Share-based Compensation and Employee Benefits

Share-based Compensation

Class P Shares

Kinder Morgan, Inc. Amended and Restated Stock Compensation Plan for Non-Employee Directors

We have a Kinder Morgan, Inc. Amended and Restated Stock Compensation Plan for Non-Employee Directors, in which our eligible non-employee directors participate. The plan recognizes that the compensation paid to each eligible non-employee director is fixed by our board, generally annually, and that the compensation is payable in cash. Pursuant to the plan, in lieu of receiving some or all of the cash compensation, each eligible non-employee director may elect to receive shares of Class P common stock. Each election will be generally at or around the first board meeting in January of each calendar year and will be effective for the entire calendar year. An eligible director may make a new election each calendar year. The total number of shares of Class P common stock authorized under the plan is 250,000. During 2017, 2016 and 2015, we made restricted Class P common stock grants to our non-employee directors of 17,740, 31,880 and 9,580, respectively. These grants were valued at time of issuance at $400,000, $400,000 and $401,000, respectively. All of the restricted stock awards made to non-employee directors vest during a six-month period.

Kinder Morgan, Inc. 2015 Amended and Restated Stock Incentive Plan

The Kinder Morgan, Inc. 2015 Amended and Restated Stock Incentive Plan is an equity awards plan available to eligible employees. The total number of shares of Class P common stock authorized under the plan is 33,000,000. The following table sets forth a summary of activity and related balances of our restricted stock awards excluding that issued to non-employee directors (in millions, except share and per share amounts):



	Year Ended				Year Ended				Year Ended
	December 31, 2017				December 31, 2016				December 31, 2015
	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Outstanding at beginning of period	9,038,137		$	32.72	7,645,105		$	37.91	7,373,294		$	37.63
Granted	3,221,691		19.52		2,816,599		21.36		1,488,467		38.20
Vested	(1,501,939	)	36.67		(1,226,652	)	38.53		(817,797	)	35.66
Forfeited	(239,545	)	28.34		(196,915	)	35.74		(398,859	)	38.51
Outstanding at end of period	10,518,344		$	28.21	9,038,137		$	32.72	7,645,105		$	37.91

The intrinsic value of restricted stock awards vested during the years ended December 31, 2017, 2016 and 2015 was $30 million, $25 million and $31 million, respectively. Restricted stock awards made to employees have vesting periods ranging from 1 year with variable vesting dates to 10 years. Following is a summary of the future vesting of our outstanding restricted stock awards:



Year		Vesting of Restricted Shares
2018		2,272,019
2019		4,268,118
2020		3,647,967
2021		199,850
2022		65,928
Thereafter		64,462
Total Outstanding		10,518,344

The related compensation costs less estimated forfeitures is generally recognized ratably over the vesting period of the restricted stock awards. Upon vesting, the grants will be paid in our Class P common shares.

During 2017, 2016 and 2015, we recorded $65 million, $66 million and $52 million, respectively, in expense related to restricted stock awards and capitalized approximately $9 million, $9 million and $15 million, respectively. At December 31, 2017 and 2016, unrecognized restricted stock awards compensation costs, less estimated forfeitures, was approximately $112 million and $133 million, respectively.

KML Restricted Shares

KML adopted the 2017 Restricted Share Unit Plan for Employees, an equity awards plan, for its eligible employees, and the 2017 Restricted Share Unit Plan for Non-Employee Directors, in which its eligible non-employee directors participate. During the year ended December 31, 2017, we recognized $1 million of expense and capitalized $1 million related to these compensation programs. At December 31, 2017, unrecognized compensation costs, less estimated forfeitures associated with KML’s restricted share unit awards, was approximately $8 million.

Pension and Other Postretirement Benefit Plans

Savings Plan

We maintain a defined contribution plan covering eligible U.S. employees. We contribute 5% of eligible compensation for most of the plan participants. Certain collectively bargained participants receive Company contributions in accordance with collective bargaining agreements. The total cost for our savings plan was approximately $47 million, $47 million, and $46 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Pension Plans

Our U.S. pension plans are defined benefit plans that cover substantially all of our U.S. employees and provide benefits under a cash balance formula. A participant in the cash balance formula accrues benefits through contribution credits based on a combination of age and years of service, multiplied by eligible compensation. Interest is also credited to the participant’s plan account. A participant becomes fully vested in the plan after three years and may take a lump sum distribution upon termination of employment or retirement. Certain collectively bargained and grandfathered employees accrue benefits through career pay or final pay formulas.

Two of our subsidiaries, Kinder Morgan Canada Inc. and Trans Mountain Pipeline ULC (as general partner of Trans Mountain Pipeline L.P.), are sponsors of pension plans for eligible Canadian and Trans Mountain pipeline employees. The plans include registered defined benefit pension plans, supplemental unfunded arrangements (which provide pension benefits in excess of statutory limits) and defined contributory plans. Benefits under the defined benefit components accrue through career pay or final pay formulas. The net periodic benefit costs, contributions and liability amounts associated with our Canadian plans are not material to our consolidated income statements or balance sheets; however, we began to include the activity and balances associated with our Canadian plans (including our Canadian OPEB plans discussed below) in the following disclosures on a prospective basis beginning in 2016. For the year ended December 31, 2015, the associated net periodic benefit costs for these combined Canadian plans of $12 million were reported separately.

Other Postretirement Benefit Plans

We and certain of our U.S. subsidiaries provide other postretirement benefits (OPEB), including medical benefits for closed groups of retired employees and certain grandfathered employees and their dependents, and limited postretirement life insurance benefits for retired employees. Our Canadian subsidiaries also provide OPEB benefits to current and future retirees and their dependents. The U.S. plans provide a fixed subsidy to post-age 65 Medicare eligible participants to purchase coverage through a retiree Medicare exchange. Medical benefits under these OPEB plans may be subject to deductibles, co-payment provisions, dollar caps and other limitations on the amount of employer costs, and we reserve the right to change these benefits.

Additionally, our subsidiary SFPP has incurred certain liabilities for postretirement benefits to certain current and former employees, their covered dependents, and their beneficiaries. However, the net periodic benefit costs, contributions and liability amounts associated with the SFPP postretirement benefit plan are not material to our consolidated income statements or balance sheets.

Benefit Obligation, Plan Assets and Funded Status. The following table provides information about our pension and OPEB plans as of and for each of the years ended December 31, 2017 and 2016 (in millions):



	Pension Benefits						OPEB
	2017			2016			2017			2016
Change in benefit obligation:
Benefit obligation at beginning of period	$	2,884		$	2,654		$	473		$	509
Service cost	40			36			1			1
Interest cost	88			89			13			16
Actuarial loss (gain)	155			127			(16		)	(42		)
Benefits paid	(180		)	(180		)	(38		)	(41		)
Participant contributions	3			3			2			2
Medicare Part D subsidy receipts	—			—			1			1
Exchange rate changes	13			4			1			1
Settlements	(21		)	—			—			—
Other(a)	—			151			(12		)	26
Benefit obligation at end of period	2,982			2,884			425			473



Change in plan assets:
Fair value of plan assets at beginning of period	2,160			2,050			332			325
Actual return on plan assets	292			157			29			29
Employer contributions	32			8			9			16
Participant contributions	3			3			2			2
Medicare Part D subsidy receipts	—			—			1			1
Benefits paid	(180		)	(180		)	(38		)	(41		)
Exchange rate changes	10			3			—			—
Settlements	(21		)	—			—			—
Other(a)	—			119			—			—
Fair value of plan assets at end of period	2,296			2,160			335			332
Funded status - net liability at December 31,	$	(686	)	$	(724	)	$	(90	)	$	(141	)

_______

(a)

2017 amounts represent December 31, 2016 balances associated with our Plantation Pipeline OPEB plan that are no longer included in these disclosures. 2016 amounts primarily represent December 31, 2015 balances associated with our Canadian pension and OPEB plans for prospective inclusion in these disclosures, which associated net periodic benefit costs were reported separately in years prior to 2016.

Components of Funded Status. The following table details the amounts recognized in our balance sheets at December 31, 2017 and 2016 related to our pension and OPEB plans (in millions):



	Pension Benefits						OPEB
	2017			2016			2017			2016
Non-current benefit asset(a)	$	—		$	—		$	198		$	153
Current benefit liability	—			—			(15		)	(16		)
Non-current benefit liability	(686		)	(724		)	(273		)	(278		)
Funded status - net liability at December 31,	$	(686	)	$	(724	)	$	(90	)	$	(141	)

_______


(a)	2017 and 2016 OPEB amounts include $33 million and $29 million, respectively, of non-current benefit assets related to a plan we sponsor which is associated with employee services provided to an unconsolidated joint venture, and for which we have recorded an offsetting related party deferred credit.

Components of Accumulated Other Comprehensive (Loss) Income. The following table details the amounts of pre-tax accumulated other comprehensive (loss) income at December 31, 2017 and 2016 related to our pension and OPEB plans which are included on our accompanying consolidated balance sheets, including the portion attributable to our noncontrolling interests, (in millions):



	Pension Benefits						OPEB
	2017			2016			2017		2016
Unrecognized net actuarial (loss) gain	$	(635	)	$	(682	)	$	88	$	69
Unrecognized prior service (cost) credit	(4		)	(5		)	17		18
Accumulated other comprehensive (loss) income	$	(639	)	$	(687	)	$	105	$	87

We anticipate that approximately $34 million of pre-tax accumulated other comprehensive loss, inclusive of amounts reported as noncontrolling interests, will be recognized as part of our net periodic benefit cost in 2018, including approximately $36 million of unrecognized net actuarial loss and approximately $2 million of unrecognized prior service credit.

Our accumulated benefit obligation for our pension plans was $2,840 million and $2,834 million at December 31, 2017 and 2016, respectively.

Our accumulated postretirement benefit obligation for our OPEB plans, whose accumulated postretirement benefit obligations exceeded the fair value of plan assets, was $373 million and $415 million at December 31, 2017 and 2016, respectively. The fair value of these plans’ assets was approximately $84 million and $121 million at December 31, 2017 and 2016, respectively.

Plan Assets. The investment policies and strategies are established by the Fiduciary Committee for the assets of each of the U.S. pension and OPEB plans and by the Pension Committee for the assets of the Canadian pension plans (the “Committees”), which are responsible for investment decisions and management oversight of the plans. The stated philosophy of each of the Committees is to manage these assets in a manner consistent with the purpose for which the plans were established and the time frame over which the plans’ obligations need to be met. The objectives of the investment management program are to (1) meet or exceed plan actuarial earnings assumptions over the long term and (2) provide a reasonable return on assets within established risk tolerance guidelines and to maintain the liquidity needs of the plans with the goal of paying benefit and expense obligations when due. In seeking to meet these objectives, the Committees recognize that prudent investing requires taking reasonable risks in order to raise the likelihood of achieving the targeted investment returns. In order to reduce portfolio risk and volatility, the Committees have each adopted a strategy of using multiple asset classes.

As of December 31, 2017, the allowable range for asset allocations in effect for our U.S. pension plan were 34% to 59% equity, 37% to 57% fixed income, 0% to 5% cash, 0% to 2% alternative investments and 0% to 10% company securities (KMI Class P common stock and/or debt securities). As of December 31, 2017, the allowable range for asset allocations in effect for our U.S. retiree medical and retiree life insurance plans were 15% to 55% equity, 15% to 47% fixed income, 0% to 20% cash and 13% to 39% MLPs. As of December 31, 2017, the target asset allocation for our Canadian pension plans that are closed to new participants was 90% fixed income and 10% equity. The target allocation for the remaining Canadian pension plans were 45% fixed income and 55% equity.

Below are the details of our pension and OPEB plan assets by class and a description of the valuation methodologies used for assets measured at fair value.


•	Level 1 assets’ fair values are based on quoted market prices for the instruments in actively traded markets. Included in this level are cash, equities, exchange traded mutual funds and MLPs. These investments are valued at the closing price reported on the active market on which the individual securities are traded.

•

Level 2 assets’ fair values are primarily based on pricing data representative of quoted prices for similar assets in active markets (or identical assets in less active markets). Included in this level are short-term investment funds, fixed income securities and derivatives. Short-term investment funds are valued at amortized cost, which approximates fair value. The fixed income securities’ fair values are primarily based on an evaluated price which is based on a compilation of primarily observable market information or a broker quote in a non-active market. Derivatives are exchange-traded through clearinghouses and are valued based on these prices.


•	Level 3 assets’ fair values are calculated using valuation techniques that require inputs that are both significant to the fair value measurement and are unobservable, or are similar to Level 2 assets. Included in this level are guaranteed insurance contracts and immediate participation guarantee contracts. These contracts are valued at contract value, which approximates fair value.

•

Plan assets with fair values that are based on the net asset value per share, or its equivalent (NAV), as reported by the issuers are determined based on the fair value of the underlying securities as of the valuation date and include common/collective trust funds, private investment funds, limited partnerships, and fixed income trusts. The plan assets measured at NAV are not categorized within the fair value hierarchy described above, but are separately identified in the following tables.

Listed below are the fair values of our pension and OPEB plans’ assets that are recorded at fair value by class and categorized by fair value measurement used at December 31, 2017 and 2016 (in millions):



	Pension Assets
	2017								2016
	Level 1		Level 2		Level 3		Total		Level 1		Level 2			Level 3		Total
Measured within fair value hierarchy
Cash	$	6	$	—	$	—	$	6	$	10	$	—		$	—	$	10
Short-term investment funds	—		65		—		65		—		100			—		100
Mutual funds(a)	245		—		—		245		197		—			—		197
Equities(b)	278		—		—		278		283		—			—		283
Fixed income securities(c)	—		416		—		416		—		428			—		428
Immediate participation guarantee contract	—		—		—		—		—		—			16		16
Derivatives	—		5		—		5		—		(2		)	—		(2		)
Subtotal	$	529	$	486	$	—	1,015		$	490	$	526		$	16	1,032
Measured at NAV(d)
Common/collective trusts(e)							895									829
Private investment funds(f)							337									290
Private limited partnerships(g)							49									9
Subtotal							1,281									1,128
Total plan assets fair value							$	2,296								$	2,160

_______


(a)	Includes mutual funds which are invested in equity.


(b)	Plan assets include $110 million and $126 million of KMI Class P common stock for 2017 and 2016, respectively.


(c)	For 2016, plan assets include $1 million of KMI debt securities.


(d)	Plan assets for which fair value was measured using NAV as a practical expedient.


(e)	Common/collective trust funds were invested in approximately 36% fixed income and 64% equity in 2017 and 39% fixed income and 61% equity in 2016.


(f)	Private investment funds were invested in approximately 52% fixed income and 48% equity in 2017 and 54% fixed income and 46% equity in 2016.


(g)	Includes assets invested in real estate, venture and buyout funds. 2016 also includes high yield investments.



	OPEB Assets
	2017								2016
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Measured within fair value hierarchy
Short-term investment funds	$	—	$	7	$	—	$	7	$	—	$	15	$	—	$	15
Equities(a)	16		—		—		16		11		—		—		11
MLPs	50		—		—		50		57		—		—		57
Guaranteed insurance contracts	—		—		49		49		—		—		47		47
Mutual funds	1		—		—		1		1		—		—		1
Subtotal	$	67	$	7	$	49	123		$	69	$	15	$	47	131
Measured at NAV(b)
Common/collective trusts(c)							68								68
Fixed income trusts							66								64
Limited partnerships(d)							78								69
Subtotal							212								201
Total plan assets fair value							$	335							$	332

_______


(a)	Plan assets include $2 million of KMI Class P common stock for each 2017 and 2016.


(b)	Plan assets for which fair value was measured using NAV as a practical expedient.


(c)	Common/collective trust funds were invested in approximately 71% equity and 29% fixed income securities for 2017 and 72% equity and 28% fixed income securities for 2016.


(d)	Limited partnerships were invested in global equity securities.

The following tables present the changes in our pension and OPEB plans’ assets included in Level 3 for the years ended December 31, 2017 and 2016 (in millions):



	Pension Assets
	Balance at Beginning of Period		Transfers In (Out)		Realized and Unrealized Gains (Losses), net		Purchases (Sales), net			Balance at End of Period
2017
Insurance contracts	$	16	$	—	$	—	$	(16	)	$	—

2016
Insurance contracts	$	15	$	—	$	1	$	—		$	16



	OPEB Assets
	Balance at Beginning of Period		Transfers In (Out)		Realized and Unrealized Gains (Losses), net			Purchases (Sales), net			Balance at End of Period
2017
Insurance contracts	$	47	$	—	$	5		$	(3	)	$	49

2016
Insurance contracts	$	49	$	—	$	(2	)	$	—		$	47

Changes in the underlying value of Level 3 assets due to the effect of changes of fair value were immaterial for the years ended December 31, 2017 and 2016.

Expected Payment of Future Benefits and Employer Contributions. As of December 31, 2017, we expect to make the following benefit payments under our plans (in millions):



Fiscal year	Pension Benefits		OPEB(a)
2018	$	244	$	36
2019	241		36
2020	242		35
2021	232		34
2022	230		33
2023 - 2027	1,029		149

_______


(a)	Includes a reduction of approximately $2 million in each of the years 2018 - 2022 and approximately $13 million in aggregate for 2023 - 2027 for an expected subsidy related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.

In 2018, we expect to contribute approximately $30 million to our U.S. pension plans and $7 million, net of anticipated subsidies, to our U.S. OPEB plans. In 2018, we expect to contribute approximately $10 million to our Canadian pension plans and $1 million to our Canadian OPEB plan.

Actuarial Assumptions and Sensitivity Analysis. Benefit obligations and net benefit cost are based on actuarial estimates and assumptions. The following table details the weighted-average actuarial assumptions used in determining our benefit obligation and net benefit costs of our pension and OPEB plans for 2017, 2016 and 2015:



	Pension Benefits						OPEB
	2017		2016		2015		2017		2016		2015
Assumptions related to benefit obligations:
Discount rate	3.56	%	3.83	%	4.05	%	3.48	%	3.69	%	3.91	%
Rate of compensation increase	3.53	%	3.52	%	3.50	%	n/a		n/a		n/a
Assumptions related to benefit costs:
Discount rate for benefit obligations	3.83	%	4.05	%	3.66	%	3.69	%	3.91	%	3.56	%
Discount rate for interest on benefit obligations	3.09	%	3.24	%	3.66	%	3.05	%	3.18	%	3.56	%
Discount rate for service cost	3.88	%	4.15	%	3.66	%	4.15	%	4.36	%	3.56	%
Discount rate for interest on service cost	3.24	%	3.50	%	3.66	%	3.95	%	4.17	%	3.56	%
Expected return on plan assets(a)	7.07	%	7.31	%	7.50	%	6.84	%	7.07	%	7.08	%
Rate of compensation increase	3.52	%	3.51	%	4.50	%	n/a		n/a		n/a

_______


(a)	The expected return on plan assets listed in the table above is a pre-tax rate of return based on our targeted portfolio of investments. For the OPEB assets subject to unrelated business income taxes (UBIT), we utilize an after-tax expected return on plan assets to determine our benefit costs, which is based on a UBIT rate of 21% for 2017, 2016 and 2015.

Prior to 2016, we selected our discount rates by matching the timing and amount of our expected future benefit payments for our pension and other postretirement benefit obligations to the average yields of various high-quality bonds with corresponding maturities. Effective January 1, 2016, we changed our estimate of the service and interest cost components of net periodic benefit cost (credit) for our pension and other postretirement benefit plans. The new estimate utilizes a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to their underlying projected cash flows. The new estimate provides a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows and their corresponding spot rates. The change did not affect the measurement of our pension and postretirement benefit obligations and it was accounted for as a change in accounting estimate, which was applied prospectively. The expected long-term rates of return on plan assets were determined by combining a review of the historical returns realized within the portfolio, the investment strategy included in the plans’ investment policy, and capital market projections for the asset classes in which the portfolio is invested and the target weightings of each asset class.

Actuarial estimates for our OPEB plans assumed a weighted-average annual rate of increase in the per capita cost of covered health care benefits of 7.71%, gradually decreasing to 4.54% by the year 2038. Assumed health care cost trends have a significant effect on the amounts reported for OPEB plans. A one-percentage point change in assumed health care cost trends would have the following effects as of December 31, 2017 and 2016 (in millions):



	2017			2016
One-percentage point increase:
Aggregate of service cost and interest cost	$	1		$	1
Accumulated postretirement benefit obligation	22			27
One-percentage point decrease:
Aggregate of service cost and interest cost	$	(1	)	$	(1	)
Accumulated postretirement benefit obligation	(19		)	(23		)

Components of Net Benefit Cost and Other Amounts Recognized in Other Comprehensive Income. For each of the years ended December 31, the components of net benefit cost and other amounts recognized in pre-tax other comprehensive income related to our pension and OPEB plans are as follows (in millions):



	Pension Benefits									OPEB
	2017			2016			2015			2017			2016			2015
Components of net benefit cost:
Service cost	$	40		$	36		$	33		$	1		$	1		$	—
Interest cost	88			89			99			13			16			21
Expected return on assets	(147		)	(151		)	(172		)	(19		)	(19		)	(23		)
Amortization of prior service cost (credit)	1			1			—			(3		)	(3		)	(3		)
Amortization of net actuarial loss (gain)	52			35			5			(6		)	—			1
Curtailment and settlement loss	5			—			—			—			—			—
Net benefit (credit) cost(a)	39			10			(35		)	(14		)	(5		)	(4		)

Other changes in plan assets and benefit obligations recognized in other comprehensive (income) loss:
Net loss (gain) arising during period	17			116			267			(25		)	(48		)	(49		)
Prior service cost (credit) arising during period	—			—			—			—			—			—
Amortization or settlement recognition of net actuarial (loss) gain	(64		)	(34		)	(5		)	6			—			(1		)
Amortization of prior service credit	(1		)	—			—			1			1			1
Exchange rate changes	—			1			—			—			—			—
Total recognized in total other comprehensive (income) loss	(48		)	83			262			(18		)	(47		)	(49		)
Total recognized in net benefit cost (credit) and other comprehensive (income) loss	$	(9	)	$	93		$	227		$	(32	)	$	(52	)	$	(53	)

_______

(a)

2017 and 2016 OPEB amounts each include $4 million of net benefit credits related to a plan that we sponsor that is associated with employee services provided to an unconsolidated joint venture. We charge or refund these costs or credits associated with this plan to the joint venture as an offset to our net benefit cost or credit and receive our proportionate share of these costs or credits through our share of the equity investee’s earnings.

Multiemployer Plans

We participate in several multi-employer pension plans for the benefit of employees who are union members. We do not administer these plans and contribute to them in accordance with the provisions of negotiated labor contracts. Other benefits include a self-insured health and welfare insurance plan and an employee health plan where employees may contribute for their dependents’ health care costs. Amounts charged to expense for these plans were approximately $8 million, $8 million and $10 million for the years ended December 31, 2017, 2016 and 2015, respectively. We consider the overall multi-employer pension plan liability exposure to be minimal in relation to the value of its total consolidated assets and net income.