Kinder Morgan, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise. The consolidated results include Kinder Morgan’s controlled subsidiaries, including KMP and EPB, and therefore include substantial noncontrolling interests.
Business context and reporting period
Kinder Morgan operates North American pipelines and terminals, with businesses spanning natural gas, refined products, crude oil, CO2 and bulk storage. Comparability with 2012 is affected by the May 2012 El Paso acquisition, the May 1, 2013 Copano acquisition, and the November 2012 disposal of certain FTC-related natural gas pipeline assets. KMP’s acquisition of Copano included the remaining 50% interest in Eagle Ford.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $3,382 | $2,167 | $6,442 | $4,024 |
| Operating income | $775 | $260 | $1,795 | $776 |
| Income from continuing operations | $781 | $37 | $1,439 | $342 |
| Net income (loss) attributable to KMI | $277 | $(126) | $569 | $(105) |
| Class P diluted EPS | $0.27 | $(0.15) | $0.55 | $(0.14) |
| Declared dividend per share | $0.40 | $0.35 | $0.78 | $0.67 |
Operating margin was approximately 22.9% in Q2 2013 versus 12.0% in Q2 2012, and 27.9% versus 19.3% for the six-month periods. Revenue and operating-income growth reflect, in significant part, acquired businesses and a larger consolidated footprint; the periods are not directly comparable on a same-business basis.
Results included a $558 million non-cash gain from remeasuring KMP’s previously held Eagle Ford interest upon the Copano acquisition. First-half 2013 also included a $225 million pre-tax gain on the Express pipeline investment sale, with related tax expense of $84 million. In contrast, 2012 included substantial losses on the remeasurement and disposal of the FTC pipeline group, presented as discontinued operations. Q2 2013 operating results also included $162 million of expense for Products Pipelines rate-case liability adjustments.
- Cash flow: First-half cash from operations was $1,717, up from $1,013. Investing used $1,100, including $1,345 of capital expenditures; financing used $294. Cash and cash equivalents ended June at $1,017, compared with $714 at year-end 2012.
- Liquidity: Working capital deficit was $3,561, versus $1,554 at year-end. Available borrowing capacity was approximately $319 at KMI, $1,127 at KMP and $990 at EPB. Management said cash and remaining borrowing capacity were adequate for day-to-day requirements and anticipated obligations.
- Debt: Consolidated debt carrying value, including fair-value adjustments, was $35,546. Principal debt excluding those adjustments was $30,586, including $3,964 classified as current. KMP had $1,369 of commercial paper outstanding. Total interest expense, net, was $427 in Q2 and $829 for the first half, versus $291 and $470, respectively, in 2012.
- Cash available for dividends: Management-defined cash available was $294 in Q2 versus $307 a year earlier, and $807 for the first half versus $610. Per-share amounts were $0.28 versus $0.36 for Q2 and $0.78 versus $0.79 for the first half. This measure is not GAAP net income or operating cash flow.
Changes, outlook, commentary and risks
- Management expected 2013 KMI dividends of $1.60 per share, a 14% increase from 2012 and above the original $1.57 budget. It projected an 18% increase in 2013 cash available to pay dividends versus 2012; these are forward-looking estimates, not guarantees. The board declared a Q2 dividend of $0.40 per share, payable August 15, 2013.
- KMP expected 2013 distributions of $5.33 per unit, up 7% from 2012, and estimated Copano would contribute about $0.10 per unit of accretion annually beginning in 2014 for at least five years. KMP also expected its average 2013 WTI price to be about $96.36 per barrel, versus a budget assumption of $91.68; management estimated each $1 WTI price change would affect KMP CO2 segment cash flow by about $6 million.
- The company forecast 2013 investment of more than $4 billion for its expansion program, excluding Copano. Its schedule listed $448 million of sustaining and $4,295 million of discretionary capital expenditures for the year.
- Material exposures include ongoing FERC and California rate proceedings, pipeline integrity and environmental obligations, commodity-price and interest-rate risks, and access to debt and equity markets. Legal reserves were $612 million at June 30, up from $425 million at year-end; environmental reserves were $402 million, down from $421 million.
- Among disclosed proceedings, shippers sought approximately $375 million in California rate-case reparations and $30 million in annual rate reductions; the filing says actual outcomes remain subject to proceedings. A new Louisiana coastal-loss lawsuit was filed in July 2013 and seeks unspecified damages and injunctive relief. Management stated it did not expect the disclosed contingencies, based on its assessments and reserves, to have a material adverse effect, while acknowledging outcomes cannot be predicted with certainty.
- Management reported no goodwill impairment in its May 2013 annual test and no subsequent impairment indicator. It also disclosed corrections to prior condensed consolidating information; the company said these were not material to consolidated financial statements and did not affect consolidated results, cash flows, financial position or debt covenants.
Important facts for investors to verify
- How much of reported earnings and segment growth is recurring versus acquisition-related or driven by the Eagle Ford remeasurement and Express sale gains.
- Whether operating cash generation and the company’s non-GAAP cash-available measure support the $1.60 annual dividend outlook, given the working-capital deficit and cash tax timing.
- Debt maturities, commercial-paper refinancing needs, covenant compliance and the availability and cost of external financing.
- Developments and reserve adequacy in pipeline rate cases, environmental matters and the newly filed Louisiana litigation.
- Copano integration, projected distribution accretion, capital-spending execution and the sensitivities of cash flows to commodity prices.