Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2011, for Kinder Morgan, Inc. (KMI). During this period, KMI completed its initial public offering (IPO) on February 16, 2011, converting from a limited liability company to a Delaware corporation. The company operates as a master limited partnership holding company, owning the general partner and approximately 11% of the limited partner interests of Kinder Morgan Energy Partners, L.P. (KMP), which operates approximately 38,000 miles of pipelines and 180 terminals. KMI also holds a 20% interest in NGPL PipeCo LLC.
Key Financial Metrics
| Metric (in millions) | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2011 |
|---|---|---|
| Total Revenues | $2,033.5 | $4,041.6 |
| Operating Income | $256.6 | $653.6 |
| Net Income Attributable to KMI | $132.1 | $287.1 |
| Net Income (Consolidated) | $81.7 | $282.7 |
| Cash Flow from Operating Activities | N/A | $967.7 |
| Total Debt (Short-term + Long-term) | $14,685.8 | $14,685.8 |
| Cash and Cash Equivalents | $354.4 | $354.4 |
Note: Operating cash flow is reported for the six-month period only in the source text.
Material Changes vs. Prior Period
- Net Income: Net income attributable to KMI increased significantly to $132.1 million for the quarter (from $46.0 million in Q2 2010) and $287.1 million for the six months (from a net loss of $114.9 million in the first half of 2010). The 2010 results were negatively impacted by a $430 million non-cash impairment charge on the NGPL PipeCo LLC investment and a reduction in incentive distributions due to an interim capital transaction.
- Revenues: Total revenues increased slightly to $2,033.5 million for the quarter (from $1,990.9 million in Q2 2010) but decreased to $4,041.6 million for the six months (from $4,148.5 million in H1 2010), primarily due to lower natural gas sales volumes and prices in the Texas intrastate segment.
- Segment Performance:
- Products Pipelines: Earnings before depreciation, depletion, and amortization (EBDA) decreased $137.6 million in the quarter, largely due to a $165.0 million increase in expense associated with rate case liability adjustments.
- Natural Gas Pipelines: EBDA remained relatively flat, with increases from equity investments (KinderHawk, Fayetteville Express) offset by lower earnings from interstate pipelines.
- CO2: EBDA increased due to higher realized crude oil prices and CO2 sales prices, partially offset by higher operating expenses.
- General and Administrative Expenses: Increased to $290.1 million for the six months (from $220.5 million in 2010), driven by a $100 million special bonus expense for non-senior employees and $11.1 million in IPO-related costs, partially offset by a $45.8 million litigation insurance reimbursement.
Guidance, Outlook, and Risks
- Dividend Policy: KMI declared a dividend of $0.30 per share for the second quarter of 2011. The company expects to meet or exceed its $820 million budget for cash available to pay dividends in 2011.
- Capital Expenditures: KMP estimates spending approximately $2.5 billion for its 2011 capital expansion program, including acquisitions. Discretionary capital expenditures for the first six months of 2011 totaled $456.3 million.
- Liquidity: As of June 30, 2011, KMI had approximately $0.6 billion available under its credit facility, and KMP had approximately $1.8 billion available under its facility. KMP's credit rating was affirmed as investment grade (BBB/Baa2).
- Legal and Regulatory Risks:
- Rate Cases: Significant litigation reserves were increased by $165.0 million in Q2 2011 related to FERC and California Public Utilities Commission (CPUC) proceedings regarding pipeline rates. KMP estimates shippers are seeking approximately $50 million in annual rate reductions and $140 million in refunds from FERC cases, and $360 million in reparations from CPUC cases.
- Environmental: Ongoing environmental remediation and litigation, including a lawsuit by the City of San Diego seeking up to $365 million in damages related to the Mission Valley terminal.
- Commodity Price Risk: The CO2 segment is exposed to crude oil price volatility. KMP hedges a significant portion of its crude oil production but retains exposure on unhedged volumes, primarily natural gas liquids.
Key Facts for Investor Verification
- Impact of Rate Case Reserves: Verify the potential financial impact of the $165.0 million expense increase in Q2 2011 related to FERC and CPUC rate cases and the adequacy of the total $268.1 million litigation reserve.
- NGPL Impairment Comparison: Confirm that the significant improvement in 2011 net income is not solely due to the absence of the $430 million non-cash impairment charge recorded in Q1 2010.
- Debt Maturities: Review the schedule for short-term debt maturities, specifically the $500 million of KMP senior notes due February 2019 (callable 2012) and $450 million due March 2012, and the company's refinancing strategy.
- Dividend Sustainability: Assess the "Cash Available to Pay Dividends" metric ($405.3 million for six months) against the declared dividends to ensure coverage ratios remain healthy.
- Acquisition Integration: Monitor the integration and performance of recent acquisitions, including the Watco Companies preferred shares and the TGS Development terminal, as well as the subsequent July 2011 acquisition of KinderHawk Field Services.