Kinder Morgan, Inc. — Q2 2016 Form 10-Q
Business context and reporting period. Kinder Morgan reported the quarter and six months ended June 30, 2016. The company owns interests in or operates approximately 84,000 miles of pipelines and 180 terminals, with businesses spanning natural gas pipelines, CO2, terminals, products pipelines and Canada. Financial amounts below are in millions of U.S. dollars, except per-share data.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $3,144 | $3,463 | $6,339 | $7,060 |
| Operating income | $940 | $892 | $1,756 | $1,970 |
| Net income | $375 | $342 | $689 | $761 |
| Net income attributable to KMI | $372 | $333 | $687 | $762 |
| Net income available to common stockholders | $333 | $333 | $609 | $762 |
| Basic/diluted EPS | $0.15 | $0.15 | $0.27 | $0.35 |
| Operating margin (calculated) | 29.9% | 25.8% | 27.7% | 27.9% |
| Segment EBDA | $1,789 | $1,721 | $3,431 | $3,623 |
| DCF (non-GAAP) | $1,050 | $1,095 | $2,283 | $2,337 |
| DCF per common share (non-GAAP) | $0.47 | $0.50 | $1.02 | $1.07 |
Second-quarter operating income and net income increased year over year, but preferred dividends of $39 million left income available to common stockholders unchanged. For the first half, common-stockholder income fell 20%. DCF is a company-defined non-GAAP measure; the filing cautions it is not a substitute for GAAP results and may not be comparable with other companies’ measures.
Cash flow, debt and liquidity
- Six-month operating cash flow was $2,344, down from $2,538. Investing used $1,880, compared with $3,744 in the prior-year period; financing used $518, versus providing $1,058. Cash ended the period at $180, down $49 from year-end 2015.
- Cash capital expenditures were $1,470 for the first half. The company reported $245 of sustaining capital expenditures and $1,581 of discretionary capital expenditures for the period; these latter figures use the company’s capital expenditure classifications.
- Debt principal totaled $41,632 at June 30, 2016, excluding fair-value adjustments. The balance sheet reported $3,419 of current debt and $40,201 of long-term debt, including fair-value adjustments. Current debt was $821 at December 31, 2015.
- The $5.0 billion revolving credit facility had $4,102 of availability, net of borrowings and letters of credit. Working capital was a deficit of $4,096, compared with a $1,241 deficit at year-end; management attributed the deterioration mainly to increased short-term borrowings and current maturities.
- Management stated that cash, operating cash flow and available credit were adequate for anticipated needs. It expected to refinance or repay short-term debt through borrowings, new long-term debt, retained cash or asset-sale proceeds.
Material changes and operating drivers
- Revenue declined 9% in Q2 and 10% for the first half. Natural gas sales and product sales were lower; management cited lower commodity prices and, in certain businesses, reduced volumes. Services revenue increased.
- First-half Segment EBDA fell 5%. CO2 Segment EBDA before certain items declined 21%, reflecting lower commodity prices and volumes. Natural Gas Pipelines EBDA before certain items rose 2% for the first half, supported by Tennessee Gas Pipeline expansion projects and Hiland, but offset by weakness in several gathering and pipeline operations. Terminals EBDA before certain items rose 3%, with growth from marine operations and expansions partly offset by coal-customer bankruptcies. Products Pipelines EBDA before certain items rose 12%, supported by pipeline throughput and splitter operations.
- Interest expense before certain items decreased $20 for the first half, primarily due to lower average debt balances, partly offset by a slightly higher average interest rate.
- The company recorded $257 of non-cash pre-tax impairment charges and disposal losses in the first half, substantially in Q1. These included write-offs associated with the Northeast Energy Direct and Palmetto projects, among other items. The income statement reported a net $231 loss on impairments and disposals for the six months.
- In February, KMI completed a $349 acquisition of 15 BP products terminals and formed a joint venture in which BP owns 25% of 14 contributed terminals.
Outlook, dividends and risks
- KMI expected to declare common dividends of $0.50 per share for 2016, or $0.125 per quarter. The board declared the Q2 dividend of $0.125 per share, payable August 15, 2016. The filing notes dividends are subject to board discretion, financial and liquidity conditions, and other constraints.
- On July 10, 2016, after quarter-end, KMI announced an anticipated sale of a 50% interest in its Southern Natural Gas pipeline system to Southern Company for $1.47 billion. KMI said it intended to use all proceeds to reduce debt. Closing was expected in Q3 or early Q4, subject to approvals and other conditions.
- Management said it was prioritizing higher-return growth projects and did not expect to need capital-market access for growth funding beyond 2016, while noting short-term liquidity would rely primarily on operating cash and borrowings.
- Commodity prices, project execution and customer commitments remain important risks. Management said the Natural Gas Pipelines—Non-Regulated reporting unit’s estimated fair value remained slightly below carrying value; further deterioration in commodity prices, market valuations or cash-flow estimates could lead to impairment.
- Legal and environmental reserves were $490 and $318, respectively, at June 30. Notable matters include ongoing FERC rate proceedings, an Eni arbitration seeking to terminate or change a Gulf LNG terminal-use agreement, and unresolved price-reporting litigation. KMI said the ultimate exposure in some cases could not be estimated. The proposed Portland Harbor cleanup was estimated by the EPA at approximately $750, but KMI said its share could not yet be reasonably estimated. The company settled the Mission Valley Terminal litigation for $20 million plus specified indemnification obligations.
- The filing said there were no material changes to the risk factors in KMI’s 2015 Form 10-K. Forward-looking statements are subject to risks and are not guarantees of performance.
Most important facts for investors to verify
- Whether the announced Southern Natural Gas sale closed as expected, the proceeds received, debt reduction achieved and resulting accounting impact.
- Whether the $0.50 annual common-dividend expectation remained supported by cash generation, debt maturities and liquidity needs.
- Trends in DCF, Segment EBDA and segment performance excluding company-defined “certain items,” especially the sensitivity of CO2 operations to commodity prices.
- Refinancing and repayment plans for the $3,419 of current debt, and the evolution of working-capital deficit and revolving-credit availability.
- Developments in major rate, commercial, environmental and other legal matters, including the Gulf LNG arbitration and the allocation of potential Portland Harbor cleanup costs.