Kinder Morgan, Inc. — Q3 2021 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Kinder Morgan operates approximately 83,000 miles of pipelines, 144 terminals and 700 Bcf of natural gas storage capacity. Unless indicated otherwise, amounts below are in millions of dollars.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $3,824 | $2,919 | $12,185 | $8,585 |
| Operating income | $844 | $819 | $1,966 | $580 |
| Net income (loss) attributable to KMI | $495 | $455 | $1,147 | $(488) |
| GAAP diluted EPS | $0.22 | $0.20 | $0.50 | $(0.22) |
| Operating cash flow | Not reported separately for the quarter | Not reported separately for the quarter | $4,440 | $3,282 |
| DCF, non-GAAP | $1,013 | $1,085 | $4,367 | $3,347 |
| DCF per share, non-GAAP | $0.44 | $0.48 | $1.92 | $1.47 |
Q3 operating margin was approximately 22% versus 28% a year earlier; the revenue increase was heavily influenced by higher commodity sales and related costs. Management reported Q3 Adjusted Earnings of $505 million versus $485 million, while nine-month Adjusted Earnings were $2,395 million versus $1,407 million. These are non-GAAP measures.
- Cash flow and investment: Nine-month investing cash outflow was $1,911 million, including $1,518 million for acquisitions; financing cash outflow was $3,459 million, including $1,828 million of dividends. Cash and cash equivalents were $102 million at quarter-end, with $177 million of restricted deposits.
- Debt and liquidity: Principal debt was $31,810 million at September 30, versus $33,396 million at year-end 2020. The balance sheet reports $2,822 million current debt and $28,988 million long-term debt before debt fair-value adjustments. The company had $160 million of commercial paper outstanding, no credit-facility borrowings, $81 million of letters of credit and $3,759 million of facility availability. It reported compliance with covenants, including a maximum net indebtedness-to-EBITDA ratio of 5.50:1. Working-capital deficit was $3,139 million.
- Dividends: Declared $0.27 per share for Q3. Management expected 2021 declared dividends of $1.08 per share, 3% above 2020.
Material changes and operating developments
- Q3 revenue rose 31% year over year, while attributable net income rose 9%. Nine-month attributable earnings turned positive from a prior-year loss; comparisons are materially affected by large impairment charges in both periods and unusual 2021 winter-storm results.
- Nine-month Segment EBDA increased to $4,682 million from $3,282 million. Management attributed much of the increase to Natural Gas Pipelines and CO2 results related to February 2021 Winter Storm Uri, which it characterized as largely nonrecurring, as well as higher Products Pipelines earnings. Terminals earnings declined.
- The company recorded a $1,600 million non-cash impairment on South Texas gathering and processing assets after lowering expectations for volumes and rates as contracts expire through 2024. The nine-month results also included a $206 million gain on the partial sale of its NGPL Holdings interest and a $117 million write-down of a Ruby-related note receivable.
- Completed the $1,228 million Stagecoach natural gas pipeline and storage acquisition in July and the $318 million Kinetrex LNG/RNG acquisition in August. Kinetrex supports the company’s energy-transition strategy; construction began on three additional landfill-based renewable natural gas facilities.
Outlook, risks and contingencies
- Management expected to invest $0.8 billion in expansion projects and joint-venture contributions during 2021, excluding recent acquisitions, and stated it expected to fund dividends and discretionary spending without capital-markets funding. The filing cautions that forecasts are subject to risks and are not guarantees.
- Winter Storm Uri transactions remain exposed to counterparty credit risk, disputed purchases and sales, and possible regulatory action or litigation. A Freeport LNG lawsuit seeks approximately $98 million plus fees and interest; Kinder Morgan disputes the claim and intends to defend it.
- Other material legal matters include a Continental Resources claim seeking damages exceeding $276 million and ongoing SFPP rate proceedings in which shippers had pleaded claims of at least $50 million in refunds, plus unspecified rate reductions. The company says it believes it has meritorious defenses.
- Legal reserves were $192 million and environmental reserves were $242 million at September 30. Potential liabilities at Portland Harbor, uranium mine sites and other environmental matters remain uncertain or not reasonably estimable. Management stated it did not expect resolution of disclosed matters to have a material adverse effect, but outcomes are not assured.
- Key business risks include changing demand and commodity prices, contract expirations and recontracting, counterparty creditworthiness, pipeline integrity and environmental obligations. The company reported no material change in risk factors from its 2020 Form 10-K.
Important facts for investors to verify
- How much recurring operating performance is reflected in nine-month results after separating Winter Storm Uri effects, impairment charges, derivative mark-to-market movements and the NGPL gain.
- Whether South Texas gathering and processing volumes and contract renewals support the carrying values and future earnings assumptions for those assets.
- Debt refinancing needs and liquidity, given $2,822 million of current debt, low unrestricted cash and the reported working-capital deficit.
- Progress and costs for Stagecoach, Kinetrex and planned capital projects, and whether the expected $1.08 annual dividend is supported by future cash generation.
- Developments in the Freeport LNG and Continental Resources lawsuits, SFPP rate proceedings, and environmental matters whose ultimate costs remain uncertain.