Kinder Morgan, Inc. — Q1 2016 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2016, Kinder Morgan reported as a North American energy infrastructure company with approximately 84,000 miles of pipelines and 180 terminals. Results are unaudited and may not indicate full-year performance. Comparisons are with Q1 2015 unless noted.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior balance |
|---|---|---|
| Revenue | $3.195 billion | $3.597 billion |
| Operating income | $816 million | $1.078 billion |
| Net income attributable to KMI | $315 million | $429 million |
| Net income available to common shareholders | $276 million; $0.12 per share | $429 million; $0.20 per share |
| Declared common dividend per share | $0.125 | $0.48 |
| Operating cash flow | $1.050 billion | $1.256 billion |
| Capital expenditures | $919 million, including $108 million sustaining | $897 million total |
| Cash and cash equivalents | $175 million | $229 million at December 31, 2015 |
| Total debt carrying value | $43.807 billion | $43.227 billion at December 31, 2015 |
Operating margin was approximately 25.5%, versus 30.0% a year earlier; net margin was approximately 9.8%, versus 11.6%. Segment EBDA, a company-defined non-GAAP measure, was $1.642 billion, down 14%. Distributable cash flow (DCF) before certain items available to common shareholders was $1.233 billion, or $0.55 per share, versus $1.242 billion, or $0.58 per share.
Current liabilities exceeded current assets by $1.915 billion, a working-capital deficit that widened from $1.241 billion at year-end. The company had $3.937 billion of availability under its $5.0 billion revolving credit facility, net of borrowings and letters of credit. Operating cash flow less total capital expenditures was approximately $131 million.
Material changes versus the prior period
- Revenue fell 11% and common-shareholder net income fell 36%; lower commodity prices and reduced sales revenue were important factors, while services revenue increased.
- Non-cash impairment and disposal losses were $254 million in the quarter, compared with $80 million in Q1 2015. The income statement separately reports a $235 million net loss line for impairments and disposals.
- Segment EBDA before certain items declined in CO₂ (21%), while Natural Gas Pipelines rose 4%, Terminals rose 2%, and Products Pipelines rose 17%. CO₂ was pressured by lower realized oil and NGL prices; pipeline and products results benefited from expansions, throughput and acquired operations.
- Operating cash flow decreased $206 million, partly because Q1 2015 included a $195 million income tax refund and a $73 million take-or-pay contract payment that did not recur.
- Investing cash outflow narrowed to $1.144 billion from $2.775 billion, primarily reflecting lower acquisition spending. Financing cash flow was $35 million versus $1.468 billion, with no repeat of the prior-year $1.626 billion common-share issuance and lower dividends paid.
- KMI acquired 15 BP products terminals for $348 million and formed a joint venture in which KMI holds 75% and BP 25%.
Outlook, management commentary, risks and contingencies
- Management expected 2016 common dividends of $0.50 per share and budgeted DCF of approximately $4.7 billion; it then expected DCF to be about 4% below budget because of continued weakness in the energy sector. The board declared $0.125 per share for the quarter.
- 2016 growth capital was forecast at approximately $2.9 billion, down from the $3.3 billion budget and preliminary guidance of $4.2 billion. Management expected excess cash to fund growth capital without capital-markets access and said liquidity, borrowing capacity and operating cash flow were adequate for anticipated needs.
- Debt principal, excluding fair-value adjustments, was $41.895 billion. Short-term debt was $1.702 billion, including $900 million drawn on the revolving facility, $48 million of commercial paper, and notes due within 12 months. The filing identifies refinancing options but does not provide a debt/EBITDA leverage ratio.
- Project write-offs included $106 million associated primarily with the Northeast Energy Direct project, amid insufficient customer commitments, and $64 million for the Palmetto project following an unfavorable Georgia legislative action affecting eminent domain and permitting. Further impairments remain possible if commodity prices or asset recoverability deteriorate.
- Material exposures include FERC rate complaints against SFPP (shipper demands of approximately $40 million in annual rate reductions and $169 million in refunds), the Mission Valley Terminal lawsuit (plaintiff’s claimed damages reduced by a court order from about $365 million to about $160 million), and other pipeline, environmental and commercial disputes. Legal reserves were $481 million and environmental reserves $325 million at March 31. Management stated it believed the matters would not have a material adverse effect, but outcomes are uncertain.
- An LNG customer initiated arbitration seeking relief from a terminal-use agreement running to 2031; management disputed the claims. The filing also notes derivative, commodity-price, interest-rate, currency, regulatory, operational and environmental risks. Forward-looking statements are subject to risks and actual results may differ.
Important facts for investors to verify
- Whether DCF and cash generation meet management’s reduced 2016 expectations while covering dividends, sustaining needs and planned growth spending.
- Debt refinancing, facility availability, interest costs and liquidity, particularly given the working-capital deficit and substantial debt balance.
- The extent to which commodity prices, customer commitments and project decisions affect segment earnings and trigger additional impairments.
- Developments and potential financial effects of the disclosed rate proceedings, lawsuits, arbitration and environmental obligations.
- How non-GAAP DCF and segment EBDA reconcile to GAAP results, and the effect of preferred dividends on common-shareholder returns.