Kinder Morgan, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Kinder Morgan operates a large North American energy infrastructure network, including approximately 84,000 miles of pipelines and 180 terminals. Results reflect the November 2014 merger in which KMI acquired the public interests in KMP, EPB and KMR; consequently, year-over-year comparisons are not fully comparable.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $3.597 billion | $4.047 billion | Down 11% |
| Operating income | $1.078 billion | $1.147 billion | Down 6% |
| Net income | $419 million | $601 million | Down 30% |
| Net income attributable to KMI | $429 million | $287 million | Up 49% |
| Diluted EPS | $0.20 | $0.28 | Down |
| Operating cash flow | $1.256 billion | $1.118 billion | Up $138 million |
| Cash and equivalents | $259 million | $315 million at year-end | Down $56 million |
| Total debt, including fair-value adjustments | $45.259 billion | $42.963 billion at year-end | Up |
Operating margin was approximately 30.0%, versus 28.3% a year earlier; net margin was approximately 11.6%, versus 14.9%. The difference between lower consolidated net income and higher KMI-attributable income principally reflects the post-merger reduction in earnings allocated to noncontrolling interests. Weighted-average shares also more than doubled, affecting per-share comparability.
Operating cash flow less capital expenditures was approximately $359 million, compared with $273 million in Q1 2014. Investing cash outflow was $2.775 billion, including $1.859 billion for acquisitions and $897 million in capital expenditures. Financing provided $1.468 billion, including $1.626 billion from share issuance and $962 million of cash dividends.
At March 31, current assets were $3.289 billion and current liabilities were $6.784 billion, a $3.495 billion working-capital deficit. The company reported $3.435 billion of current debt and $41.824 billion of long-term debt on the balance sheet. It had $896 million outstanding under its revolving credit facility and commercial-paper program, plus $128 million of letters of credit; reported facility availability was $2.976 billion.
Material changes and operating trends
- Revenue fell mainly because lower commodity prices reduced natural gas sales and product sales; these revenue declines were partly offset by lower associated costs.
- Segment earnings before DD&A were broadly flat at $1.902 billion. Terminals increased 29% to $270 million and Products Pipelines increased 18% to $246 million; Natural Gas Pipelines declined 5% to $1.015 billion and CO2 declined 7% to $336 million.
- CO2 segment EBDA before certain items decreased 23% to $281 million, primarily due to lower realized oil and NGL prices. Products Pipelines benefited from higher crude and condensate throughput; Terminals benefited from tanker acquisitions and expansion projects.
- Q1 acquisitions included Hiland Partners for approximately $3.120 billion in aggregate consideration, including assumed debt and liabilities, and Vopak terminal assets for approximately $158 million.
- Principal debt increased during the quarter, with acquisition funding and investment needs contributing to higher interest expense. Capital spending for 2015 was expected to total $4.793 billion: $614 million sustaining and $4.179 billion discretionary.
Outlook, risks and unusual items
- KMI expected to declare $2.00 per share in 2015 dividends, approximately 15% above 2014’s $1.74. The board declared a $0.48-per-share dividend for Q1, payable May 15, 2015. Dividends remain subject to board discretion and financial, liquidity, legal and other constraints.
- The company recorded a $77 million noncash impairment charge tied to gas gathering and processing assets and equity investments amid low commodity prices and customer actions. Management warned that further deterioration could trigger additional impairments.
- After the Q1 earnings release, a court opinion in Brinckerhoff II found an EPB general partner liable for breach of contract and assessed $171 million in damages related to a 2010 transaction. KMI disputed the decision and stated it was evaluating options. The 10-Q reflects a $60 million noncash estimated legal-exposure adjustment, including $37 million in G&A and $23 million in interest expense.
- Legal and environmental exposures include pending pipeline rate and right-of-way matters, commercial litigation and environmental remediation. Reserves at March 31 were $518 million for legal matters and $332 million for environmental liabilities. Management said it did not expect resolution of disclosed matters to materially adversely affect the company, while noting uncertainty around outcomes.
- Commodity prices, interest rates and foreign exchange are managed in part through derivatives. Management reported no material change in market-risk exposures from year-end; additional collateral requirements could arise under certain credit-rating downgrades.
- Management stated that cash, operating cash flow, borrowing capacity and access to financing were adequate for anticipated needs, while noting that expansion spending, acquisitions and debt payments may be funded with borrowings, equity issuance or asset-sale proceeds. Forward-looking statements are subject to risks and actual results may differ.
Important facts for investors to verify
- How much of reported earnings, cash generation and dividend capacity is recurring, given merger-related comparability changes and non-GAAP DCF adjustments?
- Whether the projected $2.00 annual dividend and planned capital program remain supportable alongside the working-capital deficit, debt maturities and financing requirements.
- How the Hiland acquisition performs and whether low commodity prices lead to further impairments or weaker gathering and processing results.
- The eventual outcome and financial exposure from Brinckerhoff II and the other significant legal, regulatory and environmental proceedings.
- How much reported segment performance depends on commodity prices, derivative gains, acquisition contributions and throughput growth.