Kinder Morgan, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparative figures are for the same periods in 2022. Kinder Morgan owns or operates approximately 82,000 miles of pipelines, 140 terminals, 700 Bcf of natural gas storage capacity and 3.8 Bcf per year of RNG generation capacity.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $3.501 billion | $5.151 billion | $7.389 billion | $9.444 billion |
| Operating income | $1.030 billion | $1.006 billion | $2.224 billion | $2.030 billion |
| Net income attributable to KMI | $586 million | $635 million | $1.265 billion | $1.302 billion |
| Diluted EPS | $0.26 | $0.28 | $0.56 | $0.57 |
| Adjusted Earnings | $540 million | $621 million | $1.215 billion | $1.353 billion |
| DCF | $1.076 billion | $1.176 billion | $2.450 billion | $2.631 billion |
| Adjusted EBITDA | $1.805 billion | $1.819 billion | $3.801 billion | $3.786 billion |
Revenue fell 32% in Q2 and 22% in the first half, principally because lower commodity prices reduced natural gas and product sales; lower costs of sales largely offset the revenue decline. Services revenue increased to $2.045 billion in Q2 from $2.011 billion. Operating income rose despite the lower revenue, while higher net interest expense—up $88 million in Q2 and $200 million in the first half—contributed to lower net income. Management attributed lower Adjusted Earnings and DCF mainly to lower commodity prices and higher interest expense; higher sustaining capital expenditures also reduced DCF.
Natural Gas Pipelines Segment EBDA increased to $1.255 billion in Q2 from $1.134 billion and to $2.750 billion in the first half from $2.318 billion. Terminals EBDA also increased. Products Pipelines and CO2 EBDA declined in both reported periods. The filing cautions that its non-GAAP measures, including DCF and Adjusted EBITDA, are supplemental and not substitutes for GAAP measures.
Cash flow, debt and liquidity
- First-half operating cash flow was $2.883 billion, versus $2.648 billion a year earlier. Investing activities used $1.086 billion; financing activities used $2.071 billion. Cash, cash equivalents and restricted deposits decreased $274 million to $520 million.
- At June 30, cash and cash equivalents were $497 million. Debt was approximately $31.4 billion, including $2.760 billion classified as current. The company had no credit-facility or commercial-paper borrowings and approximately $3.9 billion of credit-facility availability; it reported compliance with required covenants.
- Working capital was negative $2.885 billion. Management said operating cash flows, cash and available borrowing capacity were adequate for day-to-day needs and anticipated obligations.
- Capital expenditures were $1.042 billion in the first half. The company expects 2023 capital investments of $3.116 billion, including $1.028 billion of sustaining and $2.088 billion of expansion investments.
- Dividends paid in the first half were $1.264 billion. The board declared a Q2 dividend of $0.2825 per share, payable August 15, 2023. Management expects 2023 declared dividends of $1.13 per share, 2% above 2022.
Material changes, outlook and notable items
- In January, KMI issued $1.5 billion of 5.20% senior notes due 2033 and used proceeds to repay short-term borrowings, maturing debt and for general corporate purposes. It repaid three senior-note issues at maturity during Q1. First-half share repurchases totaled $317 million.
- A $67 million non-cash impairment of the Double Eagle Pipeline investment was recorded in Q1, reflecting lower expected contract renewal rates. KMI also paid approximately $28.5 million net in connection with the Ruby bankruptcy plan, an amount accrued at year-end 2022.
- The EPA’s Good Neighbor Plan could require more stringent controls on hundreds of pipeline engines. If fully implemented under the assumptions described, KMI estimates compliance costs of $1.5–$1.8 billion, including costs attributable to operated joint ventures, with potential equipment shortages and operational disruption. Costs estimated for states that had not challenged SIP disapprovals were $200–$300 million. KMI challenged the rule and said it would seek to mitigate costs and recover expenditures through regulated rates where available. Estimates are preliminary and outcomes depend on pending litigation and other assumptions.
- Other disclosed matters include the ongoing Portland Harbor cleanup allocation process, where KMI said its share cannot yet be reasonably estimated, and appeals in the Freeport LNG and Gulf LNG disputes. KMI stated it did not expect the ultimate resolution of disclosed legal and environmental matters to have a material adverse effect, while noting that outcomes are uncertain.
- The May 2023 annual goodwill test found fair value above carrying value for each reporting unit; the Terminals unit’s cushion was less than 10%. The Arizona Line 2000 pipeline returned to service in February 2023 after repairs; the incident caused two fatalities and one injury.
Important facts for investors to verify
- Whether Natural Gas Pipelines’ stronger segment results and contracted service revenues can offset weaker commodity-linked earnings in Products Pipelines and CO2.
- Progress and potential financial, operational and rate-recovery effects of the Good Neighbor Plan litigation and compliance requirements.
- Debt maturities, interest expense and exposure to variable rates, including the planned December 2023 expiry of $3.445 billion of variable-to-fixed interest rate contracts.
- Whether forecast 2023 capital investments and the $1.13-per-share dividend remain supported by cash generation and liquidity.
- Renewal outcomes for Double Eagle contracts and developments in material legal and environmental contingencies, including the Portland Harbor allocation.