Kinder Morgan, Inc. — Q2 2017 Form 10-Q
Business context and period. Kinder Morgan operates North American energy infrastructure, including approximately 84,000 miles of pipelines and 155 terminals. This unaudited report covers the quarter and six months ended June 30, 2017; financial amounts below are in millions of U.S. dollars unless noted.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $3,368 | $3,144 | $6,792 | $6,339 |
| Operating income | $922 | $940 | $1,902 | $1,756 |
| Operating margin | 27.4% | 29.9% | 28.0% | 27.7% |
| Net income attributable to KMI | $376 | $372 | $816 | $687 |
| Net income available to common stockholders | $337 | $333 | $738 | $609 |
| Basic and diluted EPS | $0.15 | $0.15 | $0.33 | $0.27 |
| Declared common dividend per share | $0.125 | $0.125 | $0.250 | $0.250 |
Q2 revenue increased 7%, while operating income declined 2%; six-month revenue rose 7% and net income rose 20%. Six-month results benefited from fewer impairment and project write-off charges than in 2016, so the net-income comparison is not solely indicative of underlying operating growth. Q2 net income attributable to KMI increased 1%.
- Cash flow: Six-month operating cash flow was $2,166, down from $2,345. Investing used $1,573; financing used $835. Cash declined to $452 from $684 at year-end 2016.
- Distributable cash flow (non-GAAP): $1,022 in Q2 and $2,237 for six months, compared with $1,050 and $2,283, respectively. DCF per share was $0.46 for Q2 and $1.00 year to date, versus $0.47 and $1.02. The declared common dividend was $0.125 per share per quarter.
- Debt and liquidity: Principal debt was $37,224 at June 30, versus $38,901 at December 31, 2016; balance-sheet debt carrying value, including fair-value adjustments, was $38,324. Cash was $452, and $4,774 was available under the $5.0 billion revolving facility. Current debt was $3,224, and working capital was negative $3,637. KMI reported compliance with required debt covenants.
- Capital spending: Six-month capital expenditures were $1,336. The company estimated full-year 2017 sustaining capital of $621, KMI discretionary investments of $2,348, and KML discretionary investments of $814.
Material changes and management commentary
- On May 30, KML completed an IPO that raised net proceeds of approximately $1,247 for KMI’s consolidated cash-flow reporting. KMI retained control and approximately 70% ownership of the Canadian business; proceeds were used to pay down debt. Public ownership is reflected as noncontrolling interest.
- KMI completed the sale of a 49% interest in Elba Liquefaction Company for $386, with additional EIG contributions of $29. The company retains a 51% controlling interest; proceeds and contributions are recorded as deferred credit while specified contingencies remain.
- Six-month Segment EBDA increased 7% to $3,709; Q2 Segment EBDA declined 1% to $1,799. Products Pipelines and Terminals improved year to date, while Natural Gas Pipelines performance was affected notably by KMI’s 2016 sale of a 50% interest in SNG. Management also cited higher DD&A and increased tax expense as offsets to earnings growth.
- Management expected 2017 common dividends of $0.50 per share, and announced expected dividends of $0.80 in 2018, $1.00 in 2019, and $1.25 in 2020. These are plans, not guarantees. A $2 billion share repurchase program was approved, expected to begin in 2018.
- KMI announced its final investment decision on the C$7.4 billion Trans Mountain Expansion Project. Construction was expected to begin in September 2017, with completion targeted for December 2019. Planned funding sources include project facilities, potential KML securities issuance, and operating cash flow.
Risks, contingencies, and unusual items
- Trans Mountain Expansion faces multiple legal challenges. An adverse outcome could require further review, change or revoke approvals, delay or alter the project, or stop it, materially affecting project feasibility and KMI’s investment.
- FERC proceedings challenge rates at SFPP and other pipeline subsidiaries. Shippers in SFPP matters sought approximately $40 million in annual rate reductions and $210 million in refunds; an administrative law judge issued an initial decision in one case, subject to FERC review.
- Environmental and legal exposures include the Portland Harbor Superfund cleanup, whose estimated total cost rose to approximately $1.1 billion; KMI could not reasonably estimate its share while allocation remained pending. Environmental reserves were $294 million and legal reserves $389 million at June 30.
- Other disclosed matters include the Gulf LNG arbitration, which could affect facility revenues if the customer succeeds in terminating or changing payment obligations, and pipeline integrity, environmental, and other litigation risks. Management stated it believes the ultimate resolution of disclosed matters will not materially harm the company, but outcomes remain uncertain.
- Goodwill testing found reporting-unit fair values above carrying values; however, the Natural Gas Pipelines—Non-Regulated unit exceeded carrying value by only 4%, leaving sensitivity to commodity prices, market multiples, and cash-flow assumptions.
- KMI uses commodity, interest-rate, and currency derivatives. About 30% of debt, excluding fair-value adjustments, was variable-rate or converted to variable-rate exposure at June 30.
Important facts for investors to verify
- Whether operating cash flow and DCF can support dividends, debt service, and planned investment, given lower year-to-date cash flow and negative working capital.
- Debt refinancing needs and progress in reducing leverage, including maturities within the next 12 months and the availability of committed credit.
- Trans Mountain Expansion legal, regulatory, financing, cost, and construction developments, including KML’s funding plan and KMI’s support commitments.
- Final outcomes and financial effects of pipeline rate cases, Gulf LNG arbitration, environmental cleanups, and other material litigation.
- Execution of the announced dividend increases and 2018 share repurchase plan; both are subject to financial, contractual, regulatory, and board considerations.