Adjustments | Consolidated KMI | |||||||||||||||||||
| Net cash (used in) provided by operating activities | $ | (3,981 | ) | $ | 4,980 | $ | 11,641 | $ | 885 | $ | (8,730 | ) | $ | 4,795 | ||||||||||
| Cash flows from investing activities | ||||||||||||||||||||||||
| Acquisitions of assets and investments | (2 | ) | — | (331 | ) | — | — | (333 | ) | |||||||||||||||
| Capital expenditures | (27 | ) | — | (2,258 | ) | (597 | ) | — | (2,882 | ) | ||||||||||||||
| Proceeds from sale of equity interests in subsidiaries net | — | — | 1,401 | — | — | 1,401 | ||||||||||||||||||
| Sales of property, plant and equipment, investments and other net assets, net of removal costs | 6 | — | 326 | (2 | ) | — | 330 | |||||||||||||||||
| Contributions to investments | (343 | ) | — | (54 | ) | (11 | ) | — | (408 | ) | ||||||||||||||
| Distributions from equity investments in excess of cumulative earnings | 2,417 | 298 | 190 | — | (2,674 | ) | 231 | |||||||||||||||||
| Funding to affiliates | (2,820 | ) | (535 | ) | (5,062 | ) | (727 | ) | 9,144 | — | ||||||||||||||
| Other, net | — | (73 | ) | 39 | (10 | ) | — | (44 | ) | |||||||||||||||
| Net cash used in investing activities | (769 | ) | (310 | ) | (5,749 | ) | (1,347 | ) | 6,470 | (1,705 | ) | |||||||||||||
| Cash flows from financing activities | ||||||||||||||||||||||||
| Issuances of debt | 8,255 | — | 374 | — | — | 8,629 | ||||||||||||||||||
| Payments of debt | (7,322 | ) | (500 | ) | (2,227 | ) | (11 | ) | — | (10,060 | ) | |||||||||||||
| Debt issue costs | (16 | ) | — | (2 | ) | (1 | ) | — | (19 | ) | ||||||||||||||
| Cash dividends - common shares | (1,118 | ) | — | — | — | — | (1,118 | ) | ||||||||||||||||
| Cash dividends - preferred shares | (154 | ) | — | — | — | — | (154 | ) | ||||||||||||||||
| Funding from affiliates | 5,461 | 1,116 | 1,959 | 608 | (9,144 | ) | — | |||||||||||||||||
| Contributions from parents | — | — | 117 | — | (117 | ) | — | |||||||||||||||||
| Contributions from noncontrolling interests | — | — | — | — | 117 | 117 | ||||||||||||||||||
| Distributions to parents | — | (5,286 | ) | (6,116 | ) | (73 | ) | 11,475 | — | |||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | (24 | ) | (24 | ) | ||||||||||||||||
| Other, net | (8 | ) | — | — | — | — | (8 | ) | ||||||||||||||||
| Net cash provided by (used in) financing activities | 5,098 | (4,670 | ) | (5,895 | ) | 523 | 2,307 | (2,637 | ) | |||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | — | — | — | 2 | — | 2 | ||||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | 348 | — | (3 | ) | 63 | 47 | 455 | |||||||||||||||||
| Cash and cash equivalents, beginning of period | 123 | — | 12 | 142 | (48 | ) | 229 | |||||||||||||||||
| Cash and cash equivalents, end of period | $ | 471 | $ | — | $ | 9 | $ | 205 | $ | (1 | ) | $ | 684 |
| Condensed Consolidating Statements of Cash Flows for the Year Ended December 31, 2015 (In Millions) | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Parent Issuer and Guarantor | Subsidiary Issuer and Guarantor - KMP | Subsidiary Guarantors | Subsidiary Non-Guarantors | Consolidating Adjustments | Consolidated KMI | |||||||||||||||||||
| Net cash (used in) provided by operating activities | $ | (4,208 | ) | $ | 6,824 | $ | 11,039 | $ | 347 | $ | (8,689 | ) | $ | 5,313 | ||||||||||
| Cash flows from investing activities | ||||||||||||||||||||||||
| Acquisitions of assets and investments | (1,843 | ) | — | (236 | ) | — | — | (2,079 | ) | |||||||||||||||
| Capital expenditures | (10 | ) | — | (3,555 | ) | (331 | ) | — | (3,896 | ) | ||||||||||||||
| Sales of property, plant and equipment, investments, and other net assets, net of removal costs | — | — | 39 | — | — | 39 | ||||||||||||||||||
| Contributions to investments | (21 | ) | — | (70 | ) | (10 | ) | 5 | (96 | ) | ||||||||||||||
| Distributions from equity investments in excess of cumulative earnings | 2,653 | — | 143 | — | (2,568 | ) | 228 | |||||||||||||||||
| Investment in KMP | (159 | ) | — | — | — | 159 | — | |||||||||||||||||
| Funding to affiliates | (3,204 | ) | (8,388 | ) | (7,980 | ) | (779 | ) | 20,351 | — | ||||||||||||||
| Other, net | — | 24 | 16 | 58 | — | 98 | ||||||||||||||||||
| Net cash used in investing activities | (2,584 | ) | (8,364 | ) | (11,643 | ) | (1,062 | ) | 17,947 | (5,706 | ) | |||||||||||||
| Cash flows from financing activities | ||||||||||||||||||||||||
| Issuances of debt | 14,316 | — | — | — | — | 14,316 | ||||||||||||||||||
| Payments of debt | (14,048 | ) | (675 | ) | (383 | ) | (10 | ) | — | (15,116 | ) | |||||||||||||
| Debt issue costs | (24 | ) | — | — | — | — | (24 | ) | ||||||||||||||||
| Issuances of common shares | 3,870 | — | — | — | — | 3,870 | ||||||||||||||||||
| Issuance of mandatory convertible preferred stock | 1,541 | — | — | — | — | 1,541 | ||||||||||||||||||
| Cash dividends - common shares | (4,224 | ) | — | — | — | — | (4,224 | ) | ||||||||||||||||
| Repurchases of warrants | (12 | ) | — | — | — | — | (12 | ) | ||||||||||||||||
| Funding from affiliates | 5,502 | 6,989 | 7,112 | 748 | (20,351 | ) | — | |||||||||||||||||
| Contributions from parents | — | 156 | 3 | 16 | (175 | ) | — | |||||||||||||||||
| Contributions from noncontrolling interests | — | — | — | — | 11 | 11 | ||||||||||||||||||
| Distributions to parents | — | (4,944 | ) | (6,133 | ) | (166 | ) | 11,243 | — | |||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | (34 | ) | (34 | ) | ||||||||||||||||
| Other, net | (10 | ) | (1 | ) | — | — | — | (11 | ) | |||||||||||||||
| Net cash provided by financing activities | 6,911 | 1,525 | 599 | 588 | (9,306 | ) | 317 | |||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | — | — | — | (10 | ) | — | (10 | ) | ||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | 119 | (15 | ) | (5 | ) | (137 | ) | (48 | ) | (86 | ) | |||||||||||||
| Cash and cash equivalents, beginning of period | 4 | 15 | 17 | 279 | — | 315 | ||||||||||||||||||
| Cash and cash equivalents, end of period | $ | 123 | $ | — | $ | 12 | $ | 142 | $ | (48 | ) | $ | 229 |
| Supplemental Selected Quarterly Financial Data (Unaudited) | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Quarters Ended | |||||||||||||||
| March 31 | June 30 | September 30 | December 31 | ||||||||||||
| (In millions, except per share amounts) | |||||||||||||||
| 2017 | |||||||||||||||
| Revenues | $ | 3,424 | $ | 3,368 | $ | 3,281 | $ | 3,632 | |||||||
| Operating Income | 980 | 922 | 830 | 812 | |||||||||||
| Net Income (Loss) | 445 | 383 | 387 | (992 | ) | ||||||||||
| Net Income (Loss) Attributable to Kinder Morgan, Inc. | 440 | 376 | 373 | (1,006 | ) | ||||||||||
| Net Income (Loss) Available to Common Stockholders | 401 | 337 | 334 | (1,045 | ) | ||||||||||
| Basic and Diluted Earnings (Loss) Per Common Share | 0.18 | 0.15 | 0.15 | (0.47 | ) | ||||||||||
| 2016 | |||||||||||||||
| Revenues | $ | 3,195 | $ | 3,144 | $ | 3,330 | $ | 3,389 | |||||||
| Operating Income | 816 | 940 | 882 | 934 | |||||||||||
| Net Income (Loss) | 314 | 375 | (183 | ) | 215 | ||||||||||
| Net Income (Loss) Attributable to Kinder Morgan, Inc. | 315 | 372 | (188 | ) | 209 | ||||||||||
| Net Income (Loss) Available to Common Stockholders | 276 | 333 | (227 | ) | 170 | ||||||||||
| Basic and Diluted Earnings (Loss) Per Common Share | 0.12 | 0.15 | (0.10 | ) | 0.08 |
Previous: Item 14. Principal Accounting Fees and Services. · Next: Item 16. Form 10-K Summary.