Kinder Morgan, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. Kinder Morgan operates or owns interests in approximately 83,000 miles of pipelines and 147 terminals across North America. This unaudited report covers the quarter and six months ended June 30, 2020, compared with the same 2019 periods. COVID-19-related energy demand declines and lower commodity prices affected results; the December 2019 sale of KML and the U.S. Cochin Pipeline also reduced year-over-year activity.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $2.560 billion | $3.214 billion | $5.666 billion | $6.643 billion |
| Net income (loss) attributable to KMI | $(637) million | $518 million | $(943) million | $1.074 billion |
| Diluted earnings (loss) per share | $(0.28) | $0.23 | $(0.42) | $0.47 |
| Adjusted EBITDA | $1.568 billion | $1.817 billion | $3.416 billion | $3.764 billion |
| DCF | $1.001 billion | $1.128 billion | $2.262 billion | $2.499 billion |
| DCF per common share | $0.44 | $0.50 | $0.99 | $1.10 |
Profit and unusual items. Q2 operating loss was $282 million, versus operating income of $973 million a year earlier. Results include a $1.0 billion non-cash goodwill impairment in Natural Gas Pipelines Non-Regulated. First-half pre-tax impairment and divestiture losses were $1.976 billion, including $1.6 billion of goodwill impairments and $350 million of CO₂ long-lived-asset impairments. Excluding specified items, adjusted earnings attributable to KMI were $381 million in Q2 and $922 million in the first half; these are non-GAAP measures.
Cash flow and capital spending. First-half operating cash flow was $2.232 billion, up from $2.098 billion. Investing activities used $241 million, versus $1.795 billion in 2019, reflecting asset-sale proceeds and lower investment contributions and capital expenditures. Cash capital expenditures were $963 million. Financing activities used $1.649 billion, including $1.166 billion of common dividends. Cash and cash equivalents were $526 million at June 30, up from $185 million at year-end.
Margins and segment trends. The filing does not present a conventional consolidated operating-margin measure. Adjusted Segment EBDA fell 68% to $599 million in Q2. Adjusted EBDA decreased across Products Pipelines ($227 million, down 26%), Terminals ($229 million, down 21%) and CO₂ ($156 million, down 15%). Natural Gas Pipelines reported a GAAP segment loss due primarily to the $1.0 billion impairment; adjusted Segment EBDA was $1.016 billion, down 5%. Lower refined-product volumes, including gasoline and jet fuel, weighed on Products Pipelines; COVID-related demand weakness and the KML sale affected other segments.
Balance sheet, debt and liquidity
- Total debt principal was $32.982 billion, excluding debt fair-value adjustments; the balance sheet reported $3.006 billion current debt and $31.441 billion long-term debt including fair-value adjustments.
- Cash was $526 million. The $4.0 billion revolving credit facility had no borrowings and $3.918 billion available after letters of credit. KMI reported compliance with required covenants.
- Working capital was negative $2.712 billion, compared with a deficit of $1.862 billion at December 31, 2019. Management noted that current liabilities include debt that may be refinanced or paid using operating cash flow.
- Net debt-to-Adjusted EBITDA was 4.5x at June 30. Approximately 17% of principal debt was subject to variable interest rates.
- The board declared a quarterly dividend of $0.2625 per share, or $1.05 annualized. The declaration was a 5% year-over-year increase, below the previously budgeted 25% increase.
Outlook, risks and contingencies
2020 outlook. Against its original budget of approximately $5.1 billion DCF and $7.6 billion Adjusted EBITDA, KMI expected both measures to fall short by slightly more than 10% and 8%, respectively. It expected year-end net debt-to-Adjusted EBITDA of approximately 4.7x. Planned expansion projects and joint-venture contributions were reduced by approximately $660 million from the $2.4 billion budget; management said this improved DCF less expansion capital spending by more than $100 million versus budget. Management expected 2020 dividends and discretionary spending to be funded from internally generated cash flow and anticipated $1.05 per share in 2020 dividends.
Management emphasized uncertainty over the duration and severity of the pandemic and its effects on energy demand, commodity prices, customer volumes, counterparties and cash flow. Further impairments remain possible if asset values or expected demand deteriorate. The filing also identifies counterparty credit risk, pipeline safety and environmental exposure, and regulatory rate matters. KMI reported a $221 million legal reserve and $259 million environmental reserve at June 30.
Notable disclosed matters include ongoing SFPP rate proceedings, in which shippers seek approximately $425 million in refunds and $50 million of annual rate reductions; a Hiland Partners dispute with claimed damages exceeding $225 million; and Gulf LNG customer disputes. KMI stated that some environmental liabilities, including potential Portland Harbor and natural-resource-damage exposure, could not yet be reasonably estimated. Management believes the ultimate resolution of disclosed matters will not materially harm the business, but outcomes are uncertain.
Important facts for investors to verify
- Whether energy volumes, customer demand and commodity prices recover sufficiently to meet the revised 2020 DCF and Adjusted EBITDA outlook.
- Whether additional asset or goodwill impairments arise, particularly in reporting units whose fair values were close to carrying value.
- Debt maturities, refinancing access, leverage and the sustainability of the dividend amid the working-capital deficit and forecast cash flows.
- Actual capital spending versus the revised plan, and whether deferred expansion projects return to acceptable investment thresholds.
- Developments in significant FERC, commercial and environmental proceedings, including amounts and timing of any payments or rate changes.
- The company’s non-GAAP definitions and reconciliations when comparing DCF, Adjusted EBITDA and adjusted earnings with other issuers.