Kinder Morgan, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. Kinder Morgan owns or operates approximately 83,000 miles of pipelines and 147 terminals across North America. This unaudited filing covers the quarter and nine months ended September 30, 2020, with comparisons to the same 2019 periods. COVID-19-related energy demand reductions and commodity-price volatility affected results; the December 2019 sale of KML and the U.S. portion of the Cochin Pipeline also reduced year-over-year activity.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $2.919B | $3.214B | $8.585B | $9.857B |
| Operating income | $819M | $951M | $580M | $2.942B |
| Net income (loss) attributable to KMI | $455M | $506M | $(488)M | $1.580B |
| GAAP diluted EPS | $0.20 | $0.22 | $(0.22) | $0.69 |
| Adjusted EBITDA | $1.709B | $1.834B | $5.125B | $5.598B |
| Distributable cash flow (DCF) | $1.085B | $1.140B | $3.347B | $3.639B |
| DCF per common share | $0.48 | $0.50 | $1.47 | $1.60 |
| Net cash from operating activities | Not presented for quarter | Not presented for quarter | $3.282B | $3.121B |
Quarterly revenue was down about 9% year over year and nine-month revenue about 13%. Nine-month operating results included $1.987B of net impairment and divestiture losses, including $1.6B of goodwill impairments and $350M of CO2 long-lived asset impairments. Adjusted EBITDA and DCF are non-GAAP measures; the filing cautions they should not be viewed as substitutes for GAAP results.
Balance sheet and liquidity
- At September 30, 2020, cash and cash equivalents were $632M, versus $185M at year-end 2019; cash, cash equivalents and restricted deposits totaled $699M.
- Reported total debt principal was $33.338B, excluding $1.379B of debt fair-value adjustments. The balance sheet reports current debt of $2.057B and long-term debt of $32.660B, including those adjustments.
- The company had no borrowings under its $4.0B revolving credit facility or commercial paper program, $81M of letters of credit, and $3.919B of available facility capacity. It reported compliance with required covenants.
- Working capital remained negative at $(1.704)B. Management said cash, operating cash flow and available credit were adequate for cash requirements and anticipated obligations through 2021.
- Nine-month capital expenditures were $1.351B. Cash dividends paid were $1.764B. The declared quarterly dividend was $0.2625 per share, or $1.05 annualized.
Material changes versus the prior comparable period
- Nine-month Segment EBDA declined 43% to $3.282B. Adjusted EBITDA declined about 8% and DCF about 8% year over year.
- COVID-19-related lower refined-product demand and commodity-price and volume effects weighed on Products Pipelines, Terminals and CO2. The sale of KML and U.S. Cochin also reduced reported Natural Gas Pipelines and Terminals contributions.
- Natural Gas Pipelines benefited from completed expansion projects, including Elba Liquefaction and Gulf Coast Express, partly offsetting weakness elsewhere.
- Interest expense, net, fell to $1.214B for nine months from $1.359B, primarily due to lower debt balances and LIBOR rates. Operating cash flow rose $161M, largely reflecting lower income-tax payments.
- The company recorded $1.6B of non-cash goodwill impairments: $1.0B in Natural Gas Pipelines Non-Regulated and $600M in CO2. Total goodwill fell to $19.851B from $21.451B at year-end 2019.
Outlook, management commentary and risks
- 2020 outlook: Against original budget of approximately $5.1B DCF and $7.6B Adjusted EBITDA, management expected DCF to fall slightly more than 10% below plan and Adjusted EBITDA slightly more than 8% below plan. Year-end net debt-to-Adjusted EBITDA was expected to be approximately 4.6x.
- Management reduced planned 2020 expansion projects and joint-venture contributions by approximately $680M from the $2.4B budget, as some projects were no longer needed or met internal return thresholds. It expected 2020 dividends and discretionary spending to be funded with internally generated cash flow.
- The board maintained the quarterly dividend at $0.2625 per share, a 5% increase over Q3 2019, rather than the originally budgeted $0.3125 per share. The board declared the Q3 dividend payable November 16, 2020.
- Key uncertainties include the duration and effects of the pandemic, energy demand and commodity prices, customer and counterparty financial distress, and the possibility of further impairments if asset values or expected cash flows weaken. Management reported no additional impairment-triggering events in Q3.
- Legal and environmental exposures include ongoing FERC rate disputes, Gulf LNG arbitration and litigation, a gas-purchase dispute seeking more than $225M, and environmental remediation matters. Legal reserves were $280M and environmental reserves $253M at September 30, 2020. Management stated it could not reasonably estimate potential liability for certain matters, including Portland Harbor and some coastal litigation.
- Management considered the existing risk factors unchanged in any material respect from its prior reports. The filing also warns that forward-looking statements are subject to risks and are not guarantees.
Important facts for investors to verify
- Whether updated 2020 DCF, Adjusted EBITDA and leverage expectations were achieved, and how those non-GAAP measures reconcile to GAAP results.
- Whether energy demand, customer volumes and counterparty credit quality recover or deteriorate, including the implications for receivables and future cash generation.
- Whether impairment assumptions remain supportable, particularly for reporting units whose fair values were close to carrying value.
- Debt refinancing needs, covenant headroom, interest-rate exposure and the sustainability of the dividend relative to DCF and capital spending.
- Developments in FERC proceedings, Gulf LNG disputes, the CLR claim and environmental matters that could change estimated costs, refunds or reserves.