Kinder Morgan, Inc. — Q3 2015 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods. Kinder Morgan operates approximately 84,000 miles of pipelines and 165 terminals. Comparisons are affected by the November 2014 merger transactions, which brought KMP, EPB and KMR fully into KMI; 2014 earnings included substantial income attributable to former public noncontrolling interests.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $3.707B | $4.291B | $10.767B | $12.275B |
| Operating income | $721M | $1.332B | $2.691B | $3.492B |
| Net income | $183M | $779M | $944M | $1.877B |
| Net income attributable to KMI | $186M | $329M | $948M | $900M |
| Basic EPS | $0.08 | $0.32 | $0.43 | $0.87 |
| Operating margin | 19.4% | 31.0% | 25.0% | 28.5% |
| Cash from operations | — | — | $3.507B | $3.492B |
| Cash capital expenditures | — | — | $2.999B | $2.678B |
| Dividends declared per share | $0.51 | $0.44 | $1.48 | $1.29 |
Cash from operations less capital expenditures was approximately $508M for the first nine months, versus $814M in 2014. KMI’s non-GAAP distributable cash flow (DCF) before certain items was $1.129B for Q3 and $3.466B year to date, compared with $435M and $1.340B, respectively. DCF per share was $0.51 for Q3 and $1.58 year to date. The company cautions that DCF is not a GAAP measure and may not be comparable across companies.
Balance sheet and liquidity: At September 30, 2015, cash was $179M, total assets $85.677B, and total liabilities $49.835B. Debt principal was $42.778B, compared with $41.029B at year-end 2014; balance-sheet debt including fair-value adjustments was $44.633B. Current debt was $3.003B, including $2.382B of senior notes maturing within a year. Working capital was a $3.124B deficit. The $4.0B revolving credit facility had $3.415B of availability after borrowings and letters of credit. Management said it intended to refinance short-term debt and considered liquidity adequate.
Material changes and operating drivers
- Q3 revenue fell 14% and operating income fell 46% year over year; nine-month revenue declined 12% and operating income declined 23%. KMI-attributable net income rose 5% year to date, but consolidated net income fell 50%. The change in noncontrolling interests after the merger materially affects comparisons; weighted-average shares rose from 1.028B to 2.203B in Q3.
- Lower commodity prices weighed on the CO2 business: segment EBDA before certain items declined 22% in both Q3 and the first nine months. KMI reported significant noncash impairments, including charges related primarily to the Goldsmith oil and gas field, driven by lower crude prices.
- Products Pipelines EBDA before certain items increased 29% in Q3 and 27% year to date, supported by higher crude pipeline volumes, the KMCC-Splitter start-up and the Double H pipeline acquired with Hiland. Terminals EBDA before certain items increased 6% and 14%, respectively, aided by expansions and acquisitions. Natural Gas Pipelines EBDA before certain items was broadly flat year over year.
- Interest expense, net, increased to $540M in Q3 from $432M and to $1.524B year to date from $1.320B, primarily reflecting higher average debt balances. Nine-month investing cash use included $1.864B of business acquisitions and $2.999B of capital expenditures.
- KMI acquired Hiland for approximately $3.12B including assumed debt, acquired Vopak terminal assets for $158M, and bought Shell’s 49% interest in the Elba liquefaction venture for $185M. It issued shares under its equity distribution agreement for $3.9B of net proceeds during the nine-month period.
Outlook, risks and contingencies
- Management said it remained on track for a 2015 dividend target of $2.00 per share, approximately 15% above 2014 declared dividends. It also warned that lower commodity prices had reduced the expected cushion of cash available above that target. The board declared a $0.51-per-share Q3 dividend, payable November 13, 2015.
- Management described cash flows as largely insulated from commodity-price changes because of predominantly take-or-pay support, while also noting commodity-price exposure and the potential for additional asset impairments if conditions deteriorate.
- Legal and environmental reserves at September 30 were $441M and $306M, respectively. Disclosed matters include FERC rate disputes; railroad right-of-way and pipeline relocation litigation; the Plains Gas Solutions claim alleging at least $100M in damages; price-reporting litigation with alleged damages exceeding $140M against all defendants in one case; and environmental matters with uncertain potential costs. Management said it did not expect resolution of the disclosed matters to have a material adverse effect, while acknowledging uncertainty in outcomes.
- A proposed $27.5M settlement of KMP capital-expenditure litigation was subject to court approval. The filing also disclosed an agreement for four new tankers costing $568M, with expected deliveries from late 2016 through 2017 and scheduled payments of $14M in 2015, $170M in 2016 and $384M in 2017.
- Management reported no material changes to the risk factors in the 2014 Form 10-K and no material changes in market-risk exposures. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether operating cash flow and DCF continue to support the $2.00-per-share 2015 dividend target, particularly under sustained low commodity prices.
- The effect of higher debt, near-term maturities, refinancing needs and ongoing capital spending on liquidity and interest costs.
- Whether further commodity-price-related impairments arise, especially in the CO2 and midstream businesses.
- How much of reported earnings and cash generation reflects recurring operations versus merger effects, acquisitions, hedges and other “certain items.”
- Developments in material litigation, environmental liabilities and the proposed KMP settlement, including any changes to reserves or cash exposure.