Kinder Morgan, Inc. — Q3 2018 Form 10-Q
Business context and period. Kinder Morgan operates approximately 84,000 miles of pipelines and 152 terminals. This unaudited filing covers the three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. On August 31, 2018, the company completed the sale of its Trans Mountain pipeline system and related Canadian assets.
Key financial results
Amounts are in millions of U.S. dollars, except per-share data.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $3,517 | $3,281 | $10,363 | $10,073 |
| Operating income | $1,515 | $826 | $2,736 | $2,721 |
| Net income | $1,005 | $387 | $1,417 | $1,215 |
| Net income attributable to KMI | $732 | $373 | $1,115 | $1,189 |
| Net income available to common stockholders | $693 | $334 | $998 | $1,072 |
| Diluted earnings per common share | $0.31 | $0.15 | $0.45 | $0.48 |
| Declared common dividend per share | $0.20 | $0.125 | $0.60 | $0.375 |
- Margins and earnings quality: Q3 operating income included a $622 million pre-tax gain on the Trans Mountain sale; the reported operating margin was approximately 43%, versus approximately 25% in Q3 2017, and is not directly representative of recurring operations. Excluding that gain alone, Q3 operating income would have been approximately $893 million. The nine-month period also included substantial impairments, including $600 million for Oklahoma gathering and processing assets, $60 million for terminal assets, and a $270 million impairment of the Gulf LNG equity investment.
- Cash flow: Nine-month operating cash flow was $3.375 billion, versus $3.307 billion. Investing activities provided $686 million, including $3.003 billion of net Trans Mountain sale proceeds; capital expenditures were $2.206 billion. Financing activities used $853 million. Cash and cash equivalents were $3.459 billion at September 30, versus $264 million at year-end 2017.
- Debt and liquidity: Principal debt was $37.062 billion, excluding debt fair-value adjustments; balance-sheet debt carrying value was $37.605 billion. Current debt was $2.337 billion. KMI had $4.019 billion available under its $5 billion credit facility and reported covenant compliance. Working capital was a $277 million surplus, compared with a $3.466 billion deficit at year-end.
- Non-GAAP cash measure: Distributable cash flow (DCF) was $1.093 billion, or $0.49 per share, in Q3, versus $1.055 billion, or $0.47, a year earlier. Nine-month DCF was $3.457 billion, or $1.56 per share, versus $3.292 billion, or $1.47. DCF is a non-GAAP measure and should be considered alongside GAAP results.
Material changes versus prior periods
- Q3 revenue rose about 7%, while nine-month revenue rose about 3%. Adoption of the new revenue-recognition standard reduced reported nine-month revenue by $441 million and cost of sales by the same amount, with no operating-income effect.
- Q3 net income and common-stockholder income rose sharply, primarily reflecting the Trans Mountain sale gain. For the first nine months, net income increased, but income available to common stockholders declined 7% and diluted EPS fell from $0.48 to $0.45.
- Nine-month Segment EBDA before certain items increased in Natural Gas Pipelines, CO2, Terminals and Products Pipelines. Performance varied by business; the reported nine-month Segment EBDA total was nearly unchanged year over year. These segment measures are non-GAAP.
- The sale produced $3.4 billion of cash consideration (C$4.43 billion) and a $622 million pre-tax gain. KMI’s Canadian segment will have no results of operations prospectively. The sale proceeds also contributed to the large year-over-year increase in cash.
Outlook, management commentary and risks
- Management expected 2018 common dividends of $0.80 per share. The board declared a $0.20-per-share dividend for Q3, payable November 15, 2018.
- KMI expected its approximately 70% share of KML’s after-tax Trans Mountain sale proceeds to be about $2 billion and intended to use its distribution to reduce debt. The proposed KML return of capital required shareholder approval, with a vote scheduled for November 29, 2018 and an anticipated payment date of January 3, 2019.
- Management reported that cash, operating cash flow and available credit were adequate for anticipated needs, and did not expect to need equity-market funding for growth projects in the foreseeable future. Planned 2018 capital expenditures included $650 million of sustaining capital, $2.458 billion of KMI discretionary investment and $428 million of KML discretionary investment; KML’s figure excludes TMEP investment.
- Regulatory and litigation exposure remains relevant. SFPP shippers sought approximately $320 million in refunds and $30 million in annual rate reductions; management said it believed its arguments were meritorious and estimated potential reductions and refunds would be substantially lower than those sought. FERC implementation of tax-reform changes could also affect regulated pipeline rates.
- Environmental and other contingencies include a $270 million environmental reserve. The company stated that the ultimate resolution of disclosed matters was not expected to have a material adverse effect, while noting that some exposures—such as its share of Portland Harbor cleanup costs—could not yet be reasonably estimated.
- Management identified potential further impairment risk if asset cash-flow estimates or market conditions deteriorate. It recorded material impairments in 2018, including the Gulf LNG impairment following an arbitration ruling affecting a customer contract.
- The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Management said there had been no material change in the risk factors disclosed in its 2017 Form 10-K.
Important facts for investors to verify
- Whether KML shareholders approved the proposed return of capital and reverse stock split, the final distribution amount and timing, and how much KMI ultimately used to repay debt.
- Underlying operating performance apart from the Trans Mountain gain, impairments, derivative effects and other items excluded from management’s non-GAAP measures.
- Debt levels, refinancing requirements and interest-rate sensitivity; approximately 32% of debt was subject to variable rates at September 30, 2018.
- Outcomes and potential financial effects of FERC rate proceedings, environmental matters and other litigation, including exposures not currently estimable.
- Whether the expected $0.80-per-share 2018 dividend and planned capital spending remained supportable by subsequent operating cash flow and liquidity.