Kinder Morgan, Inc. — Q2 2021 Form 10-Q
Business context and period. Kinder Morgan owns interests in or operates approximately 83,000 miles of pipelines and 144 terminals across North America. This unaudited filing covers the quarter and six months ended June 30, 2021; comparisons are with the same 2020 periods. Amounts below are in U.S. dollars.
Financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $3.150 billion | $2.560 billion | $8.361 billion | $5.666 billion |
| Operating income (loss) | $(764) million | $(282) million | $1.122 billion | $(239) million |
| Net income (loss) attributable to KMI | $(757) million | $(637) million | $652 million | $(943) million |
| Basic and diluted EPS | $(0.34) | $(0.28) | $0.29 | $(0.42) |
| Adjusted EBITDA (non-GAAP) | $1.670 billion | $1.568 billion | $4.484 billion | $3.416 billion |
| DCF (non-GAAP) | $1.025 billion | $1.001 billion | $3.354 billion | $2.262 billion |
| DCF per share (non-GAAP) | $0.45 | $0.44 | $1.47 | $0.99 |
Q2 revenue rose about 23%, while the first-half increase was driven largely by higher commodity sales and related costs. Q2 included a $1.6 billion non-cash impairment of South Texas gathering and processing assets, reflecting lower expected volumes and rates when contracts renew through 2024. First-half 2021 results also benefited from unusually favorable, largely nonrecurring effects of the February winter storm. DCF and Adjusted EBITDA are company-defined non-GAAP measures and should not be viewed as substitutes for GAAP results.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $3.311 billion, versus $2.232 billion a year earlier. Investing activities used $111 million; financing activities used $2.440 billion. Capital expenditures were $545 million.
- At June 30, cash and cash equivalents were $1.365 billion and restricted deposits were $604 million. The restricted balance included $506 million escrowed for notes and accrued interest repaid July 1.
- Total debt was $32.191 billion excluding debt fair-value adjustments; the balance-sheet debt carrying amount was $33.260 billion. Management’s non-GAAP Net Debt measure was approximately $30.7 billion. Long-term debt outstanding was $30.008 billion excluding fair-value adjustments.
- No revolver or commercial-paper borrowings were outstanding; $81 million of letters of credit left $3.919 billion available on the $4.0 billion credit facility. KMI reported compliance with debt covenants.
- Working capital was negative $776 million, an improvement from negative $1.871 billion at year-end 2020. Management said operating cash flow, cash and revolver capacity were adequate for anticipated requirements through 2021.
- Cash dividends paid in the first half totaled $1.212 billion. The board declared a Q2 dividend of $0.27 per share, payable August 16, 2021.
Changes, outlook and notable events
- First-half adjusted results improved versus 2020, including higher Natural Gas Pipelines and CO2 segment earnings; however, storm-related gains are not expected to represent a normal run rate. Q2 Natural Gas Pipelines adjusted Segment EBDA was $1.064 billion, up from $1.016 billion; Products Pipelines was $293 million, up from $227 million; Terminals was $246 million, up from $229 million; and CO2 was $151 million, down from $156 million.
- KMI expects 2021 dividends of $1.08 per share, 3% above 2020 declared dividends, and approximately $0.8 billion of expansion-project and joint-venture investment excluding acquisitions. The filing cautions that estimates are not guarantees.
- On July 9, after quarter-end, KMI completed the Stagecoach acquisition for approximately $1.228 billion, funded with cash on hand. On July 16, it announced a proposed $310 million Kinetrex Energy acquisition, expected to close in Q3 subject to regulatory approval.
- KMI sold a partial interest in NGPL Holdings in March, receiving $413 million in net proceeds and recording a $206 million pretax gain. It also wrote down a Ruby-related note receivable by $117 million.
- Management cited potential winter-storm-related counterparty, disputed-transaction, regulatory and litigation exposures. Other disclosed matters include ongoing FERC rate proceedings, significant unresolved environmental liabilities, and a Continental Resources claim seeking damages in excess of $225 million. KMI reported legal reserves of $185 million and environmental reserves of $248 million at June 30, and stated that it did not expect these matters to have a material adverse effect; some exposures cannot yet be reasonably estimated.
- Commodity, interest-rate and foreign-exchange risks are managed in part with derivatives. A two-notch credit-rating downgrade could require an estimated $169 million of additional collateral based on June 30 positions.
Most important facts for investors to verify
- Whether South Texas asset contract renewals support the volumes and rates assumed after the $1.6 billion impairment, and whether further impairments arise.
- How much of first-half earnings and cash flow reflects the February winter storm and other nonrecurring items, and how sustainable normalized DCF is.
- Post-quarter liquidity and leverage after the Stagecoach cash acquisition and July 1 debt repayment; also monitor Kinetrex approval, closing, and funding.
- Whether operating cash flow and capital needs support the $1.08 annual dividend expectation and planned 2021 investment.
- Developments in FERC rate cases, environmental matters and other litigation, plus potential derivative collateral needs and counterparty credit exposure.