Acquisitions and Divestitures

Acquisitions

March 2013 KMI Asset Drop-Down

As discussed above in Note 1 “General”, we acquired the drop-down asset group from KMI effective March 1, 2013. Our consideration to KMI consisted of (i) $988 million in cash; (ii) 1,249,452 common units (valued at $108 million based on the $86.72 closing market price of a common unit on the New York Stock Exchange on the March 1, 2013 issuance date); and (iii) $557 million in assumed debt (consisting of 50% of the outstanding principal amount of EPNG’s debt borrowings as of March 1, 2013, excluding any debt fair value adjustments). The terms of the drop-down transaction were approved on behalf of KMI by the independent members of its board of directors and on our behalf by the audit committees and the boards of directors of both our general partner and KMR, in its capacity as the delegate of our general partner, following the receipt by the independent directors of KMI and the audit committees of our general partner and KMR of separate fairness opinions from different independent financial advisors.

The EPNG natural gas pipeline system collectively consists of both the 10,200-mile El Paso Natural Gas pipeline system and the 500-mile Mojave pipeline system. It has a design capacity of approximately 5.6 billion cubic feet per day of natural gas, and transports natural gas from the San Juan, Permian and Anadarko basins to California, other western states, Texas and northern Mexico. EPNG also provides up to 44 billion cubic feet of underground working natural gas storage capacity. The midstream assets include both the Altamont natural gas gathering, processing and treating assets located in the Uinta Basin in Utah, and the Camino Real natural gas and oil gathering system located in the Eagle Ford shale formation in South Texas. We included the drop-down asset group in our Natural Gas Pipelines reportable business segment.

August 2012 KMI Asset Drop-Down

Effective August 1, 2012, we acquired the full ownership interest in the Tennessee Gas natural gas pipeline system and an initial 50% ownership interest in EPNG from KMI for an aggregate consideration of approximately $6.2 billion. For additional information about this acquisition, see Note 2 “Summary of Significant Accounting Policies—Basis of Presentation—August 2012 KMI Asset Drop-Down” and Note 3 “Acquisitions and Divestitures—August 2012 KMI Asset Drop-Down” to our consolidated financial statements included in our 2012 Form 10-K. In this report, we refer to the Tennessee Gas natural gas pipeline system or our wholly-owned subsidiary Tennessee Gas Pipeline Company, L.L.C. as TGP.

Pro Forma Information

The following summarized unaudited pro forma consolidated income statement information for the three months ended March 31, 2012, assumes that our acquisition of TGP and our initial 50% ownership interest in EPNG had occurred as of January 1, 2012. We prepared the following unaudited pro forma financial results for comparative purposes only. The unaudited pro forma financial results may not be indicative of the results that would have occurred if we had completed our acquisition of TGP and our initial 50% interest in EPNG as of January 1, 2012 or the results that will be attained in the future. Amounts presented below are in millions, except for the per unit amounts:



	Pro Forma Three Months Ended March 31, 2012
	(Unaudited)
Revenues	$	2,116
Income from Continuing Operations	$	579
Loss from Discontinued Operations	$	(272	)
Net Income	$	307
Net Income Attributable to Noncontrolling Interests	$	(2	)
Net Income Attributable to Kinder Morgan Energy Partners, L.P.	$	305

Limited Partners’ Net Income (Loss) per Unit:
Income from Continuing Operations	$	0.70
Loss from Discontinued Operations	(0.76		)
Net Loss	$	(0.06	)

Copano Energy, L.L.C.

On January 29, 2013, we and Copano Energy, L.L.C., referred to in this report as Copano, announced a definitive agreement whereby we will acquire all of Copano’s outstanding units, including convertible preferred units, for a total purchase price of approximately $5 billion, including the assumption of debt. The transaction, which has been approved by the board of directors of each of KMR, our general partner, and its delegate, as well as the board of directors of Copano, will be a 100% unit for unit transaction with an exchange ratio of 0.4563 of our common units for each Copano unit. The transaction is subject to customary closing conditions, regulatory approvals, and a vote of the Copano unitholders; however, TPG Advisors VI, Inc., Copano’s largest unitholder, has agreed to support the transaction and we expect the transaction to close in early May 2013.

Copano is a midstream natural gas company that provides comprehensive services to natural gas producers, including natural gas gathering, processing, treating and natural gas liquids fractionation. Copano owns an interest in or operates approximately 6,900 miles of pipelines with 2.7 billion cubic feet per day of natural gas transportation capacity, and also owns nine natural gas processing plants with more than 1 billion cubic feet per day of natural gas processing capacity and 315 million cubic feet per day of natural gas treating capacity. Its operations are located primarily in Texas, Oklahoma and Wyoming. Most of the acquired assets will be included in our Natural Gas Pipelines business segment.

Divestitures

FTC Natural Gas Pipelines Disposal Group – Discontinued Operations

As described above in Note 1 “General—Basis of Presentation,” we began accounting for our FTC Natural Gas Pipelines disposal group as discontinued operations in the first quarter of 2012 (prior to KMI’s sale announcement, we included the disposal group in our Natural Gas Pipelines business segment). During that quarter, we also remeasured the disposal group's net assets to reflect our initial assessment of its fair value as a result of the FTC mandated sale requirement, and based on this remeasurement, we recognized a $322 million loss. We reported this loss amount separately as “Loss on sale and the remeasurement of FTC Natural Gas Pipelines disposal group to fair value” within the discontinued operations section of our accompanying consolidated statement of income for the three months ended March 31, 2012. The final consideration was trued up in the first quarter of 2013 resulting in a $2 million additional loss recorded as “Loss on sale and the remeasurement of FTC Natural Gas Pipelines disposal group to fair value.” As a result of our remeasurement of net assets to fair value and the sale of net assets, we recognized a combined $829 million loss for the year ended December 31, 2012.

Summarized financial information for the disposal group is as follows (in millions):



	Three Months Ended March 31, 2012
Operating revenues	$	71
Operating expenses	(37		)
Depreciation and amortization	(7		)
Earnings from equity investments	22
Interest income and Other, net	1
Income from operations of FTC Natural Gas Pipelines disposal group	$	50

Express Pipeline System

Effective March 14, 2013, we sold both our one-third equity ownership interest in the Express pipeline system and our subordinated debenture investment in Express to Spectra Energy Corp. for $403 million in cash. We recorded a pre-tax gain of $225 million with respect to this transaction, and we reported this amount separately as “Gain on sale of investments in Express pipeline system” in our accompanying consolidated statement of income for the three months ended March 31, 2013. We also recorded an income tax expense of $84 million related to this gain amount, and we included this expense within “Income Tax Expense” in our accompanying consolidated statement of income for the three months ended March 31, 2013. As of the date of sale, our equity investment in Express totaled $67 million and our note receivable due from Express totaled $110 million.

Prior to the sale, we (i) accounted for our equity investment under the equity method of accounting; (ii) accounted for our debt investment under the historical amortized cost method of accounting; and (iii) included the financial results of the Express pipeline system within our Kinder Morgan Canada business segment. As of December 31, 2012, our equity and debt investments in Express totaled $65 million and $114 million, respectively, and we included the combined $179 million amount within “Assets held for sale” on our accompanying consolidated balance sheet as of that date.