Kinder Morgan, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2017. Kinder Morgan owns interests in or operates approximately 84,000 miles of pipelines and 155 terminals, transporting and storing natural gas, petroleum products, crude oil, CO₂ and other products. All financial amounts below are in U.S. dollars and millions, except per-share amounts and where noted.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $3,424 | $3,195 |
| Operating income | $980 | $816 |
| Net income | $445 | $314 |
| Net income attributable to KMI | $440 | $315 |
| Net income available to common stockholders | $401 | $276 |
| Diluted earnings per share | $0.18 | $0.12 |
| Cash provided by operating activities | $886 | $1,050 |
| Distributable cash flow (non-GAAP) | $1,215 | $1,233 |
| DCF per common share (non-GAAP) | $0.54 | $0.55 |
Revenue increased 7% year over year. Operating margin was approximately 28.6%, compared with 25.5%; net margin was approximately 13.0%, compared with 9.8%. These are calculations from reported figures, not company-presented measures. Segment EBDA rose 15% to $1,910. By segment, EBDA was $1,055 for Natural Gas Pipelines, $218 for CO₂, $307 for Terminals, $287 for Products Pipelines and $43 for Kinder Morgan Canada.
Capital expenditures were $664, including $104 of sustaining expenditures. Cash and cash equivalents were $396 at quarter-end, down from $684 at year-end. Total debt principal was $38,313, including $3,928 classified as current; balance-sheet debt including fair-value adjustments was $39,392. Debt principal was $38,901 at December 31, 2016. The company reported $4,881 of availability under its $5.0 billion revolving facility, net of letters of credit. Working capital was negative $4,014.
Material changes versus the prior comparable period
- Common-stockholder net income increased 45%, but management said specified unusual items accounted for $277 of the year-over-year change in pretax income. Excluding those items, pretax income decreased $54, or 8%.
- 2016 included $235 of net impairment and divestiture losses, versus $6 in Q1 2017. The prior-period charges included project write-offs and coal-facility impairments.
- Operating cash flow decreased $164, reflecting lower cash generation after adjustments for non-cash items and less favorable working-capital and other balance changes.
- Natural Gas Pipelines EBDA before certain items declined 10%, primarily following the 2016 sale of a 50% interest in SNG; Terminals increased 9%. Products Pipelines EBDA before certain items was nearly flat, despite reported EBDA rising substantially because Q1 2016 included project and impairment charges.
- Interest expense, net, before certain items decreased $33, primarily due to lower average debt balances after proceeds from the SNG sale were used to repay debt.
Outlook, management commentary, risks and unusual items
- Management expected to declare common dividends of $0.50 per share for 2017, or $0.125 quarterly. The board declared a $0.125 dividend for Q1, payable May 15, 2017. Future dividends remain subject to board discretion and financial, legal and other factors.
- Management stated that operating cash flow, cash and available borrowing capacity were adequate for day-to-day needs and anticipated obligations. It expected to fund short-term needs through operating cash, borrowings and refinancing, and did not expect to need equity-market access for growth projects for the foreseeable future.
- For the remainder of 2017, the company estimated $532 of sustaining capital expenditures and $2,843 of discretionary capital investments, in addition to Q1 spending. Capital commitments for property and equipment were $1,214 at quarter-end.
- In February, KMI sold a 49% partnership interest in Elba Liquefaction Company to EIG for $387, with an additional $4 contribution for capital expenditures. KMI retained a 51% controlling interest and continues to operate ELC. The $391 contribution was recorded as a deferred credit pending specified contingencies.
- Near-term maturities included significant notes due in 2017 and early 2018. KMI repaid $300 of TGP notes and $355 of EPNG notes in April 2017. The filing reported no material change to previously disclosed risk factors or market-risk exposures.
- Contingencies include FERC rate proceedings involving SFPP, EPNG, NGPL and WIC; commercial and landowner litigation; and environmental matters. The company reported legal reserves of $413 and environmental reserves of $299 at March 31. Its potential share of the Portland Harbor cleanup could not yet be reasonably estimated; the EPA’s estimated site-wide cleanup cost was approximately $1.1 billion. Management stated it did not expect the disclosed matters to have a material adverse effect, while noting that outcomes remain uncertain.
- Management cautioned that interim results are not necessarily indicative of full-year results. No clear full-year earnings or cash-flow guidance is provided in the filing text.
Important facts for investors to verify
- Whether DCF and operating cash flow can support the targeted dividend and planned 2017 capital program, particularly given the year-over-year decline in both cash measures.
- Refinancing and repayment plans for current debt maturities, and the effect of interest rates on the portion of debt subject to variable rates (approximately 28%).
- Underlying segment performance excluding identified unusual items, especially the effects of the SNG interest sale and commodity-price-related revenue changes.
- Developments in FERC proceedings, environmental allocations and other litigation, including whether reserves remain adequate as matters progress.
- Completion of the ELC transaction contingencies and the company’s future treatment of EIG’s capital account.