Kinder Morgan, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2019. Kinder Morgan operates or holds interests in approximately 84,000 miles of pipelines and 157 terminals. Results are compared with 2018; the Trans Mountain pipeline and related assets were sold in August 2018, so Kinder Morgan Canada no longer contributes prospective segment results.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $3.214 billion | $3.428 billion | $6.643 billion | $6.846 billion |
| Operating income | $973 million | $272 million | $1.991 billion | $1.221 billion |
| Net income (loss) | $528 million | $(130) million | $1.095 billion | $412 million |
| Net income (loss) attributable to KMI | $518 million | $(141) million | $1.074 billion | $383 million |
| EPS available to common stockholders | $0.23 | $(0.08) | $0.47 | $0.14 |
| Declared dividend per common share | $0.25 | $0.20 | $0.50 | $0.40 |
| Operating cash flow | Not presented by quarter in the supplied filing text | $2.098 billion | $2.468 billion |
Q2 revenue declined about 6% year over year, while reported operating income and earnings improved substantially. The comparison is affected by 2018 charges, including a $600 million impairment of Oklahoma gathering and processing assets, a $60 million terminal-asset impairment, and a $270 million impairment of the Gulf LNG equity investment. The filing reports the latter in equity-investment earnings, not the operating-impairment line. Q2 2019 included a $10 million net gain on impairments and divestitures. The filing does not provide a clear, directly comparable GAAP operating margin discussion.
Management’s non-GAAP measure: Distributable cash flow (DCF) was $1.128 billion, or $0.50 per share, in Q2 2019, versus $1.117 billion and $0.50 per share in Q2 2018. First-half DCF was $2.499 billion, or $1.10 per share, versus $2.364 billion and $1.07 per share. DCF is not a substitute for GAAP operating cash flow or net income.
Segment results: Q2 Segment EBDA was $1.881 billion versus $1.109 billion; first-half Segment EBDA was $3.855 billion versus $3.044 billion. Natural Gas Pipelines led the improvement, with segment EBDA of $1.088 billion in Q2 and $2.291 billion year to date, including the impact of 2018 impairment charges. Excluding certain items, Natural Gas Pipelines EBDA rose 7% in Q2 and 10% year to date. CO2 segment EBDA before certain items fell 17% in Q2 and 19% year to date, primarily reflecting lower realized oil and NGL prices. Products Pipelines and Terminals EBDA before certain items also declined in both comparative periods.
Balance sheet, debt and liquidity
- At June 30, 2019, cash and cash equivalents were $213 million, down from $3.280 billion at year-end 2018. Cash plus restricted deposits totaled $249 million.
- Principal debt was $35.002 billion, excluding debt fair-value adjustments; reported current and long-term debt on the balance sheet totaled $36.059 billion. Current debt was $3.054 billion, including $2.735 billion of senior notes maturing within 12 months.
- KMI had $136 million of commercial paper outstanding, no borrowings under its credit facilities, and $4.280 billion of availability under those facilities after letters of credit and commercial paper. KMI and KML reported compliance with required covenants.
- Working capital was negative $3.359 billion, compared with negative $1.835 billion at December 31, 2018. Management said operating cash flow, available borrowing capacity and cash on hand were adequate for day-to-day needs and anticipated obligations.
- First-half operating cash flow decreased $370 million year over year, primarily because of $370 million of income-tax payments, mainly related to the Trans Mountain sale. Investing cash use was $1.795 billion; financing cash use was $3.413 billion. Cash declined by $3.082 billion, principally reflecting debt repayment, dividends and the distribution of Trans Mountain sale proceeds.
- First-half capital expenditures were $304 million for sustaining capital and $1.380 billion for KMI discretionary capital investments. The company estimated full-year 2019 amounts of $707 million and $2.833 billion, respectively, plus $27 million of KML discretionary investments.
Changes, outlook and risks
- KMI used most of its approximately $1.9 billion share of after-tax Trans Mountain sale proceeds to repay $0.4 billion of commercial paper and approximately $1.3 billion of maturing long-term debt. KML distributed approximately $0.9 billion to public shareholders. The sale proceeds explain much of the year-end-to-Q2 cash decline.
- Management expected to declare common dividends of $1.00 per share for 2019. The Q2 dividend of $0.25 was declared July 17, 2019 and payable August 15. Dividends remain subject to board discretion and financial, legal and other constraints. The filing provides no specific earnings guidance in the supplied text.
- Management attributed Natural Gas Pipelines gains to stronger capacity sales and usage, new projects and increased activity in certain basins. CO2 results were pressured by lower realized commodity prices; Terminal performance was affected by customer-contract termination, maintenance, repairs and high Mississippi River water levels.
- Legal and environmental matters include ongoing FERC rate challenges, with shippers seeking approximately $30 million in annual SFPP rate reductions and approximately $330 million in refunds. The company had legal reserves of $215 million and environmental reserves of $264 million. Potential liabilities for Portland Harbor cleanup and natural-resource claims, and for parts of the Passaic River matter, were not reasonably estimable at filing time.
- Other exposures include pipeline leaks and ruptures, environmental compliance and remediation, commodity prices, interest rates and foreign currency. Management reported no material change in risk factors from its 2018 Form 10-K and believed disclosed contingencies would not materially harm the company, while noting outcomes remain uncertain.
- Goodwill impairment testing at May 31, 2019 found fair value above carrying value for each reporting unit. Management cautioned that commodity-price volatility or changes in valuation assumptions could lead to future impairment charges.
Important facts for investors to verify
- Whether operating cash flow and available credit remain sufficient given the $3.359 billion working-capital deficit and near-term debt maturities.
- Progress in refinancing or repaying the $2.735 billion of senior notes due within 12 months, and the effect of variable-rate exposure (approximately 30% of debt principal at June 30).
- Delivery of the stated 2019 dividend expectation and whether cash generation supports dividends alongside the planned capital program.
- Underlying segment trends excluding impairments and other certain items, especially continued Natural Gas Pipelines growth and weaker CO2, Products Pipelines and Terminals performance.
- Developments in SFPP and other FERC proceedings, environmental remediation and litigation, including matters for which potential exposure is currently not estimable.