Kinder Morgan, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unless otherwise noted, amounts are in U.S. dollars and millions. Kinder Morgan operates approximately 83,000 miles of pipelines and 147 terminals. Results were affected by COVID-19-related economic disruption, falling energy demand and commodity prices, and the December 2019 sale of KML and the U.S. portion of the Cochin Pipeline.
Financial performance and condition
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $3,106 | $3,429 |
| Operating income | $43 | $1,018 |
| Net income (loss) | $(291) | $567 |
| Net income (loss) attributable to KMI | $(306) | $556 |
| Basic and diluted earnings (loss) per share | $(0.14) | $0.24 |
| Cash from operating activities | $893 | $635 |
| Adjusted EBITDA (non-GAAP) | $1,848 | $1,947 |
| Distributable cash flow (DCF, non-GAAP) | $1,261 | $1,371 |
| DCF per common share (non-GAAP) | $0.55 | $0.60 |
Q1 included $971 of impairment and divestiture losses, including $600 of CO2 goodwill impairment, $350 of CO2 producing-asset impairments and $21 related to a Products Pipelines terminal. These were non-cash charges. Excluding identified “Certain Items,” adjusted earnings attributable to KMI were $541 versus $571 a year earlier; adjusted Segment EBDA was $1,884 versus $1,982.
GAAP operating income fell sharply, principally because of the impairments. Revenue declined about 9% year over year; adjusted EBITDA declined about 5%, and DCF about 8%. Operating cash flow increased by $258, mainly reflecting lower income tax payments and other operating-cash changes. Investing cash flow included $907 in proceeds from the sale of Pembina shares; it should not be viewed as recurring operating cash generation.
Balance sheet at March 31, 2020: Cash and cash equivalents were $360; restricted deposits were $582, including $535 escrowed for senior notes repaid April 1. Current assets were $3,096 versus current liabilities of $5,608, a working-capital deficit of $2,512. Balance-sheet debt was $34,945 including fair-value adjustments; principal debt was $33,495. The company reported $3,917 of availability under its $4.0 billion revolving credit facility, with no borrowings outstanding and $83 of letters of credit. Net debt-to-adjusted EBITDA was 4.3x at quarter-end.
Cash dividends paid were $569 in the quarter. The board declared a $0.2625 per-share dividend for Q1, payable May 15, 2020. The company repurchased approximately 3.6 million shares for about $50.
Material changes and segment performance
- Natural Gas Pipelines: Adjusted Segment EBDA was $1,179, down 2%. Expansion-project contributions partly offset lower midstream earnings, including the effects of the Cochin sale, lower volumes and rates, and mild Northeast weather.
- Products Pipelines: Adjusted Segment EBDA was $273, down 7%. Commodity-price-driven inventory effects weighed on results; total delivery volumes increased to 2.314 million barrels per day from 2.254 million.
- Terminals: Adjusted Segment EBDA was $257, down 14%, mainly reflecting the KML asset sale. Liquids utilization was 93.7%, compared with 94.0%.
- CO2: Adjusted Segment EBDA was $175, down 7%; reported Segment EBDA was $(755) after impairments. Lower CO2 sales volumes pressured adjusted results.
The January 2020 sale of Pembina shares generated approximately $907 of proceeds, used to repay debt. KMI also reported that the $535 escrowed for notes due April 1 was used for repayment. TGP issued $1.0 billion of 2.90% notes due 2030 in February.
Outlook, risks and contingencies
On April 22, 2020, management lowered its 2020 expectations in response to COVID-19, weaker demand and unfavorable commodity prices. Compared with its original budget of approximately $7.6 billion adjusted EBITDA and $5.1 billion DCF, the company expected adjusted EBITDA to be about 8% below budget and DCF about 10% below budget. It expected year-end net debt-to-adjusted EBITDA of approximately 4.6x, versus a long-term objective around 4.5x.
Management reduced planned 2020 expansion capital by approximately $700 from the original $2.4 billion budget because some projects no longer met return thresholds. Revised expected 2020 capital spending was $665 sustaining and $1,693 discretionary. The company expected dividends and discretionary spending to be funded from internally generated cash flow and did not expect to need capital markets funding for growth projects in 2020. The revised expected 2020 dividend was $1.05 per share, below the previously budgeted $1.25.
Key risks include the duration and severity of the pandemic and economic downturn; continued low or volatile commodity prices and product demand; reduced customer volumes, customer defaults or bankruptcies; potential further asset or goodwill impairments; and exposure to commodity, interest-rate and foreign-exchange markets despite hedging. The filing also discusses pipeline integrity, cybersecurity, environmental obligations and regulatory rate disputes.
Litigation and environmental reserves were $243 and $256, respectively, at March 31, 2020. Some potential exposures remain unquantifiable, including the company’s share of Portland Harbor cleanup costs and certain environmental and coastal-erosion claims. Shippers in pending SFPP rate proceedings sought approximately $50 in annual rate reductions and $400 in refunds; management said outcomes could be substantially lower than amounts sought.
Most important facts for investors to verify
- Whether pandemic-related demand, commodity prices and customer credit conditions support, or undermine, the revised 2020 EBITDA, DCF and leverage outlook.
- Whether the $971 of impairments, particularly the CO2 goodwill and asset write-downs, lead to further impairment charges.
- Whether operating cash flow can sustain dividends, debt service and planned capital spending while maintaining liquidity and leverage targets.
- Whether the declared $1.05 annualized dividend expectation remains appropriate; future dividends are not guaranteed and are subject to board approval.
- Developments in material litigation, environmental matters and FERC proceedings, including costs or refunds not currently estimable.