Kinder Morgan, Inc. — 2017 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2017. Kinder Morgan owns or operates approximately 85,000 miles of pipelines and 152 terminals across North America, with businesses in Natural Gas Pipelines, CO₂, Terminals, Products Pipelines and Kinder Morgan Canada. Its strategy emphasizes fee-based transportation and storage, expansion of existing infrastructure, cost control and shareholder returns.
In May 2017, subsidiary Kinder Morgan Canada Limited (KML) completed an IPO that sold the public an approximately 30% interest in the Canadian business. KMI retained control and continues to consolidate KML; IPO proceeds of approximately $1.245 billion were used to reduce debt.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $13.705 billion | $13.058 billion |
| Operating income | $3.544 billion | $3.572 billion |
| Net income | $223 million | $721 million |
| Net income available to common stockholders | $27 million | $552 million |
| Basic and diluted EPS | $0.01 | $0.25 |
| Cash provided by operating activities | $4.601 billion | $4.795 billion |
| Distributable cash flow (non-GAAP) | $4.482 billion | $4.511 billion |
| Capital expenditures | $3.188 billion | $2.882 billion |
| Cash and cash equivalents at year-end | $264 million | $684 million |
| Debt principal outstanding | $36.916 billion | $38.901 billion |
Revenue increased 5.0%, while operating income was broadly flat. Net income available to common stockholders fell sharply, chiefly reflecting the tax-reform charge described below. Fourth-quarter 2017 revenue was $3.632 billion; net loss available to common stockholders was $1.045 billion, or $0.47 per share.
Operating cash flow declined 4% year over year. KMI reported a $3.466 billion working-capital deficit at year-end, compared with $2.695 billion in 2016. It had $4.528 billion of availability under its $5.0 billion revolving credit facility; short-term debt was $2.828 billion. Approximately $10.4 billion of debt was exposed to variable interest rates, including debt converted through swaps. The company reported compliance with its debt covenants and investment-grade ratings with stable outlooks.
Segment EBDA, a company-defined non-GAAP measure, was $6.975 billion versus $6.364 billion. Segment results before certain items showed Natural Gas Pipelines down to $3.879 billion from $4.036 billion; CO₂ down to $887 million from $919 million; Terminals up to $1.214 billion from $1.169 billion; Products Pipelines up to $1.193 billion from $1.180 billion; and Kinder Morgan Canada reported $186 million versus $181 million. KMI cautions that non-GAAP measures are not substitutes for GAAP results.
Material changes versus the prior year
- The Tax Cuts and Jobs Act prompted an estimated $1.4 billion non-cash fourth-quarter charge to remeasure deferred tax assets at the lower 21% federal tax rate. Income-tax expense rose to $1.938 billion from $917 million. Management said the law is expected to be moderately positive over time, including through lower tax rates and accelerated deductions for capital spending at many U.S. business units; the estimate remains provisional.
- DCF was nearly flat year over year, at $4.482 billion versus $4.511 billion. The declared common dividend remained $0.50 per share for 2017.
- Debt principal declined by approximately $2.0 billion. KMI used KML IPO proceeds to pay down debt, and issued $1.25 billion of 2023 notes, primarily to refinance maturing or higher-cost borrowings.
- Natural Gas Pipelines EBDA before certain items declined, notably following the 2016 sale of a 50% interest in Southern Natural Gas (SNG), and due to lower CIG tariff rates. Growth at TGP and other assets partly offset these declines. Terminals benefited from tanker deliveries and expansion projects; CO₂ results remained pressured by lower production and commodity prices.
- Hurricane Harvey disrupted Gulf Coast operations; Terminals recorded $21 million of hurricane-related repair expense, and KMI reported $27 million of repair costs for assets near the Texas Gulf Coast as of year-end.
Outlook, risks and contingencies
- For 2018, management expected approximately $4.57 billion of DCF, $0.80 per common share in dividends (60% above 2017), and $2.2 billion of KMI discretionary investment. KMI said it expected to fund discretionary spending from internally generated cash and not need equity-market access during 2018. The board authorized a $2 billion share-repurchase program; approximately $500 million of shares had been repurchased through January 2018.
- Management also outlined a path to dividends of $1.00 per share in 2019 and $1.25 in 2020. These are expectations, not guarantees, and depend on cash generation, financing needs, business conditions and board decisions.
- KMI’s 2018 budget assumed average WTI crude oil of $56.50 per barrel and Henry Hub natural gas of $3.00 per MMBtu. Management estimated each $1 change in average WTI would affect DCF by about $7 million, and each $0.10/MMBtu change in gas by about $1 million. Most cash generation is supported by multi-year, fee-based contracts, but CO₂ and certain midstream activities retain commodity exposure.
- The Trans Mountain Expansion Project (TMEP) has an estimated cost of C$7.4 billion and was supported by long-term shipper commitments. By year-end 2017, C$930 million had been spent, but numerous permits and approvals remained outstanding and legal challenges were pending. KML said permitting uncertainty could delay completion by a year, to December 2020; costs and timing could change, and the project could be materially affected by court or regulatory outcomes.
- Environmental reserves were $279 million, the low end of an estimated range of $279 million to $443 million. The legal reserve was $350 million. Material uncertainties include environmental remediation, pipeline integrity and safety costs, regulatory rate challenges, customer and counterparty credit risk, commodity-price movements, interest rates, foreign exchange, severe weather and project execution. SFPP shippers sought approximately $230 million in refunds and $40 million in annual rate reductions; outcomes were unresolved.
- The audited financial statements received an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective as of December 31, 2017.
Important facts for investors to verify
- Track whether the provisional tax-reform accounting charge is revised and how the tax law affects cash taxes and regulated pipeline rates.
- Compare actual DCF, operating cash flow and sustaining capital spending with 2018 expectations; distinguish DCF from GAAP earnings and cash flow.
- Monitor dividend and buyback execution alongside debt reduction, upcoming maturities, variable-rate exposure and covenant headroom.
- Confirm TMEP permitting, judicial-review outcomes, updated cost estimates, financing and revised in-service timing.
- Review developments in SFPP rate proceedings, environmental reserves and other disclosed legal and remediation contingencies.