Business Context and Reporting Period
This Form 10-K covers Kinder Morgan, Inc. for the fiscal year ended December 31, 2010. The company operates as a holding company primarily through its ownership of the general partner and approximately 11% of the limited partner interests of Kinder Morgan Energy Partners, L.P. (KMP), and a 20% equity interest in NGPL PipeCo LLC. The company owns or operates approximately 38,000 miles of pipelines and 180 terminals across North America. A significant corporate event occurred subsequent to the reporting period: on February 16, 2011, the company completed its initial public offering (IPO) and converted from a limited liability company to a Delaware corporation.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total Revenues | $8,190.6 million | $7,185.2 million |
| Operating Income | $1,280.7 million | $1,407.2 million |
| Net Income (Consolidated) | $299.6 million | $773.1 million |
| Net Income Attributable to Kinder Morgan, Inc. | $(41.3) million | $495.0 million |
| Cash Provided by Operating Activities | $1,911.0 million | $1,587.5 million |
| Capital Expenditures | $1,002.5 million | $1,324.3 million |
| Total Debt (KMP and Subsidiaries) | $11.5 billion | $10.0 billion (approx.) |
| Cash and Cash Equivalents | $502.4 million | Filing text does not provide a clear value for 2009 |
Material Changes vs. Prior Period
- Net Income Decline: Net income attributable to Kinder Morgan, Inc. turned from a profit of $495.0 million in 2009 to a loss of $41.3 million in 2010. This was primarily driven by three non-operating or non-recurring items: a $200 million pre-tax settlement of the "Going Private Transaction" litigation, a $430 million non-cash impairment charge on the investment in NGPL PipeCo LLC, and a reduction in income recognized from KMP due to interim capital transactions.
- Revenue Growth: Total revenues increased by approximately 14% to $8.2 billion, driven by higher energy prices (crude oil and natural gas liquids) in the latter half of 2010, incremental earnings from new shale gas gathering assets (KinderHawk), and full-year operations from new pipeline systems (Midcontinent Express and Kinder Morgan Louisiana).
- Segment Performance: While most KMP segments showed improved earnings before depreciation, depletion, and amortization (EBDA), the NGPL PipeCo LLC segment reported a significant loss due to the impairment charge. The Products Pipelines segment saw a $172 million expense related to rate case liability adjustments.
- Acquisitions: KMP invested approximately $1.2 billion in cash for acquisitions in 2010, including a 50% interest in KinderHawk Field Services LLC ($921.4 million) and various terminal assets.
Guidance, Outlook, and Risks
- 2011 Outlook: KMP expects to declare cash distributions of $4.60 per unit for 2011, a 4.5% increase over 2010. The company anticipates generating approximately $3.6 billion in earnings before non-cash depreciation, depletion, and amortization (EBITDA) and investing approximately $1.4 billion in capital expansion.
- Dividend Policy: Following the IPO, the company expects to have cash available for dividends of $820.0 million ($1.16 per share) for 2011.
- Commodity Sensitivity: The CO2 segment is exposed to crude oil price volatility. Management estimates that every $1 change in the average West Texas Intermediate (WTI) crude oil price impacts the CO2 segment's cash flows by approximately $5.5 million.
- Key Risks:
- Regulatory: Ongoing FERC and CPUC proceedings regarding rate challenges on West Coast pipelines could result in refunds or rate reductions.
- Debt: KMP carries substantial debt ($11.5 billion), with 47% subject to variable interest rates, creating vulnerability to interest rate hikes.
- Environmental: Potential liabilities from environmental remediation and new regulations regarding greenhouse gas emissions could increase costs.
- Customer Credit: Financial distress among customers could impact collections and future volumes.
Investor Verification Checklist
- Verify the impact of the $430 million NGPL PipeCo LLC impairment charge on the carrying value of the remaining 20% equity investment.
- Confirm the status and potential financial impact of the FERC and CPUC rate case proceedings regarding the SFPP, L.P. pipelines.
- Review the details of the $200 million "Going Private Transaction" litigation settlement and ensure no further liabilities remain.
- Assess the company's ability to service its $11.5 billion debt load, particularly the portion subject to variable interest rates, given the current interest rate environment.
- Validate the projected 2011 capital expenditure budget of $1.4 billion and the funding sources (debt vs. equity) to be used.
- Monitor the realization of the $820 million dividend target for 2011 post-IPO.