Acquisitions and Divestitures

Business Combinations and Acquisitions of Investments

During 2013, 2012 and 2011, we completed the following significant acquisitions, and except for our acquisition of two separate equity interests in Watco Companies, LLC and our acquisition of an initial 50% interest in the EP midstream assets (noted as (1), (5) and (6), respectively, in the table and discussion below and accounted for under the equity method), we accounted for these acquisitions in accordance with the “Business Combinations” Topic of the Codification.

After measuring all of the identifiable tangible and intangible assets acquired and liabilities assumed at fair value on the acquisition date, goodwill is an intangible asset representing the future economic benefits expected to be derived from an acquisition that are not assigned to other identifiable, separately recognizable assets. We believe the primary items that generated our goodwill are both the value of the synergies created between the acquired assets and our pre-existing assets, and our expected ability to grow the business we acquired by leveraging our pre-existing business experience. With the exception of our acquisitions of (i) KinderHawk and EagleHawk and (ii) SouthTex Treaters (noted as (3) and (4) in the table and discussion below), we do not expect our recorded goodwill to be deductible for tax purposes.

The following table discloses our assignment of the purchase price for each of our significant acquisitions (in millions):



				Assignment of Purchase Price
Ref.		Date	Acquisition	Purchase price		Current assets		Property plant & equipment		Deferred charges & other		Goodwill		Long-term debt			Other liabilities			Non-controlling interest			Previously held equity interest
(1	)	1/11	Watco Companies, LLC (1 of 2)	$	50	$	—	$	—	$	50	$	—	$	—		$	—		$	—		$	—
(2	)	6/11	TGS Development, L.P. Terminal Acquisition	67		—		43		31		—		—			(7		)	—			—
(3	)	7/11	KinderHawk and EagleHawk	835		36		642		140		94		(77		)	—			—			—
(4	)	11/11	SouthTex Treaters, Inc. Natural Gas Treating Assets	152		27		9		17		126		—			(27		)	—			—
(5	)	12/11	Watco Companies, LLC (2 of 2)	50		—		—		50		—		—			—			—			—
(6	)	6/12	EP Midstream Assets (1 of 2)	289		—		—		289		—		—			—			—			—
(7	)	5/13	Copano	3,733		218		2,805		1,775		1,141		(1,252		)	(233		)	(17		)	(704		)
(8	)	6/13	Goldsmith-Landreth Field Unit	280		—		298		—		—		—			(18		)	—			—

(1) Watco Companies, LLC (1 of 2)

On January 3, 2011, we purchased 50,000 Class A preferred shares of Watco Companies, LLC for $50 million in cash in a private transaction. In connection with our purchase of these preferred shares, the most senior equity security of Watco, we entered into a limited liability company agreement with Watco that provides us certain priority and participating cash distribution and liquidation rights. Pursuant to the agreement, we receive priority, cumulative cash distributions from the preferred shares at a rate of 3.25% per quarter (13% annually), and we participate partially in additional profit distributions at a rate equal to 0.5%. The preferred shares have no conversion features and hold no voting powers, but do provide us certain approval rights, including the right to appoint one of the members to Watco’s Board of Managers. On December 28, 2011, we made an additional $50 million investment in Watco, as described below in “—(5) Watco Companies, LLC (2 of 2).”

Watco Companies, LLC is the largest privately held short line railroad company in the U.S., operating 22 short line railroads on approximately 3,500 miles of leased and owned track. Our investment provided capital to Watco for further expansion of specific projects and complemented our existing terminal network. It also provides our customers more transportation services for many of the commodities that we currently handle, and offers us the opportunity to share in additional growth opportunities through new projects. As of December 31, 2013, our net equity investment in Watco totaled $103 million and is within “Investments” on our accompanying consolidated balance sheet. We account for our investment under the equity method of accounting, and we include it in our Terminals business segment.

(2) TGS Development, L.P. Terminal Acquisition

On June 10, 2011, we acquired a newly constructed petroleum coke terminal located in Port Arthur, Texas from TGS Development, L.P. (TGSD) for an aggregate consideration of $74 million, consisting of $43 million in cash, $24 million in common units, and an obligation to pay additional consideration of $7 million. In March 2012, we settled the $7 million liability by issuing additional common units to TGSD (we issued 87,162 common units and determined each unit’s value based on the $83.87 closing market price of the common units on the NYSE on the March 14, 2012 issuance date).

All of the acquired assets are located in Port Arthur, Texas, and include long-term contracts to provide petroleum coke handling and cutting services to improve the refining of heavy crude oil at Total Petrochemicals USA Inc.’s Port Arthur refinery. The acquisition complemented our existing Gulf Coast bulk terminal facilities and expanded our pre-existing petroleum coke handling operations. All of the acquired assets are included as part of our Terminals business segment.

(3) KinderHawk and EagleHawk

Effective July 1, 2011, we acquired from Petrohawk Energy Corporation (Petrohawk, now a subsidiary of BHP Billiton as discussed below) both the remaining 50% equity ownership interest in KinderHawk that we did not already own and a 25% equity ownership interest in EagleHawk, Petrohawk’s natural gas gathering and treating business located in the Eagle Ford shale formation in South Texas for an aggregate consideration of $912 million, consisting of $835 million in cash and assumed debt of $77 million (representing 50% of KinderHawk’s borrowings under its bank credit facility as of July 1, 2011). We then repaid the outstanding $154 million of borrowings and following this repayment, KinderHawk had no outstanding debt. We also terminated the revolving bank credit facility at the time of such repayment. All of the acquired operations are included in our Natural Gas Pipelines business segment.

Following this acquisition of the remaining ownership interest on July 1, 2011, we changed our method of accounting from the equity method to full consolidation, and due to the fact that we acquired a controlling financial interest in KinderHawk, we remeasured our previous 50% equity investment in KinderHawk to its fair value. We recognized a $167 million non-cash loss as a result of this remeasurement. The loss amount represented the excess of the carrying value of our investment ($910 million as of July 1, 2011) over its fair value ($743 million), and we reported this loss separately within the “Other Income (Expense)” section in our accompanying consolidated statement of income for the year ended December 31, 2011. Additionally, on August 25, 2011, mining and oil company BHP Billiton completed its previously announced acquisition of Petrohawk through a short-form merger under Delaware law. The merger was closed with Petrohawk being the surviving corporation as a wholly owned subsidiary of BHP Billiton. The acquisition did not affect the terms of our contracts with Petrohawk.

(4) SouthTex Treaters, Inc. Asset Acquisition

On November 30, 2011, we acquired a manufacturing complex and certain natural gas treating assets from SouthTex Treaters, Inc. for an aggregate consideration of $179 million, consisting of $152 million in cash and assumed liabilities of $27 million. SouthTex Treaters, Inc. is a leading manufacturer, designer and fabricator of natural gas treating plants that are used to remove impurities (CO₂ and hydrogen sulfide) from natural gas before it is delivered into gathering systems and transmission pipelines to ensure that it meets pipeline quality specifications. The acquisition complemented and expanded our existing natural gas treating business, and all of the acquired operations are included in our Natural Gas Pipelines business segment.

(5) Watco Companies, LLC (2 of 2)

On December 28, 2011, we purchased an additional 50,000 Class A preferred shares of Watco Companies, LLC for $50 million in cash in a private transaction. The priority and participating cash distribution and liquidation rights associated with these shares are similar to the rights associated with the 50,000 Class A preferred shares we acquired on January 3, 2011—we receive priority, cumulative cash distributions from the preferred shares at a rate of 3.25% per quarter (13% annually), and we participate partially in additional profit distributions at a rate equal to 0.5%.

(6) EP Midstream Assets (1 of 2)

Effective June 1, 2012, we acquired from an investment vehicle affiliated with KKR a 50% equity ownership interest in the EP midstream assets, a joint venture that owns (i) the Altamont natural gas gathering, processing and treating assets located in the Uinta Basin in Utah and (ii) the Camino Real natural gas and oil gathering system located in the Eagle Ford shale formation in South Texas. We acquired our initial 50% interest for an aggregate consideration of $289 million in common units (we issued 3,792,461 common units and determined each unit’s value based on the $76.23 closing market price of the common units on the NYSE on the June 4, 2012 issuance date).

Effective March 1, 2013, we acquired from KMI the remaining 50% equity ownership interest in the EP midstream assets. For more information about this acquisition see “—KMI Asset Drop-Downs—March 2013 KMI Asset Drop-Down.”

(7) Copano

Effective May 1, 2013, 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).

Also, due to the fact that our acquisition included the remaining 50% interest in Eagle Ford Gathering LLC 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. As a result of our remeasurement, we recognized a $558 million non-cash gain, which represented the excess of the investment’s fair value ($704 million) over our carrying value as of May 1, 2013 ($146 million). We reported this gain separately within the “Other Income (Expense)” section in our accompanying consolidated statement of income for the year ended December 31, 2013.

The table above reflects the adjusted preliminary purchase price allocation as of December 31, 2013. Deferred charges & other includes $1,375 million assigned to “Other intangibles, net” and $387 million assigned to “Investments.” The intangible amount represents the fair value of acquired customer contracts and agreements, and we are currently amortizing these intangible assets over an estimated remaining useful life of 25 years. The investment amount represents an aggregate of seven separate investments, each accounted for under the equity method of accounting. Our evaluation of the assigned fair values is ongoing and subject to adjustment.

Copano provides comprehensive services to natural gas producers, including natural gas gathering, processing, treating and NGL 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 are included in our Natural Gas Pipelines business segment.

(8) Goldsmith Landreth Field 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 an aggregate consideration of $298 million, consisting of $280 million in cash and assumed liabilities of $18 million (including $12 million of long-term asset retirement obligations). The acquisition of the Goldsmith Landreth San Andres oil field unit includes more than 6,000 acres located in Ector County, Texas. 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. As of December 31, 2013, the field was producing approximately 1,230 Bbl/d of oil, and as part of the transaction, we obtained a long-term supply contract for up to 150 MMcf/d of CO₂. The acquisition complemented our existing oil and gas producing assets in the Permian Basin, and we included the acquired assets as part of our CO₂ business segment. Our evaluation of the assigned fair values is ongoing and subject to adjustment.

KMI Asset Drop-Downs

August 2012 KMI Asset Drop-Down

As discussed above in Note 2, we acquired the August 2012 drop-down asset group from KMI effective August 1, 2012. Our consideration to KMI consisted of (i) $3.5 billion in cash; (ii) 4,667,575 common units (valued at $0.4 billion based on the $81.52 closing market price of the common units on the NYSE on the August 13, 2012 issuance date); and (iii) $2.3 billion in assumed debt (consisting of the combined carrying value of 100% of TGP’s debt borrowings and 50% of EPNG’s debt borrowings as of August 1, 2012, excluding any debt fair value adjustments). We acquired the August 2012 drop-down asset group in order to replace the cash flows associated with the divested FTC Natural Gas Pipelines disposal group, and the terms of the August 2012 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 August 2012 drop-down asset group in our Natural Gas Pipelines segment.

TGP is an 11,800 mile pipeline system with a transport design capacity of approximately 8.5 Bcf/d of natural gas. It transports natural gas from Louisiana, the Gulf of Mexico and south Texas to the northeastern U.S., including the metropolitan areas of New York City and Boston. EPNG is a 10,700 mile pipeline system with a design capacity of approximately 5.6 Bcf/d of natural gas. It transports natural gas from the San Juan, Permian and Anadarko basins to California, other western states, Texas and northern Mexico.

March 2013 KMI Asset Drop-Down

As discussed above in Note 2, 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.

Pro Forma Information

The following summarized unaudited pro forma consolidated income statement information for the years ended December 31, 2013 and 2012, assumes that our acquisitions of the drop-down asset groups, Copano and the Goldsmith Landreth field unit had occurred as of January 1, 2012. We prepared the following unaudited pro forma financial results for comparative purposes only. The summarized 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, Copano and the Goldsmith Landreth field unit 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 Year Ended December 31,
	2013			2012
	(Unaudited)
Revenues	$	13,235		$	11,577
Income from continuing operations	3,277			1,788
Loss from discontinued operations	(4		)	(669		)
Net income	3,273			1,119
Net income attributable to noncontrolling interests	(36		)	(21		)
Net income attributable to KMEP	3,237			1,098

Limited partners’ net income (loss) per unit:
Income from continuing operations	$	3.63		$	0.78
Loss from discontinued operations	(0.01		)	(1.66		)
Net income (loss)	$	3.62		$	(0.88	)

Acquisition Subsequent to December 31, 2013

Effective January 17, 2014, we acquired American Petroleum Tankers (APT) and State Class Tankers (SCT) from affiliates of The Blackstone Group and Cerberus Capital Management for an aggregate consideration of approximately $962 million in cash (pending final true-ups for both acquired working capital balances and capital spending prior to the closing date). We funded this transaction with borrowings made under our commercial paper program, which is supported by a short-term liquidity facility dated January 17, 2014 (discussed further in Note 8 “Debt-Subsequent Event”). Additionally, our general partner has agreed to waive incentive distribution amounts of $13 million for 2014, $19 million for 2015 and $6 million for 2016 to facilitate the transaction.

APT and SCT are engaged in the marine transportation of crude oil, condensate and refined products in the U.S. domestic trade, commonly referred to as the Jones Act trade. APT’s primary assets consist of a fleet of five medium range Jones Act qualified product tankers, each with 330 MBbl of cargo capacity, and each operating pursuant to long-term time charters with high quality counterparties, including major integrated oil companies, major refiners and the U.S. Navy. The vessels’ time charters have an average remaining term of approximately four years, with renewal options to extend the initial terms by an average of two years. APT’s vessels are operated by Crowley Maritime Corporation.

SCT has commissioned the construction of four medium range Jones Act qualified product tankers, each with 330 MBbl of cargo capacity. The SCT vessels are scheduled to be delivered in 2015 and 2016 and are being constructed by General Dynamics’ NASSCO shipyard. We expect to invest approximately $214 million to complete the construction of the vessels. Upon delivery, the SCT vessels will be operated pursuant to long-term time charters with a major integrated oil company. Each of the time charters has an initial term of five years, with renewal options to extend the initial term by up to three years. The acquisition of APT and SCT complements and extends our existing crude oil and refined products transportation business, and all of the acquired assets are included in our Terminals business segment.

Divestitures

FTC Natural Gas Pipelines Disposal Group – Discontinued Operations

As described above in Note 2, following KMI’s March 2012 agreement with the FTC, we began accounting for our FTC Natural Gas Pipelines disposal group as discontinued operations (prior to KMI’s sale announcement, we included the disposal group in our Natural Gas Pipelines business segment). Effective November 1, 2012, we then sold our FTC Natural Gas Pipelines disposal group to Tallgrass Energy Partners, LP (now known as Tallgrass Development, LP) (Tallgrass), and we received proceeds of $1,791 million (before cash selling expenses). In November 2012, we also paid selling expenses of $78 million (consisting of certain required tax payments to joint venture partners); however, KMI contributed to us $45 million to be used as partial funding for our cash selling expenses, and we recognized this contribution as an increase to our general partner’s capital interest in us.

Additionally, during 2012, we remeasured the disposal group’s net assets to reflect our assessment of fair value as a result of the FTC mandated sale requirement, and 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. 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 year ended December 31, 2012. We reported the proceeds we received from the sale separately as “Proceeds from disposal of discontinued operations” within the investing section of our accompanying consolidated statement of cash flows for the year ended December 31, 2012.

In 2013, we and Tallgrass trued up the final consideration for the sale of our FTC Natural Gas Pipelines disposal group and based both on this true up and certain incremental selling expenses we paid in 2013, we recognized an additional $4 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 year ended December 31, 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 2013.

Summarized financial information for our FTC Natural Gas Pipelines disposal group is as follows (in millions):



	Year Ended December 31,
	2012(a)			2011
Revenues	$	227		$	322
Operating expenses	(131		)	(182		)
Depreciation and amortization	(7		)	(27		)
Other expense	(1		)	—
Earnings from equity investments	70			87
Interest income and Other, net	2			2
Income tax (expense)	—			(1		)
Income from operations of FTC Natural Gas Pipelines disposal group	$	160		$	201

__________


(a)	2012 amounts represent financial information for the ten month period ended October 31, 2012. We sold our FTC Natural Gas Pipelines disposal group effective November 1, 2012.

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. We received net cash proceeds of $402 million (after paying both a final working capital settlement and certain transaction related selling expenses), and we reported the net cash proceeds received from the sale separately as “Proceeds from sale of investments in Express pipeline system” within the investing section of our accompanying consolidated statement of cash flows. For the year ended December 31, 2013, we recognized a combined $224 million pre-tax gain with respect to this sale, and we reported this gain amount separately as “Gain on sale of investments in Express pipeline system” on our accompanying consolidated statement of income. We also recorded an income tax expense of $84 million related to this gain on sale, and we included this expense within “Income Tax Expense.”

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.

BOSTCO

Effective December 1, 2012, TransMontaigne exercised its previously announced option to acquire up to 50% of our Class A member interest in BOSTCO, our previously announced oil terminal joint venture located on the Houston Ship Channel. On this date, TransMontaigne acquired a 42.5% Class A member interest in BOSTCO from us for an aggregate consideration of $79 million, and following this acquisition, we now own a 55% Class A member interest in BOSTCO (we sold a 2.5% Class A member interest in BOSTCO to a third party on January 1, 2012 for an aggregate consideration of $1 million). Because we retained a controlling financial interest in BOSTCO, we continued to account for our investment under the full consolidation method and we accounted for this change in our ownership interest as an equity transaction; specifically, partners’ capital attributable to us decreased by $5 million and the noncontrolling interest in BOSTCO increased by $84 million.

TGP’s Sale of Production Area Facilities

On September 1, 2013, TGP sold certain natural gas facilities located offshore in the Gulf of Mexico and onshore in the state of Louisiana for an aggregate consideration of $32 million in cash. TGP’s net assets sold in this transaction (including assets identified as “held for sale”) totaled $89 million, and as a result of the sale, TGP recognized both a $93 million increase in regulatory assets pursuant to a FERC order, and a $36 million gain from the sale of assets. We included the cash proceeds received from the sale in 2013 within “Sale or casualty of property, plant and equipment, investments and other net assets, net of removal costs” within the investing section of our accompanying consolidated statement of cash flows for the year ended December 31, 2013, and we included the gain amount within “Other Income (Expense)” on our accompanying consolidated statement of income for the year ended December 31, 2013.