Acquisitions and Divestitures

Acquisitions

March 2013 KMI Asset Drop-Down

As discussed above in Note 1 “General—Basis of Presentation—KMI Asset Drop-Downs,” we acquired the March 2013 drop-down asset group from KMI effective March 1, 2013. Our consideration to KMI consisted of (i) $994 million in cash (including $6 million paid to KMI in the second quarter of 2013 to settle the final working capital adjustment); (ii) 1,249,452 common units (valued at $108 million based on the $86.72 closing market price of a common unit on the NYSE 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. We included the March 2013 drop-down asset group in our Natural Gas Pipelines segment.

August 2012 KMI Asset Drop-Down

As discussed above in Note 1 “General—Basis of Presentation—KMI Asset Drop-Downs,” we acquired the August 2012 drop-down asset group from KMI effective August 1, 2012. 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.

Copano Energy, L.L.C.

Effective May 1, 2013, we closed our previously announced acquisition of Copano. We acquired all of Copano’s outstanding units for a total purchase price of approximately $5.2 billion (including assumed debt and all other assumed liabilities). The transaction was a 100% unit for unit transaction with an exchange ratio of 0.4563 of our common units for each Copano common unit. We issued 43,371,210 of our common units valued at $3,733 million as consideration for the Copano acquisition (based on the $86.08 closing market price of a common unit on the NYSE on the May 1, 2013 issuance date).

We accounted for our acquisition of Copano under the acquisition method of accounting, and accordingly, we measured the consideration paid to Copano unitholders, the acquired identifiable tangible and intangible assets, and the assumed liabilities at their acquisition-date fair values. Also, due to the fact that our acquisition included the remaining 50% interest in Eagle Ford that we did not already own, we remeasured our existing 50% equity investment in Eagle Ford to its fair value as of the acquisition date, resulting in the recognition of a $558 million pre-tax non-cash gain reported separately within “Other Income (Expense)”.

The preliminary purchase price allocation related to the Copano acquisition is as follows (in millions). Our evaluation of the assigned fair values is ongoing and subject to adjustment:



Preliminary Purchase Price Allocation:
Current assets (including cash acquired of $29)	$	217
Property, plant and equipment	2,753
Investments	448
Goodwill	1,123
Other intangibles, net	1,350
Other assets	12
Total assets	5,903
Less: Fair value of previously held 50% interest in Eagle Ford Gathering, LLC	(704		)
Total assets acquired	5,199
Current liabilities	(207		)
Other liabilities	(7		)
Long-term debt	(1,252		)
Common unit consideration	$	3,733

The “Goodwill” intangible asset amount represents the future economic benefits expected to be derived from this acquisition that are not assignable to other individually identifiable, separately recognizable assets acquired. We believe the primary items that generated the goodwill are the value of the synergies created by expanding our natural gas gathering and refined product transportation operations. This goodwill is not deductible for tax purposes, and is subject to an impairment test at least annually. The “Other intangibles, net” asset amount represents the fair value of acquired customer contracts and agreements. We are currently amortizing these intangible assets over an estimated remaining useful life of 25 years.

Copano 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 Bcf/d of natural gas transportation capacity, and also owns nine natural gas processing plants with more than 1 Bcf/d of natural gas processing capacity and 315 MMcf/d 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.

Goldsmith Landreth Unit

On June 1, 2013, we acquired certain oil and gas properties, rights, and related assets in the Permian Basin of West Texas from Legado Resources LLC for approximately $285 million (before working capital adjustments). We also assumed $18 million of liabilities. The acquisition of the Goldsmith Landreth San Andres oil field unit includes more than 6,000 acres located in Ector County, Texas, and based on our measurement of fair values for all of the identifiable tangible and intangible assets acquired and liabilities assumed, we assigned the $285 million amount to “Property, plant and equipment, net.” The acquired oil field is in the early stages of CO₂ flood development and includes a residual oil zone along with a classic San Andres waterflood. The field currently produces approximately 1,250 barrels of oil per day, and as part of the transaction, we obtained a long-term supply contract for up to 150 MMcf/d of CO₂. The acquisition complements our existing oil and gas producing assets in the Permian Basin, and we included the acquired assets as part of our CO₂ business segment.

Pro Forma Information

The following summarized unaudited pro forma consolidated income statement information for the three and six months ended June 30, 2013 and 2012, assumes that our acquisitions of the drop-down asset groups, Copano and the Goldsmith Landreth Unit 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 acquisitions of the drop-down asset groups and Copano 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 June 30, 2013			Three Months Ended June 30, 2012			Six Months Ended June 30, 2013			Six Months Ended June 30, 2012
	(Unaudited)
Revenues	$	3,204		$	2,660		$	6,383		$	5,366
Income from Continuing Operations	$	984		$	288		$	1,766		$	695
Loss from Discontinued Operations	$	—		$	(279	)	$	(2	)	$	(551	)
Net Income	$	984		$	9		$	1,764		$	144
Net Income Attributable to Noncontrolling Interests	$	(10	)	$	(7	)	$	(19	)	$	(8	)
Net Income Attributable to Kinder Morgan Energy Partners, L.P.	$	974		$	2		$	1,745		$	136

Limited Partners’ Net Income (Loss) per Unit:
Income from Continuing Operations	$	1.30		$	(0.04	)	$	2.21		$	0.19
Loss from Discontinued Operations	—			(0.70		)	(0.01		)	(1.39		)
Net Loss	$	1.30		$	(0.74	)	$	2.20		$	(1.20	)

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 additional information gained in the sale process during the second quarter of 2012, we recognized an additional loss amount from fair value remeasurement. For the six months ended June 30, 2012, we recognized a combined $649 million non-cash loss from remeasurement, and 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. 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.

We and Tallgrass trued up the final consideration for the sale of our FTC Natural Gas Pipelines disposal group in the first quarter of 2013, and based on this true up, we recognized an additional $2 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 six months ended June 30, 2013, and except for this loss amount, we recorded no other financial results from the operations of our FTC Natural Gas Pipelines disposal group in the first six months of 2013.

Summarized financial information for the FTC Natural Gas Pipelines Disposal Group is as follows (in millions):



	Three Months Ended June 30, 2012			Six Months Ended June 30, 2012
Operating revenues	$	62		$	133
Operating expenses	(34		)	(71		)
Depreciation and amortization	—			(7		)
Earnings from equity investments	20			42
Interest income and Other, net	—			1
Income from operations of FTC Natural Gas Pipelines disposal group	$	48		$	98

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 in the first quarter of 2013, and we reported this gain amount separately within the “Other Income (Expense)” section of our accompanying consolidated statements of income for the six months ended June 30, 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 six months ended June 30, 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.