Description
Kinder Morgan, Inc. Director FAYEZ SAROFIM bought 600,000 shares on 10-26-2012 at $ 34.76
BUSINESS OVERVIEW
Kinder Morgan, Inc. was formed August 23, 2006 principally for the purpose of acquiring (through a wholly owned subsidiary) all of the common stock of Kinder Morgan Kansas, Inc.. The merger closed on May 30, 2007 with Kinder Morgan Kansas, Inc. continuing as a surviving legal entity. This transaction is referred to herein as the “Going Private Transaction.” Unless the context requires otherwise, references to “we,” “us,” “our,” “KMI,” or the “Company” are intended to mean Kinder Morgan, Inc. and its consolidated subsidiaries including Kinder Morgan Kansas, Inc., referred to in this report as KMK and Kinder Morgan Energy Partners, L.P., referred to in this report as KMP.
Primarily through KMP, we operate or own an interest in approximately 37,000 miles of pipelines and approximately 180 terminals. These pipelines transport natural gas, refined petroleum products, crude oil, carbon dioxide and other products, and our terminals store petroleum products and chemicals, and handle such products as ethanol, coal, petroleum coke and steel. We are the leading provider of carbon dioxide, commonly called CO 2 , for enhanced oil recovery projects in North America. We also own a 20% equity interest in NGPL PipeCo LLC, the owner of Natural Gas Pipeline Company of America and certain affiliates, collectively referred to in this report as NGPL. NGPL is a major interstate natural gas pipeline and storage system that we operate. As of December 31, 2011, our interests in KMP and its affiliates consisted of the following:
â–Şthe general partner interest, which we hold through our ownership of the common equity of the general partner of KMP and which entitles us to receive incentive distributions;
â–Ş21.7 million of the 238.0 million outstanding KMP units, representing an approximately 6.4% limited partner interest; and
▪14.1 million of KMP’s 98.5 million outstanding i-units, representing an approximately 4.2% limited partner interest, through our ownership of 14.1 million Kinder Morgan Management, LLC, referred to as KMR in this report, shares (i-units are a class of KMP’s limited partner interests that receive distributions in the form of additional i-units instead of cash).
Pending Acquisition of El Paso Corporation
On October 16, 2011, we and El Paso Corporation (NYSE: EP) announced a definitive agreement whereby we will acquire all of the outstanding shares of EP. EP owns North America’s largest interstate natural gas pipeline system, one of North America’s largest independent exploration and production companies and an emerging midstream business. EP also owns a 42 percent limited partner interest and the 2 percent general partner interest in El Paso Pipeline Partners, L.P.( NYSE:EPB).
As of the announcement date, the total purchase price, including the assumption of debt outstanding at EP and the debt outstanding at EPB, was approximately $38 billion. Under the terms of the transaction, the consideration to be received by the EP shareholders is valued at $26.87 per EP share based on KMI’s closing price as of October 14, 2011, representing a 47 percent premium to the 20-day average closing price of EP common shares and a 37 percent premium over the closing price of EP common shares on October 14, 2011. The offer is comprised of $14.65 in cash, 0.4187 KMI Class P shares (valued at $11.26 per EP share) and 0.640 KMI warrants (valued at $0.96 per EP share) based on KMI’s closing price on October 14, 2011. The warrants will have an exercise price of $40 and a five-year term. EP shareholders will be able to elect, for each EP share held, either (i) $25.91 in cash, (ii) 0.9635 KMI Class P shares, or (iii) $14.65 in cash plus 0.4187 KMI Class P shares. All elections will be subject to proration and in all cases EP shareholders will receive 0.640 KMI warrants per share of EP common stock.
On February 10, 2012, we entered into (i) an amendment to our existing $1.0 billion revolving credit facility to permit, among other things, the transactions contemplated by the E P merger agreement, and to fund, in part, the transactions and related costs and expenses; (ii) an incremental joinder agreement which provides for $750 million in additional commitments under our existing revolving credit facility; and (iii) an acquisition debt facilities credit agreement containing a $6.8 billion 364-day facility and a $5.0 billion 3-year term loan facility, the proceeds of which will be used to finance a portion of the cash consideration and related fees and expenses to be paid in connection with the EP acquisition. All of the foregoing will be effective upon completion of the EP acquisition.
The transaction has been approved by each company’s board of directors. Prior to closing, the transaction will require approval of both KMI and EP shareholders. The transaction is expected to close in the second quarter of 2012 and is subject to customary regulatory approvals.
The opportunity to sell (drop-down) EP’s natural gas pipeline assets to KMP and EPB and sell EP’s exploration and production business, and the availability of certain net operating loss carryforwards to help offset taxable gains in connection with such sales, is expected to reduce substantially the level of indebtedness incurred to finance the transactions.
Initial Public Offering
On February 10, 2011, we converted from a Delaware limited liability company named Kinder Morgan Holdco LLC to a Delaware corporation named Kinder Morgan, Inc. and our outstanding units were converted into classes of our capital stock. These transactions are referred to herein as the “Conversion Transaction.” Our subsidiary formerly known as Kinder Morgan, Inc. was renamed Kinder Morgan Kansas, Inc. On February 16, 2011, we completed the initial public offering of our common stock. All of the common stock that was sold in the offering was sold by our existing investors consisting of funds advised by or affiliated with Goldman Sachs & Co., Highstar Capital LP, The Carlyle Group and Riverstone Holdings LLC, referred to herein as the “Sponsor Investors.” No members of management sold shares in the offering, and we did not receive any proceeds from the offering.
We are currently owned by the public due to the sale of Class P common stock, which is sometimes referred to herein as our “common stock,” in our initial public offering, and by individuals and entities that were the owners of Kinder Morgan Holdco LLC, which are referred to collectively in this report as the “Investors.” The Investors are Richard D. Kinder, our Chairman and Chief Executive Officer; the Sponsor Investors; Fayez Sarofim, one of our directors, and investment entities affiliated with him, and an investment entity affiliated with Michael C. Morgan, another of our directors, and William V. Morgan, one of our founders, whom we refer to collectively as the “Original Stockholders”; and a number of other members of our management, who are referred to collectively as “Other Management.”
The Investors currently own all of our outstanding Class A shares, Class B shares and Class C shares, which are sometimes referred to in this report as the “investor retained stock.” As of December 31, 2011, there were 170,921,140 shares of our Class P common stock outstanding, and the shares of the investor retained stock were convertible into an aggregate of 535,972,387 shares of our Class P common stock. As a result, as of December 31, 2011 we had 706,893,527 shares of Class P common stock outstanding on a fully-converted basis.
Our Class A shares represent the total capital contributed by the Investors (and a notional amount of capital allocated to the contribution of the holders of the Class C shares) at the time of the Going Private Transaction. The Class B shares and Class C shares represent incentive compensation that is held by members of our management, including Mr. Kinder only in the case of the Class B shares.
You should read the following in conjunction with our audited consolidated financial statements and the notes thereto included elsewhere in this report. We have prepared our accompanying consolidated financial statements under the rules and regulations of the United States Securities and Exchange Commission (SEC). Our accounting records are maintained in United States dollars, and all references to dollars in this report are United States dollars, except where stated otherwise. Canadian dollars are designated as C$. Our consolidated financial statements include our accounts and those of our majority-owned and controlled subsidiaries, and all significant intercompany items have been eliminated in consolidation. The address of our principal executive offices is 500 Dallas Street, Suite 1000, Houston, Texas 77002, and our telephone number at this address is (713) 369-9000 .
(a) General Development of Business
Organizational Structure
KMR is a publicly traded Delaware limited liability company that was formed on February 14, 2001. Kinder Morgan G.P., Inc., of which we indirectly own all of the outstanding common equity, owns all of KMR’s voting shares. KMR, pursuant to a delegation of control agreement, has been delegated, to the fullest extent permitted under Delaware law, all of Kinder Morgan G.P., Inc.’s power and authority to manage and control the business and affairs of KMP subject to Kinder Morgan G.P., Inc.’s right to approve certain transactions. KMR also owns all of the i-units of KMP. The i-units are a class of KMP’s limited partner interests that have been, and will be, issued only to KMR. We have certain rights and obligations with respect to these securities.
KMP is a publicly traded pipeline limited partnership whose limited partner units are traded on the New York Stock Exchange under the ticker symbol “KMP.” KMR’s shares (other than the voting shares held by Kinder Morgan G.P., Inc.) are traded on the New York Stock Exchange under the ticker symbol “KMR.”
The equity interests in KMP and KMR (which are both consolidated in our financial statements) owned by the public are reflected within “noncontrolling interests” on our accompanying consolidated balance sheets. The earnings recorded by KMP and KMR that are attributed to their units and shares, respectively, held by the public are reported as noncontrolling interests” in our accompanying consolidated statements of income.
Additional information concerning the business of, and our investment in and obligations to, KMP and KMR is contained in Notes 2 and 10 to our consolidated financial statements included elsewhere in this report and KMP’s Annual Report on Form 10-K for the year ended December 31, 2011 and KMR’s Annual Report on Form 10-K for the year ended December 31, 2011.
Recent Developments
The following is a brief listing of significant developments since December 31, 2010. We begin with developments pertaining to our reportable business segments. Additional information regarding most of these items may be found elsewhere in this report.
Products Pipelines—KMP
The Products Pipelines—KMP segment consists of KMP’s refined petroleum products and natural gas liquids pipelines and their associated terminals, Southeast terminals, and its transmix processing facilities.
West Coast Products Pipelines
KMP’s West Coast Products Pipelines include the SFPP, L.P. operations (often referred to in this report as the Pacific operations), the Calnev pipeline operations, and the West Coast Terminals operations. The assets include interstate common carrier pipelines regulated by the FERC, intrastate pipelines in the state of California regulated by the California Public Utilities Commission, and certain non rate-regulated operations and terminal facilities.
The Pacific operations serve six western states with approximately 2,500 miles of refined petroleum products pipelines and related terminal facilities that provide refined products to major population centers in the United States, including California; Las Vegas and Reno, Nevada; and the Phoenix-Tucson, Arizona corridor. In 2011, the Pacific operations’ mainline pipeline system transported approximately 1,071,400 barrels per day of refined products, with the product mix being approximately 59% gasoline, 24% diesel fuel, and 17% jet fuel.
The Calnev pipeline system consists of two parallel 248-mile, 14-inch and 8-inch diameter pipelines that run from KMP’s facilities at Colton, California to Las Vegas, Nevada. The pipeline serves the Mojave Desert through deliveries to a terminal at Barstow, California and two nearby major railroad yards. It also serves Nellis Air Force Base, located in Las Vegas, and also includes approximately 55 miles of pipeline serving Edwards Air Force Base in California. In 2011, the Calnev pipeline system transported approximately 118,800 barrels per day of refined products, with the product mix being approximately 41% gasoline, 33% diesel fuel, and 26% jet fuel.
The West Coast Products Pipelines operations include 15 truck-loading terminals (13 on the Pacific operations and two on Calnev) with an aggregate usable tankage capacity of approximately 15.3 million barrels. The truck terminals provide services including short-term product storage, truck loading, vapor handling, additive injection, dye injection and ethanol blending.
The West Coast Terminals are fee-based terminals located in the Seattle, Portland, San Francisco and Los Angeles areas along the west coast of the United States with a combined total capacity of approximately 9.1 million barrels of storage for both petroleum products and chemicals. KMP’s West Coast Products Pipelines and associated West Coast Terminals together handled 17.6 million barrels of ethanol in 2011.
Combined, the West Coast Products Pipelines operations’ pipelines transport approximately 1.2 million barrels per day of refined petroleum products, providing pipeline service to approximately 29 customer-owned terminals, 11 commercial airports and 15 military bases. The pipeline systems serve approximately 70 shippers in the refined petroleum products market, the largest customers being major petroleum companies, independent refiners, and the United States military. The majority of refined products supplied to the West Coast Product Pipelines come from the major refining centers around Los Angeles, San Francisco, West Texas and Puget Sound, as well as from waterborne terminals and connecting pipelines located near these refining centers.
Plantation Pipe Line Company
KMP owns approximately 51% of Plantation Pipe Line Company, the sole owner of the approximately 3,100-mile refined petroleum products Plantation pipeline system serving the southeastern United States. KMP operates the system pursuant to agreements with Plantation and its wholly-owned subsidiary, Plantation Services LLC. The Plantation pipeline system originates in Louisiana and terminates in the Washington, D.C. area. It connects to approximately 130 shipper delivery terminals throughout eight states and serves as a common carrier of refined petroleum products to various metropolitan areas, including Birmingham, Alabama; Atlanta, Georgia; Charlotte, North Carolina; and the Washington, D.C. area. An affiliate of ExxonMobil Corporation owns the remaining approximately 49% ownership interest, and ExxonMobil has historically been one of the largest shippers on the Plantation system both in terms of volumes and revenues. In 2011, Plantation delivered approximately 518,000 barrels per day of refined petroleum products, with the product mix being approximately 67% gasoline, 20% diesel fuel, and 13% jet fuel.
Products shipped on Plantation originate at various Gulf Coast refineries from which major integrated oil companies and independent refineries and wholesalers ship refined petroleum products, from other products pipeline systems, and via marine facilities located along the Mississippi River. Plantation ships products for approximately 30 companies to terminals throughout the southeastern United States. Plantation’s principal customers are Gulf Coast refining and marketing companies, and fuel wholesalers.
Central Florida Pipeline
KMP’s Central Florida pipeline system consists of a 110-mile, 16-inch diameter pipeline that transports gasoline and ethanol, and an 85-mile, 10-inch diameter pipeline that transports diesel fuel and jet fuel from Tampa to Orlando. KMP Central Florida pipeline operations also include two separate liquids terminals located in Tampa and Taft, Florida, which KMP owns and operates.
In addition to being connected to the Tampa terminal, KMP’s Central Florida pipeline system is connected to terminals owned and operated by TransMontaigne, Citgo, BP, and Marathon Petroleum. The 10-inch diameter pipeline is connected to KMP’s Taft terminal (located near Orlando), has an intermediate delivery point at Intercession City, Florida, and is also the sole pipeline supplying jet fuel to the Orlando International Airport in Orlando, Florida. In 2011, the pipeline system transported approximately 93,000 barrels per day of refined products, with the product mix being approximately 69% gasoline and ethanol, 11% diesel fuel, and 20% jet fuel.
CEO BACKGROUND
Richard D. Kinder
Director since October 1999; also from 1998 to June 1999 – Age 67
Mr. Kinder served as Chief Manager and Chief Executive Officer of Kinder Morgan Holdco LLC from May 2007 until completion of the initial public offering in February 2011, at which time he assumed the positions of Director, Chairman and Chief Executive Officer. He is also Director, Chairman and Chief Executive Officer of KMR, Kinder Morgan G.P., Inc. and KMI. Mr. Kinder has served as Director, Chairman and Chief Executive Officer of KMR since its formation in February 2001. He was elected Director, Chairman and Chief Executive Officer of KMI in October 1999. He was elected Director, Chairman and Chief Executive Officer of Kinder Morgan G.P., Inc. in February 1997. Mr. Kinder was elected President of KMR, Kinder Morgan G.P., Inc. and KMI in July 2004 and served as President until May 2005. Mr. Kinder is the uncle of David D. Kinder, Vice President, Corporate Development and Treasurer of KMR, Kinder Morgan G.P., Inc. and KMI. Mr. Kinder’s experience as Chief Executive Officer of KMI and of KMR, combined with his service as our Chairman and Chief Executive Officer provide him with a familiarity with our strategy, operations and finances that can be matched by no one else. In addition, Mr. Kinder’s significant equity ownership in KMI aligns his economic interests with those of our other stockholders.
C. Park Shaper
Director since May 2007 – Age 43
Mr. Shaper served as Manager and President of Kinder Morgan Holdco LLC from May 2007 until completion of the initial public offering in February 2011, at which time he assumed the positions of Director and President of KMI. He is also Director and President of KMR, Kinder Morgan G.P., Inc. and KMI. Mr. Shaper was elected President of KMR, Kinder Morgan G.P., Inc. and KMI in May 2005. He served as Executive Vice President of KMR, Kinder Morgan G.P., Inc. and KMI from July 2004 until May 2005. Mr. Shaper was elected Director of KMR and Kinder Morgan G.P., Inc. in January 2003 and of KMI in May 2007. He was elected Vice President, Treasurer and Chief Financial Officer of KMR upon its formation in February 2001, and served as its Treasurer until January 2004, and its Chief Financial Officer until May 2005. He was elected Vice President, Treasurer and Chief Financial Officer of KMI in January 2000, and served as its Treasurer until January 2004, and its Chief Financial Officer until May 2005. Mr. Shaper was elected Vice President, Treasurer and Chief Financial Officer of Kinder Morgan G.P., Inc. in January 2000, and served as its Treasurer until January 2004 and its Chief Financial Officer until May 2005. He received a Masters of Business Administration degree from the J.L. Kellogg Graduate School of Management at Northwestern University. Mr. Shaper also has a Bachelor of Science degree in Industrial Engineering and a Bachelor of Arts degree in Quantitative Economics from Stanford University. Mr. Shaper is also a trust manager of Weingarten Realty Investors. Mr. Shaper’s experience as our President, together with his experience as an executive officer of various Kinder Morgan entities, provide him valuable management and operational expertise and intimate knowledge of our business operations, finances and strategy.
Steven J. Kean
Director since May 2007 – Age 50
Mr. Kean served as Manager and Chief Operating Officer of Kinder Morgan Holdco LLC from May 2007 until completion of the initial public offering in February 2011, at which time he assumed the positions of Director, Executive Vice President and Chief Operating Officer of KMI. He is also Executive Vice President and Chief Operating Officer of KMR, Kinder Morgan G.P., Inc. and KMI. Mr. Kean was elected Executive Vice President and Chief Operating Officer of KMR, Kinder Morgan G.P., Inc. and KMI in January 2006. He served as Executive Vice President, Operations of KMR, Kinder Morgan G.P., Inc. and KMI from May 2005 to January 2006. He served as President, Natural Gas Pipelines of KMR and Kinder Morgan G.P., Inc. from July 2008 to November 2009. He served as President, Texas Intrastate Pipeline Group from June 2002 until May 2005. He served as Vice President of Strategic Planning for the Kinder Morgan Gas Pipeline Group from January 2002 until June 2002. Mr. Kean received his Juris Doctor from the University of Iowa in May 1985 and received a Bachelor of Arts degree from Iowa State University in May 1982. Mr. Kean’s experience as one of our executives since 2002 provides him valuable management and operational expertise and a thorough understanding of our business operations and strategy.
Henry Cornell
Director since May 2007 – Age 55
Mr. Cornell served as a Manager of Kinder Morgan Holdco LLC from May 2007 until completion of the initial public offering in February 2011, at which time he continued as a Director. He is a managing director of Goldman, Sachs & Co. and the Chief Operating Officer of its Merchant Banking Division, which includes all of the firm’s corporate, real estate and infrastructure investment committees. He is a member of all of its global Merchant Banking Investment Committees. Mr. Cornell serves on the boards of directors of Apple American Group, LLC, Pro Sight Specialty Insurance, Kenan Advantage Group, McJunkin Red Man Corporation and USI Holdings Corporation. Mr. Cornell is Chairman of The Citizens Committee of New York City, Treasurer and Trustee of the Whitney Museum of American Art, a member of The Council on Foreign Relations, Trustee Emeritus of the Asia Society, Trustee Emeritus of the Japan Society and a member of Sotheby’s International Advisory Board. Mr. Cornell joined Goldman, Sachs & Co. in 1984 and became a partner in 1994. Prior to joining Goldman, Sachs & Co., Mr. Cornell practiced law with Davis Polk & Wardwell from 1981 to 1984 in New York and London. Mr. Cornell holds a B.A. from Grinnell College and a J.D. from New York Law School. Mr. Cornell has significant experience with energy companies and investments and familiarity with our industry and capital markets activity, which enhance his contributions to the board of directors.
Deborah A. Macdonald
Director since April 2011 – Age 60
Ms. Macdonald was elected as a Director in April 2011. For the past five years, Ms. Macdonald has served on the boards of several private charitable organizations. Ms. Macdonald served as Vice President (President, Natural Gas Pipelines) of KMI, KMR and Kinder Morgan G.P., Inc. from June 2002 until September 2005 and served as President of NGPL from October 1999 until March 2003. Ms. Macdonald received her Juris Doctor, summa cum laude, from Creighton University in May 1980 and received a Bachelors degree, magna cum laude, from Creighton University in December 1972. As a result of Ms. Macdonald’s prior service as an executive officer of KMI, she possesses a familiarity with our business operations, financial strategy and organizational structure which enhance her contributions to the board of directors.
Michael Miller
Director since May 2007 – Age 53
Mr. Miller served as a Manager of Kinder Morgan Holdco LLC from May 2007 until completion of the initial public offering in February 2011, at which time he continued as a Director. Mr. Miller is a Partner at Highstar Capital LP and has been with the firm since 2001. He serves on Highstar’s Investment Committee and Executive Committee. Mr. Miller has over 20 years of experience in direct investments, principally in the energy, waste-to-energy, conventional and renewable power sectors and utilities. Mr. Miller currently serves on the boards of directors of Star Atlantic Waste Holdings, L.P. and Utilities, Inc. Mr. Miller received a B.S. from Rensselaer Polytechnic Institute, an M.B.A. from the University of Chicago and is a CFA charter holder. Mr. Miller has significant experience with public companies and investments and familiarity with our industry and capital markets activity, which enhance his contributions to the board of directors.
Michael C. Morgan
Director since May 2007 – Age 43
Mr. Morgan served as a Manager of Kinder Morgan Holdco LLC from May 2007 until completion of the initial public offering in February 2011, at which time he continued as a Director. From 2003 until the Going Private Transaction, Mr. Morgan served as a director of KMI. He has been Chairman and Chief Executive Officer of Triangle Peak Partners, LP, a registered investment adviser and fund manager, since April 2008. He also has been President of Portcullis Partners, L.P., a private investment partnership, since October 2004. Mr. Morgan has been a director of Bunchball, Inc. since June 2011, a director of DriveCam, Inc. since July 2009, and an observer to the board of directors of SCIenergy Inc., since April 2011 and was a director of Kayne Anderson MLP Investment Company and Kayne Anderson Energy Total Return Fund, Inc. from May 2007 until March 2008. Mr. Morgan was President of KMI, KMR and Kinder Morgan G.P., Inc. from July 2001 to July 2004. Mr. Morgan served as Vice President—Strategy and Investor Relations of KMR from February 2001 to July 2001. He served as Vice President-Strategy and Investor Relations of KMI and Kinder Morgan G.P., Inc. from January 2000 to July 2001. He served as Vice President, Corporate Development of Kinder Morgan G.P., Inc. from February 1997 to January 2000. Mr. Morgan was Vice President, Corporate Development of KMI from October 1999 to January 2000. Mr. Morgan received an M.B.A. from Harvard Business School and a Bachelor of Arts and a Masters of Arts from Stanford University. As a result of Mr. Morgan’s prior service as a director of KMI, he possesses a familiarity with our business operations, financial strategy and organizational structure which enhance his contributions to the board of directors.
Kenneth A. Pontarelli
Director since May 2007 – Age 41
Mr. Pontarelli served as a Manager of Kinder Morgan Holdco LLC from May 2007 until completion of the initial public offering in February 2011, at which time he continued as a Director. He is also a Director of KMI. Mr. Pontarelli is a managing director of Goldman, Sachs & Co. Mr. Pontarelli was elected Director of KMI upon the consummation of the Going Private Transaction in May 2007. He joined Goldman, Sachs & Co. in 1997, became a managing director in 2004 and became a partner in 2006. Mr. Pontarelli serves on the boards of directors of CCS Corporation, Cobalt International Energy, Inc., Energy Future Holdings Corp. and Expro International Group Ltd. He received a B.S. from Syracuse University and an M.B.A. from the Harvard Business School. Mr. Pontarelli’s over 10 years of experience as an investment banker and experience as a director of both public and private companies provide him with an understanding of strategic planning, management and financial matters which enhance his contributions to the board of directors.
Fayez Sarofim
Director since May 2007 – Age 83
Mr. Sarofim served as a Manager of Kinder Morgan Holdco LLC from May 2007 until completion of the initial public offering in February 2011, at which time he continued as a Director. He has been Chairman of the Board and President of Fayez Sarofim & Co., a registered investment advisor, for more than five years. Over the past five years, Mr. Sarofim has served as a director of Unitrin, Inc. and Argo Group International Holdings, Ltd. and was a director of KMI prior to the Going Private Transaction. As a result of Mr. Sarofim’s prior service as a director of KMI, he possesses a familiarity with our business operations, financial strategy and organizational structure which enhance his contributions to the board of directors.
Joel V. Staff
Director since 2011 – Age 68
Mr. Staff was elected as Director in April 2011. Since May 2007, Mr. Staff has acted as a private investor. Mr. Staff was Chief Executive Officer of Reliant Energy, Inc. from April 2003 until his retirement in May 2007. He also served as Reliant Energy, Inc.'s Chairman of the Board from April 2003 to October 2008 and Executive Chairman of the Board from October 2008 until his retirement from the board in June 2009. Mr. Staff was a director of Ensco International Incorporated between May 2002 and May 2008. Mr. Staff's experience as a senior executive in the energy industry provide him with and understanding of the issues we face, which enhance his contributors to our board of directors.
John Stokes
Director since September 2008 – Age 60
Mr. Stokes served as a Manager of Kinder Morgan Holdco LLC from September 2008 until completion of the initial public offering in February 2011, at which time he continued as a Director. Mr. Stokes joined Highstar Capital LP in 2002 as a full-time consultant and became a partner in 2005. Mr. Stokes currently serves on the board of directors of Utilities, Inc. Mr. Stokes received a BS in Mechanical Engineering from Clemson University and an MBA from the University of Miami. Mr. Stokes has over 35 years of experience in various sectors of the infrastructure industry, including conventional and renewable electric power generation, fuel procurement, energy trading, and project development and finance, which enhance his contributions to the board of directors.
R. Baran Tekkora
Director since November 2010 – Age 38
Mr. Tekkora served as a Manager of Kinder Morgan Holdco LLC from November 2010 until completion of the initial public offering in February 2011, at which time he continued as a Director. Mr. Tekkora is a Managing Director of Riverstone Holdings LLC and has been with the firm since 2005. He is primarily engaged in generating and managing the firm’s investments in the midstream and oil field services segments of the energy industry. Prior to joining Riverstone, Mr. Tekkora was a Vice President at Goldman, Sachs & Co. in the Natural Resources Group. Mr. Tekkora joined Goldman, Sachs & Co. in 1996 and focused on all segments of the energy and power industry. Mr. Tekkora serves on the boards of directors of Hudson Products Corp. and Permian Tank & Manufacturing, Inc. Previously, he served on the boards of directors of Petroplus Holdings AG and FDR Holdings Ltd. Mr. Tekkora graduated summa cum laude with a Bachelor degree in Economics and Mathematics from Hamilton College in 1996. Mr. Tekkora has a wide variety of mergers and acquisitions, strategic advisory and capital markets experience in many sectors of the energy industry, which enhance his contributions to the board of directors.
Glenn A. Youngkin
Director since May 2003 – Age 45
Mr. Youngkin served as a Manager of Kinder Morgan Holdco LLC from May 2007 until completion of the initial public offering in February 2011, at which time he continued as a Director. Mr. Youngkin is Chief Operating Officer of The Carlyle Group and serves on Carlyle’s Management Committee. From October 2010 until March 2011, Mr. Youngkin served as Carlyle’s interim chief financial officer. From 2005 to early 2008, Mr. Youngkin was the Global Head of the Industrial investment team. From 2000 to 2005, Mr. Youngkin led Carlyle’s buyout activities in the United Kingdom, and from 1995 to 2000 he was part of the U.S. buyout team. Prior to joining Carlyle, Mr. Youngkin was a management consultant with McKinsey & Company. Mr. Youngkin also previously worked in the investment banking group at CS First Boston. Mr. Youngkin received a B.S. in mechanical engineering and a B.A. in managerial studies from Rice University and his M.B.A. from the Harvard Business School, where he was a Baker Scholar. Mr. Youngkin currently serves on the Board of Directors of PQ Corporation, and Scalina S.A., both Carlyle portfolio companies. Mr. Youngkin also serves on the Board of Trustees of the Langley School and AlphaUSA, and the Board of Directors of the Rice Management Company. Mr. Youngkin has significant experience with public companies and investments and familiarity with our industry and capital markets activity, which enhance his contributions to the board of directors.
MANAGEMENT DISCUSSION FROM LATEST 10K
General
Pending Acquisition of El Paso Corporation
On October 16, 2011, we and El Paso Corporation (NYSE: EP) announced a definitive agreement whereby we will acquire all of the outstanding shares of EP. EP owns North America’s largest interstate natural gas pipeline system, one of North America’s largest independent exploration and production companies and an emerging midstream business. EP also owns a 42 percent limited partner interest and the 2 percent general partner interest in El Paso Pipeline Partners, L.P.( NYSE:EPB).
As of the announcement date, the total purchase price, including the assumption of debt outstanding at EP and the debt outstanding at EPB, was approximately $38 billion. Under the terms of the transaction, the consideration to be received by the EP shareholders is valued at $26.87 per EP share based on KMI’s closing price as of October 14, 2011, representing a 47 percent premium to the 20-day average closing price of EP common shares and a 37 percent premium over the closing price of EP common shares on October 14, 2011. The offer is comprised of $14.65 in cash, 0.4187 KMI Class P shares (valued at $11.26 per EP share) and 0.640 KMI warrants (valued at $0.96 per EP share) based on KMI’s closing price on October 14, 2011. The warrants will have an exercise price of $40 and a five-year term. EP shareholders will be able to elect, for each EP share held, either (i) $25.91 in cash, (ii) 0.9635 KMI Class P shares, or (iii) $14.65 in cash plus 0.4187 KMI Class P shares. All elections will be subject to proration and in all cases EP shareholders will receive 0.640 KMI warrants per share of EP common stock.
On February 10, 2012, we entered into (i) an amendment to our existing $1.0 billion revolving credit facility to permit, among other things, the transactions contemplated by the E P merger agreement, and to fund, in part, the transactions and related costs and expenses; (ii) an incremental joinder agreement which provides for $750 million in additional commitments under our existing revolving credit facility; and (iii) an acquisition debt facilities credit agreement containing a $6.8 billion 364-day facility and a $5.0 billion 3-year term loan facility, the proceeds of which will be used to finance a portion of the cash consideration and related fees and expenses to be paid in connection with the EP acquisition. All of the foregoing will be effective upon completion of the EP acquisition.
The transaction has been approved by each company’s board of directors. Prior to closing, the transaction will require approval of both KMI and EP shareholders. The transaction is expected to close in the second quarter of 2012 and is subject to customary regulatory approvals.
The opportunity to sell (drop-down) EP’s natural gas pipeline assets to KMP and EPB and sell EP’s exploration and production business, and the availability of certain net operating loss carryforwards to help offset taxable gains in connection with such sales, is expected to reduce substantially the level of indebtedness incurred to finance the transactions.
Initial Public Offering
On February 16, 2011, we completed an initial public offering of common stock (see Notes 1 and 10 to our consolidated financial statements included elsewhere in this report).
Our assets that currently generate cash for the payment of dividends and for other purposes consist primarily of our ownership of the general partner interest in KMP, approximately 11% of the limited partner interests of KMP and a 20% interest in NGPL PipeCo LLC. Approximately 98% and 97% of the distributions we received from our subsidiaries for the years ended December 31, 2011 and 2010, respectively, were attributable to KMP.
In addition, during the historical periods presented prior to 2011 in this report, we had a business segment referred to as Power, which consisted of our ownership of natural gas-fired electric generation facilities. On October 22, 2010, we sold our facility located in Michigan, referred to as Triton Power, for approximately $15.0 million in cash, and as a result, we no longer report Power as a business segment. See Note 3 to our consolidated financial statements included elsewhere in this report.
As an energy infrastructure owner and operator in multiple facets of the United States’ and Canada’s various energy businesses and markets, we examine a number of variables and factors on a routine basis to evaluate our current performance and our prospects for the future. Many of our operations are regulated by various U.S. and Canadian regulatory bodies and a portion of the business portfolio (including the Kinder Morgan Canada—KMP business segment, the Canadian portion of the Cochin Pipeline, and bulk and liquids terminal facilities located in Canada) uses the local Canadian dollar as the functional currency for its Canadian operations and enters into foreign currency-based transactions, both of which affect segment results due to the inherent variability in U.S.-Canadian dollar exchange rates. To help understand our reported operating results, all of the following references to â€â€foreign currency effects,’’ or similar terms in this section represent our estimates of the changes in financial results, in U.S. dollars, resulting from fluctuations in the relative value of the Canadian dollar to the U.S. dollar. The references are made to facilitate period-to-period comparisons of business performance and may not be comparable to similarly titled measures used by other registrants.
The profitability of our refined petroleum products pipeline transportation business is generally driven by the volume of refined petroleum products that we transport and the prices we receive for our services. Transportation volume levels are primarily driven by the demand for the refined petroleum products being shipped or stored. Demand for refined petroleum products tends to track in large measure demographic and economic growth, and with the exception of periods of time with very high product prices or recessionary conditions, demand tends to be relatively stable. Because of that, we seek to own refined petroleum products pipelines located in, or that transport to, stable or growing markets and population centers. The prices for shipping are generally based on regulated tariffs that are adjusted annually based on changes in the U.S. Producer Price Index.
With respect to our interstate natural gas pipelines and related storage facilities, the revenues from these assets are primarily received under contracts with terms that are fixed for various and extended periods of time. To the extent practicable and economically feasible in light of our strategic plans and other factors, we generally attempt to mitigate risk of reduced volumes and prices by negotiating contracts with longer terms, with higher per-unit pricing and for a greater percentage of our available capacity. These long-term contracts are typically structured with a fixed-fee reserving the right to transport natural gas and specify that we receive the majority of our fee for making the capacity available, whether or not the customer actually chooses to utilize the capacity. Similarly, in the Texas Intrastate Pipeline business, we currently derive approximately 75% of our sales and transport margins from long-term transport and sales contracts that include requirements with minimum volume payment obligations. As contracts expire, we have additional exposure to the longer term trends in supply and demand for natural gas. As of December 31, 2011, the remaining average contract life of KMP’s natural gas transportation contracts (including its intrastate pipelines) was approximately eight years.
The CO 2 sales and transportation business primarily has contracts with minimum volume requirements, which as of December 31, 2011, had a remaining average contract life of four years (this remaining average contract life includes intercompany sales; when we eliminate intercompany sales, the remaining average contract life is approximately five years). Carbon dioxide sales contracts vary from customer to customer and have evolved over time as supply and demand conditions have changed. Our recent contracts have generally provided for a delivered price tied to the price of crude oil, but with a floor price. On a volume-weighted basis, for contracts making deliveries in 2012, and utilizing the average oil price per barrel contained in our 2012 budget, approximately 70% of our contractual volumes are based on a fixed fee or floor price, and 30% fluctuate with the price of oil (these percentages include intercompany sales; when we eliminate intercompany sales, the percentages are 72% and 28%, respectively). In the long-term, our success in this business is driven by the demand for carbon dioxide. However, short-term changes in the demand for carbon dioxide typically do not have a significant impact on us due to the required minimum sales volumes under many of our contracts. In the CO 2 —KMP business segment’s oil and gas producing activities, we monitor the amount of capital we expend in relation to the amount of production that we expect to add. In that regard, our production during any period is an important measure. In addition, the revenues we receive from our crude oil, natural gas liquids and carbon dioxide sales are affected by the prices we realize from the sale of these products. Over the long-term, we will tend to receive prices that are dictated by the demand and overall market price for these products. In the shorter term, however, market prices are likely not indicative of the revenues we will receive due to our risk management, or hedging, program, in which the prices to be realized for certain of our future sales quantities are fixed, capped or bracketed through the use of financial derivative contracts, particularly for crude oil. The realized weighted average crude oil price per barrel, with all hedges allocated to oil, was $69.73 per barrel in 2011, $59.96 per barrel in 2010 and $49.55 per barrel in 2009. Had we not used energy derivative contracts to transfer commodity price risk, our crude oil sales prices would have averaged $92.61 per barrel in 2011, $76.93 per barrel in 2010 and $59.02 per barrel in 2009.
The factors impacting the Terminals—KMP business segment generally differ depending on whether the terminal is a liquids or bulk terminal, and in the case of a bulk terminal, the type of product being handled or stored. As with our refined petroleum products pipeline transportation business, the revenues from our bulk terminals business are generally driven by the volumes we handle and/or store, as well as the prices we receive for our services, which in turn are driven by the demand for the products being shipped or stored. While we handle and store a large variety of products in our bulk terminals, the primary products are coal, petroleum coke, and steel. For the most part, we have contracts for this business that have minimum volume guarantees and are volume based above the minimums. Because these contracts are volume based above the minimums, our profitability from the bulk business can be sensitive to economic conditions. Our liquids terminals business generally has longer-term contracts that require the customer to pay regardless of whether they use the capacity. Thus, similar to our natural gas pipeline business, our liquids terminals business is less sensitive to short-term changes in supply and demand. Therefore, the extent to which changes in these variables affect our terminals business in the near term is a function of the length of the underlying service contracts (which is typically approximately four years), the extent to which revenues under the contracts are a function of the amount of product stored or transported, and the extent to which such contracts expire during any given period of time. To the extent practicable and economically feasible in light of our strategic plans and other factors, we generally attempt to mitigate the risk of reduced volumes and pricing by negotiating contracts with longer terms, with higher per-unit pricing and for a greater percentage of our available capacity. In addition, weather-related factors such as hurricanes, floods and droughts may impact our facilities and access to them and, thus, the profitability of certain terminals for limited periods of time or, in relatively rare cases of severe damage to facilities, for longer periods.
In our discussions of the operating results of individual businesses that follow (see “—Results of Operations” below), we generally identify the important fluctuations between periods that are attributable to acquisitions and dispositions separately from those that are attributable to businesses owned in both periods. Continuing its history of making accretive acquisitions and economically advantageous expansions of existing businesses, in 2011, we invested approximately $2.6 billion for both strategic business acquisitions and expansions of existing assets. KMP’s capital investments helped it to achieve compound annual growth rates in cash distributions to its limited partners of 4.8%, 4.7%, and 7.2%, respectively, for the one-year, three-year, and five-year periods ended December 31, 2011.
Thus, KMP’s ability to increase distributions to us and other investors will, to some extent, be a function of its ability to complete successful acquisitions and expansions. We believe KMP will continue to have opportunities for expansion of its facilities in many markets, and it has budgeted approximately $1.7 billion for its 2012 capital expansion program, including small acquisitions and investment contributions. Based on our historical record and because there is continued demand for energy infrastructure in the areas we serve, we expect to continue to have such opportunities in the future, although the level of such opportunities is difficult to predict.
In addition, KMP regularly considers and enters into discussions regarding potential acquisitions, including those from us or our affiliates, and are currently contemplating potential acquisitions. While there are currently no unannounced purchase agreements for the acquisition of any material business or assets, such transactions can be effected quickly, may occur at any time and may be significant in size relative to our existing assets or operations. KMP’s ability to make accretive acquisitions is a function of the availability of suitable acquisition candidates at the right cost, and includes factors over which we have limited or no control. Thus, we have no way to determine the number or size of accretive acquisition candidates in the future, or whether we will complete the acquisition of any such candidates.
KMP’s ability to make accretive acquisitions or expand its assets is impacted by its ability to maintain adequate liquidity and to raise the necessary capital needed to fund such acquisitions. As a master limited partnership, KMP distributes all of its available cash, and it accesses capital markets to fund acquisitions and asset expansions. Historically, KMP has succeeded in raising necessary capital in order to fund its acquisitions and expansions, and although we cannot predict future changes in the overall equity and debt capital markets (in terms of tightening or loosening of credit), we believe that KMP’s stable cash flows, its investment grade credit rating, and its historical record of successfully accessing both equity and debt funding sources should allow it to continue to execute its current investment, distribution and acquisition strategies, as well as refinance maturing debt when required. For a further discussion of our liquidity, including KMP’s public debt and equity offerings in 2011, please see “—Liquidity and Capital Resources” below.
Dividend Policy
Our dividend policy set forth in our shareholders agreement provides, subject to applicable law, that we will pay quarterly cash dividends on all classes of our capital stock equal to the cash we receive from our subsidiaries and other sources less any cash disbursements and reserves established by a majority vote of our board of directors, including for general and administrative expenses, interest and cash taxes. The division of our dividends among our classes of capital stock will be in accordance with our charter. Our board of directors may declare dividends by a majority vote in accordance with our dividend policy pursuant to our bylaws. This policy reflects our judgment that our stockholders would be better served if we distributed to them a substantial portion of our cash. As a result, we may not retain a sufficient amount of cash to fund our operations or to finance unanticipated capital expenditures or growth opportunities, including acquisitions.
As presented in the table at the end of this section, for the year ended December 31, 2011, we had cash available to pay distributions of $835.3 million, exceeding our budget of $820 million. As discussed below, our dividend for the first quarter of 2011 (paid on May 16, 2011) was prorated for the time we have been public. Dividends on our investor retained stock generally will be paid at the same time as dividends on our common stock and will be based on the aggregate number of shares of common stock into which our investor retained stock is convertible on the record date for the applicable dividend.
The portion of our dividends payable on the three classes of our investor retained stock may vary among those classes, but the variations will not affect the dividends we pay on our common stock since the total number of shares of common stock into which our outstanding investor retained stock can convert in the aggregate was fixed on the closing of our initial public offering on February 16, 2011. As of December 31, 2011, investor retained stock was convertible into a fixed aggregate of 535,972,387 shares of our common stock, which represent 75.7% of our common stock on a fully-converted basis. Subsequent to our initial public offering, any conversion of our investor retained stock into our common stock reduces on a one for one basis the number of common shares into which our investor retained stock can convert such that the number of shares on a fully converted basis is the same before and after the conversion of our investor retained stock.
Our board of directors may amend, revoke or suspend our dividend policy at any time and for any reason, which would require a supermajority board approval while the Sponsor Investors, consisting of investment funds advised by, or affiliated with, Goldman, Sachs & Co., Highstar Capital LP, The Carlyle Group and Riverstone Holdings LLC, maintain prescribed ownership thresholds. During that time, supermajority approval would also be required to declare and pay any dividends that are not in accordance with our dividend policy. There is nothing in our dividend policy or our governing documents that prohibits us from borrowing to pay dividends. The actual amount of dividends to be paid on our capital stock will depend on many factors, including our financial condition and results of operations, liquidity requirements, market opportunities, our capital requirements, legal, regulatory and contractual constraints, tax laws and other factors. Distributions we receive from KMP are our most significant source of our cash available to pay dividends (including the value of additional KMR shares we receive on the approximately 14.1 million shares we own). We intend periodically to sell the KMR shares we receive as distributions to generate cash.
On February 11, 2011, our board of directors declared and paid a dividend to our then existing investors of $245.8 million with respect to the period for which we were not public. This consisted of $205.0 million for the fourth quarter of 2010 and $104.8 million for the first 46 days of 2011, representing the portion of the first quarter of 2011 that we were not public, less a one-time adjustment of $64.0 million in available earnings and profits reserved for the after tax cost of special cash bonuses (and premium pay) in an aggregate amount of approximately $100 million that was paid in May of 2011 to certain of our non-senior management employees. No holders of our Class B shares or Class C shares received such bonuses.
Subsequent to the offering and through December 31, 2011, we paid dividends totaling $523.8 million, or $0.74 per common share, which consisted of (i) the initial quarterly dividend of $0.14 per share for the first quarter of 2011, representing a prorated amount for the period during the first quarter that we were public and (ii) quarterly dividends of $0.30 per share with respect to the second and third quarters of 2011. On January 18, 2012, our Board of directors declared a dividend of $0.31 per share ($1.24 annualized) for the fourth quarter of 2011 paid on February 15, 2012, to shareholders of record as of January 31, 2012.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
General and Basis of Presentation
The following information should be read in conjunction with (i) our accompanying interim consolidated financial statements and related notes (included elsewhere in this report); (ii) our consolidated financial statements and related notes included in our 2011 Form 10-K and in our Current Report on Form 8-K filed May 4, 2012; and (iii) our management's discussion and analysis of financial condition and results of operations included in our 2011 Form 10-K and in our Current Report on Form 8-K filed May 4, 2012.
We prepared our consolidated financial statements in accordance with GAAP and these statements include the reclassifications necessary to reflect the results of KMP’s FTC Natural Gas Pipelines disposal group as discontinued operations. Accordingly, we have excluded the disposal group’s financial results from the Natural Gas Pipelines business segment disclosures for all periods presented in this report. For more information about the discontinued operations, see Notes 1 and 2 to our consolidated financial statements included elsewhere in this report.
Acquisition of El Paso Corporation
Effective on May 25, 2012, we completed the acquisition of all of the outstanding shares of EP. As part of the acquisition, we acquired an emerging midstream business and one of North America's largest interstate natural gas pipeline systems, including a 43.5% limited partner interest and 2% general partner interest in El Paso Pipeline Partners, L.P., a publicly-traded pipeline limited partnership, referred to as "EPB." Together EP and EPB (EPC) offer natural gas transmission services to a range of customers, including natural gas producers, marketers and end-users, as well as other natural gas transmission, distribution and electric generation companies. The pipelines business also includes storage and liquefied natural gas terminalling facilities. EPC owns and operates approximately 44,000 miles of natural gas pipelines that connect the nation's principal natural gas supply regions to five major consuming regions in the United States (the Gulf Coast, California, the northeast, the southwest and the southeast). EPC also has access to systems in Canada and Mexico. EPC owns three underground natural gas storage facilities and two LNG receiving terminals, which provide approximately 240 Bcf of storage capacity and 3.3 Bcf/d of peak send out capacity, respectively. Our combined enterprise, including the associated master limited partnerships, KMP and EPB, now owns an interest in or operates more than 75,000 miles of pipeline and 180 terminals and represents the largest natural gas pipeline network in the United States, the largest independent transporter of petroleum products in the United States, the largest transporter of CO 2 in the United States, the second largest oil producer in Texas and the largest independent terminal owner/operator in the United States.
In connection with our acquisition of EP we issued approximately 330 million shares of common stock and approximately 505 million warrants to purchase our common stock and paid approximately $11.6 billion in cash to former EP stockholders and equity award holders. Each warrant entitles the holder to purchase one share of our common stock for an exercise price of $40 per share, payable in cash or by cashless exercise, at any time until May 25, 2017. On May 23, 2012, we announced that our board of directors had approved a warrant repurchase program, authorizing us to repurchase in the aggregate up to $250 million of the warrants we issued in our acquisition of EP. Subsequent to the EP acquisition, and through June 30, 2012, we paid approximately $110 million to repurchase approximately 51 million warrants that were then canceled.
KMI Dividends
Our board of directors has adopted the dividend policy set forth in our shareholders' agreement, which provides that, subject to applicable law, we will pay quarterly cash dividends on all classes of our capital stock equal to the cash we receive from our subsidiaries and other sources less any cash disbursements and reserves established by a majority vote of our board of directors, including for general and administrative expenses, interest and cash taxes. The division of our dividends among our classes of capital stock is in accordance with our charter. Our board of directors may declare dividends by a majority vote in accordance with our dividend policy pursuant to our bylaws. This policy reflects our judgment that our stockholders would be better served if we distributed to them a substantial portion of our cash. As a result, we may not retain a sufficient amount of cash to fund our operations or to finance unanticipated capital expenditures or growth opportunities, including acquisitions.
As presented in the following tables, during the three and six months ended June 30, 2012, we generated cash available to pay dividends of $307 million and $610 million, respectively. On February 15, 2012, we paid a dividend of $0.31 per share for the fourth quarter of 2011 to shareholders of record as of January 31, 2012. On May 16, 2012, we paid a dividend of $0.32 per share for the first quarter of 2012 to shareholders of record as of April 30, 2012. On July 18, 2012, our board of directors declared a dividend of $0.35 per share ($1.40 annualized) for the second quarter of 2012, payable on August 15, 2012, to shareholders of record as of July 31, 2012. Incorporating the impact of the EP acquisition, we expect to declare dividends of at least $1.40 per share for 2012, a 17% increase over our 2011 declared dividends of $1.20 (the 2011 per share amounts are presented as if we were publicly traded for all of 2011).
Dividends on our investor retained stock generally are paid at the same time as dividends on our common stock and are based on the aggregate number of shares of common stock into which our investor retained stock is convertible on the record date for the applicable dividend. The portion of our dividends payable on the three classes of our investor retained stock may vary among those classes, but the variations will not affect the dividends we pay on our common stock since the total number of shares of common stock into which our investor retained stock could convert in the aggregate was fixed on the closing of our initial public offering. As of June 30, 2012, our outstanding investor retained stock was convertible into an aggregate of 470,043,494 shares of our common stock, which represents 45.3% of our common stock on a fully-converted basis.
Our board of directors may amend, revoke or suspend our dividend policy at any time and for any reason, which would require a supermajority board approval while the Sponsor Investors, consisting of investment funds advised by, or affiliated with, Goldman, Sachs & Co., Highstar Capital LP, The Carlyle Group and Riverstone Holdings LLC, maintain prescribed ownership thresholds. During that time, supermajority approval would also be required to declare and pay any dividends that are not in accordance with our dividend policy. There is nothing in our dividend policy or our governing documents that prohibits us from borrowing to pay dividends. The actual amount of dividends to be paid on our capital stock will depend on many factors, including our financial condition and results of operations, liquidity requirements, market opportunities, our capital requirements, legal, regulatory and contractual constraints, tax laws and other factors. In particular, distributions received from KMP continue to be the most significant source of our cash available to pay dividends. Our ability to pay and increase dividends to our stockholders is primarily dependent on distributions received from KMP and EPB.
Critical Accounting Policies and Estimates
Accounting standards require information in financial statements about the risks and uncertainties inherent in significant estimates, and the application of U.S. generally accepted accounting principles involves the exercise of varying degrees of judgment. Certain amounts included in or affecting our consolidated financial statements and related disclosures must be estimated, requiring us to make certain assumptions with respect to values or conditions that cannot be known with certainty at the time our financial statements are prepared. These estimates and assumptions affect the amounts we report for our assets and liabilities, our revenues and expenses during the reporting period, and our disclosure of contingent assets and liabilities at the date of our financial statements. We routinely evaluate these estimates, utilizing historical experience, consultation with experts and other methods we consider reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from our estimates, and any effects on our business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.
Furthermore, with regard to goodwill impairment testing, we review our goodwill for impairment annually, and we evaluated our goodwill for impairment on May 31, 2012. Our goodwill impairment analysis performed on that date did not result in an impairment charge, and subsequent to that date, no event has occurred indicating that the implied fair value of each of our reporting units (including its inherent goodwill) is less than the carrying value of its net assets.
Further information about us and information regarding our accounting policies and estimates that we consider to be “critical” can be found in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2011 Form 10-K and our Current Report on Form 8-K filed May 4, 2012.
Income Taxes
Our total tax expense for continuing operations for the six months ended June 30, 2012 is approximately $105 million, as compared with 2011 tax expense for the same period of $183 million. The $78 million decrease in tax expense is due primarily to (i) the net effect of consolidating KMP's and EPB's income tax provisions; (ii) adjustments to our income tax reserve for uncertain tax positions; (iii) an adjustment to the deferred tax liability related to our investment in KMR; and (iv) the tax impact of recording a deferred tax asset related to our state net operating losses. These decreases are partially offset by (i) the impact of non tax-deductible costs incurred in 2012 to facilitate the acquisition of EP; (ii) an adjustment to the deferred tax liability related to non tax-deductible losses recorded to our investment in KMP in 2012; and (iii) the tax impact of an increase in the deferred state tax rate in 2012 as a result of the acquisition of the EP.
KMI's total tax expense for continuing operations for the three months ended June 30, 2012 is approximately $9 million, as compared with 2011 tax expense for the same period of $87 million. The $78 million decrease in tax expense is due primarily to the same items identified above for the six months ended June 30, 2012 period plus greater dividend-received deductions from our 20% investment in NGPL and 50% investment in Citrus. These decreases are partially offset by the same items identified above for the six months ended June 30, 2012 period.
Financial Condition
General
Our acquisition of EP on May 25, 2012 resulted in significant changes in our consolidated financial position and our future cash requirements. As of June 30, 2012, we had a combined $675 million of “Cash and cash equivalents” on our consolidated balance sheet (included elsewhere in this report), an increase of $264 million (64%) from December 31, 2011 . As of June 30, 2012 , KMI also had approximately $757 million of borrowing capacity available under its $1.75 billion senior secured revolving credit facility, KMP had approximately $1.5 billion of borrowing capacity available under its $2.2 billion senior unsecured revolving credit facility and EPB (through its wholly-owned subsidiary, EPPOC) had approximately $480 million of borrowing capacity available under its $1.0 billion senior unsecured revolving credit facility (discussed below in “—Short-term Liquidity”). We believe that our cash position and remaining borrowing capacity allow us to manage our day-to-day cash requirements and any anticipated obligations, and currently, we believe our liquidity to be adequate.
We have relied primarily on cash provided from operations to fund our operations as well as our debt interest payments, sustaining capital expenditures, quarterly dividend payments and our subsidiaries' quarterly distributions.
Expansion capital expenditures, and debt principal payments, as such debt principal payments become due, have historically been funded by us and our subsidiaries through (i) additional borrowings (including commercial paper issuances by KMP); (ii) the issuance of additional common stock by us; (iii) issuance of shares by KMR with proceeds used for its purchase of additional KMP i-units; and (iv) issuance of common units by KMP or EPB. In addition, KMP has funded a portion of its historical expansion capital expenditures and debt principal payments with retained cash (which may result from including i-units owned by KMR in the determination of KMP's cash distributions per unit but paying quarterly distributions on i-units in additional i-units rather than cash).
In addition to results of operations, our, EPB and KMP’s debt and capital balances are affected by financing activities, as discussed below in “—Financing Activities.”
Subsequent Event - Financing of the Drop-Down Transaction
On August 6, 2012, KMP entered into a Credit Agreement (the “Credit Agreement”), as Borrower; Wells Fargo Bank, National Association, as Administrative Agent; Barclays Bank PLC, as Syndication Agent; and a syndicate of other lenders. The Credit Agreement provides for a $2.0 billion credit facility with a term of six months that may be used to back commercial paper issuances and for other general partnership purposes, which included to pay a portion of the purchase price for the Drop-Down Transaction, see Note 2 “Acquisitions and Divestiture—Drop-Down of EP Assets to KMP” to our consolidated financial statements included elsewhere in this report. KMP is required to prepay borrowings under the Credit Agreement with net proceeds from certain debt and equity issuances and from the expected sale of KMP's FTC Natural Gas Pipelines Disposal Group and such prepayments automatically will reduce the size of the credit facility. Borrowings under the Credit Agreement will bear interest, at KMP's election, based on LIBOR or the alternate base rate (the highest of the Administrative Agent's prime rate, the Federal Funds rate, or one month LIBOR plus 1% ). The Credit Agreement includes financial and other covenants and events of default that are common in such agreements. The financial and other covenants under the Credit Agreement are comparable to those under KMP's existing revolving credit facility.
In addition to the above described Credit Agreement, on August 13, 2012, KMP completed a public offering of $1.25 billion in principal amount of senior notes in two separate series, consisting of $625 million of 3.45% notes due February 15, 2023, and $625 million of 5.00% notes due August 15, 2042. The net proceeds of approximately $1.24 billion were used to pay a portion of the purchase price for the Drop-Down Transaction.
Credit Ratings and Capital Market Liquidity
On July 17, 2012, Moody's Investors Service downgraded our senior secured debt ratings to Ba2 from Ba1 with a negative outlook. This action concludes the review that was initiated on October 18, 2011 after KMI agreed to purchase 100% of the stock of EP. Other actions taken by Moody's included placing EP's ratings on review for upgrade, and the affirmation of the senior unsecured ratings for KMP at Baa2 and EPB at Ba1. The EP ratings are under review to reflect the possibility that KMI will guarantee EP's debt. If not for the guarantee, a downgrade of EP's rating is likely.
A number of affiliated companies had their outlooks changed, the most notable being the change to a positive outlook from a negative outlook for Tennessee Gas Pipeline Company (TGP) and El Paso Natural Gas Company (EPNG) in line with our announced intention to drop-down 100% of TGP and 50% of EPNG from EP to KMP. An agreement to drop-down these assets to KMP was entered into on August 6, 2012 and the transaction was closed on August 13, 2012.
As a result of the above downgrade on our our senior secured debt ratings, the interest rate on our $1.75 billion senior secured revolving credit facility, 364-day facility and a $5.0 billion 3 -year term loan facility, increased by 50 basis points, effective July 17, 2012.
Liquidity
As of June 30, 2012, our principal sources of short-term liquidity were (i) KMI’s $1.75 billion senior secured revolving credit facility; (ii) KMP’s $2.2 billion senior unsecured revolving credit facility with a diverse syndicate of banks; (iii) EPB's $1.0 billion senior unsecured revolving credit facility; and (iv) cash from operations. The facilities can be used for the respective entity’s general corporate or partnership purposes, and KMP’s facility can be used as a backup for its short-term commercial paper program. In addition, KMP’s facility can be amended to allow for borrowings of up to $2.5 billion. We provide for additional liquidity by maintaining a sizable amount of excess borrowing capacity related to our credit facilities (discussed following). Additionally, we have consistently generated strong cash flow from operations, providing a source of funds of $1,013 million and $954 million in first six months of 2012 and 2011, respectively (the period-to-period increase is discussed below in “—Operating Activities”).
CONF CALL
Richard D. Kinder - Chairman and Chief Executive Officer
Okay. Thank you, Holly. This is the Kinder Morgan earnings call and, as usual, we'll be making statements that may fall within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Now that we have closed the El Paso merger, we'll be talking about 3 entities: KMI, Kinder Morgan, Inc.; KMP, Kinder Morgan Energy Partners; and EPB, Enron -- I mean, El Paso Pipeline Partners. In addition, of course, there's a fourth security, KMR, which is the equivalent of KMP, but is -- pays its dividends in FICC and is suitable for investors who do not want to hold an MLP.
Kim will take you through the financial details, and there's a good bit of noise there resulting from the El Paso merger and from the FTC mandated sale. But I think there's a strong fundamental story in most respects. For those of you new to this call, and to the Kinder Morgan philosophy, we're all about generating cash and paying out that cash to shareholders in distributions or dividends. So the real news here, I think, is that all 3 entities increased their dividends or distributions for the second quarter.
KMI increased its dividend to $0.35. Now that's up 17% since the second quarter of 2011, and we anticipate dividending $1.40 for the year 2012. KMP and KMR raised their distribution to $1.23 per quarter. That's up 7% from the second quarter of 2011, and we anticipate distributing $4.98 for the year at KMP and KMR. EPB increased its dividend to $0.55. That's up 15% from the second quarter of 2011, and we anticipate paying dividends of $2.25 for calendar year 2012.
Now let me talk about each of the 3 entities briefly, before I turn it over to Kim. At KMI, the cash available for dividends this quarter was $307 million. That's up 83% from the $168 million in the second quarter of 2011. If you look at it on the basis of cash available for dividends per share, it's $0.36 this quarter versus $0.24 in the second quarter of 2011. And I might add that for the full year 2012 at KMI, we expect to generate over $1.3 billion in cash available for dividends.
Obviously, the most important thing that occurred during the second quarter this year was the completion of the El Paso acquisition on May 24. As we promised, in conjunction with that acquisition, we sold off the E&P assets of El Paso for approximately $7.2 billion. We had originally targeted producing $350 million of cost savings per year. We now expect that number to be north of $400 million per year.
We said we would drop down significant assets to EPB, and we did that just prior to the close by dropping down the remaining 14% of Colorado Interstate and all of the Cheyenne Plains Pipeline. We expect to drop down 100% of Tennessee, TGP, and 50% of El Paso Natural Gas to KMP during this third quarter. And I might add that we really believe that TGP, obviously, has just a unique footprint in the Marcellus and Utica. We expect to complete the FTC mandated sales of certain KMP Rockies pipelines during the third quarter also.
It's early in the game. We've only had these assets for a little less than 2 months. But so far, the assimilation is going well. We're seeing real upside possibilities from the assets, and we think we've inherited, most importantly, a great number of really good people. There are some profound effects that this merger has and, just to give you a couple of them, it now makes gas pipelines and storage across all 3 of the entities about 60% of all the earnings before DD&A. So we've become much more of a gas pipeline company, obviously.
And then secondly, by putting all these companies together, if you look at enterprise value on a combined basis, at yesterday's close, the total enterprise value of these 3 entities is right at $100 billion. So this is quite a company we've assembled, with a footprint that I think is going to pay enormous dividends for years to come.
Now let me turn to KMP. There the distributable cash flow increased by 13% to $366 million. Of course, the key thing for us is distributable cash flow per unit, and that is up to $1.07 versus $1.01 in Q2 of 2011. All the segments were positive in comparison to the second quarter of 2011 in terms of earnings before DD&A prior to certain items, with the exception of the Products Pipeline segment, which was burdened by lower rates on SFPP as a result of FERC and CPUC decisions and settlements.
If you look at how the underlying business has performed, and I think sometimes we're kind of a microcosm of the economy, I can give you some interesting statistics. On the refined products volumes, we were off 0.9% in terms of throughput for the second quarter of 2012 compared to the same period a year ago. And coincidentally, that's exactly equal to the EIA numbers recently published for the second quarter.
In terms of NGL volumes, our performance was much better. We were up 27%, largely through increased volumes on our Cochin and Cypress systems. We increased our biofuels volumes, and we're still handling about 30% of all the ethanol consumed in the United States. If you look at some of our terminal activities, we continue to benefit from strong coal export volumes, offset somewhat by weaker domestic coal volumes. Overall, coal volumes in our Terminals group was up 12%.
Our petcoke volumes were also up 12%. Steel was up a much more modest 2%. And I think, returning to coal for just a minute, we believe that for the full year 2012, we will handle over 20 million tons of coal for export at our 4 export terminals, 2 on the Houston Ship Channel, 1 on the Mississippi, south of New Orleans; and the other in the Newport News, Virginia area. And that's about 20% of all the coal exported from the United States anticipated for calendar year 2012. The throughput on our liquids terminals was also positive, up about 5%.
Turning to our Natural Gas segment, natural gas transport volumes were up 6% compared to the quarter a year ago. Natural gas sales volumes, virtually all in Texas, were up 12% compared to the second quarter of 2011. And the big drivers for that 12% increase were increased power demand and increased exports to Mexico. But as we look across all of our pipelines, the power demand is very high. We're setting records both for the month and year-to-date in terms of gas delivery to the power demand on both Tennessee and on the Southern Natural Gas systems.
Now all that sounds pretty rosy, but life is never that way. And let me just say that not all is rosy in terms of volumes of natural gas throughput. Clearly, as you can imagine, the volumes are below budget on our dry gas activities, particularly in the Haynesville play, what we call our KinderHawk facility. But I will say that our EBITDA there is still nicely above the EBITDA in our acquisition model when we bought the second half of KinderHawk from Petrohawk back in the middle of 2011. So we're below plan in terms of volumes and EBITDA but above our acquisition model in terms of EBITDA.
We're also seeing some producer delays in getting Eagle Ford production into our pipeline systems. I think largely this is the inability of producers to get equipment delivered on a timely basis, and just the sheer volume of activity there, I think, is creating some bottlenecks. But volumes are certainly there. We have long-term throughput contracts. But in some cases, the ramp-up is going more slowly in terms of getting the volumes to us than we would have anticipated it would be.
In our CO2 segment, the production volumes are pretty good. SACROC is up 1,600 barrels a day from quarter 1 of 2012 and about flat to quarter 2 of 2011. Cash volumes are obviously way up above the second quarter of 2011 as that particular field ramps up, but still slightly below our plan for the second quarter of 2012.
Gross NGL production is at record levels, and this is the fourth consecutive quarter that we've had record levels. So in short, the operations in the CO segment are doing pretty well, and we expect the rest of the year to continue strong from a production standpoint. The headwind in this section, which would come as no news to any of you who follow the midstream energy business, is the deterioration in NGL prices, and they're clearly substantially lower than the numbers we had in the budget, which was based on outlook dating from last November. Now we're not quite as bad as some. We estimate now, we put this in the release, that if the present trends were to hold through the year, our NGL price would be down by about 23%. So we're not as bad as some others because we do have less ethane in our mix. But overall, there's no question that that's a headwind for our CO2 segment.
On the sales and transportation side, demand for CO2 remains strong, and we continue to work to expand our source fields, both in Southwest Colorado and to develop our newest source field, the St. John's field, which is on the Arizona-New Mexico border.
In Canada, the Trans Mountain volumes were up slightly from the second quarter of 2011, and we expect to have those volumes hold in for the rest of the year. Probably the most important development at KMP and perhaps throughout the whole Kinder Morgan family of companies is the tremendous project development that we're seeing. We've made a lot of progress on these projects, and we're now estimating that our project backlog is now approaching $10 billion. The bulk of that is at KMP, but some is in the assets we still hold at KMI and some is in the EPB assets. But a huge backlog of products, and we -- those are already either approved, or we expect to approve them with the board very shortly. And it's money that will be spent not just in 2012, obviously, but over the next 3 or 4 years. All of these projects are backed by long-term contracts with our shippers, which is obviously a critical thing for us.
Now we've detailed the most important of the projects that have been approved in the earnings release, and I won't go through them, but I think they bode very well for future cash flow. Let me just give you a few numbers to remember. Not counting the drop-downs of Tennessee and EPNG, which again we expect to occur this quarter, nor the CapEx associated with those drop-downs, not counting those, we expect KMP to invest about $2.2 billion in expansions and acquisitions this year, up from our original estimate of about $1.5 billion. And remember, that's just for 2012.
If you look at it a little more -- in a little more detail, Terminals alone has approved projects of more than $1.3 billion, and much of that money will be spent in '13 and '14, not just in 2012. In the Products Pipelines, 3 of the projects that we outline in the release, namely the Houston condensate splitter, the Parkway Pipeline and the Cochin Reversal project, those 3 projects alone total almost $700 million in CapEx, most of which will be spent in '13 and '14. And if you add all of the projects that have been approved for the Products Pipelines group, it's more like $800 million.
Now beyond all these projects that are underway and approved and advancing quickly is, of course, the Trans Mountain Expansion project in Canada. We now have contracts with 9 shippers for approximately 510,000 barrels per day for 20 years. That allows us to plan an expansion from the present capacity of 300,000 barrels a day to 750,000 barrels a day. Now there'll be a long regulatory process, although I would add that recent developments have indicated that the Canadian national government is very intent on streamlining that process. But we expect to get this approval, and we expect to spend the $4.1 billion to bring this project to completion.
We think it will be built in the 2015, 2016 time frame, assuming regulatory approval, and be in service sometime in early 2017. Now all these projects, when you count them all up, are just tremendous building blocks for the future, and I think that's what we'll need more than any other single factor to continue growth at all 3 of these entities.
Now turning to EPB, there, the DCF is up 14% to $135 million for the second quarter of 2012. Again, the more key figure is the DCF per unit and is 65% this quarter versus $0.60 a year ago. During the quarter, the most significant single event was the completion of the drop-down that I detailed earlier. But we also completed the third and final phase of Southern Natural Gas's system 3, and that expansion was placed in service in June. All 3 of those phases together resulted in additional capacity on the system of about 375 million cubic feet a day, and that's all subscribed to by the Southern companies for electric generation mode.
From a broader perspective on EPB, we're just starting the process of assimilating these assets, but we're really very encouraged by the step-out expansion opportunities; by opportunities for storage, both in the Southeast and the Rockies; and by potential LNG export opportunities. We think EPB will also benefit from its share of these reduced costs, which we've been able to put into effect across the entire Kinder Morgan companies. So that's an update on where we stand. And with that, I'll turn it over to Kim.
Kimberly Allen Dang - Chief Financial Officer, Principal Accounting Officer and Vice President
Okay. Thanks, Rich. Okay, I'm going to start with the numbers on KMP. I'll do EPB second, and KMI, third. And so looking at the first page of numbers on KMP, the GAAP income statement, we don't think that the GAAP income statement is overly meaningful. We're going to focus on our calculation of EPS. But a few things I want to point out here, one, we're declaring a distribution today of $1.23. That's up about 7% from the second quarter of last year. The other thing on the GAAP income statement, you will see that there is an incremental loss on the remeasurement of our discounts -- that's the FTC assets -- to adjust them to fair value. That's $327 million. That's noncash. When we go to the DCF calculation, you'll see that we exclude that. However, right above that, you'll see the income from discontinued operations, the $48 million. When we calculate DCF because we still own those assets and we get those cash flows, we include that in our calculation of DCF.
So on the second page, towards the bottom of the page, you can see our DCF before certain items. As Rich mentioned, $366 million in the quarter, up $42 million or 13%. For the 6 months, $828 million, up $122 million. Now just to back up one second, what we're doing in calculating DCF is we're taking GAAP net income before certain items, the primarily -- the primary certain item is the loss on remeasurement that I just mentioned. We're adding back DD&A, including our share of DD&A. We're making some other small adjustments, book cash taxes and some other small adjustments, taking out sustaining CapEx to get us to what our DCF is. So that is $366 million in the quarter. That's about $1.07 per unit. That compares to the distribution that we're declaring today of $1.23. So we have negative coverage in the quarter, which is -- we expected. We told you that, that would be the case, so it's last quarter and it's the time we went over the budget.
For the 6 months, $2.44 of distributable cash flow per unit compared to a distribution of $2.43. So slightly positive on coverage for the 6 months. For the full year, on coverage, what we're expecting is to be at 1x coverage or maybe slightly under that. And I'll go through in a minute as I go through where we are relative to our budget, but that's primarily a function of lower NGL prices and then lower results, operating results from our KinderHawk assets.
So looking back up at the segment, $959 million in segment earnings before DD&A, up $107 million in the quarter, up $257 million year-to-date. The Products Pipelines, as Rich mentioned, down $9 million in the quarter, down $13 million year-to-date on an actual basis. That is primarily a function of the lower rates on Pacific. We do have lower performance on our Transmix business as we had a contract expire there, but that's largely offset by a favorable on Cochin as a result of a settlement with our shippers.
The same factors are driving the year-to-date. With respect to the budget, we're very close to the budget year-to-date. For the year, we expect to end slightly below the budget. Natural Gas segment's up $47 million in the quarter. It's up $103 million year-to-date, and that's a function of the KinderHawk acquisition, the SouthTex acquisition and just favorable results in our trading business and our Fayetteville Express Pipeline, as volumes ramped during 2011.
With respect to our budget year-to-date on Natural Gas, we're below our budget, primarily as a result of KinderHawk. And then as things progressing more slowly in the Eagle Ford as Rich mentioned. For the year, on Natural Gas, we expect to be above our budget as a result of the drop-downs. And so absent the drop-downs, we would expect that we would end below our budget, primarily as a function of KinderHawk.
CO2 business is up $52 million in the quarter. It's up $131 million year-to-date. Obviously, oil price is up. Our oil volumes in the quarter are up about 800 barrels per day, largely as a result of caps. Our NGL volumes are up in the quarter, about 1,100 barrels a day, and then that's slightly offset by lower NGL prices. The same is true for the quarter except for the oil volume is flat. So the same factors, except the oil volume.
Year-to-date, we are below budget on CO2, and that's a function -- oil production is, as I said, about 850 barrels per day below our budget. However, for the full year, given SACROC, the improved performance of SACROC, we're expecting to end pretty close to our production budget. And so for the full year, we're expecting CO2 to come in about 5% below its budget, and that is primarily a factor of lower NGL prices.
Terminals up $17 million in the quarter, up $34 million year-to-date. 80% of that is internal growth in the quarter, primarily higher volumes on our liquids terminals, higher rates and expansions on our liquids terminals, higher coal, export coal volumes and higher petcoke volumes. And the same factors are largely true on the year-to-date basis. Year-to-date, Terminals is on budget. And for the year, we expect them to exceed their budget, primarily due to higher export coal volumes.
Kinder Morgan Canada is flat in the quarter. It's up about $2 million year-to-date. They're slightly exceeding their budget year-to-date, and we expect for the year that they will slightly exceed their budget.
Dropping down to G&A, which is about in the middle of your page, G&A is down $2 million versus -- I'm sorry, is up $2 million versus last year. It's up $10 million versus last year, year-to-date. It's on budget year-to-date. And -- but for the year, we expect it to be above its budget. And we expect to be its -- for it to be above its budget largely as a result of the drop-downs of GDP and EPNG. Absent the drop-downs, we would come in under our budget on G&A, primarily as a function of higher capitalized overhead as capital expenditures have increased to the $2.2 billion that Rich mentioned before.
Interest expense, up $12 million versus the second quarter last year, up $19 million year-to-date. That's primarily a function of the higher balance. Our balance is up about $1.3 billion. Year-to-date, we are favorable to budget as a result of lower rates. For the full year, we expect to be above our budget as a result of the acquisitions. If you strip out the acquisitions, we would expect that interest expense would be favorable versus our budget, also as a function of lower rates.
Sustaining CapEx in the quarter is up $3 million. So higher spending in the quarter than a year ago. It's also up year-to-date. Versus our budget year-to-date, we're actually favorable. We've spent less than we anticipated. Some of that is timing. But for the full year, we expect sustaining capital to be above our budget, and that's also a function of the acquisitions. Our full year forecast does build in the impact of the drop-downs and from KMI, as well as the FTC divestitures. We think we'll be in the range of $55 million higher than our budget. If you strip out the acquisitions, we would come in favorable to budget. Primarily, some has moved -- some of the sustaining CapEx has moved to O&M and then there is a small amount of savings and deferrals.
So that is the DCF for the quarter. I'll move to the balance sheet. The balance sheet -- I'm just going to focus on the debt. $12.6 billion is our net debt in the quarter. That results in a debt to EBITDA of 3.4x. That's down from year end of 3.6x and down from last quarter at 3.5x. We expect to end the year at about 3.9x debt to EBITDA, but that also has all the debt associated with the drop-down transactions and only a partial year of the operating results. So if you pro forma the EBITDA for a full year, so you take out the FTC assets and you put in a full year of TGP and EPNG, we would end the year at 3.7x.
The change in debt for the quarter is about $55 million. For the year-to-date, it's about $223 million. And just to go through the main drivers of that, on the quarter, we had about $730 million of spending. It was $400 million of expansion CapEx, about $300 million of acquisitions and about $35 million of contributions to equity investments.
We issued equity of $578 million. That's KMR. That's KMP at the market. We issued about $300 million in the Midstream transaction. We had a rate case settlement payment of $54 million. We unwound a swap that largely offset that. That was a positive $53 million. Our coverage was negative $56 million and then we had a working capital positive of $157 million. And that is primarily accrued interest.
Year-to-date, $223 million change in debt. We spent a little over $1.1 billion year-to-date. That's about $700 million in expansion, $330 million in acquisitions, the biggest acquisition being the $300 million Midstream acquisition, and about $86 million in contributions to equity investments, primarily Eagle Ford and EagleHawk. We raised about $817 million of equity. The Canada rate case began and a swap on line [ph] largely offset. Coverage was about $2 million positive and then we had $82 million of positive working capital, which was primarily dark [ph] premiums, accrued taxes, AP and AR, offset by some inventory purchases in our Transmix business. So that's KMP.
Moving to EPB, and the first page of EPB is also the GAAP income statement. As Rich said, we're declaring a distribution of $0.55 in the quarter. The GAAP income statement recasts our prior period results to include Cheyenne Plains as if EPB had owned Cheyenne Plains during all periods presented. So when I go to the next page and we go to our calculation of DCF, it will not -- it will only include Cheyenne Plains for the periods that we owned it. So you can see the incremental impact from the acquisition. DCF calculation, this is going to -- for some of you who follow EPB, it's going to be a little bit of a new format. This format is consistent with KMP's format. I think we get to the same answer at the end of the day, it's just done -- it's laid out a little bit differently. So more to KMP, we're just taking that income, adding back DD&A and subtracting sustaining CapEx. There are a couple of other adjustments to get to DCF that you'll see at the bottom. Those are consistent with the adjustments that El Paso was making previously.
So DCF before certain items, as Rich mentioned, at $135 million in the quarter, up $17 million in the quarter, up $22 million year-to-date. $135 million is $0.65 on a per-unit basis versus our $0.55 declared distribution, results in coverage of about $20 million. On the 6 months, the $278 million is $1.35 per unit compared to our declared distribution of $1.06. That's about $60 million. And as Rich mentioned, for the year, we expect to declare distributions of $2.25 and to have coverage in excess of $80 million.
Now just looking at the $17 million, where did that growth come from? If you look out at the segments, the segments were up $17 million, and that's primarily the acquisition of Cheyenne Plains, as well as improved results on Southern Natural as a result of the completed expansion project and greater power demand load. That $17 million, though, because El Paso consolidated the -- all the pipelines in prior periods, it didn't own 100% of those pipelines, and so you're seeing the benefit of the acquisition down below in the minority interest line.
So as EPB has bought more of those assets from El Paso, the minority interest decreases. And so you see that benefit down in the minority interest line below. So if you add that, that takes your $17 million, there's about $4 million of benefit from those incremental acquisitions since 2011. So that's $21 million total increase in the assets.
Sustaining CapEx is a positive $17 million in the quarter. That's because there were -- in 2011, there were some nonrecurring maintenance items. There's some timing, which I will get to in a second, and also the cost savings that we've implemented. So we have $38 million of cash flow available. Interest is up by $10 million as a result of the acquisition. GP incentive is up $13 million as a result of these units issued and the increase in the distribution. There's some other items that are about $2 million, and that takes you to the $17 million.
Same analysis for the year-to-date. The segments are up $7 million. The incremental from acquisitions is -- it shows up in the minority interest line, is about $30 million. That's $37 million total. Sustaining CapEx is $29 million lower. Now on sustaining CapEx, for the full year, what we're expecting is around $55 million to $60 million. So you can see in the quarter and year-to-date, there is some timing relative to the full year. But we do expect -- but we are lower than last year in the quarter.
Interest is up $20 million. GP incentive is up $25 million year-to-date. There is about $1 million of other items, and so that takes you to the increase of $22 million for the year-to-date.
On EPB's balance sheet, the largest change in EPB's balance sheet relates to the drop-down of CIG, the 14% interest in CIG and the Cheyenne Plains. And so you can see that the debt is up about $509 million. And then you also see equity is negative. And those results because we have to recast. And so when we recast this as we own these assets in all periods, when you originally do it, you don't have the financing because they're assuming this happened way in the past. So you put assets on your books. Adding to that, creates a positive in equity. And then when you go finance these assets that are already on your books for GAAP purposes, that is going to be a negative running through your equity account. And so you can see that happening this quarter.
On a debt-to-EBITDA basis, 4.7x versus 4.1x. Now the debt here on the balance sheet has also been recast for Cheyenne Plains. So the 3.990 at the end of the year is not really what was on the balance sheet at the end of the year. So -- what was on the balance sheet at the end of the year was 3.825. So we're up about $800 million year-to-date, and we're up about 700 -- sorry, we're up $800 million from the quarter. We're up about $750 million year-to-date.
The acquisitions, $635 million went out the door on that, but we also issued equity for $64 million. So $570 million net. We assumed $176 million in debt, there is $23 million in expansion capital, $45 million in the termination of an AR program. Cheyenne Plains came with cash of about $20 million. There's about $20 million of coverage and then there's working capital of about $27 million negative, largely associated with accrued interest. Year-to-date, the acquisition, $635 million. $176 million of debt assumed. $40 million of expansion CapEx, same $45 million on the termination of the AR program, same $20 million of cash. Equity issued, $64 million. Coverage is $60 million and then the working capital is about $4 million. And so that is EPB.
Moving to KMI, just couple of overall comments for those of you who might be new. This is our calculation of cash available to pay dividends at KMI. So what we are showing here is the cash that we received based on the declared distribution at KMP and EPB. It is the cash we -- or the cash available for us from our investment in NGPL. And then this quarter, we have added a second section because now KMI owns assets. And so we've tried to divide the schedule: the top schedule, which I'll -- the top half of the schedule, which I'll call the GP section; and the bottom half is what I'll call the asset section. The asset section is assets that we intend to drop over time to KMP and EPB. So it will largely go away over time, and the cash flows will move up into the GP section. Now it's not perfect. There is -- all the interest associated with the El Paso acquisition is in the bottom part of the section. All the cash taxes are in the top part of the section. But if you try to get -- if you ask 5 different people how to allocate this stuff, they do it 5 different ways. So we didn't try to go through an allocation exercise. That's just -- that's so -- just presented it this way for simplicity.
In this schedule, we have full -- there are no transaction costs in the schedule. What we're trying to show here is the recurring cash flow that is available for distribution. So in the quarter, $307 million available for distribution. That's $0.36 a unit -- I mean, per share versus our declared dividend of $0.35 a share. For the 6 months, $610 million, which is $0.79 per share versus $0.67 on a declared basis. The -- we're up, again, $139 million in the quarter, $175 million year-to-date. If you look at what's driving the $139 million, the KMP distribution to us, $393 million, that's up $49 million. The distribution from EPB, $82 million -- up $82 million. And then that's offset somewhat by lower distributions from NGPL, higher interest expense and higher cash taxes, those 3 totaling about $20 million. So the -- you get to about $100 million in cash available to pay dividends before you get to the assets that we own. The assets generated about $38 million. Some of you may say well, that seems kind of low. But remember that all the acquisition interest is allocated to this section. We have already dropped some of the assets to EPB, and the GP and LP contribution from EPB are up above the $80 million.
In the year-to-date, $175 million increase, $767 million is coming from KMP. That's over a $90 million increase. EPB is an $82 million increase. So between the 2 of those, you have about a $170 million increase. NGPL is down a little bit, but NGPL is, for the full year, is consistent with what we budgeted. And so the interest is up a little bit, G&A is up a little bit and cash taxes are up about $20 million to take you to $137 million. Again, we have $38 million from the assets to get you a $175 million increase, which is about 40% increase in the cash available year-to-date.
Moving to the GAAP net income. There's a lot of noise in the -- given all the transaction expenses in the quarter. But our net income attributable to KMI is a $125 million loss. Now in the footnote on the prior page, you can see that there's about $273 million of after-tax expenses associated with EPC transaction and the EPE transaction. There's also a $29 million deferred tax adjustment associated with the transaction. There's $24 million in KMP-certain items that flow through to KMI on an income basis, which is largely KMI's share of the FTC revaluation. And then there's $15 million of other purchase accounting. So if you add those back, which is about $341 million, you get to about $216 million of net income, which is about $0.26 a share. We don't, again, think that the GAAP income statement is overly meaningful, but I know that some of you are required to report net income.
The next page is the GAAP reconciliation, which I'm not going to go through. I'm just going to spend a few minutes on the balance sheet. And the balance sheet is a consolidated balance sheet. It consolidates KMP, EPB into KMI. This is preliminary. We expect that there will be some movement in this balance sheet given the transaction and finalizing purchase accounting. We expect there'll primarily be re-classes, but there could be some other changes as well.
If you look down to the bottom -- oh, first, the change in total assets is about $38.8 billion. Of that, KMP is about $300 million and really, the remaining change is almost all attributable to the acquisition of El Paso. On the debt balance, KMI's debt balance is about $16.4 billion. That debt balance we expect to come down as we drop assets to KMP over -- in this quarter. But some of that debt will move to KMP as KMP takes on debt to finance the acquisition. But on a consolidated basis and pro forma-ing the EBITDA for a full year, we expect to end the year slightly over 5x. The change in debt on the quarter is about -- for the year is about $13.128 billion. For the quarter, it's about $13.155 billion. And so I'm going to reconcile that for you quickly.
The transaction, we assumed about $7.3 billion in net debt from EPC. We also issued about $5.4 billion. And then when KMP purchased the other half of Midstream, it caused us to consolidate Midstream's debt on KMI's balance sheet. So that's another $100 million. So that's about $12.8 billion. So it is up $12.827 billion, and then -- so the change in debt is $328 million after you take out those -- the transaction debt assumed or issued.
The performance metric that we went through was $307 million. There's about $146 million of timing on distributions. That means we recognized those distributions in the quarter for the performance metric, but we haven't received the cash yet. And that's higher than what we would anticipate going forward. What we anticipate going forward is about $15 million. It's higher in this quarter, primarily because this is the first quarter that we've gotten a distribution from EPB. We show it on the performance metric, but we don't actually receive that distribution until August.
We paid $226 million in dividends in the quarter. We repurchased about $110 million of warrants. There's $125 million of transaction-related items, primarily severance and retention bonuses and then the termination of the AR financing facility. And then there is about $28 million of other items, expansion CapEx and contributions to equity investments to get you to your total change of $328 million. So that's all I have.
Richard D. Kinder - Chairman and Chief Executive Officer
Okay. Thank you, Kim. And with that, we will take any questions you may have.
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