Kinder Morgan, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Unaudited consolidated results include KMP and other controlled subsidiaries; significant portions of consolidated earnings and equity belong to noncontrolling investors. Amounts are U.S. dollars unless stated otherwise.
Business context and reporting period
Kinder Morgan operates energy infrastructure businesses, primarily through Kinder Morgan Energy Partners, L.P. (KMP): pipelines, terminals, CO₂ production and transportation, and related services. KMI completed its IPO in February 2011; existing investors sold the shares, so KMI received no IPO proceeds. After quarter-end, on October 16, KMI announced an agreement to acquire El Paso Corporation.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $2,206.0m | $2,088.2m | $6,247.6m | $6,236.7m |
| Operating income | $415.5m | $181.1m | $1,069.1m | $830.9m |
| Operating margin | 18.8% | 8.7% | 17.1% | 13.3% |
| Income from continuing operations | $84.6m | $52.8m | $367.4m | $133.4m |
| Net income attributable to KMI | $151.5m | $10.6m | $438.6m | $(104.3)m |
| Diluted EPS, Class P / Class A | $0.21 / $0.19 | Not clearly shown in the supplied statement | $0.52 / $0.48 | Not clearly shown in the supplied statement |
Revenue was nearly flat for the nine months, while operating income improved. KMI-attributable net income exceeded consolidated net income in Q3 because the allocation to noncontrolling interests was a net loss; it should not be read as consolidated net income. Results also reflect significant unusual items, including a $167.2m noncash loss from remeasuring KMP’s previously held KinderHawk interest and increased pipeline rate-case and rights-of-way expenses. Q3 2010 included a $200m pretax Going Private litigation settlement.
- Cash flow: Nine-month operating cash flow was $1,587.7m, versus $1,218.5m. Investing used $1,814.9m; financing provided $13.5m. Cash and equivalents ended at $273.9m, down $228.5m from year-end 2010. Capital expenditures were $845.0m, including $140.7m of sustaining expenditures.
- Debt and liquidity: Disclosed debt carrying value, excluding interest-rate-swap values, was $15,765.7m at September 30. Combined short-term debt was $3,061.0m. Working capital was negative $2,916.8m. Available borrowing capacity was approximately $576m at KMI and $1,615m at KMP. KMI and KMP weighted average borrowing rates were 4.72% and 4.12% in Q3, respectively.
- Dividends and distributions: Cash available to pay KMI dividends was $186.9m for Q3 and $592.2m for nine months. KMI declared a $0.30-per-share Q3 dividend, payable November 15. Management expected 2011 cash available for dividends to meet or exceed its $820m budget. KMP declared a Q3 distribution of $1.16 per unit and expected 2011 distributions to exceed $4.60 per unit.
Material changes and management commentary
- Q3 segment earnings before depreciation, depletion and amortization (EBDA) fell 11% to $710.5m, largely due to the KinderHawk remeasurement loss and higher rate-case/rights-of-way expenses. Excluding identified items, management reported underlying quarterly segment growth; CO₂, terminals, and Canadian operations improved, while Products Pipelines and Natural Gas Pipelines faced pressure.
- Nine-month segment EBDA rose 22% to $2,308.1m. The comparison benefited from a $430m noncash NGPL investment impairment recorded in 2010; management also cited stronger performance across several segments.
- Effective July 1, KMP acquired the remaining 50% of KinderHawk and a 25% interest in EagleHawk for $912.1m of consideration. KinderHawk became consolidated; the remeasurement of the prior interest generated the $167.2m noncash loss.
- KMP’s 2011 expansion and acquisition spending outlook was approximately $2.4bn, including investments and contributions; its discretionary capital expenditure forecast was approximately $1.0bn. Management said liquidity was sufficient for working capital, debt service, capital spending, and distributions, while noting dependence on access to debt and equity markets.
Outlook, risks, contingencies, and unusual items
- El Paso transaction: Proposed enterprise purchase price, including assumed debt, was approximately $38bn. Closing was expected in Q2 2012, subject to shareholder and regulatory approvals. The filing identifies financing, approval, integration, synergies, and failure-to-close risks; KMP’s Moody’s outlook was revised to negative after the announcement. The filing also disclosed shareholder lawsuits seeking to block the transaction.
- Regulatory and litigation exposure: Ongoing pipeline tariff proceedings could result in refunds or lower future rates. KMP estimated shipper claims of about $140m in refunds and $50m in annual rate reductions in certain FERC cases; California proceedings involved requests of about $360m in reparations and $30m in annual rate reductions. KMP recorded $18.4m of California intrastate refunds in September.
- Legal reserves were $325.2m at September 30, versus $169.8m at year-end 2010; environmental reserves were $81.9m. A rights-of-way ruling led to a $73.9m expense and reserve increase, subject to appeal. Other disclosed matters include a $7.5m jury verdict in a wrongful-death case (with further proceedings contemplated) and pipeline incidents and environmental claims. Management stated it believed reserves adequate and did not expect these matters to have a material adverse effect, while acknowledging outcomes are uncertain.
- Commodity prices, interest rates, customer credit, regulation, environmental and pipeline safety matters, capital-market access, and the proposed El Paso acquisition are key risks. KMP hedges commodity and interest-rate exposures; about 46% of its debt was subject to variable rates, including debt converted through swaps.
Most important facts for investors to verify
- Reconcile KMI-attributable earnings and EPS with consolidated results, noncontrolling-interest allocations, and the IPO-period presentation.
- Track the $3.061bn short-term debt balance, refinancing needs, actual revolver availability, and the effect of El Paso financing on leverage and credit ratings.
- Assess whether operating cash flow and KMP distributions support KMI’s $820m dividend-cash target and declared dividends after capital needs and debt service.
- Monitor SFPP/Calnev rate cases, rights-of-way obligations, legal and environmental reserves, and the final outcomes of significant claims.
- Verify El Paso transaction approvals, committed financing conditions, closing timing, integration plans, and any changes to consideration or expected debt burden.