Business Context and Reporting Period
Kinder Morgan, Inc. (KMI) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The company operates approximately 85,000 miles of pipelines and 152 terminals across North America. Unless noted, amounts below are U.S. dollars in millions.
Key Financial Results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $3,428 | $3,368 | $6,846 | $6,792 |
| Operating income | $272 | $918 | $1,221 | $1,895 |
| Net income (loss) attributable to KMI | $(141) | $376 | $383 | $816 |
| Net income (loss) available to common stockholders | $(180) | $337 | $305 | $738 |
| Diluted earnings (loss) per share | $(0.08) | $0.15 | $0.14 | $0.33 |
| Distributable cash flow (DCF; non-GAAP) | $1,117 | $1,022 | $2,364 | $2,237 |
Revenue increased modestly year over year. Reported operating income and earnings fell sharply, primarily reflecting impairment charges. Q2 included a $600 million non-cash impairment of Oklahoma gathering and processing assets, a $60 million non-cash terminals impairment, and a $270 million non-cash impairment of the Gulf LNG equity investment. Management reported that income before taxes, after adjusting for its identified certain items, increased $114 million (21%) in Q2 and $178 million (15%) for the six-month period.
Operating cash flow was $2,468 million for the first half, up from $2,166 million. Investing used $1,432 million, including $1,473 million of capital expenditures; financing used $1,010 million. DCF rose to $1,117 million in Q2 and $2,364 million for the half, while declared common dividends were $0.20 and $0.40 per share, respectively.
Debt, Liquidity and Capital
At June 30, 2018, cash and cash equivalents were $271 million. Principal debt totaled $36,872 million, versus $36,916 million at year-end 2017; the balance sheet reports total debt of $37,498 million including fair-value adjustments. Current debt was $2,132 million, including $1,300 million of senior notes maturing within twelve months. KMI reported $4,411 million available under its $5 billion revolving credit facility and compliance with required covenants. Working capital remained negative at $2,745 million, improved from a $3,466 million deficit at year-end.
About 32% of debt principal was subject to variable rates at quarter-end, compared with 28% at December 31, 2017. KMI repurchased approximately 13 million shares for $250 million in the first half under its $2 billion buyback program. Its 9.75% mandatory convertible preferred shares are expected to convert by October 26, 2018.
Material Changes Versus Prior Period
- First-half operating cash flow increased $302 million year over year; management attributed the improvement primarily to working-capital movements and non-cash adjustments, despite lower net income.
- Segment EBDA before certain items increased year over year in each reported segment for the first half, with the largest reported underlying growth in Natural Gas Pipelines; consolidated reported earnings were weighed down by impairments and other identified items.
- Revenue-recognition rules adopted January 1, 2018 reduced reported first-half revenue by $280 million relative to the prior accounting presentation, with an equal reduction in cost of sales and no effect on operating income.
- Common dividends declared rose to $0.20 per share per quarter from $0.125 in the comparable 2017 quarter. Management expected 2018 dividends of $0.80 per share.
Outlook, Commentary and Risks
KMI reported that the Government of Canada agreed to purchase the Trans Mountain pipeline system, expansion project and related assets for C$4.5 billion, subject to adjustments, shareholder approval and regulatory approvals. Closing was expected late in Q3 or early Q4 2018. KMI estimated its share of after-tax proceeds at approximately $2 billion and intended to use proceeds it receives to reduce debt. The filing states the transaction was expected to result in a gain; completion and timing remained subject to approvals.
Management said existing cash, operating cash flow and borrowing capacity were adequate for day-to-day needs and anticipated obligations. It expected to fund operations, debt service, dividends and capital spending principally from operating cash flow and debt refinancing, and did not expect to need equity-market funding for growth projects for the foreseeable future. The company projected $664 million in 2018 sustaining capital expenditures and $2,387 million of KMI discretionary capital investments.
Key exposures include potential further asset or investment impairments if valuations or cash-flow expectations deteriorate; pipeline safety, environmental and litigation liabilities; and regulatory disputes over pipeline rates and tax allowances. The company estimated shippers in SFPP proceedings sought about $30 million of annual rate reductions and $300 million of refunds, while management said it expected any eventual reductions and refunds to be substantially below the amounts sought. Legal reserves were $411 million and environmental reserves were $279 million at June 30. The filing also describes ongoing Trans Mountain legal and regulatory challenges. Management said no material changes had occurred in the risk factors disclosed in its 2017 Form 10-K.
Most Important Facts for Investors to Verify
- Whether the Trans Mountain transaction closed on schedule, the final net proceeds attributable to KMI, and the actual use of proceeds for debt reduction.
- Whether operating cash flow and DCF support the stated dividend and capital-spending plans, particularly given the first-half cash outlays.
- The scale and assumptions behind the Oklahoma, terminals and Gulf LNG impairments, and whether further impairments occur.
- Outcomes of SFPP and other rate proceedings, environmental matters and material litigation, including any resulting refunds, rate changes or reserve adjustments.
- Debt refinancing and liquidity developments, including near-term maturities, variable-rate exposure and conversion of the mandatory preferred shares.