Kinder Morgan, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022. Kinder Morgan operates North American energy infrastructure, including approximately 82,000 miles of pipelines, 140 terminals, and natural gas storage capacity.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $3.888 billion | $4.293 billion; down 9% |
| Operating income | $1.194 billion | $1.024 billion; up 17% |
| Net income attributable to KMI | $679 million | $667 million; up 2% |
| Basic and diluted EPS | $0.30 | $0.29 |
| Adjusted Earnings | $675 million; $0.30 per share | $732 million; $0.32 per share |
| Distributable cash flow (DCF) | $1.374 billion; $0.61 per share | $1.455 billion; $0.64 per share |
| Adjusted EBITDA | $1.996 billion | $1.967 billion |
| Operating cash flow | $1.333 billion | $1.084 billion |
| Capital expenditures | $507 million | $407 million |
| Cash and cash equivalents | $416 million at March 31 | Down $329 million from year-end 2022 |
| Debt | $31.3 billion principal; $31.506 billion carrying value including fair-value adjustments | $31.673 billion principal at year-end 2022 |
Revenue declined mainly because commodity sales were lower on reduced prices and volumes. Costs of sales also fell substantially, partly offsetting the revenue decline. Net interest expense increased $112 million year over year, primarily reflecting higher realized SOFR rates on swaps and changes in swap fair values. The filing does not provide a clear consolidated gross-margin figure.
Operating cash flow increased $249 million, largely due to favorable working-capital timing. Investing activities used $508 million, including $507 million of capital expenditures; financing activities used $1.181 billion. Cash, cash equivalents, and restricted deposits decreased $356 million during the quarter.
At quarter-end, available credit-facility capacity was approximately $3.9 billion, with no credit-facility or commercial-paper borrowings outstanding and $81 million of letters of credit. Working capital was a deficit of $2.079 billion. Management said cash flows, cash on hand, and borrowing capacity were adequate for expected requirements.
Material changes and operating segments
- Natural Gas Pipelines Segment EBDA rose to $1.495 billion from $1.184 billion. Management cited favorable margins and higher equity earnings, alongside commodity and derivative-related effects.
- Products Pipelines Segment EBDA fell to $184 million from $299 million. This included a $67 million non-cash impairment of the Double Eagle Pipeline investment; adjusted Segment EBDA was $251 million versus $299 million.
- Terminals Segment EBDA increased to $254 million from $238 million, supported by rate escalations, handling volumes, and utilization.
- CO₂ Segment EBDA decreased to $172 million from $192 million, reflecting lower CO₂ sales prices and volumes, lower NGL prices and volumes, and an extended SACROC outage.
- Across segments, reported Segment EBDA was $2.105 billion, up from $1.913 billion. Adjusted Earnings and DCF declined, primarily due to higher interest expense; increased sustaining capital expenditures further reduced DCF.
Capital allocation, outlook, risks, and contingencies
- Management expected to declare 2023 dividends of $1.13 per share, 2% above the $1.11 declared for 2022. The board declared a $0.2825-per-share dividend for the first quarter, payable May 15, 2023.
- Management expected to invest $2.2 billion in 2023 in expansion projects, acquisitions, and joint-venture contributions. Separately, the filing forecast $3.251 billion of total capital investments, including sustaining and expansion investments across the company and joint ventures.
- KMI issued $1.5 billion of 5.20% senior notes due 2033 in January, using proceeds to repay short-term borrowings, maturing debt, and for general corporate purposes. It repaid three senior-note issues at maturity during the quarter. The company repurchased 6.8 million shares for $113 million and increased its buyback authorization to $3 billion.
- The company recorded a $67 million impairment on Double Eagle because of lower expected renewal rates on contracts expiring in the second half of 2023. The Ruby bankruptcy reorganization and sale to Tallgrass closed in January; KMI’s net payment to the bankruptcy estate was approximately $28.5 million, accrued at year-end.
- Legal and environmental reserves were $43 million and $218 million, respectively, at March 31. Notable matters include the Freeport LNG lawsuit, where KMI had won summary judgment and Freeport had filed notice of appeal; the Gulf LNG guarantee dispute, where an appeal was denied and rehearing was sought; and environmental remediation matters. Management said it did not expect disclosed matters to have a material adverse effect, while noting some potential liabilities cannot yet be reasonably estimated.
- The filing identifies regulatory change as a risk. EPA proposals and the announced Good Neighbor Plan could increase compliance costs, require controls on pipeline engines, and create equipment, timing, and operational challenges if implemented as described.
- Other key risks include commodity-price and volume changes, interest-rate exposure, pipeline integrity and safety, and environmental obligations. Management cautions that forward-looking statements are subject to risks and are not guarantees.
Important facts for investors to verify
- Whether operating cash flow and the stated credit capacity remain sufficient to cover debt maturities, capital spending, and dividends.
- How higher interest rates and interest-rate swaps affect future interest expense, debt mix, and cash flow.
- Progress toward the 2023 dividend and investment plans, including project execution and expected returns.
- Whether Double Eagle contract renewals, Products Pipelines performance, and the SACROC outage affect subsequent results.
- Developments in the disclosed litigation and environmental matters, and the cost and timing of potential regulatory compliance.