KINDER MORGAN, INC. quarterly report, Q1 FY2013

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Business context and reporting period

Kinder Morgan, Inc. (KMI) filed this unaudited Form 10-Q for the three months ended March 31, 2013. KMI owns or operates approximately 73,000 miles of pipelines and 180 terminals, and consolidates Kinder Morgan Energy Partners (KMP) and El Paso Pipeline Partners (EPB). Results are not directly comparable with Q1 2012: KMI acquired El Paso Corporation in May 2012, adding substantial natural-gas operations to the current-period results. The statements also reflect common-control accounting for assets transferred to KMP in March 2013.

Financial performance and position

Unless otherwise stated, amounts are U.S. dollars in millions.

  • Revenue: $3,060, up 65% from $1,857. Service revenue was $1,561 versus $761; natural gas sales were $737 versus $584; product sales and other were $762 versus $512.
  • Profit: Operating income was $1,020, up from $516; operating margin was approximately 33% versus 28%. Income from continuing operations was $658 versus $305. Net income attributable to KMI was $292, compared with $21; basic and diluted Class P EPS was $0.28 versus $0.03.
  • Cash flow: Operating cash flow was $767 versus $560. Investing activities used $116 versus $365, including $598 of capital expenditures versus $354. Financing activities used $253 versus $119. Cash increased $392 to $1,106.
  • Liquidity: Cash comprised $164 at KMI and $942 at KMP and EPB; the filing states KMI does not have rights to subsidiary cash except as permitted under their partnership agreements. Available revolving-credit capacity was approximately $399 at KMI, $1,395 at KMP, and $990 at EPB. Working capital was negative $1,896.
  • Debt: Debt carrying value, excluding $2,449 of fair-value adjustments, was $31,941, versus $31,810 at year-end. Reported current and long-term debt, including fair-value adjustments and preferred interest, totaled $34,390. Approximately 42% of KMI debt and 35% of KMP debt was variable-rate or swapped to variable-rate.
  • Dividends: KMI declared $0.38 per share, up from $0.32. Management’s cash-available-to-pay-dividends measure was $513 ($0.49 per diluted share), versus $303 ($0.43); this is a company-defined measure, not operating cash flow.

Material changes versus the prior comparable period

  • Segment earnings before depreciation, depletion and amortization and excess-cost amortization (EBDA) increased 86% to $1,806. Natural Gas Pipelines EBDA rose to $896 from $227, primarily reflecting the El Paso acquisition. Products Pipelines EBDA increased to $185 from $174; CO2 EBDA was $342 versus $334; Terminals remained $186.
  • Kinder Morgan Canada segment EBDA was $193 versus $50, substantially due to a $225 pretax gain on KMP’s sale of its Express pipeline investments. The gain added $141 after tax to segment EBDA; the sale generated $403 cash proceeds.
  • Net income attributable to KMI also benefited from the absence of the prior-year FTC pipeline disposal-group remeasurement loss. Q1 2012 included a $428 after-tax loss on remeasurement; Q1 2013 included a further $2 loss on final sale adjustments.
  • Interest expense rose to $402 from $179, reflecting acquired and increased borrowings. Income tax expense increased to $279 from $96; the effective tax rate was 30% versus 24%.

Outlook, risks and unusual items

  • Management expected 2013 KMI dividends of $1.57 per share, a 12% increase over 2012 declared dividends, subject to cash receipts, board decisions, liquidity needs and other constraints. KMI’s ability to pay dividends depends substantially on distributions from KMP and EPB.
  • KMP expected 2013 distributions of $5.28 per unit, up 6% from 2012, and expected the Copano acquisition to be modestly accretive in 2013 and about $0.10 per unit accretive annually for at least five years beginning in 2014. KMP completed its approximately $5 billion Copano acquisition on May 1, 2013, after quarter-end. EPB expected 2013 distributions of $2.55 per unit.
  • Forecast 2013 capital expenditures were $442 sustaining and $2,968 discretionary. Management said cash and available borrowing capacity were adequate for day-to-day needs, but noted that access to debt and equity markets and future operating performance affect financing and capital plans. KMP’s $2.7 billion revolving credit facility, replacing its $2.2 billion facility, was entered into May 1, 2013.
  • Commodity prices, interest rates, counterparty credit, pipeline integrity and regulation are key exposures. KMP estimated that each $1 change in average WTI crude price would affect CO2 segment cash flow by about $6 annually. Management reported no material change in market-risk exposures from year-end.
  • Legal and regulatory matters include FERC and California rate cases; KMP estimated shippers sought approximately $100 in FERC refunds and $20 annual rate reductions, and approximately $375 in California reparations and $30 annual rate reductions. Recorded legal and litigation reserves were $449; environmental reserves were $385. The company cautioned that actual outcomes and timing remain uncertain.
  • Other notable matters include a proposed $300,000 Colorado regulatory penalty; a Los Angeles terminal remediation settlement capped at $15; a CERCLA claim seeking up to $175 against approximately 70 defendants; and an appeal reinstating natural-gas price-reporting litigation in which damages exceeding $140 were alleged against all defendants. KMI said it could not currently determine its exposure in the latter matter. KMI also indemnified KMP for approximately $5.9 billion of debt and EPB for $470, payable only if the relevant assets cannot meet the obligations.
  • Unusual first-quarter items include the Express gain, prior-year FTC disposal loss, and warrant repurchases of $80. KMI reported 422.96 million warrants outstanding at quarter-end, exercisable at $40 per share through May 25, 2017.

Important facts for investors to verify

  1. Separate acquired El Paso contributions and accounting changes from underlying year-over-year operating growth.
  2. Assess recurring cash generation and dividend coverage independently of the Express gain and the company-defined cash-available measure.
  3. Review debt maturities, variable-rate exposure, subsidiary-level cash restrictions, refinancing needs and credit-facility availability.
  4. Track delivery of the 2013 dividend and distribution outlook, Copano’s realized accretion, and the planned capital-spending program.
  5. Monitor rate-case, environmental, pipeline-integrity and other litigation outcomes against recorded reserves and potential claims.