Policy

Guarantee of Securities of Subsidiaries

KMEP has guaranteed the payment of Copano’s outstanding series of senior notes that mature on April 1, 2021 (referred to in this report as the “Guaranteed Notes”). Copano Energy Finance Corporation (Copano Finance Corp), a direct subsidiary of Copano, is the co-issuer of the Guaranteed Notes. Excluding fair value adjustments, as of December 31, 2013, Copano had $332 million of Guaranteed Notes outstanding. Copano Finance Corp’s obligations as a co-issuer and primary obligor are the same as and joint and several with the obligations of Copano as issuer, however, it has no subsidiaries and no independent assets or operations. Subject to the limitations set forth in the applicable supplemental indentures, KMEP’s guarantee is full and unconditional and guarantees the Guaranteed Notes through their maturity date.

A significant amount of KMEP’s income and cash flow is generated by its respective subsidiaries. As a result, the funds necessary to meet its debt service and/or guarantee obligations are provided in large part by distributions or advances it receives from its respective subsidiaries. For purposes of the condensed consolidating financial information, distributions from our wholly owned subsidiaries have been presented as operating cash flows whether or not distributions exceeded cumulative earnings. In addition, we utilize a centralized cash pooling program among our majority-owned and consolidated subsidiaries, including the subsidiary issuers and non-guarantor subsidiaries. The following Condensed Consolidating Statements of Cash Flows present the intercompany loan and distribution activity, as well as cash collection and payments made on behalf of our subsidiaries, as cash activities.

Included among the non-guarantor subsidiaries are KMEP’s five operating limited partnerships and their majority-owned and controlled subsidiaries, along with Copano’s remaining majority-owned and controlled subsidiaries. In the following condensed consolidating financial information, KMEP is “Parent Guarantor,” and Copano and Copano Finance Corp are the “Subsidiary Issuers.” The Subsidiary Issuers are 100% owned by KMEP.

Condensed Consolidating Balance Sheets as of December 31, 2013 (In Millions)

	Parent Guarantor		Subsidiary Issuers		Non-guarantor Subsidiaries		Eliminations			Consolidated KMP
ASSETS
Cash and cash equivalents	$	10	$	1	$	393	$	—		$	404
All other current assets	3,071		13		2,151		(2,971		)	2,264
Property, plant and equipment, net	—		170		27,235		—			27,405
Investments	—		—		2,233		—			2,233
Investments in subsidiaries	13,931		4,430		—		(18,361		)	—
Goodwill	—		813		5,734		—			6,547
Notes receivable from affiliates	17,284		—		—		(17,284		)	—
Deferred charges and all other assets	233		—		3,678		—			3,911
Total Assets	$	34,529	$	5,427	$	41,424	$	(38,616	)	$	42,764

LIABILITIES AND PARTNERS’ CAPITAL
Liabilities
Current portion of debt	$	1,504	$	—	$	—	$	—		$	1,504
All other current liabilities	407		107		5,530		(2,971		)	3,073
Total long-term debt	15,644		393		3,587		—			19,624
Notes payable to affiliates	—		907		16,377		(17,284		)	—
Deferred income taxes	—		2		283		—			285
All other long-term liabilities	173		—		884		—			1,057
Total Liabilities	17,728		1,409		26,661		(20,255		)	25,543

Partners’ Capital
Total KMEP Partners’ Capital	16,801		4,018		14,343		(18,361		)	16,801
Noncontrolling interests	—		—		420		—			420
Total Partners’ Capital	16,801		4,018		14,763		(18,361		)	17,221
Total Liabilities and Partners’ Capital	$	34,529	$	5,427	$	41,424	$	(38,616	)	$	42,764

Condensed Consolidating Balance Sheets as of December 31, 2012 (In Millions)

	Parent Guarantor		Subsidiary Issuers		Non-guarantor Subsidiaries		Eliminations			Consolidated KMP
ASSETS
Cash and cash equivalents	$	95	$	—	$	434	$	—		529
All other current assets	2,235		—		1,752		(2,139		)	1,848
Property, plant and equipment, net	—		—		22,330		—			22,330
Investments	—		—		1,864		—			1,864
Investments in subsidiaries	10,124		—		—		(10,124		)	—
Goodwill	—		—		5,417		—			5,417
Notes receivable from affiliates	14,787		—		—		(14,787		)	—
Deferred charges and all other assets	674		—		2,314		—			2,988
Total Assets	$	27,915	$	—	$	34,111	$	(27,050	)	$	34,976

LIABILITIES AND PARTNERS’ CAPITAL
Liabilities
Current portion of debt	$	1,155	$	—	$	—	$	—		1,155
All other current liabilities	341		—		3,890		(2,139		)	2,092
Total long-term debt	13,876		—		3,729		—			17,605
Notes payable to affiliates	—		—		14,787		(14,787		)	—
Deferred income taxes	—		—		249		—			249
All other long-term liabilities	48		—		1,065		—			1,113
Total Liabilities	15,420		—		23,720		(16,926		)	22,214

Partners’ Capital
Total KMEP Partners’ Capital	12,495		—		10,124		(10,124		)	12,495
Noncontrolling interests	—		—		267		—			267
Total Partners’ Capital	12,495		—		10,391		(10,124		)	12,762
Total Liabilities and Partners’ Capital	$	27,915	$	—	$	34,111	$	(27,050	)	$	34,976

Condensed Consolidating Statements of Income for the Year ended December 31, 2013 (In Millions)

	Parent Guarantor			Subsidiary Issuers			Non-guarantor Subsidiaries			Eliminations			Consolidated KMP
Revenues	$	—		$	—		$	12,530		$	—		$	12,530
Operating Costs, Expenses and Other
Costs of sales	—			—			5,207			—			5,207
Depreciation, depletion and amortization	—			—			1,446			—			1,446
Other operating expenses	—			39			2,609			—			2,648
Total Operating Costs, Expenses and Other	—			39			9,262			—			9,301
Operating (Loss) Income	—			(39		)	3,268			—			3,229
Other Income (Expense), Net	3,292			127			251			(3,414		)	256
Income from Continuing Operations Before Income Taxes	3,292			88			3,519			(3,414		)	3,485
Income Tax Expense	(11		)	—			(153		)	—			(164		)
Income from Continuing Operations	3,281			88			3,366			(3,414		)	3,321
Loss from Discontinued Operations	—			—			(4		)	—			(4		)
Net Income	3,281			88			3,362			(3,414		)	3,317
Net Income Attributable to Noncontrolling Interests	—			—			(36		)	—			(36		)
Net Income Attributable to KMEP	$	3,281		$	88		$	3,326		$	(3,414	)	$	3,281

Condensed Consolidating Statements of Income for the Year ended December 31, 2012 (In Millions)

	Parent Guarantor			Subsidiary Issuers		Non-guarantor Subsidiaries			Eliminations			Consolidated KMP
Revenues	$	—		$	—	$	9,035		$	—		$	9,035
Operating Costs, Expenses and Other
Costs of sales	—			—		3,029			—			3,029
Depreciation, depletion and amortization	—			—		1,159			—			1,159
Other operating expenses	—			—		2,363			—			2,363
Total Operating Costs, Expenses and Other	—			—		6,551			—			6,551
Operating Income	—			—		2,484			—			2,484
Other Income (Expense), Net	1,392			—		(416		)	(1,351		)	(375		)
Income from Continuing Operations Before Income Taxes	1,392			—		2,068			(1,351		)	2,109
Income Tax Expense	(9		)	—		(30		)	—			(39		)
Income from Continuing Operations	1,383			—		2,038			(1,351		)	2,070
Loss from Discontinued Operations	—			—		(669		)	—			(669		)
Net Income	1,383			—		1,369			(1,351		)	1,401
Net Income Attributable to Noncontrolling Interests	—			—		(18		)	—			(18		)
Net Income Attributable to KMEP	$	1,383		$	—	$	1,351		$	(1,351	)	$	1,383

Condensed Consolidating Statements of Income for the Year ended December 31, 2011 (In Millions)

	Parent Guarantor			Subsidiary Issuers		Non-guarantor Subsidiaries			Eliminations			Consolidated KMP
Revenues	$	—		$	—	$	7,889		$	—		$	7,889
Operating Costs, Expenses and Other
Costs of sales	—			—		3,278			—			3,278
Depreciation, depletion and amortization	—			—		928			—			928
Other operating expenses	—			—		2,126			—			2,126
Total Operating Costs, Expenses and Other	—			—		6,332			—			6,332
Operating Income	—			—		1,557			—			1,557
Other Income (Expense), Net	1,267			—		(487		)	(1,225		)	(445		)
Income from Continuing Operations Before Income Taxes	1,267			—		1,070			(1,225		)	1,112
Income Tax Expense	(9		)	—		(36		)	—			(45		)
Income from Continuing Operations	1,258			—		1,034			(1,225		)	1,067
Loss from Discontinued Operations	—			—		201			—			201
Net Income	1,258			—		1,235			(1,225		)	1,268
Net Income Attributable to Noncontrolling Interests	—			—		(10		)	—			(10		)
Net Income Attributable to KMEP	$	1,258		$	—	$	1,225		$	(1,225	)	$	1,258

Condensed Consolidating Statements of Comprehensive Income for the Year ended December 31, 2013 (In Millions)

	Parent Guarantor			Subsidiary Issuers		Non-guarantor Subsidiaries			Eliminations			Consolidated KMP
Net Income	$	3,281		$	88	$	3,362		$	(3,414	)	$	3,317
Other Comprehensive Income (Loss)
Change in fair value of derivatives utilized for hedging purposes	(60		)	—		(60		)	60			(60		)
Reclassification of change in fair value of derivatives to net income	18			—		18			(18		)	18
Foreign currency translation adjustments	(136		)	—		(137		)	136			(137		)
Adjustments to pension and other postretirement benefit plan liabilities, net of tax	43			—		43			(43		)	43
Total Other Comprehensive Loss	(135		)	—		(136		)	135			(136		)
Comprehensive Income	3,146			88		3,226			(3,279		)	3,181
Comprehensive Income Attributable to Noncontrolling Interests	—			—		(35		)	—			(35		)
Comprehensive Income Attributable to KMEP	$	3,146		$	88	$	3,191		$	(3,279	)	$	3,146

Condensed Consolidating Statements of Comprehensive Income for the Year ended December 31, 2012 (In Millions)

	Parent Guarantor			Subsidiary Issuers		Non-guarantor Subsidiaries			Eliminations			Consolidated KMP
Net Income	$	1,383		$	—	$	1,369		$	(1,351	)	$	1,401
Other Comprehensive Income (Loss)
Change in fair value of derivatives utilized for hedging purposes	115			—		117			(115		)	117
Reclassification of change in fair value of derivatives to net income	(8		)	—		(8		)	8			(8		)
Foreign currency translation adjustments	44			—		44			(44		)	44
Adjustments to pension and other postretirement benefit plan liabilities, net of tax	14			—		14			(14		)	14
Total Other Comprehensive Income	165			—		167			(165		)	167
Comprehensive Income	1,548			—		1,536			(1,516		)	1,568
Comprehensive Income Attributable to Noncontrolling Interests	—			—		(20		)	—			(20		)
Comprehensive Income Attributable to KMEP	$	1,548		$	—	$	1,516		$	(1,516	)	$	1,548

Condensed Consolidating Statements of Comprehensive Income for the Year ended December 31, 2011 (In Millions)

	Parent Guarantor			Subsidiary Issuers		Non-guarantor Subsidiaries			Eliminations			Consolidated KMP
Net Income	$	1,258		$	—	$	1,235		$	(1,225	)	$	1,268
Other Comprehensive Income (Loss)
Change in fair value of derivatives utilized for hedging purposes	14			—		13			(13		)	14
Reclassification of change in fair value of derivatives to net income	253			—		256			(253		)	256
Foreign currency translation adjustments	(44		)	—		(45		)	44			(45		)
Adjustments to pension and other postretirement benefit plan liabilities, net of tax	(34		)	—		(34		)	34			(34		)
Total Other Comprehensive Income	189			—		190			(188		)	191
Comprehensive Income	1,447			—		1,425			(1,413		)	1,459
Comprehensive Income Attributable to Noncontrolling Interests	—			—		(12		)	—			(12		)
Comprehensive Income Attributable to KMEP	$	1,447		$	—	$	1,413		$	(1,413	)	$	1,447

Condensed Consolidating Statements of Cash Flow for the Year ended December 31, 2013 (In Millions)

	Parent Guarantor			Subsidiary Issuers			Non-guarantor Subsidiaries			Eliminations			Consolidated KMP
Net Cash Provided by (Used in) Operating Activities	$	3,160		$	(25	)	$	4,529		$	(3,792	)	$	3,872

Cash Flows from Investing Activities
Payment to KMI for drop-down asset groups, net of cash acquired (Note 3)	—			—			(994		)	—			(994		)
Acquisitions of assets and investments, net of cash acquired	—			5			(297		)	—			(292		)
Proceeds from sale of investments in Express pipeline system	—			—			402			—			402
Repayments from related party	—			—			1			—			1
Capital expenditures	—			(141		)	(3,077		)	—			(3,218		)
Sale or casualty of property, plant and equipment, investments and other net assets, net of removal costs	—			—			86			—			86
Contributions to investments	—			—			(204		)	—			(204		)
Distributions from equity investments in excess of cumulative earnings	—			—			66			—			66
Funding to affiliates	(5,753		)	(287		)	(1,762		)	7,802			—
Other, net	(12		)	—			60			—			48
Net Cash Used in Investing Activities	(5,765		)	(423		)	(5,719		)	7,802			(4,105		)

Cash Flows From Financing Activities
Issuance of debt	10,213			—			14			—			10,227
Payment of debt	(7,627		)	(854		)	(101		)	—			(8,582		)
Debt issue costs	(22		)	—			—			—			(22		)
Proceeds from issuance of i-units	210			—			—			—			210
Funding from affiliates	1,592			1,303			4,907			(7,802		)	—
Proceeds from issuance of common units	1,285			—			—			—			1,285
Contributions from noncontrolling interest	—			—			148			—			148
Contributions from General Partner	38			—			—			—			38
Pre-acquisition contributions and distributions from KMI to drop-down asset group	—			—			35			—			35
Cash distributions	(3,168		)	—			(3,792		)	3,792			(3,168		)
Distributions to noncontrolling interests	—			—			(41		)	—			(41		)
Other, net	(1		)	—			—			—			(1		)
Net Cash Provided by Financing Activities	2,520			449			1,170			(4,010		)	129

Effect of Exchange Rate Changes on Cash and Cash Equivalents	—			—			(21		)	—			(21		)

Net (decrease) increase in Cash and Cash Equivalents	(85		)	1			(41		)	—			(125		)
Cash and Cash Equivalents, beginning of period	95			—			434			—			529
Cash and Cash Equivalents, end of period	$	10		$	1		$	393		$	—		$	404

Condensed Consolidating Statements of Cash Flow for the Year ended December 31, 2012 (In Millions)

	Parent Guarantor			Subsidiary Issuers		Non-guarantor Subsidiaries			Eliminations			Consolidated KMP
Net Cash Provided by Operating Activities	$	2,508		$	—	$	3,800		$	(3,029	)	$	3,279

Cash Flows from Investing Activities
Payment to KMI for drop-down asset groups, net of cash acquired (Note 3)	—			—		(3,465		)	—			(3,465		)
Acquisitions of assets and investments, net of cash acquired	—			—		(83		)	—			(83		)
Proceeds from disposal of discontinued operations	—			—		1,791			—			1,791
Repayments from related party	—			—		66			—			66
Capital expenditures	—			—		(1,900		)	—			(1,900		)
Sale or casualty of property, plant and equipment, investments and other net assets, net of removal costs	—			—		100			—			100
Contributions to investments	—			—		(177		)	—			(177		)
Distributions from equity investments in excess of cumulative earnings	—			—		144			—			144
Funding to affiliates	(4,871		)	—		(2,069		)	6,940			—
Other, net	(15		)	—		(10		)	—			(25		)
Net Cash Used in Investing Activities	(4,886		)	—		(5,603		)	6,940			(3,549		)

Cash Flows From Financing Activities
Issuance of debt	9,270			—		—			—			9,270
Payment of debt	(8,003		)	—		(25		)	—			(8,028		)
Debt issue costs	(16		)	—		—			—			(16		)
Proceeds from issuance of i-units	727			—		—			—			727
Funding from affiliates	2,069			—		4,871			(6,940		)	—
Proceeds from issuance of common units	909			—		—			—			909
Contributions from noncontrolling interests	—			—		62			—			62
Contributions from General Partner	45			—		—			—			45
Pre-acquisition contributions and distributions from KMI to drop-down asset group	—			—		(26		)	—			(26		)
Cash distributions	(2,528		)	—		(3,029		)	3,029			(2,528		)
Distributions to noncontrolling interests	—			—		(32		)	—			(32		)
Other, net	(1		)	—		—			—			(1		)
Net Cash Provided by Financing Activities	2,472			—		1,821			(3,911		)	382

Effect of Exchange Rate Changes on Cash and Cash Equivalents	—			—		8			—			8

Net increase in Cash and Cash Equivalents	94			—		26			—			120
Cash and Cash Equivalents, beginning of period	1			—		408			—			409
Cash and Cash Equivalents, end of period	$	95		$	—	$	434		$	—		$	529

Condensed Consolidating Statements of Cash Flow for the Year ended December 31, 2011 (In Millions)

	Parent Guarantor			Subsidiary Issuers		Non-guarantor Subsidiaries			Eliminations			Consolidated KMP
Net Cash Provided by Operating Activities	$	2,185		$	—	$	3,337		$	(2,648	)	$	2,874

Cash Flows from Investing Activities
Acquisitions of assets and investments, net of cash acquired	—			—		(1,179		)	—			(1,179		)
Repayments from related party	—			—		31			—			31
Capital expenditures	—			—		(1,199		)	—			(1,199		)
Sale or casualty of property, plant and equipment, investments and other net assets, net of removal costs	—			—		25			—			25
Contributions to investments	—			—		(371		)	—			(371		)
Distributions from equity investments in excess of cumulative earnings	—			—		214			—			214
Funding to affiliates	(3,419		)	—		(1,208		)	4,627			—
Other, net	8			—		54			—			62
Net Cash Used in Investing Activities	(3,411		)	—		(3,633		)	4,627			(2,417		)

Cash Flows From Financing Activities
Issuance of debt	7,502			—		—			—			7,502
Payment of debt	(6,233		)	—		(161		)	—			(6,394		)
Debt issue costs	(18		)	—		—			—			(18		)
Funding from affiliates	1,208			—		3,419			(4,627		)	—
Proceeds from issuance of common units	955			—		—			—			955
Contributions from noncontrolling interests	—			—		29			—			29
Cash distributions	(2,215		)	—		(2,648		)	2,648			(2,215		)
Distributions to noncontrolling interests	—			—		(28		)	—			(28		)
Net Cash Provided by Financing Activities	1,199			—		611			(1,979		)	(169		)

Effect of Exchange Rate Changes on Cash and Cash Equivalents	—			—		(8		)	—			(8		)

Net (decrease) increase in Cash and Cash Equivalents	(27		)	—		307			—			280
Cash and Cash Equivalents, beginning of period	28			—		101			—			129
Cash and Cash Equivalents, end of period	$	1		$	—	$	408		$	—		$	409

KINDER MORGAN ENERGY PARTNERS L P | 2013 | FY |

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