Kinder Morgan, Inc. — 2015 Q2 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2015. Kinder Morgan operates approximately 84,000 miles of pipelines and 165 terminals. Comparisons with 2014 are affected by the November 2014 acquisition of the publicly held interests in KMP, EPB and KMR; the company consolidated those businesses and their results differently after the transaction.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $3.463 billion | $3.937 billion | $7.060 billion | $7.984 billion |
| Operating income | $892 million | $1.013 billion | $1.970 billion | $2.160 billion |
| Net income | $342 million | $497 million | $761 million | $1.098 billion |
| Net income attributable to KMI | $333 million | $284 million | $762 million | $571 million |
| Basic and diluted EPS | $0.15 | $0.27 | $0.35 | $0.55 |
| Declared dividend per share | $0.49 | $0.43 | $0.97 | $0.85 |
Revenue fell 12% in both comparison periods. Q2 net income attributable to KMI rose 17%, and six-month attributable income rose 33%, despite lower consolidated net income; reduced noncontrolling-interest allocations following the 2014 merger materially affected this comparison. Weighted-average shares more than doubled, making per-share comparisons particularly sensitive to the transaction.
Operating cash flow was $2.538 billion for the six months, up from $2.203 billion. Investing activities used $3.744 billion, including $1.864 billion for business acquisitions and $1.909 billion in capital expenditures. Financing activities provided $1.058 billion; cash dividends paid were $2.006 billion. Cash ended the period at $163 million, down $152 million from year-end.
At June 30, total debt principal was $42.930 billion, compared with $41.029 billion at December 31, 2014. The balance sheet reported $3.154 billion of current debt and $41.399 billion of long-term debt, including fair-value adjustments. Working capital was a deficit of $3.563 billion, versus a $2.610 billion deficit at year-end. The company had no borrowings under its $4.0 billion revolving credit facility, $619 million of commercial paper outstanding and $3.258 billion of stated facility availability.
Material changes versus prior comparable periods
- Segment EBDA before certain items was $1.721 billion in Q2, down 2%; for the six months it was $3.623 billion, down 1%. Terminals and Products Pipelines improved, while CO2 declined amid lower commodity prices.
- CO2 EBDA before certain items fell 21% in Q2 and 22% year to date. Natural Gas Pipelines EBDA before certain items increased 1% in both periods, while Terminals increased 19% and 18%, and Products Pipelines increased 32% and 26%, respectively.
- Interest expense, net, increased to $472 million in Q2 and $984 million for the six months, reflecting higher average debt, partly offset by lower average interest rates.
- In February, KMI acquired Hiland Partners for approximately $3.120 billion including assumed debt, and acquired Vopak terminal assets for $158 million. Hiland contributed crude-oil gathering and transportation and gas gathering and processing assets.
- During the six months, KMI issued approximately $2.562 billion of shares under its equity distribution agreement. Outstanding Class P shares rose from 2.125 billion at year-end to 2.188 billion at June 30.
Outlook, commentary, risks and unusual items
- Management said it remained on track for a 2015 dividend target of $2.00 per share, approximately 15% above 2014 declared dividends. The board declared a $0.49-per-share dividend for Q2, payable August 14, 2015. The filing notes dividends are subject to board discretion and financial, liquidity, legal and other factors.
- For the remainder of 2015, planned capital spending was $358 million for sustaining projects and $2.435 billion for discretionary projects; full-year totals were estimated at $603 million and $4.098 billion, respectively.
- Non-GAAP distributable cash flow before certain items was $1.095 billion in Q2 and $2.337 billion for the six months, versus $332 million and $905 million. The comparisons are affected by the 2014 public MLP distributions deducted in the earlier period; DCF is not a GAAP measure and may not be comparable across companies.
- The company recorded non-cash, pretax impairment charges of $59 million in Q2 and $136 million for the six months. These included charges related to Oklahoma midstream assets amid a deteriorating commodity-price environment and a decision to sell certain assets. Management cautioned that further deterioration could result in additional impairments.
- Legal reserves were $470 million at June 30, up from $400 million at year-end; environmental reserves were $321 million. Notable exposures include FERC rate and refund proceedings, pipeline easement and relocation disputes, environmental matters, and the Mission Valley Terminal litigation, where an appellate court reversed summary judgment on several claims. Management stated that it did not expect the described matters, based on current assessments and reserves, to have a material adverse effect, but outcomes remain uncertain.
- On July 15, 2015, after quarter-end, KMI paid $200 million for Shell’s 49% interest in Elba Liquefaction Company. The company also disclosed that the FERC issued a July 2015 decision in the EPNG 2008 rate case requiring refunds; EPNG was evaluating its options.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. No material changes to the risk factors in the 2014 Form 10-K were reported.
Important facts for investors to verify
- How much of the increase in attributable earnings and DCF reflects the 2014 merger and changed noncontrolling-interest treatment, rather than underlying operating growth.
- Whether operating cash generation and financing access can support the $2.00 annual dividend target alongside planned capital spending, acquisitions and debt service.
- Debt maturities and refinancing plans: $3.154 billion was classified as current debt, including $2.382 billion of senior notes maturing within a year.
- Further effects of commodity prices on CO2 and gathering/processing assets, including possible additional impairments.
- Developments and potential financial impact of the cited FERC proceedings, easement litigation, environmental liabilities and other contingencies.