Risk Management

Certain of our business activities expose us to risks associated with unfavorable changes in the market price of natural gas, NGL and crude oil. We also have exposure to interest rate 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 EP acquisition, we acquired power forward and swap contracts. We have entered into offsetting positions that eliminate the price risks associated with our power contracts. As part of the May 1, 2013 Copano acquisition, KMP acquired derivative contracts related to natural gas, NGL and crude oil. None of these derivatives are designated as accounting hedges.

Energy Commodity Price Risk Management

As of March 31, 2014, KMI and KMP had entered into the following outstanding commodity forward contracts to hedge their forecasted energy commodity purchases and sales:



	Net open position long/(short)
Derivatives designated as hedging contracts
Crude oil fixed price	(24.0)	MMBbl
Natural gas fixed price	(23.0)	Bcf
Natural gas basis	(23.0)	Bcf
Derivatives not designated as hedging contracts
Crude oil fixed price	(0.7)	MMBbl
Crude oil basis	(0.7)	MMBbl
Natural gas fixed price	(13.1)	Bcf
Natural gas basis	(8.3)	Bcf
NGL fixed price	(1.0)	MMBbl

As of March 31, 2014, 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 2018.

Interest Rate Risk Management

As of March 31, 2014, KMI and KMP had a combined notional principal amount of $725 million and $5,175 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 LIBOR plus a spread. All of KMI 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, 2014, 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.

As of December 31, 2013, KMI and KMP had a combined notional principal amount of $725 million and $4,675 million, respectively, of fixed-to-variable interest rate swap agreements. In February 2014, KMP entered into four separate fixed-to-variable interest rate swap agreements having a combined notional principal amount of $500 million. These agreements effectively convert a portion of the interest expense associated with KMP’s 3.50% senior notes due March 1, 2021, from a fixed rate to a variable rate based on an interest rate of LIBOR plus a spread.

Fair Value of Derivative Contracts

The following table summarizes the fair values of our derivative contracts included in our accompanying consolidated balance sheets as of March 31, 2014 and December 31, 2013 (in millions):



Fair Value of Derivative Contracts
		Asset derivatives				Liability derivatives
		March 31, 2014		December 31, 2013		March 31, 2014			December 31, 2013
	Balance sheet location	Fair value		Fair value		Fair value			Fair value
Derivatives designated as hedging contracts
Natural gas and crude derivative contracts	Other current assets/(Other current liabilities)	$	13	$	18	$	(51	)	$	(33	)
	Deferred charges and other assets/(Other long-term liabilities and deferred credits)	22		58		(13		)	(30		)
Subtotal		35		76		(64		)	(63		)
Interest rate swap agreements	Other current assets/(Other current liabilities)	122		87		—			—
	Deferred charges and other assets/(Other long-term liabilities and deferred credits)	170		172		(94		)	(116		)
Subtotal		292		259		(94		)	(116		)
Total		327		335		(158		)	(179		)

Derivatives not designated as hedging contracts
Natural gas, crude and NGL derivative contracts	Other current assets/(Other current liabilities)	6		4		(9		)	(5		)
Subtotal		6		4		(9		)	(5		)
Power derivative contracts	Other current assets/(Other current liabilities)	2		7		(49		)	(54		)
	Deferred charges and other assets/(Other long-term liabilities and deferred credits)	8		11		(58		)	(73		)
Subtotal		10		18		(107		)	(127		)
Total		16		22		(116		)	(132		)
Total derivatives		$	343	$	357	$	(274	)	$	(311	)

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 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. As of March 31, 2014 and December 31, 2013, these fair value adjustments to our debt balances included (i) $1,340 million and $1,379 million, respectively, associated with fair value adjustments to our debt previously recorded in purchase accounting; (ii) $198 million and $143 million, respectively, associated with the offsetting entry for hedged debt; (iii) $501 million and $517 million, respectively, associated with unamortized premium from the termination of interest rate swap agreements; and offset by (iv) $70 million and $62 million, respectively, associated with unamortized debt discount amounts. As of March 31, 2014, the weighted-average amortization period of the unamortized premium from the termination of the interest rate swaps was approximately 16 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, 2014 and 2013 (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,
		2014			2013
Interest rate swap agreements	Interest expense	$	55		$	(88	)
Total		$	55		$	(88	)

Fixed rate debt	Interest expense	$	(55	)	$	88
Total		$	(55	)	$	88

_______


(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,
	2014			2013				2014			2013			2014			2013
Energy commodity derivative contracts	$	(43	)	$	(32	)	Revenues—Natural gas sales	$	(9	)	$	—	Revenues—Natural gas sales	$	—		$	—
							Revenues—Product sales and other	(6		)	5		Revenues—Product sales and other	(5		)	(3		)
							Costs of sales	1			—		Costs of sales	—			—
Interest rate swap agreements	(2		)	1			Interest expense	—			1		Interest expense	—			—
Total	$	(45	)	$	(31	)	Total	$	(14	)	$	6	Total	$	(5	)	$	(3	)

_______

(a)

We expect to reclassify an approximate $15 million loss associated with energy commodity price risk management activities and included in our accumulated other comprehensive loss and noncontrolling interest balances as of March 31, 2014 into earnings during the next twelve months (when the associated forecasted sales and purchases are also expected to occur), however, actual amounts reclassified into earnings could vary materially as a result of changes in market prices.


(b)	Amounts reclassified were the result of the hedged forecasted transactions actually affecting earnings (i.e., when the forecasted sales and purchases actually occurred).



Derivatives not designated as accounting hedges	Location of gain/(loss) recognized in income on derivatives	Amount of gain/(loss) recognized in income on derivatives
		Three Months Ended March 31,
		2014			2013
Energy commodity derivative contracts	Revenues—Natural gas sales	$	(7	)	$	1
	Revenues—Product sales and other	(1		)	2
	Costs of sales	10			—
	Other expense(income)	(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 OTC 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 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.

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, 2014 and December 31, 2013, KMP had no outstanding letters of credit supporting its hedging of energy commodity price risks associated with the sale of natural gas, NGL and crude oil. As of both March 31, 2014 and December 31, 2013, KMI had $167 million of outstanding letters of credit supporting its commodity price risks associated with the sale of natural gas and power.

KMP and KMI also have agreements with certain counterparties to their derivative contracts that contain provisions requiring us to post additional collateral upon a decrease in their credit rating. As of March 31, 2014, 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 $25 million of incremental collateral. As of March 31, 2014, 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

Cumulative revenues, expenses, gains and losses that under GAAP are included within our comprehensive income but excluded from our earnings are reported as “Accumulated other comprehensive loss” within “Stockholders’ Equity” in our consolidated balance sheets. Changes in the components of our “Accumulated other comprehensive loss” for the three months ended March 31, 2014 and 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 adjustments			Total accumulated other comprehensive loss
Balance as of December 31, 2013	$	(3	)	$	2		$	(23	)	$	(24	)
Other comprehensive loss before reclassifications	(19		)	(25		)	—			(44		)
Amounts reclassified from accumulated other comprehensive loss	6			—			—			6
Net current-period other comprehensive loss	(13		)	(25		)	—			(38		)
Balance as of March 31, 2014	$	(16	)	$	(23	)	$	(23	)	$	(62	)



	Net unrealized gains/(losses) on cash flow hedge derivatives			Foreign currency translation adjustments			Pension and other postretirement liability adjustments			Total accumulated other comprehensive loss
Balance as of December 31, 2012	$	7		$	51		$	(176	)	$	(118	)
Other comprehensive loss before reclassifications	(16		)	(17		)	(1		)	(34		)
Amounts reclassified from accumulated other comprehensive loss	(4		)	—			—			(4		)
Net current-period other comprehensive loss	(20		)	(17		)	(1		)	(38		)
Balance as of March 31, 2013	$	(13	)	$	34		$	(177	)	$	(156	)