Kinder Morgan, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. Kinder Morgan owns or operates North American energy infrastructure, including approximately 83,000 miles of pipelines, 141 terminals and 700 Bcf of working natural gas storage capacity. This unaudited filing covers the three and six months ended June 30, 2022; comparisons are to the corresponding 2021 periods unless stated otherwise. Amounts are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $5.151 billion | $3.150 billion | $9.444 billion | $8.361 billion |
| Operating income (loss) | $1.006 billion | $(764) million | $2.030 billion | $1.122 billion |
| Net income (loss) attributable to KMI | $635 million | $(757) million | $1.302 billion | $652 million |
| Diluted EPS | $0.28 | $(0.34) | $0.57 | $0.29 |
| Adjusted Earnings | $621 million | $516 million | $1.353 billion | $1.890 billion |
| Distributable cash flow (DCF) | $1.176 billion | $1.025 billion | $2.631 billion | $3.354 billion |
- Revenue growth was led by commodity sales, which rose to $3.100 billion in Q2 from $1.246 billion. Costs of sales also increased substantially, to $2.683 billion from $936 million; revenue growth therefore should not be read as equivalent growth in underlying margins.
- Q2 Segment EBDA was $1.898 billion versus $91 million. The comparison chiefly reflects the prior-year $1.600 billion non-cash South Texas gathering and processing impairment. Q2 adjusted Segment EBDA was $1.896 billion versus $1.754 billion.
- For the first half, adjusted Segment EBDA was $3.938 billion versus $4.629 billion. Prior-year results benefited from largely nonrecurring February 2021 winter-storm earnings, particularly in Natural Gas Pipelines and CO2.
- Operating cash flow for the first half was $2.648 billion versus $3.311 billion. Capital expenditures were $779 million; dividends paid were $1.247 billion. Investing activities used $672 million and financing activities used $2.706 billion.
- At June 30, cash and cash equivalents were $100 million and restricted deposits were $317 million. Current liabilities exceeded current assets by $3.284 billion. Management cited approximately $3.0 billion of available credit-facility capacity and stated that operating cash flows, cash and borrowing capacity were adequate for expected requirements.
- Debt principal was $31.110 billion; reported debt carrying value, including fair-value adjustments, was $31.522 billion. Commercial paper outstanding was $936 million, and $2.970 billion of debt was classified as current. The company reported covenant compliance and no credit-facility borrowings at quarter end.
Material changes and segment trends
- Q2 net income attributable to KMI improved by $1.392 billion year over year, principally because the 2021 quarter included the $1.600 billion impairment. Adjusted Earnings rose by $105 million in Q2, but fell by $537 million for the first half.
- Natural Gas Pipelines adjusted Segment EBDA increased $69 million in Q2, but declined $728 million for the first half. The first-half decline was largely driven by lower Midstream margins against unusually high 2021 winter-storm-related commodity results.
- Products Pipelines adjusted Segment EBDA rose $6 million in Q2 and $42 million year to date. Terminals rose $7 million and $18 million, respectively. CO2 increased $60 million in Q2, mainly on higher realized oil and NGL prices, but declined $23 million year to date, partly due to higher operating expenses and prior-year storm-related effects.
- Debt principal declined from $32.418 billion at year-end 2021 to $31.110 billion. The company repaid maturing notes, including $1.0 billion of 3.95% notes on June 1, using short-term borrowings.
Outlook, risks and notable items
- Management expected 2022 dividends of $1.11 per share, a 3% increase from 2021’s declared $1.08. The board declared a Q2 dividend of $0.2775 per share, payable August 15, 2022. Dividend expectations remain subject to financial, liquidity, business and other factors and board approval.
- Management expected to invest $1.9 billion in 2022 expansion projects, acquisitions, joint-venture contributions and other discretionary capital. The capital plan listed $930 million of sustaining capital and $1.855 billion of discretionary capital investments for the year, including the Mas CanAm acquisition.
- On July 19, 2022, KMI completed the approximately $358 million acquisition of three landfill assets, including a renewable natural gas facility and two medium-Btu facilities.
- Ruby Pipeline filed for Chapter 11 on March 31, 2022 after lacking liquidity to repay $475 million of notes at maturity. KMI reported no Ruby investment or subordinated-note balance on its June 30 balance sheet.
- Material disclosed legal and regulatory matters include a FERC rate proceeding concerning EPNG; claims by Continental Resources seeking more than $276 million; Freeport LNG’s claim of approximately $104 million relating to Winter Storm Uri; and litigation and investigations following the 2021 EPNG Arizona pipeline rupture, which caused two fatalities and one injury. Management said it did not expect the ultimate resolution of the disclosed matters to materially adversely affect the business, while noting uncertainty in some cases.
- Environmental exposures include the Portland Harbor Superfund allocation process, for which KMI said its share could not yet be reasonably estimated, and other remediation and regulatory matters. Environmental reserves were $235 million at June 30, 2022; legal reserves were $178 million.
- Commodity, interest-rate and foreign-exchange risks are managed in part with derivatives. KMI had $309 million of cash margin posted at quarter end and estimated that a two-notch credit-rating downgrade would require an additional $358 million of collateral. It expected approximately $267 million of cash-flow-hedge losses to be reclassified into earnings over the next 12 months, subject to market changes.
Important facts for investors to verify
- How much of reported revenue and earnings reflects commodity prices, marketing activity, hedging and related cost-of-sales movements versus durable fee-based pipeline and terminal performance.
- Whether first-half operating cash flow and DCF can support the announced dividend, planned capital spending and debt maturities, particularly given low cash balances and the working-capital deficit.
- Debt refinancing needs, commercial-paper usage, interest-rate exposure and potential collateral requirements if derivative marks or credit ratings change.
- Progress and financial effects of the Mas CanAm acquisition, the 2022 capital plan and the $1.11-per-share dividend expectation.
- Developments in the EPNG rate case, pipeline incident matters, major litigation and environmental allocations whose eventual costs remain uncertain.