KINDER MORGAN, INC. annual report, FY2013

Kinder Morgan, Inc. — 2013 Form 10-K Summary

Business context and reporting period. This is an annual report for the fiscal year ended December 31, 2013, not a standalone fourth-quarter filing. Kinder Morgan operates or owns interests in about 80,000 miles of pipelines and 180 terminals. Most operations are conducted through its consolidated master limited partnerships, KMP and EPB; KMI depends substantially on distributions from them. The company focuses primarily on energy transportation, storage and related services, many supported by fee-based contracts.

Financial performance and position

Metric	2013	2012
Revenue	$14.070 billion	$9.973 billion
Operating income	$3.990 billion	$2.593 billion
Income from continuing operations	$2.696 billion	$1.204 billion
Net income attributable to KMI	$1.193 billion	$315 million
Diluted Class P EPS	$1.15	$0.35
Cash from operating activities	$4.064 billion	$2.795 billion
Capital expenditures	$3.369 billion	$2.022 billion
Cash and cash equivalents at year-end	$598 million	$714 million
Declared dividend per share	$1.60	$1.40

Operating margin was approximately 28.4% in 2013 versus 26.0% in 2012. The company’s reported income includes material acquisition, disposal and remeasurement items, so GAAP earnings growth does not by itself indicate underlying operating growth.
Segment EBDA, a company-defined non-GAAP measure, was $7.415 billion versus $5.108 billion. Natural Gas Pipelines EBDA rose to $4.207 billion from $2.174 billion, reflecting acquisitions and a full year of contributions from El Paso-related assets. KMP’s Copano acquisition also contributed from May 2013.
Consolidated debt principal, excluding debt fair-value adjustments, was approximately $34.2 billion at year-end, versus $31.8 billion a year earlier. Debt carrying value including fair-value adjustments was $36.193 billion. About $8 billion, or 25%, of consolidated debt was variable-rate or effectively variable-rate.
Working capital deficit widened to $2.207 billion from $1.554 billion. Available year-end borrowing capacity was about $4.0 billion across KMI, KMP and EPB facilities. Near-term debt maturities totaled $2.306 billion.
Operating cash flow less reported capital expenditures was approximately $695 million in 2013, compared with $773 million in 2012; this simple calculation is not a company-defined free-cash-flow measure. Cash used in investing was $3.064 billion and financing activities used $1.095 billion.
Fourth-quarter 2013 revenue was $3.872 billion, operating income $1.160 billion, income from continuing operations $706 million, net income attributable to KMI $338 million and diluted EPS $0.33.

Material changes versus 2012

Revenue increased about 41%, while operating income increased about 54%. Results reflect the 2012 El Paso acquisition and 2013 Copano acquisition, as well as the March 2013 transfer of remaining EPNG and EP midstream interests to KMP.
Net income attributable to KMI increased to $1.193 billion from $315 million. Major 2013 items included a $558 million noncash gain from remeasuring KMP’s previously held Eagle Ford interest and a $224 million gain on the sale of Express pipeline investments. KMI also recorded a $36 million gain on TGP facility sales. These items and changes in tax expense affect period comparability.
2012 included a $777 million net loss from discontinued operations, primarily related to the FTC-required sale of KMP’s FTC Natural Gas Pipelines group. The 2013 discontinued-operations loss was $4 million.
Operating cash flow rose by $1.269 billion, while capital expenditures increased by $1.347 billion. Capital spending and acquisitions were financed in part through debt and equity issuance.
Reported revenue and earnings reflect different ownership periods and consolidation for acquired businesses. Copano represented 9% of 2013 revenue and 8% of year-end assets; it was excluded from management’s internal-control assessment.

Outlook, commentary, risks and contingencies

KMI outlook: Management expected 2014 dividends of $1.72 per share, an 8% increase over 2013 declared dividends. KMI’s ability to pay depends materially on distributions from KMP and EPB; the dividend policy may be changed, and dividends are not guaranteed.
KMP outlook: Expected 2014 distributions of $5.58 per unit, up 5%; approximately $6.4 billion of segment EBDA; and about $3.6 billion of expansion capital spending, excluding asset drop-downs. The budget assumed WTI crude oil of approximately $96.15 per barrel. Management estimated each $1 WTI price change would affect CO2 segment cash flow by about $7 million.
EPB outlook: Expected 2014 distributions of $2.60 per unit, up approximately 2%, and approximately $1.3 billion of earnings before DD&A. The budget included planned asset drop-downs from KMI; rate-case settlements and lower WIC contract-renewal rates were expected to offset much of their benefit.
Management described base cash flows as relatively stable and largely supported by multi-year fee-based, reservation or minimum-volume contracts, while acknowledging exposure to contract renewals, commodity prices, throughput, customer credit, and acquisition and expansion execution.
Key risks include substantial leverage and refinancing needs, capital-market access, interest-rate exposure, dependence on KMP and EPB distributions, regulatory rate challenges, pipeline safety and integrity costs, environmental liability, severe weather, commodity-price exposure in CO2 and oil production, and construction delays or cost overruns.
Environmental reserves were $378 million at year-end, with disclosed estimates ranging up to $562 million. Legal reserves were $624 million, principally associated with pipeline-rate proceedings. California rate matters involved shipper requests of approximately $400 million in reparations and $30 million in annual rate reductions; KMP stated its reserve was adequate and did not expect the matter to affect 2014 distributions.
Other disclosed matters include a lawsuit alleging at least $100 million in damages concerning TGP’s sale of facilities, ongoing pipeline-rate disputes, and environmental and safety proceedings. The filing states management does not expect the disclosed matters, based on reserves and current information, to have a material adverse effect; outcomes remain uncertain.
The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. Management reported effective controls as of year-end, but excluded Copano from its internal-control assessment.

Most important facts for investors to verify

How much of 2013 earnings growth came from recurring operations versus the Eagle Ford remeasurement gain, Express sale gain, and other acquisition or disposal effects.
Debt maturities, refinancing plans, variable-rate exposure, covenant headroom and the effect of credit ratings on funding costs and growth spending.
Whether KMP and EPB meet their distribution and operating targets, and whether KMI can fund its stated dividend from subsidiary distributions after debt service, taxes and reserves.
Final outcomes and potential cash effects of California and FERC rate cases, environmental remediation, and other material litigation or contingencies.
Delivery, cost and contracted-customer progress for major expansion projects, planned drop-downs and the Trans Mountain expansion.