Kinder Morgan, Inc. — Q2 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2014, compared with the same 2013 periods. Kinder Morgan operates pipelines and terminals across North America and consolidates KMP, EPB and KMR; consequently, consolidated debt and earnings include these entities, whose obligations are generally legally separate from KMI’s.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $3,937 million | $3,382 million | $7,984 million | $6,442 million |
| Operating income | $1,013 million | $772 million | $2,160 million | $1,789 million |
| Net income | $497 million | $781 million | $1,098 million | $1,437 million |
| Net income attributable to KMI | $284 million | $277 million | $571 million | $569 million |
| Diluted EPS | $0.27 | $0.27 | $0.55 | $0.55 |
| Operating cash flow | Not separately stated | Not separately stated | $2,203 million | $1,734 million |
- Margins: Operating margin was approximately 25.7% in Q2 2014 versus 22.8% in Q2 2013; for the first half, approximately 27.1% versus 27.8%. These are calculated from reported revenue and operating income.
- Cash available for KMI dividends (non-GAAP): $332 million, or $0.32 per average share, in Q2; $905 million, or $0.87 per share, in the first half. Declared dividends were $0.43 and $0.85 per share, respectively. The filing cautions this measure is not a substitute for GAAP results.
- Cash flow and investment: First-half operating cash flow was $2,203 million; investing used $2,707 million, including $1,717 million of capital expenditures and $993 million for acquisitions and investments. Financing provided $273 million. Cash declined $235 million to $363 million.
- Debt and liquidity: June 30 current and long-term debt, including debt fair-value adjustments and KMP/EPB, totaled $37,144 million; principal debt excluding fair-value adjustments was $33,838 million. Cash was $363 million and the working-capital deficit was $3,120 million. Available borrowing capacity was reported at $872 million for KMI, $1,807 million for KMP and $1,000 million for EPB. KMI reported compliance with its financial covenants.
- Distributions: KMI declared $0.43 per share for Q2, up from $0.40 a year earlier. KMP declared $1.39 per unit and EPB $0.65 per unit.
Material changes versus the prior comparable period
- Q2 revenue increased approximately 16%, while operating income increased approximately 31%. KMI-attributable net income rose about 3% and EPS was unchanged. Consolidated net income fell approximately 36%, primarily reflecting prior-year gains and changes in noncontrolling-interest allocations.
- Prior-year results included a $558 million noncash gain from remeasuring KMP’s previously held Eagle Ford interest and a $225 million gain on the Express pipeline investment sale. These items materially distort comparisons; the filing’s segment EBDA before certain items showed improved performance, including first-half growth in Natural Gas Pipelines, Products Pipelines and Terminals.
- First-half operating cash flow rose $469 million year over year, while investing cash use increased substantially, reflecting the $961 million APT acquisition, higher capital spending and the absence of 2013 divestiture proceeds.
- On May 2, 2014, EPB acquired KMI interests in Ruby Pipeline, Gulf LNG and Young Gas Storage in a transaction valued at approximately $2 billion, including about $1 billion of assumed debt; KMI received approximately $875 million cash and EPB units. KMP acquired APT and State Class Tankers for $961 million in January.
Outlook, management commentary and risks
- KMI expected to declare dividends of at least $1.72 per share for 2014, an 8% increase over 2013. Management said expected growth was driven by continued strong KMP performance and EPB contributions. Dividends remain discretionary and depend substantially on distributions from KMP and EPB.
- Management forecast remaining 2014 capital expenditures of $343 million for sustaining investment and $2,638 million for discretionary investment. KMP’s 2014 budget assumed average WTI of about $96.15 per barrel; at the filing date KMP expected an average near $102.71. Each $1 change in average WTI was estimated to affect the CO2 segment’s annual cash flow by about $7 million.
- Principal risks include access to debt and equity markets, refinancing short-term debt, interest-rate and commodity-price exposure, pipeline integrity and environmental obligations, and regulatory rate disputes. KMP’s crude oil and NGL activities have commodity exposure; the company uses hedges but remains exposed to unhedged volumes and counterparty risk.
- Legal reserves were $688 million at June 30, 2014, compared with $624 million at year-end 2013. Environmental reserves were $353 million, versus $378 million. Notable matters include CPUC shipper claims seeking approximately $400 million in reparations and $30 million in annual rate reductions; SFPP FERC claims seeking about $100 million in refunds and $20 million in annual reductions; and multiple railroad, environmental and other lawsuits. Management stated it believed reserves adequate and did not expect the disclosed matters to have a material adverse effect, but outcomes remain uncertain.
- No material changes to the 2013 Form 10-K risk factors were reported. The annual goodwill test found no impairment. Management said disclosure controls were effective and no material change in internal control over financial reporting occurred during the quarter.
Key facts investors should verify
- Whether reported dividend cash generation, particularly Q2 cash available of $0.32 per share versus the $0.43 declared dividend, is sustainable and how the first-half coverage measure translates into full-year cash needs.
- Debt maturities, refinancing plans and liquidity across KMI, KMP and EPB; consolidated totals should not be mistaken for debt guaranteed by KMI.
- Underlying operating trends after adjusting for prior-year gains, acquisition effects and other “certain items,” especially Natural Gas Pipelines and CO2 segment performance.
- Actual resolution and financial impact of FERC/CPUC rate cases, railroad disputes, environmental remediation and other litigation relative to recorded reserves.
- Delivery of the 2014 dividend and capital-spending outlook, and sensitivity of cash flows to commodity prices, interest rates and capital-market access.