KINDER MORGAN, INC. annual report, FY2018

Kinder Morgan, Inc. — 2018 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2018. This is an annual filing; unaudited fourth-quarter results are also included. Unless otherwise noted, financial amounts are in U.S. dollars.

Business context

Kinder Morgan is a North American energy infrastructure company with interests in or operations covering approximately 84,000 miles of pipelines and 153 terminals. Its businesses include Natural Gas Pipelines, Products Pipelines, Terminals and CO₂. Most revenue is supported by fee-based or long-term customer arrangements. The company sold its Trans Mountain pipeline system and related Canadian assets in August 2018.

Financial performance

Metric	2018	2017
Revenue	$14.144 billion	$13.705 billion
Operating income	$3.794 billion	$3.529 billion
Net income	$1.919 billion	$223 million
Net income available to common stockholders	$1.481 billion	$27 million
Basic and diluted earnings per share	$0.66	$0.01
Cash provided by operating activities	$5.043 billion	$4.601 billion
Distributable cash flow (DCF; non-GAAP)	$4.730 billion	$4.482 billion
Capital expenditures	$2.904 billion	$3.188 billion

Revenue rose 3.2% and operating income rose 7.5%. Operating margin was approximately 26.8%, versus 25.8% in 2017.
Net income available to common stockholders increased substantially, but comparisons are affected by unusual items, notably the 2017 tax-reform charge and the 2018 Trans Mountain sale gain. The filing reports a $596 million pre-tax gain on the sale.
DCF increased approximately 5.5%; DCF per common share was $2.12 versus $2.00. DCF is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP cash flow.
By segment, 2018 Segment EBDA was $3.580 billion for Natural Gas Pipelines, $1.173 billion for Products Pipelines, $1.171 billion for Terminals, $759 million for CO₂, and $720 million for Kinder Morgan Canada. The Canadian segment includes the sale gain and has no prospective results after the transaction.
Fourth-quarter 2018 revenue was $3.781 billion and net income available to common stockholders was $483 million, compared with fourth-quarter 2017 revenue of $3.632 billion and a common-stockholder loss of $1.045 billion.

Debt and liquidity

Consolidated debt, excluding debt fair-value adjustments, was $36.6 billion at year-end; approximately $11.4 billion was variable-rate or effectively variable-rate. The company reported $24.5 billion of scheduled future interest payments in its contractual-obligations table.
Cash and cash equivalents were $3.280 billion. The company had $3.968 billion of availability under its revolving credit facilities, after commercial paper and letters of credit, and reported compliance with its debt covenants.
Working capital was negative $1.835 billion, improved from negative $3.466 billion in 2017. Current debt was $3.388 billion, including $2.8 billion of senior notes maturing in 2019.
After year-end, KML distributed approximately $1.9 billion of net sale proceeds to Kinder Morgan. The company used proceeds to repay commercial paper and, in February 2019, $1.3 billion of maturing notes. These subsequent repayments are not reflected in year-end debt balances.

Material changes, outlook and risks

Trans Mountain divestiture: The sale generated $2.998 billion of net cash proceeds in 2018 and a $596 million pre-tax gain. The divestiture reduces future Canadian-segment earnings and helped fund debt reduction.
Dividend and investment outlook: Management expected to declare $1.00 per share in 2019, up 25% from the 2018 declared dividend of $0.80, and forecast approximately $5.0 billion of 2019 DCF. Planned 2019 expansion investment and joint-venture contributions were $3.1 billion; management expected to fund discretionary spending with internally generated cash and not require equity-market access for 2019 growth projects. These are forward-looking estimates, not guarantees.
Budget assumptions included WTI at $60 per barrel and Henry Hub natural gas at $3.15 per MMBtu. Management estimated that a $1 WTI price change would affect budgeted DCF by about $8 million, and a $0.10/MMBtu gas-price change by about $1 million.
A $600 million non-cash impairment was recorded for certain Oklahoma gathering and processing assets; a further $270 million of impairment related to equity investments, including Gulf LNG. Non-cash impairments affected reported earnings.
PG&E filed for Chapter 11 in January 2019. Kinder Morgan’s exposure is through its $750 million Ruby equity investment and approximately $55 million note receivable; PG&E represents about $93 million of annual Ruby revenue. Contract cancellation could impair the investment.
Environmental liabilities accrued were $271 million, with an estimated range of approximately $271 million to $448 million. Significant risk areas include pipeline integrity and incidents, environmental remediation, regulatory rate challenges, construction delays and cost overruns, customer or counterparty distress, commodity-price exposure in selected businesses, and interest-rate and refinancing risk.
The 2018 U.S. corporate tax rate reduction lowered tax expense compared with 2017; the prior-year results included a large non-cash deferred-tax remeasurement charge. FERC reviews of pipeline rates and tax allowances may affect future rates and earnings.

Important facts for investors to verify

Reconcile DCF and its growth to GAAP net income and operating cash flow, including the company’s adjustments for “certain items.”
Confirm the extent to which the Trans Mountain proceeds reduced debt and assess the remaining maturity schedule, variable-rate exposure and leverage.
Track delivery and contracted economics of major expansion projects, including Elba Liquefaction, Gulf Coast Express and Permian Highway Pipeline.
Monitor Ruby’s PG&E contracts and any resulting impairment or credit-support changes.
Review outcomes of FERC and other rate cases, environmental reserves and litigation, and whether the planned dividend and 2019 DCF outlook were achieved.