Kinder Morgan, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. KMI operates pipelines and terminals and consolidates KMP and EPB. Comparisons are affected by acquisitions, divestitures and changes in consolidated assets; notably, KMI acquired EP in May 2012 and KMP acquired Copano in May 2013.
Financial performance
- Third-quarter revenue: $3.756 billion, up 31% from $2.870 billion. Operating income was $1.041 billion versus $852 million; operating margin was approximately 27.7% versus 29.7%.
- Third-quarter earnings: Continuing-operations income was $551 million versus $386 million; net income attributable to KMI was $286 million versus $200 million. Class P earnings per share were $0.27 versus $0.21.
- Nine-month revenue: $10.198 billion, up 48% from $6.894 billion. Operating income was $2.830 billion versus $1.628 billion; operating margin was approximately 27.8% versus 23.6%.
- Nine-month earnings: Continuing-operations income was $1.990 billion versus $728 million; net income attributable to KMI was $855 million versus $95 million. Class P earnings per share were $0.82 versus $0.33. The 2013 results include significant transaction gains and are not directly comparable.
- Cash flow: Nine-month operating cash flow was $2.777 billion, up from $1.927 billion. Investing cash outflow was $2.038 billion versus $6.365 billion; financing cash outflow was $625 million versus $4.789 billion of inflow. Capital expenditures were $2.270 billion versus $1.399 billion.
- Dividend coverage measure: Management’s non-GAAP cash available to pay dividends was $1.231 billion ($1.18 per average share) for nine months, versus $972 million ($1.13 per share). Declared dividends were $1.19 and $1.03 per share, respectively. For the quarter, cash available and declared dividends were both $0.41 per share.
- Debt and liquidity: Debt carrying value, including fair-value adjustments, was $36.011 billion at September 30, compared with $34.401 billion at year-end 2012. The filing reports approximately $33.9 billion of debt excluding fair-value adjustments, versus $31.8 billion at year-end. Cash was $816 million; working capital deficit was $2.824 billion. Available revolver capacity was approximately $156 million at KMI, $2.322 billion at KMP and $1.0 billion at EPB.
Changes, outlook and management commentary
- Revenue and segment earnings growth largely reflect EP and Copano contributions. Nine-month segment EBDA increased 52% to $5.611 billion; management cited growth in Natural Gas Pipelines, Products Pipelines, CO2 and Terminals.
- Unusual nine-month items include a $558 million non-cash gain from remeasuring KMP’s existing Eagle Ford interest upon the Copano acquisition and a $224 million pre-tax gain on the sale of Express pipeline investments. TGP’s facility sale also generated a $36 million gain. The Express sale produced $402 million in net proceeds.
- Management expected 2013 KMI dividends of $1.60 per share, above original guidance of $1.57 and 14% above 2012. KMP expected $5.33 per unit for 2013, compared with its published budget of $5.28; EPB expected $2.55 per unit. These are forward-looking expectations, not guarantees.
- KMI expected to invest over $4 billion in its 2013 capital expansion program, excluding the Copano acquisition. It anticipated funding needs through operating cash flow, borrowing and equity issuance. KMI said liquidity was adequate, while noting refinancing and capital-market access risks.
- Commodity exposure remains, particularly in KMP’s CO2 business; management estimated each $1 change in average WTI crude price would affect that segment’s annual cash flow by about $6 million. The company uses derivatives to manage commodity and interest-rate risks.
Risks, contingencies and other matters
- Legal reserves were $619 million, up from $425 million at year-end, primarily for pipeline transportation rate cases. Environmental reserves were $390 million, down from $421 million.
- Rate proceedings include estimated shipper requests of approximately $100 million in refunds and $20 million in annual rate reductions in SFPP federal cases; California proceedings include requests of approximately $375 million in reparations and $30 million in annual reductions. EPNG’s preliminary estimated incremental refund exposure above reserves was zero to $50 million.
- Other disclosed claims include a Plains Gas suit alleging damages of at least $100 million and a Roosevelt Irrigation District claim seeking up to $175 million from multiple defendants. The filing describes additional environmental, pipeline, and commercial litigation; outcomes are uncertain.
- KMI had agreed to indemnify KMP for approximately $5.9 billion of debt and EPB for $470 million, payable only if the relevant subsidiary assets cannot satisfy those obligations. KMI also disclosed an estimated $800 million EPB investment in Phase I of the Elba Island LNG project.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported earnings and segment growth is recurring versus attributable to acquisitions, divestitures, fair-value remeasurement and other unusual items.
- Whether operating cash flow and management’s non-GAAP dividend-coverage measure sustainably support the stated dividend outlook and planned capital spending.
- Debt maturities, refinancing plans, interest-rate exposure and the availability of subsidiary-level borrowing capacity, especially given KMI’s working capital deficit.
- Developments in FERC and CPUC rate cases, environmental obligations and other litigation, including whether reserves remain adequate.
- Copano integration and expected accretion, and the assumptions underlying KMI, KMP and EPB distribution guidance.