v2.4.0.6
Risk Management
 3 Months Ended
Mar. 31, 2013
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Risk Management
Risk Management
 
Certain of our business activities expose us to risks associated with unfavorable changes in the market price of natural gas, natural gas liquids and crude oil.  We also have exposure to interest rate risk as a result of the issuance of our debt obligations.  Pursuant to our management’s approved risk management policy, we use derivative contracts to hedge or reduce our exposure to certain of these risks.

As part of the El Paso acquisition (see Note 2), we acquired long-term natural gas and power forward and swap contracts. We have entered into offsetting positions that eliminate the price risks associated with our power contracts and substantially offset the fixed price exposure related to our natural gas supply contracts. None of these derivatives are designated as accounting hedges.

Energy Commodity Price Risk Management
 
As of March 31, 2013, KMI and KMP had entered into the following outstanding commodity forward contracts to hedge their forecast energy commodity purchases and sales:
 
 
Net open position long/(short)
Derivatives designated as hedging contracts
 
 
 
Crude oil fixed price
(21.4
)
 
million barrels
Natural gas fixed price
(33.9
)
 
billion cubic feet
Natural gas basis
(34.4
)
 
billion cubic feet
Derivatives not designated as hedging contracts
 

 
 
Crude oil fixed price
(0.1
)
 
million barrels
Crude oil basis
(3.6
)
 
million barrels
Natural gas fixed price
(2.0
)
 
billion cubic feet
Natural gas basis
13.1

 
billion cubic feet


As of March 31, 2013, the maximum length of time over which we have hedged our exposure to the variability in future cash flows associated with energy commodity price risk is through December 2016.

Interest Rate Risk Management
 
As of both March 31, 2013 and December 31, 2012, KMI and KMP each had combined notional principal amounts of $725 million and $5,525 million, respectively, of fixed-to-variable interest rate swap agreements, effectively converting the interest expense associated with certain series of senior notes from fixed rates to variable rates based on an interest rate of London InterBank Offered Rate (LIBOR) plus a spread.  All of KMI’s and KMP’s swap agreements have termination dates that correspond to the maturity dates of the related series of senior notes and, as of March 31, 2013, the maximum length of time over which we have hedged a portion of our exposure to the variability in the value of this debt due to interest rate risk is through March 15, 2035.
 
Fair Value of Derivative Contracts
 
The fair values of our current and non-current asset and liability derivative contracts are each reported separately as “Fair value of derivative contracts” in the respective sections of our accompanying consolidated balance sheets. The following table summarizes the fair values of our derivative contracts included on our accompanying consolidated balance sheets as of March 31, 2013 and December 31, 2012 (in millions):
Fair Value of Derivative Contracts
 
 
 
 
Asset derivatives
 
Liability derivatives
 
 
 
 
March 31,
 
December 31,
 
March 31,
 
December 31,
 
 
 
 
2013
 
2012
 
2013
 
2012
 
 
Balance sheet location
 
Fair value
 
Fair Value
 
Fair value
 
Fair Value
Derivatives designated as hedging contracts
 
 
 
 
 
 
 
 
 
 
Natural gas and crude derivative contracts
 
Current-Fair value of derivative contracts
 
$
19

 
$
42

 
$
(45
)
 
$
(18
)
 
 
Non-current-Fair value of derivative contracts
 
37

 
40

 
(8
)
 
(11
)
Subtotal
 
 
 
56

 
82

 
(53
)
 
(29
)
Interest rate swap agreements - Fair value hedges
 
Current-Fair value of derivative contracts
 
7

 
9

 
—

 
—

 
 
Non-current-Fair value of derivative contracts
 
572

 
656

 
(3
)
 
(1
)
Subtotal
 
 
 
579

 
665

 
(3
)
 
(1
)
Total
 
 
 
635

 
747

 
(56
)
 
(30
)
Derivatives not designated as hedging contracts
 
 
 
 

 
 
 
 

 
 
Natural gas and crude derivative contracts
 
Current-Fair value of derivative contracts
 
7

 
4

 
(4
)
 
(3
)
 
 
Non-current-Fair value of derivative contracts
 
—

 
—

 
—

 
(1
)
Subtotal
 
 
 
7

 
4

 
(4
)
 
(4
)
Power derivative contracts
 
Current-Fair value of derivative contracts
 
6

 
8

 
(55
)
 
(59
)
 
 
Non-current-Fair value of derivative contracts
 
9

 
13

 
(105
)
 
(120
)
Subtotal
 
 
 
15

 
21

 
(160
)
 
(179
)
Total
 
 
 
22

 
25

 
(164
)
 
(183
)
Total derivatives(a)
 
 
 
$
657

 
$
772

 
$
(220
)
 
$
(213
)
_______
(a)
As of March 31, 2013 and December 31, 2012, we presented the fair value of our derivative contracts on a gross basis on our accompanying consolidated balance sheets.  If we had elected to net derivative contracts subject to master netting agreements as of March 31, 2013 and December 31, 2012, the impact would have reduced our derivative assets and liabilities by $33 million and $38 million, respectively.  As of March 31, 2013 and December 31, 2012, KMP had cash margin deposits associated with its derivative contracts posted with counterparties of $21 million and $5 million, respectively, that would have additionally reduced our derivative liabilities.

Debt Fair Value Adjustments

The offsetting entry to adjust the carrying value of the debt securities whose fair value was being hedged is included within “Debt fair value adjustments” on our accompanying consolidated balance sheets. Our “Debt fair value adjustments” also include amounts associated with the offsetting entry for hedged debt, all unamortized debt discount/premium amounts, purchase accounting on our debt balances, and any unamortized portion of proceeds received from the early termination of interest rate swap agreements. These fair value adjustments to our debt balances included (i) $1,431 million and $1,470 million at March 31, 2013 and December 31, 2012, respectively, associated with fair value adjustments to our debt previously recorded in purchase accounting; (ii) $576 million and $664 million at March 31, 2013 and December 31, 2012, respectively, associated with the offsetting entry for hedged debt; (iii) $478 million and $490 million at March 31, 2013 and December 31, 2012, respectively, associated with unamortized premium from the termination of interest rate swap agreements; and offset by (iv) $36 million and $33 million at March 31, 2013 and December 31, 2012, respectively, associated with unamortized debt discount amounts. As of March 31, 2013, the weighted-average amortization period of the unamortized premium from the termination of the interest rate swaps was approximately 18 years.

Effect of Derivative Contracts on the Income Statement
 
The following three tables summarize the impact of our derivative contracts on our accompanying consolidated statements of income for each of the three months ended March 31, 2013 and 2012 (in millions):
 
Derivatives in fair value hedging relationships
 
Location of gain/(loss) recognized in income on derivatives
 
Amount of gain/(loss) recognized in income
 on derivatives and related hedged item(a)
 
 
 
 
Three Months Ended March 31,
 
 
 
 
2013
 
2012
Interest rate swap agreements
 
Interest expense
 
$
(88
)
 
$
(115
)
Total
 
 
 
$
(88
)
 
$
(115
)
 
 
 
 
 
 
 
Fixed rate debt
 
Interest expense
 
$
88

 
$
115

Total
 
 
 
$
88

 
$
115

_______
(a)
Amounts reflect the change in the fair value of interest rate swap agreements and the change in the fair value of the associated fixed rate debt which exactly offset each other as a result of no hedge ineffectiveness.
Derivatives
 in cash flow 
hedging
relationships
 
Amount of gain/(loss)
recognized in OCI 
on derivative(effective portion)(a)
 
Location of
gain/(loss)
reclassified from
Accumulated OCI
into income
(effective
 portion)
 
Amount of gain/(loss)
reclassified from
Accumulated OCI
into income
(effective portion)(b)
 
Location of
gain/(loss)
recognized in
income on
derivative
(ineffective
 portion
and amount
excluded from
effectiveness
testing)
 
Amount of gain/(loss)
recognized in income
on derivative
(ineffective portion
and amount
excluded from
effectiveness testing)
 
 
Three Months Ended
March 31,
 
 
 
Three Months Ended
March 31,
 
 
 
Three Months Ended
March 31,
 
 
2013
 
2012
 
 
 
2013
 
2012
 
 
 
2013
 
2012
Energy commodity derivative  contracts
 
$
(32
)
 
$
(86
)
 
Revenues-Natural gas sales
 
$
—

 
$
—

 
Revenues-Natural gas sales
 
$
—

 
$
—

 
 
 
 
 
 
Revenues-Product sales and other
 
5

 
(21
)
 
Revenues-Product sales and other
 
(3
)
 
(3
)
 
 
 
 
 
 
Gas purchases and other costs of sales
 
—

 
(2
)
 
Gas purchases and other costs of sales
 
—

 
—

Interest rate swap agreements
 
1

 
—

 
Interest expense
 
1

 
—

 
Interest Expense
 
—

 
—

Total
 
$
(31
)
 
$
(86
)
 
Total
 
$
6

 
$
(23
)
 
Total
 
$
(3
)
 
$
(3
)
_______
(a)
We expect to reclassify an approximate $12 million loss associated with derivatives and included in our accumulated other comprehensive loss and noncontrolling interest balances as of March 31, 2013 into earnings during the next twelve months (when the associated forecasted transactions are also expected to occur), however, actual amounts reclassified into earnings could vary materially as a result of changes in market prices. 
(b)
No material amounts were reclassified into earnings as a result of the discontinuance of cash flow hedges because it was probable that the original forecast transactions would no longer occur by the end of the originally specified time period or within an additional two-month period of time thereafter, but rather, the amounts reclassified were the result of the hedged forecast transactions actually affecting earnings (i.e., when the forecast sales and purchases actually occurred). 

Derivatives not designated as hedging contracts
 
Location of gain/(loss) recognized in income on derivatives
 
Amount of gain/(loss) recognized in income
 on derivatives
 
 
 
 
Three Months Ended
March 31,
 
 
 
 
2013
 
2012
Natural gas derivative contracts
 
Revenues-Natural gas sales
 
$
1

 
$
—

Crude oil derivative contracts
 
Revenues-Product sales and other
 
4

 
—

Power derivative contracts
 
Revenues-Product sales and other
 
(2
)
 
—

Total
 
 
 
$
3

 
$
—



Credit Risks
 
We and our subsidiary, KMP, have counterparty credit risk as a result of our use of financial derivative contracts.  Our counterparties consist primarily of financial institutions, major energy companies, natural gas and electric utilities, and local distribution companies.  This concentration of counterparties may impact our overall exposure to credit risk, either positively or negatively, in that the counterparties may be similarly affected by changes in economic, regulatory or other conditions.
 
We maintain credit policies with regard to our counterparties that we believe minimize our overall credit risk.  These policies include (i) an evaluation of potential counterparties’ financial condition (including credit ratings); (ii) collateral requirements under certain circumstances; and (iii) the use of standardized agreements which allow for netting of positive and negative exposure associated with a single counterparty.  Based on our policies, exposure, credit and other reserves, our management does not anticipate a material adverse effect on our financial position, results of operations, or cash flows as a result of counterparty performance.
 
Our over-the-counter swaps and options are entered into with counterparties outside central trading organizations such as futures, options or stock exchanges.  These contracts are with a number of parties, all of which have investment grade credit ratings.  While we enter into derivative transactions principally with investment grade counterparties and actively monitor their ratings, it is nevertheless possible that from time to time losses will result from counterparty credit risk in the future.
 
The maximum potential exposure to credit losses on derivative contracts as of March 31, 2013 was as follows (in millions): 
 
Asset
position
Interest rate swap agreements
$
579

Energy commodity derivative contracts
78

Gross exposure
657

Netting agreement impact
(33
)
Cash collateral held
—

Net exposure
$
624



In conjunction with the purchase of exchange-traded derivative contracts or when the market value of our derivative contracts with specific counterparties exceeds established limits, we are required to provide collateral to our counterparties, which may include posting letters of credit or placing cash in margin accounts.   As of both March 31, 2013 and December 31, 2012, KMP had no outstanding letters of credit supporting its hedging of energy commodity price risks associated with the sale of natural gas, natural gas liquids and crude oil. As of March 31, 2013 and December 31, 2012, KMP had cash margin deposits associated with its energy commodity contract positions and over-the-counter swap partners totaling $21 million and $5 million, respectively, and we reported this amount within “Other current assets” in our accompanying consolidated balance sheets. As of both March 31, 2013 and December 31, 2012, KMI had $300 million of outstanding letters of credit supporting its commodity price risks associated with the sale of natural gas and power.  As of both March 31, 2013 and December 31, 2012, KMI had no margin deposits outstanding with counterparties associated with its energy commodity contract positions and over-the-counter swap agreements.
 
KMP and KMI also have agreements with certain counterparties to their derivative contracts that contain provisions requiring the posting of additional collateral upon a decrease in their credit rating.  As of March 31, 2013, we estimate that if KMP’s credit rating was downgraded one notch, KMP would be required to post no additional collateral to its counterparties.  If KMP was downgraded two notches (that is, below investment grade), KMP would be required to post $13 million of incremental collateral. As of March 31, 2013, we estimate that if KMI’s credit rating was downgraded one or two notches, KMI would be required to post no additional collateral to its counterparties.

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
Changes in the components of our “Accumulated other comprehensive income” for the three months ended March 31, 2013 are summarized as follows (in millions):


 
Net unrealized
gains/(losses)
on cash flow
hedge derivatives
 
Foreign
currency
translation
adjustments
 
Pension and
other
postretirement
liability adjs.
 
Total
Accumulated other
comprehensive
income/(loss)
Balance as of December 31, 2012
$
7

 
$
51

 
$
(177
)
 
$
(119
)
Other comprehensive income before reclassifications
(16
)
 
(17
)
 
(1
)
 
(34
)
Amounts reclassified from accumulated other comprehensive income
(4
)
 
—

 
—

 
(4
)
Net current-period other comprehensive income
(20
)
 
(17
)
 
(1
)
 
(38
)
Balance as of March 31, 2013
$
(13
)
 
$
34

 
$
(178
)
 
$
(157
)