KINDER MORGAN, INC. annual report, FY2015

Kinder Morgan, Inc. — 2015 Form 10-K

Reporting period: Fiscal year ended December 31, 2015. The filing also reports quarterly results; fourth-quarter figures are noted below. Dollar amounts are U.S. dollars unless stated otherwise.

Business context

Kinder Morgan operates North American energy infrastructure, including approximately 84,000 miles of pipelines and about 180 terminals (including 15 acquired from BP in February 2016). Its businesses span natural gas pipelines, CO₂, terminals, products pipelines, Kinder Morgan Canada and other activities. The November 2014 merger of KMP, EPB and KMR into KMI materially changed the ownership and noncontrolling-interest structure, affecting year-over-year comparisons.

Financial performance and liquidity

Metric	2015	2014
Revenue	$14.403 billion	$16.226 billion
Operating income	$2.447 billion	$4.448 billion
Operating margin	17.0%	27.4%
Net income attributable to KMI	$253 million	$1.026 billion
Net income available to common stockholders	$227 million	$1.026 billion
Basic and diluted EPS	$0.10	$0.89
Cash from operating activities	$5.303 billion	$4.467 billion
Capital expenditures	$3.896 billion	$3.617 billion

Revenue fell 11%, principally reflecting lower commodity prices and reduced natural gas and product-sales revenue. Operating income and GAAP earnings were sharply lower, driven by non-cash impairment and disposal charges totaling $2.125 billion, including a $1.150 billion goodwill impairment in non-regulated Natural Gas Pipelines. Net interest expense rose to $2.051 billion from $1.798 billion.

Distributable cash flow (DCF), a non-GAAP measure, was $4.725 billion available to equity and $4.699 billion available to common shareholders after preferred dividends, compared with $2.618 billion in 2014. The filing cautions that DCF is not a substitute for GAAP measures and may not be comparable across companies.

Segment trends: DCF/segment performance was pressured by CO₂, whose EBDA before certain items fell to $1.141 billion from $1.458 billion, largely due to lower commodity prices. Natural Gas Pipelines EBDA before certain items increased to $4.125 billion from $4.069 billion; Products Pipelines rose to $1.096 billion from $860 million; Terminals rose to $1.055 billion from $979 million.
Debt and liquidity: Consolidated debt was approximately $41.6 billion excluding fair-value adjustments, versus $41.0 billion at year-end 2014; long-term debt excluding those adjustments was $40.732 billion. Cash was $229 million. The company reported a $1.241 billion working-capital deficit, but had $3.885 billion available under its $4.0 billion revolving facility at year-end. The facility was expanded to $5.0 billion in January 2016.
Cash uses and funding: Investing activities used $5.706 billion. KMI issued $3.870 billion of common shares and $1.541 billion of mandatory convertible preferred stock during 2015. The preferred stock carries a 9.75% annual dividend and is scheduled to convert in 2018.

Fourth-quarter 2015 revenue was $3.636 billion; operating loss was $244 million, net loss was $736 million, and net loss available to common stockholders was $721 million, or $0.32 per share.

Material changes versus prior year

Total revenue declined $1.823 billion and operating income declined $2.001 billion year over year. Impairments were the principal cause of the GAAP earnings decline; the company said underlying segment earnings before certain items were broadly stable overall.
CO₂ segment EBDA before certain items decreased $317 million, mainly from lower realized oil and NGL prices. Its realized weighted-average oil price, including hedges, was $73.11 per barrel versus $88.41 in 2014; the unhedged price would have averaged $47.56.
Products Pipelines and Terminals improved, supported by increased volumes, acquisitions and expansions. Natural Gas Pipelines benefited from the Hiland acquisition and new contracted capacity, partly offset by weaker midstream results and contract expirations.
Operating cash flow increased 19%, aided by working-capital movements and tax refunds; cash generation should be considered alongside elevated debt, investment spending and dividend payments.
Common dividends declared for 2015 were $1.605 per share. In December 2015, KMI cut its intended annualized 2016 dividend to $0.50 per share from the prior level, citing capital-market conditions and a goal of funding growth internally.

Outlook, risks and contingencies

Management expected 2016 DCF of approximately $4.9 billion available to equity and $4.7 billion available to common shareholders, with approximately $3.6 billion of cash flow in excess of the planned dividend. Assumptions included average WTI of $38 per barrel and Henry Hub natural gas of $2.50 per MMBtu. Management said most cash generation is fee-based; the CO₂ segment is the principal direct commodity-price exposure, with most of the next 12 months’ oil production hedged. These are estimates, not guarantees.

Planned 2016 capital spending was approximately $574 million sustaining and $3.281 billion discretionary. Key projects included the Trans Mountain Expansion, LNG-related pipeline and export infrastructure, and products-pipeline expansions. Execution depends on permitting, regulatory approvals, construction costs, customer commitments and financing access.

Management warned that continued low commodity prices could cause further impairments of producing properties, goodwill, long-lived assets or equity investments. The 2015 goodwill test left the regulated Natural Gas Pipelines reporting unit with only about 3% fair-value headroom.
Debt, refinancing needs, interest-rate exposure, credit ratings and access to external capital are significant risks. About $11 billion of debt was subject to variable rates, including debt converted through swaps.
In 2015, certain counterparties defaulted or entered bankruptcy. Coal-customer distress contributed to bad-debt expense and impairment charges in terminals.
Environmental remediation reserves were $284 million, with management’s estimated range of approximately $284 million to $457 million. Legal reserves were $463 million. These estimates may change as matters develop.
Material disclosed matters include pipeline tariff complaints and rate cases, a $100.2 million Brinckerhoff judgment under appeal, environmental and property claims, and the Mission Valley Terminal case. The filing describes outcomes and potential exposures as uncertain; some claimed amounts may exceed recorded reserves.
Other risks include pipeline safety incidents, environmental and climate regulation, project delays, customer and supplier performance, cyberattacks, weather events, competition, and Canadian-dollar fluctuations.

Most important facts for investors to verify

Whether the $0.50-per-share 2016 dividend and management’s DCF and excess-cash-flow expectations were achieved, and how preferred dividends affect common-share cash available.
Debt maturities, borrowing capacity, credit ratings and refinancing costs, including the impact of the January 2016 term loan and revolver expansion.
The assumptions behind the $2.125 billion of 2015 impairment and disposal charges, and whether low commodity prices trigger additional write-downs.
Actual performance of fee-based contracts and major expansions, including customer credit quality, project approvals, timing and spending versus budget.
Developments in tariff proceedings, environmental remediation and litigation, particularly the $284 million environmental reserve range and significant legal claims.