Kinder Morgan, Inc. — 2019 Q3 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and nine months ended September 30, 2019; comparisons are with the same 2018 periods. Kinder Morgan operates or owns interests in approximately 84,300 miles of pipelines and 157 terminals. Financial amounts below are U.S. dollars in millions unless otherwise noted.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $3,214 | $3,517 | $9,857 | $10,363 |
| Operating income | $951 | $1,515 | $2,942 | $2,736 |
| Net income | $517 | $1,005 | $1,612 | $1,417 |
| Net income attributable to KMI | $506 | $732 | $1,580 | $1,115 |
| Net income available to common stockholders | $506 | $693 | $1,580 | $998 |
| Basic and diluted EPS | $0.22 | $0.31 | $0.69 | $0.45 |
| Distributable cash flow (non-GAAP) | $1,140 | $1,093 | $3,639 | $3,457 |
| DCF per common share | $0.50 | $0.49 | $1.60 | $1.56 |
Q3 operating income margin was approximately 29.6%, compared with 43.1% in 2018; the prior-year quarter included a $622 million gain on the Trans Mountain sale. The nine-month operating margin was approximately 29.8%, versus 26.4%.
- Cash flow: Nine-month cash from operations was $3,121, versus $3,375 in 2018. Investing activities used $2,610, compared with $686 provided in 2018; financing activities used $3,600, versus $853 used. Capital expenditures were $1,719, including $477 of sustaining capital.
- Debt and liquidity: Principal debt totaled $35,355 at September 30, 2019, excluding debt fair-value adjustments; $4,406 was classified as current. Cash and cash equivalents were $241. KMI had $3,884 available under its credit facilities and $532 of commercial paper outstanding; KMI and KML reported covenant compliance.
- Balance sheet: Total assets were $76,931 and stockholders’ equity was $34,474. Working capital was negative $4,461.
- Dividends: KMI declared $0.25 per share for Q3 and expected full-year 2019 dividends of $1.00 per share. Nine-month cash dividends paid on common shares were $1,593.
Material changes versus prior comparable periods
- Q3 revenue fell $303 million year over year, chiefly reflecting lower natural gas and product sales and the absence of the sold Canadian business. Nine-month revenue declined $506 million.
- Q3 net income available to common stockholders declined 27%; the comparison was affected by the 2018 Trans Mountain sale gain and prior-year noncontrolling-interest allocation. Nine-month net income available to common stockholders rose 58%, aided by stronger Natural Gas Pipelines results and lower interest expense, as well as prior-year impairments and sale-related comparison effects.
- Adjusted Segment EBDA for Natural Gas Pipelines increased 8% in Q3 and 9% year to date. CO2 Adjusted Segment EBDA declined 36% and 24%, respectively, mainly due to lower oil and NGL prices and lower production. Products Pipelines grew 7% in Q3 but 1% year to date; Terminals declined 1% in Q3 and 2% year to date.
- Interest expense, net, decreased $26 million in Q3 and $97 million year to date on a GAAP basis, primarily due to lower average debt balances. Cash from operations was lower year to date, mainly reflecting higher income-tax payments, including foreign taxes associated with the Trans Mountain sale.
- Cash declined from $3,280 at year-end 2018 to $241, largely as the prior-year Trans Mountain sale proceeds were distributed and used to repay debt. The company also paid higher common dividends and made greater contributions to equity investments.
Outlook, risks and unusual items
- 2019 outlook: Management expected DCF to be slightly below its $5.0 billion budget, citing delayed Elba Liquefaction commissioning, lower commodity prices and volumes in CO2, and the impact of FERC 501-G settlements; strong West Region pipeline results and lower interest expense partly offset these factors. The first of ten Elba liquefaction units entered commercial service in late September. Growth-project and joint-venture investment was budgeted at $3.1 billion, with spending expected slightly below budget, primarily due to lower CO2 capital expenditures.
- Pending divestitures: KMI agreed to sell the U.S. portion of the Cochin Pipeline to Pembina for $1.546 billion cash. Pembina also agreed to acquire KML; KMI expected to receive approximately 25 million Pembina shares, valued at about $927 million pre-tax as of September 30, 2019, for its 70% KML interest. The transactions were cross-conditioned, required approvals, and were expected to close in late 2019 or early 2020. Management intended to use proceeds partly to reduce debt, with the remainder for investments and/or share repurchases.
- Regulatory and legal exposure: The company estimated SFPP shippers were seeking approximately $330 million in refunds and $30 million in annual rate reductions; management said successful claims could result in lower rates and refunds and stated it would defend the proceedings. Legal reserves were $188 million and environmental reserves $258 million. Certain environmental-site and natural-resource-damage exposures, including Portland Harbor, were not reasonably estimable; management said it did not expect disclosed matters collectively to have a material adverse impact.
- Operational and market risks: Pipeline leaks or ruptures may cause property, environmental or personal injury liabilities. Commodity prices, interest rates, foreign exchange and regulated tariffs affect results; approximately 31% of principal debt was exposed to variable rates. The company was reviewing the phaseout of LIBOR by end-2021 and did not expect a material impact.
- Other items: The 2018 comparison included the $622 million pre-tax Trans Mountain sale gain and significant non-cash impairment and other adjustments. Management cautioned that non-GAAP measures such as DCF are not substitutes for GAAP results. No material risk-factor changes were reported; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether both Pembina transactions close on the expected terms and timeline, and how proceeds are ultimately applied to debt, investment or repurchases.
- Progress toward the 2019 DCF and investment outlook, including Elba ramp-up, CO2 prices and volumes, and FERC settlement impacts.
- Debt maturities, refinancing plans, leverage targets and liquidity following the decline in cash and the working-capital deficit.
- Developments in SFPP rate cases and refund claims, other material litigation, and environmental liabilities whose amounts remain uncertain.
- Whether the declared dividend level remains supported by operating cash generation and capital requirements; compare DCF with GAAP operating cash flow and sustaining capital needs.