Kinder Morgan, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed February 10, 2017. The company operates North American energy infrastructure, including approximately 84,000 miles of pipelines and 155 terminals, across Natural Gas Pipelines, CO2, Terminals, Products Pipelines and Kinder Morgan Canada.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $13.058 billion | $14.403 billion |
| Operating income | $3.572 billion | $2.447 billion |
| Net income | $721 million | $208 million |
| Net income available to common stockholders | $552 million | $227 million |
| Diluted EPS | $0.25 | $0.10 |
| Cash provided by operating activities | $4.787 billion | $5.303 billion |
| Distributable cash flow (non-GAAP) | $4.511 billion | $4.699 billion |
| Common dividend declared per share | $0.50 | $1.605 |
Revenue declined about 9%; operating income and net income rose largely because 2015 included substantially larger impairment charges. Management reported 2016 income before taxes was approximately flat versus 2015 after adjusting for its identified “certain items.” DCF, a non-GAAP measure, declined about 4%; it should not be treated as a substitute for GAAP operating cash flow.
Reported segment EBDA was $6.364 billion, compared with $5.891 billion. Before identified certain items, segment results were: Natural Gas Pipelines $4.036 billion (down 2%); CO2 $919 million (down 20%); Terminals $1.169 billion (up 8%); Products Pipelines $1.180 billion (up 7%); and Kinder Morgan Canada $181 million (approximately flat). Lower commodity prices weighed on CO2; terminal and products-pipeline growth partly offset weaker natural gas pipeline results.
At year-end, cash and cash equivalents were $684 million. Principal debt was approximately $38.9 billion, excluding fair-value adjustments; $2.696 billion was classified as current. The company had $4.840 billion available under its $5.0 billion revolving credit facility and no revolver or commercial-paper borrowings outstanding. Working capital was negative $2.695 billion. Cash from operations covered common dividends and sustaining capital, while expansion spending remained a substantial funding requirement.
Material changes and unusual items
- In September 2016, KMI sold a 50% interest in Southern Natural Gas (SNG) to Southern Company for approximately $1.4 billion, formed a 50/50 joint venture and used sale proceeds to reduce debt. SNG was deconsolidated.
- Non-cash impairment and divestiture losses totaled $1.013 billion in 2016, versus $2.125 billion in 2015. 2016 included $606 million of impairments on equity investments, principally MEP and Ruby, and an $84 million pre-tax loss on the SNG sale. 2015 included a $1.150 billion goodwill impairment.
- Income tax expense increased to $917 million from $564 million. The company cited higher earnings before tax, deferred state tax effects associated with the SNG sale, and valuation allowances; its effective tax rate was unusually high at approximately 56%.
- Debt principal fell from $41.553 billion to $38.901 billion. KMI also repaid Copano and Hiland notes using SNG sale proceeds and issued $375 million of CIG notes.
- Fourth-quarter 2016 revenue was $3.389 billion; net income available to common stockholders was $170 million and diluted EPS was $0.08. The third quarter had a common-stockholder loss of $227 million, including significant impairment and divestiture effects.
Outlook, commentary and risks
For 2017, management expected to declare common dividends of $0.50 per share and generate approximately $4.46 billion of DCF. It budgeted approximately $3.2 billion of expansion investment, intended to be funded from internally generated cash flow without issuing equity. The budget assumed WTI at $53 per barrel and Henry Hub gas at $3 per MMBtu. Management estimated that each $1/barrel change in average WTI would affect DCF by about $6 million, and each $0.10/MMBtu gas-price change by about $1 million. These are forecasts, not guarantees.
Management said most cash generation is supported by multi-year fee-based contracts, but commodity exposure remains in CO2 and certain midstream activities. Key risks include high leverage and refinancing needs, interest-rate and credit-market conditions, counterparty defaults, commodity prices and production levels, regulated tariff challenges, pipeline safety and environmental obligations, and delays or cost overruns on expansion projects. About $2.696 billion of debt was due within one year at December 31, 2016; the company planned to refinance, repay or otherwise address near-term maturities.
- Growth projects: The Trans Mountain Expansion received Canadian federal approval in December 2016; construction was planned to begin in September 2017, with a stated capital scope of $5.4 billion and expected service in December 2019. The 2017 budget assumed a joint-venture partner would fund its share of project capital.
- Contingencies: Environmental liabilities accrued were $302 million, the low end of an estimated $302 million–$477 million range. The legal reserve was $407 million. KMI said its share of Portland Harbor cleanup costs was not yet reasonably estimable; the EPA’s 2017 cleanup plan increased the estimated site cost to approximately $1.1 billion.
- Regulatory and contract matters: Pipeline rate proceedings, including FERC proceedings involving NGPL and WIC, could affect future rates. An arbitration over a Gulf LNG customer contract and other environmental and coastal-zone litigation remain relevant exposures; outcomes and potential costs may be uncertain.
Investor verification priorities
- Confirm that 2017 DCF, dividend and internally funded capital-spending expectations are supported by operating cash flow, and review the non-GAAP DCF reconciliation.
- Review the $2.696 billion of near-term debt maturities, available borrowing capacity, covenant headroom and the company’s refinancing plans.
- Track the Trans Mountain project’s partner funding, regulatory and construction milestones, cost estimates and schedule.
- Assess whether commodity-price weakness, production changes or customer distress could further reduce segment cash generation, especially in CO2, midstream and coal-related terminal operations.
- Monitor impairment assumptions and the development of environmental, legal and rate-case exposures, including Portland Harbor and Gulf LNG arbitration.