General

Organization

We are the largest energy infrastructure company in North America. We own an interest in or operate approximately 84,000 miles of pipelines and 180 terminals. Our pipelines transport natural gas, refined petroleum products, crude oil, condensate, CO₂ and other products, and our terminals transload and store petroleum products, ethanol and chemicals, and handle such products as coal, petroleum coke and steel. We are also the leading producer and transporter of CO₂, which is utilized for enhanced oil recovery projects in North America.

On November 26, 2014, we completed our acquisition, pursuant to three separate merger agreements, of all of the outstanding common units of KMP and EPB and all of the outstanding shares of KMR that we did not already own, which transactions are referred to collectively as the “Merger Transactions.”

Basis of Presentation

General

Our reporting currency is U.S. dollars, and all references to dollars are U.S. dollars, unless stated otherwise. Our accompanying unaudited consolidated financial statements have been prepared under the rules and regulations of the United States Securities and Exchange Commission (SEC). These rules and regulations conform to the accounting principles contained in the FASB’s Accounting Standards Codification, the single source of GAAP. Under such rules and regulations, all significant intercompany items have been eliminated in consolidation.

In our opinion, all adjustments, which are of a normal and recurring nature, considered necessary for a fair presentation of our financial position and operating results for the interim periods have been included in the accompanying consolidated financial statements, and certain amounts from prior periods have been reclassified to conform to the current presentation. Interim results are not necessarily indicative of results for a full year; accordingly, you should read these consolidated financial statements in conjunction with our consolidated financial statements and related notes included in our 2015 Form 10-K.

Goodwill

Goodwill is the cost of an acquisition in excess of the fair value of acquired assets and liabilities and is recorded as an asset on our balance sheet. Goodwill is not subject to amortization but must be tested for impairment at least annually. This test requires us to assign goodwill to an appropriate reporting unit and to determine if the implied fair value of the reporting unit’s goodwill is less than its carrying amount.

We evaluate goodwill for impairment on May 31 of each year. For this purpose, we have seven reporting units as follows: (i) Products Pipelines (excluding associated terminals); (ii) Products Pipelines Terminals (evaluated separately from Products Pipelines for goodwill purposes); (iii) Natural Gas Pipelines Regulated; (iv) Natural Gas Pipelines Non-Regulated; (v) CO₂; (vi) Terminals; and (vii) Kinder Morgan Canada. We also evaluate goodwill for impairment to the extent events or conditions indicate a risk of possible impairment during the interim periods subsequent to our annual impairment test. Generally, the evaluation of goodwill for impairment involves a two-step test, although under certain circumstance an initial qualitative evaluation may be sufficient to conclude that goodwill is not impaired without conducting the quantitative test.

Step 1 involves comparing the estimated fair value of each respective reporting unit to its carrying value, including goodwill. If the estimated fair value exceeds the carrying value, the reporting unit’s goodwill is not considered impaired. If the carrying value exceeds the estimated fair value, step 2 must be performed to determine whether goodwill is impaired and, if so, the amount of the impairment. Step 2 involves calculating an implied fair value of goodwill by performing a hypothetical allocation of the estimated fair value of the reporting unit determined in step 1 to the respective tangible and intangible net assets of the reporting unit. The remaining implied goodwill is then compared to the actual carrying amount of the goodwill for the reporting unit. To the extent the carrying amount of goodwill exceeds the implied goodwill, the difference is the amount of the goodwill impairment. A large portion of our goodwill is non-deductible for tax purposes, and as such, to the extent there are impairments, all or a portion of the impairment may not result in a corresponding tax benefit.

In the fourth quarter 2015, we recorded a $1,150 million impairment of goodwill associated with our Natural Gas Pipeline - Non-Regulated reporting unit triggered by decreases in market valuations in our industry which were caused by the commodity price environment at that time.

The results of our May 31, 2016 annual impairment test indicated that for each of our reporting units other than our Natural Gas Pipelines - Non-Regulated, the reporting unit fair value exceeded the carrying value. For our Natural Gas Pipelines - Non-Regulated, and similar to December 31, 2015, the fair value of the reporting unit continues to be slightly less than the carrying value of the reporting unit, thereby necessitating a step 2 evaluation. The hypothetical fair value allocation to the assets and liabilities of the reporting unit in the step 2 evaluation, resulted in an amount of implied goodwill exceeding the carrying amount of the reporting unit’s goodwill and, as a result, no adjustment to the reporting unit’s goodwill carrying value was warranted.

The fair value estimates used in the step 1 and step 2 goodwill tests are based on Level 3 inputs of the fair value hierarchy. The methodologies and key inputs used by management were substantially consistent with those utilized in the fourth quarter 2015.

We expect that the carrying value of our Natural Gas Pipelines - Non-Regulated reporting unit will continue to approximate fair value so long as our estimate of future cash flows and the market valuation remain consistent with current levels. A continued or prolonged period of lower commodity prices could result in further deterioration of market multiples, comparable sales transactions prices, weighted average costs of capital, and our cash flow estimates. Changes to any one or combination of these factors, particularly for our Natural Gas Pipelines - Non-Regulated reporting unit given that the carrying value slightly exceeds the current estimated fair value, would result in a change to the reporting unit fair values discussed above which could lead to further impairment charges. Such potential impairment could have a significant effect on our results of operations.

Impairments and Disposals

During the six months ended June 30, 2016, we had non-cash pre-tax impairment charges and losses on disposals of assets of $257 million substantially all of which was recorded in the first quarter of 2016 comprised of (i) $106 million of project write-offs on our Northeast Energy Direct (NED) Market project and $13 million related to an equity investment in a gas gathering entity within our Natural Gas Pipelines business segment; (ii) $33 million of project write-offs within our CO₂ business segment; (iii) $20 million related to certain terminals with significant coal operations within our Terminals business segment; (iv) $64 million of write-offs associated with our Palmetto project and an $8 million loss on a held-for-sale Transmix facility both within our Products Pipelines business segment; and (v) $13 million net losses on other disposals of assets. The project write-offs recorded in the six months ended June 30, 2016 were driven by management's assessment of the probability of those projects moving forward based on insufficient progress in obtaining contractual commitments from customers in the New England market, in the case of the NED Market project, and an unfavorable action by the Georgia legislature regarding permitting for refined products pipelines affecting the Palmetto project.

During the three and six months ended June 30, 2015 we had non-cash pre-tax impairment charges and losses on disposals of assets of $50 million and $130 million, respectively. These amounts include (i) $48 million and $99 million for the three and six months ended June 30, 2015, respectively, of impairments and project write-offs, related to certain gas gathering and processing assets within our midstream operations and $26 million for the six months ended June 30, 2015 primarily related to an equity investment in a gathering entity, both within our Natural Gas Pipelines business segment; (ii) $9 million for both the three and six months ended June 30, 2015 related to an impairment charge associated with the pending sale of excess construction pipe within our CO₂ business segment; and (iii) $7 million and $4 million for the three and six months ended June 30, 2015, respectively, of net gains on other disposals of assets.

In addition, during the three and six months ended June 30, 2016 we recognized a $12 million gain on the sale of an equity investment, which is included in “Other, net” on the accompanying consolidated statements of income.

As conditions warrant, we routinely evaluate our assets for potential triggering events that could impact the fair value of certain assets or our ability to recover the carrying value of long-lived assets. Such assets include accounts receivable, equity investments, goodwill, other intangibles and property plant and equipment, including oil and gas properties and in-process construction. Depending on the nature of the asset, these evaluations require the use of significant judgments including but not limited to judgments related to customer credit worthiness, future cash flow estimates, future volume expectations, current and future commodity prices, regulatory environment, management’s decisions to dispose of certain assets and estimates of the fair values of our reporting units, as well as general economic conditions and the related demand for products handled or transported by our assets. In the current commodity price environment and to the extent conditions further deteriorate, we may identify additional triggering events that may require future evaluations of the recoverability of the carrying value of our long-lived assets, investments and goodwill which could result in further impairment charges. Because certain of our assets, including our oil and gas producing properties have been written down to fair value, any deterioration in fair value that exceeds the rate of depletion of the related asset would result in further impairments. Such non-cash impairments could have a significant effect on our results of operations, which would be recognized in the period in which the carrying value is determined to not be recoverable. Certain of these impairments are based on Level 3 estimates of fair value using income approach valuation methodologies which include assumptions regarding future cash flows, terminal values and discount rates. We believe our methodologies are standard techniques and results would not vary materially using a reasonable range of assumptions.

Earnings per Share

We calculate earnings per share using the two-class method. Earnings were allocated to Class P shares of common stock and participating securities based on the amount of dividends paid in the current period plus an allocation of the undistributed earnings or excess distributions over earnings to the extent that each security participates in earnings or excess distributions over earnings. Our unvested restricted stock awards, which may be stock or stock units issued to management employees and include dividend equivalent payments, do not participate in excess distributions over earnings.

The following tables set forth the allocation of net income available to shareholders of Class P shares and participating securities and the reconciliation of Basic Weighted Average Common Shares Outstanding to Diluted Weighted Average Common Shares Outstanding (in millions):



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Class P	$	332	$	330	$	607	$	756
Participating securities:
Restricted stock awards(a)	1		3		2		6
Net Income Available to Common Stockholders	$	333	$	333	$	609	$	762



	Three Months Ended June 30,		Six Months Ended June 30,
	2016	2015	2016	2015
Basic Weighted Average Common Shares Outstanding	2,229	2,175	2,229	2,158
Effect of dilutive securities:
Warrants	—	12	—	11
Diluted Weighted Average Common Shares Outstanding	2,229	2,187	2,229	2,169

________


(a)	As of June 30, 2016, there were approximately 8 million such restricted stock awards.

The following maximum number of potential common stock equivalents are antidilutive and, accordingly, are excluded from the determination of diluted earnings per share (in millions on a weighted-average basis):



	Three Months Ended June 30,		Six Months Ended June 30,
	2016	2015	2016	2015
Unvested restricted stock awards	8	7	8	7
Warrants to purchase our Class P shares(a)	293	287	293	288
Convertible trust preferred securities	8	8	8	9
Mandatory convertible preferred stock(b)	58	n/a	58	n/a

_______

n/a - not applicable

(a) 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. The potential dilutive effect of the warrants does not consider the assumed proceeds to KMI upon exercise.

(b) Until our mandatory convertible preferred shares are converted to common shares, on or before the expected mandatory conversion date of October 26, 2018, the holder of each preferred share participates in our earnings by receiving preferred dividends.