v2.4.0.6
Fair Value
 12 Months Ended
Dec. 31, 2011
Fair Value [Abstract]  
Fair Value
14.  Fair Value
 
The Codification emphasizes that fair value is a market-based measurement that should be determined based on assumptions (inputs) that market participants would use in pricing an asset or liability.  Inputs may be observable or unobservable, and valuation techniques used to measure fair value should maximize the use of relevant observable inputs and minimize the use of unobservable inputs.  Accordingly, the Codification establishes a hierarchal disclosure framework that ranks the quality and reliability of information used to determine fair values.  The hierarchy is associated with the level of pricing observability utilized in measuring fair value and defines three levels of inputs to the fair value measurement process—quoted prices are the most reliable valuation inputs, whereas model values that include inputs based on unobservable data are the least reliable.  Each fair value measurement must be assigned to a level corresponding to the lowest level input that is significant to the fair value measurement in its entirety.
 
The three broad levels of inputs defined by the fair value hierarchy are as follows:
 
 
▪
Level 1 Inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;
 
 
▪
Level 2 Inputs—inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.  If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability; and
 
 
▪
Level 3 Inputs—unobservable inputs for the asset or liability.  These unobservable inputs reflect the entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances (which might include the reporting entity’s own data).
 
Fair Value of Derivative Contracts
 
The following two tables summarize the fair value measurements of our (i) energy commodity derivative contracts and (ii) interest rate swap agreements as of December 31, 2011 and 2010, based on the three levels established by the Codification (in millions).  The fair value measurements in the tables below do not include cash margin deposits made by KMP or its counterparties, which would be reported within “Restricted deposits” and “Accrued other current liabilities,” respectively, in our accompanying consolidated balance sheets.
 
   
Asset fair value measurements using
 
   
Total
  
Quoted prices in
active markets
for identical
assets (Level 1)
  
Significant other
observable
inputs (Level 2)
  
Significant
unobservable
inputs (Level 3)
 
As of December 31, 2011
            
Energy commodity derivative contracts(a)
 $107.9  $34.1  $47.0  $26.8 
Interest rate swap agreements
 $661.4  $-  $661.4  $- 
                  
As of December 31, 2010
                
Energy commodity derivative contracts(a)
 $67.1  $-  $23.5  $43.6 
Interest rate swap agreements
 $258.6  $-  $258.6  $- 

   
Liability fair value measurements using
 
   
Total
  
Quoted prices in
active markets
for identical
liabilities
(Level 1)
  
Significant other
observable
inputs (Level 2)
  
Significant
unobservable
inputs (Level 3)
 
As of December 31, 2011
            
Energy commodity derivative contracts(a)
 $(159.5) $(14.5) $(124.9) $(20.1)
Interest rate swap agreements
 $-  $-  $-  $- 
                  
As of December 31, 2010
                
Energy commodity derivative contracts(a)
 $(384.5) $-  $(359.7) $(24.8)
Interest rate swap agreements
 $(69.2) $-  $(69.2) $- 
__________

(a)
Level 1 consists primarily of NYMEX natural gas futures.  Level 2 consists primarily of OTC West Texas Intermediate swaps and OTC natural gas swaps that are settled on NYMEX.  Level 3 consists primarily of natural gas basis swaps and West Texas Intermediate options.  
 
The table below provides a summary of changes in the fair value of our Level 3 energy commodity derivative contracts for each of the years ended December 31, 2011 and 2010 (in millions):
 
Significant unobservable inputs (Level 3)
 
   
Year Ended December 31,
 
   
2011
  
2010
 
Derivatives-net asset (liability)
      
Beginning of period
 $18.8  $13.0 
Transfers into Level 3
  -   - 
Transfers out of Level 3
  -   - 
Total gains or (losses):
        
Included in earnings
  (2.3)  (1.2)
Included in other comprehensive income
  (11.4)  2.9 
Purchases
  4.6   - 
Issuances
  -   - 
Sales
  -   - 
Settlements
  (3.0)  4.1 
End of period
 $6.7  $18.8 
          
The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or (losses) relating to assets held at the reporting date
 $(1.7) $(4.2)

Fair Value of Financial Instruments
 
Fair value as used in the disclosure of financial instruments represents the amount at which an instrument could be exchanged in a current transaction between willing parties.  As of each reporting date, the estimated fair value of our outstanding publicly-traded debt is based upon quoted market prices, if available, and for all other debt, fair value is based upon prevailing interest rates currently available to us.  In addition, we adjust (discount) the fair value measurement of our long-term debt for the effect of credit risk.
 
The estimated fair value of our outstanding debt balance as of December 31, 2011 and 2010 (both short-term and long-term, but excluding the value of interest rate swaps), is disclosed below (in millions):
 
 
December 31, 2011
 
December 31, 2010
 
Carrying
Value
 
Estimated
fair value
 
Carrying
Value
 
Estimated
fair value
Total Debt(a)
$
16,103.7
   
$
17,616.0
   
$
15,169.9
   
$
16,129.1
 
__________

(a)
The 2010 amounts include the $750.0 million of 5.35% senior notes paid on January 5, 2011 (see note 8 “Debt – KMI”).