Kinder Morgan, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012, compared with the three months ended March 31, 2011. Consolidated results include Kinder Morgan Energy Partners (KMP) and other consolidated entities; the filing’s 2011 EPS discussion separately notes that KMI became public in February 2011.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $1.857 billion | $1.932 billion |
| Operating income | $516 million | $365 million |
| Income from continuing operations | $305 million | $150 million |
| Net income (loss) attributable to KMI | $21 million | $155 million |
| Operating cash flow | $560 million | $483 million |
| Capital expenditures | $354 million | $270 million |
| Declared dividends per share | $0.32 | $0.14 |
- Operating margin was approximately 27.8%, versus 18.9% in the prior-year quarter, based on reported revenue and operating income.
- Consolidated net loss was $73 million, versus net income of $201 million. The difference from KMI-attributable income reflects noncontrolling interests. Discontinued operations included $50 million of after-tax operating income but a $428 million after-tax loss on remeasurement of the FTC-related pipeline disposal group, producing a $378 million net discontinued-operations loss.
- Revenue declined about 4%, while operating income increased. Natural gas sales revenue fell $219 million; services revenue rose $20 million and product sales and other revenue rose $124 million. Management reported total segment earnings before depreciation, depletion and amortization (EBDA) of $971 million, up 15%. Excluding specified items and discontinued-operations earnings, management cited an 18% increase, led by CO2, Natural Gas Pipelines and Terminals.
- Segment highlights: CO2 EBDA increased $68 million to $334 million, Natural Gas Pipelines continuing-operations EBDA rose $56 million to $222 million, and Terminals EBDA rose $12 million to $186 million. Products Pipelines EBDA declined $6 million to $174 million.
Cash, debt and liquidity
- Cash and cash equivalents were $494 million at quarter-end. Operating cash flow was $560 million; investing cash outflow was $365 million and financing cash outflow was $119 million. Capital expenditures were $354 million, including $44 million of sustaining expenditures.
- Reported total debt carrying value was $16.330 billion, excluding the value of interest-rate swaps; estimated fair value was $17.910 billion. Debt increased from $16.104 billion at December 31, 2011. Interest expense was $184 million, compared with $174 million.
- Short-term debt was $2.126 billion, including KMI notes of $840 million due September 2012, KMP notes of $500 million due September 2012, and KMP commercial paper of $358 million. The filing says these maturities were expected to be refinanced through debt, equity, commercial paper and/or revolver borrowings.
- Available borrowing capacity at March 31 was approximately $556 million under KMI’s revolver and $1.616 billion under KMP’s revolver. Working capital was a $194 million surplus, compared with a $2.866 billion deficit at year-end; the improvement was substantially affected by classifying the disposal group’s assets as held for sale.
- KMI reported $303 million of cash available to pay dividends, compared with $267 million a year earlier. This is a company-defined measure, not GAAP cash flow.
Material developments, outlook and risks
- El Paso acquisition and required divestiture: KMI and El Paso shareholder approvals were obtained in March. On May 1, 2012, the FTC accepted a settlement permitting the acquisition to proceed, subject to divestiture of specified KMP natural gas pipelines, processing assets and its 50% Rockies Express interest within 180 days after closing. The filing expected the merger to close by the end of May and the divestiture in Q3 2012. The $428 million impairment reflects estimated fair value; the ultimate sale price was uncertain.
- Acquisition financing facilities agreed in February include a $6.8 billion 364-day facility and a $5.0 billion three-year term loan, effective upon completion of the acquisition. The filing notes that acquisition-related leverage could constrain KMP’s ability to upstream cash; Moody’s had changed KMP’s outlook to negative.
- KMI expected to declare dividends of at least $1.35 per share for 2012, a 13% increase over its stated 2011 annual dividend, excluding the effect of the El Paso acquisition. KMP expected 2012 distributions of $4.98 per unit, up 8% from 2011. Management cautioned that the dividend policy may leave limited retained cash.
- KMP forecast approximately $1.9 billion for its 2012 expansion program. A proposed Trans Mountain expansion was estimated at approximately $5 billion, with construction expected to begin in 2015 or 2016, subject to regulatory approval.
- Key operating exposures include commodity-price and interest-rate movements, pipeline demand and volumes, regulatory tariffs, customer credit, access to capital markets, acquisition integration and execution, and environmental or operational incidents. Approximately 34% of KMI debt and 47% of KMP debt was subject to variable rates, including debt converted through swaps.
- Material contingencies include regulatory rate cases and environmental matters. Recorded legal, transportation-rate and other litigation reserves were $333 million; environmental reserves were $79 million. KMP disclosed substantial asserted claims in California CPUC proceedings, while emphasizing that it believes the eventual amounts should be considerably lower. The filing also describes pipeline-release investigations and multiple environmental claims.
- Management said liquidity was adequate and disclosure controls were effective. Interim results are not necessarily indicative of full-year results.
Investor verification points
- Confirm the eventual El Paso closing, acquisition funding and leverage, and the terms, timing and proceeds of the FTC-required divestiture.
- Assess whether KMP’s planned asset drop-downs offset the earnings and cash flow lost through divestiture, and whether the expected distribution neutrality is achieved.
- Track refinancing of the 2012 maturities, revolver availability, KMP credit ratings and the effect of acquisition leverage on cash upstreaming to KMI.
- Reconcile the $428 million disposal-group impairment with the final sale price and subsequent reported discontinued-operation results.
- Monitor KMI dividends, KMP distributions and the assumptions behind management’s 2012 outlook, along with significant rate-case, environmental and litigation developments.