Kinder Morgan, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted. Kinder Morgan owns interests in or operates approximately 85,000 miles of pipelines and 152 terminals. Financial amounts are in U.S. dollars; millions unless stated.
Key financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $3,418 | $3,424 | Down $6 |
| Operating income | $949 | $977 | Down $28 |
| Net income | $542 | $445 | Up $97 |
| Net income available to common stockholders | $485 | $401 | Up $84 |
| Diluted EPS | $0.22 | $0.18 | Up $0.04 |
| Operating cash flow | $974 | $886 | Up $88 |
| Capital expenditures | $707 | $664 | Up $43 |
- Net income growth reflected lower income tax expense ($164 million versus $246 million), primarily following the reduction in the U.S. federal corporate tax rate from 35% to 21%. The effective tax rate was 23.2%, versus 35.6%.
- Operating costs rose to $2,469 million from $2,447 million; operating income declined. Net income was also supported by higher earnings from equity investments ($220 million versus $175 million), including a $44 million share of investees’ provisional 2017 Tax Reform adjustments.
- Management’s non-GAAP distributable cash flow (DCF) was $1,247 million, or $0.56 per share, versus $1,215 million, or $0.54 per share. DCF is not a substitute for GAAP cash flow or net income.
- Segment EBDA was $1,935 million, up 1%. Natural Gas Pipelines EBDA rose 8% to $1,136 million; CO₂ fell 9% to $199 million; Terminals fell 4% to $295 million; Products Pipelines fell 10% to $259 million; and Kinder Morgan Canada rose 7% to $46 million.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $294 million at March 31, up from $264 million at year-end; cash plus restricted deposits totaled $363 million.
- Total debt principal was $37.317 billion, versus $36.916 billion at December 31, 2017. Balance-sheet debt, including fair-value adjustments, was $38.037 billion. Net interest expense was $467 million, broadly unchanged from $465 million.
- Current debt was $2.494 billion, including $1.777 billion of senior notes maturing within 12 months. Working capital deficit improved to $2.801 billion from $3.466 billion.
- KMI reported $4.416 billion of available capacity under its $5 billion revolving credit facility and said it was in compliance with required covenants. Management considered cash, operating cash flow and borrowing capacity adequate for day-to-day needs and anticipated obligations.
- Operating cash flow less reported capital expenditures was $267 million; this simple difference is not the company’s DCF measure. Cash used in investing activities was $725 million and cash used in financing activities was $209 million.
Material changes, outlook and notable items
- On April 8, 2018, subsidiary Kinder Morgan Canada (KML) suspended non-essential activity and related spending on the Trans Mountain Expansion Project (TMEP). KML would not commit additional shareholder resources under then-current conditions and sought stakeholder agreements by May 31, 2018; management said proceeding without an agreement would be difficult to conceive. KML did not update project cost or schedule estimates, citing unquantifiable regulatory and construction risk. C$1.135 billion had been spent on development by March 31. Termination could cause significant impairments, foregone capitalized costs and wind-down costs; delay could increase costs.
- The company expected 2018 common dividends of $0.80 per share. The board declared a $0.20-per-share dividend for Q1, payable May 15, 2018. KMI repurchased approximately 13.2 million shares for $250 million during the quarter under its $2 billion buyback authorization.
- For 2018, the company forecast $672 million of sustaining capital expenditures, $2.346 billion of KMI discretionary capital investment and $1.325 billion of KML discretionary capital investment. The KML estimate included approximately $1.215 billion for TMEP and was subject to project uncertainty.
- Revenue adoption of Topic 606 reduced reported Q1 revenue and cost of sales by $146 million each, with no effect on operating income. Therefore, reported revenue comparisons are affected by presentation changes; 2018 revenue without Topic 606 would have been $3.564 billion.
- Legal and regulatory matters include ongoing FERC rate proceedings, TMEP judicial and regulatory challenges, and other commercial and environmental claims. SFPP shippers sought approximately $300 million of refunds and $40 million in annual rate reductions; actual exposure was uncertain. Legal reserves were $404 million and environmental reserves $275 million at quarter-end.
- Management stated there had been no material change in the risk factors from the 2017 Form 10-K. Forward-looking results remain subject to risks, including project approvals and delays, litigation, environmental obligations, commodity and interest-rate exposure, and refinancing needs.
Investor facts to verify
- Whether KML reached an agreement by May 31, 2018 allowing TMEP to proceed, and the resulting project schedule, financing needs and impairment exposure.
- Progress on refinancing or repaying near-term maturities and the trend in total debt, interest expense and available credit capacity.
- Whether operating cash flow and DCF support the anticipated $0.80 annual dividend alongside planned capital spending and share repurchases.
- Developments in material FERC proceedings and other litigation or environmental matters, including potential refunds, reserves and unquantifiable exposures.
- The extent to which Topic 606 presentation changes and the $44 million tax-related equity-investee benefit affect interpretation of year-over-year performance.