Related Party Transactions

General and Administrative Expenses

KMGP Services Company, Inc., a subsidiary of our general partner, provides employees and Kinder Morgan Services LLC, a wholly owned subsidiary of KMR, provides centralized payroll and employee benefits services to (i) us; (ii) our operating partnerships and subsidiaries; (iii) our general partner; and (iv) KMR (collectively referred to in this note as the Group). Employees of KMGP Services Company, Inc. are assigned to work for one or more members of the Group. The direct costs of all compensation, benefits expenses, employer taxes and other employer expenses for these employees are allocated and charged by Kinder Morgan Services LLC to the appropriate members of the Group, and the members of the Group reimburse Kinder Morgan Services LLC for their allocated shares of these direct costs. There is no profit or margin charged by Kinder Morgan Services LLC to the members of the Group. The administrative support necessary to implement these payroll and benefits services is provided by the human resource department of KMI, and the related administrative costs are allocated to members of the Group in accordance with existing expense allocation procedures.

The effect of these arrangements is that each member of the Group bears the direct compensation and employee benefits costs of its assigned or partially assigned employees, as the case may be, while also bearing its allocable share of administrative costs. Pursuant to our limited partnership agreement, we provide reimbursement for our share of these administrative costs and such reimbursements will be accounted for as described above. Additionally, we reimburse KMR with respect to costs incurred or allocated to KMR in accordance with our limited partnership agreement, the delegation of control agreement among our general partner, KMR, us and others, and KMR’s LLC agreement.

The named executive officers of our general partner and KMR and other employees that provide management or services to both KMI and the Group are employed by KMI. Additionally, other KMI employees assist in the operation of certain of our assets (discussed below in “—Operations”). These employees’ expenses are allocated without a profit component between KMI on the one hand, and the appropriate members of the Group, on the other hand.

Non-Cash Compensation and Severance Expenses

In 2013 and 2012, KMI paid and then allocated to us employee severance expense amounts of $11 million and $9 million, respectively. KMI’s severance expense was associated with its acquisition of EP on May 25, 2012, and the severance expense allocated to us was associated with the drop-down asset groups we acquired from KMI effective August 1, 2012 and March 1, 2013. However, we do not have any obligation, nor did we pay any amounts related to this allocated severance expense. We recognized $10 million of the amount allocated to us in 2013 and $7 million of the amount allocated to us in 2012 as both an expense on our income statement and a contribution to “Total Partners’ Capital” on our balance sheet. The remaining amounts of allocated severance expense for both years was included within (i) the earnings of our subsidiary EPNG in periods prior to the acquisition of our remaining 50% ownership interest in EPNG on March 1, 2013 (because we have included the historical results of EPNG as though 100% of the net assets had been transferred to us May 25, 2012) and (ii) our proportionate share of the equity earnings from our 50% ownership interest in Bear Creek (a 50%-owned equity investee of our subsidiary TGP).

In addition, for accounting purposes, KMI was required to allocate to us a portion of the compensation expense incurred from (i) a one-time special cash bonus payment that was paid to non-senior management employees in May 2011 and (ii) a May 2007 merger of its then wholly-owned subsidiary Kinder Morgan Kansas, Inc. and a wholly-owned subsidiary of Kinder Morgan Kansas, Inc.’s then parent, Knight Holdco LLC (Knight Holdco LLC was a private company owned by investors led by Richard D. Kinder, Chairman and Chief Executive Officer of our general partner and KMR, and this merger is referred to as the going-private transaction). As a subsidiary of KMI, we were then required to recognize the allocated amounts as expense on our income statements, and accordingly in 2011, we recognized non-cash compensation expense of (i) $87 million associated with the special bonus payment to non-senior management employees and (ii) $3 million associated with certain going-private transaction expenses. However, we did not have any obligation, nor did we pay any amounts related to this allocated compensation expense, and since we were not responsible for paying this expense, we recognized the amounts allocated to us as both an expense on our income statement and a contribution to “Total Partners’ Capital” on our balance sheet.

Partnership Interests and Distributions

General

Our partnership agreement requires that we distribute 100% of “Available Cash,” as defined in our partnership agreement, to our partners within 45 days following the end of each calendar quarter. Available Cash consists generally of all of our cash receipts, including cash received by our operating partnerships and net reductions in reserves, less cash disbursements and net additions to reserves and amounts payable to noncontrolling interests.

Our general partner is granted discretion by our partnership agreement, which discretion has been delegated to KMR, subject to the approval of our general partner in certain cases, to establish, maintain and adjust reserves for the proper conduct of our business, which might include reserves for matters such as future operating expenses, debt service, sustaining capital expenditures and rate refunds, and for distributions for the next four quarters. These reserves are not restricted by magnitude, but only by type of future cash requirements with which they can be associated. When KMR determines our quarterly distributions, it considers current and expected reserve needs along with current and expected cash flows to identify the appropriate sustainable distribution level.

Our general partner and owners of our common units and Class B units receive distributions in cash, while KMR, the sole owner of our i-units, receives distributions in additional i-units. We do not distribute cash to i-unit owners (KMR) but instead retain the cash for use in our business. However, the cash equivalent of distributions of i-units is treated as if it had actually been distributed for purposes of determining the distributions to our general partner. Each time we make a distribution, the number of i-units owned by KMR and the percentage of our total units owned by KMR increase automatically under the provisions of our partnership agreement.

Pursuant to our partnership agreement, distributions to unitholders are characterized either as distributions of cash from operations or as distributions of cash from interim capital transactions. This distinction affects the distributions to owners of common units, Class B units and i-units relative to the distributions to our general partner.

Cash from Operations. Cash from operations generally refers to our cash balance on the date we commenced operations, plus all cash generated by the operation of our business, after deducting related cash expenditures (including capital expenditures other than expansion capital expenditures), net additions to or reductions in reserves, debt service and various other items.

Cash from Interim Capital Transactions. Cash from interim capital transactions will generally result only from distributions that are funded from borrowings, sales of debt and equity securities and sales or other dispositions of assets for cash, other than inventory, accounts receivable and other current assets and assets disposed of in the ordinary course of business.

Rule for Characterizing Distributions. Generally, all available cash distributed by us from any source will be treated as distributions of cash from operations until the sum of all available cash distributed equals the cumulative amount of cash from operations actually generated from the date we commenced operations through the end of the calendar quarter prior to that distribution. Any distribution of available cash which, when added to the sum of all prior distributions, is in excess of the cumulative amount of cash from operations, will be considered a distribution of cash from interim capital transactions until the initial common unit price is fully recovered as described below under “—Allocation of Distributions from Interim Capital Transactions.” For purposes of calculating the sum of all distributions of available cash, the total equivalent cash amount of all distributions of i-units to KMR, as the holder of all i-units, will be treated as distributions of available cash, even though the distributions to KMR are made in additional i-units rather than cash and we retain this cash and use it in our business. To date, all of our available cash distributions, other than a $177 million distribution of cash from interim capital transactions in 2010, have been treated as distributions of cash from operations.

Allocation of Distributions from Operations. Cash from operations for each quarter will be distributed effectively as follows:



		Marginal percentage interest in distribution
	Total quarterly distribution per unit target amount	Unitholders	General partner
First target distribution	$0.15125	98%	2%
Second target distribution	above $0.15125 up to $0.17875	85%	15%
Third target distribution	above $0.17875 up to $0.23375	75%	25%
Thereafter	above $0.23375	50%	50%

Allocation of Distributions from Interim Capital Transactions. Any distribution by us of available cash that would constitute cash from interim capital transactions would be distributed effectively as follows:


▪	98% to all owners of common units and Class B units pro rata in cash and to the holder of i-units in equivalent i-units; and


▪	2% to our general partner, until we have distributed cash from this source in respect of a common unit outstanding since our original public offering in an aggregate amount per unit equal to the initial common unit price of $5.75, as adjusted for splits.

As cash from interim capital transactions is distributed, it would be treated as if it were a repayment of the initial public offering price of the common units. To reflect that repayment, the first three distribution target levels of cash from operations (described above) would be adjusted downward proportionately by multiplying each distribution target level amount by a fraction, the numerator of which is the unrecovered initial common unit price immediately after giving effect to that distribution and the denominator of which is the unrecovered initial common unit price immediately prior to giving effect to that distribution. When the initial common unit price is fully recovered, then each of the first three distribution target levels will have been reduced to zero, and thereafter, all distributions of available cash from all sources will be treated as if they were cash from operations and available cash will be distributed 50% to all classes of units pro rata (with the distribution to i-units being made instead in the form of i-units), and 50% to our general partner. With respect to the portion of our distribution of available cash for 2010 that was from interim capital transactions, our general partner waived this resetting of the distribution target levels.

Kinder Morgan G.P., Inc.

Kinder Morgan G.P., Inc. serves as our sole general partner. Pursuant to our partnership agreement, our general partner’s interests represent a 1% ownership interest in us, and a direct 1.0101% ownership interest in each of our five operating partnerships. Collectively, our general partner owns an effective 2% interest in our operating partnerships, excluding incentive distributions rights as follows:


▪	its 1.0101% direct general partner ownership interest (accounted for as a noncontrolling interest in our consolidated financial statements); and


▪	its 0.9899% ownership interest indirectly owned via its 1% ownership interest in us.

As of December 31, 2013, our general partner owned 1,724,000 common units, representing approximately 0.39% of our outstanding limited partner units. For information on distributions paid to our general partner, see Note 10 “Partners’ Capital—Income Allocation and Declared Distributions.”

KMI

KMI remains the sole indirect common stockholder of our general partner. Also, as of December 31, 2013, KMI directly owned 18,169,815 common units, indirectly owned 5,313,400 Class B units and 4,117,640 common units through its consolidated affiliates (including our general partner), and owned 15,934,516 KMR shares, representing an indirect ownership interest of 15,934,516 i-units. Together, these units represented approximately 9.8% of our outstanding limited partner units.

Including both its general and limited partner interests in us, at the 2013 distribution level, KMI received approximately 49% of all quarterly distributions of available cash from us, with approximately 43% attributable to its general partner interest and the remaining 6% attributable to its limited partner interest. These percentages were impacted slightly due to the general partner’s waiver of certain incentive distribution amounts, as described in Note 10 “Partners’ Capital—Income Allocation and Declared Distributions.”

KMR

As of December 31, 2013, KMR, our general partner’s delegate, remained the sole owner of our 125,323,734 i-units.

Asset Acquisitions and Sales

From time to time in the ordinary course of business, we buy and sell assets and related services from KMI and its subsidiaries. Such transactions are conducted in accordance with all applicable laws and regulations and on an arms’ length basis consistent with our policies governing such transactions. In conjunction with our acquisition of (i) certain Natural Gas Pipelines assets and partnership interests from KMI in December 1999 and December 2000; (ii) TransColorado Gas Transmission Company LLC from KMI in November 2004; (iii) TGP and 50% of EPNG from KMI in August 2012; and (iv) the remaining 50% ownership interest in EPNG and the EP midstream assets from KMI in March 2013, KMI has agreed to indemnify us and our general partner with respect to approximately $5.9 billion of our debt as of December 31, 2013. KMI would be obligated to perform under this indemnity only if we are unable, and/or our assets were insufficient, to satisfy our obligations.

Mr. C. Berdon Lawrence, a non-management director on the boards of our general partner and KMR until July 20, 2011, is also Chairman Emeritus of the Board of Kirby Corporation. On February 9, 2011, we sold a marine vessel to Kirby Corporation’s subsidiary Kirby Inland Marine, L.P., and additionally, we and Kirby Inland Marine L.P. formed a joint venture named Greens Bayou Fleeting, LLC. Pursuant to the joint venture agreement, we sold our ownership interest in the boat fleeting business we acquired from Megafleet Towing Co., Inc. in April 2009 to the joint venture for $4 million in cash and a 49% ownership interest in the joint venture. Kirby then made cash contributions to the joint venture in exchange for the remaining 51% ownership interest. In the first quarter of 2011, after final reconciliation and measurement of all of the net assets sold, we recognized a combined $2 million increase in income from the sale of these net assets, and additionally, the sale of our ownership interest resulted in an $11 million non-cash reduction in our goodwill.

Operations

Natural Gas Pipelines and Products Pipelines Business Segments

KMI (or its subsidiaries) operates and maintain for us the assets comprising our Natural Gas Pipelines business segment, as well as our Products Pipelines business segment’s 50%-owned Cypress Pipeline. Pursuant to the applicable underlying agreements, we pay (reimburse) KMI for the actual corporate general and administrative expenses incurred in connection with the operation of these assets. The combined amounts paid to KMI for corporate general and administrative costs incurred were$213 million for 2013, $198 million for 2012 and $71 million for 2011. We believe the amounts paid to KMI for the services it provided each year fairly reflect the value of the services performed; however, due to the nature of the allocations, these reimbursements may not exactly match the actual time and overhead spent. We also reimburse KMI for operating and maintenance costs and capital expenditures incurred with respect to our assets.

We sold our ownership interest in Kinder Morgan NatGas Operator LLC as part of our divestiture of the FTC Natural Gas Pipelines disposal group effective November 1, 2012. Prior to its divestiture, Kinder Morgan NatGas Operator LLC operated the Rockies Express natural gas pipeline system pursuant to an operating agreement. Under this agreement, it was reimbursed for its costs and received a management fee of 1%, based on Rockies Express’ operating income, less all depreciation and amortization expenses. In the first ten months of 2012, and the full year of 2011, it received management fees of $5 million and $6 million, respectively. Prior to its divestiture, Kinder Morgan NatGas Operator LLC also operated the Midcontinent Express pipeline system. The Midcontinent Express pipeline system is operated by one of our affiliates.

In addition, we purchase natural gas transportation and storage services from NGPL and certain affiliates, collectively. KMI owns a 20% ownership interest in NGPL and accounts for its investment under the equity method of accounting. Pursuant to the provisions of a 15-year operating agreement that was entered into in 2008, KMI continues to operate NGPL’s assets. For each of the years 2013, 2012 and 2011, expenses related to NGPL totaled $1 million, $5 million and $8 million, respectively, and we included these expense amounts within the caption “Gas purchases and other costs of sales” in our accompanying consolidated statements of income.

Terminals Business Segment

For services in the ordinary course of Kirby Corporation’s and our Terminals segment’s businesses, Kirby Corporation received payments from our subsidiaries totaling $38,729 in 2011. In turn, Kirby made payments of $44,615 to our subsidiaries in 2011.

Risk Management

Certain of our business activities expose us to risks associated with changes in the market price of natural gas, NGL and crude oil. We also have exposure to interest rate risk as a result of the issuance of our fixed rate debt obligations. Pursuant to our management’s approved risk management policy, we use derivative contracts to hedge or reduce our exposure to these risks and protect our profit margins.

Our commodity-related risk management activities are monitored by our risk management committee, which is a separately designated standing committee whose job responsibilities involve operations exposed to commodity market risk and other external risks in the ordinary course of business. Our risk management committee is charged with the review and enforcement of our management’s risk management policy. The committee is comprised of 14 executive-level employees of KMI or KMGP Services Company, Inc. whose job responsibilities involve operations exposed to commodity market risk and other external risks in the ordinary course of our businesses. The committee is chaired by our Chief Financial Officer and is charged with the following three responsibilities: (i) establish and review risk limits consistent with our risk tolerance philosophy; (ii) recommend to the audit committee of our general partner’s delegate any changes, modifications, or amendments to our risk management policy; and (iii) address and resolve any other high-level risk management issues.

For more information on our risk management activities see Note 13.

KM Insurance, Ltd.

KM Insurance, Ltd. is a Class 2 Bermuda insurance company and wholly-owned subsidiary of KMI. The sole business of KM Insurance is to issue policies for KMI, EPB and us to secure the deductible portion of our workers compensation, automobile liability, and general liability policies placed in the commercial insurance market. We accrue for the cost of insurance and include these costs within our related party general and administrative expenses. For each of the years 2013, 2012 and 2011, these expenses totaled $9 million.

Notes Receivable

Plantation

We and ExxonMobil have a term loan agreement covering a note receivable due from Plantation. We own a 51.17% equity interest in Plantation and our proportionate share of the outstanding principal amount of the note receivable was $48 million as of December 31, 2013 and $49 million as of December 31, 2012. The note bears interest at the rate of 4.25% per annum and provides for semiannual payments of principal and interest on December 31 and June 30 each year, with a final principal payment of $45 million (for our portion of the note) due on July 20, 2016. We included $1 million of our note receivable balance within “Other current assets” on our accompanying consolidated balance sheets as of both December 31, 2013 and December 31, 2012, and we included the remaining outstanding balance within “Deferred charges and other assets.”

Express US Holdings LP

As discussed in Note 3 “Acquisitions and Divestitures—Divestitures—Express Pipeline System,” we sold both our 33 1/3 % equity ownership interest in the Express pipeline system and a subordinated debenture investment in Express to Spectra Energy Corp. effective March 14, 2013. Our long-term debt investment consisted of a C$114 million debt security issued by Express US Holdings LP (the obligor), the partnership that maintained ownership of the U.S. portion of the Express pipeline system. The debenture was denominated in Canadian dollars, bore interest at a rate of 12.0% per annum, and was due in full on January 9, 2023. As of December 31, 2012, the outstanding note receivable balance, representing the translated amount included in our consolidated financial statements in U.S. dollars, was $114 million. Since we had entered into a definitive agreement to sell our debt investment in Express as of this date, we included this note balance within “Assets held for sale” on our accompanying consolidated balance sheet as of that date.

KMI and EP

At the time of KMI’s acquisition of EP on May 25, 2012 (discussed in Note 1), TGP and EPNG each had a note receivable from EP, and during the second quarter of 2012, TGP and EPNG received principal note repayments of approximately $44 million and $21 million, respectively. Upon our acquisition of TGP and EPNG from KMI as part of the drop-down transactions discussed in Note 2, we and KMI agreed that both the remaining $466 million amount due on TGP’s note receivable and the remaining $858 million amount due on EPNG’s note receivable would not be repaid. Accordingly, the amounts were treated as a decrease in KMI’s investment in TGP, EPNG and us, and as a result, neither TGP nor EPNG any longer has a related party note receivable with either KMI or EP. However, because we have included the historical results of TGP and EPNG as though the net assets had been transferred to us on May 25, 2012, the combined principal note repayments of $65 million are now included within “Repayments from related party” on our consolidated statement of cash flows for the year ended December 31, 2012.

Subsequent Event

On February 4, 2014, we entered into a loan agreement with Midcontinent Express Pipeline LLC, our 50%-owned equity investee. The loan agreement allows us, at our sole option, to make loans from time to time to Midcontinent Express to fund its working capital needs and for other limited liability company purposes. Each individual loan must be in an amount not less than $2 million, and the aggregate loan balance outstanding must not exceed $40 million. All loans mature on February 3, 2015, however, the loan agreement includes renewal provisions for one or more additional one-year terms if approved by both parties. Borrowings under the loan agreement bear interest at a rate per annum equal to LIBOR plus 1.5875%, and all borrowings can be prepaid before maturity without penalty or premium. As of the date of this report, we made loans totaling $4 million pursuant to this loan agreement.

Other Receivables and Payables

As of December 31, 2013 and December 31, 2012, our related party receivables (other than the notes receivable discussed above in “—Notes Receivable”) totaled $7 million and $14 million, respectively. The receivable amounts consisted of (i) $6 million and $12 million, respectively, included within “Accounts receivable, net” on our accompanying consolidated balance sheets and (ii) $1 million and $2 million, respectively, of natural gas imbalance receivables included within “Other current assets.”

The $6 million accounts receivable amount as of December 31, 2013 primarily consisted of amounts due from NGPL and Plantation, and the $1 million natural gas imbalance receivable consisted of amounts due from NGPL. The $12 million accounts receivable amount as of December 31, 2012 primarily consisted of amounts due from the Express pipeline system, and the $2 million natural gas imbalance receivable consisted of amounts due from NGPL.

As of December 31, 2013 and December 31, 2012, our related party payables totaled $13 million and $10 million, respectively. The 2013 amount consisted of (i) $12 million for amounts payable to both KMI and certain of our equity investees and included within “Accounts payable” on our accompanying consolidated balance sheet and (ii) $1 million for natural gas imbalance payables due to EPB and included within “Other current liabilities.” Our 2012 related party payable amount consisted primarily of amounts due to KMI, and we included this amount within “Accounts payable.”

Additionally, we have agreed to guarantee certain KMI lease payments from 2014 through 2035. For more information about this guarantee, see “Note 12 Commitments and Contingent Liabilities—Contingent Lease Liabilities.”

Other

Generally, KMR makes all decisions relating to the management and control of our business, and in general, KMR has a fiduciary duty to manage us in a manner beneficial to our unitholders. Our general partner owns all of KMR’s voting securities and elects all of KMR’s directors. KMI, through its wholly owned and controlled subsidiary Kinder Morgan (Delaware), Inc., owns all the common stock of our general partner, and the officers of KMI have fiduciary duties to manage KMI, including selection and management of its investments in its subsidiaries and affiliates, in a manner beneficial to the owners of KMI. Accordingly, certain conflicts of interest could arise as a result of the relationships among KMR, our general partner, KMI and us.

The partnership agreements for us and our operating partnerships contain provisions that allow KMR to take into account the interests of parties in addition to us in resolving conflicts of interest, thereby limiting its fiduciary duty to our unitholders, as well as provisions that may restrict the remedies available to our unitholders for actions taken that might, without such limitations, constitute breaches of fiduciary duty. The partnership agreements also provide that in the absence of bad faith by KMR, the resolution of a conflict by KMR will not be a breach of any duties. The duty of the officers of KMI may, therefore, come into conflict with the duties of KMR and its directors and officers to our unitholders. The audit committee of KMR’s board of directors will, at the request of KMR, review (and is one of the means for resolving) conflicts of interest that may arise between KMI or its subsidiaries, on the one hand, and us, on the other hand.