Kinder Morgan, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unless otherwise noted, financial amounts are in millions of U.S. dollars. Kinder Morgan operates approximately 84,000 miles of pipelines and 157 terminals.
Financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $3,429 | $3,418 | Up $11 (less than 1%) |
| Operating income | $1,018 | $949 | Up 7% |
| Operating margin | 29.7% | 27.8% | Up 1.9 percentage points |
| Net income attributable to KMI | $556 | $524 | Up 6% |
| Net income available to common stockholders | $556 | $485 | Up 15%; prior period included $39 of preferred dividends |
| Basic and diluted EPS | $0.24 | $0.22 | Up $0.02 |
| Segment EBDA | $1,974 | $1,935 | Up 2% |
| DCF, a non-GAAP measure | $1,371 | $1,247 | Up 10%; $0.60 vs. $0.56 per share |
| Operating cash flow | $635 | $974 | Down $339 |
| Capital expenditures | $554 | $707 | Down $153 |
| Cash and cash equivalents at period-end | $221 | $3,280 at year-end 2018 | Down $3,059 |
| Total debt, including fair-value adjustments | $35,830 | $37,324 at year-end 2018 | Down $1,494 |
Operating margin is operating income divided by revenue. Principal debt, before fair-value adjustments, was $34,970 at March 31, 2019. Interest expense, net, was $460, compared with $467 a year earlier. The effective tax rate was 23.3%, versus 23.2%.
Liquidity, cash flow and capital allocation
- Cash, cash equivalents and restricted deposits totaled $270 at quarter-end. Net cash used in investing activities was $814; net cash used in financing activities was $2,908.
- The cash decline primarily reflected the distribution of approximately $879 of Trans Mountain sale proceeds to KML public shareholders and debt repayments. Most of KMI’s approximately $1.9 billion share of net proceeds was used to repay commercial paper and maturing long-term debt.
- Working capital was negative $2,747, compared with negative $1,835 at December 31, 2018. Management said operating cash flow, cash and available credit were adequate for day-to-day needs and anticipated obligations.
- KMI reported $4,307 of availability under its credit facilities after outstanding commercial paper and letters of credit. KMI and KML reported compliance with required covenants.
- Q1 sustaining capital expenditures were $115; KMI discretionary capital investments were $594. The company expected full-year 2019 sustaining capital expenditures of $712 and KMI discretionary investments of $2,961.
Material changes and management commentary
- Natural Gas Pipelines Segment EBDA rose 7% to $1,203, supported by expansion projects, higher capacity sales and increased activity in several producing basins. Products Pipelines EBDA rose 4% to $276, while Terminals EBDA increased 1% to $299.
- CO2 Segment EBDA was $198, but EBDA before certain items fell 20% to $189. Lower realized oil and NGL prices and lower oil volumes reduced underlying results; realized oil price fell to $48.67 per barrel from $59.72.
- The Kinder Morgan Canada segment had no ongoing operations following the August 2018 sale of the Trans Mountain pipeline system and expansion project. Its Q1 2019 results included a $2 loss on divestiture related to a working-capital adjustment.
- Operating cash flow fell partly because KMI paid $340 of foreign income taxes associated with the Trans Mountain sale. Cash contributions to equity investments increased, including funding for Gulf Coast Express, Permian Highway and Citrus projects.
- KMI declared a $0.25-per-share dividend for Q1, payable May 15, 2019. Management expected to declare $1.00 per share in common dividends for 2019; actual dividends remain subject to the board’s discretion and company circumstances.
- Other comprehensive loss was $184, primarily reflecting a $215 after-tax decline in the fair value of hedge derivatives. This affected equity and comprehensive income, not reported net income in the same way.
Risks, contingencies and unusual items
- Pending FERC rate matters could lead to refunds or lower rates. Shippers in SFPP proceedings sought approximately $330 in refunds and $30 in annual rate reductions; management said any eventual reductions and refunds were expected to be substantially below the amounts sought, but outcomes remain uncertain.
- FERC’s inquiry into return-on-equity policy could affect regulated pipeline cost-of-service rates. The company also disclosed environmental, pipeline integrity, and Louisiana coastal erosion litigation and remediation exposures.
- Legal reserves were $222 at March 31, 2019; environmental reserves were $270. The company stated that it could not reasonably estimate its potential liability for the Portland Harbor cleanup allocation or certain aspects of the Passaic River matter.
- KMI had agreed to fund its proportionate share of $700 of 2019 debt obligations at certain equity investees; its potential obligation was $350 if those investees could not meet their obligations.
- A two-notch credit downgrade was estimated to require $73 of additional collateral under derivative agreements; a one-notch downgrade was not expected to require additional collateral.
- Management cited risks and uncertainties affecting forward-looking statements and referred investors to the risk factors in its 2018 Form 10-K. No material changes to those risk factors or market-risk exposures were reported.
Most important facts for investors to verify
- Whether operating cash flow recovers from the Q1 level, recognizing the unusually large Trans Mountain-related tax payment and working-capital movements.
- Progress on the company’s planned 2019 capital spending and major pipeline investments, and the returns and funding needs associated with them.
- Debt maturities and refinancing plans, credit-facility availability, covenant compliance, and the effect of variable-rate exposure (approximately 31% of debt principal).
- Whether the $1.00-per-share 2019 dividend expectation remains supportable given cash flow, investment requirements and debt service.
- Outcomes of FERC rate proceedings and environmental and legal matters, including exposures that the company says cannot yet be reasonably estimated.
- Underlying performance trends by segment, particularly CO2 results and the effect of commodity prices, separate from hedge-related and other “certain items.” DCF and Segment EBDA are non-GAAP measures and should be assessed alongside GAAP results and cash flows.