Partners’ Capital

Limited Partner Units

As of September 30, 2012 and December 31, 2011, our Partners’ Capital included the following limited partner units:



	September 30, 2012	December 31, 2011
Common units	246,111,590	232,677,222
Class B units	5,313,400	5,313,400
i-units	113,276,125	98,509,389
Total limited partner units	364,701,115	336,500,011

The total limited partner units represent our limited partners’ interest and an effective 98% interest in us, exclusive of our general partner’s incentive distribution rights. Our general partner has an effective 2% interest in us, excluding its right to receive incentive distributions.

As of September 30, 2012, (i) KMI and its consolidated affiliates (excluding our general partner) held 19,314,003 common units; (ii) our general partner held 1,724,000 common units; (iii) a wholly-owned subsidiary of KMI held all of our Class B units; and (iv) KMR held all of our i-units. As of December 31, 2011, (i) KMI and its consolidated affiliates (excluding our general partner) held 14,464,428 common units; (ii) our general partner held 1,724,000 common units; (iii) a wholly-owned subsidiary of KMI held all of our Class B units; and (iv) KMR held all of our i-units. Our Class B units are similar to our common units except that they are not eligible for trading on the New York Stock Exchange. Our i-units are a separate class of limited partner interests in us and are not publicly traded. The number of i-units we distribute to KMR is based upon the amount of cash we distribute to the owners of our common units. When cash is paid to the holders of our common units, we issue additional i-units to KMR. The fraction of an i-unit paid per i-unit owned by KMR will have a value based on the cash payment on the common units.

Changes in Partners’ Capital

For each of the nine month periods ended September 30, 2012 and 2011, changes in the carrying amounts of our Partners’ Capital attributable to both us and our noncontrolling interests, including our comprehensive income are summarized as follows (in millions):



	Nine Months Ended September 30,
	2012									2011
	KMP			Noncontrolling Interests			Total			KMP			Noncontrolling interests			Total
Beginning Balance	$	7,508		$	96		$	7,604		$	7,211		$	82		$	7,293
Units issued for cash	1,114			—			1,114			813			—			813
Units issued as consideration in the acquisition of assets	686			—			686			24			—			24
Distributions paid in cash	(1,836		)	(23		)	(1,859		)	(1,639		)	(20		)	(1,659		)
Adjustments to capital due to acquisitions from KMI(a)	2,483			25			2,508			—			—			—
Contribution from KMI for FTC Natural Gas Pipelines disposal group selling expenses(b)	45			—			45			—			—			—
Noncash compensation expense allocated from KMI(c)	—			—			—			89			1			90
Cash contributions	—			40			40			—			15			15
Other adjustments	4			1			5			(3		)	—			(3		)
Comprehensive income	900			14			914			1,142			10			1,152
Ending Balance	$	10,904		$	153		$	11,057		$	7,637		$	88		$	7,725

__________

(a)

Amounts relate to the drop-down transaction, described in Note 2. We determined that the drop-down transaction constituted a transfer of net assets between entities under common control, and accordingly, we recognized the assets we acquired and the liabilities we assumed at KMI's carrying value (including all purchase accounting adjustments from KMI's acquisition of the drop-down asset group from EP effective May 25, 2012). We then recognized the difference between our purchase price and the carrying value of the assets acquired and liabilities assumed as an adjustment to our Partners' Capital. As of September 30, 2012, the carrying value of the assets we acquired and the liabilities we assumed totaled $6,371 million. We paid to KMI $3,482 million in cash, issued to KMI 4,667,575 common units valued at $381 million, and recognized a non-cash increase of $2,508 million in our Partners' Capital. The increase to Partners' Capital consisted of a $2,483 million increase in our general partner's 1% general partner capital interest in us, and a $25 million increase in our general partner's 1.0101% general partner capital interest in our subsidiary Kinder Morgan Operating L.P. "A" (a noncontrolling interest to us).


(b)	For further information about this contribution, see Note 9.


(c)	For further information about this expense, see Note 9. We do not have any obligation, nor do we expect to pay any amounts related to this expense.

During each of the nine month periods ended September 30, 2012 and 2011, there were no material changes in our ownership interests in subsidiaries in which we retained a controlling financial interest.

Equity Issuances

On February 27, 2012, we entered into a third amended and restated equity distribution agreement with UBS Securities LLC (UBS) which increased the aggregate offering price of our common units to up to $1.9 billion (up from $1.2 billion). During the three and nine months ended September 30, 2012, we issued 1,357,946 and 4,772,741, respectively, of our common units pursuant to our equity distribution agreement with UBS. We received net proceeds of $110 million and $387 million, respectively, from the issuance of these common units and we used the proceeds to reduce the borrowings under our commercial paper program. For additional information regarding our equity distribution agreement, see Note 10 to our consolidated financial statements included in our 2011 Form 10-K.

For the nine month period ended September 30, 2012, in addition to the issuance of common units pursuant to our equity distribution agreement, our significant equity issuances consisted of the following:


•	on June 4, 2012, we issued 3,792,461 common units as our purchase price for the 50% equity ownership interest in El Paso Midstream Investment Company, LLC we acquired from KKR. For more information about this acquisition, see Note 2 "Acquisitions and Discontinued Operations—El Paso Midstream Investment Company, LLC;"

•

in August 2012, in connection with the drop-down transaction, we issued 4,667,575 of our common units to KMI. We valued the units at $381 million, based on the $81.52 closing market price of the common units on the New York Stock Exchange on August 13, 2012. For more information on the drop-down transaction, see Note 2 "Acquisitions and Discontinued Operations—August 2012 KMI Asset Drop-Down;" and

•

in the third quarter of 2012, KMR issued 10,120,000 of its shares in a public offering at a price of approximately $73.50 per share, less commissions and underwriting expenses. KMR used the net proceeds received from the issuance of these 10,120,000 shares to buy additional i-units from us, and we received net proceeds of $727 million. We used the proceeds to pay a portion of the purchase price for the drop-down transaction.

Income Allocation and Declared Distributions

For the purposes of maintaining partner capital accounts, our partnership agreement specifies that items of income and loss shall be allocated among the partners, other than owners of i-units, in accordance with their percentage interests. Normal allocations according to percentage interests are made, however, only after giving effect to any priority income allocations in an amount equal to the incentive distributions that are allocated 100% to our general partner. Incentive distributions are generally defined as all cash distributions paid to our general partner that are in excess of 2% of the aggregate value of cash and i-units being distributed, and we determine the allocation of incentive distributions to our general partner by the amount quarterly distributions to unitholders exceed certain specified target levels, according to the provisions of our partnership agreement.

On August 14, 2012, we paid a cash distribution of $1.23 per unit to our common unitholders and to our Class B unitholder for the quarterly period ended June 30, 2012. KMR, our sole i-unitholder, received a distribution of 1,578,616 i-units from us on August 14, 2012, based on the $1.23 per unit distributed to our common unitholders on that date. The distributions were declared on July 18, 2012, payable to unitholders of record as of July 31, 2012.

On August 12, 2011, we paid a cash distribution of $1.15 per unit to our common unitholders and to our Class B unitholder for the quarterly period ended June 30, 2011. KMR, our sole i-unitholder, received a distribution of 1,701,916 i-units from us on August 12, 2011, based on the $1.15 per unit distributed to our common unitholders on that date. The distributions were declared on July 20, 2011, payable to unitholders of record as of August 1, 2011.

Our general partner’s incentive distribution that we paid in August 2012 and August 2011 (for the quarterly periods ended June 30, 2012 and 2011, respectively) was $337 million and $293 million, respectively. The increased incentive distribution to our general partner paid for the second quarter of 2012 over the incentive distribution paid for the second quarter of 2011 reflects the increase in the amount distributed per unit as well as an increase in the number of common units and i-units outstanding. Each of these two incentive distributions were reduced from what they would have been, however, by waived incentive amounts equal to $7 million related to common units issued to finance our acquisition of KinderHawk (we acquired an initial 50% ownership interest in KinderHawk in May 2010 and the remaining 50% interest in July 2011). To support our KinderHawk acquisition, our general partner agreed to waive certain incentive distribution amounts beginning with the distribution payments we made for the quarterly period ended June 30, 2010, and ending with the distribution payments we make for the quarterly period ended March 31, 2013.

For additional information about our 2011 partnership distributions, see Notes 10 and 11 to our consolidated financial statements included in our 2011 Form 10-K and in our Current Report on Form 8-K filed May 1, 2012.

Subsequent Events

In early October 2012, we issued 269,501 of our common units for the settlement of sales made on or before September 30, 2012 pursuant to our equity distribution agreement. We received net proceeds of $22 million from the issuance of these 269,501 common units, and we used the proceeds to reduce the borrowings under our commercial paper program.

On October 17, 2012, we declared a cash distribution of $1.26 per unit for the quarterly period ended September 30, 2012. The distribution will be paid on November 14, 2012 to unitholders of record as of October 31, 2012. Our common unitholders and our Class B unitholder will receive cash. KMR will receive a distribution of 1,842,210 additional i-units based on the $1.26 distribution per common unit. For each outstanding i-unit that KMR holds, a fraction of an i-unit (0.016263) will be issued. This fraction was determined by dividing:


•	$1.26, the cash amount distributed per common unit


•	$77.478, the average of KMR’s shares’ closing market prices from October 15-26, 2012, the ten consecutive trading days preceding the date on which the shares began to trade ex-dividend under the rules of the New York Stock Exchange.