Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2011 for Kinder Morgan, Inc. (KMI). During this period, KMI completed its initial public offering (IPO) on February 16, 2011, converting from a Delaware limited liability company to a Delaware corporation. The company operates as an energy infrastructure owner and operator, primarily through its ownership of the general partner and approximately 11% of the limited partner interests of Kinder Morgan Energy Partners, L.P. (KMP), and a 20% interest in NGPL PipeCo LLC. KMI's common stock trades on the NYSE under the symbol "KMI."
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total Revenues | $2,008.1 million | $2,157.6 million |
| Operating Income | $397.0 million | $244.4 million |
| Net Income (Consolidated) | $201.0 million | ($179.9) million |
| Net Income Attributable to KMI | $155.0 million | ($160.9) million |
| Diluted EPS (Class A & P) | $0.12 | N/A (Loss) |
| Cash Flow from Operations | $478.5 million | $438.7 million |
| Total Debt (Carrying Value) | $14,994.5 million | $15,169.9 million |
| Cash and Cash Equivalents | $189.5 million | $137.1 million |
Material Changes vs. Prior Period
- Profitability Turnaround: Net income attributable to KMI improved from a loss of $160.9 million in Q1 2010 to a profit of $155.0 million in Q1 2011. This $315.9 million swing was primarily driven by the absence of a $430.0 million non-cash impairment charge on the NGPL PipeCo LLC investment recorded in Q1 2010 and a $158.0 million expense related to rate case liability adjustments in Q1 2010.
- Revenue Decline: Total revenues decreased by 7% to $2,008.1 million, largely due to lower natural gas sales volumes and prices in the Texas intrastate natural gas pipeline group, which offset growth in other segments.
- Segment Performance:
- Products Pipelines-KMP: Earnings before depreciation, depletion, and amortization (EBDA) surged 2,719% to $180.4 million, excluding the prior year's $158 million rate case charge.
- NGPL PipeCo LLC: Equity earnings improved from a loss of $419.6 million to $7.3 million, excluding the prior year's impairment charge.
- Terminals-KMP: EBDA increased 16% to $174.2 million, driven by higher volumes in Gulf Liquids and Mid-Atlantic regions.
- General and Administrative Expenses: Increased to $180.4 million from $115.7 million. This includes a $100 million pre-tax special bonus expense for non-senior employees (funded by retained earnings, not impacting Class P shareholders), $11.1 million in IPO-related costs, and a $45.8 million insurance reimbursement for prior litigation.
Guidance, Outlook, and Risks
- Dividend Policy: KMI declared a prorated dividend of $0.14 per share for Q1 2011 (payable May 16, 2011), representing an annualized rate of $1.16 per share. The company expects to pay quarterly dividends of $0.29 per share for the remainder of 2011.
- Capital Expenditures: KMP budgeted approximately $1.4 billion for its 2011 capital expansion program. Sustaining capital expenditures for Q1 2011 were $36.0 million.
- Liquidity: The company maintains a working capital deficit of $2,108.2 million, which is typical for its business model and does not indicate a lack of liquidity. KMP's credit rating was upgraded to stable by Moody's in February 2011, improving access to commercial paper markets.
- Key Risks and Contingencies:
- Regulatory Proceedings: Ongoing FERC and California Public Utilities Commission (CPUC) proceedings regarding pipeline rates could result in refunds or rate reductions. KMP estimates a maximum exposure of approximately $220 million in reparation and refund payments from CPUC proceedings.
- Environmental Liabilities: The company has accrued an environmental reserve of $79.3 million as of March 31, 2011, for cleanup and enforcement actions.
- Commodity Price Risk: While most operations are fee-based, the CO2 segment is exposed to crude oil and natural gas liquids price volatility. KMP hedges a significant portion of this exposure.
Investor Verification Checklist
- Dividend Sustainability: Verify the "Cash Available to Pay Dividends" metric ($251.1 million in Q1 2011) against the declared dividend obligations to ensure coverage.
- Non-Cash Adjustments: Confirm the impact of the $100 million special bonus expense on GAAP earnings versus distributable cash flow, noting it is funded by retained earnings.
- Debt Maturities: Review the schedule of short-term debt maturities, specifically the $500 million KMP senior notes due February 2019 (repurchase option 2012) and $450 million notes due March 2012.
- Regulatory Reserves: Monitor the $106.0 million reserve for legal fees and transportation rate cases for any material changes in the CPUC or FERC proceedings.
- Equity Method Investments: Assess the performance of NGPL PipeCo LLC and KinderHawk Field Services LLC, which contribute significantly to earnings but are accounted for under the equity method.